AMBALAL SARABHAI ENTERPRISES LTD. vs. ASSTT. COMMISSIONER OF INCOME TAX

Facts

The appellant, Ambalal Sarabhai Enterprises Ltd., a public limited company engaged in pharmaceuticals and instruments, filed its return for Assessment Year 1987-88 declaring a loss. The Assessing Officer determined a positive total income. Following a remand, the Assessing Officer disallowed the appellant's claim of long-term capital loss on the transfer of its electronic undertaking and assessed a long-term capital gain of Rs. 50,56,240. The Commissioner of Income Tax (Appeals) confirmed this. The Income Tax Appellate Tribunal also upheld the CIT(A)'s order. The appellant's appeal to the High Court challenged the Tribunal's decision.

Held

The High Court held that the Electronic Undertaking vested in SEL (Sarabhai Electronics Limited) for a sum of Rs. 7,32,00,000 pursuant to a Scheme sanctioned by the High Court. The court found that the undertaking ceased to be an asset of the appellant. It was held that the face value of shares issued by SEL to the appellant's shareholders under the scheme should not be excluded. The authorities rightly considered the actual cost of Rs. 6,81,43,760 and did not consider it as a loss. The court affirmed that the authorities correctly calculated the capital gain of Rs. 50,56,240 (Rs. 7,32,00,000 minus Rs. 6,81,43,760), deeming it immaterial whether part of the sale consideration was received by the appellant and part was given to shareholders via share allotment. The issue was answered against the assessee and in favour of the revenue.

Key Issues

1. Whether, in the facts and circumstances of the case, the Tribunal erred in law in holding that the appellant is liable to Capital Gains of Rs. 50,58,240 instead of Long Term Capital Loss of Rs. 3,07,69,120? (Question of law, concerning capital gains/loss calculation). Assessee's contention: The appellant argued that the transfer of its electronic undertaking was pursuant to a court-approved scheme of arrangement. It claimed to have received consideration of Rs. 3,73,74,640, not Rs. 7,32,00,000 as held by lower authorities. Based on the received consideration and a cost of Rs. 6,81,43,760 for the undertaking, the appellant contended there was a long-term capital loss of Rs. 3,07,69,120, not a capital gain. Revenue's contention: The revenue supported the impugned order, arguing no error was committed by the Tribunal and the appeal should be dismissed.