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Income Tax Appellate Tribunal, DELHI BENCH ‘E’: NEW DELHI
Before: SHRI SATBEER SINGH GODARA & SHRIS.RIFAUR RAHMAN
6301/DEL/2015 5830/DEL/2016 ITA No.5489 to 5490/DEL/2018 ITA No.516 & 6081/DEL/2016 ITA No.5835 & 5836/DEL/2018 ITA No.5835/DEL/2018 (Assessment Year: 2014-15) ITA No.5836/DEL/2018 (Assessment Year: 2015-16) DCIT, LTU-1, vs. M/s. SIEL Limited, New Delhi. (Now known as Mawana Sugars Ltd.), 5th Floor, Kirti Mahal, 19, Rajendra Place, New Delhi – 110 008. (PAN :AAACS4902Q) (ASSESSEE) (RESPONDENT) ASSESSEE BY :Shri Taran Deep Singh, Advocate Shri Sandeep Yadav, Advocate REVENUE BY :Ms. Baljeet Kaur, CIT DR Shri Dheeraj Kumar Jain, Sr. DR Date of Hearing : 23.01.2025 Date of Order : 26.03.2025 ORDER
PER S. RIFAUR RAHMAN, ACCOUNTANT MEMBER :
The assessee, M/s. SIELLimited earlier known as Mawana Sugars Ltd. and both are the same company, has filed seven appeals against the orders of the ld. Commissioner of Income Tax (Appeals)-22, New Delhi [“ld. CIT(A)”, for short]dated 08.09.2015, 06.11.2015, 10.09.2015, 16.09.2016, 29.06.2018, 29.06.2018 & 29.06.2018 for AYs 2003-04, 2006-07, 2011-12, 2012-13, 2013-14, 2014-15 & 2015-16 respectively.The Revenue has also filed cross appeals against the orders 6301/DEL/2015 5830/DEL/2016 ITA No.5489 to 5490/DEL/2018 ITA No.516 & 6081/DEL/2016 ITA No.5835 & 5836/DEL/2018 of the ld. CIT (A) dated 06.11.2015, 16.09.2016, 29.06.2018 & 29.06.2018 for AYs 2006-07, 2012-13, 2014-15 & 2015-16.
Since the issues are common and the appeals are connected, therefore, the same are heard together and being disposed off by this common order.These appeals involving common issues are for Assessment Years 2003-04, 2006-07, 2011-12 to 2005-16. With the consent of both the sides, we first take up ITA 3. No.6300/Del/2015 for AY 2003-04.
The assesseeis aggrieved by the order of ld. CIT(A) dated 08.09.2015. Brief facts of the case are thatthe assessee filed its return of income on 06.11.2003 declaring loss of Rs.75,41,05,090/-. The case was selected for scrutiny and vide assessment order dated 20-02-2006, the Assessing Officer has assessed the Total Loss of the assessee for AY 2003-04 at a sum of Rs.5,87,77,750/-.
Aggrieved,the assesseefiled an appeal before ld CIT(A)who has partly allowed the appeal.
Aggrieved with the order of ld. CIT (A), the assessee has come up in appeal before raising following grounds of appeal :-
“1. That on facts and in law the orders passed by both the Assessing Officer {hereinafter referred to as the “AO”} and the Commissioner of Income Tax(Appeals) {hereinafter referred to as the “CIT(A)”} are bad in law and void ab-initio.
2. That on facts and in law the CIT(A) erred in upholding the action of AO in rejecting the claim for loss under the head “Capital Gains” on transfer of following assets by the assessee pursuant to Scheme of Arrangement u/s 391 to 394 of the Companies Act: a. Transfer of Land to M/s Shivajimarg Properties Limited b. Transfer of Investments to M/s Siel Holdings Limited 2.1 That on facts and in law the CIT(A) erred in holding that under the Scheme of Arrangement assets and liabilities were assigned by the assessee to M/s Shivajimarg Properties Limited and M/s Siel Holdings Limited respectfully as “one unit of zero value”. 2.2 That on facts and in law the CIT(A) erred in not appreciating that assignments of land and investments to M/s Shivajimarg Properties Limited and M/s Siel Holdings Limited respectfully did not constitute an “undertaking” as prescribed in Explanation 1 of section 2(19AA) and hence said assignment amounted to transfer of capital asset u/s 2(47) of the Act.
That on facts and in law the CIT(A) erred in not objectively adjudicating upon ground nos.2.3 and 4 of the Memorandum of Appeal filed before him.
4. That on facts and in law the CIT(A) erred in upholding the action of AO in making following disallowances out of interest cost claimed as deduction by the assessee: (i) Interest of Rs 2,96,55,000/- calculated @15% p.a on Investments and Advances made to M/s Jay Engineering Works. (ii) Interest of Rs 2,58,80,700/- calculated @ 15% p.a on Interest free advances given to subsidiary companies i.e M/s SFSL Limited and M/s SFSL Investment Ltd. 4.1 That on facts and in law the CIT(A) / AO erred in not appreciating that investments and advances to the above companies were not made out of borrowed funds. 4.2 That on facts and in law the CIT(A) erred in not appreciating that on identical issue relief was granted by AO / CIT(A) for AYs 1998-99 to 2002-03 pursuant to directions of Hon’ble ITAT in assessees own case for AYs 1998- 99 to 1999-00 4.3 That on facts and in law the CIT(A) erred in holding that nexus of borrowed funds with the above investments has been established by the decision of Hon’ble Delhi High Court approving the Scheme of Arrangement.
6301/DEL/2015 5830/DEL/2016 ITA No.5489 to 5490/DEL/2018 ITA No.516 & 6081/DEL/2016 ITA No.5835 & 5836/DEL/2018 5. Without prejudice, on facts and in law the AO / CIT(A) erred in making / upholding the disallowance of interest cost @ 15% which is high and excessive.”
7. Ground No. 1 is general in nature, hence does not require any specific adjudication.
In grounds no.2, 2.1, 2.2 and 3, the assessee challenged the action of both the lower authorities in disallowing claim for loss under the head “Capital Gains” on transfer of land to M/s Shivaji Marg Properties Limited and investments to M/s Siel Holdings Limited pursuant to a Scheme of Arrangement sanctioned under sections 391 to 394 of the Companies Act 1956. Relevant facts in this regard are that in the original return filed on 06.11.2003, the assessee had claimed long term capital loss of Rs.42,22,93,246/- on investments stated to have been transferred to M/s Siel Holding Ltd.. However, in the revised return filed on 31.10.04, in addition to capital loss as mentioned above, the assessee claimed long term capital loss of another amount of Rs.3,31,99,713/- on land at 15 Shivaji Marg, New Delhi stated to have been transferred to wholly owned subsidiary company namely M/s Shivaji Marg Properties Ltd. (SPL). As a result of this, the total long term capital loss that has been claimed in the revised return is Rs.45,54,92,959/-.
6301/DEL/2015 5830/DEL/2016 ITA No.5489 to 5490/DEL/2018 ITA No.516 & 6081/DEL/2016 ITA No.5835 & 5836/DEL/2018 9. The transfer of both the above capital assets have been done pursuant to a Scheme of Arrangement (SOA) under sections 391 to 394 of the Companies Act 1956, duly approved by the Hon’ble High Court of Delhi vide its order dated 26-08-2003. The Hon’ble High Court as sanctioned the SOA effective w.e.f. 01.10.2002.Silent features of the SOA have been elaborately articulated by the Ld CIT(A) at pages 8 to 10 of the impugned order as under:-
“11. Before examining the rival contentions of AO and the assessee, it is necessary to discuss the salient features of the decision of Hon’ble Delhi High Court dated 26.08.2003 in respect of company petition No.107/108/109 & 110/2003. (a) The petitions were filed u/s 391(2) & 394 of the Companies Act praying sanction of scheme of arrangement regarding restructuring of corporate debt of M/s Siel Limited i.e., assessee. (b) The four companies which filed the petitions were M/s Shivaji Marg Properties Ltd. (100% equity with M/s Siel Limited), M/s Siel Holdings Limited (100% equity share capital with M/s Siel Sugar Limited), M/s Siel Sugar Limited and the assessee. (c) The debt restructuring was undertaken due to substantial accumulated losses of M/s Siel Limited i.e., the assessee. (d) As a result of arrangement, the lenders were given three options :- Under option ‘A’ 80% of the principal amount was to be repaid without interest within 24 months from the cutoff date i.e., 30.09.2022, this means 20% of the principal amount, and the entire amount of outstanding interest was waived. Under option ‘B’ 100% of the principal amount was to be repaid without interest out of which 45% was to be repaid within 24 months from the cutoff date and the remaining 55% amount was to be allocated to M/s Siel Sugar Limited at zero coupon debentures repayable in four years from the cutoff date i.e., entire amount of interest liquidated and damages were waived. Under option ‘C’ 100% of the principal amount and interest on 88% on the principal was to be repaid within a period of seven years from the cut off date i.e., interest on 12% of the principal amount was waived. (e) 32% of the total land valued at Rs.65 crores, was assigned to M/s Shivaji Marg Properties Limited along with the same amount of debt (Rs.65 6301/DEL/2015 5830/DEL/2016 ITA No.5489 to 5490/DEL/2018 ITA No.516 & 6081/DEL/2016 ITA No.5835 & 5836/DEL/2018 crores) from the sale of the said land, the corresponding debt was to discharged i.e., M/s Shivaji Marg Properties Ltd. was a self liquidated company. (f) The investments valued at Rs.35 crores were assigned to M/s Siel Holding Limited along with equivalent amount of debt and the said debt was to be discharged by selling the said shares i.e., Siel Holding Ltd. was also a self-liquidated company. (g) The two sugar units (supra) of the assessee company were vested in M/s Siel Sugar Limited for which the shareholders of the assessee company were granted the shares of M/s Siel Sugar Limited in the ratio mentioned in the order of the High Court. (h) M/s Siel Limited i.e., the assessee was to continue to operate the residual business of Chemicals and Vegetable Oils. 11.1 As a result of above exercise, the debt of 100 crores (65 + 35) was discharged while the remaining debt was to be discharged with a period of seven years by the operation of M/s Siel Limited and M/s Siel Sugar Limited. In other words, the debt of lenders who exercised option ‘A’ and ‘B’ was to be discharged by sale of assets assigned to M/s Shivaji Marg Properties Ltd. and M/s Siel Holding Limited while the debt of lenders exercising option ‘C’ was to be discharged from the operations of the assessee (residual Siel Limited) and M/s Siel Sugar Limited.”
The main issue forconsideration here is that in the return of income,assessee has treated transaction for transfer of land to M/s Shivaji Marg Properties Limited and transaction for transfer investments to M/s Siel Holdings Limited as a “transfer” u/s 2(47) of the Act which is chargeable to tax and has thereby computed Long Term Capital Loss therein, however vis a vis transaction for transfer of two sugar units of the assessee company to M/s Siel Sugar Limited it was claimed by the assessee that this is a “transfer” which is exempt from tax u/s 47(vib) of the Act. Ld AO has doubted this by alleging that since all the above 6301/DEL/2015 5830/DEL/2016 ITA No.5489 to 5490/DEL/2018 ITA No.516 & 6081/DEL/2016 ITA No.5835 & 5836/DEL/2018 transactions flow out of a common SOA the assessee cannot paint some transactions (i.e. vesting of land and investments) as a “transfer” which is chargeable to tax and thereby claiming loss thereunder and on a flip side claim that vesting of sugar units is a transaction of “demerger” not chargeable to tax u/s 47(vib) of the Act. AO therefore disallows claim for Long Term Capital Loss of Rs.42,22,93,246/- by finally concluding (at pages 4 and 5) as under:
“I have considered the explanation of the assessee. The assessee has repeated time and again that the transfer of property and assets has been carried out at the values approved by the Hon’ble High Court. There is no dispute with regard to the transfer of property or assets as per the scheme of Arrangement (SOA). There is also no dispute with regard to the value of assets transferred. The issue which is relevant here is whether the assessee company is justified in giving different treatment to different transactions. I have gone through the Scheme of Arrangement (SOA), a copy of which was filed by the assessee. There is no provision in the scheme of arrangement for treating the transfer of property and assets vested in the demerged companies in different manner for different entities. The assessee’s explanation in this regard also does not justify its action in treating the transfer of property and assets vested its de- merged companies in different manner for different entities. As a result of this, after having considered the assessee contention, I am of the firm opinion the assessee has not been able to justify its claim for different treatment to the assets stated to have been transferred to different demerging units, as no satisfactory explanation in this regard has been filed nor any material in support of its claim has been filed by the assessee company. In view of the clear cut provisions in clause 1 of Part II of schedule -1 of the scheme of arrangement (SOA) stating that Siel i.e., Assessee company will be de- merged/hived off into four different entities, I hold that the transfer of assets to such entities falls under the category of demerger only. This shall, therefore, be treated as transaction, not regarded as transfer under clause (vib) of section 47 of I.T. Act. Since these transactions are not treated as transfer within the meaning of sec.47(b), there is no question of any capital loss being computed and allowed in the hands of assessee company for the assessment year under consideration. As a result of this, the assessee’s claim of long term capital loss on the basis of original as well as the revised returns filed by the company shall not be considered in computing the total income/loss.”
8. Ld CIT(A) has upheld the above disallowance, though on a different footing. At page 11of the impugned order, it is held by Ld CIT(A) as under:-
“13. From a perusal of the above facts and the order of the Hon’ble Court, it is noticed that the facts have not been examined in proper perspective. As a part of debt restructuring exercise of the assessee company, the scheme of arrangement provided for a payment of principal and interest to the lenders. In some cases interest was waived, which would be income of the assessee u/s 41(1) of the I.T. Act. For ensuring payment to lenders, certain assets of the assessee were identified and the corresponding debt was also identified. What was assigned to M/s Shivaji Marg Properties Ltd. and M/s Siel Holding Limited were assets of Rs.65 lakhs with debt of Rs.65 lakhs and the assets of Rs.35 lakhs with the debt of Rs.35 lakhs. Rs.65 lakhs and Rs.35 lakhs were the market values of the assets assigned and the corresponding debt was the value of debt after considering the waiver of interest / principal as the case may be. The assets and liabilities were assigned as one unit of zero value i.e., Shivaji Marg Properties Ltd. received land valued at 65 lakhs and debt valued at 65 lakhs while M/s Siel Holding Limited receives share valued at 35 lakhs and the debt valued at 35 lakhs. This combined units assigned to two companies in both the cases were of zero value. The assessee has claimed capital loss in respect of land and shares, without considering the debt linked to it. Therefore, it is held that what has been assigned to Shivaji Marg Properties Ltd. & Siel Holding Limited is a combined asset of zero value. Consequently, the question of any loss as a result of these assignments does not arise. In such situation, the question where the such transfer falls under demerger u/s 47(vib) becomes infructuous and is only an academic exercise. Therefore, the said issue need not be examined and the addition made by the AO disallowing the claim of Long Term Capital Loss in respect of these two assignments, is upheld. Consequently, ground no.1 to ground no.4 of the appeal along with the corresponding sub grounds stand dismissed.”
Assailing the above findings before us, it was submitted by the Ld AR that both the lower authorities have not properly appreciated the facts of the case. At the outset, Ld AR invited our attention towards the SOA which is at pages 21 to 54 of PB. Referring to page 29 of the paper book, 6301/DEL/2015 5830/DEL/2016 ITA No.5489 to 5490/DEL/2018 ITA No.516 & 6081/DEL/2016 ITA No.5835 & 5836/DEL/2018 ld AR accepted that the scheme uses the words “de-merger” for transactions as under:
“1. With effect from the appointed date, seal will be demerged/Hyde into four entities in the following manner: (a) SPL comprising of special purpose vehicle 1 (SPV 1) to leverage the Land situated at 15, Shivaji Marg, New Delhi - 110015 The Land with an estimated realizable value of Rs 6500 lacs (net cost of sales) shall be vested in SPL upon sanction of the scheme. The liabilities of lenders to extent of Rs 5453 lacs and liabilities of Siel of Rs 1042 lacs will also be vested in SPL. The detailed break-up of the liabilities of individual lenders to be transferred to SPL will depend upon the Option exercised by the respective lenders. The realization from SPL will be assured within 24 months of the Cut-off Date and will be utilised towards payment of its liabilities. …. …. (b) SHL comprising of Special purpose Vehicle 2 (SPV 2) to leverage the investments. The “Investments” or any proceeds, realised therefrom after the Cut-off date up to Effective date shall be vested in SHL upon sanction of the scheme. The total realizable value of such investments to be vested in SHL is estimated at Rs 3500 lacs (net of cost of sales). The liabilities of lenders to the extent of Rs 3075 Lacs and liabilities of Siel of Rs 420 lacs will also be vested in SHL. The detailed breakup of the liabilities of individual lenders to be transferred to SHL will depend upon the Option exercised by the respective Lenders. The proceeds from sale of investment invested in SHL will be assured within 24 months from a date and will be utilised towards payment of its liabilities.”
It was however submitted by the Ld AR that the moot issue for consideration in this case is whether the above “demerger” will also satisfy the definition of “demerger” as per defined u/s 2(19AA) of the Income Tax Act. Ld AR further invited our attention to pages 34 and 35 of PB to highlight the nature of liabilities which vested with M/s Shivaji Marg Properties Limited and M/s Siel Holdings Limited under the SOA.
6301/DEL/2015 5830/DEL/2016 ITA No.5489 to 5490/DEL/2018 ITA No.516 & 6081/DEL/2016 ITA No.5835 & 5836/DEL/2018 It was accordingly submitted by the Ld AR that the assets transferred to M/s Shivaji Marg Properties Limited and M/s Siel Holdings Limited carried no debt but these assets were used to clear other debts.
Ld AR thereafter submitted that the definition of “demerger” as per provisions of section 2(19AA) of the Act is satisfied in this case vis-a-vis transfer of sugar units to M/s Siel Sugars Limited, however the conditions stated in this section are not satisfied for “transfer” of land and investments to M/s Shivaji Marg Properties Limited and M/s Siel Holdings Limited. It was submitted that for this very reason the transaction for transfer of sugar units to M/s Siel Sugars Limited was claimed as exempt u/s 47(vib) of the Act, however, the other two transactions were claimed as chargeable to tax. Elaborating this aspect Ld AR submitted as under:
“(i) Section 2(19AA) of the Act visualises “demerger” of an “undertaking”. Explanation 1 to section 2(19AA) prescribes that for the purposes of this clause, "undertaking" shall include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity. It was submitted thus that land and investments are not an “undertaking” but individual assets. (ii) Moreover, it was submitted that condition of clause (v) to section 2(19AA) are also not satisfied as no shares are issued by M/s Shivaji Marg Properties Limited and M/s Siel Holdings Limited to the assessee pursuant to vesting of land and investments.”
6301/DEL/2015 5830/DEL/2016 ITA No.5489 to 5490/DEL/2018 ITA No.516 & 6081/DEL/2016 ITA No.5835 & 5836/DEL/2018 11. Ld AR therefore submitted that “transfer” of land and investments to M/s Shivaji Marg Properties Limited and M/s Siel Holdings Limited is not a “demerger” u/s 2(19AA) so as to attract exemption provisions of section 47(vib). It was submitted that were condition of section 2(19AA) were satisfied i.e. in case of vesting of Sugar units in M/s Siel Sugar Limited the Tribunal has upheld the same. In this regard our attention was drawn towards copy of decision of co-ordinate bench in case of M/s Mawana Sugar Ltd order dated 04-12-2015 in ITA no. 820/Del/2010 copy at pages 576 to 585 of paper book. Ld AR thereafter referred to provisions of section 394 of the Companies Act, 1956. It was submitted that u/s 394 the Company Court has vide powers to approve “transfer to the transferee company of the whole or any part of the undertaking, property or liabilities of any transferor company”. Sub-section 4 of section 394 further defines term “property” in an inclusive form as under:
"property" includes property, rights and powers of every description; and "liabilities" includes duties of every description;”
It was thus submitted that there is a material difference in provisions of section 394 of Companies Act and section 2(19AA) of the Income Tax Act. Under section 394 even individual assets can be demerged, whereas u/s 2(19AA) only an “undertaking” can be demerged.
6301/DEL/2015 5830/DEL/2016 ITA No.5489 to 5490/DEL/2018 ITA No.516 & 6081/DEL/2016 ITA No.5835 & 5836/DEL/2018 12. Ld AR then submitted that undisputedly “land” and “investments” are “capital assets” as defined u/s 2(14) of the Act. Vesting of these “capital assets” in M/s Shivaji Marg Properties Limited and M/s Siel Holdings Limited under the SOA is a “transfer” u/s 2(47) of the Act. Therefore, it is submitted that chargeability u/s 45 under the head “Capital Gains” is attracted which has to be computed u/s 48 of the Act. Vesting of capital assets in hands of the transferee pursuant to a SOA will not absolve “capital gain” chargeability in hands of the transferor. It is submitted that only exceptions stated u/s 47 would negate such chargeability. In this regard our attention was drawn towards the decision of Delhi High Court in case of CIT vs Salora International reported in 386 ITR 580(Del) were in the Hon’ble High Court has held as under:-
“18. An order passed by the Company Court sanctioning a scheme of arrangement under Section 391-394 of the Companies Act, 1956 is an order in rem. It is not in dispute that the Scheme is binding on all the persons including the Assessee. However, we are unable to appreciate any material difference, in so far as the incidence of tax is concerned, between a scheme of arrangement which has been approved by a Company Court under the provisions of the Companies Act, 1956 (or the Companies Act 2013) or any other binding arrangement/agreement. Mere sanctioning or approval under Section 391-394 of the Companies Act, 1956 would not alter the character of the scheme or the nature of transaction embodied therein for the purposes of levy of income tax under the Act. To illustrate the aforesaid, let us take an instance of a company which enters into an agreement for sale of one of its undertakings (substantial) and in terms of the agreement, a part of the consideration is payable directly to its shareholders. The company also obtains the necessary approvals of its shareholders as required under the provision of Section 180 of the Companies Act, 2013, which is parimateria to Section 293 of the Companies Act, 1956. Another company which is identically situated enters into a similar arrangement, however, follows a different route and instead of directly 6301/DEL/2015 5830/DEL/2016 ITA No.5489 to 5490/DEL/2018 ITA No.516 & 6081/DEL/2016 ITA No.5835 & 5836/DEL/2018 approaching its shareholders, files a scheme of arrangement before the Company Court and makes an application for the requisite meetings to be convened. The Court gives directions for holding of the meetings and the entire transaction (the scheme) is placed before the members and creditors for obtaining their approval. After following the prescribed procedure, the Company Court sanctions the scheme. In either case, the nature of the transaction essentially remains the same. In the first case, it is effected by means of an agreement, which is binding and in the later case, it is effected under the scheme of arrangement which too is binding under the provisions of the Companies Act, 1956 (or the Companies Act 2013). In our view, there would be no difference as to the incidence of taxation on the sale effected through the two modes.”
Ld AR referring to the case made out by the Ld CIT(A), it was submitted by the Ld AR that there is an elementary mistake made by Ld CIT(A) when he alleges that “combined units assigned to two companies in both the cases were of zero value”. Ld AR submitted that the above observations of ld CIT(A) may merit acceptance provided the assessee would have computed Capital Gains taking Sale Consideration as Nil. It was submitted that while computing “Capital Gains” u/s 48 of the Act “cost of acquisition” is reduced from the “full value of consideration received or accruing”. Referring to computation of capital gains in the return of income at pages 72 and 73 of paper book it was submitted by Ld AR that while computing Capital Gains the Fair Market Value (FMV) of investments and land i.e. Rs 35crore and Rs 65crore respectively were taken as the Sale Consideration. The FMV is stated in SOA and is also accepted by the Ld AO at page 4, last para of his order. It was submitted 6301/DEL/2015 5830/DEL/2016 ITA No.5489 to 5490/DEL/2018 ITA No.516 & 6081/DEL/2016 ITA No.5835 & 5836/DEL/2018 that as per SOA loans to be discharged by M/s Shivaji Marg Properties Limited and M/s Siel Holdings Limited are on behalf of the assessee and therefore the loans are not deductible from the value of assets transferred by the assessee. In support of this proposition Ld AR relied upon the decision of Hon’ble Apex Court in case of CIT vs Attili N Rao reported in 252 ITR 880(SC) wherein the Apex Court has held as under:
“5. We are of the view that the Tribunal and the High Court were in error. What was sold by the State at the auction was the immovable property that belonged to the assessee. The price that was realised therefrom belonged to the assessee. From out of that price, the State deducted its dues towards 'kist' and interest due from the assessee and paid over the balance to him. The capital gain that the assessee made was on the immovable property that belonged to him. Therefore, it is on the full price realised (less admitted deductions) that the capital gain and the tax thereon has to be computed.”
Before concluding on this issue it was submitted by Ld AR that Ld CIT(A) has alleged applicability of section 41(1). Referring to pages 250 and 251 of the paper book It was also submitted during course of assessment applicability of section 41(1) was investigated by AO however then no such addition / enhancement has been made in this case.
15. On the other hand, Ld DR submitted that the issue involved is of loss claimed by the assessee. He submitted that the AO and Ld CIT(A) has elaborately discussed the issue under consideration and dealt with the 6301/DEL/2015 5830/DEL/2016 ITA No.5489 to 5490/DEL/2018 ITA No.516 & 6081/DEL/2016 ITA No.5835 & 5836/DEL/2018 issue in accordance with the consequence of scheme of amalgamation. He relied on the findings of the lower authorities.
Considered the rival submissions and material placed on record. We observed that Hon’bleHighCourt has approved the scheme of arrangementsfor demerger and hive off of certain assets with the four methodsof restructuring the debts andto address the revival of the assessee company. Accordingly, they have agreed to create two SPVs to address the repayment of Debts of 6500 lakhs thruShivaji Marg Properties Ltd (SMPL) by transferring the equal amount of land to them and Another SPV of Siel Holdings Ltd (SHL) by transferring the Investments of Rs. 3500 Lakhs with equivalent Debts. These SPVs will discharge the liabilities after liquidating the assigned assets, it will dissolve themselves. The assessee had claimed long-termcapital losses against the above transfer of assets to the SPVs and adjustment towards the repayment of loans/debts. The AO has raised the issue under consideration is that the scheme of arrangement gives four options to address the debt restructuring to the assessee, in first two options the assessee has to transfer of the identified assets and liabilities to the SPVs and in other two methods, the assessee was directed to implement the demerger scheme to transfer the sugar plants to Siel Sugar Ltd and rest 6301/DEL/2015 5830/DEL/2016 ITA No.5489 to 5490/DEL/2018 ITA No.516 & 6081/DEL/2016 ITA No.5835 & 5836/DEL/2018 of the operation to continue in the assessee units itself like chemical etc. Accordingly, the assessee has transferred the assets and liabilities to the SPVs at the market value and also the identified liabilities to the respective SPVs. The issue raised by the revenue authorities is that the assessee cannot treat the transfer of assets in the three options differently and should adoptonly the process of demerger. We observed that the Hon’ble High Court has approved the scheme of restructuringso that the debt of the assessee can be reduced in order to rehabilitate the units. After careful consideration of the SOA, it is only a restructure of the debt, accordingly, they have directed the assessee company to liquidate the assets to settle the liabilities and along with that scheme of restructure the company to function efficiently. Therefore, if we have to treat all the options of restructure of the debts alike, then the conditions of section 2(19AA) of the Act are not fulfilled in the options of transferring assets to SPVs. They have only taken the specific assets and liabilities andnot allotted any shares back to the assessee, also the assets are not transferred with the concept of going concern. Their limited purpose was to liquidate the debts only. Therefore, as per the commercial transactions, the assets and liabilities belong to the assessee and assessee has recorded the value of the assets at cost in their books of 6301/DEL/2015 ITA No.457& 5830/DEL/2016 ITA No.5489 to 5490/DEL/2018 ITA No.516 & 6081/DEL/2016 ITA No.5835 & 5836/DEL/2018 account and the assets were transferred at market value. Therefore, once the conditions of definition of demergerare not satisfied, then the transaction has to be treated as regular capital transactions.
17. We observed that the assessee has rightly recorded the transaction at cost and determined the indexed cost of the respective assets and treated the transfer value of the land and shares as sale consideration. The difference they claimed aslong term capital loss. Refer 72 and 73 of the paper book.
We also observed from the order of Ld CIT(A) that he has looked at the transactions differently. He observed that the assessee has transferred assets and liability at the same cost, that means the assets were transferred at zero, therefore, there is no loss or gain to the assessee. Further, he observed that the lenders had waived the interest, therefore, provisions of section 41(1) of the Act are applicable. He has missed the point of commercial aspect in these transactions, the assessee recorded the value of the assets at cost in its Balance Sheet and transferred the assets at fair market value, i.e., Value of land on the date of transfer was Rs. 15,28,41,099/- and transferred at the value of Rs. 65,00,00,000/- and liquidated the liabilities to that extent. On the date of transfer the indexed cost of the land was Rs. 68,31,99,113/-. That means the assessee has settled the value of liabilities of Rs. 65 crores at the cost of Rs.68.32 6301/DEL/2015 5830/DEL/2016 ITA No.5489 to 5490/DEL/2018 ITA No.516 & 6081/DEL/2016 ITA No.5835 & 5836/DEL/2018 crores. How can we say that the assets were transferred at zero cost. It lakes commercial understanding.
Similarly, for the transfer of shares, the book value of shares were Rs.53.95 crores and its indexed cost was Rs.77.23 crores on the date of transfer and settled the liabilities worth Rs. 35 crores. Therefore, the transactions of transfer of assets and liabilities to its SPVs with the specific purpose of liquidating the assets and settling the liabilities cannot be equated with the demerger, it does not satisfy the provisions of section 2(19AA) of the Act. Therefore, we are inclined to agree with the method of transaction recorded by the assessee in their books and computation of income. Accordingly, the grounds raised
by the assessee are allowed.
20. Next issue for consideration in ground nos.4, 4.1, 4.2, 4.3 and 5 is disallowance of interest cost. Relevant facts in this regard are that in preceding years the assessee has made some investments and has also advanced loans to its group companies (which are outstanding during the year under consideration) as under:-
Name of Group Company Nature of payment Amount M/s Jay Engg. Works Ltd. (JEW) Equity and Rs 18 crore Preference Shares M/s Jay Engg. Works Ltd. (JEW) Loans Rs 1077 lacs M/s SFSL Ltd Loans Rs 400.88 lacs M/s SFSL Investment Ltd Loans Rs 1324.50 lacs
AO has alleged that the assessee has deployed its interest-bearing funds for non-business activities as above. Relying upon the fact that identical disallowances have been made by his predecessor on this very issue in earlier years, the AO continued to follow the same line of action that the interest on funds deployed for equity shares, preference share, loanetc. shall be disallowed in this year as in earlier years. As regards investments made and loans advanced to M/s JEW Ltd, the AO notes that since these investments have been transferred to M/s Siel Holding Ltd under the SOA the interest disallowable, if any, has to be restricted to 6 months only. He accordingly computes disallowance as under:
“Equity & Preference shares JEW Rs.18,00,00,000/-
Intt. From 01.04.2002 to 30.09.2002 Upto date of demerger at the rate of 15% as in the earlier years. Rs.1,35,00,000/- Advances to JEW Rs.1077 lacs Intt. At 15% as this loan has continued for full years i.e., upto 31.03.2003 Rs.1,61,55,000/-
Total Rs.2,96,55,000/-“
As regards other loans advanced the AO notes the details as under:- Name of the Advance Company Opening Given Recd. Balance as on Balance as on during the During 31.03.2003 01.04.2002 year the year Rs. SFSL Ltd. 400.88 - - 400.88 SFSL Investment 1324.50 - - 1324.50 Ltd. Jay Engg Works 1077.00 - - 1077.00 Total 2802.38 2802.38
Further, the AO observes that while completing assessment for the year 2002-2003, his predecessor has discussed the matter in detail and held that deployment of borrowed funds to the extent of investment made in JEW and loans and advances given free of interest to sister/subsidiaries companies were not called for. Applying a rate of 15% as in the earlier assessment years, the disallowance out of interest on account of interest free loans to SFSL & SFSLIL has been worked out to Rs.2,58,80,700/-.
Aggrieved, the assessee filed appeal before Ld CIT(A) and before Ld CIT(A) it was submitted that the disallowances made by the AO in preceding years have been deleted by the Tribunal. Assessee relied upon orders of Ld CIT(A) and Tribunal in its case for earlier years. However, the Ld CIT(A) has confirmed the disallowance by observing as under:-
6301/DEL/2015 5830/DEL/2016 ITA No.5489 to 5490/DEL/2018 ITA No.516 & 6081/DEL/2016 ITA No.5835 & 5836/DEL/2018 “14.4 As discussed earlier, in the scheme of arrangement for debts restructuring various investments in subsidiary companies including investment in Jay Engineering Works have been transferred to Siel Holding Ltd. along with debts of equivalent amount. Therefore, the nexus of borrowed funds debts and these investments have been established by the operation of the decision of Hon’ble High Court. In the A.Yrs. 98-99, 99-00 there was nothing on record to establish this nexus and the directions of Hon’ble ITAT were given in this background. The order of the Hon’ble High Court, which came subsequently, also mentions in the specific terms that M/s Siel Ltd. had been facing severe financial problems and had incurred heavy losses and large debt burden which led to the financial restructuring proposal u/s 391(2) and 394 of the Companies Act, 1956. Prior to this an earlier restructuring was done in October, 1999 as well without the intervention of Court. However, the company continued to face financial problems in spite of the same. The losses incurred year after year, were wiping out the interest free funds and equity available with the assessee. 14.5 The claim u/s 36(1)(iii) is allowed in respect of interest paid for money borrowed for the purpose of business. The shares acquired in subsidiary companies and interest free advances to associate concerned does not fall within the definition of section 36(1)(iii) and, therefore, the interest on borrowed fund utilized for the said purpose cannot be allowed as deduction. This issue is settled and there is no dispute about the same. The directions of ITAT in A.Y. 1998-1999/ 1999-2000 were based on the fact that borrowed funds till that year were not utilized for these interest free advances and investments. However, in view of regular losses and increasing financial difficulties, the company moved before the Hon’ble High Court for financial restructuring. Therefore, on one hand the assessee is claiming that it has sufficient funds to make investments in subsidiaries and give interest free advances to associate concerns and the other hand it moved before Hon’ble High Court on the ground that it is not able to service its secured loans and pay the lenders in view of regular losses.
It needs to be mentioned here that M/s Siel Sugar Ltd. was renamed as Mawana Sugar on 16.06.2004. After that it was amalgamated back with assessee is Siel Ltd. w.e.f., 01.10.2006. Later, the name of assessee was changed to Mawana Sugar Ltd. w.e.f. 04.01.2008. The entire sequence of financial restructuring from October 1999 to 2006, establish that the entire funds of the assessee formed common Hotchpot. Restructuring proposals acknowledged this fact. Regular losses and restricting wiped out the basis of orders for A.Y.98-99 and A.Y. 99-00. This can be explained by an example. An assessee may have interest free funds of Rs.100/- and interest bearing funds of Rs.100/-. He invests Rs.100/- in business assets and Rs.100/- in interest free advances / shares of subsidiaries. He makes a loss of Rs.100/- in the next year in business. This wipes out his availability of funds by Rs.100/-.
6301/DEL/2015 5830/DEL/2016 ITA No.5489 to 5490/DEL/2018 ITA No.516 & 6081/DEL/2016 ITA No.5835 & 5836/DEL/2018 He cannot claim in next year that interest free advances and shares in subsidiaries are still from interest free funds. 15.1 In view of these new facts on record and in view of the order of Hon’ble High Court, it cannot be held that interest paid in A.Y.03-04 cannot be disallowed to the extent of corresponding interest in respect of free advances and investments in subsidiaries. Since, the order of Hon’ble High Court was not available before the ITAT when it gave decision for A.Y. 98- 99/99-00, the issue of disallowance in the present assessment year, is not covered by that decision. Therefore, the interest pertaining to these investments and interest free advance has to be disallowed out of interest paid and claimed as deduction. Considering the same, grounds no.5 & 6 and its sub grounds are dismissed.”
Aggrieved, the assessee has raised several grounds andsubmitted a status
chart of appellate orders passed on this issue in earlier years as under:-
AY 1998-99 ITAT order dated 28-10-2003 in – copy enclosed at pages 209 to 222 of PB, relevant conclusions at pages 216 to 218, para 16. Matter remanded back to AO to decide as per ratio laid down in case of Meenakshi Synthetics reported in 79 TTJ 423(Luck). Appeal effect order dated 17-09-2004 (copy enclosed at pages 439 to 440 of PB) passed by AO u/s 254 of the Act. Disallowances made are deleted. AY 1999-00 ITAT order dated 20-04-2005 in – copy enclosed at pages 196 to 208 of PB, relevant conclusions at pages 204-205, paras 9 and 10. Matter remanded back to AO following ITAT order for AY 1998-99. Appeal effect order dated 19-09-2005 (copy enclosed at page 441 of PB) passed by AO u/s 254 of the Act. Disallowances made are deleted. AY 2000-01 ITAT order dated 30-09-2009 in ITA No. 3867/Del/2004 – copy enclosed at pages 348 to 363 of PB, relevant conclusions at page 352, paras 6 to 8. Matter remanded back to AO following earlier years ITAT orders. Appeal effect order dated 27-07-2011 (copy enclosed at page 441A and 441B of PB) passed by AO u/s 254 of the Act. Disallowances made are deleted. AY 2001-02 In assessment order dated 31-03-2004 passed for AY 2001-02 (copy enclosed at pages 442 to 465 of PB) again a cumulative disallowance 6301/DEL/2015 ITA No.457& 5830/DEL/2016 ITA No.5489 to 5490/DEL/2018 ITA No.516 & 6081/DEL/2016 ITA No.5835 & 5836/DEL/2018 of Rs 8,03,65,600/- (i.e Rs 4,31,55,000/- and Rs 3,72,10,600/-) is made by the AO on this issue – refer pages 443 to 448 of PB. Vide appellate order dated 30-10-2009 (copy enclosed at pages 466 to 473) the CIT(A) deletes this disallowance – relevant at page 468, para 2.3. CIT(A) deletes the disallowance taking into consideration ITAT orders for earlier years and appeal effect orders passed thereon by the AO. AY 2002-03 In assessment order dated 31-03-2005 passed for AY 2002-03 (copy enclosed at pages 465-A to 465-E of PB) again a cumulative disallowance of Rs 7,87,44,837/- (i.e Rs 4,31,55,000/- and Rs 3,55,89,837/-) is made by the AO on this issue. Vide appellate order dated 30-10-2009 (copy enclosed at pages 466 to 473) the CIT(A) deletes this disallowance – relevant at page 471, para 3 and 3.1. CIT(A) deletes the disallowance taking into consideration ITAT orders for earlier years and appeal effect orders passed thereon by the AO. AY 2003-04 Year under consideration AY 2004-05 In assessment order dated 28-12-2006 passed for AY 2004-05 (copy enclosed at pages 474 to 482 of PB) again a cumulative disallowance of Rs 3,36,29,000/- is made by the AO on this issue. Vide appellate order dated 26-12-2013 (copy enclosed at pages 483 to 493 of PB) the CIT(A) deletes this disallowance – relevant at page 491, para 6. CIT(A) deletes the disallowance taking into consideration ITAT orders for earlier years and appeal effect orders passed thereon by the AO. AYs 2005-06 It is also relevant to note that in case of Mawana Sugars Limited for to 2007-08 AYs 2005-06 to 2009-10 identical issue has been decided in favor of (M/s the ‘A’ – Copy of ITAT order dated 28-05-2018 passed in case of Mawana M/s Mawana Sugars Limited is enclosed at pages 494 to 521 of the Sugar PB. ITAT decides this issue at pages 504 to 508. Disallowances Limited) made by AO are deleted by ITAT (i) holding that no disallowance can be made on opening balances which has been accepted in earlier years, and (ii) examining the source of fresh investments / advances given during the year (refer page 507, para 23).
It was then submitted by Ld AR that as regards M/s Jay Engineering
Works investment in equity and preference shares of Rs 18 crores were made by the assessee in FY 1998-99. Loans were also advanced to M/s 6301/DEL/2015 5830/DEL/2016 ITA No.5489 to 5490/DEL/2018 ITA No.516 & 6081/DEL/2016 ITA No.5835 & 5836/DEL/2018 Jay Engineering Works in FY 1999-00. In this regard he relied upon facts noted by Tribunal in its order for AYs 1999-00 and 2000-01 relevant at pages 197, para 3 and page 352, para 6 of paper book. As regards other loans being advanced again it was the submission of Ld AR that all these loans were advanced in earlier years and there is no fresh deployment of funds during the year under consideration. It was argued that these facts are undisputed even as per the table reproduced by the Ld AO at page 7 of assessment order. The proposition advanced before us is that once opening balance of investment made or loans advanced is accepted to have been made out of non-interest-bearing funds then to that extend no disallowance of interest expense is called for. In support of this proposition Ld AR relied upon the decision of Hon’ble Apex Court in case of Munjal Sales Corporation reported in 298 ITR 298(SC), decision of Karnataka High Court in case of Sridev Enterprises reported in 192 ITR 165(Kar) and the decision of jurisdictional High Court in case of DD industries reported in 231 Taxman 784(Del).Carrying his arguments further it was then submitted by Ld AR that the findings of earlier years when loans were advanced or investments were made is a “fundamental aspect” or “fundamental point” of the matter which once settled cannot be disturbed in the years under consideration. Support in this regard was 6301/DEL/2015 ITA No.457& 5830/DEL/2016 ITA No.5489 to 5490/DEL/2018 ITA No.516 & 6081/DEL/2016 ITA No.5835 & 5836/DEL/2018 drawn from the decision of Apex Court in case of CIT vs Excel Industries reported in (2014) 13 SCC 459 and PCIT vs Power Links Transmission reported in 287 Taxman 327(DEL). In Excel Industries it was held by Hon’ble Apex Court as under:
“25. In Radhasoami Satsang v. CIT this Court did not think it appropriate to allow the reconsideration of an issue for a subsequent assessment year if the same “fundamental aspect” permeates in different assessment years. In arriving at this conclusion, this Court referred to an interesting passage from Hoystead v. Taxation Commr., wherein it was said: (Radhasoami Satsang case, SCC pp. 665-66, para 14) “14. … Parties are not permitted to begin fresh litigations because of new views they may entertain of the law of the case, or new versions which they present as to what should be a proper apprehension by the court of the legal result either of the construction of the documents or the weight of certain circumstances. If this were permitted, litigation would have no end, except when legal ingenuity is exhausted. It is a principle of law that this cannot be permitted and there is abundant authority reiterating that principle. Thirdly, the same principle, namely, that of setting to rest rights of litigants, applies to the case where a point, fundamental to the decision, taken or assumed by the plaintiff and traversable by the defendant, has not been traversed. In that case also a defendant is bound by the judgment, although it may be true enough that subsequent light or ingenuity might suggest some traverse which had not been taken.’ (Hoystead case, AC pp. 165-66)”
Reference was also made to Parashuram Pottery Works Co. Ltd. v. ITO and then it was held: (Radhasoami Satsang case, SCC p. 666, paras 16-17)
6301/DEL/2015 5830/DEL/2016 ITA No.5489 to 5490/DEL/2018 ITA No.516 & 6081/DEL/2016 ITA No.5835 & 5836/DEL/2018 “16. We are aware of the fact that strictly speaking res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.
On these reasonings in the absence of any material change justifying the revenue to take a different view of the matter—and if there was no change it was in support of the assessee—we do not think the question should have been reopened and contrary to what had been decided by the Commissioner of Income Tax in the earlier proceedings, a different and contradictory stand should have been taken.”
It appears from the record that in several assessment years, the Revenue accepted the order of the Tribunal in favour of the assessee and did not pursue the matter any further but in respect of some assessment years the matter was taken up in appeal before the Bombay High Court but without any success. That being so, the Revenue cannot be allowed to flip-flop on the issue and it ought let the matter rest rather than spend the taxpayers' money in pursuing litigation for the sake of it.”
26. Without Prejudice, it was submitted by Ld AR that even on an overall analysis of financial statements of the assessee it is seen that there are enough surplus of own funds to cover the investments made and loans advanced. It was submitted that total investments made, and loans advanced to group companies is Rs 46.02 crores against which assessee has surplus own funds of Rs 188.52 crores in form of capital and 6301/DEL/2015 5830/DEL/2016 ITA No.5489 to 5490/DEL/2018 ITA No.516 & 6081/DEL/2016 ITA No.5835 & 5836/DEL/2018 reserves. In this regard Ld AR relied upon decisions in case of Reliance Utilities reported in 313 ITR 340(Bom) and South India Bank reported din 438 ITR 1(SC). Ld AR thereafter submitted that the Ld CIT(A) has also not properly appreciated the facts of the case. It was submitted that as regards investments made in JEW (i.e Equity Share investment of Rs 11cr and Preference Share Investment in 7 cr) which now vest with Siel Holdings Limited as per SOA, now carry no debt attached. As regard other loans advanced it was submitted that they are still outstanding as on last day of the financial year in the books of accounts of the assessee. In this regard Ld AR relied upon details submitted before lower authorities at pages 183 and 187 of the paper book. It was therefore submitted that there is no relevance of SOA to the issue under consideration. Lastly it was submitted that without prejudice the quantum of disallowance requires a fresh consideration. In this regard reliance is placed upon order passed by Ld CIT(A) for AY 2006-07.
27. On the other hand, Ld DR relied on the findings of lower authorities.
Considered the rival submissions and material placed on record. We observed that the issue under consideration is concern, the disallowance of notional interest on the loans given to its sister concerns out of interest free and owned funds, it is brought to our attention that the issue under 6301/DEL/2015 5830/DEL/2016 ITA No.5489 to 5490/DEL/2018 ITA No.516 & 6081/DEL/2016 ITA No.5835 & 5836/DEL/2018 consideration is settled in favour of the assessee by the Coordinate benches and orders of CIT(A) in the earlier assessment years. The Ld AR submitted a chart, as per which the issue of notional interest was disallowed in AY 1998-99 and subsequent AYs, the coordinate bench has remanded the matter to AO and in OGE, the AO has deleted the additions as per the ratio of Meenakshi Synthetics (supra) case. Since, the similar issue was considered by the first appellate authorities in the subsequent AYs, remanded the matter to the AO and in OGE, the same were deleted. The issue was squarely settled in favour of the assessee in AYs 1999-00 to 2002-03 and from AYs 2004-05 onwards to 2007-08. Therefore, the investments and loan/ advances lent to its sister concerns are squarely covered in favour of the assessee.
In the current year, the issue of Jay Engineering Works investments and further loans were raised by the AO. Since the issues under consideration is exactly similar tothe other transactions which are advanced in the earlier AYs. Since the facts in the present AY also similar, we are inclined to allow the grounds in favour of the assessee. Accordingly, the grounds raised by the assessee in this regard are allowed.
In the result, appeal being for AY 2003-04 filed by the assessee is allowed.
6301/DEL/2015 5830/DEL/2016 ITA No.5489 to 5490/DEL/2018 ITA No.516 & 6081/DEL/2016 ITA No.5835 & 5836/DEL/2018 31. Grounds No.1, 2, 2.1, 2.2 & 2.3 of assessee’s appeal in ITA No.457/Del/2016 for AY 2006-07 are covered in favour of the assessee by our decision in the earlier part of the order. Ground No.3 & sub- grounds is not pressed by the assessee, hence dismissed. Accordingly, appeal being ITA No.457/Del/2016 for AY 2006-07 is partly allowed.
Grounds No.1, 2, 2.1, 2.2 & 2.3 in assessee’s appeal being for AY 2011-12 is covered in favour of the assessee by our decision in the earlier part of the order.
33.1 Grounds No.3, 3.1, 4 & 5 of assessee’s appeal in AY 2011-12 is against upholding the action of the AO in making a disallowance u/s 14A read with Rule 8D. At the outset, ld. AR of the assessee submitted that undisputedly there is no exempt income earned by the assessee during the year under consideration, therefore, section 14A is not applicable. In this regard, he relied on the decision of Hon’ble Delhi High Court in the case of PCIT vs. Era Infrastructure India Ltd. In 448 ITR 674 (Delhi). On the other hand, ld. DR of the Revenue did not controvert this proposition. Accordingly, respectfully following the decision of Hon’ble Delhi High Court in the case of Era Infrastructure Ltd. (supra), we are inclined to delete the disallowance made by the AO and confirmed by the ld. CIT(A) and allow the ground of the assessee.
6301/DEL/2015 5830/DEL/2016 ITA No.5489 to 5490/DEL/2018 ITA No.516 & 6081/DEL/2016 ITA No.5835 & 5836/DEL/2018 33.2 Ground No.6 is not pressed by the assessee, hence dismissed.
33.3 Accordingly, appeal being No.6301/Del/2015 for AY 2011-12 is partly allowed.
Grounds No.1, 2, 2.1 & 2.2 of assessee’s appeal in for AY 2012-13 is covered in favour of the assessee by our decision in the earlier part of the order. Ground No.3 is not pressed by the assessee, hence dismissed. Accordingly, appeal being for AY 2012-13 is partly allowed.
Grounds No.1 & 1.1 of assessee’s appeal in 5490/del/2018 & 5491/Del/2018 for AYs 2013-14, 2014-15 & 2015-16 are covered in favour of the assessee by our decision in the earlier part of the order. Grounds No.2 & 3 are general in nature, hence not adjudicated. Accordingly, appeals being 5490/del/2018 & 5491/Del/2018 for AYs 2013-14, 2014-15 & 2015-16 are allowed.
With regard to Department’s appeal in for AY 2006-07, at the time of hearing, ld. Counsel for the assessee has submitted that the tax effect in the appeal filed by the Revenue is below Rs. 60 lakhs. The CBDT in its Circular No.09/2024 dated 17.09.2024 has 6301/DEL/2015 5830/DEL/2016 ITA No.5489 to 5490/DEL/2018 ITA No.516 & 6081/DEL/2016 ITA No.5835 & 5836/DEL/2018 recently revised the monetary limit for filing of the departmental appealto the ITAT atRs. 60 lakhs. He has, therefore, requested that the Revenue’s appeal may be dismissed accordingly. However, Ld. DR of the Revenue did not oppose the aforesaid proposition.
In view of the above position, we noticed that the tax effect in appeal preferred by the Revenue is below Rs.60 lakhs, we deem it proper to dismiss the appeal of the Revenue in the light of the latest Circular No.09/2024 of the CBDT dated 17.09.2024, as not maintainable.
In the result, the appeal of the Revenue for AY 2006-07 is dismissed.
With regard to issues relating to disallowance out of interest expenditure and disallowance of the interest expenses in Department’s appeal in AYs 2012-13, these issues are dealt in favour of the assessee in assessee’s appeal in the above part of the order and accordingly, these grounds taken by the Revenue are dismissed.
The Revenue has taken the issue involving deletion of disallowance made u/s 14A of the Act in three AYs i.e.2012-13, 2014-15 & 2015-16. Since the issue involved is common we are taking the facts from AY 2012-13 for the sake of brevity.
6301/DEL/2015 5830/DEL/2016 ITA No.5489 to 5490/DEL/2018 ITA No.516 & 6081/DEL/2016 ITA No.5835 & 5836/DEL/2018 40. The Assessing Officer on examination of record seen that the assessee has invested Rs.317.47 million in the instruments which will result in tax exempt income and the assessee was asked to show cause as to why disallowance u/s 14A should not be made. In this regard, assessee vide letter dated 19.12.2014 objected to any disallowance u/s 14A read with Rule 8D on various grounds. The AO after going through the objections raised by the assessee rejected the same and expenses attributable to exempt income are computed and made a disallowance of Rs.1,98,44,735/-.
Aggrieved assessee preferred an appeal before the ld. CIT (A). Ld. CIT (A) observed that the issue is covered in favour of the assessee by the decision of Hon’ble jurisdictional High Court in the case of Cheminvest Ltd. reported in 378 ITR 33 holding that a disallowance u/s 14A cannot be made, if there is no exempt dividend income. Accordingly, ld. CIT (A) deleted the addition made by the Assessing Officer.
Aggrieved Revenue is in appeal before us and the ld. DR of the Revenue relied on the order of the Assessing Officer.
On the other hand, ld. AR of the assessee submitted that there is no exempt income earned by the assessee during the year under 6301/DEL/2015 5830/DEL/2016 ITA No.5489 to 5490/DEL/2018 ITA No.516 & 6081/DEL/2016 ITA No.5835 & 5836/DEL/2018 consideration, therefore, section 14A is not applicable. He relied on the findings of the ld. CIT (A) and also relied on the decision of Hon’ble Delhi High Court in the case of PCIT vs. Era Infrastructure India Ltd. reported in 448 ITR 674 (Del.).
Considered the rival submissions and material available on record. We observed that this issue is squarely covered in favour of the assessee by the decision of Hon’ble jurisdictional High Court in Cheminvest Ltd. (supra), relied on by the ld. CIT (A) and also in the case of PCIT vs. Era Infrastructure India Ltd. (supra), relied on by the assessee. The Hon’ble Courts have categorically held that where the assessee has not earned any dividend income forming part of the total income during the year under assessment, section 14A read with Rule 8D is not attracted. So, finding no illegality or perversity in the order of the ld. CIT (A), we hereby dismiss the ground taken by the Revenue.
Accordingly, the grounds involving deletion of addition u/s 14A read with Rule 8D in all the three Revenue’s appeal for AYs 2012-13, 2014-15 & 2015-16 are dismissed.
Ground No.2 of Revenue’s appeal for AYs 2014-15 & 2015-16 is pertaining to deletion of disallowance being 30% of staff welfare 6301/DEL/2015 5830/DEL/2016 ITA No.5489 to 5490/DEL/2018 ITA No.516 & 6081/DEL/2016 ITA No.5835 & 5836/DEL/2018 expenses incurred by the assessee. As the issue is common in both the assessment years, we are taking relevant facts for AY 2015-16 for the sake of brevity. During the course of assessment proceedings, the assessee was asked to furnish details of staff welfare expenses. In response, the assessee furnished the details. On perusal of the same, AO noted that the said expense included various expenses not related to the activity of business and for earning business profit. Accordingly, the assessee was show cause as to why the welfare expenses should not be disallowed, as the nature of these expenses are not for the earning of business profit. In response, the assessee submitted its reply. Assessing Officer considered the contention of the assesses but not accepted in view of the fact that the assessee has failed to prove that these expenses were made during the course of business for earning business profit and it was further noted that the assessee is incurring huge book loss during this year as well as in earlier years which further calls for prudent business practices to be followed by the assessee. Accordingly, the Assessing Officer made a disallowance of 30% of the staff welfare expense (i.e. 30% of Rs.4,10,20,000/-) amounting to Rs.1,23,06,000/- and added back to the total income of the assessee.
6301/DEL/2015 5830/DEL/2016 ITA No.5489 to 5490/DEL/2018 ITA No.516 & 6081/DEL/2016 ITA No.5835 & 5836/DEL/2018 47. Aggrieved assessee preferred an appeal before the ld. CIT (A) and during the appellate proceedings, the ld. AR of the assessee has made elaborate submissions and stated that the assessee has been incurring similar expenses in earlier year also and the same has been allowed in the past. The Ld. AR further submitted year wise expenses under these head vis-a- vis revenue in tabular form and submitted that the expenses is only .33% to the total revenue of the company. He further submitted that the assessee is a company in which public is substantially interested and having more than 55,000 shareholders and it has about 2600 employees working in four units of the company and corporate office. He submitted that the company had to incur expenditure towards staff welfare and expenses have been incurred by the company in earlier years also. He further relied on various cases laws.
Ld. CIT (A) after considering the elaborate submissions of the assessee deleted the disallowance made by the Assessing Officer by observing as under :-
“7.2 I have carefully gone through the finding of the AO, submission of the appellant and case laws relied upon by the Ld. AR. On the one hand the AO has disallowed certain percentage of the expenses, stating that it has not been established that these expenses were made during the course of business for earning business profit. Against this the Ld. AR argued that these are purely business expenses and allowable u/s 37 of the Act and it is 6301/DEL/2015 5830/DEL/2016 ITA No.5489 to 5490/DEL/2018 ITA No.516 & 6081/DEL/2016 ITA No.5835 & 5836/DEL/2018 for business expediency to take care the employees. The other argument of the AO through which the AO has questioned prudency of appellant that despite huge loss, the appellant is incurring these expenses. For this the Ld. AR relied upon several case laws and argued that business expediency of expenses has to be decided by the assessee not the AO. Considering .theassessment order and submission of Ld. AR I am of the view that the AO ha~ 'hot made any definite observation in regard to particular expense that the same is not business expenditure. Taking the arguments in totality I am inclined to accept the argument of the Ld. AR and of the view that disallowance without specific finding is not sustainable. Hence the disallowance made by the AO is deleted and the ground of appeal is allowed.”
49. Ld. DR of the Revenue relied on the order of the Assessing Officer and the ld. AR of the assessee reiterated the submissions made by the ld. CIT(A) and relied on the findings of the ld. CIT (A).
50. Considered the rival submissions and material available on record. After going through the submissions made by the ld. AR and findings of ld. CIT (A), we do not find any infirmity in the order of the ld. CIT (A) and accordingly we affirm the same and delete the grounds taken by the Revenue in AYs 2014-15 & 2015-16.
In the result, all the appeals filed by the Revenue for AYs 2006-07, 2012- 13, 2014-15, 2015-16.
To sum up : assessee’s appeal being 5489/Del/2018, 5490/del/2018 & 5491/Del/2018 for AYs 2003-04, 6301/DEL/2015 5830/DEL/2016 ITA No.5489 to 5490/DEL/2018 ITA No.516 & 6081/DEL/2016 ITA No.5835 & 5836/DEL/2018 2013-14, 2014-15 & 2015-16 are allowed and assessee’s appeal in ITA No.457/Del/2016, 6301/Del/2015 & 5830/Del/2016 for AYs 2006-07, 2011-12 & 2012-13 are partly allowed. All the appeals filed by the Revenue for AYs 2006-07, 2012-13, 2014-15 & 2015-16 are dismissed.