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Income Tax Appellate Tribunal, MUMBAI BENCH “F”, MUMBAI
Before: SHRI G.S. PANNU & SHRI SANDEEP GOSAIN
PER G.S. PANNU, VICE PRESIDENT
The captioned are cross-appeals filed by the assessee and the Revenue, directed against the order of the CIT(A) - VII, Mumbai dated 27.01.2009, pertaining to the assessment year 2004-05, which in turn has arisen from an order passed by the Assessing Officer dated 29.12.2006 under Section 143(3) of the Income Tax Act, 1961 (in short "the Act").
First, we may take-up the appeal of the assessee in wherein the Grounds of appeal read as under:-
“1. On the facts and in the circumstances of the case and in law, the Commissioner of Income tax (Appeals)-VII, Mumbai ["the CIT(A)"] erred in upholding the action of the Assistant Commissioner of Income Tax, Ward 6 (3), Mumbai ("the AO") in not treating the sale of textile business to M/s Morarjee Brembana Ltd, as a slump sale on the alleged ground that the Assets and liabilities have been individually valued for arriving at the sales value consideration.
2. He failed to appreciate and ought to have held that the textile division was sold in its entirety and all the Assets and Liabilities relating to the business were transferred and the sales consideration is based on the valuation report of an independent valuer.
3. The Appellant prays that the sale of textile undertaking be held as a slump sale and the Long term Capital Loss of Rs. 34,47,24,138/- be allowed.
Without prejudice to ground I:
GROUND II :
1. On the facts and circumstances of the case and in law, the CIT (A) erred in disallowing the loss on sale of textile business to the extent of Rs.3,86,86,330/- out of 3 Morarjee Realties Ltd. & 2343/Mum/2009 total loss of Rs.34,47,24,136/- as "Business loss" under section 28 of the Income Tax Act, 1961 ( "the Act").
2. In doing so, the CIT (A) upheld the action of the AO of treating loss in respect of deposits with others of Rs.76,15,921/-, BMC Deposit of Rs.15,00,000 and Excise Duty Deposit of Rs. 2,95,70,409/- aggregating to Rs. 3,86,86,330/- as capital in nature and hence not allowed the same as business loss.
3. He failed to appreciate and ought to have held that the aforesaid assets are in the nature of current business assets and therefore revenue in nature.
4. The Appellant prays that of entire loss of Rs. 34,47,24,138/- be allowed as business loss.
GROUND III :
On the facts and circumstances of the case and in law, the CIT(A) erred in upholding the action of the A.O. of denying a claim made during assessment proceedings for deduction of certain expenditure of Rs. 4,50,49,311/- as these expenses were accounted as Prior period expenses and has been added to business income in the Computation of Income in A.Y.2005-06.
2. He failed to appreciate and ought to have considered the submissions given by the Appellant as the expenditure is business expenditure and relates to the Year under consideration.
The Appellant prays that the Expenditure claimed of Rs.4,50,49,311/- at the time of Assessment proceedings be considered and be allowed as deduction.”
The assessee has also raised an Additional Ground, which reads as under :-
Allowance of loss of Rs.3,86,86,330 on the sale of textile business as a long term capital loss u/s 45 of the Income Tax Act, 1961 (“the Act
1. On the facts and in the circumstances of the case and in law, the CIT(A) erred in disallowing the loss on sale of textile business to the extent of Rs.3,86,86,330/- (consisting of deposits with others of Rs.76,15,921/-, BMC Deposit of Rs.15,00,000/-
4 Morarjee Realties Ltd. & 2343/Mum/2009 and Excise Duty Deposit of Rs.2,95,70,409/-) as “Business Loss” u/s 28 of the Act or alternatively as “Capital Loss” u/s 45 of the Act.
2. The Appellant prays that aforesaid loss of Rs.3,86,86,330/- be allowed as capital loss.”
3. Briefly put, the relevant facts are that the assessee is a company incorporated under the provisions of the Companies Act, 1956 and it is, inter- alia, engaged in the business of textiles and real estate. The assessee-company filed its return of income for assessment year 2004-05 on 30.10.2004 declaring total income at NIL. In the course of assessment proceedings finalised under Section 143(3) of the Act on 29.12.2006, the Assessing Officer, inter-alia, rejected assessee’s claim of Long Term Capital Loss of `34,47,24,138/- which had arisen on transfer of its textile undertaking on a slump sales basis; disallowed the loss on sales of shares of `67,91,97,223/-; denied the claim of deduction of certain expenses of `4,50,49,311/- which were treated as prior period expenses in assessment year 2005-06 and added it back to the total income; and, rejected assessee’s claim of deduction of Fair Market Value of land purchased before 01.04.1981. The assessment was thus finalised at an income of `32,48,92,350/-. On appeal to CIT(A), part relief was allowed to the assessee. In this background, both assessee as well as Revenue are in appeal before us on the respective Grounds of appeal. The assessee has challenged the sustenance of additions/disallowances by the CIT(A), whereas the Revenue has challenged the relief allowed by the CIT(A).
4. We may first take-up the appeal preferred by the assessee. The Ground nos. I, II and also an Additional Ground raised by the assessee pertain to denial of Long Term Capital Loss of `34,47,24,138/-, which is stated to have arisen on 5 Morarjee Realties Ltd. & 2343/Mum/2009 transfer of its textile undertaking on a slump sales basis. The relevant facts on this issue are that, in order to consolidate the textile business in one entity and focus more on real estate business, the assessee company during the year under consideration sold its textile business as a going concern on slump sale basis vide Business Transfer Agreement dated 04.09.2003 to its subsidiary company, namely, Morarjee Brembana Ltd. (now Morarjee Textile Ltd) (hereinafter referred to as “MBL” or “Purchaser”) for a consideration of `4,32,00,000/-. The textile division was sold by the assessee in its entirety, and all the assets and liabilities relating to the business were transferred to MBL. The assessee, thus, claimed that all the conditions of section 2(42C) of the Act with respect to slump sale were fulfilled by it and accordingly claimed Long Term Capital Loss of `34,47,24,138/- in terms of section 50B of the Act, being difference between sale consideration of `4,32,00,000/- and net worth of the textile division of `38,79,24,138/-. Notably, the net worth of the undertaking, as disclosed in Form 3CEA was `38,79,24,138/- while the sales consideration was `4,32,00,000/, resulting in a Long Term Capital Loss of `34,47,24,138/-. The Assessing Officer noted that in the valuation report submitted by the assessee during the course of assessment proceedings, the assets and liabilities have been individually valued and then the value of sale consideration has been arrived at. The Assessing Officer accordingly concluded that since the assessee failed to fulfil this condition of slump sale, the impugned sale could not be regarded as a slump sale and thus, denied the claim of Long Term Capital Loss of `34,47,24,138/-.
5. On appeal, the CIT(A) held that though the agreement for slump sale dated 04.09.2003 did not assign any individual values to specific
6 Morarjee Realties Ltd. & 2343/Mum/2009 assets/liabilities yet for all intent and purposes the individual values were discernable, as was evident from the information submitted by the assessee to the Assessing Officer, and thus the action of the Assessing Officer was upheld by him. Further, with respect to the assessee's alternative contention regarding allowance of loss arising on a slump sale to be a business loss, the CIT(A) accepted the claim in relation to current business assets like deposits, sundry debtors, stocks and advances and recoveries, being revenue in nature. However, the CIT(A) held that the deposit with others of `76,15,921/-, BMC deposit of `15,00,000/- and excise duty deposit of `2,95,70,409/- to be capital in nature . In other words, the CIT(A) allowed loss on slump sale to the extent of `30,60,37,807 to be a business loss.
In this background, the Learned Representative for the assessee referred to various clauses of the agreement dated 04.09.2003 and pointed out that the transfer agreement does not assign any values to the individual assets or liabilities. Further, it was pointed out that 'consideration' as defined in clause 1.1(i) of the agreement, inter-alia, means the purchase price being a lump sum amount agreed for transfer of textile undertaking on a going concern basis. In this context, our attention was drawn to the Page No. 41 of the Paper Book – 1 wherein consideration for transfer is defined to mean a lump sum amount. Further, Learned Representative for the assessee referred to various clauses of the agreement dated 04.09.2003 to contend that the transaction was in the nature of slump sale. The Learned Representative referred to the definition of ‘slump sale’ contained in Section 2(42C) of the Act and pointed out that the expression, "in such sales" contained in Section 2(42C) of the Act, clearly means the document or agreement which evidences the sale of undertaking. In the present case, the agreement clearly provides for one lump sum
7 Morarjee Realties Ltd. & 2343/Mum/2009 consideration for entire textile division which, inter-alia, included tangible and intangible assets as also transfer of employees and no individual values were prescribed under such agreement for any individual asset or liabilities. Reliance has been placed on the following judgments: a) CIT v. Polychem Ltd. 343 ITR 115 (Bom.) b) Novartis India Limited v. DCIT (ITA No. 1749/Mum/2003) (Mum.) c) Mahindra Engineering& Chemical Products Ltd. v. ITO 51 SOT 496 (Mum.)
It was asserted that in all documents including Board Resolutions, Transfer agreement and even as per understanding between the parties, it was a transfer of an undertaking on a going concern basis. In the Transfer agreement, parties have not negotiated the price for any individual asset. It was further submitted that for the purpose of books of account, the assessee had to assign value to each of the assets transferred, but such an act for accounting purposes cannot lead to an inference that it is a case of itemised sale. Lastly, it was submitted that in order to ascertain the value of its textile undertaking, assessee had appointed a Chartered Accountant for the purposes of valuation. However, merely because it obtained such a report for its own purposes, cannot lead to an inference that in the agreement with purchaser, both parties agreed on individual values of each of the asset transferred.
8. On the other hand, the ld. DR relied upon the findings of the lower authorities to state that the instant ‘transfer’ cannot be termed as a ‘slump sale’ as assessee has assigned values to individual items of the assets and liabilities. In this context, the ld. DR placed reliance on the decision of Hon’ble Calcutta High Court in the case of DPIL Ltd. vs. CIT 386 ITR 539 (Cal) (2016) and 8 Morarjee Realties Ltd. & 2343/Mum/2009 decision of Hon’ble Supreme Court in the case of Vastsala Shenoy 389 ITR 519 (SC)(2016) to state that value has been assigned to individual assets and liabilities and therefore transaction could not be treated as slump sale.
Per contra, Learned Representative for the assessee pointed out that in all the cases relied upon by the ld. DR, the respective courts have recorded a finding that in the transfer document or agreement to sell itself, individual values were ascribed. Thus, those cases are distinguishable on facts and ratio of the said decisions is not applicable to the facts of the case, as in the present case agreement only provides for lump sum amount.
The Learned Representative for the assessee also made an alternate plea that in case capital loss is not allowed, then loss of `34,47,24,138/- be allowed as business loss. The second alternate argument advanced was if the capital loss is not allowed, then loss pertaining to 'deposit with others', ‘BMC deposit' and ‘Excise duty deposit' aggregating to `3,86,86,330/- be allowed to it as a Capital loss under Section 45 of the Act.
We have carefully considered the rival submissions. The first and the foremost issue for our consideration is whether or not the transfer of textile division by the assessee is on a slump sale basis; and, thus whether or not the claim of Long Term Capital Loss of `34,47,24,138/- arising on such transfer is admissible. Section 50B of the Act contains the provisions relating to taxation of slump sale which states that profits or gains arising from the slump sale effected in the previous year shall be chargeable to income tax as capital gains arising from the transfer of long term capital assets and shall be deemed to be 9 Morarjee Realties Ltd. & 2343/Mum/2009 the income of the previous year in which the transfer took place. The term “slump sale” is defined in Section 2(42C) of the Act, which reads as under:-
“2(42C) "slump sale" means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.
Explanation 1.—For the purposes of this clause, "undertaking" shall have the meaning assigned to it in Explanation 1 to clause (19AA).
Explanation 2.—For the removal of doubts, it is hereby declared that the determination of the value of an asset or liability for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities” (underlined for emphasis by us)
In terms of Section 2(42C) of the Act, ‘slump sale’ means transfer of undertaking as going concern as a result of sale for a lump sum consideration without value being assigned to the individual assets and liabilities. Admittedly, there is a transfer of textile division of the assessee for a consideration of `4,32,00,000/-, which included all assets, liabilities, employees, etc. The issue before us is whether consideration of `4,32,00,000/- can be termed as lump sum consideration or itemized consideration in view of the fact that assessee obtained valuation report for determining the consideration of Rs.4,32,00,000/- wherein values to individual assets and liabilities were assigned. The Assessing Officer as well as the CIT(A) have been influenced by the fact that since the valuation report obtained by the assessee contains value of individual asset and liabilities, values to the individual assets and liabilities were very much assigned in the transaction and thus, conditions of Section 2(42C) of the Act were not fulfilled. We find that the agreement provides for a 10 Morarjee Realties Ltd. & 2343/Mum/2009 lump sum consideration for transfer of undertaking and individual assets and liabilities were not assigned any values in the agreement. At this point, we may refer to some of the clauses of the Business Transfer Agreement which are significant in the context of the dispute before us. Firstly, in clause 1.1(i) the consideration is defined to mean “the purchase price being a lump sum amount, agreed for the sale of the Textile Business, as a going concern including its assets and liabilities, to be discharged by the Purchaser in accordance with Clause 3”. Similarly, in clause 2 it is stated that “...... the Vendor agrees to sell/transfer and the Purchaser agrees to purchase/acquire from the Vendor the Textile Business as a running business/on going concern basis with effect from the Appointed Date, including but not limited to the following: (a) The Purchaser’s right to represent itself as carrying on such business in continuation of the Vendor and/or as successors to the Vendor; (b) All the Assets and Liabilities belonging to the Vendor in connection with the Textile Business; (c) All the contracts, rights, powers, authorities, allotments, approvals, consensus, licenses, etc. pertaining to the Textile Business.” Thirdly, in clause 3 containing the quantification of consideration, it is stated that “The Purchaser shall satisfy the lump sum Consideration by payment to the Vendor of the sum Rs. 4,32,00,000 as and by way of the Consideration for the purchase of the Business.” It is also relevant to refer to clauses 11 and 12.1 dealing with non-compete and employees of the business under transfer. The said clauses read as under :-
“11. NON-COMPETE The Vendor shall not, from the Closing Date, directly or indirectly, solely or together with any other person compete with the 11 Morarjee Realties Ltd. & 2343/Mum/2009
Purchaser by conducting the Textile Business for a period of 3 years except as provided in this agreement during the Interregnum Period.
EMPLOYEES 12.1 The Vendor shall take all the reasonable endeavour to ensure continuation of the services of the Employees of the Business of the Vendor on and from the Appointed Date with the Purchaser and the Purchaser undertakes to continue to employ the Employees on terms which are no less favorable than the existing terms of their employment.”
12. The aforesaid provisions of the Business Transfer Agreement clearly bring out that the consideration is stated to be on a lump sum basis and the same is for transfer of Textile Division of the assessee as a going concern.
Notably, the Business Transfer Agreement provides for transfer of textile division on a going concern basis for a lump sum consideration and individual assets and liabilities were not assigned any values in the agreement. Now, the point is whether obtaining of valuation report can be termed as violation of the conditions stipulated in section 2(42C) of the Act. In the case of Polychem Ltd. (supra), in a somewhat similar situation, the Hon’ble Bombay High Court, following its earlier decision in the case of Premier Automobile Ltd. vs. ITO [2003] 264 ITR 193 held the transaction to be in the nature of a slump sale. The relevant extract of the said decision is reproduced hereunder:
“7. Reading the agreement as it stands, it is evident that the subject matter of contract between the assessee and the purchaser was the transfer of the business of the undertaking of the IMFL unit as a going concern. The total consideration of Rs. 10.6 crores that is determined under the agreement was 12 Morarjee Realties Ltd. & 2343/Mum/2009 for the transfer of the business and undertaking as a whole comprising of but not limited to the land, building and fixed assets. Among the assets that were transferred included the benefit of the existing contracts, licenses which the assessee held entitling it to manufacture and sell Indian Made Foreign Liquor, intangibles including the right to utilize trade marks and the labor force which was being transferred to the purchaser. The transaction involved a slump sale. There was no itemized valuation of the fixed assets and other assets which formed part of the undertaking. What was sold comprised of the undertaking and the business as a whole.
The Judgment of the Division Bench of this Court in Premier Automobiles Ltd. (supra) contains an elucidation of the distinction between a slump sale agreement and an agreement for the transfer itemwise of the fixed assets of an undertaking. In the case of a slump sale the sale is for a lump sum price and there is a transfer of the entire business for a fixed price. The sale consideration is, in other words, not attributable to the individual assets of the assessee. Both in the case of a slump sale as well as in the case of itemized assets a transfer of land, building, plant and machinery may and probably would be involved. However, where there is a slump sale, the transfer of land, building, plant and machinery forms part of the transfer of the entire business. On the other hand where there is an itemized sale the transfer of land, building, plant and machinery takes place in specie. This distinction which was noted in the judgment of Premier Automobiles Ltd. (supra ) must equally apply to the facts of the present case.There was, as we have noted earlier, neither a transfer of assets in specie nor was a valuation placed in the agreement on the individual assets of the undertaking that formed the subject matter of the transfer.
9. The Assessing Officer proceeded on the basis, and in our view erroneously, that from the copy of the agreement which was filed, the profit on the sale of the business had been worked out by taking the sale price of Rs. 10.38 crores and after deducting from it the written down value of the fixed assets, stores, raw materials and finished goods of Rs. 3.48 crores, there was a profit of Rs. 6.90 crores. The agreement dated 24 March 1994 does not contain any such computation. There was, therefore, fundamentally an error on the part of the Assessing Officer when he proceeded to hold that there was a profit of Rs. 6.90 crores being the difference between the sale price and the deductions
13 Morarjee Realties Ltd. & 2343/Mum/2009 which he erroneously regarded as having emerged from the agreement itself. From the order passed by the Commissioner (Appeals), it emerges that the purchaser had in response to a query of the Commissioner indicated by its letter dated 24 August 1998 the valuation made by a valuer in a report of September 1994 of the lands, buildings, plant and machinery. The Commissioner also noted that the assessee had by its letter dated 18 August 1998 furnished a figure of Rs. 3.48 crores as being the value of the stores, raw materials, fixed assets and finished products. As the order of the Commissioner (Appeals) itself recognizes in para 3.10, Rs. 3.48 crores represented the book value of the assets transferred to the purchaser by the assessee. The book value of the assets transferred to the purchaser by the assessee had to be reflected of necessity in the books of the assessee. Rs. 3.48 crores was the written down value on the date of the transfer. The point which both the Assessing Officer and the Commissioner (Appeals) missed however, was the fact that when a transfer takes place as in the present case of the whole business and undertaking of the assessee and the transfer involves not only fixed assets such as land, building and machinery but other component elements such as the benefit of existing contracts, licenses and approvals and intangibles including intellectual property and transfer of the work force of the undertaking or business, it would be impossible in a case such as the present to attribute or allocate the sale consideration as between the fixed assets on the one hand and the intangibles on the other.” (underlined for emphasis by us)
Notably, the Hon’ble Bombay High Court has explained the distinction between a slump sale agreement and an agreement for the itemwise transfer of the fixed assets of an undertaking. Undisputedly, in the present case also, the Transfer Agreement does not postulate sale of individual items of assets and liabilities, and instead what has been transferred was the entire textile division as a whole.
Further, in the case of M/s. Novartis India Limited vs. DCIT in dated 25.09.2013, our coordinate bench has analysed the 14 Morarjee Realties Ltd. & 2343/Mum/2009 above issue and following the judgment of the Hon’ble Bombay High Court in the case of Premier Automobiles Ltd.(supra) held as under:
“17. A perusal of sale agreement at page 1 to 82 of the paper book shows that the sale consideration is not itemized which means that it is not a case of itemized sale. If it is the case of “no sale of itemized assets”, we have to hold that the transaction amounts to slump sale as held by the Hon’ble Bombay High Court in the case of Premier Automobiles Ltd.[supra]. Here we would like to state that the CIT[A] has based his findings on the decision of the Tribunal in the case of Premier Automobiles Ltd.
Thus, the very decision on which the CIT(A) has based his finding as gone in favour of the assessee and the Jurisdictional High Court while deciding the issue has also considered the decision of the Hon’ble Supreme Court in the case of CIT Vs. Artex Manufacturing Company (227 ITR 260), which is another decision on which the CIT(A) has based his finding . With this decision of the Jurisdictional High Court going in favour of the assessee, the transaction has to be taken a slump sale and the capital gains have to be computed accordingly as per the provisions of Section 45 to 50.” (underlined for emphasis by us)
Before us, it is not the case of the Revenue that all the assets and liabilities of the textile division were not transferred as a going concern in a slump sale. It is also not the case of the Revenue that the individual assets and liabilities of the undertaking were assigned values in the agreement and were individually available for purchase by the purchaser. These facts clearly substantiate the case of the assessee that for all intent and purposes, it was a transfer of an undertaking on a going concern basis. As held by the Hon'ble Bombay High Court in case of Premier Automobiles Ltd. (supra) that it is intent of the parties which is relevant to categorize the transfer as slump sale. Once that is so, we do not find merit in the contention of the Revenue that since
15 Morarjee Realties Ltd. & 2343/Mum/2009 assessee has obtained valuation report, which states value against each of the assets and liabilities, it should not be treated as a slump sale. Thus, following the decision of the Hon’ble Bombay High Court in the case of Polychem Ltd. (supra)and Premier Automobiles Ltd. (supra), it has to be inferred that transfer of textile division by the assessee on a going concern basis for a lump sum consideration is in the nature of slump sale. Further, once the transaction is held to be in the nature of slump sale, the manner of computation of Long Term Capital Gain / (Loss) is provided for in the Section 50B of the Act; and, the Assessing Officer is not empowered to substitute the same. Thus, assessee succeeds on this aspect.
The next Ground in assessee’s appeal pertains to allowability of expenses of `4,50,49,311/- as an allowable expenditure for the instant assessment year, which are accounted for a prior period expenditure in the accounts for next assessment year of 2005-06. The assessee made an additional claim during the course of assessment proceedings in the instant year pertaining to expenditure of `4,50,49,311/-, after making suo-moto disallowance of such expenditure in assessment year 2005-06 since such expenses pertained to assessment year 2004-05. The Assessing Officer placing reliance on the decision of Hon’ble Supreme Court in the case of Goetze India Ltd. vs CIT, 284 ITR 323 (SC) denied the claim as it was not made by filing a revised return of income for instant year and even complete details of such expenditure were not furnished. On appeal, the CIT(A) upheld the action of the Assessing Officer on this issue.
16 Morarjee Realties Ltd. & 2343/Mum/2009
Before us, the Learned Representative for the assessee placed reliance on the decision of the Hon'ble Bombay High Court in case of CIT v. Pruthvi Brokers and Shareholders P. Ltd., 349 ITR 336 (Bom.) wherein it has been held that the assessee is entitled to raise before appellate authorities Additional Grounds in respect of claims hitherto not made in return filed by it. The Learned Representative pointed out that the assessee in its computation of income for assessment year 2005-06 disallowed these expenses as prior period and hence, the same be allowed in the year under consideration. Reliance was also placed on the decision of Hon'ble Bombay High Court in CIT v. Nagri Mills, 33 ITR 681 (Bom.) and the Hon'ble Supreme Court in case of CIT v. Excel Industries Limited (2013) 358 ITR 295 (SC) for the proposition that if the tax rate has remained same for present and subsequent assessment year, then an expense which was otherwise allowable, ought to be allowed as the entire issue regarding year of tax becomes academic in absence of tax effect.
It was submitted that in view of the decision of the Mumbai Bench of the Tribunal in the case of Chicago Pneumatic India Ltd v Dy. CIT, 15 SOT 252 (Mum), the claim of the assessee ought to be considered by the CIT(A) even though it was not made by way of a revised return.
On the other hand, the Ld. DR has defended the stand of the lower authorities by reiterating the reasoning contained in the respective orders, which we have already noted in the earlier part of this order, and is not being repeated for the sake of brevity.
We have carefully considered the rival submissions. The short controversy is with respect to allowance of an expenditure, which was claimed
17 Morarjee Realties Ltd. & 2343/Mum/2009 by the assessee in the course of the instant assessment proceedings; the same was suo-moto disallowed by the assessee in its return of income for assessment year 2005-06 on the ground that such expenditure relates to period corresponding to the instant assessment year 2004-05. The Assessing Officer has relied on the decision of Hon’ble Supreme Court in the case of Goetze India Ltd vs CIT 284 ITR 323 (supra) to deny the claim on the plea that, a fresh claim has to be made by filing a revised return and not otherwise. On appeal, the CIT(A) has upheld the action of the Assessing Officer on this issue. It is pertinent to note that in the case of CIT v. Pruthvi Brokers and Shareholders P. Ltd. (supra), the Hon'ble Bombay High Court held that an assessee is entitled to raise before appellate authorities Additional Grounds containing even fresh claims, which were hitherto not made in return of income. Notably, the said decision has been rendered after considering the judgment of the Hon'ble Supreme Court in the case of Goetze (India) Ltd. v. CIT (supra). Thus, there was no bar on the CIT(A) to have considered the claim of the assessee. Moreover, at the time of hearing, Learned Representative for the assessee relied on the judgment of Hon'ble Bombay High Court in case of CIT V. Nagri Mills (supra) and the Hon'ble Supreme Court in case of CIT v. Excel Industries Limited (supra) wherein it has been laid down that if the tax rate remains same for present and subsequent assessment year, then an expense which was otherwise allowable, ought to have been allowed as the entire issue regarding year of taxation becomes academic in the absence of tax effect. Admittedly, the tax rates for corporate assessees have remained the same for this year as well as next year. Once that is so, relying on the decision of Hon'ble Bombay High Court in the case of Pruthvi Brokers and Shareholders P. Ltd (Supra), we don’t find any justifiable reason for the CIT(A) to have denied assessee’s claim of expenses in the instant assessment year of 2004-05, which 18 Morarjee Realties Ltd. & 2343/Mum/2009 were suo-moto disallowed by the assessee in assessment year 2005-06 treating the same to be prior period expenditure. Merely because the claim for expenses was made in the course of assessment proceedings, cannot ipso facto lead to an inference that such claim is not admissible as it was not made by way of a revised return of income. We thus, direct the Assessing Officer to consider assessee’s impugned claim in the instant year. However, we note that as per the Assessing Officer, the details of such expenses were not available; therefore, we hereby remand the matter back to the file of Assessing Officer for the limited purpose of verification of the details of such expenses, and thereafter allow the same as per law. Accordingly, this Ground of the assessee is allowed, as above.
In the result, appeal of the assessee is hereby allowed.
We shall now take up the Grounds of appeal raised by the Revenue in its cross appeal in ITA No. 2343/M/2009.
The Grounds of appeal raised by the Revenue read as under:
“1.(a) On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing the Assessing Officer to adopt the cost of acquisition of land at the fair market value determined by the Registered Valuer as on 01/04/1981 although the assessee has opted to adopt actual historical cost in the return of income duly verified u/s. 140 for the A.Y. 2002-03 during which the asset was first converted into stock-in trade and sold.
1.(b) On the facts and in the circumstances of the case and in law, the CIT(A) further erred in holding that the assessee is entitled to exercise its option between the actual cost of acquisition or the fair market value as on 01/04/1981 in respect of each transaction separately for different portions of the same assets and that such right to 19 Morarjee Realties Ltd. & 2343/Mum/2009 exercise option cannot be frozen at the rate adopted for the first transaction in respect of the converted asset.
1.(c) The learned CIT(A) failed to appreciate that the impugned asset being landed property of 174412 sq.ft. was converted enmass in AY 2002-03 for doing realty business and in such case, the subsequent parceling of land for development and sale would not change the nature that existed before the conversion and the cost adopted in the first year of sale of part of the same land.
Slump sale – 2.(a) On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in taking inconsistent view by confirming the disallowance of capital loss on alleged slump sale of textile business on one hand and, restricting such disallowance only to transfer of deposits with public bodies and others at Rs.38686330/-, on the other.
2.(b) The learned CIT(A) erred in holding that the debtors, stock, advances etc. transferred by assessee being subjected to levy of tax in the earlier, the same are allowable, though not as loss on slump sale.
2.(c) The learned CIT(A) filed to appreciate that such assets being a mere assignment, cannot be held on par with any trading transaction for being allowed as a revenue loss.
Long term capital loss - 3.(a) On the facts and in the circumstances of the case and in law, the CIT(A) erred in allowing the long term capital loss of Rs.65,29,19,139/- on the transfer of shares, share-application money to M/s. MGM Shareholders Trust & M/s.Morarjee Brembana Ltd. on the ground that the said transfers were properly effect due to restructuring of the assessee-group.
3.(b) The CIT(A) erred in not appreciating the fact that the intra-group transaction in the shares and application money suffered from want of transparency and it had obtained the blemish of colorable device and tax avoidance.
20 Morarjee Realties Ltd. & 2343/Mum/2009 3.(c) The CIT(A) also erred in equating share application-money with capital asset without appreciating that the money, even if held as capital asset, cannot fall in value, except in international market.
Short term capital loss - 3.(d) On the facts and in the circumstances of the case and in law, the CIT(A) erred in allowing the short term capital loss on transfer of equity shares of M/s. Morarjee Brembana Ltd. to MGM Shareholders Trust both of whom are the assessee's group concerns, without appreciating the fact that this transaction is also merely a concoction of loss for avoidance of tax incidence.
The appellant prays that the order of CITA on the above grounds be set aside and that of the AO restored.”
The first Ground raised by the Revenue pertains to the action of CIT(A) in directing Assessing Officer to adopt the cost of acquisition of land at Fair Market Value as on 01.04.1981 determined by the registered valuer although the assessee had opted to adopt actual historical cost in the return of income for assessment year 2002-03 during which the asset was first converted into stock-in-trade and sold.
Briefly put, the relevant facts are that the assessee had acquired 2 plots of land, during the year 1934-35. The assessee in Assessment Year 2002-03 converted its land of 90,000 sq. ft. of Peninsula Centre Unit I ("PC-I") and 1,74,412 sq. ft. of Peninsula Chambers Unit II ("PC-II") into stock in trade. In the same assessment year i.e., Assessment Year 2002-03, the assessee developed the units and sold 80,666.36 Sq. ft. of land of PC-II and in Assessment Year 2003-04 sold 34,434 sq. ft. of PC-I. The assessee, while computing the Capital Gains, had taken the cost of acquisition of land at Rs.100 per sq. ft. of PC-I and 21 Morarjee Realties Ltd. & 2343/Mum/2009 Rs. 16.32 per sq. feet for PC-II, the same being the original cost of purchase without considering the Fair market value of the land as on 01.04.1981. However, the assessee had Annexed a Note to the computation of Long Term Capital Gains while filing the returns of income in Assessment Years 2002-03 and 2003-04 stating that the fair market value will be substituted on obtaining a report from a Registered Valuer. Subsequently, the assessee vide letter dated 16.02.2005 and 13.12.2005, for the Assessment Years 2002-03 and 2003-04 respectively, submitted the Valuation Report according to which the Fair Market Value as on 01.04.1981 was determined at Rs.240 per square feet for PC-I and Rs.260 per square feet for PC-II. Accordingly, the revised Computation of Capital Gains was filed during the assessment proceedings of Assessment Years 2002-03 and 2003-04.
During the year under consideration, the assessee further sold part of land 45,662 sq. ft. of PC-I and 2,770 sq. ft. of PC-II. The cost of acquisition taken for calculation of income from Capital Gains was taken at Rs. 240 per sq. ft. of PC-I and Rs. 260 per sq. ft. of PC-II, being the value determined in the aforesaid valuation report and the same was filed along with the Return of Income. In the course of assessment proceeding, the Assessing Officer noted that as per section 55(2)(b)(i) of the Act, the cost of acquisition in relation to a capital asset acquired prior to 01.04.1981 means actual cost of acquisition of the asset to the assessee or the fair market value of the asset on the 01.04.1981, at the option of the assessee. Accordingly, Assessing Officer concluded that as per the provisions of the Act, the assessee had already exercised its option to adopt the original cost of acquisition as against the fair value as on 01.04.1981 in Assessment Years 2002-03 and 2003-04, therefore, the impugned claim of enhancing the cost of acquisition was not as per the provisions of the Act.
22 Morarjee Realties Ltd. & 2343/Mum/2009 Accordingly, the Assessing Officer denied the cost of acquisition claimed by the assessee, holding that the option was already exercised by the assessee to value land as per historical cost in the return of income for assessment years 2002-03 and 2003-04. The Assessing Officer relied on the decision of Hon'ble Supreme Court in the case of Goetze India Ltd vs CIT (supra) while denying the claim of the assessee.
When the matter travelled to CIT(A), the CIT(A) noted that it was an agreed position that the option vested with the assessee to choose between the historical cost and the fair market value (as per valuation report) as on 01.04.1981, a right which was enshrined by the Act. The CIT(A) also relied on the judgments in PNB Finance Ltd vs CIT, 168 CTR 0509 (Del) and Rani Udayadevi Payagpur Dewas vs CIT, 180 ITR 375 (MP) and held that since the claim had been made in the return of income itself, the Assessing Officer was not justified in not admitting the claim based on the decision of Hon’ble Supreme Court in the case of Goetze India Ltd (supra). Accordingly, the CIT(A) directed the Assessing Officer to adopt the cost of the acquisition of both the land pieces sold during the year on the basis of fair market value as on 01.04.1981, instead of considering the historical cost during the period 1934-35.
Before us, the Ld. DR has relied on the order of the Assessing Officer in support of the case of the Revenue.
On the other hand, the Learned Representative for the assessee submitted that the option of availing Fair Market Value as on 01.04.1981 or the 23 Morarjee Realties Ltd. & 2343/Mum/2009 historical cost of acquisition, whichever is higher, is qua the transaction and not qua the property. Reliance has been placed on the decision of the Tribunal in assessee’s own case for Assessment Years 2002-03 and 2003-04 vide & 2342/Mum/2009 wherein the question before Tribunal was whether the CIT(A) was justified in accepting the assessee’s claim of fair market value of the lands as on 01.04.1981 while computing the Long Term Capital Gain, which was raised in the course of assessment proceedings, instead of cost of acquisition claimed by the assessee in its return of income. The Tribunal approved the decision of CIT(A) and held that assessee can exercise its right to claim fair market value of the land as on 01.04.1981 even in the course of assessment proceedings; and, the matter was restored to the file of Assessing Officer for determination of the fair market value as on 01.04.1981.
We have carefully considered the rival submissions. In sum and substance, the issue involved is limited to the fact that whether assessee was justified in adopting the fair market value of the land as on 01.04.1981 as cost of acquisition to arrive at the Long Term Capital Gain. Notably, the lands in question, being PC – I and PC – II were acquired during the year 1934-35. The said lands were converted into stock-in-trade in the assessment year 2002-03. The assessee developed the units and sold part of land in PC – II in assessment year 2002-03 and part of the land in PC – I in assessment year 2003-04. Since lands were acquired prior to 01.04.1981, the assessee had an option to adopt the fair market value as on 01.04.1981 instead of the actual cost of acquisition, while computing the Long Term Capital Gain. The assessee in its return of income for assessment years 2002-03 and 2003-04 computed the Long Term Capital Gain taking cost of acquisition, but attached a Note with the return of 24 Morarjee Realties Ltd. & 2343/Mum/2009 income reserving its right to substitute the same with the fair market value as on 01.04.1981 as and when valuation report was obtained. In the course of assessment proceeding for assessment years 2002-03 and 2003-04, assessee based on such Note, claimed fair market value of land as on 01.04.1981 instead of cost as per return of income. The Assessing Officer denied the assessee’s claim of fair market value as on 01.04.1981. The CIT(A) reversed the decision of the Assessing Officer, which has since been affirmed by the Tribunal in its order dated 04.05.2011 (supra) for assessment years 2002-03 and 2003-04.
Ostensibly, the Tribunal in its order dated 04.05.2011 (supra) has dealt with a similar issue. The land in question in the present appeal is also the part of the same land which was subject matter of appeal before our co-ordinate bench in the order dated 04.05.2011 (supra). It was a common ground between the parties that the decision of the Tribunal in the assessee’s own case is clearly applicable to the controversy involved in the present appeal. In fact, in the present year the assessee has claimed the fair market value as on 01.04.1981 in its return of income itself unlike in assessment years 2002-03 and 2003-04, wherein such claim was made in the course of assessment proceeding. Thus, the decision of the Hon’ble Supreme Court in the case of Goetze India Ltd. (supra) has no relevance in the year under consideration. However, it may be noted that Fair Market Value as on 01.04.1981 has been directed to be the value adopted by the Assessing Officer for assessment years 2002-03 and 2003-04 following the directions of the Tribunal dated 04.05.2011 (supra). It has been pointed by the Learned Representative that following the directions of the Tribunal in assessee’s own case for assessment years 2002-03 and 2003-04, the Assessing Officer has passed an order u/s 143(3) r.w.s. 254 of the Act dated 31.03.2013 adopting the fair market value of property situated
25 Morarjee Realties Ltd. & 2343/Mum/2009 within the vicinity of the relevant area, against which the assessee has filed an appeal before the CIT(A), which is pending. Considering the aforesaid, it is directed that the fair market value as on 01.04.1981 should be allowed to the assessee based on the final outcome of the appeal filed by the assessee for assessment years 2002-03 and 2003-04 challenging the determination of valuation. The Ground of appeal raised by the Revenue is thus dismissed.
32. The second Ground relates to inconsistent view of the CIT(A) wherein on one hand he has confirmed the disallowance of Capital Loss on the impugned slump sale and on the other hand he has restricted such disallowance only to the transfer of deposits with public bodies and others, amounting to Rs.3,86,86,330/-. Further, the Department has contested the decision of the CIT(A) in holding that debtors, stock, advances, etc. transferred by the assessee are allowable as business loss, though not a loss on slump sale. It is also canvassed that the CIT(A) failed to appreciate that such assets being a mere assignment, cannot be treated on par with any trading transaction for being allowed as a loss of revenue nature.
Since we have already held the transaction to be in the nature of a slump sale and adjudicated the main Ground of appeal no. 1 in assessee’s appeal in favour of assessee, the instant Ground raised by the Department becomes infructuous, and we refrain from adjudicating the same. Thus, the Ground of appeal of the Revenue is hereby dismissed.
34. The third Ground raised by the Revenue is against the action of CIT(A) in allowing the long term capital loss of Rs.65,29,19,139/- on transfer of shares
26 Morarjee Realties Ltd. & 2343/Mum/2009 and share application money which were sold to MGM Shareholders Trust and Morarjee Brembana Ltd (“MBL”) (Now known as Morarjee Textile Ltd (“MTL”)) on the restructuring of the assessee group. It is also contested that the CIT(A) erred in not appreciating the fact that the intra-group transaction in the shares and application money suffered from want of transparency and it had obtained the blemish of colourable device and tax avoidance. The Department further contested the decision of CIT(A) in allowing short term capital loss of Rs.2,62,78,084/- on transfer of equity shares of MBL to MGM Shareholders Trust both of whom are the assessee's group concerns without appreciating the fact that this transaction is also merely a concoction of loss for avoidance of tax incidence.
A perusal of the orders of the authorities below reveal that the relevant facts are that as a part of corporate restructuring undertaken at the group level, it was decided that shares of certain group entities held by the assessee would be transferred to other group companies, with the assessee-company focussing on real estate business. Accordingly, during the year under consideration, the assessee transferred its investments in equity shares, preference shares and Rights to apply for shares i.e. share application money in MBL, to MGM Shareholders Benefit Trust (“MGM S.B.Trust”). All the shareholders of the assessee-company (public as well as the promoters) were the beneficiaries of the MGM S.B.Trust. Apart from above, the assessee also transferred equity shares of Morarjee Castiglioni Limited, PMP Components Limited and Morarjee Legler Limited as well as share application money of Morarjee Legler Limtied to MBL.
27 Morarjee Realties Ltd. & 2343/Mum/2009
In view of the above, assessee claimed a total Long Term Capital Loss of Rs.65,29,19,139/- from sale of its investments in equity shares, preference shares and share application money to MGM S.B. Trust and MBL. Also, assessee had claimed Short Term Capital Loss on sale of investments in equity shares of MBL to MGM S.B. Trust amounting to Rs. 2,62,78,084/-. The said losses were duly reflected by the assessee in the return of income for the instant assessment year 2004-05. The Assessing Officer disallowed the entire long term and short term capital loss treating the same as non-genuine on the ground that shares and share application money were transferred to related parties at unduly low prices with the intention to create losses and to avoid taxes. According to the Assessing Officer, the transactions of sale of shares were non-transparent, since Long Term losses were created so as to set them off against Long Term Capital Gains arising from conversion of Capital asset into stock-in-trade. In nut-shell, the Assessing Officer disallowed the above capital losses on the ground that the transactions of sale of shares were structured in a way to evade tax liability and to benefit the promoters by diverting the profits. The Assessing Officer also held that share application money could not be regarded as a capital asset. Without prejudice, the Assessing Officer applied the Explanation to Section 73 in the context of the losses, and held them to be speculative in nature.
However, the abovestated stand of the Assessing Officer did not find favour with the CIT(A). As per the CIT(A), the shares were not sold with the intention of setting-off long term losses against long term capital gains as contended by the Assessing Officer. On the contrary, the same was done as a part of restructuring exercise of the assessee-group. The CIT(A) further observed that the investments were sold by the assessee at the fair value
28 Morarjee Realties Ltd. & 2343/Mum/2009 determined by an independent valuer, which was not disputed by the Assessing Officer The CIT(A) also observed that while assessee sold shares of MBL at Rs.2.90 to MGM SB Trust, the said Trust ended up tendering the said shares @ Rs.0.10 per share under a Court approved Capital reduction Scheme. In fact, CIT(A) has given a finding in his order that by undertaking above exercise, the assessee was able to arrest its future losses to extent of Rs.2.80/- share only.
In relation to capital loss arising from the transfer of share application money, the CIT(A) held that the share application money is a ‘capital asset’ within the meaning of section 2(14)of the Act. Accordingly, CIT(A) directed Assessing Officer to allow the claim of the Long Term Capital Loss of Rs.65,29,19,139/- and Short Term Capital Loss of Rs.2,62,78,084/-. In the above background, both sides have advanced their respective submissions.
Before us, the ld. DR relied upon the findings in the assessment order and contested that assessee has not submitted primary details in the form of dates of purchase and sales, cost of acquisition and sale consideration received, proof of payment of purchase price, proof of receipt of sale consideration. As per the Ld. DR, in absence of these documents the genuineness of the transaction entered into by the assessee has been rightly negated by the Assessing Officer. Thus, the loss claimed by the assessee should not be allowed to the assessee, and that the CIT(A) has erred in allowing the same.
On the other hand, the Learned Representative for the respondent- assessee submitted that the details of sale of shares of MBL, Morarjee
29 Morarjee Realties Ltd. & 2343/Mum/2009 Castiglioni Ltd, PMP Components Ltd and Morarjee Legler Ltd were provided to the Assessing Officer during the course of assessment proceedings. Further, assessee furnished a report by an independent valuer to justify that the shares were sold at fair value and not at reduced prices as made out by the Assessing Officer. It was explained that the Assessing Officer never doubted the genuineness of such valuation report. The Learned Representative explained that in order to establish genuineness, assessee submitted the details of sale of shares as recorded in the meeting of Board of Directors dated 26.11.2003. In relation to Transfer of shares of MBL to MGM S.B. Trust, Learned Representative submitted that transfer of shares of MBL to MGM S.B. Trust was a part of corporate restructuring scheme of the assessee and was done with commercial purpose and accordingly, it cannot be alleged as non-genuine. The transfer of shares by the assessee by way of sale was undertaken at fair value based on a valuation report, whose genuineness has not been doubted by the Assessing Officer. It was also pointed out that the issue as to whether the transfer of shares was genuine or not, was examined in the hands of the purchaser MBL by the Hon'ble Bombay High Court vide order dated 24.01.2017 in of 2014. It was also pointed out that the timely selling of shares by the assessee company helped it in arresting its loss and avoiding a situation of higher capital loss in future. In relation to Transfer of shares of Morarjee Castiglioni Limited (“MCL”) and PMP Components Private Limited, it is submitted that such shares were sold based on the value determined by an independent valuer whose valuation report was furnished before the Assessing Officer. The Assessing Officer in the assessment order did not give any specific reasoning for disallowing the capital loss in respect of sale of shares of MCL and PMP Components Pvt Ltd.
30 Morarjee Realties Ltd. & 2343/Mum/2009
It has been pointed out that the purchase of shares of PMP Components Pvt. Ltd. by MBL and the loss thereof came up before the Tribunal in the case of MBL (subsequently, MBL was renamed as MTL and thus, order is in name of MTL) and vide its order dated 10.05.2013 in the stand of the assessee has been accepted by the Tribunal. The said decision of the Tribunal dated 10.05.2013 (supra) has been further approved by the Hon'ble Bombay High Court in ITA No.738 of 2014 vide its order dated 24.01.2017, wherein the Hon'ble Bombay High Court has categorically held that the Department does not have any power to substitute the full value of the consideration by the market value of shares.
In relation to share application money transferred to MGM SB Trust and MBL, it has been submitted that the application money paid by it is a 'capital asset' as per Section 2(14) of the Act, and the CIT(A) has correctly held that the application money falls within the meaning of the 'property' as the same is wide enough to cover such rights.
In relation to the allegation of transfer of shares and share application being a colourable device and a mode of tax avoidance, the Learned Representative for the assessee reiterated the submission made before the CIT(A). It is explained that the transactions entered are within the framework of law and not paper transactions. A reference was made to the decision of the Hon’ble Supreme Court in the case of Azadi Bachao Andolan, 263 ITR 703 (SC), wherein it has been observed that an act which is otherwise valid in law cannot be treated as non-est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the Department.
31 Morarjee Realties Ltd. & 2343/Mum/2009
In reply, the Ld. DR has attempted to distinguish the decision of the Hon’ble Bombay High Court in the case of MTL (supra) by pointing out that it pertained to assessment year 2005-06 and the issue involved in that case was whether Assessing Officer is empowered to substitute the full value of consideration with fair market value, whereas in the present case the issue of substitution of full value of consideration with fair market value is not quite relevant; rather, it is a case where assessee has not submitted the necessary evidence to support the instant transaction resulting in long term/ short term capital loss.
We have carefully considered the rival submissions. At the outset, we tabulate below the details of the transactions which resulted into Long Term Capital Loss and Short Term Capital Loss:
Long Term Capital Loss:
Nature of Shares No. of Indexed Sale Profit/ (Loss) Asset Transferred shares purchase Proceeds Cost Morarjee 1,64,38,000 22,14,93,710 4,76,70,200 (17,38,23,510) Brembana Ltd Morarjee 10,00,000 1,31,90,883 64,10,000 (67,80,883) Castiglini Ltd. Equity PMP 22,50,750 18,88,47,349 4,07,38,575 (14,81,08,774) Shares Components Ltd. Morarjee Legler 9,960 1,03,165 100 (1,03,065) Ltd Preference Morarjee 10,00,000 12,56,40,376 5,45,30,000 (7,11,10,376) Shares Brembana Ltd Morarjee 2,50,00,000 27,70,67,578 7,25,00,000 (20,45,67,578) Share Brembana Ltd application Morarjee Legler 31,90,040 4,84,25,583 900 (4,84,24,953) money Ltd Total (65,29,19,139)
32 Morarjee Realties Ltd. & 2343/Mum/2009 Short Term Capital Loss: Nature of Shares No. of Purchase Sale Profit/ (Loss) Asset Transferred shares Cost Proceeds Equity Morarjee 29,58,240 82,31,980 85,78,896 3,46,916 Shares Brembana Ltd Share Morarjee 37,50,000 3,75,00,000 1,08,75,000 (2,66,25,000) application Brembana Ltd money Total (2,62,78,084)
During the year under consideration, the assesse transferred the above Equity shares, preference share and share application money to MBL and MGM SB Trust which has resulted in Long Term Capital Loss of Rs. 65,29,19,139/- and Short Term Capital Loss of Rs. 2,62,78,084/-. Before proceeding further, we may briefly touch upon the basis of determining the transfer price by the assessee and applicable provisions in this regard. Firstly, we take up equity shares of MBL which were transferred by the assessee at Rs. 2.90 per share to MGM SB Trust. It has been pointed out that when assessee sold the shares, the Capital and Reserves of MBL were completely eroded. It was further pointed out that subsequent to transfer of shares by the assessee, MBL went through an exercise of capital re-structuring wherein, the transferee Trust landed up tendering these shares for capital reduction at Rs 0.10 per share. Thus, timely sale of shares by the assessee company helped in avoiding a situation of higher capital loss in future. The assessee has sufficiently explained the basis of determining the share transfer price. Merely because the shares are transferred to related party, it cannot lead to an ipso facto inference that assessee has attempted to evade tax. Thus, we do not find any error on the part of the CIT(A) in accepting the Long Term Capital Loss and Short Term Capital Loss arising on transfer of Equity Shares of MBL.
33 Morarjee Realties Ltd. & 2343/Mum/2009
Now coming to the preference shares of MBL, in this regard assessee had obtained a valaution report and based on the same the transfer price was fixed at Rs. 54.53 per share. The Assessing Officer has not pointed out any defect in the valuation report so submitted by the assessee; in the absence of any adverse finding by the Assessing Officer on the quality of the valuation report, we do not find any merit in the stand of the Assessing Officer rejecting the transfer price adopted by the assessee.
Next, we take up the transfer price of shares of Morarjee Castiglini Ltd. and PMP Components Ltd., where it has been brought out that the shares were sold, based on the value determined by an independent valuer whose valuation report was furnished before the Assessing Officer. The Assessing Officer has not given any specific reasoning for disallowing the capital loss in respect of sale of shares of MCL and PMP Components Pvt. Ltd. Further, the purchase of shares of PMP Components Pvt. Ltd. by MBL also figured in the case of MBL before the Tribunal in dated 10.05.2013 (supra). The said decision of the Tribunal in the case of MBL (supra) has been upheld by the Hon'ble Bombay High Court in its order dated 24.01.2017 (supra), wherein the Hon'ble High Court has categorically held that the Department does not have any power to substitute the full value of the consideration by the market value of shares. We may now examine the manner in which the CIT(A) has allowed the claim of Long Term and Short Term Capital Loss, whose relevant portion reads as under:
“5.15 The undersigned has carefully perused through the rival contentions. It is observed that the shares were not sold with the intention of setting off long term capital losses against long term capital gains on sale of converted stock- in-trade and on contrary, the same were done as a part of restructuring
34 Morarjee Realties Ltd. & 2343/Mum/2009 exercise as stated above by the appellant and the loss on account of share application money arose out of transfer of capital asset within in the meaning of section 2(14) of the Act read with the decision of the Apex Court in the case of Ahmed G.H. Ariff and Others v. Commissioner of wealth tax 76 ITR 471 (SC), and of the Bombay High Court in the case of Tata Tele Services Limited supra. The share application money is therefore a capital asset within the meaning of section 2(14) of the Act considering the interpretation of the word ‘property’ in the above mentioned decision.
5.16 Moreover, it is also seen that the shares have been sold at the fair value determined by an independent valuer, which has not been disputed by the AO. In fact there is nothing on record to suggest that the above valuation report has been disapproved by the AO. Moreover it has been pointed out by the appellant that the break up value of MBL was negative and in fact these shares of MBL were subsequently surrendered @Rs0.10 only per share under the Court approved capital reduction scheme under section 100 of the Companies Act, 1956.
5.17 It is pertinent to note that by doing the above exercise, the appellant been able to arrest its future loss to the extent of Rs 2.80 per share only.
5.18 In the totality of the facts and circumstances, the undersigned is of the considered opinion that the AO was not right in treating the above transactions as non-genuine and accordingly he was not right in disallowing these losses as claimed by the appellant. The appellant is therefore entitled to the claim of long term capital loss on sale of equity shares, share application money and preference shares and hence the main portion of the ground is allowed.
5.19 In view of the above discussion, the AO is directed to allow the claim of the long term capital loss of Rs. 65,29,19,139 as claimed by the appellant.
5.20 The AO without prejudice to the above, held that the share application money is a capital asset and thereby had alternatively denied the long term capital loss of Rs 25,29,92,531/-. The appellant on the contrary submitted that the application money is very much a capital asset within the meaning of section 2(47) of the IT Act, and therefore the appellant was entitled to the 35 Morarjee Realties Ltd. & 2343/Mum/2009 long term capital loss on sale of the said right also. In support thereof, the reliance was placed on:
(i)Ahmed GH Ariff and others vs. Commissioner of wealth tax 761TR471(SC) (ii) CIT vs Tata Services Ltd. 122 ITR 594 (Bom)
5.21 The undersigned has carefully perused through the rival contentions.
5.22 It is observed and held that the right in the share application money, isa capital asset. However, since the main portion of the ground of appeal has been already allowed, this subsequent portion of the ground has become redundant which is not necessary to be adjudicated upon, as the same is already covered in the decision with regards to the main portion of the ground.”
At this stage, we may also refer to the ratio laid down in the judgment rendered by the Hon’ble Bombay High Court in the case of MBL in of 2014 (supra), the relevant portion of the said judgment reads as under:
“4. (a) The issue which arises herein for consideration is whether it is open to the Assessing Officer to substitute the 'full value of consideration' received on sale of shares by its 'fair market value' in the subject Assessment Year. The impugned order of the Tribunal allowed the respondent assessee's appeal by inter alia holding that the reliance by the Revenue on Section 2(22B) of the Act is not justified. This is for the reason that there is no provision under the Act which would permit the Assessing Officer to substitute the 'full value of consideration' received on sale of shares by 'fair market value'. The only provision in the Act at the relevant time allowing substitution of consideration received by the market value was Section 50C of the Act. Section 50C of the Act deals only with substitution of full consideration received by 'fair market value' in respect of land and/or buildings. The impugned order makes a reference to Section 50D of the Act which provides for substitution of full value of consideration received/accruing on a transfer of a capital asset being substituted by a fair market value. However this came into force only with effect from 1st April, 2013. Therefore it cannot be relied
36 Morarjee Realties Ltd. & 2343/Mum/2009 upon for the subject Assessment year. The impugned order of the Tribunal further placed reliance upon the decision of its Coordinate bench in the case of MGM Shareholders Benefit Trust (Income Tax Appeal No.316/Mum/2009) rendered on 26th November, 2009 in case of a group company of the respondent assessee on a similar issue of revaluation of shares by substitution of full value of consideration by fair market value and held the same to be impermissible.
(b) The grievance of the Revenue before us is that these transactions are all between companies belonging to the same group. Therefore it is urged that the transaction are colourable transaction and different considerations would apply.
(c) At the hearing of the admission, the Revenue did not point out any facts which would evidence that the transaction was not genuine. In such a case where the genuineness is not disputed with any evidence, it is not open to discard the documents and/or transaction on the basis of some supposed object/intent. In the present facts the Revenue accepts the documents but only substitutes the consideration. Therefore, the issue is whether such substitution of full consideration received by fair market value of the asset is permissible. As held by the Tribunal at the relevant time there was no power vested in the authorities under the Act to substitute a full value of consideration received for sale of shares by fair market value in respect of stocks and shares. The power to substitute full consideration with fair market value in respect of shares came into the statute only on introduction of Section 50D with effect from 1st April, 2013. Moreover, such a power under Section 50D of the Act is only to be exercised if the Assessing Officer comes to a finding that the consideration received is not ascertainable or cannot be determined.Moreover the decision of the Coordinate bench of the Tribunal in the case of MGM Shareholders Benefit Trust (supra) on identical facts situation has been accepted by the Revenue, as no appeal from the same has been filed by Revenue.
(d) In the above view, the question as formulated does not give rise to any substantial question of law. Thus not entertained.” (underlined for emphasis by us)
37 Morarjee Realties Ltd. & 2343/Mum/2009 The aforesaid decision, rendered in the case of assessee’s group concern, clearly supports the finding that during the relevant time there was no power vested in the authorities under the Act to substitute a full value of consideration received for sale of shares by fair market value in respect of stocks and shares. In the present case also the Assessing Officer has questioned the genuineness of the transaction based on the low transfer price of shares resulting into loss, without any evidence to establish that transaction is not genuine. Following the decision of the Tribunal in the case of MBL (supra), which has since been affirmed by the Hon'ble High Court, it has to be inferred that the Assessing Officer is not empowered to question the transfer price in absence of any evidence to establish that transaction was not genuine. In the instant case, the said onus cast on the Revenue has not been discharged.
Though the ld. DR argued that reason for disallowance of Long Term and Short Term Capital Loss was non-production of evidence of purchase and sales before Assessing Officer, we do not agree with the same, since a perusal of the assessment order shows that the genuineness of the transaction was doubted by the Assessing Officer only due to sale of shares to group concerns at unduly low prices; and, the aforesaid stand of the Assessing Officer is only a bald assertion and it is not proved that the assessee had in fact received more consideration. The reasoning taken by the Hon'ble Bombay High Court in the case of Tainwala Chemicals & Plastics India Ltd. [2013] 215 Taxman 153 (Bom) is clearly applicable in the instant case.
38 Morarjee Realties Ltd. & 2343/Mum/2009
We thus reject the grounds of appeal raised by the Revenue challenging the allowance of Long Term Capital Loss and Short Term Capital Loss and uphold the decision of the CIT(A).
51. Now, coming to the issue whether share application money can be termed as capital asset or not. In this regard, the ld. DR relied on the decision of Rainy Investments (P.) Ltd v. ACIT, 30 taxmann.com (Mum) and S.R. Thorat Milk Products (P.) Ltd v. ACIT, 70 taxmann.com 261 (Pune) to submit that share application money is not a capital asset. The Learned Representative for the respondent-assessee relied on the decision of the Hon'ble Supreme Court in the case of Ahmed G. H. Ariff and others v. Commissioner of wealth tax, 76 ITR 471 (SC), and on the decision of the Hon'ble Bombay High Court in the case of CIT vs. Tata Services Limited, 122 ITR 594.
We have carefully considered the rival submissions on this aspect. Firstly, we state that the decision relied upon by the Learned Representative are on different set of facts. Both the decisions relied on by the Learned Representative are not on the issue of share application money. Thus, the decision relied upon by the Learned Representative are distinguishable on facts. Coming to the decision relied upon by the ld. DR, we find that the Pune Tribunal in the case of S.R. Thorat Milk Products (P.) Ltd (supra) has held that share application money cannot be equated with share capital as obligation to return money is always implicit in event of non-allotment of shares. The relevant part of the decision is reproduced hereunder:
“In the light of the decision of the Co-ordinate Bench of the Tribunal, there are considerable merits in the argument of the assessee. There is also substance in the various contentions raised on behalf of the assessee.
39 Morarjee Realties Ltd. & 2343/Mum/2009
It is viewed that the share application money per se cannot be characterized and equated with share capital. The obligation to return the money is always implicit in the event of non-allotment of shares in lieu of the share application money received. Allotment of share are subject to certain regulations and restrictions as provided under the Companies Act. Therefore, receipt by way of share application money is not receipt held towards share capital before its conversion.” (underlined for emphasis by us)
In order to term the asset to be capital asset falling with the definition of section 2(14) of the Act, the assessee should have some right in the asset which can be enforced by the assessee. The share application is a refundable amount till the time shares are allotted and it does not confer any right in the hands of applicants to enforce the allotment of shares to them. The company may at its own discretion allot or reject the allotment of shares. The applicant has no legal right to compel the company to allot the shares in his favour. Further, till the time shares are actually allotted the share application money is reported as liability in the balance sheet of the company. Also there are provisions in the Companies Act, 1956 for refund of share application money alongwith the interest in case of non-allotment of shares which further substantiates the fact that the share application money is in the nature of refundable amount, if the shares are not allotted for any reason.
We, thus, hold that the share application money cannot be termed as capital asset within the meaning of section 2(14) of the Act as it does not provide right of any kind to the assessee to enforce allotment of shares. This aspect of the matter is decided in favour of the Revenue and the order of CIT(A) is set aside to this extent.
40 Morarjee Realties Ltd. & 2343/Mum/2009
In the result, appeal of the assessee as well as of the Revenue is partly allowed.
Order pronounced in the open court on 30th August, 2019.