ACIT, NEW DELHI vs. M/S. MAX HEALTHCARE INSTITUTE LTD., NEW DELHI

The facts in brief are the Assessee is a public limited company and in the assessment year 2003-04 Max India Ltd (MIL) being the parent company of the Assessee transferred its healthcare business to the Assessee, pursuant to the business transfer agreement dated 27.06.2002. In terms of said agreement all assets and liabilities were acquired by the Assessee from MIL on a going concern basis for lump-sum consideration of Rs. 68.10 crores. Since, the assets were transferred for a lumpsum consideration without independent values being assigned to each asset/ liability, during the FY 2002-03, the Assessee got the fixed asset valued from an independent Govt approved valuer, Kanwar & Co. Pvt. Ltd, chartered engineers. Accordingly, for Assessment Year 2003-04, the Assessee claimed depreciation on cost of depreciable asset so acquired and recorded in the books as on 31.03.2002, at values determined by the approved valuer. However, in the relevant Assessment Year 2003-04 the Ld/ AO did not accept the depreciation claimed on value of assets by the approved valuer and computed the claim of depreciation on the basis that the cost of assets in the hands of Assessee was taken at written down value (WDV) of such assets in the books of MIL invoking explanation 6 to section 43(1) read with Explanation 2 to section 43(6) of the Act on the ground that this transfer from holding company to a subsidiary company satisfied conditions for exemption u/s 47(iv) of the Act. Consequently, while computing WDV of assets in the hands of MIL as on 31.03.2002 the ld AO took notional WDV after reducing depreciation for Assessment Year 2002-03 invoking explanation 5 to section 32(1) of the Act. However, on appeal the ld CIT(A) deleted the disallowances of deprecation made by the ld AO holding that as no revaluation of assets was carried out by MIL prior to transfer of healthcare division and since MIL did not claim exemption u/s 47(iv)/ (v) and offered gain arising out of transfer of healthcare business of slump sale basis to capital tax u/s 50B the provision of explanation 6 to section 43(1) read with explanation 2 to Page | 2 section 43(6) of the Act were not attracted. Accordingly, the ld CIT(A) held that actual cost of acquisition in the hands of Assessee shall not be adopted for the purpose of claiming depreciation u/s 32 read with section 43(1) of the Act.

The revenue had challenged this before the ITAT but assessment for the year 2003-04 was settled in VSVS, 2020 scheme. The ld AO continued to apply the principles subsequent to Assessment Year for which now the matters is before this tribunal.

Apart from above in the relevant Assessment Years there were disallowances of management consultancy fee on adhoc basis and disallowance of preoperative expenses. Further, in Assessment Year 2005-06 and 2008-09 there was also disallowances of consultancy fee for charges paid to International Finance Corporation and Asian Development Bank in pursuant to loan agreement. Though loan did not materialize. Then, in the assessment year 2008-09 there was also a disallowances u/s 14A read with Rule 8D. The Ld. First Appellate Authority had deleted these. So now Revenue is in appeal against them.

Heard and perused the records.

On behalf of the revenue it was submitted that the ld CIT(A) has fallen an error in disagreeing with opinion of ld AO. It was submitted that the ld AO had considered all relevant factual and legal aspect while passing the assessment order.

On the other hand in regard to common grounds of disallowances of depreciation of assets acquired as part of slump sale it was submitted on behalf by the Assessee by the ld Sr. Counsel that the ld AO had fallen an error under misconceived notion that since MIL had revalued the assets before transfer to the Assessee so depreciation in the hands of the Assessee would not be available with reference to revalued amount by Approved Valuer. It was submitted that as it was the case of slump sale for the purpose of transfer so no individual values were assigned to the assets/ liabilities of the Page | 3 healthcare division of the transfer MIL. It was submitted that MIL gave effect to the slump sale in its book of account w.e.f. 01.04.2001 while reducing block of assets with the written down value of assets transferred, as appearing as on 31.03.2001. It was submitted that had the MIL undertaken the revaluation, it would have reinstituted the value of assets in its balance sheet before the sale. 7.1 The ld Sr. Counsel heavily relied upon the provision of explanation 2 to section 43(6) to contend that the same are not applicable in the present case because at the time of transfer, MIL was holding company of the Assessee and did not claim exemption of capital gains u/s 47(iv) of the Act and offered the same to short term capital gain tax in the return of income. So, the Assessee was not required to restrict actual cost of assets in its hand to the WDV, appearing in the income tax records of capital MIL. 7.2 The ld Sr. Counsel particularly referred to order of Mumbai Bench in case of ESSAR Oil Ltd Vs. DCIT 13 SOT 691 wherein, the similar situation was dealt with by the Tribunal and at the same time Ld. Sr. Counsel distinguished the judgment of Hon'ble Delhi High Court in case of Dalmia Ceramics Industries ltd Vs. CIT 277 ITR 219, contending that the judgment was referred without taking into account the provision of section 49(3) of the Act which has come into effect from 01.04.1985.

Now with regard to this controversy of disallowing depreciation, which is common to all the appeals in hand, it can be observed from the orders of the tax authorities below that the ld AO has reached the conclusion within the scope of provision of section 47 clause (iv), section 43(1) r/w explanation 6 and section 43(6) r/w explanation (2) of the Act but failed to take note of section 49(3) of the Act which distinguished the case of the Assessee. 8.1 Now taking into consideration these relevant provisions it can be observed that Clause (iv) and (v) of section 47 tenders certain Transfers between Holding and Subsidiary Companies as not Page | 4 amounting to Transfer u/s 2(47) wherein Capital Gain is not attracted on such transactions, section 47A(1) prescribe certain conditions on which the transactions shall not be considered as Transfer and if such conditions are not complied with, Capital Gain gets levied u.s.

If the Assets transacted between the Holding and Subsidiary Companies fall under prescribed conditions, then the exemption granted shall stand withdrawn and the transaction shall be chargeable to Capital Gain Tax in the previous year in which the original Transfer between the group Companies took place. Further, Section 49 (3) of the Act provides, where the capital gain arising from the transfer of a capital asset referred to in clause (iv) or, as the case may be, clause (v) of section 47 is deemed to be income chargeable under the head "Capital gains" by virtue of the provisions contained in section 47A, the cost of acquisition of such asset to the transferee company shall be the cost for which such asset was acquired by it.

It is admitted fact that the consideration of acquisition of healthcare business was discharged by the Assessee through issue of its equity shares in favor of the MIL. The Assessee company had later allotted shares of S&G Investments and Hamlet Investments on 28.11.2003, thereby ceasing to be wholly owned subsidiary of MIL. In view of the this changed of status, by virtue of Section 47A, MIL offered the capital gains of Rs. 15,08,53,716/- u/s 47(iv) of the Act. Therefore, strictly speaking the provision of section 49(3) of the Act became applicable and the cost of acquisition of the Assessee was to be construed to be the cost, for which assets were acquired by Assessee. Since, it was a slump sale, the Assessee in its wisdom, was right to get the assets revalued and thereafter claim depreciation upon it.

The ld CIT(A) has corrected this error committed by the ld AO. At the same time the tribunal appreciates the distinction brought on record by the ld Sr. Counsel for the Assessee, with regard to Page | 5 judgment of Hon'ble Delhi High Court in Dalmia Ceramics Industries ltd Case, on the fact of the case. Thus, the tribunal is inclined to dismiss the ground of appeal