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Income Tax Appellate Tribunal, DELHI BENCH “E” NEW DELHI
Before: SHRI AMIT SHUKLA & SHRI L.P. SAHU
The aforesaid appeal has been filed by the assessee against the impugned order dated 26.03.2018 passed by ld. Principal Commissioner of Income Tax (Central), Gurugram u/s.263 for the Assessment Year 2014-15.
The assessee has challenged the impugned order on the following grounds. “(A) That on the facts & circumstances of the case the learned Pr. CIT (Central) while passing the order U/s 263 erred in: Initiating the proceedings U/s 263 of the Income Tax i) Act, 1961, as the original order was passed by the AO after his due application of mind, verification and enquiries as required under law.
2 I.T.As. No.4304/DEL/2018
Understanding the factual matrix that two flats and ii) cheque (Cheque of Rs. 1 Crores) were acquired under settlement (of Rs. 46075000/-) with M/s. Yashraj Containers Ltd. through MOU dated 01.11.2010 and treating the MOU as mere agreement between two parties and an unregistered document. Calculating the Cost of Acquisition of Flat at Market iii) value of the shares while ignoring the vital facts that settlement was made after filing of four suits and four complaints to recover the money. Ignoring and not finding any infirmities in the valuation iv) Report from Registered Valuer which provides the Fair Market Value of Flat at Rs. 17952000/-. Rejecting the circle rate of Rs. 8429300/- of flat as v) provided by the Appellant without mentioning any sound reason, whereas the sale consideration of flat is Rs. 1.07 Crores. Therefore, the Provisions of Sec. 50C has been fully complied by the Appellant. Initiating/ Applying the provisions of Sec. 14A of the vi) Income Tax Act, 1961 and without appreciating that Principle of Apportionment of Expenditure is not applicable as Appellant has not earned any Exempt income. Violating the settled principle that "where the AO vii) adopted one of the courses permissible in law or where two views are possible and he has taken one view with which the Commissioner does not agree, it cannot be treated that the assessment order is erroneous so as to be prejudicial to the interest of revenue unless the view taken by AO is unsustainable in law. B. Without prejudice above, the order U/s 263 dated 26.03.2018 was invalid and liable to be quashed as the original order cannot be treated as Prejudicial to interest of revenue, if the 3 I.T.As. No.4304/DEL/2018 fair market value of the Shares be treated as Cost of Acquisition of the Flat acquired in exchange (although acquired under settlement) then the Loss arose from shares be allowed to set off with the Gain from the Flat"
The brief background and facts of the case as culled out from the impugned order are that the assessee-company which is engaged in the business of financing and instrument activities has paid sum of Rs.4,27,50,000/- to M/s. Yashraj Containers Ltd. as share application money for preferential allotment of 4,50,000 equity shares @ Rs.95 per share in the financial year 2007-08 and also paid Rs.33,25,000/- as the initial subscription money for the share warrants in the same year. Later on, assessee came to know that M/s. Yashraj Containers have referred to BIFR under the provision of the Sick Industrial Company (Special Provision) Act, 1995, the assessee withdrew its offer and wrote to M/s. Yashraj for rescinding the agreement to subscribe the shares and also filed various civil suits and criminal cases before the Hon'ble Calcutta High Court for the recovery/refund of the amount paid by the assessee and also filed complaints before BIFR, SEBI, ROC and BSE Mumbai. Later on, both the parties agreed for terms of settlement for settling the issue, which was signed by the assessee-company and M/s. Yashraj containers on 21.09.2010 in order to settle the dispute on the basis of following relevant conditions: - “a) The total settlement amount is Rs. 4,60,75,000/- i.e. share application money and share warrant. 4,50,000 shares will be sold by appellant to M/s. VAS b) Infrastructure at aforesaid amount of Rs. 4,60,75,000/- against which Rs. 1,00,00,000/- will be paid by demand draft and the 4 I.T.As. No.4304/DEL/2018
balance amount i.e. Rs. 3,60,75,000/- will be adjusted against the sale of two flats and 4 car parking space, flat admeasuring more or less 1650 saleable area each i.e. total area of 3300 Sq. ft. Against the registration of the aforesaid two flats, the c) appellant will withdraw all the civil and criminal suits and the complaints.
Then on 01.11.2010, MOU was executed between the assessee-company, M/s. Yashraj Containers Ltd. and M/s. VAS infrastructure Ltd., which was signed and registered in the office of Sub-Registrar. The Hon'ble Calcutta High Court in the suit filed by the assessee against M/s. Yashraj Containers Ltd. (in suit no.105/2008) had duly acknowledged that the disputes have been settled between the parties and the plaintiff does not wish to pursue suit. During the year under consideration, the assessee company has sold one of the flat for a total consideration of Rs.1,07,00,000/- and booked Long Term Capital Loss of Rs.1,31,21,677/-. The assessee has taken the cost of acquisition of flat at Rs.1,80,37,500/- which was 50% of sum of Rs.3,60,75,000/- which as per the settlement/MOU was the value of the flats transferred to the assessee. In view of the settlement agreement, the ld. Assessing Officer in his order passed u/s.143(3) dated 20.06.2016 has accepted the computation of Long-Term Capital Loss.
Later on, the ld. CIT in his revisionary jurisdiction, noted the following facts after examining the assessment records:- “During the year under consideration, the assessee has sold a flat at Mumbai for a total sale consideration of Rs.1.07 Crores. The assessee has submitted that the flat was acquired by it as a result
5 I.T.As. No.4304/DEL/2018 of the MOU dated 01.11.2010. A perusal of the MOU submitted during the course of assessment proceedings shows that the assessee had received two flats and Rs.1 Crore in lieu of the Rs.4,60,75,000/- paid by it for acquisition of shares of a company by the name of M/s Yash Raj Container Limited. The assessee claims to have sold one of the flats in FY 2011-12. In calculating the long-term capital loss, the assessee has taken the cost of acquisition as Rs.1,80,37,500/- [one half of 3,60,75,000], In this context, the following observations are in order: - a. The AO has accepted the cost of acquisition without verification of the actual value of the flat on the date of acquisition. b. The MOU is mere agreement between two parties and is not a registered/authenticated document which can be taken as the proof of the value of the asset transferred. Thus, the AO has not done the due diligence and wrongly allowed the claim of long term capital loss without any verification. c. The AO has also pot examined the Long-Term Capital Loss in light of the provisions u/s 50C.”
In response to the show cause notice, the assessee placed on record that it had acquired two flats in the building named as ‘Pushpa Vinod’ at S.V. Road, Borivali (West), Mumbai for Rs.3,60,45,000/- in terms of MOU dated 01.11.2010 and accordingly the acquisition of each flat worked out to Rs.1,80,37,500/-. One of the flats was sold during the financial year 2011-12; and another was sold during the year under consideration at Rs.1,07,00,000/- in which it has incurred Long Term Capital Loss of Rs.1,31,21,677/-. It was also pointed out that the value of the flat in terms of Section 50C, i.e. prevailing circle rate was Rs.84,29,300/-. Thus, it was submitted that the cost of acquisition cannot be deemed which was as per the 6 I.T.As. No.4304/DEL/2018 settlement/MOU agreed between the parties, and therefore, resultantly, the computation of Long-Term Capital Loss is correct.
The ld. CIT noted that assessee had purchased 4,50,000 preferential equity share of M/s. Yashraj Containers @ Rs.95 per share whereas the closing price of the share on various dates during the year 2007-08 was ranging between Rs. 42.25 to Rs. 50.70. Thus, when the price quote of these shares was between Rs. 40 to Rs. 50 then how and why assessee company had purchased shares @ Rs.95 per share. He also noted that when this company was already going in BIFR then why the assessee- company would apply for the shares on such huge premium. He also observed that if one of the flat admeasuring 935 sq. ft. carpet area and two parking spaces which was sold and allotted to the assessee was assessed at the market value for the purpose of stamp duty at Rs.42,07,500/- on which stamp duty was computed at Rs.1,93,000/-, then under what circumstances M/s. VAS Infrastructure has agreed to transfer two flats and two parking spaces on 01.10.2010 without receipt of any proper consideration. He held that here in this case there are two distinct transactions, firstly, transfer of 4,50,000 equity shares of M/s. Yashraj Containers Ltd. acquired by assessee company for Rs.4,27,50,000/- and sold to M/s. VAS Infrastructure and exchange for demand draft of Rs.1 crore and two flats with four parking spaces which amounts to transfer u/s.2(47) in view of the judgment of Hon'ble Kerala High Court in the case of CIT vs. P.P. Thomas, 235 ITR 191; and secondly, transaction of sale of two flats, out of which one flat was sold in the financial year 2011-12 and another was sold on 06.03.2014 for consideration of Rs.1,07,00,000/-. He held that Assessing Officer has not carried
7 I.T.As. No.4304/DEL/2018 out any inquiry or made any verification to find out the value of consideration u/s.50C; and the computation of circle rate of flat given by the assessee at Rs.84,29,300/- is not on sound basis. In so far as cost of acquisition of flat at Rs.1,80,37,500/- relying upon the judgment of Hon'ble Calcutta High Court in the case of Mrs. A. Ghosh vs. CIT, (1983) 141 ITR 45, he observed that the cost of acquisition in the case of transfer must be the value of the asset that has been transferred on the date on which the transfer took place. The value determined by him for the purpose of acquisition of value was Rs.10,97,500/- which was arrived by him after in the following manner: - “In the first set of transaction 4,50,000 equity shares of M/s. Yashraj, acquired by the assessee company for Rs.4,27,50,000/- were transferred to M/s VAS in exchange for demand draft of Rs. 1 crore and two flats with four parking spaces in the building Pushpa Park, S.V. Road, Boravali (West), Mumbai on 01.11.2010. Further the amount of Rs.33,25,000/- paid by the assessee to M/s Yashraj towards 10% of the consideration amount of 3,50,000 convertible share warrants stood forfeited. As per the data available on internet (www.moneycontrol.com) the closing price of the company M/s Yashraj is Rs.27.10 per share on 01.11.2010. Hence the value of the assets that has been transferred on the date on which exchange took place can be computed as under: Value of 4,50,000 shares of M/s Yashraj as on the date of transfer i.e. 01.11.2010 = 4,50,000 *Rs.27.10 per share = 1,21,95,000/-. Since the share warrants were forfeited, its value is taken as Nil. Hence the cost of acquisition of demand draft of Rs.1 crore and 2 flats with four parking places would be Rs.l,21,95,000/-. In view of the above the cost of 2 flats would be Rs.21,95,000/- and that of 8 I.T.As. No.4304/DEL/2018 one flat would be Rs.10,97,500/- . In view of the above the cost of acquisition of the flat for the purpose of computation of the long-term capital gain would be Rs.10,97,500/-. In the assessment order the AO has accepted the cost of acquisition shown by the assessee in return at Rs. 1,80,37,500/- without proper verification and has drawn a conclusion which is erroneous in so far as it is prejudicial to the interest of revenue.”
Another point raised by him was that assessee has invested fund in the shares of group companies which is evident from the fact that opening balance of the inventory was Rs.91,45,33,060/- which has been reduced during the year to Rs.78,01,58,060/-. The Assessing Officer has not examined the applicability of Section 14A read with Rule 8D, and therefore, to this extent also assessment order is erroneous. The relevant observation and the finding of the Ld. CIT reads as under:
“3.1 I have considered the facts of the case. Earning of exempt income in the impugned year is not a pre-requisite for making the disallowance u/s.14A of the Act. The CBDT vide Circular No. 5/2014 dated 11.02.2014 in exercise of its powers under section 119 of the Act has clarified that Rule 8D r/w section 14A of the Act provides the disallowance of the expenditure even where tax payer in a particular year has not earned any exempt income. Further, such disallowance can be made even if the shares are held as stock in trade. Explanation 2 to section 263 of the Act also provides that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interest of revenue, if in the opinion of the Principal Commissioner the order has not been made in accordance with any order, direction or instruction issued by the Board u/s.119 of the Act. Since, during the assessment proceedings the Assessing Officer has not made any 9 I.T.As. No.4304/DEL/2018 enquiry/verification in respect of disallowance u/s.14A of the Act, the order passed by the AO is held to be erroneous in so far as it is prejudicial to the interest of revenue.”
Accordingly, he set aside the matter after making following observations: -
“5. In view of the above the assessment order passed by the AO is set aside on these two issues. The AO is directed to call for the details to determine the deemed full value of consideration of flat u/s 50C of the Act and also adopt the cost of acquisition as discussed above after proper verification in view of the judgement of the Hon'ble Calcutta High Court in the case of Mrs. A. Ghosh, referred to supra. The AO is also directed to make necessary enquiry in respect of disallowance u/s 14A of the Act and pass the order in accordance with the law after proper verification. The AO is directed to suitably amend the assessment order dated 20.06.2016 for the assessment year in respect of the issues which have been set aside.”
We have heard the parties at length, perused the relevant findings given in the impugned orders as well as material referred to before us. One of the main issues on which ld. CIT has exercised his revisionary jurisdiction u/s.263 is that, the computation of Long-Term Capital Loss shown by the assessee on the sale of flats is erroneous and prejudicial to the interest of revenue. Already, we have discussed the facts and background relating to acquisition as well as sale of flats. Succinctly put, it is an undisputed fact that the assessee had paid Rs.4,27,50,000/- to M/s. Yashraj Containers as share application money for preferential allotment of 4,50,000 equity shares in the financial year 2007-08 and also paid sum of Rs.33,25,000/- for share
10 I.T.As. No.4304/DEL/2018 warrants in the same year. Later on, serious dispute arose between the assessee and M/s. Yashraj Containers and assessee rescinded from agreement to subscribe the shares for which various civil suits were filed before the Hon'ble Calcutta High Court and also criminal cases against M/s. Yashraj Containers. It is also not disputed that later on a settlement was agreed between the parties, wherein it was agreed that settlement amount is Rs.4,60,75,000/- and the said 4,50,000 equity shares were sold to M/s. VAS Infrastructure, and the consideration was in two parts, one was Rs.1 crore which was to be paid to the assessee by way of demand draft; and balance amount of Rs.3,60,75,000/- was to be adjusted against sale of two flats with four parking spaces in a building in Borivali (West) Mumbai. This agreement was duly acted upon by the parties. After the registration of the aforesaid two flats, the assessee withdrew all the civil suits and criminal complaints. Thus, two flats acquired by the assessee was under the settlement process and by way of MOU executed between the assessee-company, M/s. Yashraj Containers and M/s. VAS infrastructure Ltd. This factum of settlement of dispute has also been admitted by the parties before the Hon'ble Calcutta High Court. One of the flats was sold in the year 2011-12 and another was sold in this year for sum of Rs.1,07,00,000/-. The computation of Long-Term Capital Loss shown by the assessee was in the following manner: Long Term Capital Gain Flat at Mumbai sold on11.03.2014 Value u/s.50C Rs.1,07,00,000 Sale consideration received Rs.1,07,00,000 Sale consideration Rs.1,07,00,000 Less: Transfer expenses 0 --------------------------
11 I.T.As. No.4304/DEL/2018 Rs 1,07,00,000 Less: indexed cost and Purchase price Rs. 2,38,21,677 Long-term capital loss: Rs.1,31,21,677
From the perusal of the impugned order of ld. CIT, we find that, first of all, he has tried to held that the value of 4,50,000 shares on the date of transfer dated 01.11.2010 would be Rs.1,21,95,000/-, because the acquisition price of the share of the company M/s. Yashraj Containers Ltd. was Rs.27.10 per share as on 01.11.2010; and since share warrants were forfeited, therefore, its value has been taken at ‘Nil’. Since assessee has already received sum of Rs.1 crore, therefore, the value of two flats was taken by him at Rs.21,95,000/-, therefore, one flat would be of Rs.10,97,500/-. Thus, the cost of acquisition has tinkered by him by replacing the amount shown by the assessee at Rs.1,80,37,500/- with Rs. 10,97,500/-.
First of all, it is very difficult to fathom as to how the value of shares of M/s. Yashraj Containers Ltd. as on the date of transfer can be reckoned with the value of a flat which does not belong to M/s. Yashraj Containers Ltd. Albeit here as per the arrangement and settlement with the parties the shares was to be sold to VAS Infrastructure, who in consideration thereof has allotted two flats as part of the consideration. The reliance placed by the ld. CIT on the decision of Calcutta High Court in the case of Mrs. A.K. Ghosh vs. CIT (supra) is wholly out of context and having no applicability on the facts of the present case. That was a case where price of the acquisition of the share was reckoned to be the price of the debentures because the assessee has given the debentures and has acquired the shares. Here, the assessee has acquired a flat
12 I.T.As. No.4304/DEL/2018 under a settlement agreement, because there was a dispute amongst the parties where assessee had lodged civil suit and criminal complaints for misrepresentation by M/s. Yashraj Containers for allotting the share at such a higher price concealing the various facts. This factum of concealment by Yashraj has been acknowledged by the Hon'ble Calcutta High Court also wherein the Hon'ble Court has acknowledged that the defendant had concealed the factum of reference to the BIFR from the plaintiff. The assessee has sold these shares to M/s. VAS Infrastructure on the same amount in lieu of allotment of the flats. There is no co-relation between the share price of M/s. Yashraj Containers and the amount settled between the parties. Even if it is to be accepted that the value of the flat could have been less then also one has to keep in mind that the assessee was virtually on the verge of suffering loss of the whole of the amount and if assessee could recover some of the amount in the form of an asset (here flats), then it is wholly a decision of the assessee company which cannot be judged by the Department. Once, the authenticity and genuineness of the Settlement Agreement and MOU has not been disputed, then terms of consideration agreed between the parties cannot be questioned. Here, the nature of transaction is not an exchange of one asset with the other rather it is a sale of asset in lieu of settlement in which the whole settlement amount has been fixed. In fact, it is akin purchase of two flats from M/s. VAS Infrastructure for total consideration of Rs.3,60,75,000/- which has been adjusted against the sale of two flats. This fact has also been noted by the ld. CIT in paragraph 2.3. also. Here, it is not exchange of share with the flat rather the flats have been acquired for prefixed and agreed consideration between the transferor and the transferee and hence it is akin to sale under settlement with 13 I.T.As. No.4304/DEL/2018 an agreed stipulation to withdrawal of suit and complaint. Thus purchase/acquisition mode and price cannot be disturbed and tinkered with some other value.
Even if the we take the finding of the ld. CIT to a logical conclusion that there are two transactions, that is, one of transfer of shares; and other of transfer of flat then consequentially there would be two computation of capital gains as on 01.11.2010; firstly, computation on sale of shares; and secondly, sale of flat. For the first transaction of transfer, the full market value of shares as determined by the Ld. CIT is Rs.1,21,95,000/- and undisputedly the cost of acquisition would be Rs.4,60,75,000/- which is the total amount of consideration agreed, then the resultant loss subject to indexation would be Rs.(-)3,38,80,000/-. For the second transfer (of flats), the computation of capital gain would be full value of consideration of the flat price in which it has been sold is Rs.1,07,00,000/- and if the cost of acquisition as determined by the ld. CIT is Rs.10,97,500/-, then the resultant capital gain would be Rs.96,02,500/-. Thus, in this year there would be capital loss on sale of shares of Rs.3,38,80,000/- and capital gain of Rs.96,02,500/-, resultantly, there would be a Long- Term Capital Loss. Hence it cannot be held that it is prejudicial to the interest of revenue.
Thus, in view of our discussion made above, we hold that the order of the ld. CIT cannot be sustained, as the assessment order accepting the claim of Long-Term Capital Loss by the AO is not prejudicial to the interest of revenue as the assessee has rightly taken the cost of acquisition as per the actual consideration settled by the parties at the time of acquisition of flat. The reason being that it is not in dispute that the flat has not been acquired
14 I.T.As. No.4304/DEL/2018 under the settlement but by some other means for which the cost of acquisition of the flat needs to be determined. The price of acquisition under the facts and circumstances cannot be changed at all and accordingly the resultant computation of capital gain would result in Long Term Capital Loss which has rightly been allowed by the Assessing Officer.
In so far as observation of the ld. CIT that the Assessing Officer has not made disallowance u/s.14A, it has been admitted by both the parties that there was no dividend income earned by the assessee which has been claimed as exempt, and therefore, there would be no triggering factor of disallowance under section 14A in view of the judgment of Hon'ble Delhi High Court in the case of Cheminvest Ltd vs. CIT [2015] 378 ITR 33 (Del.)
Thus, on merits, we hold that assessment order may be termed as erroneous as he may not have conducted detailed inquiry on the points raised by him, but it cannot be held that such an assessment order is prejudicial to the interest of revenue and therefore in one of the condition is not satisfied, then the assessment order cannot be cancelled or set aside u/s.263 in view of the settled principle by the Hon'ble Supreme Court in the case of Malabar Industries Company Ltd. Vs. CIT, 243 ITR 83 (SC); and CIT vs. Max India Limited, 295 ITR 282 (SC).
In the result, the appeal of the assessee is allowed.
Order pronounced in the open Court on 20th December, 2018.