IN THE ITAT MUMBAI BENCH ‘I’
Mukand Global Finance Ltd.
v.
Deputy Commissioner of Income-tax, Range 3(2)
SUNIL KUMAR YADAV, JUDICIAL MEMBER
AND J. SUDHAKAR REDDY,
ACCOUNTANT MEMBER
IT APPEAL NO. 4078/M/2004
[ASSESSMENT YEAR 2000-01]
NOVEMBER 27, 2007
I. Section 50, read with section 32, of the
Income-tax Act, 1961 - Capital gains - Computation in case of depreciable
assets - Assessment year 2000-01 - Whether sections 50 and 32(1)(iii) deals
with different types of situations on transfer of capital assets of assessee -
Held, yes - Whether section 50 deals with those cases where profit accrues to
assessee on transfer of any block of assets, whereas section 32(1)(iii) deals
with those cases where assessee suffers a loss on sale of any building,
machinery, plant, furniture, etc. - Held, yes - Whether, therefore, loss
suffered on transfer of block of asset cannot be computed under section 50 and
this type of situation would be dealt with by provisions of section 32(1)(iii)
- Held, yes - Whether, however, deduction of such loss would be allowed under
section 32(1)(iii) if such deficiency is actually written off in books of
assessee - Held, yes
II. Section 49, read with section 47, of the Income-tax Act,
1961 - Capital gains - Cost with reference to certain modes of acquisition -
Assessment year 2000-01 - Whether when capital assets are sold and purchased
between holding company and subsidiary company, transaction would not fall
within ambit of sections 47 and 49 - Held, yes - Whether when capital asset is
sold by holding company to its subsidiary company, year of indexation in case
of subsidiary company would be year of transfer of capital asset in favour of
subsidiary company on its sale - Held, yes - Assessee-company purchased certain
shares from its holding company ‘M’ during year ending on 31-3-1994; while ‘M’
had acquired said shares in year ended on 31-3-1989 - During previous year,
relevant to assessment year 2000-01, assessee sold said shares - Whether year
of indexation for computing capital gain on sale of shares would be taken from
assessment year 1994-95, i.e., when shares were transferred in favour of subsidiary
company i.e., assessee, and not year in which it was acquired by holding
company - Held, yes
III. Section 14A of the Income-tax Act, 1961 - Expenditure
incurred in relation to exempt income - Assessment year 2000-01 - Whether for
invoking proviso to section 14A there should be an assessment order passed
which is sought to be reopened or rectified by subsequent act of Assessing
Officer - Held, yes - Whether disallowance under section 14A of interest paid
on borrowed funds can only be made where borrowed funds are invested in shares
which are held by assessee as an investment or as capital asset - Held, yes
Section 36(1)(iii) of the Income-tax Act, 1961 - Interest on
borrowed capital - Assessment year 2000-01 - Whether where assessee had
invested borrowed funds in shares which were kept as stock-in-trade, interest
paid on borrowed funds was to be allowed under section 36(1)(iii) - Held, yes
IV. Section 115JA of the Income-tax Act, 1961 - Minimum
alternate tax - Assessment year 2000-01 - Whether debt is amount receivable by
assessee and not any liability payable by assessee and, therefore, any
provision towards recovery of debt cannot be said to be provision for liability
- Held, yes - Assessee kept outstanding debts which could not be properly
recovered under head non-performing assets and made provision for same -
Assessing Officer treated provision for non-performing assets made by assessee
as a provision for unascertained liability and, accordingly, increased net
profit of assessee by this provision in order to compute book profit under -
Whether was justified - Held, no
Facts-I
During the
relevant assessment year, the assessee-company had sold a building forming part
of block of assets and had incurred certain loss. The assessee claimed the said
loss to be short-term capital loss under section 50. It also claimed set-off of
the said loss against its business income on the ground that, although the said
loss was deemed to be short-term capital loss, yet the said loss had been
incurred in the course of its business and deduction in respect thereof be
allowed from its business income. The Assessing Officer disallowed the
assessee’s claim for set-off of loss in question.
On appeal, the
Commissioner (Appeals) confirmed the action of the Assessing Officer. He held
that the claim of loss could not be considered under section 50. It could only
be considered under section 32(1)(iii), and since the assessee had not
actually written off the deficiency in its books of account, it was not
entitled for deduction under section 32 also.
On second
appeal :
HELD-I
The title of section 50 is ‘Special provision
for computation of capital gains in case of depreciable assets’. The assessee
had raised a controversy that the word ‘capital gains’ included capital loss also.
The intention of the Legislature ,where the word ‘capital gain’ include capital
loss, can be examined not by reading the title but by full reading of section
50. [
A plain reading of section 50 shows that it is a
non obstante clause and has overriding
effect over section 2(42A) which defines short-term capital asset under
different situations. Its sub-section (1) deals with the mode of calculation of
the capital gain of depreciable asset. Through the mode of computation, given
in this section only profit earned on transfer of block of assets can be worked
out. According to it where the full value of consideration received or accrued
as a result of transfer of asset together with the value of such consideration
received or accrued as a result of transfer of another capital asset falling
within the block of assets during the previous year exceeds the aggregate of
the expenditure wholly and exclusively incurred in connection with such
transfer, written down value of the block of asset at the beginning of the
previous year and the actual cost of any of assets falling within the block of
asset acquired during the previous year, such excess shall be deemed to be the
capital gain arising from the transfer of short-term capital asset. Meaning
thereby, the provisions of sub-section (1) can only be invoked where the entire
block of assets including the new assets which are acquired during the previous
year and fall within the same block of assets, are transferred and the sale
proceeds exceed the aggregate of expenditure on transfer, written down value of
the asset and the actual cost of new asset acquired during the previous year.
This provision would not apply to those cases where part of the block of assets
are transferred. Sub-section (2) deals with those types of cases where any
block of assets ceased to exist for the reason that all the assets in that
block are transferred during the previous year, the cost of acquisition of the
block assets shall be the written down value of the block of assets at the
beginning of the previous year, as increased by the actual cost of any asset
failing within that block of assets, acquired by the assessee during the
previous year and the income received or accruing as a result of such transfer
or transfers shall be deemed to be the capital gain arising from the transfer
of short-term capital assets. Provisions of this section do not apply to those
cases where the block of assets are transferred and the full value of
consideration is less than the written down value of the block of assets at the
beginning of the previous year expenditure incurred wholly and exclusively in
connection with such transfer and the actual cost of any asset falling within
the block of assets acquired during the previous year. Meaning thereby, the
loss suffered on transfer of block of assets cannot be computed under section
50. This type of situation is dealt with by the provisions of section 32(1)(iii), according to which deduction of the
amount by which the moneys payable in respect of such building, machinery,
plant or furniture, together with the amount of scrap value, if any, fall short
of the written down value thereof in case the said building, machinery, plant
or furniture is sold, discarded, demolished or destroyed in the previous year subject
to actual write off of such deficiency in the books of the assessee. [
If both the sections, i.e., section 32(1)(iii) and section 50, are read together one
would find that these sections 50 and 32(1)(iii)
deals with different types of situations on transfer of capital assets of the
assessee. Section 50 deals with those cases where the profit accrues to the
assessee on transfer of any block of assets, whereas section 32(1)(iii) deals with those cases where the
assessee suffers a loss on sale of any building, machinery, plant and
furniture. [
Turning to the facts of the instant case it was
found that the assessee had undisputedly sold its flat, which was the only
block of assets under the head building and its sale resulted into a loss inasmuch
as sale consideration was less than the written down value of the asset in
question. In such a situation where loss is incurred on sale of block of assets
of the assessee, section 50 has no application in such a situation and the case
would fall within the provision of section 32(1)(iii)
and the loss is to be computed as per clause (iii)
of section 32(1) and deduction of the same would be allowed to the assessee
from the business profit provided such deficiency is actually written off in
the books of the assessee. In the instant case, the Commissioner (Appeals) had
disallowed the claim of the assessee under section 32(1)(iii) because the assessee had not written off
the deficiencies in its books of account. During the course of hearing nothing
was placed on record on behalf of the assessee in that regard. It had simply
harped upon that its case was covered by section 50 and the capital gains
included capital loss; whereas section 50 deals only with those types of cases
where the profit accrue to the assessee on transfer of block of assets.
Therefore, the Commissioner (Appeals) had properly adjudicated the issue.
Hence, the impugned order was to be confirmed. [Para 12]
FACTS-II
The
assessee-company had purchased certain shares of a company ‘I’ from its holding
company ‘M’ during the year ending on 31-3-1994; while ‘M’ had acquired the
said shares in the year ending on 31-3-1989. During the previous year relevant
to the assessment year 2000-01, the assessee sold the said shares. While computing
the long-term capital gain it claimed
indexation from the assessment year 1979-80. The Assessing Officer held
that it was not a case of normal transfer of capital asset by a holding company
‘M’ to its subsidiary company, the assessee, as envisaged in section 47(iv)
and, therefore, had taken the base year with reference to the date of
acquisition by the assessee-company. The Assessing Officer, thus, applied
indexation from the assessment year 1994-95 in order to compute capital gain.
On appeal, the
Commissioner (Appeals) confirmed the action of the Assessing Officer.
On second
appeal :
HELD-II
On reading the provisions of sections 47(iv) and 49(1)(iii)(e), it is clear that computation of capital
gain on transfer of those assets which fall under section 47 would not be
governed by the normal provisions of section 45. Cost of acquisition of the
capital asset falling within the ambit of section 47(iv), (v),
(vi), (via) and (viab)
is to be computed as per provisions of section 49. With regard to transfer of
capital asset by a holding company to its subsidiary company, it has been
stated in sections 47(iv)
and 49(1)(iii)(e) that the cost of acquisition of a capital
asset, which has been transferred by a holding company to its subsidiary
company, if the holding company or its nominee hold whole of the share capital
of the subsidiary company and the subsidiary company is an Indian company,
shall be deemed to be the cost for which the holding company acquired the said
capital asset as increased by the cost of any improvement of the asset incurred
or borne by the holding company or the subsidiary company in whose hands cost
of acquisition is to be computed. Therefore, the cost of acquisition in the
hands of the holding company shall be deemed to be the cost of acquisition in
the hands of the subsidiary company in case of transfer of capital asset by the
holding company. This proposition would not be applicable if the capital assets
are sold by the holding company to the subsidiary company. Once the capital
assets are sold to the subsidiary company, the sale value of the capital asset
shall be the cost of acquisition in the hands of the subsidiary company. [Para
21]
Further, the provisions of sections 47 and 49
can only be invoked where the holding company transfers its capital asset
without any consideration to its subsidiary company, but when the transfer of
capital asset takes the character of sale and purchase, the sale consideration
shall be the cost of acquisition in the hands of the buyer. This deeming
provision can only be invoked where the cost of asset at the relevant point of
time could not be determined and more so the consideration was not passed on
from the buyer to the seller. Once the capital assets are sold and purchased
between the holding company and the subsidiary company the transaction would
not fall within the ambit of sections 47 and 49. [Para 22]
The next question which arose for consideration
was as to what would be the period of indexation for computing the capital gain
on transfer of assets by the subsidiary company. In those cases, where the cost
of acquisition shall be deemed to be the cost for which the holding company
acquired it the year of acquisition for the purpose of indexation shall be the
year in which the capital was acquired by the holding company and the
indexation might be computed accordingly. But in a case where the capital asset
is sold by the holding company to its subsidiary company the year of indexation
in the case of the subsidiary company shall be the year of transfer of capital
asset in favour of the subsidiary company on its sale. In the instant case,
undisputedly, the shares were purchased by the assessee-company from its
holding company. As such the year of purchase of the shares would be the year
of acquisition of the shares and the indexation would be taken from the
assessment year 1994-95 in which the capital asset was purchased and not the
year in which it was acquired by the holding company. Therefore, the Assessing
Officer had rightly computed the capital gain accrued on the sale of shares.
[Para 23]
FACTS-III
The assessee,
a non-banking finance company, was engaged in the business of investment and
trading in shares and finance and leasing. It earned dividend income on both
the types of shares, either kept as stock-in-trade or as an investment. The
assessee paid interest on borrowed funds invested in shares and claimed
deduction of the same. The Assessing Officer originally issued an intimation
under section 143(1)(a) and granted refund to the assessee as claimed.
Subsequently, the Assessing Officer issued a notice under section 143(2) on the
assessee and in regular assessment framed under section 143(3) disallowed the
interest expenditure under section 14A holding that the assessee had received
dividend income, which was exempt from tax.
On appeal, the
Commissioner (Appeals) rejected the preliminary objection raised by the
assessee that the provisions of section 14A could not be invoked in the instant
case in the light of the proviso inserted in section 14A by the Finance Act,
2002 with retrospective effect from 11-5-2001 and confirmed the disallowance
made by the Assessing Officer.
On second
appeal :
HELD-III
Section 14A was brought on the statute by the Finance
Act, 2002 with retrospective effect from 1-4-2001. After the introduction of
provision of section 14A a strong apprehension was raised on behalf of the
corporate sector and the different assessees that this provision might be
misused and assessment might be reopened. In order to avoid misuse of this
provision proviso to this section was introduced by the Finance Act, 2002 with
retrospective effect from 11-5-2001 and through this proviso a restriction was
imposed upon the Assessing Officer that he would not be empowered either to
reassess under section 147 or to pass an order enhancing the assessment or
reducing a refund already made or otherwise increasing the liability of the
assessee under section 154, for any assessment year beginning on or before
1-4-2001. Therefore, the proviso to section 14A is applicable to a situation
where the assessment order for an assessment year beginning on or before
1-4-2001 has already been passed and, subsequently, re-assessment is sought to
be made under section 147 or the income assessed or refund issued, as the case
may be, is sought to be enhanced or
reduced by passing an order under section 154. Therefore, for invoking the
proviso to section 14A there should be an assessment order passed which is
sought to be reopened or rectified by the subsequent act of the Assessing
Officer. In the instant case, undisputedly, there was no assessment order
passed under section 143(3). Only an intimation was issued through which refund
was granted. It is well settled that intimation under section 143(1)(a) cannot be called to be an assessment
order. It is merely an intimation. Further, in the instant case, regular
assessment was framed after issuance of notice under section 143(2), which
could not be called to be reassessment under section 147 or rectification under
section 154. Therefore, proviso to section 14A could not be invoked in the
instant case. Therefore, the Assessing Officer had rightly, invoked the
provisions of section 14A. Further, though the dividend income earned by the
assessee on its shares which were kept as stock-in-trade was also exempted from
tax but the interest paid on the borrowed funds invested in trading of shares
could not be disallowed because it was borrowed for the purpose of business and
was an allowable expenditure under section 36(1)(iii).
Disallowance of interest on borrowed funds can only be made where the borrowed
funds are invested in shares and the shares are held by the assessee as an
investment or as capital asset. In the instant case, the lower authorities had
disallowed the interest on borrowed funds, which were invested in shares
without looking in to the nature of shares, whether they were kept as
stock-in-trade or as an investment. Therefore, the Assessing Officer was
directed to readjudicate the issue afresh and identify the borrowed funds,
which were invested in shares, held as an investment and only with regard to
these borrowed funds disallowance under section 14A could be made. The interest
paid on the borrowed funds which were invested in shares on kept as
stock-in-trade was allowable as revenue expenditure under section 36(1)(iii). [Paras 32 and 34]
FACTS-IV
The assessee
had maintained an account for non-performing assets. It kept the outstanding
debts which could not be properly recovered under the head non-performing
assets and, accordingly, made a provision for non-performing assets while
computing its total income. But the net profit computed as shown in the profit
and loss account for the relevant previous year in accordance with the
provisions of Parts II and III of Schedule VI of the Companies Act was not
increased by the said provisions for non-performing assets in order to compute
book profit under Explanation to section 115JA. The Assessing Officer
treated the provision for non-performing assets as a provision for
unascertained liability and increased the aforesaid net profit by this
provision for non-performing assets and then recomputed the book profit under
section 115JA.
On appeal, the
Commissioner (Appeals) confirmed the action of the Assessing Officer.
On second
appeal :
HELD-IV
In the instant case assessee had maintained an
account for non-performing assets and whatever recovery of the outstanding
debts was not properly effected and certain defaults in instalments were
committed, assessee put those outstanding dues under the head ‘non-performing
assets’ and, accordingly, he made a provision for non-performing assets while
computing the total income of the assessee. In the case of bad and doubtful
debts similar type of practice is being
adopted by the assessees whenever they failed to recover the debt. Therefore,
the same analogy could also be applied to the instant case. In the case of bad
and doubtful debts, the Special Bench of the Tribunal in the case of Jt. CIT v. Usha
Martin Industries Ltd. [2007] 104 ITD 249 (Kol.) has
categorically held that the provision for bad and doubtful debts is not a
provision for any liability, it is rather a provision for diminution in the
value of assets, i.e.,
debts, because even if a debt is not recovered no liability would be fastened
upon the assessee. Debt is the amount receivable by the assessee and not any
liability payable by the assessee and, therefore, any provision towards
recovery of the debt cannot be the said to be the provision for the liability.
Similar is the position with regard to provisions for non-performing assets. In
that case also, if the debt is not recovered no liability would be fastened
upon the assessee. It is the amount receivable by the assessee and not the
liability payable by the assessee. Therefore, the provision for non-performing
assets was not a provision for liability. As such, the question whether it is
ascertained or unascertained is irrelevant. Therefore, the order of the
Commissioner (Appeals) was to be set aside and the Assessing Officer was
directed not to increase the net profit shown in the profit and loss account
for the relevant previous year in accordance with the provisions of Parts II
and III of Schedule VI of the Companies Act by this provision for
non-performing assets in order to compute the book profit under section 115JA.
[Para 41]
Editor’s
Note
1. The assessee was entitled to claim deduction
in respect of lease equalization charge, and it could not be disallowed by
treating same as capital expenditure.
2. Where the lease transaction of the assessee
was treated as financial arrangement by the Assessing Officer, in such circumstances
interest income accruing to the assessee would be charged to tax in place of
rental income assessed by him.
cases
referred to
J.K.
Chemicals Ltd. v. Asstt.
CIT [IT Appeal Nos. 8206 and 8648 (Bom.) of 1989] (para 4), CIT v. J.H.
Gotla [1985] 156 ITR 323/23 Taxman 14J (SC) (para 6), Telerad (P.) Ltd. v.
P.N. Mittal, Asstt. CIT [1980] 126 ITR 1/3 Taxman 541 (Guj.) (para 22), CIT
v. Stanes Motors (South
Shivaram and Paras Salva for the Appellant.
Ashima Gupta for the Respondent.