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Income Tax Appellate Tribunal, BENGALURU “B” BENCH, BENGALURU
IN THE INCOME TAX APPELLATE TRIBUNAL BENGALURU “B” BENCH, BENGALURU Before Smt. Beena Pillai, Judicial Member and Ms. Padmavathy S., Accountant Member ITA No. 372/Bang/2018 (Assessment Year: 2010-11)
M/s. MHM Holding Pvt. Ltd. vs ACIT, Range - 12 Bengaluru No. 52, Bassappa Road Shantinagar Bengaluru 560027 PAN – AABCM6614L (Appellant) (Respondent) Assessee by: Shri Parthasarathi, Adv. Revenue by: Shri K.R. Narayana, Addl CIT-DR Date of hearing: 23/11/2022 Date of pronouncement: 25/11/2022 O R D E R Per: Padmavathy, A.M.
This is an appeal filed by the assessee against the order of the Commissioner of Income Tax (Appeals) [CIT(A)] – 4, Bengaluru dated 27.10.2017 for Assessment Year 2010-11.
The assessee is a company engaged on the business of manufacturing of IT & HT capacitors for Energy Saving Devices. The assessee filed the original return of income on 22.09.2009 declaring gross total income of Rs.95,50,29,755/-. Later the assessee filed revised return on 31.03.2011 declaring gross total income of Rs.95,26,44,624/-. The case was selected for scrutiny under CASS and notice under Section 143(2) of the Income Tax Act, 1961 (the Act) was duly served upon the assessee. During the course of assessment the AO noticed that the assessee has sold their capacitor business
2 ITA No. 372/Bang/2018 M/s. MHM Holding Pvt. Ltd. and component business to M/s. Schneider Electric (I) Pvt. Ltd. on slump sale basis. The assessee had declared a capital gain of Rs.97,74,55,161/- under the provisions of Section 50B of the Act as per the detailed computation given below: -
Provisional purchase price in respect of capacitors 116,00,00,000 division Less Adjustment in purchase price as given in Pg. 1,74,16,651 No. 15 of the agreement Final purchase price in respect of capacitors division 114,25,83,349 Add Purchase price in respect of components 3,00,00,000 division Total consideration received 117,25,83,349 Less Expenses and deductions claimed Expenses 2,45,41,438 Investment in REC Bonds 50,00,000 Purchase price adjustment & Bank guarantee 1,91,49,675 invocation Provision for other liabilities 1,41,75,477 6,28,66,590 Balance 110,97,16,598 Less Net worth of the company 13,22,61,598 Long Term Capital Gains 97,74,55,161
The AO concluded the assessment by making the following additions: - i. Rs.1,24,00,000/- as bank guarantee invocation ii. Rs.92,76,060/- towards sundry debtors not collectable iii. Rs. 24,86,590/- towards other liabilities like provision for warranty. iv. Rs.1,00,00,000/- as advance licence liability v. Rs.17,80,623/- as excise duty payable vi. Rs.1,21,00,000/- as bank guarantee commission vii. Rs.51,00,881/- as value of depreciable assets for arriving at net worth viii. Rs.27,22,486 as Miscellaneous expenses (Rs.14,22,333 towards credit card payment of Directors & Rs.13,00,153 towards payments to sales executives ix. Rs.14,87,867 – as disallowance u/s.14A x. Rs.37,49,714 as Environment expenses xi. Rs.14,70,906 as disallowance u/s.40(a)(ia)
Aggrieved by the assessment order the assessee filed appeal before the CIT(A) who gave partial relief to the assessee. The assessee is in appeal before the Tribunal against the order of the CIT(A). The assessee raised the following grounds of appeal: -
3 ITA No. 372/Bang/2018 M/s. MHM Holding Pvt. Ltd. 1. On the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) erred in upholding the various impugned disallowances without considering the facts and evidence furnished by the appellant and accordingly the order of the CIT(A) is opposed to law and liable to be set aside. 2. The learned Commissioner (A) erred in upholding the disallowance of Rs.92,76,060/- being the sundry debtors not collectible while computing the capital gains as declared by the appellant. 3. The learned Commissioner (A) ought to have appreciated the claim of deduction as made by the appellant was in accordance with the agreement of transfer and the appellant having restricted its claim only to the extent of debt not recovered, the impugned addition as made was unsustainable and accordingly ought to have been deleted. 4. The learned Commissioner (A) erred in upholding the bank guarantee invoked by the purchaser to the tune of Rs.1,24,00,000/- since the appellant was bound to remit the amount to the bank out of the sale price and accordingly was entitled to the deduction as claimed. 5. The learned Commissioner (A) ought to have appreciated that the claim was evident from the transaction and the mere fact that was not claimed in the original return cannot prevent the learned Commissioner (A) to consider the claim which was genuine and had direct nexus to the slump sale of the business. 6. The learned Commissioner (A) erred in holding the disallowance of Rs.1,42,67,213/- without appreciating the appellant had to incur the liability out of the sale consideration arising out of the slump sale and thus liable for deduction while computing the capital gains. 7. The learned Commissioner (A) erred in upholding the disallowance of Rs. 51,00.881/- on account of recomputation by the assessing authority of the net worth of the depreciable assets transferred. 8. The learned Commissioner (A) erred in upholding the disallowance of Rs.70,000/- out of the environment expenses. 9. The learned Commissioner (A) erred in upholding the commission payment of Rs.13,00,153/- and without appreciating that the same were incidental to the business and accordingly was liable to be allowed. 10. Without prejudice the learned Commissioner (A) erred in upholding the levy of interest u/s.234C and 234D of the Act. 11. Without prejudice the disallowances are excessive, arbitrary and unreasonable and liable to be deleted. 4. The assessee has sold its capacitor business to Schneider Electric India Pvt limited 31.03.2009 whereby a provisional purchase price of Rs.116,00,00,000 was agreed which would be adjusted with the final value of
4 ITA No. 372/Bang/2018 M/s. MHM Holding Pvt. Ltd. fixed assets and working capital as on the completion date. The assessee has accordingly made adjustments to the purchase price and the adjusted purchase price as per the computation above is Rs.117,25,83,349. The assessee reduced the net worth of the company according to the final Balance Sheet as computed below and reduced the same for the purpose of capital gains: -
Inventory 12,64,70,480 Debtors 5,18,47,315 Other Current Assets 2,60,02,298 Less Current Liabilities (12,16,85,338) Less Unsecured loan (38,777) Net Current Assets 8,25,95,978 IT WDV 4,96,65,620 Net Worth 13,22,61,598
The AO called for the details of the deductions claimed towards bank guarantee invocation, provision for other liabilities etc. Before the AO the assessee made a fresh claim of Rs.1,21,00,000 payable towards bank guarantee commission to be adjusted against the capital gains. Further the AO recomputed the net worth of the company by reducing the assets acquired from 01.01.2009 to 31.07.2009 i.e. date of sale for an amount of Rs.51,00,881 on the ground that as per the provisions of section 50B r.w.s.43(6)(c) the value of depreciable assets has to be restricted to the closing WDV of the block of assets computed for the financial year immediately before the financial year in which transaction has taken place. The AO concluded the assessment by making certain other disallowances against the business income which are listed in the earlier part of this order.
The CIT(A) upheld the disallowances made towards sundry debtors not collectible, bank guarantee, provision towards warranties, advance license liability and adjustment to net worth toward assets acquired. With regard to environment expenses the CIT(A) sustained the disallowance for an amount of
5 ITA No. 372/Bang/2018 M/s. MHM Holding Pvt. Ltd. Rs.70,000 and gave relief for the balance amount. The CIT(A) also upheld the disallowance of Rs.13,00,153.
The learned A.R. submitted that it has been agreed by the assessee with the purchaser that the purchaser could invoke bank guarantee in case there is a risk to the purchase price. The ld AR also submitted that amount claimed as deduction are as per the terms agreed with the purchaser. The ld AR further submitted that the bank guarantee invoked by the purchaser has to be settled by the assessee to the bank and therefore should be allowed to be claimed against the capital gains.
The learned D.R. submitted that though the assessee and the purchaser agreed only for a provisional price, the agreement also specifies what are the adjustments permitted to arrive at the final purchase price. (page 25 & 41 of paper book). The learned D.R. also submitted that the provisions of Section 50B of the Act are special provisions and accordingly no other expenses other than the net worth of the company can be claimed as deduction while arriving at the capital gains under Section 50B of the Act. The learned D.R. further submitted that the conditions preceding to the agreement as contained in pages 33 to 37 of the paper book do not contain any clauses to state that the purchase price is subject to the expenses claimed by the assessee in terms of bank guarantee, recover provision for expanses, bank guarantee, etc. In this regard the learned D.R. relied on the decision of the coordinate bench dated 16.08.2022 in the case of ACIT vs. Bhoruka Aluminium Ltd. ITA No. 2551/Bang/2019 wherein it has been held as under: -
We have given a very careful consideration to the rival submissions. As we have already noted, from a reading of the provisions of Sec.50B (1) of the Act read with Sec.2(42C) of the Act, it is clear that taxability of capital gain on slum sale arises in the year of transfer of the undertaking. Sec.50B of the Act is a special provision for computation of capital gain on slum sale and excludes other provisions of the Act, in so far as it relates to charge and computation of capital gain on slump sale. Perusal of the business transfer agreement dated 01.03.2013 would clearly show that the fulfilment
6 ITA No. 372/Bang/2018 M/s. MHM Holding Pvt. Ltd. of the condition laid down in clause 3.1.2 is not a condition precedent in the agreement to come into effect. In fact, clause 5.2 of the agreement clearly specifies the condition precedent for the transaction to take effect and clause 3.1.2 has no reference in this clause. It is also not the case of the assessee that the condition precedent as mentioned in clause 5.2 of the agreement is not fulfilled. In fact the Assessee does not dispute that the undertaking stood transferred to the transferee during the previous year relevant to AY 2014- 15. In the facts and circumstances of the case, the computation of capital gain in tune with the provisions of Sec.50B of the Act has to be made in that year. The computation provisions of Sec.50B of the Act is also very clear and provides no lee way for parties to postpone recognizing capital gain in tune with the computation mechanism provided therein. Capital gains arising on slump sale are calculated as the difference between sale consideration and the net worth of the undertaking. Net worth is defined in Explanation 1 to section 50B as the difference between ‘the aggregate value of total assets of the undertaking or division’ and ‘the value of its liabilities as appearing in books of account’. The ‘aggregate value of total assets of the undertaking or division’ is the sum total of: WDV as determined u/s.43(6)(c)(i)(C) in case of depreciable assets, The book value in case of other assets. Net worth is deemed to be the cost of acquisition and cost of improvement for section 48 and section 49 of the Act. There is no scope for any deviation from the aforesaid statutory provisions. Even the provisions of Sec.45(1) provides that any profit or gains arising from transfer of a capital asset effected in the previous year shall be chargeable to income tax under the head capital gains and shall be deemed to be the income of the previous year in which the transfer took place. The learned counsel for the Assessee referred to the provisions of Sec.48 of the Act and submitted that income chargeable under the head "Capital gains" shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :— (i) expenditure incurred wholly and exclusively in connection with such transfer; (ii) the cost of acquisition of the asset and the cost of any improvement6 thereto: According to him the concept of receipt/accrual is relevant even for charge to tax of income in the form of capital gain. In this regard the learned counsel for the Assessee has placed reliance on the decision of the Hon’ble Bombay High Court in the case of Mrs.Hemal Raju Shete (supra). The decision rendered by the Hon’ble Bombay High Court in the case of Mrs.Hemal Raju Shete (supra) was a decision rendered in the context of provisions of Sec.45(1) of the Act and has to be read as a decision rendered on its peculiar facts. The ratio laid down therein cannot be extended to a case where computation of capital gain is made u/s.50B of the Act. As we have already explained the statutory provisions, are special provisions
7 ITA No. 372/Bang/2018 M/s. MHM Holding Pvt. Ltd. applicable to computation of capital gain on slump sale and these provisions specifically lay down the methodology of computation in Sec.50B(2) of the Act, in relation to computation of capital gain. Capital gains arising on slump sale are calculated as the difference between sale consideration and the net worth of the undertaking. Net worth is defined in Explanation 1 to section 50B as the difference between ‘the aggregate value of total assets of the undertaking or division’ and ‘the value of its liabilities as appearing in books of account’. The ‘aggregate value of total assets of the undertaking or division’ is the sum total of: WDV as determined u/s.43(6)(c)(i)(C) in case of depreciable assets, The book value in case of other assets. Net worth is deemed to be the cost of acquisition and cost of improvement for section 48 and section 49 of the Act. As per section 50B, no indexation benefit is available on cost of acquisition, i.e., net worth. Provisions of Sec.48 & 49 stand substituted by the provisions of Sec.50B(2) of the Act. The methodology contemplated by these provisions cannot be altered or tampered with by reading the terms of the slum sale agreement and deferred payments laid down therein. For these by laying down that when capital assets being an undertaking or division is transferred by way of slump sale, the "net worth" of the undertaking or the division, as the case may be, shall be deemed to be the cost of acquisition and the cost of improvement for the purposes of sections 48 and 49 and no regard shall be given to the provisions contained in the second proviso to section 48. For the reasons given above, we are unable to agree with the view canvassed by learned Counsel for the assessee. We are of the view that the CIT(A) fell into an error in accepting the plea of the assessee and holding that the sum not received owing to clause 3.1.2 of the BTA cannot be brought to tax in AY 14-15. We therefore allow the appeal of the Revenue. 9. We have heard the rival contentions and perused the material on record. The main issue for our consideration is whether expenses and deductions claimed by the assessee as a deduction / adjustment to the purchase price is allowable or not. It is noticed that the assessee has sold capacitor business and component business on slum sale basis. As per section 2(42C) of the Act, ‘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. We will therefore first look at the provisions of section 50B of the Act which contain the special provision for computation of capital gains in case of slump sale. The provisions read as under: - 50B. (1) Any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gains arising
8 ITA No. 372/Bang/2018 M/s. MHM Holding Pvt. Ltd. from the transfer of long-term capital assets and shall be deemed to be the income of the previous year in which the transfer took place: Provided that any profits or gains arising from the transfer under the slump sale of any capital asset being one or more undertakings owned and held by an assessee for not more than thirty-six months immediately preceding the date of its transfer shall be deemed to be the capital gains arising from the transfer of short-term capital assets. [(2) In relation to capital assets being an undertaking or division transferred by way of such slump sale,— (i) the "net worth" of the undertaking or the division, as the case may be, shall be deemed to be the cost of acquisition and the cost of improvement for the purposes of sections 48 and 49 and no regard shall be given to the provisions contained in the second proviso to section 48; (ii) fair market value of the capital assets as on the date of transfer, calculated in the prescribed manner48, shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of such capital asset.] (3) Every assessee, in the case of slump sale, shall furnish in the prescribed form49 50[a report of an accountant as defined in the Explanation below sub-section (2) of section 288 before the specified date referred to in section 44AB] indicating the computation of the net worth of the undertaking or division, as the case may be, and certifying that the net worth of the undertaking or division, as the case may be, has been correctly arrived at in accordance with the provisions of this section. Explanation 1.—For the purposes of this section, "net worth" shall be the aggregate value of total assets of the undertaking or division as reduced by the value of liabilities of such undertaking or division as appearing in its books of account : Provided that any change in the value of assets on account of revaluation of assets shall be ignored for the purposes of computing the net worth. Explanation 2.—For computing the net worth, the aggregate value of total assets shall be,— (a) in the case of depreciable assets, the written down value of the block of assets determined in accordance with the provisions contained in sub- item (C) of item (i) of sub-clause (c) of clause (6) of section 43; [(aa) in the case of capital asset being goodwill of a business or profession, which has not been acquired by the assessee by purchase from a previous owner, nil;] (b) in the case of capital assets in respect of which the whole of the expenditure has been allowed or is allowable as a deduction under section 35AD, nil; and (c) in the case of other assets, the book value of such assets.
9 ITA No. 372/Bang/2018 M/s. MHM Holding Pvt. Ltd. 10. A reading of Sec.50B (1) of the Act read with Sec.2(42C) of the Act, it is clear that taxability of capital gain on slum sale arises in the year of transfer of the undertaking. Sec.50B of the Act is a special provision for computation of capital gain on slum sale and excludes other provisions of the Act, in so far as it relates to charge and computation of capital gain on slump sale. Capital gains arising on slump sale are calculated as the difference between sale consideration and the net worth of the undertaking. Net worth is defined in Explanation 1 to section 50B as the difference between ‘the aggregate value of total assets of the undertaking or division’ and ‘the value of its liabilities as appearing in books of account’. The ‘aggregate value of total assets of the undertaking or division’ is the sum total of: WDV as determined u/s.43(6)(c)(i)(C) in case of depreciable assets, The book value in case of other assets. Net worth is deemed to be the cost of acquisition and cost of improvement for section 48 and section 49 of the Act. As per section 50B, no indexation benefit is available on cost of acquisition, i.e., net worth.
In the given case, it is the contention of the ld AR that though the amount of Rs.6,28,66,590 which is claimed as a deduction from the purchase price for the purpose of capital gain, the amount is an adjustment to the provisional purchase price as per the terms of the purchase agreement. We notice that page 15 of the agreement defines provisional purchase prices as under –
Provisional Purchase Price means a lump sum amount calculated in accordance with the following formula: A = B-C-D where A = the Provisional Purchase Price B = INR 1,160,000,000 C = an amount equal to the Net Fixed Assets as set out in the Reference Balance Sheet less the Net Fixed Assets as arrived at in the Provisional Financial Statements D = an amount equal to the net Working Capital as set out in the Reference Balance Sheet less the Net Working Capital arrived at in the Provisional Financial Statements
10 ITA No. 372/Bang/2018 M/s. MHM Holding Pvt. Ltd. where C and D individually and respectively is a positive number or equal to Zero (0); Purchase price means the Provisional Purchase Price, as adjusted in accordance with clause 4(e), or otherwise in accordance with this Agreement’
Clause 4(e) – Provisional purchase price shall be decreased by (i) The amount Z where Z = X – Y (A) Where X is the amount equal to the Net working Capital as set out in the Provisional Financial Statement and (B) Where Y is the amount equal to the Net working Capital as set out in the Completion Accounts and Provided that Z is a positive number and Y is less than INR 94,700,000 (ii) The amount M where M = N – O (C) Where N is the amount equal to the Net fixed assets as set out in the Provisional Financial Statement and (D) Where O is the amount equal to the Net fixed assets as set out in the Completion Accounts and Provided that M is a positive number and O is less than INR 88,885,550
Therefore as per the above terms, to arrive at the purchase price, the assessee was allowed to make adjustment towards working capital and net fixed assets as on the completion accounts. The assessee in the computation submitted before the lower authorities has shown a sum of Rs.1,74,16,651 as an adjustment in purchase price as per page 15 of the agreement. Therefore the revenue is contending that there should not be any further adjustments to the purchase price and net worth is the only deduction allowed. However on perusal of the purchase contract we notice that the assessee along with its directors stands as a warrantor providing warranties for certain events as per the agreement for a specified period of time and accordingly the assessee has executed a bank guarantee in this regard in favour of the purchaser. We also notice that according to clause 4(g) which reads as under the bank guarantee invoked is a reduction to the purchase price
11 ITA No. 372/Bang/2018 M/s. MHM Holding Pvt. Ltd. Clause 4(g)
Any payment made by the seller or setoff or adjusted against the Bank guarantee sum in respect of a breach of this agreement or arising under or pursuant to this agreement shall be deemed to pro tanto a reduction in the purchase price paid for the capacitators business and the components business respectively. 13. Therefore if the purchaser invokes bank guarantee the same can be reduced from the purchase price. We also notice that the purchaser has invoked bank guarantee to the extent of Rs.92,76,060 towards unrealised trade receivables and has assigned the list of such debtors in favour of the assessee vide letter dated 25.06.2010 which part of records submitted before the CIT(A). However the CIT(A) has upheld the disallowance on the ground that the assessee has not negated and had concurred with the disallowance. The AO has also done the disallowance on the premise that the assessee has concurred with the same. Both the CIT(A) and the AO have not looked into the details submitted by the assessee.
With regard to Rs.1,24,00,000 the assessee had submitted before the AO that the purchaser has invoked the bank guarantee towards the reduction in the purchase price as agreed by the assessee and the AO has disallowed the same stating that no other deduction other than net worth is permissible u/s.50B. Similar submissions were made for provision for liabilities, bank guarantee commission, and additions to depreciable assets stating that these are to be allowed as a deduction as these are part of financials of the assessee and there to be adjusted as part of completion accounts which is agreed as per clause 4(e) of the agreement. In this regard we notice from the perusal of records that that the purchaser is allowed to issue notice of disagreement as per clause 4(d)(iii) to the seller if the purchaser is not in agreement with the adjustments made as per the completion accounts. We also notice the assessee has prepared the completion accounts as of 31.07.2009 and had accordingly adjusted the
12 ITA No. 372/Bang/2018 M/s. MHM Holding Pvt. Ltd. purchase price. However it is noticed that the purchaser has issued notice of disagreement dated 18.12.2009 whereby certain adjustments are disputed and revised purchase price is arrived at. These are part of records in page 125 to 127 of paper book and these are submitted before the lower authorities.
In the light of the above factual findings, we notice that the lower authorities have not examined the evidences submitted and have not verified the terms of the agreement. The assessee also has not given before the lower authorities which would help the CIT(A)/AO to understand the facts, with regard to the clear breakup of the various adjustments made and how the same is relatable to the completion accounts to substantiate that it is an adjustment to purchase price. Therefore in our considered view the issue of various adjustments disallowed by the CIT(A)/AO with regard to the computation of capitals gains should be remitted to the AO for a de novo verification of facts. The AO is directed to consider the adjustments made based on completion accounts, objections filed by the purchaser, the details of bank guarantee invoked etc., before deciding the case. The AO is also directed to keep in mind the decision of the coordinate bench in the case of Bhoruka Aluminium Ltd (supra) while deciding the allowability of the various adjustments claimed by the assessee against the provisional purchase price. The assessee is directed to submit all the relevant details and cooperate with the proceedings. It is ordered accordingly.
With regard to the disallowance of Rs.70,000 as confirmed by the CIT(A) we notice that the disallowance is done on the ground that tax has not been deducted at source and in the absence of any explanation by the assessee. The disallowance towards payments to sales executives is also done on the basis that the assessee failed to furnish any credible evidence or details relating to the payments before the lower authorities. We therefore remit both these issues back to the AO to verify the details of tax deducted, evidences of sales promotion
13 ITA No. 372/Bang/2018 M/s. MHM Holding Pvt. Ltd. activity and the explanations the assessee would provide in this regard. The assessee is directed to submit the relevant evidences and documents in this regard and cooperate with the proceedings. It is ordered accordingly.
In the result, the appeal filed by the assessee is allowed for statistical purposes.
Dictated and pronounced in the open Court on 25th November, 2022.
Sd/- Sd/-
(Beena Pillai) (Padmavathy S) Judicial Member Accountant Member Bengaluru, Dated: 25th November, 2022
Copy to: 1. The Appellant 2. The Respondent 3. The CIT(A) -4, Bengaluru 4. The PCIT - 4, Bengaluru 5. The DR, ITAT, Bengaluru By Order
Assistant Registrar ITAT, Bengaluru n.p. /Desai S Murthy /