Mukand Global Finance Ltd.
v.
Deputy Commissioner of Income-tax,
Range 3(2)
Sunil Kumar Yadav , Judicial 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 would be 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 hands 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 ended 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 read with section 36(1)(iii) 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 investment or capital asset -
Held, yes - Whether where assessee had invested borrowed funds, in shares which
were kept as stock in trade, interest paid on borrowed 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 recoverability 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 provisions for non-performing assets in order to compute book profit under
section 115JA - Whether since provision for non-performing assets made by
assessee was not a provision for any liability, Assessing Officer was wrong in
increasing net profit of assessee by this provision for non-performing assets
in order to compute book profit under section 115JA - Held, yes
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. The assessee 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, 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 accounts, it was not entitled for deduction under section 32 also.
On second appeal:
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. [Para 9]
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 subsection (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 considerations received or accrued as a result of transfer of another capital asset falling within the block of assets during the previous year exceed 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 asset including the new assets which are acquired during the previous year and falls within the same block of asset 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 excess 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 asset shall be the written down value of the block of asset 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 gains arising from the transfer of short term capital assets. Provision of this section does 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 asset 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 asset acquired during the previous year. Meaning thereby the loss suffered on transfer of block of asset cannot be computed under section 50. This type of situation is dealt with by the provisions of section 32(l)(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 written off of such deficiency in the books of the assessee. [Para 10]
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. [Para 11]
Turning to the facts of the case, it was found that the assessee had undisputedly sold its flat, which was the only block of asset under the head building and its sale was 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 behalf of the assessee in this 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]
The assessee-company had purchased certain shares of a company ‘I’ from its holding company ‘M’ during the year ended on 31-3-1994 ; while M had acquired the said shares in the year ended on 31-3-1989. During the previous year relevant to the assessment year 2000-01, the assessee sold the said shares and while computing the long term capital gain applied 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
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 transfer 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]
Now the next question which arose 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 hands 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 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. The assessee 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 on the assessee a notice under section 143(2) 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 exempted 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 statue 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 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 pass 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 reassessment is sought to be made under section 147 or the income assessed or refund issued, as the case may be, 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 in 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 investment or capital asset. In the instant case, the lower authorities had disallowed the interest on borrowed funds, which were invested in shares without looking 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 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 kept as stock in trade was allowable as revenue expenditure under section 36(1)(iii). [Paras 32, 34]
FACTS IV
The assessee had maintained an account for non-performing assets. The assessee kept the outstanding debts which could not be properly effected under the head non-performing assets [NPAS] 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 provision 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 case of bad and doubtful debts similar type of practice as adopted by the assessee 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 Joint 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 recoverability 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 was ascertained or unascertained became irrelevant. Therefore, the order of the Commissioner (Appeals) was 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 prepared 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.