TML DRIVELINES LIMITED ( SINCE MERGED WITH TATA MOTORS LIMITED),MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX(LTU) 2, MUMBAI

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

These cross appeals in ITA No.1198/Mum/2019 & 1442/Mum/2019 for A.Y.2014-15 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-4, Mumbai in appeal No.CIT(A)-4/IT-303/ACIT 2(1)(2)/2016-17 dated 11/12/2018 (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 30/12/2016 by the ld. Asst. Commissioner of Income Tax, Circle 2(1)(2), Mumbai (hereinafter referred to as ld. AO).

Let us take the assessee appeal in ITA No.1198/Mum/2019

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respective time allotted for investment activities had sought to attribute part of the salary cost for the purpose of investment activity and accordingly, arrived at the disallowance of Rs.99,600/-. The ld. AO disregarded the contentions of the assessee and proceeded to compute the disallowance under third limb of Rule 8D(2) of the Rules and arrived at the figure of Rs.12,55,853/- while completing the assessment.

3.1. We find the ld. CIT(A) had observed that the ld. AO by dealing with the facts of the case had clearly recorded his satisfaction rejecting the contentions of the assessee that no expense have been incurred for earning exempt income. The ld. CIT(A) also observed that the estimated time allocated by the assessee in its workings given before the ld. AO during the course of assessment proceedings with regard to the time of senior management and middle management employees towards the investment activity, the same was done only on adhoc basis and assessee has not provided any details or documents as to how and why they had estimated such quantum of disallowance u/s.14A of the Act. Accordingly, he observed that the disallowance of administrative expenses need to be made only in accordance with third limb of Rule 8D(2) of the Rules which had been rightly made by the ld. AO and upheld the action of the ld. AO on the same.

3.2. We find that the dividend income of Rs.14,16,742/- was earned by the assessee on the investment which was held by the assessee only for nine days during the year and assessee has admittedly earned dividend from the HDFC floating rate income fund which was duly redeemed by the assessee on 09/04/2013. Hence, the said investment in mutual fund which had actually yielded dividend income was actually held by the assessee only for 9 days during the year. Hence, even if the expenses are

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to be disallowed as attributable to the said investment activity, it could be disallowed on a proportionate basis only for 9 days and not for the whole year. Hence, in this regard, the computation mechanism provided in Rule 8D(2)(iii) of the Rules would only result in absurdity if it is followed. We find that the ld. AR at the time of hearing had placed reliance on the decision of the Hon’ble Jurisdictional High Court in the case of Pr. Commissioner of Income Tax Appeal vs. Lee and Muirhead Pvt. Ltd., reported in 423 ITR 167 and the same, in our considered opinion, would come to rescue of the assessee wherein in para 3, it had been held that Rule 8D cannot be applied blindly when the assessee had hardly incurred any expenses in relation to dividend earned and substantial investments were made temporarily in order to park idle funds. At the same time, some disallowance of expenses need to be made u/s.14A of the Act even though the investment was held for 9 days. In these peculiar facts and circumstances, we direct the ld. AO to adopt the disallowance workings given by the assessee during the course of assessment proceedings computing disallowance u/s.14A of the Act at Rs.99,600/-. The disallowance of Rs.99,600 could be treated as expenses incurred for 9 days attributable to investment activity and that would meet the ends of justice in the peculiar facts and circumstances of the instant case. Accordingly, the grounds raised by the assessee are partly allowed.

ITA No.1442/Mum/2019 (Revenue Appeal) – A.Y.2014-15

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4.1. The facts narrated hereinabove with regard to the disallowance made u/s.14A of the Act in assessee’s appeal would hold good for revenue’s appeal also. The disallowance worked out by the ld. AO u/s.14A of the Act r.w.r. 8D(2)(iii) of the Rules under normal provisions of the Act amounting to Rs.12,55,853/- was considered verbatim for disallowance while computing the book profits u/s.115JB of the Act also by the ld. AO. We find that the Special Bench of Delhi Tribunal in the case of Vireet Investments reported in 165 ITD 27 had already held that the computation mechanism provided in Rule 8D(2) of the Rules cannot be applied for the purpose of disallowance of expenses under Clause ‘f’ of Explanation to Section 115JB (2) of the Act. However, certain expenses need to be disallowed as per Clause ‘f’ of Explanation to Section 115JB (2) of the Act. Hence, we hold that the disallowance computed by the assessee on rationale basis at Rs.99,600/- be disallowed under Clause ‘f’ of Explanation to Section 115JB(2) of the Act. The ld. AO is directed accordingly. Accordingly, the ground No.1 raised by the revenue is partly allowed.

5.1. We have heard rival submissions and perused the materials available on record. During the course of scrutiny proceedings for A.Y. 2007-08, it was noticed that the assessee (earlier known as H V Axles

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Limited (HVAL)) and H V Transmission Limited (HVTL) (now merged with the assessee) had purchased second hand plant and machinery for a consideration of Rs. 34,46,88,382/- and Rs. 15,58,65,444/- respectively from its holding company M/s. Tata Motors ltd. and capitalized at the WDV as appearing in the block of assets of the holding company i.e., Rs.11,09,20,582/- and Rs.5,39,80,168/- respectively. Due to change in shareholding pattern, the assessee revalued its WDV and considered the actual cost of the assets in the hands of the Transferor Company by way of filing revised return. The issue was discussed in detail in the assessment order for A.Y. 2007-08 and the excess claim of depreciation was disallowed from A.Y. 2007-08 onwards.

5.2. During the year under consideration, it is seen that the assessee has continued to claim depreciation on the inflated cost of used assets. Therefore, the assessee was asked to show cause as to why the excess depreciation claimed on second hand fixed assets should not be disallowed and added back to the business income of the assessee.

5.3. We find that the issue in dispute was subject matter of adjudication in assessee’s own case in ITA No.6020/Mum/2011 for A.Y.2007-08 dated 31/08/2012 wherein the facts and decision rendered thereon are as under:-

“2. The relevant facts are that assessee acquired certain assets from Tata Motors Limited (TML) in the year under consideration i.e. F.Y. 2006-07. Since assessee was 100% subsidiary of TML during the financial year 2006-07, depreciation on the assets so acquired was claimed on the Written Down Value (WDV) as appearing in the books of TML, though the assessee had acquired those assets at a higher price than the cost of the assets to TML. The said depreciation was claimed at WDV as per Explanation 6 to sub-section (1) of Section 43 of the Income tax Act. In the subsequent period i.e. F.Y. 2007-08, TML transferred certain shares of assessee company to Tata Sons Limited (TSL), another company. Hence, assessee company ceased to be 100% subsidiary of Assessment Year: 2007-08 TML. In view thereof, it was stated that the treatment of the transfer of the said assets acquired

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by assessee from TML had to be changed in the hands of the assessee company as well as in the hands of TML in view of clause (ii) of section 47A(1) of the I.T.Act. Accordingly, assessee changed the cost of acquisition of the said assets from WDV as appearing in the books of TML at the time of transfer to the actual price paid by the assessee company to TML and, accordingly, claimed enhanced depreciation and filed revised claim. The AO did not agree to the revised claim and allowed depreciation on WDV as appearing in the books of TML at the time of transfer of the said assets. Being aggrieved, assessee filed appeal before the first appellate authority. 3. Ld CIT(A) after considering the submissions of the assessee and decision of ITAT Mumbai in the case of Essar Oil Ltd vs DCIT, 13 SOT 691 held that the issue is squarely covered in favour of the assessee and directed the AO to take the cost of acquisition of such assets as have been acquired by the assessee from TML at the cost at which they have been acquired and, accordingly allowed the depreciation to the assessee. Hence, this appeal by the department. 4. At the time of hearing, ld D.R. relied on the order of AO. 5. On the other hand, ld A.R. supported the order of ld CIT(A) and submitted that this issue is squarely covered in favour of the assessee by the decision of ITAT in the case of Essar Oil Ltd (supra). He further submitted that Hon'ble Bombay High Court has confirmed the said order of ITAT in the appeal filed by department vide order dt.7.7.2011 in Income tax Appeal No.3160 of 2010. Ld A.R. referred the provisions of section 47A(1)(ii) and submitted that as per section 49(3) of the I.T.Act, the cost of acquisition acquired by the assessee from TML should be the cost for which such assets were acquired by it as TML transferred some of the shares of the assessee company to another company namely TSL before expiry of period of eight years. As such, assessee company ceased to be 100% subsidiary of TML. 6. We have carefully considered submissions of ld representatives of parties in the light of the relevant provisions of Act and orders of authorities below. We agree with ld A.R. that issue involved in this appeal is squarely covered by the decision of ITAT in the case of Essar Oil Ltd (supra). In the said case, assessee company was a wholly owned Assessment Year: 2007-08 subsidiary of the company namely Essar Gujarat Ltd (hereinafter referred 'EG'). The assessee company had taken over energy and offshore division of EG w.e.f. 31.5.1992. In the relevant assessment year, assessee claimed depreciation on the fixed assets and for that purpose; it had taken WDV of the fixed assets as appearing in the books of EG. However, assessee company ceased to be wholly owned subsidiary of the transferor company 'EG' on 30.9.1994. The AO allowed the depreciation by considering WDV of those assets as appearing in the books of the 'EG' in view of Explanation 6 to section 43(1) of the I.T.Act. Ld CIT(A) also confirmed the action of the AO. However, in further appeal before the Tribunal, the Tribunal held that the cost for which the assessee had acquired the assets should be the cost of acquisition for the purpose of computation of depreciation if the transferor company ceased to be the 100% holding company of its subsidiary within a period of eight years. We consider it prudent to reproduce para 10 of the said order, which reads as under:

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"Having heard both the parties extensively and having considered the material on record, we find that the dispute relates to the value of the in the hands of the assessee for the purpose of computing the depreciation. In the present case, the following undisputed facts arise :-- (i) As on the date of transfer i.e., 30-5-1999,(correct date is 30.5.1992 & appears to be typographical mistake) the transferor company M/s. Essar Gujarat Ltd. is the 100% holding company of its subsidiary M/s. Essar Oil, the transferee company and the assessee herein. (ii) The transferee company ceased to be the wholly owned subsidiary of the transferor company in September, 1994. (iii) The Energy and Offshore divisions of the holding company were taken over by the assessee as going concerns. Thus, the assessee has taken over the assets of the holding company a division by lock, stock and barrel. A division as such is completely taken over by the subsidiary. The Assessing Officer has applied the provisions of section 47(iv) of the Act to consider the nature of transfer and thereby applied the Explanation 6 sub-section (1) of section 43 for the purpose of working out the actual cost to the subsidiary company. Explanation 6 to sub-section (1) of section 43 provides as under: "Explanation 6 to sub-section (1): When any capital asset is transferred by a holding company to its subsidiary company or by a subsidiary company to its holding company, then, if the conditions of clause (iv) or, as the case may be, of clause (v) of section 47 are satisfied, the actual cost of the transferred capital asset to the transferee company shall be taken to be the same as it would have been if the transferor company had continued to hold the capital asset for the purpose of its subsidiary." Where a 100 per cent holding company of a subsidiary company transfer certain assets to such subsidiary company even for a price or consideration higher than Assessment Year: 2007-08 the- WDV, the capital gains on such transfer has been exempted under section 47(iv). The reason being the identity of the ownership of the companies precluded its being considered as involving gain to the transferor company. As capital gain was exempt in the hands of the transferor company and in order to ensure that the transferee company does not claim depreciation on a higher cost, it was provided by the-insertion of Explanation (6) to sub-section (1) of section of the Act, that in such cases the WDV in the hands of the transferor company, shall be the cost of Acquisition in the hands of the transferee company. The Assessing Officer's action is right as far as the situation as the date of transfer is concerned. But by 30-9-1994, the assessee company ceased to be the subsidiary of the transferor holding company. Section 47 grants exemption from section 45 while section 47A withdraws exemption granted under section 47 on the occurrence of the events mentioned therein. Section 47 reads as under :-- '47. Nothing contained in section 45 shall apply to the following transfers: (i) to (iii) ... (iv) any transfer of a capital asset by a company to its subsidiary company, if--

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(a) the parent company or its nominees hold the whole of the share capital of the subsidiary company, and (b) the subsidiary company is an Indian company;" Clause (ii) of section 47A provides that the exemption granted under - Section 47 shall be withdrawn if the subsidiary company ceases to be so from the holding company within a period of 8 years from the date of transfer of the capital asset and it shall be treated as the income of the year which the transfer has taken place. The fact that the assessee has ceased be the subsidiary of the holding company on 30-9-1994 was brought to notice of the Assessing Officer during the assessment proceedings but rejected the same on the ground that the subsequent events will not have any material change with respect to changing of cost of acquisition the capital assets acquired from the holding company. But, in our opinion, the Assessing Officer should have considered the subsequent events. The application of the provisions of section 47 is not final but is subject to the occurrence of events under section 47A. If the events mentioned in section 47A occur, the exemptions granted under section 47 the Income-tax Act are withdrawn. What is the effect of such withdrawals?. In the case of the transferor company, the income is to be treated as income of the year in which the transfer has taken place. This shows that the subsequent event has the effect of withdrawing the exemption granted under section 47 and the income goes back to the date of transfer. Thus, provisions of section 47 are withdrawn on occurrence of the events mentioned under section 47A and the transaction has to be treated as a transfer under section 47(v) or (vi) of the Act as the case may be and the transferor company is liable to pay the capital gains tax. In the present case due to seizure of the assessee-company being a subsidiary of the transferor company, the provisions of section 47(iv) have ceased to apply, and the transaction has to be considered as a transfer. Section 47A provides for withdrawal of exemption and the resultant treatment to be given to income in the hands of the transferor company. What is the consequential effect on the Assessment Year: 2007-08 transferee company? What should be the value of cost of acquisition in its hands? The answer lies in section 49(3). Section 49(3) reads as under :-- "49(3) - Notwithstanding anything contained in sub-section (1) where the capital gain arising from the transfer of a capital asset referred to in clause (iv) or, as the case may be, clause (v).of section 47 is deemed to be income chargeable under the head "Capital gains" by virtue of the provisions contained in section 47A, the cost of acquisition of such asset to the transferee-company shall be the cost for which such asset was acquired by it." Sub- section (3) provides that in the hands of the transferee, the valuation of the asset regarding which the exemption granted under section (iv) has been withdrawn under section 47A of the Act, it shall be the cost for which such asset was acquired by it. Thus, in the present case, the cost 1vr which the assessee has acquired the asset should be the cost of acquisition for the purpose of computation of depreciation." 7. At the time of hearing before us, it was also submitted by ld A.R. that the department filed appeal before the Hon'ble Bombay High Court being Income tax Appeal No.3160 of 2010 against the order of the Tribunal and the Hon'ble High Court vide its order dated 7th July, 2011 confirmed the order of the Tribunal. To

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substantiate his submission, ld A.R. filed a copy of the said order of Hon'ble High Court. 8. Considering the facts of the case before us, we agree with ld A.,R. that the issue is squarely covered by the order of the Tribunal in the case of Essar Oil Ltd (supra), which has been confirmed by the Hon'ble High Court and ld CIT(A) has decided the issue relying on the above said order of the Tribunal. Therefore, we do not find any infirmity in the order of ld CIT(A). Hence, we uphold his order and reject the ground of appeal taken by the department. 9. In the result, appeal filed by department is dismissed. 5.4. We also find that for A.Y.2008-09, the revenue had carried the similar issue before the Hon’ble Jurisdictional High Court in Income Tax Appeal No.665/2017 dated 30/08/2019 wherein the Hon’ble Jurisdictional High Court by following the order passed in assessee’s own case for A.Y.2007-08 dismissed the appeal of the revenue. Respectfully following the aforesaid judicial precedents, the ground No.2 raised by the revenue is dismissed.

Order pronounced on 18/12/2020 by way of proper mentioning in the notice board.

Sd/- Sd/- (C.N. PRASAD) (M.BALAGANESH) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated 18/12/2020 KARUNA, sr.ps

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Copy of the Order forwarded to : The Appellant 1. The Respondent. 2. The CIT(A), Mumbai. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. 6. //True Copy//

BY ORDER,

(Asstt. Registrar) ITAT, Mumbai