Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, ‘B’ BENCH, CHENNAI
Before: SHRI V.DURGA RAO & SHRI G. MANJUNATHA
by the assessee are directed against order passed by the learned Commissioner of Income Tax (Appeals)-6, Chennai dated 28.01.2019 and pertains to assessment year 2015-16.
Since, facts are identical and issues are common, for the sake of convenience, the appeal filed by revenue and cross objection filed by assessee were heard together and are being disposed off, by this consolidated order.
The Revenue has raised following grounds of appeal:-
C.O. No.97/Chny/2019 “1. The Order of the learned Commissioner of Income Tax (Appeals) is contrary to the Law and facts of the case.
2. The CIT(A) erred in deleting the addition made on Long Term Capital Gains for Rs.3,64,11,990/- by holding that the calculation of net worth as claimed by the assessee in its computation is as per law.
3. The CIT(A) ought to have appreciated the fact that when the liabilities are with the assessee and not taken over by the buyer which is contradiction of explanation of ‘net worth’ as per provision of Sec.50B of the IT Act.”
Brief facts of the case are that the assessee company is engaged in the business of clinical research filed its return of income for assessment year 2015-16 admitting loss of Rs.7,80,90,740/-, which includes business loss of Rs.2,33,381/- and balance amount of Rs.7,78,57,355/- towards short term capital loss arising out of transfer of an undertaking on slump sale. As per short term capital loss computation filed by the assessee, it was noticed that the assessee has transferred an undertaking on slump sale for a consideration of Rs. 4,80,75,931/- and the cost of transfer of asset claimed is Rs.12,59,33,286/- and thus, net result being a sum of Rs.7,78,57,365/- has been declared as short term capital loss.
The assessee has filed Form 3CEA from an Accountant as C.O. No.97/Chny/2019 required under law in support of computation of short term capital loss, as per which aggregate value of assets has been considered at Rs.13,28,34,472/- and as against this aggregative value of liability has been considered at Rs.69,01,185/-. The difference between aggregate value of assets and aggregate liability has been worked out at Rs.12,59,33,287/-. The Assessing Officer, during the course of assessment proceedings, called upon the assessee to justify computation of short term capital loss in light of financial statements in terms of provisions of section 50B of the Income Tax Act, 1961. In response, the assessee has filed various details, including form 3CEA issued by Accountant in support of computation of capital loss and argued that as against aggregate value of assets only liability which has been taken over by the transferee company has been considered.
The assessee had also explained difference in liabilities noticed by the Assessing Officer and argued that liabilities consisting of unsecured loans taken from directors and relatives, share application money pending allotment and advance sale consideration received from purchaser of unit and deferred tax liability. The loans and advances taken from director has not C.O. No.97/Chny/2019 been taken over by the purchaser of undertaking. Therefore, same was not considered as liability for ascertaining net worth of the undertaking share application money pending allotment has been converted into share capital by allotment of by equity shares and thus, same cannot be considered as liability. The advance consideration received from prospective buyer of an undertaking is also not liability, because it partakes nature of sale consideration received for transfer of an undertaking.
Similarly, deferred tax liability is not real time liability, but only provision made for timing difference in taxes payable by undertaking and thus, it cannot be considered as liability for purpose of computation of net worth of undertaking. The Assessing Officer, however, was not convinced with the explanation furnished by the assessee and according to him, the assessee has failed to explain difference in liability as per financial statements and liabilities considered by Accountant for determining net worth of undertaking for purpose of transfer of undertaking on slump sale, in terms of section 50B of the Act, and thus, recomputed net worth by taking into account all liabilities and determined net worth of Rs.1,16,63,941/- .
C.O. No.97/Chny/2019 Therefore, he has recomputed capital gain from transfer of undertaking u/s.50B of the Act at Rs.3,64,11,990/-.
Being aggrieved by the assessment order, the assessee filed an appeal before learned CIT(A). Before the learned CIT(A), the assessee has reiterated its arguments taken before the Assessing Officer and submitted that certain liabilities were not taken over by the transferee and further, long term borrowings in earlier financial year includes advance sale consideration received from buyer of undertaking and also share application money and thus, both cannot be considered as liabilities for purpose of determination of net worth. The assessee also seeks to exclude deferred tax liability on the ground that it is only notional entry created in books of account on taxes payable by the entity/undertaking and thus, it cannot be considered as liability for computing net worth. The learned CIT(A), after considering relevant submissions of the assessee and also taken note of facts brought out by the Assessing Officer deleted additions made by the Assessing Officer towards recomputation of long term capital gain by holding that certain liabilities were not taken over by the buyer and further, major liabilities like long term borrowings and deferred tax
C.O. No.97/Chny/2019 liability totaling to Rs.12,00,76,390/- is not a liability, but consideration received for transfer of undertaking and share application money received pending allotment, which has been subsequently converted into share capital by allotment of equity share capital. Therefore, he opined that the Assessing Officer has erred in recomputing long term capital gain on transfer of undertaking u/s.50B of the Income Tax Act, 1961, and accordingly, deleted additions made by the Assessing Officer.
Aggrieved by order of the learned CIT(A), the Revenue is in appeal before us.
The learned DR submitted that the learned CIT(A) has erred in deleting additions made by the Assessing Officer towards computation of short term capital gain for transfer of undertaking on slump sale basis in terms of section 50B of the Income Tax Act, 1961, without appreciating fact that liabilities to the extent of Rs.9,83,54,127/- have been vanished during the year and thus, in absence of proper explanation from the assessee, same needs to be considered as liability, while computing net worth of undertaking for the purpose of computation of capital gains in terms of section 50B of the Income Tax Act, 1961. The learned DR referring to Notes on C.O. No.97/Chny/2019 accounts and certificate of Chartered Accountant in Form 3CEA submitted that although, there is huge liability in the immediately preceding financial year, but the Accountant has considered liabilities only to the extent of Rs.69,01,185/-, ignoring substantial amount of liabilities of Rs.9,83,54,127/-.
Therefore, she argued that the learned CIT(A) has erred in deleting additions made towards short term capital gain, without appreciating proper facts and thus, order of the Assessing Officer should be upheld.
The learned A.R for the assessee, on the other hand, submitted that as has been explained before the authorities below, long term borrowings in earlier financial year includes share application money pending allotment, advance sale consideration received from prospective buyer of undertaking and thus, those two items have been rightly excluded for computation of net worth of undertaking, because both are not liabilities of the undertaking. Similarly, deferred tax liability is only notional entry for timing difference in taxes on income, but not real liability which is payable by the entity and thus, same cannot be considered as liability for computation of net worth.
Further, as admitted by the learned DR, loans from Director
C.O. No.97/Chny/2019 amounting to Rs.2,86,23,448/- is still continuing with the assessee, because said liability was not taken over by the buyer of undertaking and thus, it cannot be considered as liability. The learned CIT(A) after considering relevant facts has rightly allowed relief to the assessee and thus, his order should be upheld.
We have heard both the parties, perused material available on record and gone through orders of the authorities below.
There is no dispute with regard to transfer of undertaking for consideration of Rs.4,80,75,931/- and consideration of aggregate value of assets for purpose of computing net worth of undertaking in terms of provisions of section 50B of the Income Tax Act, 1961. The only dispute is with regard to liabilities considered for computing net worth of undertaking. The assessee has considered liabilities to the extent of Rs.69,01,185/-, which includes other long term liabilities being sundry creditors and expenses payable, however, not considered long term borrowings being loans from directors and loans & advances from related parties. The explanation of the assessee before authorities below was that long term
C.O. No.97/Chny/2019 borrowings includes loans and advances from related parties being share application money received pending allotment amounting to Rs.3,12,55,200/- and sale consideration received for transfer of undertaking from prospective buyer of the undertaking amounting to Rs.4,80,75,931/-. According to the assessee, share application money received pending allotment is not a liability, but shareholders funds and thus, cannot be considered as liability for computing net worth. We find substance in the arguments of the assessee for simple reason that share application money received pending allotment which was part of long term borrowings has been subsequently converted into equity share capital by allotment of shares aggregating to Rs.3,12,55,200/-, which is evident from financial statements filed by the assessee for the financial year 2014-15. Further, advance sale consideration received from M/s. Micro Therapeutic Research Lab P.Ltd., buyer of the undertaking at Rs.4,80,75,931/- was received starting from financial year 2009 to 2011 which was shown as long term borrowings in the balance sheet of the assessee. Since advance sale consideration received from buyers of the undertaking is not a liability, but consideration received for C.O. No.97/Chny/2019 sale of undertaking, same cannot be considered as liability for computing net worth of undertaking. Similarly, loans from directors amounting to Rs.2,86,23,448/- as admitted by the learned DR, said liability is continued with the assessee even after sale of undertaking on slump sale basis, because said liability has not been taken over by the buyer. Once liability was not part of sale arrangement for undertaking, then said liability cannot be considered for computing net worth of undertaking.
Insofar as deferred tax liability is concerned, the assessee has rightly not considered deferred tax liability for computing net worth, because it is only notional entry created in the books of account for timing difference in taxes on income, but not liability which can be paid immediately. Therefore, it cannot be considered as liability for ascertaining net worth of undertaking. The learned CIT(A) after considering relevant facts has rightly held that long time borrowing includes advance sale consideration received from buyer of undertaking, share application money pending allotment is not liability for an undertaking for computing net worth for purpose of computation of capital gain in terms of section 50B of the Income Tax Act,
C.O. No.97/Chny/2019 1961. Similarly, as regards deferred tax liability the learned CIT(A) has rightly appreciated arguments of the assessee in not considering deferred tax liability while computing net worth, because it is only notional entry for timing difference in taxes on income by the undertaking. Therefore, we are of the considered view that there is no error or infirmity in the reasoning given by the learned CIT(A) to delete additions made towards computation of short term capital gains on transfer of undertaking in terms of section 50B of the Income Tax Act, 1961. Hence, we are inclined to uphold findings of the learned CIT(A) and reject grounds raised by the revenue.
In the result, appeal filed by the revenue is dismissed.
C.O.No.97/Chny/2019:-
The cross objection filed by the assessee supports order of the learned CIT(A). Therefore, we are of the considered view that once appeal filed by the revenue is dismissed, then cross objection filed by the assessee in support of order of the learned CIT(A) becomes infructuous and thus, same is dismissed as not maintainable.
In the result, appeal filed by the revenue and cross objection filed by the assessee are dismissed.