THE DCIT CIR 7(1), MUMBAI vs. M/S. PIRAMAL ENTERPRISES LTD., MUMBAI

आदेश / O R D E R PER M. BALAGANESH (A.M):

These cross appeals in ITA Nos. 4000/Mum/2007 & 4345/Mum/2007 for A.Y.2003-04 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-XIX in appeal No.CIT(A)XIX/IT-206/06-07 dated 30/03/2007 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 31/03/2006 by the ld. Addl. Commissioner of Income Tax, Range- 7(1), Mumbai (hereinafter referred to as ld. AO).

ITA No.4345/Mum/2007- Revenue Appeal 2. The primary facts of the assessee are that it is engaged in manufacturing and sale of pharmaceuticals dealing in both prescription and OTC products as well as bulk drugs, chemicals and skin care products. The company has its registered office and head office at Lower Parel, Mumbai and its units at Deonar, Pithampur, Malad, Thane, Mulund, Bhandup and Paithan.

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2.1. During the A.Y.2002-03, the assessee company has amalgamated Rhone Poulenc (India) Limited (RPIL), Super Pharma Limited (SPL) and assets and liabilities (excluding certain assets and liabilities as per Schedule A of the Scheme) of amalgamation of NPIL Finvest Private Limited (NFL) with itself under the scheme of arrangement as approved by the Bombay High Court vide its order dated 29/09/2001. As per the scheme of arrangement, all the assets and liabilities of RPIL and SPL and certain specified assets of NFL stand transferred and vested with the assessee company w.e.f. 01/04/2001 being the effective date. Further during the A.Y.2002-03, the assessee company has also acquired the pharmaceutical division of ICI (India) Limited as a going concern for a total consideration of Rs.70 Crores.

3.1 We have heard rival submissions and perused the materials available on record. We find that both the parties before us fairly agreed that this issue is already covered in favour of the assessee by the order of this Tribunal in ITA No.1257/Mum/2014 and 1486/Mum/2014 for A.Y.2009-10 dated 07/05/2019 wherein it was held as under:-

“Disallowance of claim of depreciation on assets of BMIL and PHL: Rs. 68,75,396/- : 17. We shall now advert to the disallowance of the claim of depreciation raised by the assessee on the assets of “Boehringer

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Mannhem India Limited” (for short BMIL) and pharmaceutical division of “Piramal Healthcare Limited.” (for short PHL), aggregating to Rs.68,75,396/-. The facts in brief are that pursuant to the order dated 24.07.1997 of the Hon’ble High Court of Bombay sanctioning the scheme of amalgamation BMIL was merged with the assessee company w.e.f 01.04.1996. In its assessments for A.Y. 1995-96 and A.Y 1996-97 BMIL had opted not to claim depreciation on its assets, and the A.O also had not allowed the same while framing the assessments for the said respective years. After the merger, the assessee company in its returns of income filed for the subsequent years claimed depreciation on the assets of BMIL after taking into account their Written down value (for short “WDV”) as was reflected in the books of accounts of BMIL on 31.03.1994. In other words, the depreciation which though was allowable to BMIL for A.Y 1995-96 & A.Y 1996-97, but was not claimed by it, was not reduced by the assessee from the WDV as on 31.03.1994. Similarly, the assessee company had taken over the assets of PHL w.e.f 01.06.1996 under a scheme of arrangement duly sanctioned by the Hon’ble High Court of Bombay, vide its order dated 14.08.1997. In respect of the assets of PHL also the WDV was adopted by the assessee on the basis of the Income Tax records. Further, the assessee in the period relevant to A.Y. 1999-2000 had sold its glass division and bulk drug division. The A.O declined to accept the claim of the assessee that it was a slump sale transaction and considering the same as an itemised sale of assets worked out the WDV of the “block of assets by reducing the sale value as recorded in the books of the purchasing company. 18. Insofar the disallowance of the claim of depreciation pertaining to BMIL is concerned, we find that the same being a recurring issue is covered by the order of the Tribunal in the assesses own case for A.Y. 2008-09 in favour of the assessee. We find that the Tribunal while disposing off the appeal of the assessee for A.Y. 2008-09, had observed that it was an admitted fact that BMIL before its merger had not claimed depreciation on the assets in the A.Y. 1995-96 & A.Y 1996-97. In fact, the assessee had claimed depreciation for the first time on the assets taken over from BMIL. It was observed by the Tribunal that as per the provisions of Sec. 32 of the IT Act applicable to the relevant assessment year, the assessee was free to either claim or not claim depreciation, as per its own option. On the basis of the aforesaid deliberations, it was concluded by the tribunal that the A.O was not justified in notionally reducing the depreciation for A.Y 1995-96 & A.Y 1996- 97 from the WDV of the assets of BMIL while quantifying the depreciation in the hands of the assessee. As a matter of fact, the Tribunal while concluding as hereinabove had relied on a similar view taken by a coordinate bench in the assesses own case viz. Additional CIT Vs. Nicholas Piramal India Ltd. (2012) 150 TTJ 1 (Mum). In the said case the Tribunal drawing support from the

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judgment of the Hon’ble Supreme Court in the case of CIT Vs. Mahendra Mills (2000) 159 CTR (SC) 381, had concluded that in the absence of a claim of depreciation by the assessee, the same could not have been thrust upon it even if the particulars were available with the AO. We have perused the order of the Tribunal for A.Y. 2008-09 and finding no reason to take a different view, respectfully follow the same. Apart there from, we are also in agreement with the ld. A.R that now when the DRP while disposing off the objections filed by the assessee had specifically directed the A.O to allow claim of depreciation as was raised by the assessee in respect of BMIL, therefore, there was no reason for the A.O to have not followed such directions while passing the final assessment order u/s 143(3) r.w.s 144C(13), dated 28.01.2014. In terms of our aforesaid observations, we direct the A.O to allow the assesses claim of depreciation insofar the assets of BMIL are concerned. 19. As regards the claim of depreciation raised by the assessee on the assets of PHL which w.e.f 01.06.1996 were taken over by the assessee under a scheme of arrangement duly sanctioned by the Hon’ble High Court of Bombay, vide its order dated 14.08.1997, we find that the assessee subsequent to the takeover had taken the WDV on the basis of the Income Tax records of PHL. As is discernible from the orders of the lower authorities and admitted by the assessee in its objections raised before the DRP, though PHL had not claimed depreciation on its assets, however, the A.O while framing the assessment in its hands for A.Y 1996-97 had allowed the same. Apart there from, the assessee had during the year relevant to A.Y 1999- 2000 sold its two divisions viz. (i). Glass Division (GGL); and (ii). Bulk Drug Division (BDD) on a slump sale basis. As such, the assessee company in A.Y 1999-2000 while computing the deprecation had dropped the WDV of the aforesaid two undertakings from the respective block of assets on the date of such slump sale. As observed hereinabove, the A.O declined to accept the claim of the assessee that it was a slump sale transaction and considered the same as an itemised sale of assets. On the basis of his aforesaid observations, the A.O worked out the WDV of the block of assets by taking the values of the assets as were recorded in the books of accounts of the purchasing company, as the sale value, and reduced the same from the different block of assets. In the backdrop of his aforesaid reworking of the WDV the A.O scaled down the assesses claim of depreciation in respect of assets of PHL. 20. On a perusal of the records, we find that it is the claim of the assessee that the CIT(A) while disposing off its appeal for A.Y 1999-2000 had observed that the sale of two divisions viz. (i). Glass Division (GGL); and (ii). Bulk Drug Division (BDD) by the assessee was rightly claimed as slump sale transaction. However, as is discernible from the order of the DRP, the issue as to whether the sale of the aforesaid two divisions was to be construed as

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itemized sale of assets or slump sale is pending before the ITAT in the preceding years of the assessee. Accordingly, the DRP had directed the A.O to allow depreciation to the assessee on the basis of the outcome of the main appeal regarding slump sale vs. itemized sale. In the backdrop of the aforesaid fact situation, now when the matter as to whether the sale of the aforesaid two divisions by the assessee is to be treated as an itemized sale or a slump sale is pending in the case of the assessee for the preceding years, therefore, we find no infirmity in the order of the DRP who had rightly directed the A.O to allow depreciation to the assessee on the basis of the outcome of the main appeal. In terms of our aforesaid observations the Ground of appeal No. IV raised by the assessee is partly allowed.”

3.2. Respectfully following the same, the ground No.1(a) raised by the Revenue is dismissed.

4.1. We have heard rival submissions and perused the materials available on record. We find that assessee had claimed deduction of Rs.234,67,414/- u/s.80HHC of the Act which was also reduced from the computation of book profit u/s.115JB of the Act. The assessee vide letter dated 16/02/2006 revised the computation of book profit by stating that the amount to be reduced is not a deduction u/s.80HHC of the Act but the profits eligible for deduction u/s.80HHC of the Act. The ld. AO however, disallowed the revised claim made by the assessee in this regard. We find that the ld. CIT(A) by applying provisions of Section 80HHC(3)(c) of the Act observed that what is to be deducted from book profit is profits eligible for deduction u/s.80HHC of the Act. The ld. CIT(A) by placing reliance on the decision of the Special Bench of this

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Tribunal in the case of Syncom Formulations India Pvt. Ltd., reported in 106 ITD 193 granted relief to the assessee in this regard. We find that this issue is no longer res integra in view of the decision of the Hon‟ble Supreme Court in the case of CIT vs. Bhari Information Technology Systems (P) Ltd., reported in 340 ITR 593 (SC) wherein the decision of the Mumbai Tribunal Special Bench in the case of Syncom Formulations India Pvt. Ltd., referred to supra had been duly approved by the Hon‟ble Apex Court. Though this decision was rendered by the Hon‟ble Apex Court in the context of claiming deduction u/s.80HHE of the Act vis-à-vis computation of book profits u/s.115JA of the Act, the same analogy would apply to the issue in dispute before us. We find that the Hon‟ble Apex Court had held that deduction u/s.80HHE had to be worked out on the basis of adjusted book profit u/s.115JA of the Act and not on the basis of profits computed under regular provisions of law applicable to computation of profits and gains of business. Respectfully following the same, we do not find any infirmity in the order passed by the ld. CIT(A). Accordingly, the ground No.1(b) raised by the Revenue is dismissed.

5.1. We have heard rival submissions and perused the materials available on record. We find that assessee had made provision for bad and doubtful debts in the sum of Rs.2,53,88,267/-. This sum

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was duly disallowed by the assessee voluntarily while computing income under normal provisions of the Act. However, while computing book profits u/s.115JB of the Act, the assessee claimed deduction for the same. The ld. AO proceeded to disallow the same while computing book profits u/s.115JB of the Act on the ground that the said provision for bad and doubtful debts is only an unascertained liability. We find that the ld. CIT(A) by placing reliance on the Special Bench decision of Calcutta Tribunal in the case of JCIT vs. Usha Martin Industries Ltd., reported in 104 ITD 249, granted relief to the assessee. We find that the Special Bench of Calcutta Tribunal had held that the provisions for bad and doubtful debts is not a provision of liability but it is only provision for diminution in the value of asset and accordingly, it does not fall under the ambit of Clause-C of Explanation to Section 115JA of the Act. The ld. AR before us placed reliance on the decision of Hon‟ble High Court in the case of CIT vs. Tainwala Chemicals and Plastics India Ltd., reported in 215 Taxman 153 (Bom). The question raised before the Hon‟ble Jurisdictional High Court was as under:-

“(k) Whether, on the facts and circumstances of the case, the Tribunal was justified in upholding the decision of the CIT(A), in deleting the addition on account of provision for doubtful debts to the book profit under Section 115JB of the Act without appreciating that the disallowance / addition on account of diminution in the value of assets is mandatory in view of Explanation (1) to Section 115JB of the Act?”

5.2. It would be relevant to reproduce question No. „C‟ also which was raised before the Hon‟ble Jurisdictional High Court:-

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“ (c) Whether, on the facts and circumstances of the case, the Tribunal was justified in deleting the addition of Rs.1,90,51,000/- being provision for bad debts on account loan to its group concern, even though the debt did not qualify for deduction under section 36(1)(vii) read with Section 36(2) of the Act and the said debt has been depicted as a provision in the accounts of the assessee?”

5.3. We find that the Hon‟ble Jurisdictional High Court had disposed of the aforesaid two questions by observing as under:-

5.4. From the above decision, it could be seen that in the facts before the Hon‟ble Jurisdictional High Court in the case of

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Tainwala Chemicals and Plastics India Ltd., referred to supra, there was a clear finding of fact given by the Tribunal that assessee had indeed written off the debt / loan in its books of accounts and had shown the same as provision for bad and doubtful debts by reducing it from gross value of debtors on the asset side of the balance sheet. Hence, the decision of the Hon‟ble Apex Court in the case of Vijaya Bank reported in 323 ITR 166 was applied thereon. It is pertinent to note that the decision of the Hon‟ble Apex Court in Vijaya Bank was rendered in the context of computation of income under normal provisions of the Act and not in the context of computation of book profits u/s.115JB of the Act. We hold that provision of Section 115JB of the Act is a self- contained code by itself and starts with a non-obstante clause. Hence, the decision rendered under normal provisions of the Act in the context of allowability of deduction u/s. 36(1)(vii) of the Act in Vijaya Bank cannot be made applicable to the computation of book profits u/s.115JB of the Act. We find that the decision of the Hon‟ble Jurisdictional High Court relied upon by the ld. AR is factually distinguishable in view of the fact that in that case, the debt / loan was written off by the assessee in the books, whereas in the instant case before us, assessee had merely made provision for bad and doubtful debts. It is also pertinent to note that assessee itself had indeed disallowed the provision made for bad and doubtful debts while computing its income under normal provisions of the Act. This fact itself goes to prove that assessee had only made provision for bad and doubtful debts and had not written off the debt in its books. We find that Finance (No.2) Act, 2009 had brought in an amendment with retrospective effect from

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01/04/2001 by introducing Clause (i) in Explanation 1 to Section 115JB(2) of the Act as under:-

“Clause (i)- the amount or amounts set aside as provision for diminution in the value of any asset”

5.5. We find that this amendment has been brought in the statute by Finance Act, 2009 with retrospective effect from 01/04/2001. As stated earlier, Section 115JB of the Act is a self- contained code by itself starting with a non-obstante clause. The Hon‟ble Supreme Court in the case of Apollo Tyres reported in 255 ITR 273 had already held that the book profits reported by the assessee which has been approved by their shareholders in the Annual General Body meeting could not be tinkered with by the ld. AO other than those additions or deductions specified in Explanation-1 to Section 115JB (2) of the Act. Clause (i) of Explanation to Section 115JB(2) of the Act specifically mandates that provision for diminution in value of any asset should be added back while computing book profits u/s.115JB of the Act. It is not in dispute that the provision for doubtful debts in the instant case does represent provision made for diminution in value of asset. There is absolutely no quarrel that the case does not fall under Clause „C‟ of Explanation 1 to Section 115JB(2) of the Act. We hold that the issue in dispute falls in Clause (i) of Explanation 1 to Section 115JB(2) of the Act. We are not inclined to make this provision redundant or otiose. Moreover, the decision of Hon‟ble High Court as stated earlier is factually distinguishable with that of the assessee‟s case. In view of the aforesaid observations, we hold that provision for bad and doubtful debts is required to be added

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back while computing book profits u/s.115JB of the Act. Accordingly, the ground No.1(c) raised by the Revenue is allowed.

6.1. We have heard rival submissions and perused materials available on record. The assessee company has amalgamated Global Bulk Projects and Fine Chemicals (GBDFC) under the scheme of amalgamation approved by the Hon‟ble Bombay High Court vide its order dated 20/02/2003 (the appointed date being 01/01/2003). Pursuant to the said amalgamation, all the assets and liabilities of GBDFC were transferred and vested in the assessee company with effect from the appointed date i.e. 01/01/2003 for a net consideration of Rs.150 Million by issue of 15,00,000/- 6% Non-Cumulative Redeemable Preference Shares of Rs.100/- each fully paid up to the shareholders of GBDFC in the ratio of 3 preference shares for every 88 equity shares held by them. There is no dispute that amalgamation was a qualifying amalgamation as per the conditions stipulated u/s.2(1B) of the Act and hence, the assessee claimed unabsorbed depreciation and accumulated business loss of GBDFC in terms of Section 72A of the Act as under:-

AY Unabsorbed Business Loss Total Depreciation 1999-2000 13,35,11,363 6,14,68,798 19,49,80,161 2000-2001 11,27,92,461 12,11,07,238 23,38,99,699

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2001-2002 9,99,20,784 4,11,60,772 14,10,81,556 2002-2003 8,45,82,127 3,78,08,118 12,23,90,245 2003-2004 3,09,59,523 6,00,90,387 9,10,49,910

6.2. It was pointed out that both assessee as well as GBDFC were engaged in the business of pharmaceuticals. The ld. AO while examining the claim, called for certain data and compliance conditions u/s.72A of the Act as it stood then and as applicable to A.Y.2003-04 i.e. the year under consideration. The assessee provided all the data as required by the ld. AO. The ld. AO noted that amalgamating company i.e. GBDFC had hived one of its Ibuprofen unit on 01/11/2002 which was having installed capacity of 720 MTS by way of slump sale to another sister concern of GBDFC namely Alpex International Pvt. Ltd., (hereinafter referred to as Alpex), the ld. AO thus alleged by doing the slump sale, GBDFC intentionally reduced installed capacity to 150 MTS as total installed capacity of GBDFC prior to slump sale was 870 MTS. Accordingly, the ld. AO concluded that the purpose of amalgamation was only to transfer huge unabsorbed depreciation and accumulated business losses of GBDFC to the assessee company.

6.3. It was pleaded before the ld. CIT(A) that assessee company, (i) had filed a copy of merger agreement along with resolution to specify the conditions of amalgamation and set off; (ii) had furnished detailed note along with copies of the Hon‟ble Bombay High Court order sanctioning the scheme of amalgamation; (iii) had furnished copy of Minutes of meeting of the assessee company; (iv) had furnished copies of returns of

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income and balance sheet of erstwhile GBDFC together with its prescribed certificate in Form No.62 as specified in Rule 9C of the Income Tax Rules to prove that assessee company has achieved provision of 50% of the installed capacity on 26/08/2005 as prescribed in Rule 9C r.w.s. 72A(2)(b)(iii) of the Act; and (v) had furnished copy of business purchase agreement between GBDFC and Alpex relating to slump sale of Ibuprofen undertaking by GBDFC to Alpex on 01/11/2002. It was vehemently pleaded before the ld. CIT(A) that assessee had duly complied with the conditions prescribed in Section 72A of the Act r.w.Rule 9C of the Rules and hence, it was entitled for set off of unabsorbed business losses and unabsorbed depreciation of GBDFC (amalgamating company). The ld. CIT(A) noted at para 13.2 that the ld. AO has not disputed the compliance of conditions specified in section 2(1B) of the Act. Further, the ld. CIT(A) noted that the ld. AO has not allowed the set-off of unabsorbed depreciation and accumulated business losses only for the reason, that prior to amalgamation, one unit of GBDFC had been sold and thus in his view, the conditions of section 72A(2)(b)(iii) are not satisfied.

6.4. The ld. CIT(A) noted that both the companies were engaged in the business of pharmaceuticals. Further, he noted that under Rule 9C of the Rules, the amalgamated company i.e. the assessee had to achieve 50% of the installed capacity existing as on the date of amalgamation (which in present case is January 1, 2003) before the end of 4 years from the end of amalgamation and has to continue the minimum level of production till the end of 5 years from the date of amalgamation. The ld. CIT(A) further noted that the assessee had submitted Form No. 62 duly verified by the

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Accountant. The ld. CIT(A) noted that the assessee company had achieved the level of production of the installed capacity on the date of amalgamation well within time and a certificate to this effect from the accountant has also been furnished. The ld. CIT(A) also noted that other conditions to be satisfied by the amalgamating company i.e. GBDFC which includes a condition that the amalgamating company should have held as on the date of amalgamation, 3/4th of the book value of assets held by it two years prior to the date of amalgamation, were introduced in the statute only by the Finance Act, 2003 w.e.f April 1, 2004 i.e. A.Y. 2004-05 and hence these new conditions could not apply for A.Y. 2003-04 (i.e the year under consideration).

6.5. Before us, the ld. AR made a statement from the Bar that the assessee company does not hold any shares in GBDFC or in its holding company i.e. Nidus Fincom Pvt. Ltd., (hereinafter referred to as Nidus) and none of the Directors of the assessee company are the Directors on the Board of GBDFC or Nidus. It was also submitted by him that GBDFC is not a related party of the assessee company. In this regard, he drew our attention to page 25 of the factual paper book containing audited balance sheet of the assessee company for the year ended 31/03/2003. Similarly, he also drew our attention to the audited balance sheet of GBDFC as on 31/12/2002 at page 89 and 90 of the factual paper book containing related party transactions thereon, as per Accounting Standard 18 issued by the Institute of Chartered Accountants of India (ICAI). It was also submitted by him that GBDFC is a pharmaceutical company having substantial exports and that there was commercial rationale for the merger of GBDFC with the

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assessee company. In this connection, he drew our attention to the news article reported in “FINANCIAL EXPRESS” on 29/11/2002 under the caption “NPIL Board approves merger with GBDFC.”. In the said news article which is annexed in page 189 of the paper book III, it was mentioned that the merger of GBDFC with NPIL will create a platform to build a strong exports business for Nicholas Piramal India Ltd., (NPIL) in APIs, intermediates and formulations pursuant to which NPIL hopes to achieve an export turnover of Rs.100 Crores in F.Y.2003-04 as against Rs. 7 Crores in F.Y.2001-02 and Rs.35 Crores in F.Y.2002-03. It was also mentioned in the said news article that GBDFC has existing relations with former Managers in the regulated markets including Teva, Andrex Corporation, Ivas and Apotex in the generics segment and Sanofi-synthelabo and Zambon in the new drug delivery (NDD) segment. The news article further pointed that GBDFC currently exports to the European and Canadian markets and is expected to commence exports to the US later this financial year. In fact, the Board of GBDFC had in its own commercial wisdom decided to transfer the Ibuprofen Unit to its sister subsidiary, Alpex International Private Limited ("Alpex") vide Board Resolution dated October 1, 2002 and the commercial rationale thereof is noted at Pg. No. 190 and 191 of Paper Book No. III. GBDFC has transferred Ibuprofen Unit to Alpex with effect from November 1, 2002.

6.6. Post the Slump Sale, the total installed capacity of GBDFC was reduced from 870 MT. to 150 MT. In fact, the resolution to consider the merger of GBDFC into assessee by the Board of Directors of the assessee was passed only on November 29, 2002

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and the final order of the Hon‟ble Jurisdictional High Court approving the merger was passed only on February 20, 2003. Thus, the assessee was not in control of GBDFC or its decision to slump sale the Ibuprofen Unit to Alpex. Further, since the Hon‟ble Jurisdictional High Court Order was passed only on February 20, 2003 after convening meeting of all the stakeholders, it is inconceivable to accept the allegations of the ld. AO that Ibuprofen Unit was sold only to facilitate the amalgamation. He argued that all the conditions provided in Section 72A(2) of the Act r.w.r. 9C of the Rules had been complied with by the assessee.

6.7. Per contra, the ld. DR vehemently argued that in the instant case, the purpose of amalgamation of GBDFC with assessee was only to buy losses. He argued that normally the purpose of amalgamation would only be for revival of amalgamating company which is conspicuously absent in the instant case. He led more emphasis on the following dates together with the events and argued that obviously the petition for amalgamation could have been filed by the assessee company on prior to slump sale:-

Date of Slump Sale 01/11/2002 Appointed Date for 01/01/2003 amalgamation Order of the Hon‟ble High Court 20/02/2003 approving the scheme of amalgamation

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6.8. From the above mentioned dates, the ld. DR argued that obviously the assessee company could have filed the scheme of amalgamation before the Hon‟ble Bombay High Court prior to the date of slump sale i.e. 01/11/2002 and hence, the entire transaction by way of amalgamation was only done as a measure of colourable device to buy losses of GBDFC to be set off with the profits of the assessee company. He also led emphasis on the fact that Ibuprofen undertaking which is a profit making undertaking was sold by the GBDFC on 01/11/2002 by way of slump sale to its sister concern Alpex for a paltry sum of Rs.50 lakhs. The loss making Hyderabad unit remaining with GBDFC got merged with assessee only for utilisation of its losses and not for its revival. This clearly brings out the colourable devise adopted by the assessee. With regard to the argument advanced by the ld. AR that GBDFC is not a related party, is concerned, the ld. DR argued that non-related party transactions need not be always genuine. He argued that effectively this is a classic case of arrangement made between two unrelated parties by passing relevant board resolutions in their respective companies for taking advantage of accumulated losses of GBDFC and ignoring the provisions of the Act.

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only on 15/01/2003, which is much after the date of slump sale of Ibuprofen undertaking by GBDFC to Alpex, hence, the primary arguments of the ld. DR that amalgamation process was already initiated prior to the date of slump sale on 01/11/2002 is factually incorrect and deserves to be dismissed. Hence, the allegation levelled by the ld. DR that these transactions tantamount to colourable device in this aspect is also dismissed. It is not in dispute that GBDFC got merged with the assessee company with appointed date effective from 01/01/2003 pursuant to the order of the Hon‟ble Bombay High Court approving the scheme of amalgamation on 20/02/2003. It is not in dispute that pursuant to such amalgamation, all the assets and liabilities of GBDFC as on the date of amalgamation got vested with the assessee company with effect from the appointed date. Hence on the date of amalgamation, what is to be seen is whether GBDFC had accumulated losses in its kitty or not, along with other assets and liabilities. It is not in dispute that GBDFC had accumulated losses in the form of unabsorbed business losses and unabsorbed depreciation on the date of amalgamation with assessee. It could not be brushed aside that the assets and liabilities on the date of amalgamation together with the details of losses available thereon in the hands of GBDFC was duly placed before the Hon‟ble Bombay High Court along with the scheme of amalgamation while seeking approval. We hold that once the scheme of merger was duly approved by the Hon‟ble High Court having in mind the larger public interest, the same cannot be disturbed by the Revenue by merely alleging that the merger was done only to buy losses and it was done only as a measure of colourable device. It is also pertinent to note that scheme of amalgamation when it goes for

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approval before the Hon‟ble Bombay High Court, Union of India is made a party to the said scheme, which means all the Central Government regulatory authorities had a right to raise objections to the scheme of merger before the Hon‟ble High Court. In the instant case, Income Tax department which is part of Union of India had not filed any objections before the Hon‟ble High Court objecting to the merger. No evidence has been brought on record by the ld. DR before us in this regard. Hence, the department cannot object to the same at this point of time while implementing the said order of merger. We find that the scheme of amalgamation approved by the Hon‟ble Bombay High Court had to be understood and looked into in a holistic way. It would be just and fair to believe that the scheme of amalgamation would be approved by the Hon‟ble High Court only after ensuring that the same is not prejudicial to the interests of its members or to public. Hence, it could be safely inferred that the Hon‟ble Court would exercise due diligence and would conduct detailed enquiries before sanctioning the claim. The fact that the Hon‟ble Bombay High Court had accorded the sanction of the scheme of amalgamation in the assessee‟s case implies that the same had been done by considering the representations from the various fields and by duly considering the tax evasion point for income tax purposes. In this regard, it would be relevant to note the observations made by Shri A. Ramaiya in the Companies Act part 2 at pages 2499 and 2500 in point No.6 incorporated hereunder:-

“That the proposed scheme of compromise and arrangement is not found to be violative of any provision of law and is not contrary to the public policy. For ascertaining the real purpose underlying the scheme with a view to be satisfied on this aspect, the court, if

21 ITA No.4000/Mum/2007 & 4345/Mum/2007 M/s. Piramal Enterprises Limited

necessary, can pierce the veil of apparent corporate purpose underlying the scheme and can judiciously x-ray the same.” 7.1. We also find that the Hon‟ble Madras High Court in the case of Penta Media Graphics Ltd. vs. ITO reported in 236 CTR 204 had categorically held that once the merger scheme had been sanctioned with effect from the particular date by the Hon‟ble Court, it is binding on everyone including the statutory authorities. Similar is the view rendered by the Hon‟ble Jurisdictional High Court in the case of Casby CFS (P) Ltd., In Ra reported in 231 Taxman 89 (Bom) dated 19/03/2015.

7.2 Further, we also find that the Hon‟ble Supreme Court in the case of J.K.(Bombay) P. Ltd., vs. New Kaiser-I- Hind Spinning Weaving Company reported in AIR 1970 AIR 1041 had held as under:-

“The principle is that a scheme sanctioned by the court does not operate as a mere agreement between the parties; it becomes binding on the company, the creditors and the shareholders and has statutory force, and therefore, the joint-debtor could not invoke the principle of accord and satisfaction. By virtue of the provisions of sec. 391 of the Act, a scheme is statutorily binding even on creditors, and shareholders who dissented from or opposed to its being sanctioned. It has statutory force in that sense and therefore cannot be altered except with the sanction of the Court even if the shareholders and the creditors acquiesce in such alteration.”

7.3. We find that the aforesaid observations of Hon‟ble Supreme Court had been followed in yet another decision by the Hon‟ble Bombay High Court in the case of Sadanand Varde vs. State of Maharashtra reported in 247 ITR 609 wherein it was held that Once a scheme becomes sanctioned by the court, it ceases to operate as a mere agreement between the parties and becomes binding on the company, the creditors and the shareholders and

22 ITA No.4000/Mum/2007 & 4345/Mum/2007 M/s. Piramal Enterprises Limited

has statutory operation by virtue of the provisions of Section 391 of the Companies Act.”

7.4. The said judgment of Hon‟ble Bombay High Court further provided that an appeal, if any, against the order of amalgamation lies u/s.391(7) of the Companies Act 1956 and the same cannot be agitated in any collateral proceedings. The relevant extract of the said judgment is reproduced hereunder:-

“We are of the view that the amalgamation, which has become final and binding, cannot be permitted to be challenged by the petitioners, without locus standi, in a collateral proceeding in the present writ petition. An amalgamation order can only be challenged under the Companies Act by an appeal under Section 391(7) by any one of the parties, but no such appeal was ever filed.” 7.5. The ld. DR before us was not able to point out whether any appeal u/s.391(7) of the Companies Act, 1956 against the order of amalgamation sanctioned by the Hon‟ble High Court, had been preferred by the Income Tax department. In view of the aforesaid observations, the ld. DR cannot object to the scheme of amalgamation approved by the Hon‟ble High Court in the garb of calling the entire arrangements carried out by the assessee as a colourable device.

7.6. Having observed so, it would be relevant to address the next crucial aspect as to whether the assessee had complied with the provisions of Section 72A of the Act r.w.rule 9C of the Rules which alone would enable it to get the benefit of set off of accumulated losses of amalgamating company in addition to the scheme of merger approved by the Hon‟ble Bombay High Court. We find that Section 72A(2) of the Act as it stood then as is

23 ITA No.4000/Mum/2007 & 4345/Mum/2007 M/s. Piramal Enterprises Limited

relevant to A.Y.2003-04 stipulated fulfillment of 3 conditions. For the sake of ready reference, the relevant provisions of Section 72A(2) as applicable for A.Y.2003-04 are reproduced as under:-

“(2) Notwithstanding anything contained in sub-section (1), the accumulated loss shall not be set off or carried forward and the unabsorbed depreciation shall not be allowed in the assessment of the amalgamated company- (i) holds continuously for a minimum period of five years from the date of amalgamation at least three-fourths of the book value of fixed assets of the amalgamating company acquired in a scheme of amalgamation; (ii) continues the business of the amalgamating company for a minimum period of five years from the date of amalgamation; (iii) fulfils such other conditions as may be prescribed to ensure the revival of the business of the amalgamating company or to ensure that the amalgamation is for genuine business purpose.”

7.7. There is absolutely no dispute that assessee in the instant case had fulfilled all the three conditions cumulatively. There is absolutely no dispute that assessee has also fulfilled the requirement stipulated in Rule 9C of the rules by using minimum 50% of installed capacity of amalgamating company within a period of four years and which fact should also be supported by a certificate from a Chartered Accountant in Form No.62. A certificate from an Accountant in the Form No.62 is enclosed in page 76 of the factual paper book. We also find that assessee in the instant case had duly specified the commercial rationale beyond doubt which goes to prove the complete revival of GBDFC. This fact is also reiterated in the “FINANCIAL EXPRESS” news paper on 29/11/2002 Mumbai edition which date happens to be prior to the date of amalgamation. In other words, the said intention behind merger of GBDFC with assessee company, by exploiting the business prospects and inherent networking advantages of GBDFC, which was reported in the news paper on

24 ITA No.4000/Mum/2007 & 4345/Mum/2007 M/s. Piramal Enterprises Limited

29/11/2002 stood ratified and strengthened by the subsequent act of the assessee by fully utilizing the resources of GBDFC. At this juncture, we are conscious of the fact that the income tax dispute cannot be determined based on newspaper reports. But in the instant case, the facts stated in the newspaper reports stood subsequently ratified by the actual events that had taken place post merger. We are completely in agreement with the argument advanced by the ld. AR that since assessee was not in control of the operations of GBDFC prior to the merger including the sale of ibuprofen undertaking on 01/11/2002 by way of slump sale, the assessee cannot be held responsible for the same. The act of GBDFC prior to merger, to sell any of its undertaking to its sister concern Alpex for a paltry consideration is of absolutely no relevance to the assessee company herein. In view of the aforesaid observations, we hold that the ld. CIT(A) had rightly directed the ld. AO to allow set off of losses of amalgamating company in the hands of the assessee. Accordingly, ground No. 1(d) raised by the revenue is dismissed.

8.1. We have heard rival submissions and perused the materials available on record. Reckitt Piramal Pvt. Ltd. ("JVC") was a joint venture between the assessee, Reckitt Benckiser (India) Ltd- ("RBIL") and Reckitt Benckiser Plc (RBP). Since the JVC was running into losses, the assessee constituted a committee to consider the termination or restructuring the JVC on 26.07.2001.

25 ITA No.4000/Mum/2007 & 4345/Mum/2007 M/s. Piramal Enterprises Limited

Initially the Joint Venturers restructured the JVC. However, the JVC continued to run into losses and so the assessee decided to exit from the JVC. RBIL agreed to purchase all the equity shares held by the assessee in JVC for a total consideration of Rs. 75,00,000/-. Accordingly, an agreement was proposed to he entered into between the assessee, RBIL and RBP setting out the terms and conditions for disinvestments. On 13.3.2006, a Board Resolution was passed authorizing the above disinvestments. Accordingly, the assessee took sale value of shares at Rs.75,00,000/-. However, due to typographical error, the sale value was taken as 7,50,000/- in the original return of income. Hence, the assessee vide letter dated March 29, 2006 informed the ld. AO that the correct capital loss is Rs.4,43,40,171/- and not Rs.5,01,90,171/-.

8.2. As regards Charak Piramal P. Ltd (JVC), the said JVC was also incurring losses. Hence, its capital and reserves had been completely eroded. In order to prevent further losses for the company and instead of contributing to further capital of the Joint venture, the assessee decided to quit the Joint Venture and accordingly, entered into share purchase agreement with Charak Pharma Pvt. Ltd. to sell its shares at a token price of Rs. 100 since even the capital of the Joint venture was eroded.

8.3. The ld. AO has alleged that the assessee has not furnished any tenable reason for the loss that it has incurred by selling off its share holding. In this regard, the assessee submitted that as stated earlier, the capital and reserves of Charak Piramal P. Ltd had been completely eroded. Further, Reckitt Piramal Pvt. Ltd. was

26 ITA No.4000/Mum/2007 & 4345/Mum/2007 M/s. Piramal Enterprises Limited

incurring huge losses. Thus, the assessee decided that it would be prudent to exit from the company than incur further losses. The assessee exercised enough business prudence and foresight to reduce the further losses it could have incurred, had it not sold the shares. Thus, the assessee exercised appropriate caution in accordance with prudent business practices in its decision to sell the shares and receive whatever little consideration it could and took precautions to reduce the loss it suffered. However, the ld. AO failed to appreciate the action of the assessee without realizing the true intention of the assessee i.e. to avoid the further loss it could have suffered.

8.4. Further, the ld. AO failed to observe that the transaction on sale of shares of both the companies were at arm‟s length i.e the shares were not sold to any of the group concerns of assessee. Also, there is no receipt in the hands of the assessee over and above the sale price of the share and this fact has not been disputed by the ld. AO either. Thus, the transactions are genuine transactions and the assessee fails to understand the action of the ld. AO.

8.5. The assessee during the year under consideration had shown capital loss of Rs.12,42,56,652/- in the return of income which was later revised during the course of assessment proceedings to Rs.11,75,06,652/- as under:-

27 ITA No.4000/Mum/2007 & 4345/Mum/2007 M/s. Piramal Enterprises Limited

PURCHASE SALE

Name of Year of Qty Rate Purchase Rate Sale Indexed Capital Gain/ Scrips Purchase Amount Amount Cost (Loss) Reckitt Piramal Pvt. 1998-99 4,000,000 10.00 40,000,000 0.19 750,0000 50,940,171 (4,34,40,171) Ltd; Charak Piramal 1999-00 1,000,000 42.70 42,700.000 0.00 29 49,066,581 (49,066,552) Healthcare Pvt. Ltd. Charak Piramal 2002-03 2,500,000 10.00 25,000,000 0.00 71 25,000,000 (24,999,929) Healthcare Pvt. Ltd. Total Short Term Gain (11,75,06,652) / (Loss)

8.6. We find that the ld. CIT(A) in para 14.2 of his order had categorically held that the transactions on sale of shares of aforesaid two companies were made by the assessee company at arm‟s length price as the shares were not sold to any of the group concerns of the assessee company. The ld. CIT(A) had also categorically found that there was no receipt in the hands of the assessee over and above the sale price of the shares. We also find that the ld. CIT(A) had also observed that the sale price of Rs.75,00,000/- shown by the assessee was not disputed by the ld.AO. The entire gamut of the issue need to be looked into from the facts prevailing in the case and not from the point of view that it had resulted in capital loss to the assessee company. We hold that merely because the transaction on sale of shares had resulted in capital loss, the same cannot be adjudged to be sham transaction. The share sale consideration of Rs 75,00,000/- , which is not disputed , had to be accepted as commercial consideration. We find that the ld. AO in the instant case had not brought any material on record to dispute the fair market value of the consideration on sale of shares.

28 ITA No.4000/Mum/2007 & 4345/Mum/2007 M/s. Piramal Enterprises Limited

8.7. The ld. DR before us argued that the sale price quoted by the assessee at Rs.75 lakhs was not justified and was not supported by way of any valuation report and accordingly, pleaded for restoring this issue to the file of the ld. AO with a direction to the assessee to produce the valuation report. We feel that this is not required to be done as there was no requirement as per the mandate of law on the part of the assessee to furnish a valuation report for sale of unlisted shares in the year under consideration. We find that the assessee had completely narrated the facts and circumstances under which it had to sell the shares for Rs.75,00,000/-. If the ld. AO has got any doubt on the same, it is for the ld. AO to bring on record the comparable instances to prove that the share sale consideration shown by the assessee is incorrect. Nothing prevented the ld AO to even make cross reference to the buyer of the shares to ascertain the fact that the share sale consideration was anything more than Rs 75 lacs. The revenue had not brought any material on record to dispute the same and no material is also brought on record to prove whether any corresponding action has been taken in the hands of purchaser of shares. Admittedly, as pointed out earlier, the ld. AO had not brought any comparable instances of share sale consideration. We find that the ld. AR rightly placed reliance on the decision of Hon‟ble Jurisdictional High Court in the case of CIT vs. Tainwala Chemicals and Plastics India Ltd., reported in 215 Taxman 153 (Bom). The relevant question raised before the Hon‟ble Jurisdictional High Court was as under:-

(f) Whether, on the facts and circumstances of the case, the Tribunal was justified in deleting the disallowance of Rs.3,06,75,058/- on account of long term capital loss claimed by the assessee even though the loss had

29 ITA No.4000/Mum/2007 & 4345/Mum/2007 M/s. Piramal Enterprises Limited

arisen due to the transfer of unquoted shares of group companies which had been sold to other companies at abysmally low prices to contrive the loss ?

8.8. The said question was disposed of by the Hon‟ble Bombay High Court by observing as under:- “6. In so far as question (f) is concerned, it is the case of the Revenue that the shares were sold due to family arrangement at very low prices and, hence, the loss is alleged to have been contrived. The Tribunal referred to the decision of the Apex Court in the matter of K.P. Varghese v. ITO [1981] 131 ITR 597/7 Taxman 13, wherein it is held that it is not sufficient for the Revenue to merely allege that the assessee has received more consideration than what is declared, but the Revenue must prove that the assessee had in fact received more consideration. The Tribunal has recorded a finding in the impugned order that the Revenue has not discharged the burden which is casts upon it in terms of the decision of the Apex Court in the matter of K.P. Vargese (supra). Further the Tribunal also recorded that in case the Revenue doubted the calculation of the intrinsic value of shares, it was open to the Revenue to rework the appropriate value so as to justify its allegation that the price at which they were transferred was low. In these circumstances, we see no reason to entertain question (f).” 8.9. Similarly we also find that the Hon‟ble Jurisdictional High Court in the case of CIT vs. M/s. Morarjee Textiles Ltd., in Income Tax Appeal No.738 of 2014 dated 24/01/2017 had addressed the similar issue in dispute before us. The relevant question raised before the Hon‟ble Bombay High Court is as under:-

“(ii) Whether on the facts and in the circumstances of the case and in law, the Tribunal was correct in rejecting the fair market If value of the unlisted shares of PMP Components P Ltd. adopted by the Assessing Officer by invoking the provisions of Section 2(22B) (i) of the Income Tax Act 1961 for working out the long term capital gain?” 8.10. This question was disposed of by the Hon‟ble Court by observing as under:-

30 ITA No.4000/Mum/2007 & 4345/Mum/2007 M/s. Piramal Enterprises Limited

“4. Regarding question no.(ii): a) The issue which arises herein for consideration is whether it is open to the Assessing Officer to substitute the 'full value of consideration received on sale of shares by its 'fair market value' in the subject Assessment Year. The impugned order of the Tribunal allowed the Respondent assessee's appeal by inter alia holding that the reliance by the Revenue on Section 2(22B) of the Act is not justified. This is for the reason that there is no provision under the Act which would permit the Assessing Officer to substitute the 'full value of consideration' received on sale of shares by 'fair market value'. The only provision in the Act at the relevant time allowing substitution of consideration received by the market value was Section 50C of the Act. Section 50C of the Act deals only with substitution of full consideration received by 'fair market value' in respect of land and/or buildings. The impugned order makes a reference to Section 50D of the Act which provides for substitution of full value of consideration received/accruing on a transfer of a capital asset being substituted by a fair market value. However this came into force only with effect from 1st April, 2013. Therefore it cannot be relied upon for the subject Assessment year. The impugned order of the Tribunal further placed reliance upon the decision of its Coordinate bench in the case of MGM Shareholders Benefit Trust (Income Tax Appeal No.316/Mum/2009) rendered on 26th November, 2009 in case of a group company of the respondent assessee on a similar issue of revaluation of shares by substitution of full value of consideration by fair market value and held the same to be impermissible. (b) The grievance of the Revenue before us is that these transactions are all between companies belonging to the same group. Therefore it is urged that the transaction are colourable transaction and different considerations would apply. (c) At the hearing of the admission, the Revenue did not point out any facts which would evidence that the transaction was not genuine. In such a case where the genuineness is not disputed with any evidence, it is not open to discard the documents and/or transaction on the basis of some supposed object/intent. In the present facts the Revenue accepts the documents but only substitutes the consideration. Therefore, the issue is whether such substitution of full consideration received by fair market value of the asset is permissible. As held by the Tribunal at the relevant time there was no power vested in the authorities under the Act to substitute a full value of consideration received for sale of shares by fair market value in respect of stocks and shares. The power to substitute full consideration with fair market value in respect of shares came into the statute only on introduction of Section 50D with effect from 1st April, 2013. Moreover, such a power under Section 50D of the Act is only to be exercised if the Assessing Officer comes to a finding that the consideration received is not ascertainable or cannot be determined. Moreover the decision of the Coordinate bench of the Tribunal in the case of MGM Shareholders Benefit Trust (supra) on identical facts

31 ITA No.4000/Mum/2007 & 4345/Mum/2007 M/s. Piramal Enterprises Limited

situation has been accepted by the Revenue, as no appeal from the same has been filed by the Revenue. (d) In the above view, the question as formulated does not give rise to any substantial question of law. Thus not entertained.” 8.11. In view of our aforesaid elaborate observations, in the facts and circumstances of the instant case and respectfully following the aforesaid decisions of the Hon‟ble Jurisdictional High Court, we do not find any infirmity in the action of the ld. CIT(A) allowing capital loss on sale of shares of Reckitt Piramal Pvt. Ltd., and Charak Piramal Pvt. Ltd., in the sum of Rs.11,75,06,652/-. Accordingly, the ground No.1(e) raised by the Revenue is dismissed.

9.1. We have heard rival submissions and perused the materials available on record. The ld. AR did not advance any fresh arguments in this regard and vehemently relied on the order of the ld. CIT(A). Per contra, the ld. DR also did not advance any argument and did not narrate the issue in dispute before us and vehemently relied only on the order of the ld. AO. Hence, we deem it fit to reproduce the observations of ld. CIT(A) in this regard for adjudication of this issue:-

“17. Ground no. 17 deals with disallowance of bad debts of Rs.46.00.000/- on the ground that the appellant has not established that the debt hail become bad. The facts in this regard arc that during the year under consideration, the Appellant had written off bad debts amounting to Rs.46.00.000/-, being the amount of sales proceeds not received pertaining to earlier years and which had been offered to tax in

32 ITA No.4000/Mum/2007 & 4345/Mum/2007 M/s. Piramal Enterprises Limited

the respective years in which they were made. However the A.O. disallowed the Appellants claim for deduction on the ground sufficient documentary evidences were not filled. 17.1. Before me the appellant has submitted as under:- a. the debt was actually written-off in the books: b. all the conditions stipulated in section 36(2) for claiming deduction of bad debt were complied with: the appellant had taken adequate steps to claim to recover the debt. Appellant craves to rely upon the decision of the Hon’ble Bombay High Court in the case of Jethabhai Hirji and Jethabhai Ramdas vs. CIT (120 ITR 792) wherein it has been held that: “As to when a debt becomes bad depends upon the circumstances and the materials brought on record and there is general rule or universal test which will apply to all case and in all circumstances. The department cannot insist on demonstrative proof of the fact which must satisfy the test of infallibility. All that is required is an honest judgment on the part of the assessee at the time when he makes the write-off.” Further, as per section 36(1)(vii), as amended by Direct Tax Laws (Amendment) Act, 1987 w.e.f. 1.4.1989, for the purpose of claiming deduction of bad dbets it is a sufficient compliance that the amount is actually written off in the books of accounts. It is not necessary for an Appellant to establish that the debt has become bad. The Appellant also craves leaves to rely upon the decision of the Special Bench of the Hon’ble Tribunal which has constituted to decide a similar issue in the case of DCIT vs. Oman International Bank SAOG (100 ITD 285). The question before the court was whether as per the existing provisions, even after the amendment w.e.f. 01.04.1989, it is obligatory on the part of the assessee to prove that the debt written off by him is indeed a Bad Debt for the purpose of allowance u/s.36(1)(vii). Held-No. it is not”. 17.2. Respectfully following the Special Bench decision of the Jurisdictional Tribunal in the case of Oman International Bank. I hold that it is no longer necessary for the appellant to establish that the debt which is written off has become bad during the year. The A.O. is therefore directed to allow bad debts of Rs.46,00,000/-. This ground of appeal is therefore allowed.”

9.3. In view of the elaborate discussions of the ld. CIT(A) on the impugned issue, we do not find any infirmity in the order of the ld.

33 ITA No.4000/Mum/2007 & 4345/Mum/2007 M/s. Piramal Enterprises Limited

CIT(A) granting relief to the assessee in this regard. Accordingly, ground No.1(f) raised by the Revenue is dismissed.

ITA No.4000/Mum/2007 (Assessee Appeal) A.Y.2003-04

11.1. We have heard rival submissions and perused the materials available on record. Both the parties mutually agreed before us that this issue is already adjudicated by this Tribunal in assessee‟s own case for A.Y. 2002-03 in ITA No.3927/Mum/2006 dated 20/02/2020 wherein it was held as under:-

“5.1. We have heard rival submissions. We find that the ld. AO had recorded in the assessment order that in the tax audit report, the Tax Auditor mentioned that assessee is following EXCLUSIVE method of accounting for MODVAT with regard to inventory, purchases and consumption. The assessee vide letter dated 29/11/2004 had also contended that the aforesaid treatment had no impact on the profit at all. The ld. AO observed that unutilised balance of MODVAT credit on stock in trade is reflected in the balance sheet as an asset amounting to Rs.152.83 lakhs and as per the proviso of Section 145A of the Act, the unutilised MODVAT needs to be included in the value of closing stock. During the course of assessment proceedings, the assessee, without prejudice, claimed that the amount which was added to the closing stock in A.Y.2001-02 on similar lines as above i.e. Rs.86.56 lakhs should be allowed as part of the opening stock in A.Y.2002-03. This claim of the assessee was allowed by the ld. AO by increasing the opening stock to the extent of Rs.86.56 lakhs and the net addition on account of unutilised MODVAT credit was made by the ld. AO at Rs.66,27,443/-. This action of the ld. AO was upheld by the ld. CIT(A). We find that this issue was the subject matter of adjudication by this

34 ITA No.4000/Mum/2007 & 4345/Mum/2007 M/s. Piramal Enterprises Limited

Tribunal in assessee’s own case for A.Y.2009-10 in ITA Nos.1257/Mum/2014 & 1486/Mum/2014 dated 07/05/2019 wherein it was held as under:-

“Adjustment of Inventory as per Sec. 145A : Rs. 1,16,08,088 21. We shall now advert to the contention of the ld. A.R that the A.O/DRP had erred in re-computing the value of the “closing stock‟ at Rs. 15,982.73 lacs as against Rs. 14,834 lacs and “opening stock‟ at Rs. 14,367.65 lacs as against Rs. 13,335 lacs, on the ground that the assessee is following exclusive method of accounting for MODVAT with regards to its inventory. It is the claim of the ld. A.R that irrespective of whether the assessee follows Inclusive or Exclusive method of valuation of stock, the amount of unutilized MODVAT shall have no bearing on the profits of the assessee. We find that the assessee had before the lower authorities objected to the aforesaid addition as was sought to be made by the A.O on three counts viz. (i) that requirement of valuing the purchases, sales and inventories for the purpose of determining the income under the head “Profits and gains of business or profession” was contrary to the accounting principles laid down by Accounting Standard-2 (for short “AS-2”); (ii). that the ICAI had issued “Guidance Note on Tax Audit under Section 44AB of the I-T Act”, which specifically requires the formats in which information as regards the valuation of purchases, sales and inventories under both inclusive and exclusive method are to be presented, and the same provides that irrespective of the methods being followed, the net impact on the profit and loss will be nil; and (iii). that irrespective of whether the assessee follows Inclusive or Exclusive method of valuation of stock, the amount of unutilized MODVAT credit will have no impact on the profits of the assessee. Apart there from, the assessee had also objected to the calculation of the “closing stock‟ and „opening stock‟ by the A.O by multiplying the stock value by the ratio of purchases (including excise) and purchases (net of excise). It is further averred by the ld. A.R that insofar the valuation of inventories as per Sec. 145A was concerned, the raw material, packing material, stores and works-in-progress was valued at cost, while for the finished goods were valued at cost or net realisable value, whichever was lower. In fact, it is the claim of the assessee that the „cost‟ has consistently been taken at net of MODVAT credit. On the basis of the aforesaid facts, it is stated by the assessee that the element of MODVAT was neither included in the consumption nor into cost for valuation of „closing stock‟. As such, it is the claim of the assessee that as it has debited its „profit & loss a/c‟ with purchases of raw material net of MODVAT Excise duty, therefore, the valuation of „closing stock‟ of raw material was also made at cost net of such excise duty. In sum and substance, it is the claim of the assessee that the costs which have not been debited to the profit and loss account at all, cannot be used for valuation of „closing stock‟. On the basis of its aforesaid submissions, it is the claim of the assessee that the deviation on the profit of the year on account of method of valuation prescribed under Sec. 145A is Rs. Nil, which formed part of the tax audit report as “Annexure B‟. 22. We have deliberated at length on the issue under consideration and find that the assessee for the purpose of its statutory accounts had followed the AS-2 on Valuation of Inventories, and the Guidance Note on Accounting Treatment of MODVAT/CENVAT issued by the ICAI. Accordingly, the assessee had followed the exclusive

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method for accounting purposes. However, for the purposes of income- tax it had worked out the impact of grossing up of tax, duty, cess etc. by restating the values of purchases and inventories by including inter alia the CENVAT credit. The adjustment required u/s 145A of the I.T Act was reflected in Clause 12(b) of the tax audit report of the assessee. As per Clause 12(b) the adjustment u/s 145A worked out at Nil. It is the claim of the assessee that the amount reflected in Clause 12(b) of the tax Audit report shall be treated as the adjustment required u/s 145A, and in support thereof had relied on the order of the ITAT, Mumbai in the case of Hawkins Cookers Ltd. Vs. ITO (2008) 14 DTR 206 (Mum). We have perused Clause 12(b) (Page 61 of „APB‟) of the Tax Audit report of the assessee and find that it is the claim of the assessee that the impact of grossing up of tax, duty, cess etc. by restating the values of purchases and inventories by inter alia including the effect of CENVAT credit will be Nil, subject to Sec. 43B that the duty, taxes, cess etc. is paid before the „due date‟ of filing of the return of income. As the ld. D.R had submitted that the aforesaid working of the assessee would require to be verified, we therefore, in all fairness restore the matter to the file of the A.O for readjudication. Needless to say, the A.O shall in the course of the set aside proceedings afford a reasonable opportunity of being heard to the assessee, who shall remain at a liberty to substantiate its claim before him. The Ground of appeal No. V is allowed for statistical purposes.”

5.2. Respectfully following the same, we deem it fit and appropriate, to remand this issue to the file of the ld. AO to decide the same in the light of directions issued by the Tribunal for the A.Y.2009-10 . Accordingly, the Ground No. II raised by the assessee is allowed for statistical purposes”.

11.2. The workings for the MODVAT credit are enclosed in pages 161-164 of the paper book filed by the assessee. Respectfully following the aforesaid decision, we restore this issue to the file of the ld. AO to decide the same in the light of directions issued by this Tribunal for A.Y.2009-10. Accordingly, the ground No. I raised by the assessee is allowed for statistical purposes.

36 ITA No.4000/Mum/2007 & 4345/Mum/2007 M/s. Piramal Enterprises Limited

by the ld. CIT(A) by placing reliance on the order passed by his predecessor in assessee‟s own case for A.Y.2002-03. We find that the appeal preferred to this Tribunal in assessee‟s own case for A.Y.2002-03 had been adjudicated already by this Tribunal in ITA No.3927/Mum/2006 dated 20/02/2020 (authored by the undersigned) wherein this issue has been decided in favour of the assessee by holding as under:-

6.9. We find that in the instant case, the expenditure on interest and prepayment charge had been incurred by the assessee to expand the existing business of the assessee company. It was submitted by the ld AR that it was with the intent of acquiring the business of M/s RPIL that, subsidiary of the assessee company had purchased shares of M/s RPIL and, since the loan had been raised for purchase of the shares of subsidiary company so as to enable the assessee company to acquire the business of M/s RPIL, hence the expenditure incurred in respect of loan raised in the instant year is a revenue expenditure u/s 36(l)(iii)of the Act. We find lot of force in the said argument of the ld AR and we accept the same. 6.10. We find that when this point was put to the ld DR, he argued that in any case, the proviso to section 36(1)(iii) of the Act would come into operation which reads as under:- Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset (whether capitalized in the books of account or not) ; for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use , shall not be allowed as deduction.

We find that this proviso in any case would not be applicable for the year under consideration as the same was introduced in the statute only with effect from Asst Year 2004-05 and not applicable for earlier years. 6.11. We find that the ratio laid down by the Hon'ble Supreme Court in the case of S.A. Builders v CIT reported in 288 ITR 1 would be squarely applicable to the facts of the instant case. In the said case, the Hon’ble Apex Court held as under: "In our opinion, the decisions relating to section 37 of the Act will also be applicable to section 36(l)(iii) because in Section 37 also the expression used is "for the purpose of business". It has been consistently held in the decisions relating to section 37 that the expression "for the purpose of business" includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby.

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Thus in Atherton Vs. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155, it was held by the House of Lords that in order to claim a deduction, it is enough to show that the money is expended, not necessity and grounds of commercial expediency and in order to indirectly to facilitate the carrying on the business. The above test in Atherton's case [1925] 10 TC 155 (HL) has been approved by this court in several decisions, e.g. Eastern Investments Ltd. Vs. CIT [1951] 20 ITR 1, CIT Vs. Chandulal Keshavlal and Co. [1960] 38 ITR 2 601 etc. 26. The expression "Commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency. [Emphasis Supplied]

6.12. We hold that the payment of prepayment charges also partakes the character of interest . We find that there cannot be any iota of doubt that the entire transaction of acquisition of business assets by the assessee has been done on the grounds of commercial expediency and hence the entire interest payment of Rs 27.11 crores and prepayment charges of Rs 8.62 crores would be squarely allowable as deduction u/s 36(1)(iii) of the Act itself. Accordingly, the Ground No. III raised by the assessee is allowed.”

12.1. Respectfully following the same, the ground No. II raised by the assessee is allowed.

13.1. We have heard rival submissions and perused the materials available on record. We find that the very same issue was the subject matter of adjudication by this Tribunal in assessee‟s own case in ITA No.3927/Mum/2006 dated 20/02/2020 for A.Y.2002-03 wherein it was held that assessee would be eligible for deduction

38 ITA No.4000/Mum/2007 & 4345/Mum/2007 M/s. Piramal Enterprises Limited

u/s.37(1) of the Act. We find that the ld. CIT(A) had merely placed reliance on the decision of his predecessor in A.Y.2002-03 and directed the ld. AO to allow deduction u/s.35DD of the Act in respect of the subject mentioned payment. We find that this Tribunal had directed the ld. AO to allow deduction u/s.37(1) of the Act by observing as under:- “7.1. We have heard rival submissions and materials available on record. We find that under the head legal and professional fees, the assessee had claimed deduction in respect of payments made to Accenture in the sum of Rs.522.97 Lakhs. The assessee submitted that payment of Accenture was mainly pertaining to successful integration of RPIL with the assessee company. The assessee submitted that this expenditure has been incurred on the grounds of commercial expediency allowable as deduction u/s.37(1) of the Act. The ld. AO however, disregarded the contentions of the assessee and disallowed the claim of the assessee by treating it as capital expenditure. The ld. CIT(A) however, observed that since this expenditure had been incurred pursuant to amalgamation of RPIL with assessee company, the same would fall within the ambit of provisions of Section 35DD of the Act and accordingly only 1/5th of the said expenditure would be eligible for deduction. Against this action of the ld. CIT(A) both assessee as well as the revenue are in appeal before us. 7.2. We find that the genuinity of incurrence of this expenditure by way of making payment to Accenture in the total sum of Rs.522.97 lakhs is not in dispute. We find that the payment was made by the assessee to Accenture based on agreement which mandated Accenture to assess in the integration of RPIL with the assessee. As per the agreement, the NPIL management had requested Accenture to submit a proposal to ensure the realization of further value to the group through the proposed integration between NPIL and RPIL. Thus, team of Accenture consultants had conducted a detailed pre-proposal study spanning over five weeks to revive NPIL and RPIL operations with a view to identify synergy and cost reduction opportunities across the merged entity. A preliminary assessment of various opportunities identified with a focused profit improvement initiation could potentially yield in which recurring benefits of about Rs.20 to 30 Crores in the short and medium term. From the aforesaid scope of services to be rendered by Accenture, it could be seem that Accenture had purely rendered professional services by way of pre-proposal study to understand the viability of the merger by integrated operations of RPIL with NPIL and the resultant profitability that the resultant merged entity would derive in short to medium term. Hence, it is a clear case of simple professional services rendered by Accenture to the assessee which at any cost cannot be considered as a capital in nature. We find that the said expenditure has to be considered as wholly and exclusively as deduction u/s.37(1) of the

39 ITA No.4000/Mum/2007 & 4345/Mum/2007 M/s. Piramal Enterprises Limited

Act. We hold that the provisions of Section 35DD of the Act as alleged by the ld. CIT(A) cannot be made applicable in the instant case as admittedly the same only refers to expenses incurred pursuant to amalgamation. Hence, we direct the ld. AO to grant deduction of the said expenditure u/s.37(1) of the Act. Accordingly, the ground Nos. IV and IV(i) raised by the assessee are allowed and Ground No.4 raised by the revenue is dismissed.”

13.2. Respectfully following the same, the ground No.III raised by the assessee is allowed.

14.1. We have heard rival submissions and perused the materials available on record. We find that the assessee has claimed deduction u/s.80HHC of the Act to the extent of Rs.2,34,67,414/- in the return of income. The ld. AO show-caused the assessee with regard to claim of deduction u/s.80HHC of the Act to explain as to why the profits of the business should not be recomputed in view of Explanation (baa) of Section 80HHC(4) of the Act. In response, the assessee company vide letter dated 14/12/2005 submitted as under:- "Point no. 11 Claim of deduction u/s. 80HHC (i) Total turnover does not include Sales-tax Rs. 81.74 crores and Excise Duty Rs.90.17 crores. (ii) AU the foreign exchange have been realized within the stipulated period. (iii) As regards the net off of interest received, amounting to Rs.19.60 crores, from interest payments, it is submitted that interest receipts consists of interest received on Term deposits with companies. on receivable and others whereas, interest payments also consists of payment in respect of interest on loan, debentures and others which was incurred during the normal course of business having direct nexus with each other. Hence, it is purely related to business only. As for as Other income Rs.53.00 crores (Schedule 15) if concerned, Dividend Rs,22.09 crores, Profit on sale of Assets Rs.7,80 crores, Rent Received Rs.6.22 cores included in Other Income Rs. 53.00 crores have already been

40 ITA No.4000/Mum/2007 & 4345/Mum/2007 M/s. Piramal Enterprises Limited

excluded from the Business Income. Please refer Schedule 2 and Annexure A of Form No. 10CCAC forming part of enclosure of Return of Income. Other income which are forming part of Business Income is as under : Rs.In Crores a) Processing charges received 2.93 b) Services & Commission 8. 64 Miscellaneous- Income c) Scrap Sales 1.62 d) Cash discount 0.37 e) Sales Tax Refund 0.08 f) Export Incentives 0.26 g) Insurance claim 0.93 h) Misc. Income 2.06 5.32

14.2. The ld. AO observed from the above that assessee company has not reduced 90% amount of following items of other income to work out the profits of the business as under:- Rs. Rent received 6,21,82,807 Miscellaneous income (excluding scrap 2,06,00,000 etc.) Services and commission 8,64,00,000 Processing charges 2,93,00,000 Gross interest 19,60,00.000 Total... 39,44,82,807

14.3. The ld. AO observed that the above mentioned receipts are in the nature of receipts covered by Explanation (baa) of Section 80HHC of the Act and accordingly, 90% of the same should be reduced while computing the profits of the business eligible for deduction u/s.80HHC of the Act and re-worked the claim of deduction u/s.80HHC of the Act as under:-

41 ITA No.4000/Mum/2007 & 4345/Mum/2007 M/s. Piramal Enterprises Limited

Profit from business eligible for 139,98,23,255 deduction u/s.80HHC Less: 90% of other income 35,50,34,526 104,47,88,729 Total Export Turnover 39,32,33,407 Adjusted Total turnover 11,36,12,78,339

Deduction u/s.80HHC : Adjusted profit of business X Adjusted Export Turnover Adjusted total Turnover 104.47 .88. 729 x 39.32.33.407 361,61,937 11,36,12,78,339 Deduction allowable @ 50% of Rs. 361,61,9377- 1,80,80,968

14.4. The ld. CIT(A) granted partial relief to the assessee in this regard by observing as under:-

“8.1. 1 have duly considered the submissions made by the appellant. On perusal of details, 1 find that the appellant has credited an amount of Rs. 39,44,82,807/- to the P&L, Account under various heads. Following my appellate order for A.Y. 2002-03 and looking into the nature of the receipt and the legal position of the issue. I am of the view that receipts such as rent received, misc. income, service and commission charges and interest received are of the nature of receipts covered by [Explanation (baa) and therefore has to be excluded from the profits of the business while computing deduction u/s. 80HHC. However, looking into the nature, the amount received by the assessee on account of processing charges in my view, is not of the nature covered by Explanation (baa) and therefore should not be excluded while computing the deduction u/s. 80HHC. The A.O. is directed to re- compute the deduction u/s, 80HHC accordingly.”

42 ITA No.4000/Mum/2007 & 4345/Mum/2007 M/s. Piramal Enterprises Limited

14.5. We find that the short dispute in this regard which is to be addressed before us is that while computing the 90% of interest together with rent, miscellaneous income, service charges, commission etc., for the purpose of reducing the same from profits from business eligible for deduction u/s.80HHC of the Act in order to arrive at the adjusted profits of the business, whether the gross interest income or net interest income is to be considered. We find that this issue is no longer res integra in view of the decision of the Hon‟ble Supreme Court in the case of ACG Associated Capsules (P) Ltd., vs. CIT reported in 343 ITR 89 wherein it was held that net interest is to be considered. We find that the Hon‟ble Apex Court in para 10 of its order had held that 90% of net amount of receipt of nature of interest, rent, commission etc. which is actually included in the profits of the assessee is to be deducted from the profits of the assessee for determining “profits of the business” of the assessee under Explanation (baa) of Section 80HHC of the Act. Respectfully following the same, the ground No. IV raised by the assessee is allowed. The ld. AO is directed to recompute the deduction accordingly.

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issue, the ground No. V raised by the assessee is hereby dismissed as infructuous.

44 ITA No.4000/Mum/2007 & 4345/Mum/2007 M/s. Piramal Enterprises Limited

reckoned as statement made from the Bar and accordingly, the ground No. VIII raised by the assessee is dismissed as not pressed.

19.1. We have heard rival submissions and perused the materials available on record. We find that assessee company had declared the income from house property in respect of rent received from RPIL House and Centre Point. The ld. AO observed that RPIL House has been sold by the assessee company in A.Y.2002-03 and capital gains offered thereon and registration of the said property was also done in A.Y. 2002-03, the ownership of the said property does not vest with the assessee company. Similarly, the assessee company had entered into a purchase agreement with Morarjee Goculdas Spinning and Weaving Co. Ltd, (MGM) for purchase of office premises at Centre Point, which duly did not materialize. Hence, the ownership of the said premises does not vest with the assessee company. In view of the same, the ld. AO proceeded to treat the rental income received on letting out of the aforesaid property to be taxed under the head „income from other sources‟ by consequentially denying 30% standard deduction u/s.24(a) of the Act. The ld. AO however, observed that assessee would be eligible only for deduction that qualify u/s.57(iii) of the Act.

45 ITA No.4000/Mum/2007 & 4345/Mum/2007 M/s. Piramal Enterprises Limited

19.2. The ld. CIT(A) upheld the action of the ld. AO in respect of treatment of rental income from RPIL house as income from other sources. However, with regard to rental income derived from Centre Point, he directed the ld. AO to treat the rental income as „income from other house property‟ and grant statutory deduction in terms of Section 24(a) of the Act. Against this direction, the revenue is not in appeal before us. We find that the ownership of the RPIL House vests with the assessee for four years and hence, assessee continued to be the owner of the part premises of RPIL House and hence, the rental income thereon should be assessed only under the head „income from house property‟ and assessee would be entitled for statutory deduction @30% u/s.24(a) of the Act for the same. Accordingly, the ground No. IX raised by the assessee is allowed.

21.1. We have heard rival submissions and perused the materials available on record. The assessee had subscribed to preference shares of GBDFC in F.Y. 1998-99 for a total consideration of Rs.

46 ITA No.4000/Mum/2007 & 4345/Mum/2007 M/s. Piramal Enterprises Limited

39.50 Cr. Though, the preference shares were redeemable in F.Y. 2005-06, pursuant to the Board Resolution passed by the assessee and GBDFC, the preference shares were actually redeemed at its face value of Rs. 10 in November 2002. The scheme of amalgamation was approved by the Hon‟ble Jurisdictional High Court only on 20.2.2003 with effect from Appointed Date 01.01.2003. The redemption of preference shares is a taxable transfer and since the shares were held for more than 3 years, the assessee had computed Long Term Capital Loss of Rs. 10.80 Cr (purely due to indexation) and claimed the same in the Return of Income.

21.2. We find that the ld. AO accepted the claim of long term capital loss in the order passed by him u/s.143(3) of the Act. However, the ld. CIT(A) in the first appellate proceedings sought to issue a notice of enhancement on the ground that the loss claimed on redemption of preference shares was not genuine and the entire transaction has been carried out by the assessee as a measure of colourable device. In response to the notice of enhancement issued by the ld. CIT(A), the assessee explained that the said loss claimed by it is not fictitious and that the loss arose only because of indexation benefit provided in the statute and the redemption was made at par. The ld. CIT(A) however, completely ignored the contentions of the assessee and denied the claim of long term capital loss on the following grounds:-

1 . GBDFC was a loss making entity and hence, there was no need for its holding company i.e. Nidus to infuse Rs. 40 Cr as equity

47 ITA No.4000/Mum/2007 & 4345/Mum/2007 M/s. Piramal Enterprises Limited

share capital to enable the redemption of the preference shares as held by the assessee. The assessee was 87% owner of GBDFC.

21.3. Aggrieved by this enhancement, the assessee has raised ground No. XI before us on merits.

21.4. At the outset, the ld. AR vehemently pointed out that NIDUS, BMK and NOZAKI are not related parties at all. This allegation leveled by the ld. CIT(A) is absolutely without any documentary evidence and basis. He drew our attention to pages 25,89 and 90 of factual paper book and pages 185 to 187 of paper book No.III containing related party disclosures of the assessee as well as related party disclosures of GBDFC together with annexure

48 ITA No.4000/Mum/2007 & 4345/Mum/2007 M/s. Piramal Enterprises Limited

to form 3CD in Section 40A(2)(b) as per tax audit report of the assessee. These primary documents apparently go to prove that NIDUS, BMK and NOZAKI are not related parties with assessee. He also pointed out that the ld. CIT(A) observed that GBDFC is part of Piramal Group. The ld. AR argued that this statement of ld. CIT(A) is also factually incorrect as is evident from the related party disclosures schedule pointed out in the financial statements of the assessee. He clarified the fact that assessee company was only holding preference shares in GBDFC and that the equity share capital for GBDFC were held only by NIDUS. Hence, assessee cannot be said to be holding any equity stake in GBDFC.

21.5. We find that since GBDFC was incurring huge losses, the assessee could recoup its investment in preference shares by way of redemption only at par, thereby resulting in no loss no profit situation. Admittedly, there is no dispute that preference shares was held by the assessee company for more than three years and hence, the transfer of said shares would result only in long term capital gain / loss, as the case may be. Admittedly, the long term capital loss had arose to the assessee company in the instant case only due to the fact of indexation which is statutorily provided to the assessee. Hence, at the first instance, we hold that the loss claimed by the assessee cannot be treated as a measure of colourable device as pointed out by the ld. CIT(A). We hold that the entire method adopted by the ld. CIT(A) to classify this transaction as a colourable device is absolutely without any basis. We find lot of force in the argument of the ld. AR that had the preference shares not been redeemed at par, considering the fact of losses incurred by GBDFC, then the assessee company could

49 ITA No.4000/Mum/2007 & 4345/Mum/2007 M/s. Piramal Enterprises Limited

not have even got back its investment value. Hence, it could be safely concluded that assessee had taken due cognizance of the fact of incurring huge losses in the books of GBDFC, which apparently had enabled the assessee company to take a conscious call to redeem preference shares at par value so that at least the investment cost could be recovered by the assessee company. This business decision coupled with business prudence having a proper commercial rationale cannot be doubted in the facts and circumstances of the instant case and cannot be classified as a colourable device as wrongly pointed out by the ld. CIT(A).

21.6. With regard to the fact of NIDUS investing fresh equity capital of Rs.40 Crores in GBDFC to enable the redemption of preference shares held by the assessee is concerned, we find that as per the provisions of the Companies Act 1956, the redemption of preference shares could be done only by way of fresh issue of equity shares by the company. Hence, we hold that there was nothing wrong in GBDFC receiving equity capital from its parent company (i.e. NIDUS) and using the said equity proceeds to redeem the preference shares of assessee company at par. We find that the ld. DR vehemently argued that BMK had borrowed money against secured loans and invested the same in NIDUS without security, which enabled NIDUS to invest in equity of GBDFC and GBDFC utilized the same for redeeming the preference shares of the assessee company. The ld. DR argued that Circuitous transactions were carried out only to eventually end up with losses in the hands of the assessee company. We have already addressed the commercial rationale and business prudence of assessee company getting its preference shares

50 ITA No.4000/Mum/2007 & 4345/Mum/2007 M/s. Piramal Enterprises Limited

redeemed at par with GBDFC and we have already held that those transactions to be genuine transactions and cannot be classified as a colourable device. Hence, the argument advanced by the ld. DR in this regard is dismissed. We have also addressed the fact that assessee is not having any equity stake in GBDFC. From the financials of GBDFC, we find that equity share capital of GBDFC is held only by NIDUS and not by the assessee. We also find from the related party disclosures made in the financial statements of assessee and GBDFC, which are enclosed in the paper book filed before us, BMK, NIDUS, NOZAKI and GBDFC are not related party with the assessee company. Hence, the basic premise on which, the ld. CIT(A) had sought to adjudicate the entire gamut of the issue that they are all related parties, factually fails. With regard to the argument advanced by the ld. DR that through a circuitous Loan Equity route of transfer of funds i.e. BMK NIDUS; NIDUS Redemption GBDFC; GBDFC of preference shares to assessee company is concerned, as stated earlier, those parties are not related parties with the assessee company, and assessee is not bothered as to how the funds are getting arranged in the books of GBDFC to redeem the preference shares held by the assessee company in GBDFC. Further, the ld. CIT(A) also grossly erred in stating that assessee is holding 87% equity stake in GBDFC, which is factually incorrect.

21.7. As pointed out earlier, the entire loss arising on account of redemption of preference shares had arose only due to the fact of indexation statutorily provided in the Act to the assessee. Hence, the same cannot be denied to the assessee. We find that the Hon‟ble Jurisdictional High Court in the case of CIT vs. Enam

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Securities Pvt. Ltd., reported in 345 ITR 64 had an occasion to look into the similar issue on allowability of long term capital losses arising due to indexation at the time of redemption of preference shares. In the said case before the Hon‟ble Bombay High Court, the transactions were carried out with related parties, whereas in the instant case before us, the transactions were carried out with non-related parties. Despite the fact that the transactions were carried out with related parties, the Hon‟ble Bombay High court held that there was nothing wrong in claim of long term capital loss arising due to benefit of indexation. The questions raised before the Hon‟ble Bombay High Court are as under:-

“B. Whether on the facts and in the circumstances of the case the Tribunal was right in holding that there was absolutely no basis whatsoever about the Assessing Officer coming to the conclusion that the redemption of preference shares was a sham even though the management of the Company whose preference shares were redeemed and the Assessee Company belonged to the same group of persons and were also by the same group of persons;

C. Whether on the facts and in the circumstances of the case the Tribunal was right in holding that redemption of non-cumulative preference shares results in 'transfer' of assets as contemplated by section 2(17) of the Income Tax Act;

D. Whether on the facts and in the circumstances of the case and in law, the Tribunal is right in allowing indexation benefit on redemption of non- cumulative preference shares to the Assessee Company even though such non-cumulative preference shares are in the nature of 'debt' and therefore fall into the category of bonds and debentures as envisaged by the third proviso of section 48 of the Income Tax Act."

The Hon‟ble Bombay High Court disposed of the aforesaid questions by observing as under:-

52 ITA No.4000/Mum/2007 & 4345/Mum/2007 M/s. Piramal Enterprises Limited

Re: Questions (B), (C ) and (D). 4. The assessee had subscribed to the purchase of 4 lakh preference shares each of Rs. 100/- of an aggregate value of Rs. 4 crores from a company by the name of Enam Finance Consultants Pvt. Ltd. in 1992. The preference shares were to carry a dividend of four percent per annum and were to be redeemable after the expiry of ten years from the date of allotment. During the course of Assessment Year 2001-02, the assessee redeemed three lakh shares at par and claimed a long term loss of Rs. 2.73 crores after availing of the benefit of indexation. The Assessing Officer disallowed the claim of set off of long term capital loss that arose on redemption against long term capital gain on the sale of other shares on the ground that (i) Both the assessee and the Company in which the assessee held the preference shares, were managed by the same group of persons; and (ii) There was no transfer and that the assessee was not entitled to indexation on the redemption of non-cumulative redeemable preference shares. The CIT(A) on the other hand, allowed the benefit which was claimed by the assessee. The Tribunal has affirmed the view of the CIT(A) holding that the genuineness and credibility of the capital transaction was not disputed for the previous ten years. Both the Companies were juridical entities; the fact that the Companies were under common management would not indicate that the transfer was sham and that the view of the Appellate Authority was purely based on surmises and conjectures. The Tribunal has followed the judgment of the Supreme Court in Anarkali Sarabhai v. CIT [1997] 224 ITR 422/90 Taxman 502 in holding that the redemption of preference shares results in a transfer within the meaning of Section 2(47). Finally, the Tribunal has held that the non-cumulative redeemable preference shares cannot be equated with debentures or bonds. According to the Tribunal, share capital issued in the form of non-cumulative redeemable preference shares can never be regarded as debentures or bonds. A debenture is a loan taken by the Company. The Companies' Act, 1956 envisages two types of capital, equity share capital and preference share capital. Hence, the Tribunal came to the conclusion that since redeemable preference shares are not bonds or debentures, the assessee would not be deprived of the benefit of indexation under Section 48 of the Income Tax Act, 1961.

53 ITA No.4000/Mum/2007 & 4345/Mum/2007 M/s. Piramal Enterprises Limited

54 ITA No.4000/Mum/2007 & 4345/Mum/2007 M/s. Piramal Enterprises Limited

(i) any money remaining unpaid, in respect of the amounts specified in clause (a), up to the date of the winding up or repayment of capital; and (ii) any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company. Explanation.- Capital shall be deemed to be preference capital, notwithstanding that it is entitled to either of both of the following rights, namely:- (i) that, as respects dividends, in addition to the preferential right to the amount specified in clause (a), it has a right to participate, whether fully or to a limited extent, with capital not entitled to the preferential right aforesaid; (ii) that, as respects capital, in addition to the preferential right to the repayment, on a winding up, of the amounts specified in clause (b); it has a right to participate, whether fully or to a limited extent, with capital not entitled to that preferential right in any surplus which may remain after the entire capital has been repaid." Section 86 provides that the share capital of a company limited by shares shall be of two kinds only namely : (i) Equity share capital; and (ii) Preference share capital. 9. There is fundamentally as a matter of first principle and in law a clear distinction between bonds and debentures on the one hand, and preference share capital on the other. A bond includes "any instrument whereby a person obliges himself to pay money to another on condition that the obligation shall be void if a specified act is performed, or is not performed, as the case may be" [P. Ramanatha Aiyar's Advanced Law Lexicon 3rd Edition 2005 page 565 Debt] securities typically are regarded as consisting of notes, debentures and bonds. Technically, a 'debenture' is an unsecured corporate obligation while a 'bond' is secured by a lien or mortgage on corporate property. However, in commercial parlance, the expression "bond" is often used indiscriminately to cover both bonds and debentures. As a matter of fact, the Companies' Act, 1956 in Section 2(12) defines 'debenture' to include debenture stock bonds and any other securities of a company, whether or not they constitute a charge on the assets of the Company. A bond is a formal document constituting the acknowledgement of a debt by an enterprise and normally contains a provision regarding repayment of principal and interest. There is a clear distinction between bonds and share capital because a bond does not represent ownership of equity capital. Bonds are in essence interest bearing instruments which represent a loan. This distinction has been accepted by the Supreme Court in R.D. Goyal v. Reliance Industries Ltd. [2003] 113 Comp. Cas. 1/[2002] 40 SCL 503. The Supreme Court noted that a debenture is simply an instrument of acknowledgement of debt by a company whereby it undertakes to pay the amount covered by it and till then it undertakes to pay interest to the debenture holders. The expression "share" has been defined in Section 2(46) of the Companies' Act, 1956 to mean share in the share capital of a company. On the other hand, a debenture is an instrument of debt executed by the Company

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acknowledging its liability to repay the amount represented therein at a specified rate of interest. In other words, a debenture is a certificate of a loan or a bond evidencing the fact that the Company is liable to pay an amount specified with interest. Though the amount which is raised by a Company through debentures becomes a part of its capital structure, it does not become part of share capital.

21.8. Similar were the views expressed by the Hon‟ble Calcutta High Court in the case of CIT vs. Oberoi Hotels Pvt. Ltd., reported in 334 ITR 293 and Hon‟ble Karnataka High Court in the case of Bhoruka Engineering Industries Ltd., vs. DCIT reported in 356 ITR 25.

21.9. In view of our aforesaid observations in the facts and circumstances of the instant case and respectfully following the judicial precedents relied upon hereinabove, we hold that the ld. CIT(A) grossly erred in making enhancement of income by disallowing the claim of long term capital loss on redemption of preference shares. Accordingly, the ground No. XI raised by the assessee is allowed.

56 ITA No.4000/Mum/2007 & 4345/Mum/2007 M/s. Piramal Enterprises Limited

ITA No. 2238/Mum/2009 (A.Y.2003-04) – Assessee Appeal

24.1. We have heard rival submissions and perused the materials available on record. We find that we have already held that the professional fees paid to Accenture would be allowable as deduction u/s.37(1) of the Act. Since in the quantum appeal, it has already been held to be revenue expenditure, the levy of penalty would have no legs to stand. Accordingly, the grounds raised by the assessee are allowed.

57 ITA No.4000/Mum/2007 & 4345/Mum/2007 M/s. Piramal Enterprises Limited

Order pronounced on 05/10/2021 by way of proper mentioning in the notice board.

Sd/- Sd/- (VIKAS AWASTHY) (M.BALAGANESH) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated 05/10/2021 KARUNA, sr.ps Copy of the Order forwarded to : The Appellant 1. The Respondent. 2. The CIT(A), Mumbai. 3. CIT 4. DR, ITAT, Mumbai 5. 6. Guard file. //True Copy//

BY ORDER,

(Asstt. Registrar) ITAT, Mumbai