ITO 1(2)(2), MUMBAI vs. KRISHABH TRADING & SERVICES PVT. LTD., MUMBAI

The facts relating to the above said issues are discussed in brief. The assessee is a Developer and during the year under consideration it did not carry on any business activity. It filed its return of income declaring a total loss of Rs.10,040/-. The AO noticed that the assessee has received unsecured loans of Rs.3988.30 lakhs during the year under consideration. It was noticed that the assessee has received a sum of Rs.1853.39 lakhs through banking channels and the remaining amount of Rs.2134.91 lakhs were received through assignment of liabilities from other related concerns. The assessee had also received assets by way of assignments of almost equal amount from 2 M/s. Krishabh Trading & Services Private Limited related concerns. We are concerned with the liabilities of Rs.2134.91 lakhs taken by the assessee.

The assessee belongs to Hiten A Khatau Group. Under a scheme of restructuring/merger, 16 companies of the group were merged with a company named M/s Great View Properties P Ltd. The order of Hon’ble High Court of Bombay was received on 28-01-2011 and the effective date of merger was determined as 30-06-2010.

The AO noticed that the ten of companies, which were merged with M/s Great View Properties P Ltd, have assigned their assets and liabilities to the assessee herein. It was not noticed that the assessee herein was not part of merger process. The AO noticed that the assessee has taken over the assets and liabilities on 31-12-2010 and 31-03-2011. Since the effective date of merger was mentioned as 30-06-2010 as per the order of Hon’ble High Court passed on 28-01-2011, the AO took the view that all the 16 companies (including the 10 companies which transferred their assets and liabilities to the assessee) have ceased to exist from 30-06-2010. In that case, the non- existing companies could not have assigned their assets and liabilities to the assessee company, as those companies cannot be said to possess the assets and liabilities. Accordingly the AO took the view that the nature and genuineness of the entries passed by the assessee are doubtful. Accordingly the AO assessed a sum of RS.2134.91 lakhs as income of the assessee. While doing so, he did not allow set off of business loss of Rs.10,040/- against the income so assessed.

The Ld CIT(A) noticed that the order of High Court was passed only on 28-01-2011, even though the effective date of merger was determined as 30- 06-2010. He noticed that till the time the order was passed by the Hon’ble High Court, all the 16 companies were carrying on business in the usual course. Accordingly it was provided in the terms of merger that the transactions, agreements etc., carried on by those companies since 30-06-

The Ld CIT D.R submitted that the assessee has not established the nature and genuineness of the transactions, which were mandatory conditions prescribed u/s 68 of the Act. The ld CIT-DR further submitted that the assessee was not a party to the process of merger of various entities. She further submitted that the Ld CIT(A) has considered various documents in order to give relief to the assessee. She submitted that the assessee had filed those documents at the fag end of the assessment proceedings before the AO and hence the Ld CIT(A) should have obtained a remand report from the assessing officer. The Ld CIT-DR reiterated that all the companies have been merged with M/s Great View Properties P Ltd on 30-06-2010 and they have ceased to exist from that date. Hence those companies could not have transferred the liabilities to the assessee on 30-12-2010. Accordingly she

On the contrary, the Ld A.R submitted that the AO has asked the details only on 04-02-2014 and the assessee filed all the details on 10-02-2014 itself. Since the AO insisted for certified copies, the assessee could file certified copies only on 28-03-2014. Otherwise, all the relevant details have been furnished by the assessee to the AO well in advance. He submitted that the High Court has passed order on 28-01-2011 and till that date all the 16 companies were carrying on business in the usual manner. Since the effective date of merger has been mentioned as 30-06-2010, it has been expressly provided that all the transactions, agreements etc., entered by these 16 companies are binding on the transferee company, viz., M/s Great View Properties P Ltd. The ten companies under consideration have given proposal for assignment of assets and liabilities to the assessee on 15-10-2010 and 15-12-2010. The assessee has accepted the proposals on 31-12-2010. The assets and liabilities were taken over by the assessee mainly by passing journal entries only. The Ld A.R submitted that the assessee has furnished the financial statements of the ten companies, financial statement of M/s Great View Properties P Ltd, confirmation from the concerned companies in order to prove the nature and genuineness of transactions. The Ld A.R further submitted that these loans were taken by those ten companies in the earlier years and not during the year under consideration. He further submitted that the assessee has taken over the assets also, but the AO has ignored the assets. He submitted that the assessing officer has accepted the transactions entered with these 10 companies through banking channel, but refused to accept the transactions carried through passing of journal entries. Accordingly he contended that the Ld CIT(A) was justified in deleting the additions, since these loan transactions are mere taking over of liabilities through assignment process and further the 5 M/s. Krishabh Trading & Services Private Limited assessee has proved the genuineness of transactions by furnishing all relevant documents.

We have heard rival contentions and perused the record. We notice that the AO has noticed that the 10 companies, which assigned the liabilities and assets to the assessee, were deemed to have been merged on 30-06-2010. Accordingly he has taken the view that these companies become non-existing companies from 30-06-2010 itself and hence they could not have assigned the liabilities/assets to the assessee company on 31-12-2010. Though the AO has stated that the journal entries were also passed on 31.3.2011, it was established by the assessee that all the journal entries have been passed only on 31.12.2010. This view of the AO have been proved to be wrong by the assessee by showing that these companies have continue to carry on its activities till the date of passing of order by Hon’ble High Court, i.e., till 28.01.2011. Since the Effective date of merger was fixed as 30-06-2010, it has been specifically provided in the terms of merger that the transactions, agreements etc., carried on/entered by these companies since 30-06-2010 till the date of actual merger shall be binding on the transferee company and further it shall be deemed that those transactions were carrying on business on behalf of the transferee company. The relevant portion of the order was extracted by Ld CIT(A) in paragraph 9 of its order as under:-

We notice that the AO has observed that the assessee was not a party to the amalgamation process. In our view, it may not be relevant, since the assessee has got the liabilities and assets assigned to it before the final order was passed by Hon’ble High Court and for that purpose the assessee need not be a party to the amalgamation process. Further the assignment process carried on by the ten companies was also binding on transferee-company, which the transferee company has also acknowledged by passing suitable

The parties have submitted that all the loan transactions were entered by all the ten companies in the earlier years, i.e., these are not loans taken during the year under consideration. Thus what was transferred to the assessee was loan taken in the earlier years and not taken during the year under consideration.

Another important aspect is that these companies have assigned both assets and liabilities. However the AO has accepted the transfer of assets, but refused to accept the transfer of liabilities. If transfer of assets is accepted as genuine, we do not find any reason to reject the genuineness of transfer of liabilities. In any case, we notice that the assessee has proved the genuineness of transactions by furnishing the financial statements of all the concerned companies.

In view of the foregoing discussions, we are of the view that the order passed by Ld CIT(A) on this issue does not call for any interference. Accordingly we uphold his order passed on this issue.

The next issue relates to the set off of business loss against the addition made u/s 68 of the Act. Since the addition made u/s 68 of the Act has been deleted by Ld CIT(A), the question of adjudicating the above said issue did not arise and hence the Ld CIT(A) did not adjudicate the same. Since we have also confirmed the order passed by Ld CIT(A) on the addition made u/s 68 of the Act, the question of set off of business loss does not arise.

In the result, the appeal filed by the revenue is dismissed. Order has been pronounced in the Court on 4.04.2018.