M/S. LAFFANS PETROCHEMICALS LTD.,MUMBAI vs. DCIT RANGE- 10(2)(1), MUMBAI

per the classification specified under Part 1 (Form of Balance Sheet) of Schedule

VI to the Companies Act, 1956 at Closing. Total Debt shall also include the sales

tax incentive loan which the Purchaser has understood as the gross sales tax

liability.”As per the Audited financial statements of the assessee as on

31.03.2011, the Short Term Borrowings comprising of secured cash credits

stood at Rs. 22,73,45,855/-. This being in the nature of secured loans, assessee

reduced the same while arriving at total consideration for the purpose of section

50B of the Act. Thirdly, in terms of the Clause 7 of the Master Agreement,

assessee provided a Bank Guarantee in favour of the Purchaser for an amount

of Rs. 9,29,20,000/- for the purpose of paying and bearing the Purchaser Losses

for a period of 18 Months from Closing date. The Purchaser invoked the Bank

Guarantee provided by the assessee and withdrawn the amount of Rs.

9,29,20,000/-. The copy of the bank guarantee provided by the assessee is

6 ITA.No. 1464/Mum/2018

placed at page no. 120-125 of the Paper Book. Further, letter from the bank

confirming invocation of the bank guarantee by the Purchaser is placed at page

no. 127 of the Paper Book.The learned representative for the assessee

explained that the payment for bank guarantee is covered under the head “adjusted by the Audited Net working Capital Differential”,and thus, was also

reduced while arriving at the total consideration. In this context, the learned

representative for the assessee referred to letter addressed by the Purchaser for

invoking bank guarantee. Further, assessee reduced miscellaneous liabilities of

Rs. 95,646/-. Lastly, assessee deducted the loss on sale of vehicle of Rs.

17,70,034/-.

5.2 The learned representative for the assessee further submitted that in

principle, the Assessing Officer agreed with the fact that Master Agreement

provides for adjustments to be made for arriving at total consideration. However,

he himself did not made any such adjustment to arrive at ‘Total Consideration’

for want of details and explanation. The action of the Assessing Officer was also

influenced by the fact that assessee filed two reports of the Accountant in Form –

3CEA in terms of sub-section (3) of section 50B of the Act, even though the

reason for filing revised report was explained to him in the course of assessment

proceedings. On appeal to CIT(A), the CIT(A) without appreciating the merits of

the case, upheld the action of Assessing Officer and further went on to hold that

no adjustment is permissible in arriving at ‘Total Consideration’ for the purpose of

section 50B of the Act.The learned representative for the assessee, thus,

contended that the computation of the Long Term Capital Gain made by the

7 ITA.No. 1464/Mum/2018

assessee was as per the Master Agreement with the Purchaser, and it should be

accepted.

5.3 The learned DR on the other hand relied on the order of authorities below

to support the action of the Assessing Officer in denying the reduction of

liabilities and bank guarantee amount while computing the Long Term Capital Gain.

5.4 We have heard the rival submissions. The short controversy in this case

relates to the manner in which Long Term Capital Gain is to be computed under

section 50B of the Act. More precisely, the area of difference between the

assessee and the Revenue is on the calculation of ‘Total Consideration’ for the

purpose of computation of Long Term Capital Gain in terms of section 50B of the

Act. The Assessing Officer while calculating the ‘Total Consideration’ has not

made adjustments by way of reducing the total debts of the undertaking and

amount of bank guarantee as stipulated in the Master Agreement primarily on

the ground that the details with respect to the same were not available with him.

On the other hand, as per the assessee, such liabilities which are primarily

towards the bank loan, and the amount of bank guarantee given in favour of the

purchaser for the indemnifying losses are admissible as an adjustment against

the consideration received, for the purpose of computing Long Term Capital

Gain.

5.5 On perusal of the Master Agreement dated 31.07.2010, it is clear that the

Clause no. 3.2 of the Agreement clearly provides for the manner of determination

8 ITA.No. 1464/Mum/2018

of the total consideration for the sale of undertaking, which fact is not disputed by

the Assessing Officer. The said clause provides for certain adjustment to be

made to the consideration of Rs. 78,98,20,000/- stated in the Agreement to

arrive at the amount of ‘Total Consideration’. Admittedly, the Assessing Officer

has not made those adjustments and has directlytaken consideration at Rs.

78,98,20,000/-.As can be seen from the assessment order, even Assessing

Officer states that certain adjustments were in fact required to be made as per

the agreement, however in absence of details and explanation with respect to

those adjustments he has not carried out the same. The CIT(A) has also

confirmed the action of the Assessing Officer and further held that no adjustment

to the amount of consideration is permissible in terms of section 50B of the Act.

Before us, the learned representative for the assessee explained the

adjustments carried out by the assessee while arriving at the amount of total

consideration along with the supporting documents, which are placed in the

Paper Book. Thus, limited issue before us is whether assessee is justified in

carrying out the adjustments as per the Master Agreement while arriving at the

amount of total consideration from sale of undertaking.

5.6 In our considered view, when the Agreement itself provides for the

manner of computing ‘Total Consideration’ for transfer of undertaking, the same

should govern the manner of adopting ‘Total Consideration’ and no other method

should be substituted for the same. The consideration is the amount that is

determined to be payable by the buyer to the seller and is agreed upon by the

seller, as such. The manner of determination of the consideration is mutually

decided by the buyer and seller and stated in the Agreement and once it is

9 ITA.No. 1464/Mum/2018

adopted by the assessee, the same cannot be faulted by the income tax

authorities. In fact, it is not the case of the Assessing Officer that assessee has

made adjustments to ‘Total Consideration’ over and above what is provided for in

the Agreement. In any case, the observation of the CIT(A) that no adjustment to

‘Total Consideration’ is permissible in terms of section 50B of the Act is not

relevant in deciding the present controversy. Before us, the Ld. Representative

for the assessee furnished documents in the form of Master Agreement dated

31.07.2010, financial statements of the assessee for Financial Year 2010-11 and

Financial Year 2011-12, Bank guarantee, letter for invocation of bank guarantee,

etc. to support the claim of adjustments stipulated in the Master Agreement. We,

thus, hold that assessee has correctly reduced the secured liabilities and bank

guarantee, which was invoked by the purchaser, while arriving at total

consideration for the purpose of computation of capital gains in terms of section

50B of the Act. Thus, we set-aside the orders of the lower authorities in this

aspect. Thus, assessee succeeds on this ground, as above.

maintenance expenses of Rs. 94,11,574/- claimed by the assessee. The

Assessing Officer noticed that during the year under consideration assessee has

not carried out any business activity. The Assessing Officer further noticed that in

the immediately preceding year, when the company was fully operational, the

amount debited under the head “repairs and maintenance” was only Rs. 9.19

lacs. Further, as per the details of repairs and maintenance expenses submitted

by the assessee, the Assessing Officer noted that these expenses are one time

expenditures, the benefit of which is not restricted to one year. The Assessing

10 ITA.No. 1464/Mum/2018

Officer, thus, treated these expenses to be capital in nature and disallowed the

same under section 37(1) of the Act. It was explained that during the year

assessee was engaged in the warehousing business; the godown was in a

dilapidated condition, the same was got repaired and was brought to a condition

acceptable to the lessee i.e. Laffans Fine Chemicals Pvt. Ltd. During the year

under consideration, the assessee has declared income from warehousing of Rs.

45,50,000/-, which is offered as business income and thus, corresponding

business expenses should be allowed. So it cannot be said that assesse has not

carried out any business activities. Before CIT(A), assessee reiterated the

submission made before the Assessing Officer, however same did not find any

favour with the assessee.

6.1 Before us, the learned representative for the assessee pointed out that

the assessee has entered into logistic agreement with the resulting company,

M/s. Laffans Fine Chemicals Pvt. Ltd. Pursuant to the said agreement, the

assessee is to provide warehousing and transportation services to M/s. Laffans

Fine Chemicals Pvt. Ltd. To fulfil its commitments under the said agreement, the

assessee incurred huge repairs and maintenance expenses which should be

allowed as revenue expenses. It was also pointed out that assessee has also

offered income from providing logistic services to the tune of Rs. 86,20,998/-.

6.2 The learned DR on the other hand relied on the findings of the lower

authorities to state that expenditure incurred by the assessee are capital in

nature.

11 ITA.No. 1464/Mum/2018

6.3 We have heard the rival contentions. The relevant section which requires

consideration here is section 37(1) of the Act. As per section 37(1) of the Act,

deduction for expenditure of capital nature is not allowed. The capital

expenditure are the expenditures, which provide benefit of enduring nature and

which is not confined to one year.The details of the work for which repairs and

maintenance expenses wereincurred by the assessee is listed by the Assessing

Officer at para 5.2 of the assessment order. As can been from the assessment

order, payments were made for carrying out following work:

i) J.C.B. excavation of foundation, providing and PCCP FPR Mix 1.3.6 for foundation including compaction curing etc., PCC below plinth beam, etc. ii) Providing dray trap rubble solting in position including ramming. iii) Providing and dressing and clyiding stone wall, providing bank filling, flooring PCC etc. iv) Professional fees for project carried out at LPL, GIDC,Panoli., etc.

The main argument of the Assessing Officer was that assessee has not carried

out any business activity during the year under consideration. Further, the

Assessing Officer was driven by the fact that repair expenses of the current year

were substantial as compared to previous year. On perusal of the Logistic

Agreement entered into by the assessee with M/s. Laffans Fine Chemicals Pvt.

Ltd and Profit and Loss Account of the assessee, it can be seen that assessee

has in fact carried out business activities and earned income from warehousing

services. Pursuant to the Logistic Agreement entered into by the assessee,it was

required to provide warehousing services to M/s. Laffans Fine Chemicals Pvt.

Ltd. The assessee was required to carry out various repairs work at its godown,

which was in dilapidated conditions to make it acceptable to the lessee.

12 ITA.No. 1464/Mum/2018

6.4 It is pertinent here to refer to the decision of the Hon’ble Bombay High court in the case of CIT v. Chowgule& Co. Pvt. Ltd. (1995) 214 ITR 523

(Bom) wherein court has considered the expression ‘current’ preceding ‘repairs’

as under :–

“(i) The amount should be paid on account of repairs. (ii) ‘Current repairs’ means repairs undertaken in the normal course of user for the purpose of preservation maintenance or proper utilization or for restoring it to its original condition. (iii) ‘Current repairs’ do not mean only petty repairs or repairs necessitated by wear and tear during the particular year. (iv) Such repairs should not bring into existence nor obtain a new or different advantage. (v) The quantum of expenditure nor the fact that in the process of repairs, there was substantial replacement of the parts of machine or ship is decisive of the true nature of the expenditure. (vi) The original cost of the asset is not at all relevant of or ascertainment of the true nature of the expenditure on repairs. (vii) The replacement cost of the asset may however, at times may be used as indicator of the true character of the expenditure. If the expenditure on repairs added to the written down value or disposal value exceeds the replacement cost of the asset, a presumption is possible that it is not a revenue expenditure but expenditure of capital nature. Such presumption, of course, would be rebuttable. (viii) The expression ‘current’ preceding ‘repairs’ appears to have been used by the legislature with a view to restricting the allowance to expenditure incurred for preservation and maintenance thereof in its current state in contradiction to that incurred on any improvement or an addition thereto.

13 ITA.No. 1464/Mum/2018

Admittedly, it is not the case of the Assessing Officer that the impugned

expenditure has resulted into creation of a new asset. The quantum of

expenditure cannot be the guiding factor to decide whether the expenditure is in

the nature of capital expenditure or revenue expenditure. The expenditure

incurred by the assessee is towards maintenance of the existing godown and

was thus in the nature of current repair. Further more, the benefit to the

assessee is in the revenue field in as much as assessee is earning income which

is being assessed as business income. We, thus, set-aside the order of the

CIT(A) and allow the assessee’s claim of repairs and maintenance expenses. In

result, this Ground of the appeal is allowed.

4,06,641/- on motor car purchased during the year in the name of Director and

expenses incurred by the assessee on motor car. The Assessing Officer pointed

out that during the year under consideration assessee purchased car in the

name of its director,which is reflected as addition to Fixed Assets of the

assessee, and claimed deprecation on the same in the hands of the company.

For claiming depreciation u/s 32 of the Act, assessee should be the owner of the

assets.Further, assessee has not provided the RC book, date of put to use of the

asset. Since, assessee is not the owner of asset, the Assessing Officer

disallowed entire depreciation of Rs.4,06,641/-. The Assessing Officer further

disallowed 50% of the motor car expenses of Rs. 4,11,910/- claimed by the

assessee, holding the same to be related to the motor car purchased during the

year in the name of director and thus not wholly and exclusively incurred for the

purpose of business of the assessee company. The assessee explained that

14 ITA.No. 1464/Mum/2018

though the car was purchased in the name of the director, payment for the same

was made by the assessee and the car was used for the purpose of

business.The assessee also relied on the decision of Hon’ble Bombay High

Court in the case of CIT vs. Dilip Singh Sardar singh Bagga [1993] 201 ITR 995

(Bombay), decision of coordinate bench in the case of Kisan Ratilal Choksey

Shares & Securities P. Ltd. vs. ACIT [2015] 41 ITR(1) 114 (Mumbai- Trib) and

various other decisions. On appeal to CIT(A), CIT(A) agreed with the contention

of the assessee that the depreciation cannot be disallowed merely on the ground

that the asset is in the name of the director. However, CIT(A) stated that the

assessee has not submitted the details such as RC book, date on which car was

put to use and has not established that it was used for the purpose of assessee’s

business. The CIT(A), thus, disallowed the claim of depreciation.

7.1 Before us, the learned representative for the assessee reiterated the

submission made before CIT(A) and Assessing Officer.

7.2 We have heard the rival submissions. It is a well settled proposition that

merely because the asset is purchased in the name of director, the company

cannot be denied depreciation on the same, if the asset is otherwise found to be

used for the purpose of business. The decision relied upon by the assessee in

the case of CIT vs. Dilip Singh Sardarsingh Bagga [1993] 201 ITR 995 (Bombay)

clearly supports the stand of the assessee. We, thus, set aside the order of

CIT(A) and direct the Assessing Officer to allow depreciation on the motor

vehicle and related expenses on motor vehicle. Accordingly, this Ground of

appeal is also treated as allowed.

15 ITA.No. 1464/Mum/2018

Order pronounced in the open court on 29th May, 2019.

Sd/- Sd/- (Ravish Sood) (G.S. PANNU) JUDICIAL MEMBER VICE PRESIDENT

Mumbai, Date : 29th May, 2019 *SSL* 1. 2. 3. 4. 5. 6. 7. Copy to : 8. 1) The Appellant 2) The Respondent 3) The CIT(A) concerned 4) The CIT concerned 5) The D.R, “A” Bench, Mumbai 6) Guard file By Order

Dy./Asstt. Registrar I.T.A.T, Mumbai 9.