[2008] 19 SOT 163 (DELHI)

IN THE ITAT DELHI BENCH ‘D’

Paperbase Co. Ltd.

v.

Assistant Commissioner of Income-tax, Circle-16(1), New Delhi

D.R. SINGH, JUDICIAL MEMBER

AND RAJENDRA SINGH, ACCOUNTANT MEMBER

IT APPEAL NO. 477 (DELHI) OF 2004

[ASSESSMENT YEAR 2001-02]

SEPTEMBER 21, 2007

I. Section 50B of the Income-tax Act, 1961 - Capital gains - Slump sale, cost of acquisition in case of - Assessment year 2001-02 - Whether in case of slump sale, where liabilities are more than value of assets, net worth, viz., cost of acquisition, has to be taken at nil and entire sale consideration is liable to capital gains tax - Held, yes

II. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 2001-02 - Assessee-company was engaged in manufacturing and sale of stationery item and trading activities - It sold its manufacturing unit to its holding company ‘B’ - Before effecting sale of undertaking, assessee entered into an agreement with ‘B’ to carry out necessary study for identifying new markets in India and abroad for establishment of new distribution network for marketing of paper stationery - For conducting study, ‘B’ incurred an expenditure of Rs. 3.22 crores on behalf of assessee - Assessee claimed that said expenditure was incurred for commercial expediency and was allowable as deduction under section 37(1) - However, Commissioner (Appeals), without giving an opportunity to assessee for explaining as to how expenditure related to business expediency, rejected its claim - Whether order of Commissioner (Appeals) was to be set aside so as to allow a reasonable opportunity to assessee for explaining as to how expenditure incurred/claimed related to commercial expediency - Held, yes

Facts-I

The assessee had sold its manufacturing unit on slump sale basis as a going concern for a consideration of Rs. 75 lakhs and worked out the long-term capital gains on account of slump sale at Rs. 75 lakhs. The Assessing Officer having noticed that as per Form No. 3CEA the net worth of the assessee came to negative figure of Rs. 2,11,27,260 because the amount of liability transferred exceeded the amount of assets transferred and further taking into consideration the fact that the liabilities of Rs. 5,11,17,260 due to the buyer had been got extinguished, as because to that extent the assessee had not received any amount from the purchaser who was the creditor and also taking into consideration the cost of assets as per provisions of section 50B, worked out the long-term capital gains at Rs. 2,86,27,260 against Rs. 75 lakhs claimed by the assessee on account of slump sale because, according to him, the net worth of the undertaking was negative. On appeal, the Commissioner (Appeals) upheld the impugned order.

On second appeal :

Held-I

In view of the decision of the Mumbai Bench ‘E’ of the Tribunal in the case of Zuari Industries Ltd. v. Asstt. CIT [2006] 9 SOT 563 in which in identical facts an identical issue was raised, it was to be held that in case of slump sale, where the liabilities are more than the value of assets, the net worth, viz., the cost of acquisition has to be taken at nil and entire sale consideration is liable to capital gains tax. In such circumstances, the tax authorities were not justified in working out the capital gains more than the sale consideration received by the assessee. [Paras 4 and 5]

Therefore, the impugned order was not correct and was liable to be set aside. [Para 7]

Facts-II

The assessee-company was engaged in manufacturing and sale of stationery item and trading activities. It sold its main manufacturing unit for a consideration of Rs. 75 lakhs to its holding company ‘B’ on slump sales basis. Before effecting the sale of the undertaking, the assessee-company entered into an agreement with ‘B’ to carry out necessary study for identifying new markets in India and abroad for establishment of new distribution network for marketing of paper stationery. For conducting study, ‘B’ incurred an expenditure of Rs. 3.22 crores on behalf of the assessee. For the relevant assessment year, the assessee claimed deduction of the expenditure of Rs. 3.22 crores on the ground that said expenditure was incurred for commercial expediency. The Assessing Officer treated expenditure as capital expenditure on the ground that the assessee had already sold its present manufacturing unit and the study could only help in exploring the future business and, accordingly, disallowed the assessee’s claim.

On appeal, the Commissioner (Appeals) treated the expenditure as bogus and, accordingly, upheld the disallowance made by the Assessing Officer.

On second appeal :

Held-II

It is well-settled that for claiming expenditure under section 37(1), the assessee is required to establish that the expenditure was incurred by the assessee on account of commercial expediency. In the instant case, the majority of the bills placed on record by the assessee before the Commissioner (Appeals) related to the travelling expenses of the senior officers of the holding company in different months and the other bills related to the training expenses, exhibition expenses, in respect of stall charges, etc., in respect of hotel charges for communication meet, in respect of proportionate share of salaries paid to top personnel of the holding company associated with business promotion of the company. However, from the bills, it was not evident how the expenditure incurred by the holding company on account of market survey conducted related to the study which could help in exploring the future business of the assessee. Therefore, from the bills, it could not be said that the expenditure was incurred by the assessee for business expediency. However, before recording a finding that the expenditure was not incurred for the business purpose of the assessee, the Commissioner (Appeals) had not allowed an opportunity to the assessee for explaining as to how the expenditure related to the business expediency of the assessee. Once the assessee had filed the complete details of the expenditure, nothing more was required to be done by the assessee for showing its eligibility for claiming the deduction for the impugned expenditure and, therefore, the assessee did not consider it necessary to explain the same before the Commissioner (Appeals). Had the Commissioner (Appeals) asked the assessee to explain, the assessee would have done so. Hence, the impugned order was liable to be set aside and the issue was to be sent back to the file of the Commissioner (Appeals) for deciding afresh after allowing reasonable opportunity of being heard to the assessee for explaining as to how the expenditure incurred/claimed related to the commercial expediency of the assessee. [Para 17]