MAX FINANCIAL SERVICE LIMITED ,NAWANSHAHR vs. PRINCIPAL COMMISSIONER OF INCOME TAX -1, JALANDHAR

आदेश/ORDER

Per Annapurna Gupta, Accountant Member:

This appeal filed by the assessee is directed against the order of the Principal Commissioner of Income Tax, Jalandhar (in short “PCIT”), dated 25.02.2020 relating to assessment year 2015-16, passed in exercise of his revisionary jurisdiction u/s 263 of the Income Tax Act, 1961 (hereinafter referred to as Act).

2 ITA No.121/Asr/2020 A.Y.2015-16

assessment record of the assessee pertaining to the

impugned year noticed that the Assessing Officer (AO) had

framed the assessment without duly examining the claim of

the assessee relating to certain expenses and or

incomes/profits returned . Accordingly, show cause notice

was issued to the assessee as to why remedial action u/s

263 of the Act be not taken with respect to the assessment

order framed, and specific discrepancies noted by the Ld.

Pr.CIT therein was pointed out. Due and exhaustive reply

was filed by the assessee addressing the legal aspect of

assumption of jurisdiction u/s 263 of the Act and pointing

out why the same were not fulfilled in the present case vis-

à-vis each specific issue raised by the Pr. CIT. The Ld.

Pr.CIT did not find merit in the contention of the assessee

and dealing with each specific issue raised by her, arrived at

a finding that the order of the AO was erroneous so as to

cause prejudice to the interest of the Revenue with respect

to each issue. The Ld. Pr.CIT held that the AO had passed

the order u/s 143(3) of the Act without making requisite

enquiries and verification in respect of the specified issues,

which should have been made before passing of the order

u/s 143(3) of the Act and, therefore, the assessment order

was erroneous and prejudicial to the interest of the

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Revenue. Accordingly, she set side the assessment order

passed by the AO directing a fresh order to be passed after

making necessary enquiries/investigation in the light of the

discussions made by her in her order passed u/s 263 of the

Act.

found to be erroneous and prejudicial to the interest of the

Revenue by the Ld. Pr.CIT ,as set out in the show cause

notice issued to the assessee are as under:

(a) Allowability of depreciation and other expenses as business expenditure and their purpose for earning revenue from operations and other income; b) Basis of computation of loss from sale of unquoted investment of Rs.4037.19 lakhs; (c) Allowability of expenditure incurred on Corporate guarantee given on behalf of a sister concern as business deduction; (d) Basis of valuation of various assets sold in slump sale to Max Speciality Films Ltd. (e) Rent received from letting out of a property to the employee taxable as ‘income from house property’ vis-à-vis ‘business income’ offered by the assessee in the return of income and consequential claim of depreciation thereon. (f) Basis of valuation of unquoted current investment sold during the year to a sister concern. 4. It is the aforesaid order of the Ld. Pr.CIT which is in

challenge before us and the grounds raised by the assessee

challenge both the validity of the assumption of jurisdiction

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by the Ld. Pr.CIT u/s 263 of the Act as well as the merits of

the case. The grounds raised by the assessee are as under:

“1. That the order passed by the Principal Commissioner of Income Tax ("PCIT") under Section 263 of the Income Tax Act, 1961 ("Act") is bad in law and void ab-initio. 2. That the order of the PCIT is bad in law, being based on surmises and conjectures without any finding of fact as to how the order passed under section 143(3) of the Act was erroneous or prejudicial to the interest of the revenue. Jurisdictional grounds

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conducting enquiry when the issue has been examined by the AO.

On merits

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by the PCIT were duly supported by various decisions of High Courts of the country and hence, acceptance of the same by the assessment order while framing the assessment would not render the assessment erroneous, and the PCIT is not permitted to supplant his opinion with that of the AO.” 5. Before us the primary contention of the Ld.Counsel for

the assessee, addressing each issue raised, was that due

disclosure regarding the issue had been made by the

assessee before the AO during the assessment proceedings,

due inquiry had been conducted by the AO on the issue, who

had applied his mind to the same and thereafter made no

addition/disallowance with regard to the same, finding the

claim to be in accordance with law. It was contended by the

Ld.Counsel for the assessee that despite bringing out the

above aspect before the Ld.Pr.CIT and addressing each query

raised by her during the revisionary proceedings

satisfactorily, the Ld. Pr.CIT had merely stated that the

issues required further verification, without pointing out

any fallacy, sustainable in law, in the explanation of the

assessee. That there was no finding by the Ld.Pr CIT of any

error causing prejudice to the Revenue and therefore the

revisionary jurisdiction assumed by her u/s 263 of the Act

was not in accordance with law.

the Ld. Pr.CIT, with her primary contention being that the

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AO had failed to examine the specific issues raised by the

Ld. Pr.CIT and has simply accepted the claim of the assessee

as such. In this regard she heavily relied on the order of the

Ld.Pr.CIT.

and dealing with each issue vis a vis which the Ld.Pr.CIT

had found the order passed by the AO to be erroneous.

discuss the jurisprudence on the exercise of revisionary

power as per the provisions of section 263 of the Act, more

particularly with regard to order being found erroneous and

prejudicial to the interest of the Revenue on account of lack

of inquiry/inadequate inquiry by the AO, which is the

primary ground for exercising revisionary jurisdiction in the

present case.

relevant provisions of the section for the aforestated

purposes.

“Revision of orders prejudicial to revenue. 263.(1) The [Principal Commissioner or] Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing] Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he, may, after giving the assessee an opportunity of being heard and after making or

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causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. . . . . . . . …………………………………………………………………………….. Explanation 2.- For the purposes of this section, it is hereby declared that an order passed y the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner, - (a) the order is passed without making inquiries or verification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.]” 10. Interpreting section 263(1), the proposition that to

invoke revisionary jurisdiction, the assessing officers order

must be found to be both erroneous and also prejudicial to

the interest of the Revenue and if one of the conditions is

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not fulfilled recourse cannot be had to section 263 of the

Act, is settled law, laid down by the Hon'ble Apex court in

the case of Malabar Industrial Co. Ltd. vs. CIT (2000) 243

ITR 83(SC). Further, for coming to the conclusion that the

assessment order is erroneous and prejudicial to the

interest of the Revenue, the assessee has to be given

opportunity to make submissions and after considering the

same and conducting due inquiry ,the PCIT/CIT has to

arrive at the conclusion of the order being erroneous and

prejudicial to the interest of the Revenue. The finding of

error should give the reasons for arriving at the said

conclusion. The matter cannot be simply remanded back for

further inquiry without any finding of error in the order of

assessment. The Hon’ble Dehi High Court has so interpreted

the provisions of section 263 in the following decisions:

i) PCIT Vs Modicare Ltd., ITA No.759/2016, decision dated 14.09.2017. ii) PCIT Vs. Delhi Airport Metro Express Pvt. Ltd., ITA No.705/2017, decision dated 05.09.2017. iii) ITO Vs. DG Housing Projects Limited (2012) 343 ITR 329 (Delhi) 11. Explanation 2 to the section, outlines specific

circumstances in which order of assessing officer shall be

deemed to be erroneous and prejudicial to the interest of the

Revenue. The said explanation has been interpreted in

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various decisions of the ITAT holding that the explanation

cannot be resorted to simpliciter for giving a finding of

error, and the substantive requirements of section 263 ,as

stated above, have still to be fulfilled for applying the

explanation. The case laws holding so, as pointed out by the

Ld.Counsel for the assessee are as under:

i. Torrent Pharmaceuticals Ltd. Vs. DCIT, ITA No.164/Ahd/2018, decision dated 08.08.2018. ii. Asian Homes Pvt. Ltd. Vs. PCIT (2012) 78 ITR (Trib) 240 (Mumbai). iii. Citystar Ganguly Projects Ltd. Vs. PCIT, ITA No.1103/Kol/2019,decision dated 31.10.2019, Kolkata Tribunal.

by the Ld.Pr.CIT in her order.

Issue No.1: Claim of depreciation on rented out building

noted that the assessee had shown investment in building at

Rs.2731.65 lacs on which depreciation had been claimed

amounting to Rs.273.16 lacs. She further noted that this

building had been rented out on which rental income of

Rs.15.57 lacs had been shown by the assessee and returned

as business income claiming depreciation against the same.

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The Ld. Pr.CIT noted that the AO had neither examined the

claim of depreciation on this building, nor as to why the

rent from building was a ‘business income’ and not income

under the head ‘house property’ against which claim of

depreciation was not allowable.

pointed out that all due disclosure of all facts relevant to

the issue were there before the AO,

a) with the impugned property having been duly

capitalized in the books of account under the head

‘investment property’ and reflected in Schedule-XI of

the Financial Statement.

b) That the assessee had claimed depreciation of

Rs.2,73,16,571/- u/s 32(1) of the Act and the rental

income earned from the said property had been duly

disclosed under the head ‘income from business and

profession’ and disclosed in Schedule-XXI as ‘other

income in the Financial Statement of the assessee

company.

thoroughly examined by the AO, who had thereafter accepted

the claim of the assessee of returning the rental income

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under the head income from business and profession’ and

claiming depreciation on the said asset against the same,

which was in accordance with the view taken by various

High Courts on identical issue before them. Referring to the

facts of the case it was pointed out that the impugned

property had been leased out to the Managing Director of

the company for his residential purpose as part of the

retention policy of the company pertaining to Key Managerial

Personnel of the assessee company. The Ld.Counsel for the

assessee pointed out that various High Courts have held

such letting out to be in the course of business of the

assessee, for the purpose of business of the assessee and

hence to be assessed under the head ‘business income’. He

drew our attention in this regard to the following decisions:

1) Jamdeshpur Engineering & Machine Manufacturing Company, 32 ITR 41

4) CIT Vs. Modi Industries Limited,(1994) 210 ITR 1 (Del)(FB)

5) CIT Vs. New India Maritime Agencies (1994) 207 ITR 392(Mad)

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facts being duly disclosed to the AO and the AO having

taken a possible view on the issue, there was no error in the

order of the AO merely because the Ld. Pr.CIT entertained

another view on the issue. He referred to the decision of the

apex court in the case of CIT Vs. Max India Ltd., 295 ITR

282 in this regard.

attention to the finding of the Ld. Pr.CIT at para 5.2 of the

order pointing out therefrom that her entire case for finding

error in the order of the AO rested on her holding the rental

income to be categorically assessable under the head

‘income from house property’ and not “income from business

and profession’, relying on the ratio laid down by the

Hon'ble Apex Court in the case of Raj Dadarkar & Associates

Vs. ACIT Civil Appeal Nos. 6455- 6460 of 2017. That for the

aforesaid reason the Ld. Pr.CIT held that the AO by not

examining the issue of rental income earned by the assessee

and accepting the claim of the assessee for the same to be

assessed under the head ‘income from business and

profession’ claiming depreciation against the same,

tantamounted to error in the order of the AO causing

prejudice to the interest of the Revenue. The Ld.Counsel for

the assessee pointed out that the decision referred to by the

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Ld. Pr.CIT was based on totally different facts and was

distinguishable from the case of the assessee. That in the

said case the assessee had treated the rental income earned

as ‘business income’ on account of the fact that it was

engaged in the business of renting out property. In the light

of the said fact, the Hon'ble Supreme Court had held that

the income could not be termed as business income since

there was specific head for assessing the rental income and

had, therefore, held that the rental income was to be

assessed under the head of ‘house property’ as provided in

the Act. The Ld.Counsel for the assessee pointed out that

the facts in the present case were totally different, with the

assessee having rented out property to his Key Managerial

Personnel and claiming the same as business income for the

reason that the asset was owned by the assessee for the

purpose of its business, as held by various High Courts in

the decisions cited above in identical facts and

circumstances. That the decision of the Hon'ble Apex Court

was distinguished by the Hon'ble Bombay High Court in the

case of Principal Commissioner of Income Tax Vs. Krome

Planet Interiors (P) Ltd. (2019) 265 Taxman 308 while

holding that the said decision could not be applied blindly

and whether an income is from property as business income

or income from house property has to be determined keeping

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in mind the facts of each case. The Ld.Counsel for the

assessee accordingly pleaded that the finding of the Ld.

Pr.CIT was based on incorrect application of law to the facts

relating to the issue.

order of the Ld. Pr.CIT. Her contention being that the AO

had accepted the assessee’s claim of rental income being

assessed under the head ‘income from business and

profession” and depreciation being claimed against it

,without examining the claim as such, more particularly,

when the Hon'ble Supreme Court in the case of Raj

Dadarkar & Associates Vs. ACIT (supra) had categorically

held that the impugned income was to be assessed under the

head ‘income from house property’ and no claim of

depreciation was to be allowed against it. Thus the non

examining of the aforesaid claim of the assessee by the AO

was an error which has caused prejudice to the Revenue as

rightly held by the Ld. Pr.CIT.

gone through the judicial decisions referred to before us.

assessment order erroneous causing prejudice to the

Revenue on the issue of rental income earned by the

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assessee and depreciation claimed against the same, rests

on the understanding that the ratio laid down by the Hon'ble

Apex Court in the case of Raj Dadarkar & Associates Vs.

ACIT (supra) applied to the facts of the present case and the

rental income accordingly was assessable under the head

“Income from House Property” against which no claim of

depreciation was allowable .That the AO had erred in

accepting assessees claim of returning the income under the

head “Business and Profession” and allowing depreciation

against the same, without making due inquiries and

applying the correct proposition of law .

with the Ld.Counsel for the assessee that the ratio laid

down therein is not applicable in the facts of the present

case. In the case before the Hon’ble Apex Court , the

assessee was in the business of letting out the shops/stalls

on monthly rent, collecting service charges separately for

repairs, maintenance and other services. The assessee in the

said case was not found to be engaged in any systematic

activity of providing service to the occupants, but was in

fact found to be receiving income from letting out shops etc.

simpliciter and thus it was held that its income was

assessable under the head Income from House property and

not as Business income. The facts in the present case, we

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find are totally different. In the present case the rental

income was earned on letting out residential property to the

key managerial personnel of the assessee company in lieu of

its retention policy. This fact has remained uncontroverted

by the Ld.Pr.CIT and even before us. Based on identical set

of facts, various judicial decisions, as referred to by the

Ld.Counsel for the assessee, have held the rental income to

be assessable under the head “Business Income”, holding

that the occupation of the residential property by the

assessee was for the purpose of business and hence exempt

from being taxed under the head “Income from House

Property”. The said decisions are:

1) Jamdeshpur Engineering & Machine Manufacturing Company, 32 ITR 41

4) CIT Vs. Modi Industries Limited,(1994) 210 ITR 1 (Del)(FB)

5) CIT Vs. New India Maritime Agencies (1994) 207 ITR 392(Mad)

aforestated decisions that where a house property is

occupied as residence by employees or its directors to

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enable them to discharge their functions effectively and the

letting out is subservient and incidental to the main

business of the assessee, such an occupation amounts to an

occupation and user of the property by the assessee itself

for the purposes of its business. Clearly the issue is

squarely covered by various decisions of High Courts in

favour of the assessees stand and the Hon’ble Apex court

decision is distinguishable on facts and thus not applicable

in the present case .

the assessee under the head business income is in

accordance with law and the claim of depreciation against

the same therefore also is justified. There is therefore, we

find, no error in the order of the AO accepting the rental

income returned under the head Business income and

depreciation claimed against the same. Therefore, vis-à-vis

the issue of non examination of the claim of rental income

and depreciation claimed against the same, as raised by the

Ld. Pr.CIT, we hold that the findings of the Ld. Pr.CIT of the

order being erroneous and prejudicial to the Revenue are not

justified. There is no error and prejudice caused to the

Revenue, as held by us above since the claim of the assessee

is supported by various decisions of various High Courts

and finding of the Ld. Pr.CIT to the contrary supported by

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the decision of the Hon'ble Apex Court in the case of Raj

Dadarkar & Associates Vs. ACIT (supra) is, we find, based

on incorrect application of law to the facts of the case.

Pr.CIT of the order being erroneous and prejudicial to the

interest of the Revenue on account of non examination of

claim of rental income and depreciation against the same.

Issue No.2 : non-examination by the AO of the expenses claimed by the assessee 25. Taking up the next issue raised by the Ld. Pr.CIT, the

same relates to non-examination by the AO of the claim of

expenses by the assessee particularly, as per the Ld.Pr.CIT,

in the backdrop of the fact that the assessee had no other

source of income other than from investment activity.

claim that all disclosures with regard to the same were made

before the AO, it was also contended that justifiability of the

claim had also been demonstrated before the Ld. Pr.CIT, who

had failed to point out any infirmity in the same and,

therefore, there was no basis with the Ld. Pr.CIT for holding

the order erroneous on this count.

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assessee was that :

a) That the assessee was earning income not only

from investment activity but also from rendering

operational consultancy to its sister concerns and had

also income from other sources. That the expenses

accordingly had been incurred for the purposes of

carrying out the aforestated activity of rendering

functional support services to group companies and

making holding and nurturing investments in group

companies.

b) That the assessee had suo moto disallowed 45%

of the expenses claimed in its Profit & Loss Account.

c) That the expenses in any case were of the nature

for maintaining the corporate entity of the assessee,

after hiving off the manufacturing business of the

assessee.

d) That the investment activity undertaken was the

main business activity of the assessee and, therefore,

the claim of expenses was allowable against the same.

e) That no discrepancy has been observed by the

auditors in the Books of accounts maintained.

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Ld.Pr.CIT has simply stated that the claim of expenses was

not examined by the AO but has not conducted any inquiry

as to how they were not allowable. That no error has been

pointed out but the matter simply remanded to the AO for

further inquiry. That this in any case was not the first year

that the said expenses were claimed and had been allowed

by the AO himself in preceding years.

of the order which is as under:

“6.2 Decision The perusal of the facts of the case as accepted by the assessee show that the Assessee Company earned the following revenue/income during the previous year: • Income from investment activities’ (Schedule 20 of the financial statements): Rs.581.77 Crs. • Other income (Schedule 21 of the financial statements): Rs.2.87 Crs. • Income from functional support services (Schedule 24 & 25 of the financial statements) (Recovery of expenses): Rs.12.47 Crs. Further the assessee has explained that the Assessee Company was primarily engaged in providing functional support services to its subsidiaries and in the activity of investing, holding and nurturing investments made in its subsidiaries and the cost incurred to render such services was recovered from the operating subsidiaries to whom such services were rendered. Singh the cost was recovered from the sister

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concern in such cases there is not issue of any loss on this account. Besides this the other income shown by the assessee is only income from investing activity wherein the assessee has shown dividend income and interest income. Dividend income being exempt under the Income Tax Act no expense against it can be claimed by the assessee as per provisions of section 14A. Interest shown by the assessee is from investing activity and not from business activity. The AO has failed to examine the issue of admissibility of expense claimed by the assessee against such income and the reason for showing losses on the basis of facts of the case. According to section 37(1) of the Income Tax Act, 1961, any expenditure (not being expenditure of the nature described in section 30 to 35 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession. Also according to Explanation inserted by the Finance (No.2) Act, 1998, w.e.f. 1-4-1962 to section 37(1), any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction of allowance shall be made in respect of such expenditure. An expenditure can be claimed as a deduction while computing income from “business or profession” if the following condition are fulfilled. (i) Expenditure is not of the nature as described in section 30 to 35 of the Act; (ii) Expenditure is of revenue in nature nto of capital in nature; (iii) Expenditure is not personal expenses of the assessee;

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(iv) Expenditure has been laid down or expended wholly and exclusively for the purposes of business or profession of the assessee; (v) Expenditure has not been incurred for any purpose which is an offence or which is prohibited by law. ……………………………………………………………………… …………………………………………………………………….. ……………………………………………………………………..

In the assessee’ case the nexus between the expenditure incurred and the income earned has not been shown. Even if a liberal view is taken that the expenses was incurred for dealing with the residual aspects of the MSF division which was sold as slump sale on 01-04-2015 then also only 10% of the total expenses claimed should have been allowed. The adminssibility of expenditure claimed by the assessee needs to be examined by the assessing officer. The order of the AO is thus erroneous and prejudicial to the interest of the revenue.” 30. Referring to the above Ld.DR contended that the Ld.

Pr.CIT had countered the justification of the assessee by

stating that though admittedly the assessee was earning

income from operational consultancy but as per the assessee

itself it was only recovering the cost incurred on the same

so there was no question of any loss being incurred by the

assessee on account of all such activities. That other income

earned by the assessee included dividend income and

interest income and that no claim of expenses attributable

to the earning of dividend income were allowable under the

Act. That the interest income earned was on account of the

24 ITA No.121/Asr/2020 A.Y.2015-16

investment activity carried out by the assessee and could

not be categorized as the business income of the assessee.

Therefore, the Ld. Pr.CIT held that the justification of the

claim of the expenses stood negated and the non-

examination of the claim of expenses by the AO had

rendered the assessment order erroneous so as to cause

prejudice to the Revenue.

both the parties, we are in agreement with the Ld.Counsel

for the assessee that there is no finding of error as such by

the Ld.Pr.CIT on the issue of non examination of claim of

expenses by the AO.

the claim of expenses was there before the AO. Identical

claims were made in the preceding years also and allowed by

the AO. Further admittedly it is not the case that the

assessee was earning only from investment activity, as made

out by the Ld.Pr.CIT in her show cause notice, but

admittedly as per her findings at para 6.2 of the order, the

assessee had earned income from various activities

including investment activity, rendering functional support

services and other income which included interest and

dividend income. The justification of the claim of expenses

25 ITA No.121/Asr/2020 A.Y.2015-16

by the assessee is that expenses claimed relate only to

those incurred in relation to its business activity of

rendering functional support services, its income earned by

way of interest from investments made in the course of its

business and expenses incurred for maintaining its

corporate entity and that the assessee had suo moto

disallowed 45% of the total expenses debited to the profit

and loss account.

before us nor any infirmity worth its name pointed out by

the Ld.Pr.CIT. On the contrary, we find, the Ld.Pr.CIT has

tried to negate the claim of expenses against the aforestated

incomes by stating that:

a) Since the assessee was recovering cost on account of operational consultancy given and, therefore, there was no reason for incurring losses.

b) Interest income is from investment activity which therefore is not the business income of the assessee.

c) That since dividend income is exempt no claim of expenses is allowed against the same under the Act.

26 ITA No.121/Asr/2020 A.Y.2015-16

Ld. Pr.CIT’s finding that no loss could possibly have been

incurred in operational consultancy, we fail to understand.

It is not the case of the Ld. Pr.CIT that the assessee had

claimed losses under the head ‘business and profession

income’, on the contrary the only contention of the Ld.

Pr.CIT is that the assessee had claimed expenses when no

business activity/income has been earned by it. There is no

reference to any fact vis a vis the claim of losses in

operational consultancy activity, in the order and we fail to

understand how this reasoning /finding has been arrived at.

Further we find no basis for the finding of the Ld.Pr.CIT that

the interest income from investment activity was not

business income of the assessee, despite the repeated

assertions by the assessee before her that investment

activity and operational consultancy were in the nature of

business activity of the assessee, which has not been

controverted by the Ld.Pr.CIT. All in all we find that the Ld.

Pr.CIT has not given any basis or reasoning at all for

rejecting the justification of the claim of expenses made by

the assessee.

expenses admittedly made during assessment proceedings,

the claim of similar expenses having been allowed in earlier

27 ITA No.121/Asr/2020 A.Y.2015-16

years, the assessee also having justified its claim of

expenses and the Ld.Pr.CIT, we find, being unable to

controvert the aforesaid nor being able to point any fallacy

in the same, there cannot be said to any finding of error in

the order of the AO causing prejudice to the Revenue on

account of non-examination of the claim of expenses

incurred by the assessee while computing its income.

Therefore, we set aside the findings of the Ld. Pr.CIT of the

order being erroneous and prejudicial to the interest of the

Revenue on account of non examination of expenses claimed

by the assessee.

ISSUE: Non Examination of the liability of expenditure incurred by the assessee on guarantee given to sister concerns which stood discharged during the year. 36. With regard to the said issue the Ld.Counsel for the

assessee stated that it had been pointed out to the Ld.

Pr.CIT that the assessee had incurred no expenditure on

account of corporate guarantee given to the sister concerns,

nor claimed any in the return of income, that the complete

disclosures were made to the AO through financial

statements which are a matter of record and since no

expenditure was incurred, no enquiry was required to be

conducted in this regard and for the same reason there

28 ITA No.121/Asr/2020 A.Y.2015-16

could be no prejudice caused to the Revenue. The

Ld.Counsel for the assessee stated that despite the above

categorical statement the Ld. Pr.CIT went on to reiterate in

her findings that the AO had failed to examine the

expenditure incurred on given corporate guarantee and that

he had also failed to examine whether the interest free funds

or interest bearing funds were used for giving said

guarantee. He drew our attention to the findings of the Ld.

Pr.CIT at para 10.2 of her order as under:

“10.2 Decision The AO has failed to examine the expenses incurred on giving corporate guarantee. The AO has also failed to examine whether interest free funds or interest bearing funds were used for giving any such guarantee. The loss to the assessee on account of guarantee has also not been examined by the AO. The order of the assessing officer is thus prejudicial and erroneous.” 37. The Ld.Counsel for the assessee stated that in view of

the categorical statement of fact that no expenditure had

been incurred by the assessee on this account which has not

been controverted by the Ld. Pr.CIT, there is no error I the

order of the AO.

of the Ld. Pr.CIT.

29 ITA No.121/Asr/2020 A.Y.2015-16

gone through the order of the Ld. Pr.CIT on this issue.

Clearly the consistent and categorical stand of the assessee

has been that it had not incurred any expenditure on

account of corporate guarantee given to its sister concerns

and the said fact had also been pointed out from its

financial statements. The Ld. Pr.CIT has not controverted

this fact. Therefore, without controverting this basic fact

that the assessee had incurred no expenditure at all on

corporate guarantee given, we fail to understand how there

could possibly be an error of the AO for not examining the

allowability of such expenditure, which admittedly were non

existent.

examine whether the interest free funds or interest bearing

funds had been used for giving such guarantee, makes no

sense because, as is common knowledge, there is no transfer

of funds involved when an entity stands as a guarantor for

another entity with a financial institution who has extended

financial support to the other entity. The entity giving

corporate guarantee undertakes to make good the liability

to the bank in case the loanee fails to pay back its liability

or loan to the bank. Therefore, there is no question of any

financial transaction being involved on giving corporate

30 ITA No.121/Asr/2020 A.Y.2015-16

guarantee to the extent of the guarantee given atleast and,

therefore, the issue of whether what funds were used for

giving the same does not arise. As far as the finding of the

Ld. Pr.CIT that the AO had failed to examine the loss

incurred on corporate guarantee, we fail to understand how

the Ld. Pr.CIT has arrived at this finding as nothing has

been brought out in the order or even before us so as to

demonstrate what loss is being referred to by the Ld.Pr.CIT.

It is clear, therefore, vis-à-vis, the impugned issue, there is

no finding of any error in the order of the AO by the Ld.

Pr.CIT.

Pr.CIT of the order being erroneous and prejudicial to the

interest of the Revenue on account of non examination of

expenses claimed on account of guarantees given by the

assessee.

ISSUE: Non Examination of the transaction of slump sale during the year. 42. The Ld.Counsel for the assessee drew our attention to

the facts relating to the issue pointing out that the

Ld.Pr.CIT noted that the assessee had shown slump sale on

“ongoing concern basis” of its Speciality Films Division

31 ITA No.121/Asr/2020 A.Y.2015-16

engaged in the business of manufacturing and sale of

Biaxially Oriented Polypropylenes (BOPP) Films, i.e MSF

division, to Max Speciality Films Ltd., (MSFL), resulting in

profit disclosed in the return of income of Rs.163.72 lacs.

That as per the Ld.Pr.CIT, the manner of computation of

profits earned on the same and valuation of various assets

including the stock and building transferred had not been

examined by the AO, as also the Business Transfer

Agreement under which the transfer took place. As per the

Ld.Pr.CIT there was a difference in rate at which the

concern had been transferred and the rate as per the

Business Transfer Agreement, showing a downward revision

,and the same had neither being questioned, nor reconciled

during the assessment proceedings. That the sale having

been made to a sister concern, the basis of valuation and its

correctness had not been examined by the AO. For the

aforesaid discrepancies, the Ld.Pr.CIT was of the view that

the order of the AO warranted revision and accordingly

show cause notice was issued to the assessee.

that it was submitted before the Ld. Pr.CIT that during

assessment proceedings, specific query had been raised by

the AO and the assessee had explained in detail the

complete modalities of the slump sale transaction

32 ITA No.121/Asr/2020 A.Y.2015-16

undertaken and also submitted requisite documents in

support. He further contended that due reply was also filed

to the Ld. Pr.CIT to every point raised by her, explaining

how the transaction qualified as slump sale as per the

provisions of the Act evidenced with the Business Transfer

Agreement (in short ‘BTA’), the valuation of the sale

consideration as originally shown in the BTA and its

downward revision vide a letter exchanged between the

assessee and MFSL, the basis of calculation of the capital

gain earned as per the books of account and as per the

Income Tax Act. It was pointed out that in assessment

proceedings, the BTA, both original and amended, explaining

the entire transaction of slump sale, had been filed before

the AO, copy of certificate of Accountant regarding

computation of net worth of the undertaking so transferred

for the purpose of slump sale in Form No.3CEA was also

filed and specific disclosure regarding the impugned

transaction was made in the notes forming the part of the

financial transaction. Further a No Objection Certificate of

the AO u/s 281(1) of the Act, obtained by the assessee was

also filed before the AO and the entire computation of

capital gains alongwith the tax computation on the same

was also furnished. That the AO had applied his mind to

the same and had made no addition. That clearly the issue

33 ITA No.121/Asr/2020 A.Y.2015-16

had been examined by the AO during assessment

proceedings. He contended that the entire transaction and

the mode of computation and every aspect and query raised

by the Ld. Pr.CIT was replied to and it was duly

demonstrated to the Ld. Pr.CIT that the income therefrom

had been rightly reflected as per the provisions of law

applicable. He drew our attention to the detailed

submissions in this regard made before the Ld.Pr. CIT and

reproduced in her order at para 7.1 & 7.2.

findings of the Ld. Pr.CIT, pointing out the error in the

assessment so framed on the issue, the Ld. Pr.CIT had failed

to point out any anomaly in the explanation and details so

filed by the assessee. Taking us to the findings of the Ld.

Pr.CIT at para 7.3 of the order, the Ld.Counsel for the

assessee pointed out that the issues relating to the

transaction which the Ld. Pr.CIT found the AO had failed to

examine were;

i) whether the sale falls within the definition of slump

sale as defined u/s 2(42C) of the Act. He drew our

attention to point No.I of para 7.3, wherein the

findings of the Ld. Pr.CIT in this regard find mention

as under:

34 ITA No.121/Asr/2020 A.Y.2015-16

“1. Whether the sale effected feel within the definition of slump sale as defined under section 2(42C). As per section 2(42C) of Income Tax Act, 1961, ‘slump sale’ means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales. ‘Slump sale’ is transfer of a whole or part of business concern as a going concern, lock stock and barrel. ‘Undertaking’ has the same meaning as in Explanation 1 to section 2(19AA) defining ‘demerger’. As per Explanation 3 to section 2(19AA), ‘undertaking’ shall include any part of an undertaking or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof nt constituting a business activity. Explanation 2 to section 2(42C) clarifies that the determination of value of an asset or liability for the payment of stamp duty, registration fees, similar taxes, etc. shall not be regarded as assignment of values to individual assets and liabilities. Thus, if value is assigned to land for stamp duty purpose, the transaction will be a qualifying slump sale under section 2(42)C). A sale in order to constitute a stamp sale must satisfy the following quick test: (a) The subject matter of slump sale shall be an undertaking of an assessee. (b) An ‘undertaking’ may be owned by a corporate entity or a non-corporate entity, including a professional firm. (c) Slump sale may be of a single undertaking or even more than one undertaking. (d) The undertaking has to be transferred as a result of sale. (e) The consideration for transfer is a lump sum consideration. This consideration should be arrived at without assigning values to individual assets and liabilities.

35 ITA No.121/Asr/2020 A.Y.2015-16

The consideration may be discharged in cash or by issuing shares of Transferor Company. (f) Possibility of identification of price attributable to individual items (plant, machinery and dead stock) which are sold as part of slump sale, may not entitle a transaction to be qualified as slump sale – CIT vs. Artex Manufacturing Co., [227 ITR 260 (SC)]. However, in case of slump sale which includes land/building where separate value is assigned to it under the relevant stamp duty legislation, the slump sale will not be adversely affected in the light of Explanation 2 to section 2(42C). (g) Transfer of assets without transfer of liabilities is not a slump sale.” 45. Referring to the same he stated that except for stating

that the AO had not examined whether the transaction

qualified as slump sale as defined under the Act, the Ld.

Pr.CIT has not pointed out as to how the detailed

explanation furnished by the assessee in this regard, both to

the AO and the Ld. Pr.CIT fell short of explaining this

qualification of the transaction as slump sale. The

Ld.Counsel for the assessee pointed out that despite the

detailed explanation furnished by the assessee evidenced

with the BTA, the Ld. Pr.CIT had even failed to refer to the

explanation furnished by the assessee and simply stated

that the AO had failed to examine whether the transaction

qualified as slump sale. The Ld.Counsel for the assessee

stated that in view of the detailed explanation furnished by

36 ITA No.121/Asr/2020 A.Y.2015-16

the assessee and the Ld. Pr.CIT having not pointing out any

anomaly in the same, the afore mentioned findings cannot

be said to be any findings of error in this regard.

Ld. Pr.CIT which are reproduced hereunder:

“2. The perusal of the assessee’s transfer agreement in respect of the MSF division shows that the assessee has transferred the undertaking around the book value of the assets and liabilities. As per the computation submitted by the assessee the net worth of the undertaking as on 01-04-2014 works out to 275.36 crores and assessee has transferred it at Rs.277 crores. The assessee was asked to specify the basis of arriving at the sale consideration for the sale effected by the assessee. The assessee has claimed that it’s as per the BTA. The BTA in clause 4.1 mentions the business transfer consideration to be 305 crores as against which the final sale consideration has taken place at Rs.277 crores. The basis of this variation has not been specified by the assessee and has not been examined by the AO. It has been claimed that the same is as per letter dated 01-04-2014. The perusal of the copy of the letter dated 01-04-2014 doesnot give any reason for the revision or basis of computation of the same, it just says that the Business Transfer Consideration has been revised to 277 crores. During the course of the 263 proceedings ample opportunity were given to the assessee to explain the reason for change in value from Rs.305 to 277 crores. No valid explanation could be given by the assessee. He was unable to explain through a valid acceptable argument as to how the value of MSF has fallen from 305 crore to 277 crores. It is not out of context to mention that the entire transaction is a related party transaction. A simple letter has been issued revising the transaction value to 277 crores without any acceptable computation or revised valuation. Keeping in view these facts the claim of the assessee that the value of sale consideration is

37 ITA No.121/Asr/2020 A.Y.2015-16

277 crores cannot be accepted when the BTA specifies the transaction to be at Rs.305 crores.” 47. Referring to the same he contended that the Ld. Pr.CIT

had noted that despite repeated queries raised in this

regard, the assessee had not specified the basis for arriving

at the original sale consideration as mentioned in the BTA

and revised sale consideration and also the reason for

downward revision in the same. That the assessee was

unable to explain how the value had fallen from Rs.305

crores to Rs.277 crores, more particularly, when the

transaction was with the related party, that since the BTA

specified the transaction at Rs.305 crores its downward

revision to Rs.277 crores by way of a letter dated

01.04.2014 could not be accepted.

contended that there is no requirement under the Statute

for justifying the sale consideration/ price of transaction

seven if effected with the sister concern, nor has any such

provisions being pointed out by the Ld. Pr.CIT. In any case,

it was contended, the value of transaction stood justified

with the BTA both original and revised entered into between

both the parties agreeing to a particular of consideration.

That the only requirement under law was vis-à-vis the

calculation of net worth as per section 50B of the Act which

38 ITA No.121/Asr/2020 A.Y.2015-16

had been justified to the Ld. Pr.CIT and no anomaly in the

same has been pointed out. He, therefore, contended that

even the aforesaid findings of the Ld. Pr.CIT at para 2 did

not contain any finding regarding any error of the AO.

order of the Ld. Pr.CIT, which reads as under:

“3. Further, the assessee has claimed that the consideration was discharged by MSFL partly through issue of equity shares 3,84,00,000/- at Rs.10 each (issued at a premium of Rs.40 per equity shares) of Rs.167 Circumstances. And balance by way of interest bearing loan of Rs.110 Circumstances. It has not been examined by the AO where the amount of Rs.110 crores is appearing in assessee’s balance sheet and whether the interest on the loan has been accounted for by the assessee and if so what is the rate of interest and whether the interest charged is at arm’s length. During 263 proceedings it was claimed by the assessee that the interest at 13% has been received from MFSL, however, the profit and loss account does not seem to reflect that interest. It has also not been examined as to how the premium of Rs.40/- has been arrived at, as the shares of MSFL were issued to the assessee at a premium. Thus the AO has failed to examine whether the entire transaction of slump sale has occurred at arms length or not. The order of the AO is thus erroneous and prejudicial.” and referring to the same he pointed out that the Ld. Pr.CIT

mentions therein that the AO had not examined whether the

assessee had actually received consideration in the form of

interest bearing loans of Rs.110 crores and whether it had

charged interest on the same during the year or not. That

the Profit & Loss Account did not “seem” to reflect the

39 ITA No.121/Asr/2020 A.Y.2015-16

interest and the AO has also not examined how the premium

of Rs.40/- has been arrived at on the shares of MSFL issued

to the assessee in lieu of consideration for slump sale.

out that as far the reflection of interest bearing loan of

Rs.110 crores the same was clearly reflected in the Balance

Sheet and since no query has been raised by the Ld. Pr.CIT

during 263 proceedings, there was no occasion to

demonstrate the same to her. That even vis-à-vis the issue

of interest the only finding of the Ld. Pr.CIT is that it seems

that the interest has not been accounted for. The Ld. Pr.CIT

has neither cared to examine this issue during revisionary

proceedings, nor investigated the same herself and without

doing so has jumped to conclusion. Further it is not

comprehensible as to how the premium of Rs.40/- on the

shares of MSFL issued to the assessee , in any way, causes

prejudice to the Revenue since the shares have been

received as consideration for the slump sale and the

valuation of the shares is a matter of concern for MSFL and

not the assessee.

order of the Ld. Pr.CIT referring to the discrepancy noted in

the transaction on slump sale affected by the assessee and

40 ITA No.121/Asr/2020 A.Y.2015-16

the issues which needed further examination as pointed out

by the Pr. CIT, before us, at para 7.3 of her order, as

reproduced above. She stated that the AO having accepted

the submissions made by the assessee in this regard during

assessment proceedings and considering that he failed to

examine the issues flagged by the Pr. CIT as to whether the

transaction did qualify as slump sale as per the provisions

of, the justification for the sale consideration received and

its downward revision explained by a letter exchanged

between two parties and further the non examination of the

manner of receipt of consideration for the slump sale, the

findings of the Ld. Pr.CIT of error in the order of the AO in

this regard were, therefore, justified.

consideration of the submissions made by both the parties

and on going through various letters, communications and

documents which were referred to before us, we are of the

view that there is no finding of error in the order of the Ld.

Pr.CIT on the issue of slump sale transaction entered into

by the assessee during the year. Admittedly, a query had

been raised during assessment proceedings for justifying the

capital gains earned by the assessee during the year, in

response to which the assessee had filed detailed

submissions regarding the slump sale transaction of its MSF

41 ITA No.121/Asr/2020 A.Y.2015-16

division undertaken during the year. Vide letter dated

28.11.2017 the assessee had explained in detail the

complete modalities of the slump sale transaction

undertaken during the year and also submitted the relevant

documents. Perusal of the copy of the said letter, placed

before us, reveals that the assessee had explained in detail

the transaction of slump sale undertaken and evidenced the

same with the Business Transfer Agreement entered into in

the said transaction. The assessee had further explained

how the impugned transaction qualified as a slump sale as

per the provisions of section 2(42C) of the Act and had also

furnished computation of the capital gain earned on the

same as per the relevant provisions of section 50B of the

Act. Copy of No objection certificate of the AO with regard to

the aforesaid transaction obtained u/s 281(1) of the Act was

also filed. Even before the Ld. Pr.CIT we find the assessee

had reiterated his submissions made before the AO

justifying its transaction which stand reproduced at paras

7.2 and 7.3 of the order before us. We have noted from the

perusal of the letters filed before the Ld. Pr.CIT that every

query raised by the Ld. Pr.CIT qua the manner of

computation of profit generated from the said transaction,

the valuation of assets including stock and building

transfer, justification of the transfer qualifying as a slump

42 ITA No.121/Asr/2020 A.Y.2015-16

sale and variance in the value of building as reported in the

financial statements and in the Income Tax Act, all were

duly replied to. The assessee had, therefore, justified the

transaction qualifying as slump sale as per the provisions of

the Act by the Business Transfer Agreement entered into, so

also the sale consideration received for the same and its

downward revision in the sale consideration through a letter

exchanged between two parties, he had justified the capital

gain earned thereon as per the provisions of the Act and

besides furnishing the computation of the same had

furnished a certificate of an Accountant in this regard in

Form No.3CEA. The assessee had also obtained a No

objection certificate from the AO for the impugned

transaction. All the aforesaid facts are not disputed, nor

controverted before us. Therefore, the findings of the Ld.

Pr.CIT that the AO had not examined whether the

transaction qualified as slump sale, we find is not justified

based on the facts before us wherein we find that repeatedly

detailed justification had been filed by the assessee. The

findings of the Ld. Pr.CIT that the sale consideration

required to be examined further since there was a downward

revision in the same and transaction had been undertaken

between sister concern, we are of the view, merits no

consideration. Admittedly, there was a downward revision in

43 ITA No.121/Asr/2020 A.Y.2015-16

the sale consideration and the transaction did take place

with sister concern. But, we find, the assessee had

evidenced the sale consideration through Business Transfer

Agreement and the subsequent letter exchanged between the

two parties vis-à-vis which no discrepancy had been pointed

out by the Ld. Pr.CIT. In such circumstances what

occasioned further examination of the issue, we find has not

been spelt out by the Ld. Pr.CIT. Merely because the

transaction took place with the sister concern, the sale

consideration needed to be examined, seems illogical

specially when the assessee had evidenced the same with

Business Transfer Agreement. Not every transaction with a

sister concern needs to be looked at with suspect and there

had to be more reasons for conducting further enquiry.

Further as rightly pointed out by the Ld.Counsel for the

assessee the Ld. Pr.CIT has also not pointed out any

provisions in law warranting the justification of the sale

consideration in a transaction entered into with the sister

concern. Therefore, finding of error by the Ld. Pr.CIT on

account of non examination of the sale consideration also is

not justified. Further as regards the non examination of the

manner of receipt of sale consideration in the form of

unsecured loans and shares being not examined, whether

duly accounted for and the premium at which the shares

44 ITA No.121/Asr/2020 A.Y.2015-16

were acquired by the assessee not being examined for

justification, we find, do not point to any error in the order

of the AO causing prejudice to the Revenue. It is not the

case of the Ld. Pr.CIT that the said consideration has not

been accounted for by the assessee. Further how the

premium on the shares given to the assessee as

consideration for the slump sale has caused any prejudice to

the Revenue, is not clear from the order of the Ld. Pr.CIT. As

long as the consideration has been paid to the assessee in

the form of unsecured loans, and shares being given to the

assessee of equivalent value, how the premium on which the

shares were issued would, in any way, affect the

computation of capital gain or raise any doubt on the

transaction, has not been spelt out by the Ld. Pr.CIT.

Therefore, we hold that vis-à-vis the transaction of slump

sale also, there is no finding of any error in the order of the

AO.

Pr.CIT of the order being erroneous and prejudicial to the

interest of the Revenue on account of non examination of

slump sale undertaken by the assessee during the year and

the order of the Ld. Pr.CIT holding so is, therefore, set

aside.

45 ITA No.121/Asr/2020 A.Y.2015-16

ISSUE: Non Examination of Valuaton of Shares of Max Healthcare Institute Limited sold by the assessee during the year. 54. The Ld.Counsel for the assessee submitted that during

the impugned year the assessee had sold shares of M/s Max

Healthcare Institute Limited, which the Ld.Pr.CIT found that

the AO had not examined vis a vis the valuation at which it

was sold.

assessment proceedings all necessary documents evidencing

the genuineness of the transaction were filed to the AO. He

drew our attention to the following in this regard:-

“For Sale of Investment in Max HealthCare Institute Limited (MHIL) Form FC-TRS dated 10.11.2014, filed by the Assessee Company with the Authorized Dealer Bank in connection with sale of shares evidencing receipt of consideration in the Bank account of the Company; 392, Vol,2. Valuation Report as on March 31,2015; 393 to 404, Vol. 2 Copy of Share Purchase Agreement between the Assessee Company. Life Healthcare International (LHI) and MHIL; 405 to 443, Vol. 2. Copy of investment schedule along with relevant demat statements/ extracts of financial statements evidencing investment in shares; 444 to 449, Vol 2 Additionally, all disclosures vis-a-vis the Gain/Loss were duly recorded and reported in Audited Financials as submitted before the AO.” 56. Referring to the above the Ld.Counsel for the assessee

pointed out that even the Valuation Report of a independent

46 ITA No.121/Asr/2020 A.Y.2015-16

valuer determining the value of the shares sold as on

31.03.2015 was filed to the AO reflecting the value of the

shares therein at Rs.45.17 per share. He thereafter pointed

out that the Ld. Pr.CIT pointed out that since the shares

were sold much before 31.03.2015 i.e. on 31.08.2014,

therefore, the aforesaid Valuation Report was of no

relevance, and a fresh valuation as on 31.03.2014, basis

DCF Methodology was asked for. The Ld.Counsel for the

assessee submitted that the said report was also filed

reflecting valuation therein of the shares at Rs.66.33 per

share which was less than the consideration for which the

shares were sold at Rs.67.50 per share. The Ld.Counsel for

the assessee contended that the assessee, therefore, had

unequivocally established the genuineness of the

transaction both before the AO and had even addressed the

queries raised by the Ld. Pr.CIT. He thereafter stated that

the error pointed out by the Ld. Pr.CIT was in fact, no error

at all. Referring to the findings of the Ld. Pr.CIT at para 9.2

of her order as under:

“9.2 Decision The revised valuation certificate by the assessee shows that the rate at which the unquoted shares have been transferred is subject to further verification. The valuation report of the shares needs to be examined further and the computation made by the valuer needs to be cross- verified with the balance sheet. The assessing

47 ITA No.121/Asr/2020 A.Y.2015-16

officer has failed to examine the computation of share valuation as discussed above. The order of the assessing officer is thus prejudicial and erroneous.” the Ld.Counsel for the assessee pointed out that the Ld.

Pr.CIT has only stated that the revised Valuation Report

filed by the assessee needed verification, the valuation of

the shares sold needed to be examined further and had to

be crosschecked with the Balance Sheet and the AO having

failed to do so this exercise, the order was erroneous

causing prejudice to the Revenue. The Ld.Counsel for the

assessee contended that the shares were sold to an

independent third party, the valuation of the same being

duly evidenced by agreement entered into by the said parties

and further cemented as being above board by the Valuation

Report basis the DCF Method reflecting the fact that the

shares were sold at above the fair market value of the said

shares. The Ld.Counsel for the assessee contended that

there was no requirement under law, nor any such

requirement pointed out by the Ld. Pr.CIT, in the shares so

sold to an independent party to be sold at its fair market

value, nor was there any requirement under law in the

valuation of such shares to be done at DCF Method. That

such requirement was there under Statute in section

56(2)(viia) & (viib) which was applicable in different

circumstances that too in the case of purchaser of shares

48 ITA No.121/Asr/2020 A.Y.2015-16

and not the seller of the shares which the assessee was in

the present case. Therefore, there was no error as such as

pointed out by the Ld. Pr.CIT in the assessment order

passed by the AO accepting the transaction of sale of shares

of Max Healthcare Institute by the assessee.

the order of the Ld. Pr.CIT.

merit in the contention of the Ld.Counsel for the assessee. It

is not disputed that the impugned transaction of sale of

shares of Max Healthcare Institute Limited was undertaken

by the assessee with an independent third party, Life

Healthcare International, and all documents evidencing the

said transaction were filed before the AO including the share

purchase agreement between the assessee company and Life

Healthcare International to whom the said shares were sold.

It is not disputed also that the shares were sold at the price

agreed to between the two parties. No anomaly vis-à-vis the

above has been pointed out by the Ld. Pr.CIT. The only

reason for holding the order of the AO erroneous was that

the AO needed to verify the valuation of shares sold that too

for the reason that the assessee had submitted two

Valuation Reports, one as on 31.03.2015 reflecting the value

49 ITA No.121/Asr/2020 A.Y.2015-16

of shares at Rs.45.17 per share and the other as on

31.03.2014 reflecting the value of shares at Rs.67.33 per

share.

the two independent parties, the consideration evidenced by

the purchase agreement entered into between them, how and

why the issue of valuation of shares arises, has not been

pointed out by the Ld. Pr.CIT. No provision under law has

been brought to our notice which requires the assessee to

sell shares at its fair market value. In any case, the

valuation of shares as per DCF Method as on 31.03.2014 ,as

asked for by the Ld. Pr.CIT herself and relating to the year

ending just prior to the date on which the said shares were

sold ,being,31-08-2014, shows the fair market value to be

less than that at which the assessee had sold the shares.

The value at which the shares were sold,therefore, appears

to be fully justified, exceeding the fair market value of the

shares.

assessee that the assessee having evidenced the transaction

of sale of shares of Max Healthcare Institute Limited with

necessary documentary evidences and even submitted

valuation showing the actual sale price exceeding the fair

50 ITA No.121/Asr/2020 A.Y.2015-16

market value of shares, and no infirmity being pointed out

by the Ld.Pr,CIT in the same, the Ld.Pr.CIT was not justified

in holding the order erroneous for want of further inquiry

vis a vis the valuation. The Ld.Pr.CIT ought to have pointed

out discrepancy or infirmity in the valuation report

submitted to her before proceeding to hold non inquiry of

the same as rendering the order erroneous.

Pr.CIT of the order being erroneous and prejudicial to the

interest of the Revenue on account of non examination of

sale of shares of Max Healthcare Limited and the order of

the Ld. Pr.CIT holding so is, therefore, set aside.

ISSUE: Loss of Sale of Unquoted Investment amounting to Rs.4037.19 lacs 62. Pointing out the facts relating to the issue, the

Ld.Counsel for the assessee contended that during the

impugned year the assessee had sold its entire stake in

Neeman Medical International BV (hereinafter referred to as

‘Neeman BV’), its wholly owned subsidiary, representing

2361 equity shares to Maprime Management B.V. for a sale

consideration of Rs.20.74 lacs. The assessee company had

made investments in these shares over the years amounting

51 ITA No.121/Asr/2020 A.Y.2015-16

to Rs.4057.93 lacs and had made provision for dimunition

in the value of these investments in its books of account.

The said provision amount was reversed during the

impugned year pursuant to sale of shares of Neeman BV.

and accordingly, book loss of Rs.4037.19 lacs (Rs.20.74 lacs

– Rs.4057.93 lacs) was recorded in the books.

1) A complete disclosure of the aforesaid book loss of Rs.4037.19 lacs had been made and reported in the financial statements and the capital loss generated under the provisions of the Act had also been duly disclosed. The transaction had been evidenced by copy of sale deed pertaining to the transfer of shares.

2) Copy of Valuation Report determining the equity value of the shares as on 28.03.2015 had also been filed.

3) The loss suffered on account of the sale of said shares had been duly disclosed in the audited financial statements as also the entire transaction had also been reported in the audited financial statements.

accordingly complete disclosures were made by the assessee

during the course of assessment proceedings and the issue

was duly examined by the AO since a detailed reply was filed

52 ITA No.121/Asr/2020 A.Y.2015-16

by the assessee in response to notice dated 26.10.2017.

Therefore, there was no error in the order of the AO having

duly examined the said transaction and allowed the claim to

the assessee. He further contended that there was no loss to

the Revenue also since the provision for the diminution in

the value of investment provided for in the books of account

had not been allowed in the computation of income filed for

assessment year 2013-14 and the said amount was reduced

in accordance with clause(i) to Explanation-1 to section

115JB of the Act while computing the book profits for

assessment year 2015-16. The Ld.Counsel for the assessee

further contended that even before the Ld. Pr.CIT all the

above facts were duly brought out and the mode of

computation of loss on the sale of the said shares both as

per the books and as per the Act were duly filed. He drew

our attention to the same as reproduced in the order in para

8.1 sub-para 4.1.8. He further stated that all queries raised

by the Ld. Pr.CIT had also been addressed and it had been

pointed out that the provisions of section 56(2) (viia) and

56(2)(viib) of the Act were applicable to the facts of the case.

The Ld.Counsel for the assessee, therefore, contended that it

had been clearly demonstrated to the Ld. Pr.CIT that there

was no error so as to cause prejudice to the Revenue in the

order of the AO.

53 ITA No.121/Asr/2020 A.Y.2015-16

of the Ld. Pr.CIT at para 8.2 of her order as under:

“8.2 The perusal of the details filed by the assessee show that it has shown investment in shares of Neeman Medial International BV (Neeman BV)- a Netherland based wholly owned subsidiary of Max India Ltd. as under

Year Of Number of Cost of Face Value Sale Price per Sale Price Acquisition Shares Acquisition share during the year 1-12-2005 36 7,21,290 500 euros 878.64 33,388 31-08-2006 2 33,27,46,972 500 euros 31-03-2014 2323 7,23,24,900 500 euros 878.64 20,41,087 2361

The above table shows the adjustments made by the assesses to book both short term and long term capital loss in its books. The AO has failed to examine from whom 2323 shares with face value of 500 Euros were purchased on last day of the preceding year previous year for Rs.7,23,24,900/- and were then sold for Rs.20.41.087/- on the basis of valueation on the same day. Further as per the balance sheet for financial year 2013-14 the assessee made provision for diminution in the value of the shares purchased of its subsidiary for Rs.7,23,24,900/- on the same day thus showing that the transaction had been entered into just for the purpose of defrauding the revenue and for adjustment of capital loss against capital gains. It's also surprising how were« two shares of Neeman purchased for 33 crores during 2006. The assessing officer has failed to verify the authenticity of this transaction by calling for valuation submitted to the RBI on the basis of which foreign remittance was made for transfer of fund abroad The Assessing Officer has also failed to examine the authenticity of purchase of 2323 shares ON 31-03-2014 for Rs. 7,23,34,900/- which have been sold for Rs.20,41,087/- after a very short period. It is of importance that the shares are unquoted shares and the basis of valuation of unquoted share as per Rule 11U is to be on the basis of FMV computed on the basis of value on the valuation date as determined in the following manner (A-L)/(PE) X (PV). Rule 11U defines Valuation date as “the date on which the property or the consideration, as the case may be, is received by the assessee”. It also defines balance sheet as the audited balance sheet on the valuation date. The Income Tax Rules,

54 ITA No.121/Asr/2020 A.Y.2015-16

1962 does not provides for method of valuation in the assessee where the audited balance sheet is not available on the valuation date. In such cases the last audited balance sheet is to form the basis of valuation. Thus, in the instant case, the last Audited Balance Sheets for purchase and sale of shares would be same i.e. 31-03-2014. No evidence has been filed by the assessee to show that valuation of the shares of Neeman Medical International BV (Neeman BV) was done on the basis of any other date by drawing up and auditing the balance sheet on that date. The view that the valuation needs to be done on the date prescribed by the relevant provisions is upheld by the Hon'ble Madras High Court in the case of CWT Vs S Ram 147 ITR 278. One other question which arises in a few of the gift-tax references is this group relates to the choice of the balance sheet which has got to be taken as the basis for computation of the company’s net wealth as a first step in arriving at the value of unquoted shares. We may visualize the gift of unquoted shares as having occurred on the date of the company’s balance sheet. In such a case, no problem is presented because the balance sheet figures of assets and liabilities can be taken as they are, for the purpose of computing the break-up value of the company’s assets as on the date of the gift. Where however, a gift of unquoted shares takes place in between the dates of two balance sheet the question is which is the balance sheet which has got to be adopted, as the basis? The taxpayer’s view has been that only the last published balance sheet which precedes the date of the gift must be taken note of. This is a dogmatic assertion for which we find no support in principle. On the contrary, there are decisions of this court which say that the true rule would be to take into consideration not only the balance sheet immediately after the gift and find out, on some principle which would be appropriate, the value of the assets and the value of the liabilities of the company as on the date of the gift. A similar problem had arisen before this court on several occasions. In one of the judgment on the subjects in T.C.No.863 of 1977, dated December 9, 1981, CGT v. K. Ramesh (1983) 141 ITR 462 (Mad), this court preferred to adopt the figure in a balance sheet which were drawn up two or three days subsequent to the date of the gift. It may be explained that this decision was rendered by this court, not as a matter of principle but by way of avoiding as remittal order or two separated the date of the gift from the date of the balance sheet, it would be an unnecessary exercise of one’s labour not to take note of the nearest balance sheet but to go upon some other labored valuation of the company’s assets involving effort and time.

55 ITA No.121/Asr/2020 A.Y.2015-16

In all these cases of valuation of unquoted shares, however, the true principle is that if it were possible to draw up a precise balance sheet as on the date of the gift, that would afford quite an accurate basis and an ideal solution. But since the valuation question arises only in a shareholder’s assessment, neither the shareholder nor the Department can expect the staff and accountants of the company to oblige them by meticulously drawing up a balance sheet as on the date of the gift even assuming that the drawing up of a balance sheet on that date would be feasible or is capable of being done in a correct manner after a passage of time. In the absence of the facility of drawing up a balance sheet precisely on the date of the gift, the next best thing, both for the assessee who is the holder of the unquoted shares and the Department which is charged with the duty of evaluating the market value of the shares not to speak of the company itself, is to take to the balance sheet falling both before and after the date of the gift and arrive as near as may be at the break-up value of the assets and liabilities of the Commissioner as on the date of the gift on a time basis, or on some other basis. The Tribunal in this case and held that only the earlier published balance sheet must be taken note of. This is not a correct direction in law of how to proceed. We cannot be dogmatic about taking as the basis, either the balance sheet which falls before or the balance sheet which falls after the date of the gift. We have to take into account both. Our answers to the questions on this point raised in some of the gift-tax cases are rendered accordingly. We may also point out that the decision in CWT v. S. Ram (1984) 147 ITR 278 formed the subject matter of special leave petitions in S.L.P. © Nos.14051 to 14287of 1989 and 1116 of 1986 and the Supreme Court also upheld the view taken by this court in CWT v. S. Ram (1984) 147 ITR 278 and dismissed the special leave petitions on January 22, 1990 (vide[1990] 181 ITR (St.)227) In the case under consideration, the closest balance sheet which also incorporates the relevant transactions is the balance sheet for the period ending 31-03-2014, that is the only relevant balance sheet for the purpose of Rule 11U/11UA. Thus the value of shares has to be the same for short term capital gain and the AO also needs to examine the valuation of shares on basis of which long term capital loss has been computed. The AO has failed to examine these issues during the course of assessment.

56 ITA No.121/Asr/2020 A.Y.2015-16

Further, as per the sale deed the assessee has certified on oath that the issued capital was divided into 38 shares but the assessee in its books has shown purchase of 36 shares in 2005 ad 2 shares in 2006. The assessee has been the 100% holding company of the unit M/s Neeman Medial International BV. The assessee has claimed that provisions of section 56(2)(viia) of the Act are applicable on the purchaser/recipient of the shares, where the purchase price of shares is less than book net asset value (“Book NAV”) of the shares of the company. In the instant case, the Assessee Company is not the recipient or purchaser of shares but the transferor, hence, provisions of Section 56(2)(viia) are not applicable on the Assessee Commissioner with respect to both of the aforementioned subject sale transactions. However the assessee has failed to consider that the assessee has also purchased 2323 shares of M/s Neeman Medical International BV (Neeman BV) on 31-03- 2014. The AO has also failed to examine as t how two shares of the company with face value of 500 Euros were purchased for Rs.33,27,46,972/-. As per the sale agreement filed by the assessee the shares were purchased in two lots ie 38 shares on 31-08-2006 and 2323 shares on 31-03-2014 and not three lots shown by the assessee. Further, as per the sale agreement the

57 ITA No.121/Asr/2020 A.Y.2015-16

issued capital was increased to 38 shares by notarial deed on 19th October, 2006 and thus the assessee could not have purchased 38 shares on 31-08-2006 as shown by the assessee. The AO has also similarly failed to examine the basis of determination of long term and short term capital loss. The order of the AO is thus erroneous and prejudicial to the interest of the revenue.” 66. Referring to the same she contended that the Ld.

Pr.CIT had pointed out several discrepancies from the

details of the purchase and sale of the impugned shares of

Neeman BV. Referring to the same, she contended that as

per the details filed by the assessee it had purchased 2323

shares with face value of 500 Euros on the last day of

preceding year for Rs.7,23,24,900/- and immediately

thereafter sold them off for Rs.20,41,087/-. That the

assessee had also provided for diminution in the value of the

shares so purchased on the same day. These were very

unusual transactions since it was not possible for the

shares purchased for such high value to have diminished

their value the same day itself and sold off for very small

consideration within a span of few days itself and the

matter, therefore, needed further enquiry. She also referred

to the findings of the Ld. Pr.CIT as to how two shares of

Neeman BV were purchased for Rs.33 crores during 2006.

She also referred to the anomaly observed by the Ld.Pr.CIT

in the share sale agreement wherein it was stated that

shares were purchased in two lots while the details reflected

58 ITA No.121/Asr/2020 A.Y.2015-16

purchase in three lots. Also that 38 shares were apparently

issued even when the company was not authorized to do so

since its capital was increased after the shares were issued.

She therefore contended that considering the aforesaid

discrepancies noted in the impugned transaction, the non

examination of the same by the AO was rightly held by the

Ld.Pr.CIT to render the order of the AO erroneous so as to

cause prejudice to the Revenue.

gone through the order of the Ld. Pr.CIT and we find merit

in the same. The Ld. Pr.CIT, we have noted, has pointed out

grave anomalies in the impugned transaction of purchase

and sale of shares of M/s Neeman BV Ltd on account of

which the assessee had returned both long term and short

term capital gains, warranting further investigation of the

same .

assessee company. The Ld.Pr.CIT, has pointed out volatile

fluctuations in the value of these shares purchased in three

lots of 36, 2 and 2323 on 01.12.2005, 13.08.2006 and

31.03.2014, with the price rising alarmingly in a short span

of 2 years from Rs.7 lacs odd for 36 shares to Rs.33 Crs for

2 shares only and then dropping again to Rs.7 Crs odd for

59 ITA No.121/Asr/2020 A.Y.2015-16

2323 shares in 2014.She has also pointed out the sudden

drop in value of shares when sold as compared to its

purchase price, despite the transactions being effected

within a short span of a year. The Ld.Pr.CIT has pointed out

how 2323 number of shares of the said company, which

were purchased for a high value of Rs.7 crores odd on the

last day of the preceding year were sold off at much less

value of Rs.20 lacs odd, all within a matter of a year. She

has also drawn attention to the fact that while these shares

were purchased for Rs.7 Crs odd they were found to have

lost their value immediately thereafter and written off in the

books on account of diminution in the value of shares, by

the assessee. In fact, we have noticed from the details

submitted by the assessee and reproduced in the order of

the Ld.Pr.CIT, that the assessee had found the value of

these shares to have been wiped off on account of

diminution in value and written them off by making

provision for the same in F.Y 2012-13,relating to A.Y 2013-

shares of the very same company, numbering 2323,were

purchased further in the next F.Y. i.e 2013-14 for an

astronomical sum of Rs.7,23,24,900/-,which in turn were

again written off in the subsequent year on account of

diminution in value.

60 ITA No.121/Asr/2020 A.Y.2015-16

some fluctuations occurring within a short span of time,

certainly raise doubt regarding their genuineness, more

particularly when the company in which the investments

were made were completely owned by the assessee and their

value thus capable of being manipulated. The matter, in our

view, did require to be investigated further. The submissions

of documents evidencing the genuineness of the transaction

as pointed out by the Ld.Counsel for the assessee, we find,

are insufficient for dispelling the doubt on the genuineness

of the transaction by virtue of the facts as noted and

pointed out by the Ld. Pr.CIT as above. The AO having made

no enquiry vis-à-vis the same, the order passed by the AO

accepting the loss returned by the assessee on sale of

shares of Neeman BV, we hold makes the order erroneous

causing prejudice to the Revenue.

Ld. Pr.CIT of the order being erroneous and prejudicial to

the interest of the Revenue on account of non examination

of the sale of shares of Neeman BV Ltd. and the order of

the Ld. Pr.CIT holding so is, therefore, upheld.

jurisdiction is accordingly upheld only on the limited issue

61 ITA No.121/Asr/2020 A.Y.2015-16

relating to non examination of the loss returned on the sale of shares of Neeman BV Ltd,. The order of the Ld.Pr.CIT relating to the remaining issues is accordingly set aside, finding the exercise of revisionary jurisdiction on the same to be failing, in the absence of any finding of error causing prejudice to the Revenue on the same .

Order pronounced on 31.03.2021.

Sd/- Sd/- (ANNAPURNA GUPTA) (R.L. NEGI) लेखा सद�य/Accountant Member �याय�क सद�य/Judicial Member

Dated: 31st March, 2021 *रती* आदेश क� ��त�ल�प अ�े�षत/ Copy of the order forwarded to : 1. अपीलाथ�/ The Appellant 2. ��यथ�/ The Respondent 3. आयकर आयु�त/ CIT 4. आयकर आयु�त (अपील)/ The CIT(A) 5. �वभागीय ��त�न�ध, आयकर अपील�य आ�धकरण, च�डीगढ़/ DR, ITAT, CHANDIGARH 6. गाड� फाईल/ Guard File आदेशानुसार/ By order, सहायक पंजीकार/ Assistant Registrar

62 ITA No.121/Asr/2020 A.Y.2015-16

Draft dictated 09/10/12.03.2021 Sr.PS Draft placed before author 03.2021 Sr.PS Approved Draft comes to the Sr.PS/PS 03.2021 Sr.PS Order signed and pronounced on File sent to the Bench Clerk Sr.PS Date on which file goes to the AR Date on which file goes to the Head Clerk. Date of dispatch of Order.