VALUE FIRST DIGITAL MEDIA PVT LTD,NEW DELHI vs. ACIT CIRCLE-26(1), NEW DELHI

Aggrieved with the above order, the assessee is in appeal before us. At the time of hearing, the Ld. AR of the assessee brought to our notice the order of the Hon’ble High Court and scheme of arrangement approved. He specifically submitted that the assessee having two types business namely Digital Media Business Undertaking engaged in Digital Media Services and operative value added services business. In the scheme of arrangement, in order to consolidated/merge similar group businesses into itself.

On the other hand, the Ld. DR brought to our notice, relevant facts in the assessment order and the findings of the Ld. CIT(A) at para 4.12. He submitted that he relies on the findings of the lower authorities.

Considered the rival submissions and material placed on record, we observed that the Hon’ble High Court has approved the scheme of demerger and, accordingly, the demerged the business of digital media undertaking of the assessee company. Accordingly, it has taken relevant assets and liabilities relating to the digital media undertaking as per the Notes-21 submitted before us, as per the scheme approved by the Hon’ble High Court. Assessee has taken over net fixed asset and net current asset to the extent of Rs.1,39,58,558/- and taken over short term borrowing of Rs.5,17,75,921/- and they absorbed additional liabilities to the extent of 2,78,17,363/-. Therefore, assessee has transferred its liability to the holding company and ended up with reserves of Rs.3,78,17,363/-. The issue before us is, whether the transfer of liabilities to the holding company as the capital transaction or a Revenue transaction. The Assessing Officer observed from the scheme of demerger as per which the Hon’ble High Court has directed that on the difference between net assets and liabilities of the demerged business undertaking transferred to Value First (Holding Company) standing in the books of mobility shall be Value First Digital Media Pvt. Ltd. vs. ACIT adjusted for profit and loss account in the book of mobility. The balance of net asset after adjustment against profit and loss account if any shall be transferred to demerger adjustment reserves in the books of mobility.

The Assessing Officer interpreted the above direction to mean that above said adjustment has to be routed through the profits and loss account, after careful reading of the above direction of Hon’ble Court, we observe that the direction was that the difference between net assets and liability of the demerger business undertaking transferred to Value First shall be adjusted in the profit and loss account in the books of the assessee which means the excess of assets transferred has to be adjusted in the profit and loss account. In case the excess of liability has to be transferred to “demerger adjustment reserves” in the books of mobility. The above observation of the Hon’ble High Court is for the two possibilities, as if, there is excess of assets transferred, it leads to loss in that case, may be adjusted in Profit & Loss Account. In case, transfer of excess liability, it amounts to capital reserves. It should be transferred to “demerger adjustment reserves”.

In the given case, the assessee has transferred excess of liability to Value First, therefore, as per the directions of Hon’ble High Court, the assessee has to create “demerger adjustment reserves” as it transfers excess of liability over the assets. In the given case, the assessee has created capital reserves which is nothing but demerger adjustment reserves, which is clearly a capital transactions carried out by the assessee. From the above directions of the Hon’ble High Court only in case of transfer of excess of assets over the liability has to be adjusted in profit and loss account and not otherwise. In our considered view, the assessee has followed the above directions of Hon’ble High Court creating a capital reserves in its balance sheet.

The question before us is whether the above said transaction has to be adjusted in the book profit in case the same is routed through the profits and loss account. In our considered view even otherwise if the above transactions are routed through the profit and loss account, it can be done only as an extraordinary adjustment below the line in the Profit and Loss account, since, the Value First Digital Media Pvt. Ltd. vs. ACIT above transactions is an extraordinary transaction carried on by the assessee which is nothing to do with the current year operation or determination of current year result. As per the prudent method of determination of book profit, any extraordinary item has to be eliminated for determining book profit, the Assessing Officer has relied on Explanation-B to Section 115JB(2) of the Act which is an adjustment called for when there is an amount carried to any reserves by whatever name called by debiting the profit and loss account, the above said relevant amount is reduced from the profit by making adjustment. In that case the above said reserves has to be adjusted for the purposes of determining the actual book profit.

Considering the fact that the transaction carried on by the assessee for implementing the scheme of demerger it has transferred excess liability to the holding company, therefore, transfer of excess liability is nothing but a capital transaction which does not warrant the transaction to be routed through Profit and Value First Digital Media Pvt. Ltd. vs. ACIT Loss account. Accordingly, we are inclined to allow the grounds raised by the assessee. Accordingly, Ground Nos. 1 & 2 raised by the assessee are allowed.

Coming to the Ground No.3 which is nothing but consequential in nature, however, with regard to section 234C of the Act, the Ld. AR of the assessee specifically prayed that a suitable direction should be given in this regard. We direct the Assessing Officer to determine the interest u/s 234B and 234C as

In the result, the appeal filed by the assessee is allowed as