ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-2, KOTA, KOTA vs. CHAMBAL FERTILIZERS AND CHEMICALS LTD., KOTA

आयकर अपीलीय अधिकरण] जयपुर न्यायपीठ] जयपुर
IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES,”A-Bench” JAIPUR

Jh xxu xks;y] ys[kk lnL; ,o aJh ujsUnz dqekj] U;kf;d lnL; ds le{k
BEFORE: SHRI GAGAN GOYAL, AM & SHRI NARINDER KUMAR, JM vk;dj vihy la-@ITA No. 1090, 1097 to 1099 & 1091/JPR/2024
fu/kZkj.ko"kZ@Assessment Year: 2010-11, 2011-12, 2015-16 to 2017-18

Assistant Commissioner of Income Tax
Circle-2,
LFkk;hys[kk la-@thvkbZvkj la-@PAN/GIR No.: AAACC9762A vihykFkhZ@Appellant izR;FkhZ@Respondent fu/kZkfjrh dh vksjls@Assessee by : Shri P.J. Pardiwala, Adv.,

Sh. M.L. Patodi, Adv. &

Mrs. G.P. Das, C.A.
jktLo dh vksjls@Revenue by: Shri Rajesh Ojha, CIT &

Mrs. Anita Rinesh, JCIT lquokbZ dh rkjh[k@Date of Hearing

:27/08/2025

mn?kks"k.kk dh rkjh[k@Date of Pronouncement: 27/08/2025

vkns'k@ORDER
PER: NARINDER KUMAR, JUDICIAL MEMBER .

All the above captioned five appeals are interconnected and are being taken up together for disposal, as common issues, arising out of similar facts are involved, and Ld. DRs for the department-appellant and Learned counsel for the assessee have argued all the appeals simultaneously.

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ITA No. 1090, 1097 TO 1099 & 1091/JPR/2024
Chambal Fertilizers and Chemicals Ltd., Kota

Indisputably, the assessee is a public Limited company, having its registered office at Gadepan, District Kota and its corporate office is at New
Delhi and Regional Marketing offices in different states, besides other divisions in states of West Bengal and Himachal Pradesh.
As claimed by the assessee, it is engaged in manufacturing of fertilizers, powers, textiles etc. and also engaged in trading and shipping activities.
2. The assessee was before Learned CIT(A), National Faceless Appeal
Centre, Delhi, feeling aggrieved by five different assessment orders, relating to the assessment years 2010-11, 2011-12, 2015-16, 2016-17, and 2017-18. 2. In the first round of litigation, the Appellate Tribunal remanded the matter to Learned CIT (A) for decision afresh, only on the aspect of notional interest on investments by the assessee in Subsidiaries Company. At that time, Appellate Tribunal had issued following directions to Learned CIT
(A):-
“The AO has made the disallowance of interest invoking the provisions of section 36(1) (iii) holding that the assessee had utilised the borrowed funds lying in its cash credit account for making the investment in subsidiary companies and has failed to prove the commercial expediency for making these investments. The Id
CIT(A) has, however, invoked the provisions of section 14A of the Act holding o3
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Chambal Fertilizers and Chemicals Ltd., Kota that no disallowance can be made in respect of investment in foreign companies and in respect of investments in Indian companies, disallowance under 14A read with Rule 8D has been determined by him.

What we find surprising is that the Id CIT (A) has totally ignored the whole discussions and findings of the AO which have been rendered in the context of section 36(1)(iii) of the Act and has not given any findings as to why the provisions of section 36(1)(iii) are not attracted in the instant case.

The ground of appeal raised by the assessee company before the Id CIT(A) was in the context of disallowance made by the AO invoking the provisions of section 36(1) (iii) of the Act and even the submissions and contentions so advanced by the assessee company, as we have noted above, were in the context of section.
36(1) (iii) of the Act.

It is therefore incumbent upon the Id CIT(A) that he should while disposing off the said ground, examine whether the disallowance so made by the AO invoking section 36(1) (iii ) is justified or not.

Once the Id CIT(A) has examined the applicability of section 36(1)(iii) and forms an opinion that the AO has wrongly invoked the provisions of section 36(1)(iii) and he should have invoked the provisions of section 14A instead, in that case, we agree that the Id CIT(A) will be within his juri iction to examine the matter from the perspective of section 14A given that the matter forms part of assessment order and the same has been examined by the AO though in context of section 36(1) (iii). There are instances where the AO has wrongly invoked the relevant provisions of the Act, in those cases the Courts have held that the Id CIT
(A) is well within his juri iction to examine the matter from the perspective of correct provisions of law.

Given that there is no finding recorded by the Id CIT(A) regarding section 36(1)(iii) of the Act, we are constrained to remand the matter back to his file to examine the matter afresh after providing reasonable opportunity to the assessee.

The Revenue has challenged the action of the Id CIT(A) in curtailing disallowance out of interest paid to Rs.70,23,000/- (originally confirmed at Rs.79.76 lakhs) as against that of Rs. 29,36,97,412/- made by AO on borrowed funds utilized in making investment in subsidiary companies. It was contended by the Revenue that finding of Id CIT(A) that the disallowance was made by A.O. u/s o4
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Chambal Fertilizers and Chemicals Ltd., Kota

14A is not correct since the AO the made
"
disallowance u/s 36(1)(iii)……………………

We have already remanded the matter back to the file of Id CIT (A) to examine the matter afresh. Following the same and applying the same reasoning, the subject matter is set aside to the file of the Id CIT (A) to examine the same afresh. //”

Learned CIT(A) accordingly, allowed the appeal filed by the assessee and directed the Assessing Officer to delete the addition of Rs.
29,36,97,412/-, interest made on the basis of presumption. That is how, department has come up in appeal challenging the deletion of the above said addition.
ITA No. 1097/JPR/2024, A.Y.2011-12
5. By way of this appeal, department has challenged, impugned order passed by Learned CIT(A) dated 27.06.2024, whereby Learned CIT(A) deleted addition of Rs. 25,78,65,553/-, made by the Assessing Officer on account of disallowance of interest u/s 36(1)(iii) of the Act.

ITA No. 1098/JPR/2024, A.Y.2015-16
Disallowance of interest
6. By way of this appeal, department has challenged, impugned order passed by Learned CIT(A) dated 25.06.2024, whereby Learned CIT(A) deleted addition of Rs. 56,08,94,534/-, made by the Assessing Officer on account of disallowance of interest , u/s 36(1)(iii) of the Act.
Club Expenses o6
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Chambal Fertilizers and Chemicals Ltd., Kota

Department has also challenged the impugned order whereby
Learned CIT(A) deleted addition of Rs. 16,25,226/-, made by the Assessing
Officer, while disallowing to the assessee, payment of club expenses.
Disallowance on account of advances to subsidiary companies and group company

Department has also challenged deletion of addition of Rs.
45,18,254/- that was made by the Assessing Officer on account of disallowance of amount of loans and advances to subsidiary/group companies.
Disallowance of contribution to DAV Trust Management Society

Department has also challenged deletion of addition of Rs.
82,10,270/- made by the Assessing Officer by disallowing contribution to DAV Trust Management Society.

ITAT No. 1099/JPR/2024, A.Y. 2016-17
10. By way of this appeal, department has challenged, impugned order passed by Learned CIT(A) dated 25.06.2024, whereby Learned CIT(A) deleted addition of Rs. 40,35,43,107/-, made by the Assessing Officer on account of disallowance of interest u/s 36(1)(iii) of the Act.

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Chambal Fertilizers and Chemicals Ltd., Kota

Club Expenses

Department has also challenged the impugned order whereby
Learned CIT(A) has deleted addition of Rs. 3,73,206/-, made by the Assessing Officer, while disallowing to the assessee, payment of club expenses.
Loans and advances

Department has also challenged deletion of addition of Rs.
10,09,101/- that was made by the Assessing Officer on account of disallowance of amount of loans and advances to subsidiary/group companies.
Disallowance of contribution to DAV trust management society

Department has also challenged deletion of addition of Rs.
11,68,227/- i.e. was made by the Assessing Officer by disallowing contribution to DAV Trust Management Society.
Disallowances of expenses of long service award benefits and resettlement allowance

Department has also challenged, deletion of addition of Rs.
2,91,76,220/- made by the Assessing Officer by disallowing of expenses of long service award benefits and resettlement allowance.

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Chambal Fertilizers and Chemicals Ltd., Kota

Disallowance of expenses incurred exempt income u/s 14A of the Act

Department has also challenged, deletion of addition of Rs. 4,357/- made by the Assessing Officer by disallowing of expenses on exempt income u/s 14A of the Act.
ITA No. 1091/JPR/2024, A.Y. 2017-18
Disallowance of interest on borrowed funds
17. By way of this appeal, department has challenged, impugned order passed by Learned CIT(A) dated 25.06.2024, whereby Learned CIT(A) deleted addition of Rs. 19,43,58,249, made by the Assessing Officer on account of disallowance of interest u/s 36(1)(iii) of the Act.
Club Expenses

Department has also challenged the impugned order whereby
Learned CIT(A) has deleted addition of Rs. 4,20,337/-, made by the Assessing Officer, while disallowing to the assessee, payment of club expenses.
Loans and advances

Department has also challenged deletion of addition of Rs. 5,85,157/- that was made by the Assessing Officer on account of disallowance of amount of loans and advances to subsidiary/group companies.

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Chambal Fertilizers and Chemicals Ltd., Kota

Disallowance of contribution to DAV trust management society

Department has also challenged, deletion of addition of Rs. 60,280/- i.e. was made by the Assessing Officer by disallowing contribution to DAV
Trust Management Society.

Disallowance of expenses incurred on exempt income u/s 14A of the Act

Department has also challenged, deletion of addition of Rs.74,000/- made by the Assessing Officer by disallowing of expenses incurred on exempt income u/s 14A of the Act.

Disallowance relating to the capital loss

Department has also challenged the deletion of addition of Rs. 361,
43,689/-, relating to the capital loss, that was made by the Assessing
Officer, having regard to provisions of section 2(47) of the Act.

Investments in the subsidiaries and joint ventures and associates
26. During assessment year 2010-11, the assessee made following investments in the following subsidiaries and joint ventures and associates:-

“Subsidiaries”

Chambal Infrastructure Ventures Ltd., India (‘CIVL’)
CFCL Overseas Ltd., Cayman Islands (COL’)
Indian Steamship Pte. Ltd, Singapore (‘ISPL’)

“Joint Ventures and Associates”
Indo Maroc Phosphore S.A., Morocco (‘IMACID’)

Zuari Investments Ltd. (‘ZIL’)

(Amount in Rs. in lacs)
S.
No.
Name of subsidiary/associates/joint venture
Investment as on 01.04.2009
Movement during
AY
09-10
Investment as on 31.03.2010
1
Indo Maroc Phosphore S A 8513.32
0
8513.32
2
Zuari Investment Ltd.
1248.19
(624.19)
624.10
3
CFCL Overseas Ltd.
20537.70
6096.29
26633.99
4
Chambal Infrastructure Ventures
Ltd.
140.00
0
140.00
5
India
Steamship
Pte.
Ltd.
Singapore
286.04
0
286.04

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Chambal Fertilizers and Chemicals Ltd., Kota

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Chambal Fertilizers and Chemicals Ltd., Kota

Even if interest @ 9% per annum (due to reasons mentioned above) is applied on the borrowed funds utilized for making the above-mentioned investments, the disallowance works out to Rs. 8,29,75,428/- as per calculations below:-
Interest 9% per annum on investment of Rs. 8513.32 Lac
In shares of Indo Morocco Phosphate for full year
Rs. 7, 66, 19,880/-
Interest @ 9% per annum on investment of Rs. 1248.19 Lac
In shares of Zuari Investments Ltd. from 01.04.2009 to 18.05.2009

Rs. 14, 77,309/-
Interest @ 9% per annum on investment of Rs. 624.10 Lac
In shares of Zuari Investments Ltd. from 19.05.2009 to 31.03.2010

Rs. 48, 78,239/-
Total

Rs. 8, 29, 75,428/-
Therefore, it is held that the assessee has utilized borrowed funds for making the above-mentioned investments in its group companies and no commercial expediency was involved in making these investments. Accordingly, disallowance of Rs. 8, 29, 75,428/- is made out of interest paid on borrowed funds.
k). as mentioned in para 5 above, the assessee has also used a part of its borrowings for making investment in units of various mutual funds. As per calculations given in para 5(h), disallowance of Rs. 8,64,35,962/- is required to be made out of interest paid by the assessee on borrowed funds u/s 36(1)(iii) as per the ratio laid down by the Hon'ble Supreme Court in the case of SA Builders
Va. CIT (288 ITR 1) (since the assessee has failed to prove any commercial expediency for utilizing interest-bearing borrowed funds for making investment in Units of Mutual Funds) as well as in view of the decision of Hon'ble Punjab &
Haryana High Court in the case of M/s Abhishek Industries Ltd. (286 ITR 1)
(since the funds borrowed from various sources, internal accruals and assessee's own funds form part of a common kitty from where the assessee has utilized funds partly for business purposes and partly for non-business purposes i.e. for making investment in units of mutual funds without any commercial expediency. However, no such disallowance is being made u/s 36(1)(iii) since disallowance of Ra. 9,53,10,962/ made u/s 14A of the Act in para 5(i) covers disallowance required to be made u/s 36(1)(iii).
l) Accordingly, disallowance of Rs. 29,36,97,412/- (21,07,21,984 + 8,29,75,428) is made out of interest paid by the assessee on borrowed funds u/s 36(1)(iii) of the Act as per findings given above. Penalty proceedings u/s 271(1)(c) are also initiated against the assessee since I am satisfied that the assessee has furnished inaccurate particulars of income by claiming wrong deduction on account of interest paid on borrowed funds u/s 36(1)(iii) of the Act.”

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Chambal Fertilizers and Chemicals Ltd., Kota

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Chambal Fertilizers and Chemicals Ltd., Kota

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Chambal Fertilizers and Chemicals Ltd., Kota

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Chambal Fertilizers and Chemicals Ltd., Kota

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Chambal Fertilizers and Chemicals Ltd., Kota

As already noticed above, the appeal preferred by the department against the decision of the Coordinate Bench, ITAT, Jaipur stands dismissed by our own Hon’ble High Court. Consequently, there is no merit in the ground raised by the department so as to challenge the said deletion by Learned CIT (A).
DAV Trust Management Society
46. A perusal of the assessment orders would reveal that as regards the assessment years under consideration 2015-16, 2016-17 and 2017-18, the Assessing Officer held that the claim of the assessee regarding the said expenses and deductions was not admissible. He so observed in view of the fact that the decision by the Coordinate Bench, ITAT, Jaipur, vide common order, dated 13.05.2022 was under challenge by the department, before the Hon’ble High Court.
Learned CIT (A) has set aside the said disallowance by observing that the reimbursement to DAV Trust Management Society for running of school for employee children stood already debited in CSR expenses, in the ledger; that in terms of explanation 2 of section 37(1), the entire amount of CSR expenses has already been added back by the assessment itself in o20
ITA No. 1090, 1097 TO 1099 & 1091/JPR/2024
Chambal Fertilizers and Chemicals Ltd., Kota the computation of the total income, and as such, disallowance of the said amount resulted in double disallowance.
In the course of arguments, Ld. DR for the department has not put forth any contention to assail the finding recorded by Learned CIT (A).
Accordingly, the said ground raised in the grounds of appeal in respect of these three assessment years, as well, is hereby rejected.
Disallowance of account of long service award benefit expenses and resettlement allowance
47. As is available from the assessment order of the said assessment years 2016-2017 , the Assessing Officer disallowed the claim under the above said head to the extent mentioned therein, by observing in the manner as:-
“(i) The assessee company has claimed the expenses as per the above under the head
Salary, Wages and Bonus under Employee Benefits Expense in the P & L Account as well as shown under Accrued employee liabilities under Other Current Liabilities in the Balance Sheet by the assessee. Note: 27 - Page No. 68 and Note: 11 - Page No. 61
respectively of the Annual Report for the F.Y. 2015-16)
(ii) As stated above the liability for such expenses claimed was not accrued during the year under consideration.
(iii) The expenses claimed by the assessee as per the above, being contingent liability, are expressly not allowable as per the provisions of the Act.
5.5.4 In view of the above, the expenses claimed by the assessee under the head long service award benefits expenses and resettlement allowance as per the above, being o21
ITA No. 1090, 1097 TO 1099 & 1091/JPR/2024
Chambal Fertilizers and Chemicals Ltd., Kota contingent liability, to the extent of Rs. 2,91,76,220/- is hereby disallowed and added back to the total income of the assessee.
On behalf of the assessee, it has been submitted that such like expenses are incurred as per its human resources policies and that the addition has been rightly allowed by Learned CIT(A).
While dealing with the issues in appeals, Learned CIT(A) allowed the deduction of such expenses, taking into consideration that as per the accounting standards ICAI are mandatorily to be followed by every Indian company and the tax auditors, in the audit report observed that no contingent expenses were debited in the profit and loss account.
As per mercantile system of account, expenditure is chargeable when the liability to settle the same has accrued, irrespective whether it is due or not. The liability to pay for long service award and resettlement allowance would arise and can be said to have accrued as on the date of the balance sheet, by determining the ground of scientific basis, having regard to the mortality, attrition and the discounting factor to arrive at the present value of the expenses, and as such, should be allowable being a provision for expenses.

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ITA No. 1090, 1097 TO 1099 & 1091/JPR/2024
Chambal Fertilizers and Chemicals Ltd., Kota

In the course of arguments, on behalf of the department, nothing to the contrary has been argued. Having regard to the finding recorded by Learned CIT (A), we uphold the impugned order on this issue.
As regards exempt expenses
48. While dealing with claim of the assessee on this issue, the Assessing
Officer held the same to the inadmissible in terms of section 14A of the Act.
On the other hand, Learned CIT (A) allowed the claim of the assessee and directed for deletion of the said disallowances, while applying decision by Learned CIT (A), in the case of the assessee itself, as regard previous two assessment years 2009-10 and 2010-11. In the relevant paragraph, dealing with the ground no. 6 raised by the assessee there, Learned CIT (A) has not given full particulars of the decision, relating to the assessment year 2010-11. Even otherwise, as observed by Learned CIT (A), disallowance u/s 14A of the Act worked out to be Nil as the investment had its source in cash generated from business operation.

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ITA No. 1090, 1097 TO 1099 & 1091/JPR/2024
Chambal Fertilizers and Chemicals Ltd., Kota

Nothing to the contrary has been argued before us on behalf of the department. Consequently, this ground raised by the department in the two appeals is hereby rejected.
Claim of Short Term Capital Loss
49. As is available from the assessment order, the Assessing Officer, while dealing with the issue of transfer of shares by the assessee, observed that it could not be said that any loss had arisen to the assessee by transfer of shares.
The Assessing Officer so observed finding that the assessee had not relinquished or extinguished shares as provided u/s 2(47) of the Act; that ownership of shares is not transferred to another person; and that the assessee may have incurred “notional loss”, but the same was not allowable as per provisions of sections 45 and 2(47) of the Act.
With the said observations and findings, the Assessing Officer decided to withdraw short term capital loss of Rs. 3,91,92,69,355/- claimed by the assessee company, and further directed that the assessee company shall pay tax on LTCG and STCG in the manner as:-
S. No.
Particulars
Amount in Rs.

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ITA No. 1090, 1097 TO 1099 & 1091/JPR/2024
Chambal Fertilizers and Chemicals Ltd., Kota

At this stage, it may be mentioned here that in the computation of the total income, the assessee company was found to have declared STCG of Rs. 3,91,92,69,355/-, on merging of two foreign subsidiaries. It was also found that short term capital loss, on account of merger of foreign subsidiaries was found to have been set off against short term capital loss of Rs. 3,91,92,69,355/-.
Short term capital gain on sale of Mutual funds and Bonds was to the tune of Rs. 28,84,93,970/-. In this regard, the Assessing Officer reproduce the relevant figure in the following table:-
S. No.
Particulars
Amount in Rs.
1. Short term capital loss of Rs.
391,92,69,355/-
391,92,69,355/-
2. STCG on sale of Mutual funds and Bonds
28,84,93,970/-
3. LTCG
1,64,34,696/-
4. Total 2+3)
30,49,28,666/-
5. Short term capital loss to be carried forward
361,43,40,689/-

When the Assessing Officer questioned the assessee company regarding short term capital loss, it submitted following reply:- o25
ITA No. 1090, 1097 TO 1099 & 1091/JPR/2024
Chambal Fertilizers and Chemicals Ltd., Kota

“"During the year, CFCL Technologies Limited, Cayman Islands, a subsidiary of the Company, merged with its wholly owned subsidiary CFCL Ventures Limited,
Cayman Islands (CVL) effective from December 20, 2016 with an exchange ratio of 1:1 (received 2,932,947 ordinary shares of US$ 0.0001 each fully paid up in exchange of 2,932,947 ordinary shares of US$ 0.0001 each fully paid up and 11,740,459 preference shares of US$ 0.0001 each fully paid up in exchange of 11,740,459 preference shares of US$ 0.0001 each fully paid up). The value of investment recognized in the financial statements is based on the fair valuation report of an independent valuer. Accordingly, CVL became a direct subsidiary of the Company.
The fair value loss of Rs. 39,225.16 lacs recognized through profit or loss till
March 31, 2016, has been reversed and a loss of Rs. 39,225.16 lacs has been recognized as loss on issuance of shares on account of merger during the year.
The same has been shown under 'Exceptional item' (refer note 24 to the financial statements).
CVL has issued ordinary shares, preference shares (series A-1, B-1, C-1, D-1, E-
1, F-1, G, H & I) and warrants for ordinary shares and preference shares (series
G, H & I). Conversion ratio of different series of non-cumulative convertible preference shares into ordinary shares of CVL are as follows-Series A1, & B1
preference share will be converted in the ratio of 1:1.22, Series C1, D1, E1
preference share will be converted in the ratio of 1:1.68, Series F-1 preference share will be converted in the ratio of 1:1.33 and Series G. H and I preference share will be converted in the ratio of 1:1. This conversion is subject to adjustments set forth, if any, in the Articles of Association of CVL.
Further, the Company has given corporate guarantee of Rs. 11,025.35 lacs
(March 31, 2016: Rs. 14,577.20 lacs and April 01, 2015: Rs. 13,751.10 lacs) to a bank on account of loan given by bank to step-down subsidiaries of CVL The Company has further provided letter of continued financial support to the said subsidiary.
Further, the assessee submits below the computation of capital gain offered in computation of taxable income.
Short term capital loss on merger of foreign Subsidiary
Particulars
Amount (Rs. in lacs)
Value of investment in CVL as on 31.03.2017
151.38
Less: Cost of investment
39344.07
Short term capital loss
-39192.69

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Chambal Fertilizers and Chemicals Ltd., Kota

The Assessing Officer was of the view that the assessee company had not transferred its shares to any person. In this regard, following observes were made:-
“I have gone through the above submission and found that assessee Company has not transferred its shares to any other person. There is no exchange of shares between two persons. A shareholder need not pay any capital gains tax, since an amalgamation does not involve exchange or relinquishment of the assets or the amalgamation of any right therein or the compulsory acquisition under any law. It does not involve any exchange either within the legal meaning of that term. Thus merger does not involve an exchange. The merger does not involve relinquishment of an asset because relinquishment postulates the continued existence of the asset. Therefore, assessee Company was asked to explain the issue of short term capital loss. The explanation submitted by the assessee Company is as under:
 Chambal Fertilizers and Chemicals Ltd. is a listed company in India and primarily engaged in the business of fertilizer production.
 CFCL Technologies Limited, a Non Domestic Company, is a Joint Venture company of which shareholding around 72% is held by Chambal
Fertilisers and 28% is held by others.
 CFCL Technologies holds shares in CFCL Ventures Ltd. (a Non Domestic
Company), which further hold shares in other companies like ISG Nova soft Technology Ltd., Indian Company, which are engaged in the software business.
 Shares of CFCL Technologies are not deemed to be a capital asset situated in India for Indian tax purposes since CFCL Technologies does not derive its substantial value from Indian investments.
 Details of investment by Chambal Fertilisers in CFCL Technologies are as under (as at March 31, 2016):
Particulars
Amount in books (Rs. in lakhs)
Amount for tax purposes
(Rs. in Lakhs)
Equity
0.18
0.18
Redeemable
**9,725
39,343

*********** After considering impairment o27
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Chambal Fertilizers and Chemicals Ltd., Kota

Submission:
 Definition of "transfer" & tax provisions relating to merger under the Income-tax Act, 1961 ('the Act')
Definition of "transfer" under the Act
Under the provisions of the Income-tax Act, 1961 ('the Act'), the term "transfer" is defined as under: Per Section 2(47) "transfer, in relation to a capital asset, includes,-
1. The sale, exchange or relinquishment of the asset; or 2. The extinguishment of any rights therein, or 3. The compulsory acquisition thereof under any law; or (iv)...."
Thus, upon merger of CFCL Technologies into CFCL Ventures, CFCL's investment in shares of CFCL Technologies will be extinguished and simultaneously, it will get shares of CFCL Ventures.
Thus under the facts of the case, following transfer will happen on merger of CFCL Technologies and CFCL Ventures:
 Transfer in the hands of Chambal pursuant to extinguishment of rights in shares of CFCL Technologies.
Further, under the provisions of the Act, merger of amalgamating company into amalgamated company typically involves the following capital gains implications:
 Capital gains tax in the hands of amalgamating company on transfer of capital asset(s) to the amalgamated company.
 Capital gains tax in the hands of shareholders of the amalgamating company on extinguishment of right in shares of amalgamating Company.
Thus, it is clearly evident that the transaction is a transfer of a capital asset under the Act and hence subject to Capital gains Tax.
Now, it is required to be examined whether the capital gains tax in respect of merger is exempt under the Act. Ø
 Exemption provisions on merger under the Act
 Per the provisions of Income-tax Act, 1961 merger of two or more
Indian companies is tax- neutral for the amalgamating company(s) as o28
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Chambal Fertilizers and Chemicals Ltd., Kota well as its shareholders. Following clauses of the act provides enabling provision for the same.
Exempt from capital gains tax in the hands of amalgamating company
 Per Section 47(vi) of the Act, any transfer of a capital asset, upon merger, by the amalgamating company to the amalgamated company is not taxable in the hands of amalgamating company, if the amalgamated company is an Indian company
Exemption from capital gains tax in the hands of the shareholders of amalgamating company
 Further, per Section 47(vii) of the Act, the merger is also not taxable in the hands of the shareholder of the amalgamating company provided consideration is discharged by way of issue of shares by the amalgamated company to the shareholders of the amalgamating company. (This is applicable only if the Companies are Indian
Companies)
2. The Act also provides that transfer of shares of an Indian company on merger of two foreign companies is not taxable in the hands of amalgamating foreign company(s). Following clauses of the act provides enabling provision for the same:
Exemption from capital gains tax in the hands of amalgamating foreign company on transfer of shares of an Indian company on merger of two foreign companies
 Per Section 47(via) of the Act, any transfer, upon merger, of a capital asset being shares of an Indian company, by the amalgamating foreign company to the amalgamated foreign company is exempt from tax if-
(a) At least 25% of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company, and (b) Such transfer does not attract tax on capital gains in the country, in which the amalgamating company is incorporated
3. Further, as per the provisions of the Act, transfer of shares of a foreign company, which are deemed as capital asset situated in India, on merger of two or more foreign companies is also not taxable in the hands of foreign o29
ITA No. 1090, 1097 TO 1099 & 1091/JPR/2024
Chambal Fertilizers and Chemicals Ltd., Kota amalgamating company(s). Following clauses of the act provides enabling provision for the same:
Exemption from capital gains tax in the hands of foreign amalgamating company on transfer of shares of a foreign company which are deemed as capital asset situated in India
 Per Section 47(vi)(ab) of the Act, any transfer, upon merger, of a capital asset being a shares of a foreign company which derives
(directly or indirectly) its value substantially from shares of an Indian company, held by the amalgamating foreign company to the amalgamated foreign company, if-
(a) At least 25% of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company, and (b) Such transfer does not attract tax on capital gains in the country in which the amalgamating company is incorporated.
Accordingly, from the above points, it can be inferred that under the Act, there is no specific provision providing for exemption in the hands of the Indian shareholder of the amalgamating foreign company on merger of two or more foreign companies.
Income-tax implications in India on merger of CFCL Technologies into CFCL Ventures
In the hands of Chambal Fertilisers (i.e. Indian shareholder of the amalgamating company)
In the absence of any specific exemption for the Indian shareholder, capital gains on transfer of shares of CFCL Technologies is taxable in the hands of Chambal Fertilisers. Consequently, capital loss (if any) is also to be allowed in the hands of Chambal Fertilisers.”
That is how, the Assessing Officer withdrew short capital loss of Rs.
3, 91, 92, 69,355/-.

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ITA No. 1090, 1097 TO 1099 & 1091/JPR/2024
Chambal Fertilizers and Chemicals Ltd., Kota

When the matter came up before Learned CIT(A), he set aside the above said finding by observed in the manner as:-
“Ground No. 10, Ground No.11 and Ground No. 12-
This ground relates to the allowability or otherwise of capital loss incurred on extinguishment of right of the appellant in CFCL Technologies Limited, Cayman
Islands on its merger with CFCL Ventures Ltd, Cayman Islands.
From the material placed before me, the investment in Preference Shares of CFCL Technologies Limited as per the books of accounts of the appellant is as under Particulars

Rs. in lakhs
Balance in CFCL Technologies Limited as on 31.03.2015

(shares of CTL) was transferred or right in it was extinguished in FY 2016-17
relevant to AY 2017-18,
Consequent to the amalgamation of proportionate shareholding in CVL and hence the value of shares in CTL became NIL and the identical book value was assigned to the new shares received in CVL
Since the alleged transfer" of asset took place in FY 2016-17, in the return of income filed for the assessment year 2017-18, the appellant claimed short-term capital loss of Rs.391,92,69,355 arising on account of extinguishment and consequent transfer of shares in CTL as under:
Particulars
(Rs. Lakhs)
Fair value of shares in CVL received (as per the report of Price
Waterhouse Coopers) being transfer price selling price
151.38
Less: Cost of investment in shares of CTL-(39343+0.18)
39,344.07
Short term capital loss as per income tax
39,192.69)

It may be noted that although the book value of the shares of CTL was 118.91
lakhs (118.73 lakhs + 0.18 lakhs), the appellant considered the fair market value of Rs.151.38 lakhs as determined in the Report of Price Waterhouse Coopers as the sales proceeds from amalgamation and calculated capital gains based on such figure.
From the detailed submissions placed before me, it is seen that the word
"transfer has been inclusively defined in section 2(47) to include exchange, relinquishment and extinguishment of an asset and is not merely restricted to sale of capital asset. Since investment of the appellant in shares of CTL constituted 'capital asset within the meaning of section 2(14), hence in my opinion, extinguishment of right/ relinquishment of shares pursuant to merger of the CTL with CVL would be 'transfer of the investments held in CTL thereby attracting the provisions of section 45 of the Act.
In the case of Orient Trading Co. Ltd. v. CIT [1997] 224 ITR 371 1 referred to by the appellant, the Hon'ble Supreme Court held that the exchange of shares of one company for shares of another company was realisation of shares of first company and the difference between the price of shares of the first company and the second company on the date of exchange was income chargeable. Hence by corollary, the loss on similar exchange is to be allowed. Thus the allegation of the o32
ITA No. 1090, 1097 TO 1099 & 1091/JPR/2024
Chambal Fertilizers and Chemicals Ltd., Kota assessing officer that there is no transfer within the meaning of section 2(47) of the Act for the reason that investment in CTL has extinguished, is not in accordance with law.
The Assessing Officer has opined that since a third party is not involved in merger of CTL and CVL, extinguishment of rights in shares of CTL is not a transfer. However, in the case of Kartikeya V. Sarabhai vs. CIT: 228 ITR 163
(SC) the Hon'ble Supreme Court held that the reduction of share capital results in extinguishment of substantial rights of the shareholder in the investee company to the extent of reduced share capital, which are covered in the category of "extinguishment" within the meaning of 'transfer under section 2(47) of the Act.
Thus, even when there is a single entity there can be an extinguishment of right within the meaning of Section 2(47) and hence the observation of the Assessing
Officer is not in accordance with law.
As regards the valuation of the shares sold it has a scientific basis. it is based on the Report of a reputed valuer. To this end, it is a well-established fact that the Courts have repeatedly held that valuation is not an exact science, and therefore cannot be done with arithmetic precision. It is a technical and complex problem which can be appropriately left to the consideration and wi om of experts in the field of accountancy. Therefore, until and unless methodology adopted by the valuer is not in question, no question can be raised upon the value of assets determined by the Valuer as stated in the case of PCIT v. Cinestaan
Entertainment Pvt. Ltd.: ITA No. 1007 of 2019 (Delhi High Court) referred to by the appellant. As the assessing officer has not pointed out any shortcoming in the method of valuation, it can safely be said that the valuation taken as transfer price is appropriate.
It may be mentioned that as pointed out by the appellant, the extinguishment of investments in CTL, owing to its merger with CVL, is not covered under the exceptions provided in section 47 of the Act. Section 47(vii), which exempts capital gain on the hands of shareholder of amalgamating company, as and when its shareholding is transferred on account of scheme of amalgamation, is only applicable when the amalgamated company is an Indian Company.
Therefore, as CVL (amalgamated company) is a Foreign Company, exception provided in section 47(vii), from chargeability of capital gain, is not applicable.
Ground No. 13
As per law, if the current year's loss of Rs. 391,92,69,355/- is allowed then it would be available for set-off against the Long Term Capital gain of Rs
1,64,34,696/- and consequently, no tax would be payable thereon.”

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ITA No. 1090, 1097 TO 1099 & 1091/JPR/2024
Chambal Fertilizers and Chemicals Ltd., Kota

Ld. DR for the department-appellant has referred to the following observations made by the Assessing Officer from 74 to 76 of the assessment order, and submitted that from all these facts available therein, it can safely be said that the claim of transfer of its shares by the assessee company of two subsidiaries in foreign, was actually totally false:-
“I have gone through the above submission but found them untenable for the reasons discussed hereunder:-
1. Both the subsidiaries are foreign companies and registered in Cayman Island.
The Assessee Company has substantial share holdings in the both
Companies. Assets held by the assessee Company in Amalgamating
Company have not been transferred to any other party. Ownership of the shares of the amalgamated Company remained in the hands of Assessee
Company.
2. As far as "Amalgamation" is concerned, the important question is whether there is a transfer of asset from the amalgamating Company to the Amalgamated Company. Section 2(47) refers to the extinguishment of any rights in the capital assets, it does not use the expression extinguishment of the capital assets. Therefore, it seems, that such amalgamation does not involve a transfer within 2(47) and no tax under the head capital gain or loss would be payable by the shareholders of the Company.
3. The CFCL holds majority equity in CVL and became direct subsidiary.
Therefore, it may be inferred that assessee Company has planned for tax avoidance by merging its two subsidiaries. Third party is not involved in these transactions. Assessee Company was having share holding of 72.27% in CFCL Technologies Limited. Amalgamating Company CFCL Technologies
Limited has merged in Amalgamated Company CFCL Venture Limited
Company. Assessee Company was having same share holding of 72.27% in CFCL Venture Limited Company after December 20, 2016. Therefore, it cannot be treated as transfer under section 2(47) of the I.T. Act, 1961. 4. The valuation report of CVL (CFCL Ventures Limited, Cayman Islands) is prepared by the Price Water House & Co LLP. It has prepared projected financial performance. The CFCL Ventures Limited, Cayman Islands has o34
ITA No. 1090, 1097 TO 1099 & 1091/JPR/2024
Chambal Fertilizers and Chemicals Ltd., Kota declared net profit of Rs. 532.53 lakh after taxation for the AY 2017-18 which has been reported in form number AOC-1 at page number 208 of the annual report. The valuation of shares of Assessee Company in CFCL Ventures
Limited, Cayman Islands is worked out only to Rs. 151.38 Lakh which appears to be incorrect because all the assets of the amalgamated Company are located outside the country. There is huge gap between the actual investment in amalgamating Company CFCL Technologies Limited and value of the shares determined in valuation report.
5. Relinquishment and extinguishment apply only to circumstances where the rights of the person holding the 'capital asset' come to an end without extinguishment of the 'capital asset' itself. In present case, shares of amalgamated Company have been allotted and loss is not actually incurred.
CFCL Ventures Limited, Cayman Islands was a wholly owned subsidiary of CFCL Technologies Limited, Cayman Islands. The CFCL Technologies
Limited merged with CFCL Ventures Limited with effect from December 20,
2016 and CFCL Ventures Limited became a direct subsidiary of Assessee
Company. It is a cross border merger or amalgamation of two subsidiary
Companies and appears a veiled attempt of tax avoidance.
6. History of CFCL Technology Limited:- In pursuance of the voluntary liquidation of CFCL Overseas Limited (COL), Cayman Island all the assets of COL (Including the shares, warrants and convertible notes held by COL in CFCL Technology Limited) were transferred in favour of the Company (Sole shareholder of COL) on March 25, 2015. The aforesaid assets have been accounted for in the books of the Company based on fare market value, which was lower than the carrying value of investment in COL. Accordingly, a loss of Rs. 10,702.09 lacs has been accounted for as loss on liquidation of subsidiary Company in the statement of profit and loss and same has been shown under "Exceptional Item' in note number 30 of the financial statement.
Therefore, it may be inferred that Assessee Company used to amalgamate and merge its Cayman Island based Subsidiaries Company.”
As is available from page 77 of the assessment order, the Assessing
Officer was of the considered view that there was no transfer of shares of CFCL technologies limited and it was only a case change of status of the share holdings, and further that the assessee company had neither o35
ITA No. 1090, 1097 TO 1099 & 1091/JPR/2024
Chambal Fertilizers and Chemicals Ltd., Kota relinquished and extinguished its shares, and consequently no loss had arisen to the assessee with the meaning of section 45 of the Act.
50. On the other hand, Learned counsel for the assessee has referred to the material available on record and submitted that he stands by the reasons and findings recorded by Learned CIT (A) on this issue, and that the findings recorded by the Assessing Officer have been rightly set aside while deciding the issue in favour of the assessee.
51. In the course of arguments, our attention has been drawn to the observations made by the Assessing Officer at page 75 and 76 that the valuation of shares of the assessee company in CFCL ventures Limited,
Cayman Islands was found to have been worked only to Rs. 151.38 lakh, which appeared to be incorrect, because all the assets of the amalgamated company are located outside the country and further that there is huge gap between the actual investment in amalgamating company CFCL
Technologies Limited and the value of the shares determined in the valuation report.

The Assessing Officer arrived at the conclusion that the assessee might have incurred notional loss, but same was not allowable as per provisions of section 45 and 2(47) of the Act and further that it could not be o36
ITA No. 1090, 1097 TO 1099 & 1091/JPR/2024
Chambal Fertilizers and Chemicals Ltd., Kota said that the loss to the assessee had arisen by transfer of shares within the meaning of section 45 of the Act.
52. Learned counsel for the assessee has submitted that when the Assessing Officer disbelieved the valuation arrived at by the Valuer as regards the transfer of shares, he should have given valuation as per his calculations, but, the Assessing Officer having not given any valuation of his own, there is no merit in the contention raised on behalf of the department.
53. Learned CIT(A) directed the Assessing Officer to allow the capital loss by accepting the claim of the assessee that extinguishment of right of the assessee in CFCL Technologies Ltd., Cayman Islands, on its merger with CFCL Ventures Ltd., Cayman Islands was a capital loss amounting to transfer within the meaning of section 2(47) of the Act.
54. Having been taken through the provisions of section 2(47) of the Act and decision Commissioner of Income Tax, Cochin v. Mrs. Grace Collis and Ors, 2001(4) SRJ 37, by both the sides, there is no merit in the contention raised on behalf of the department that this is not a case of “transfer” within the meaning of section 2(47) of the Act.

o37
ITA No. 1090, 1097 TO 1099 & 1091/JPR/2024
Chambal Fertilizers and Chemicals Ltd., Kota

Copy of the common order is also placed in the connected appeal file. File consignment to the record room after the needful is done by the office.

Order pronounced in the open court on 27/08/2025. ¼xxu xks;y½

¼ujsUnz dqekj½

(GAGAN GOYAL)

(NARINDER KUMAR) ys[kk lnL; @Accountant Member U;kf;d lnL;@Judicial Member

Tk;iqj@Jaipur fnukad@Dated:- 27/08/2025
*Santosh
आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू
1. The Appellant- ACIT, Circle-2, Kota.
2. izR;FkhZ@ The Respondent- Chambal Fertilizers and Chemicals Ltd., Kota.
3. vk;dj vk;qDr@ The ld CIT
4. विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत
5. xkMZ QkbZy@ Guard File ITA No. 1090, 1097 to 1099 & 1091/JPR/2024) vkns'kkuqlkj@ By order,

सहायक पंजीकार@Aेेजज. त्महपेजतंत

o39
ITA No. 1090, 1097 TO 1099 & 1091/JPR/2024
Chambal Fertilizers and Chemicals Ltd., Kota