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Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI ABRAHAM P. GEORGE
आदेश /O R D E R
PER N.R.S. GANESAN, JUDICIAL MEMBER:
Both assessee and Revenue filed appeals for assessment
year 2010-11 and Revenue has filed one more appeal for
assessment year 2007-08. Since common issue arises for
consideration in all these appeals, we heard these appeals together
and disposing of the same by this common order.
Let’s us first take Revenue’s appeal in I.T.A.
No.738/Mds/2010 for assessment year 2007-08.
The first ground of appeal is with regard to exclusion of
freight and clearing charges from export turnover and total turnover.
We have heard both the Ld. Departmental Representative
and the Ld.counsel for the assessee.
For the purpose of computing deduction under Section 10B
of the Income-tax Act, 1961 (in short 'the Act'), the numerator and
denominator should be of same figure. In other words, what was
included in the export turnover shall also be included in total
turnover. The CIT(Appeals) by placing reliance on the decision of
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this Bench of the Tribunal in ITO v. Sak Soft Limited (2009) 313 ITR
353, has directed the Assessing Officer to recompute the deduction
under Section 10B of the Act by reducing the freight and clearing
charges and expenses for technical services both from export
turnover and total turnover. Therefore, this Tribunal do not find any
reason to interfere with the order of the lower authority and
accordingly the same is confirmed.
The next ground of appeal is with regard to disallowance of
provision for Gratuity.
Sh. Pathlavath Peerya, the Ld. Departmental Representative,
submitted that the assessee made provision of `83,39,144/-
towards Gratuity with Life Insurance Corporation of India. The
Assessing Officer disallowed the claim of the assessee on the
ground the Gratuity payment falls under Section 43B of the Act,
therefore, the same cannot be allowed as deduction under Section
43B of the Act. According to the Ld. D.R., the CIT(Appeals) by
placing reliance in Section 40A(7)(b) of the Act, allowed the claim
of the assessee on the ground that 40A(7)(b) of the Act is a special
provision for allowing the Gratuity, therefore, the same
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overrides Section 43B of the Act. According to the Ld. D.R., since
Gratuity payment falls under Section 43B of the Act, the same
cannot be allowed unless it is actually paid. In this case, what was
made is only the provision, therefore, in view of Section 43B of the
Act, the same cannot be allowed. The Ld. D.R. placed reliance on
the judgment of Calcutta High Court in CIT v. Shri Kamakhya Tea
Co. Pvt. Ltd. (199 ITR 714).
On the contrary, Sh. R. Vijayaraghavan, the Ld.counsel for
the assessee, submitted that Section 40A(7)(b) of the Act is a
special provision for allowing provisions for payment towards
approved Gratuity fund. The LIC Gratuity fund was approved by the
Commissioner. Therefore, according to the Ld. counsel, the
CIT(Appeals) by placing reliance on the judgment of Kerala High
Court in CIT v. Commonwealth Trust (I.) Ltd. (2004) (269 ITR 290)
allowed the claim of the assessee. Referring to the judgment of
Kerala High Court (supra), the Ld.counsel submitted that both the
Section 40A(7) and Section 43B of the Act have to be harmoniously
construed. The Kerala High Court found that harmonious
construction of both the provisions of Section 40A(7) and Section
43B of the Act clearly indicate that the Legislature never intended to
5 I.T.A. No.986/Mds/15 I.T.A. No.1170/Mds/15 I.T.A. No.738/Mds/10
take away the benefit conferred under Section 40A(7)(b) of the Act
by placing provisions of Section 43B(b) of the Act. Therefore,
according to the Ld. counsel, the CIT(Appeals) has rightly allowed
the claim of the assessee.
We have considered the rival submissions on either side and
perused the relevant material available on record. The
CIT(Appeals) by placing reliance on the judgment of Kerala High
Court in Commonwealth Trust (I) Ltd. (supra), found that both
Section 40A(7) and Section 43B of the Act should be construed
harmoniously. This Tribunal is of the considered opinion that when
Section 40A(7)(b) of the Act provides a special allowance for
provision for payment of Gratuity fund, the same has to be given
preference. As held by Kerala High Court, a harmonious reading of
Section 40A(7)(b) and Section 43B(b) of the Act never intended to
take away the benefit conferred under Section 40A(7)(b) of the Act.
Therefore, this Tribunal do not find any reason to interfere with the
order of the lower authority and accordingly the same is confirmed.
The next issue arises for consideration is whether the sale of
API division is slump sale or not.
6 I.T.A. No.986/Mds/15 I.T.A. No.1170/Mds/15 I.T.A. No.738/Mds/10
Sh. Pathlavath Peerya, the Ld. Departmental Representative,
submitted that the assessee has sold API division and claimed that
it is not a slum sale. According to the Ld. D.R., API division was
transferred to Actavis for a total consideration of `55.54 Crores. As
per the business agreement, the division was sold as a going
concern for a lump sum payment of `55.54 Crores out of which, `3
Crores was assigned to the net current assets. According to the Ld.
D.R., the assessee never assigned any value to the individual asset
in the agreement for sale/ transfer. Therefore, according to the Ld.
D.R., it is a clear case of sale of going concern without assigning
any value to the individual assets, therefore, it is a slump sale as
defined in Section 2(42C) of the Act. The Ld. D.R. further submitted
that except the value of land, no asset was valued individually,
hence, the CIT(Appeals) is not justified in allowing the claim of the
assessee.
On the contrary, Sh. R. Vijayaraghavan, the Ld.counsel for
the assessee, submitted that it is not correct to say that the assets
were not valued individually. In fact, the assets were valued
individually which was extracted by the CIT(Appeals). The current
7 I.T.A. No.986/Mds/15 I.T.A. No.1170/Mds/15 I.T.A. No.738/Mds/10
assets were valued at `3 Crores; the patents were valued at `1000/-
furniture and fixtures were valued at `34,00,000/-; plant and
machinery were valued at `43,40,99,000/-; the land was valued at
`3 crores and building was valued at `4,25,00,000/-. According to
the Ld. counsel, this was extracted by the CIT(Appeals) in the
impugned order and the CIT(Appeals) found that it is not the case of
slump sale.
We have considered the rival submissions on either side and
perused the relevant material available on record. We have
carefully gone through the agreement for sale. The agreement for
sale clearly says that it is a transfer of API division as going concern
to Actavis. In the agreement, there was no mention about the
values of individual assets. The CIT(Appeals) has stated that the furniture and fixtures were `34 lakhs, plant and machinery were
`43,40,99,000/-. However, the details of plant and machinery were
not available on record. When the details of plant and machinery
are not available on record, it is not known how the individual assets
were valued as claimed by the assessee. The Assessing Officer,
after considering the submissions furnished by the assessee, has
observed at page 7 of his order as follows:-
8 I.T.A. No.986/Mds/15 I.T.A. No.1170/Mds/15 I.T.A. No.738/Mds/10
“The above submissions of the assessee were given a careful thought. On perusal of the note and the agreement copies filed along with that note it is found that as claimed by the assessee it was not an individualized sale. In page number 2 Clause ‘D’ and clause 2.1 in page number 8 of the agreement clearly tells that the division was sold as ‘going concern’. In the payment clause 3.1 in page 10 of the agreement also it is clearly mentioned that in consideration of the Seller transferring its division to the Purchaser, ‘as a going concern’ the payment agreed upon is paid. As claimed by the assessee company the values are never assigned to individual asset wise in the agreement. Total amount of `54 Crores was paid as aggregate of, except the value of `3.00 Crores assigned to the net current assets. The Directors report also stated that the division is divested which means that the entire division is sold to Actavis. From this it is very clear that the sale is not an individual sale as claimed by the assessee company and it is very clearly falling under the ‘Slump Sale’ definition given in section 2(42C) of the Act.”
The assessee also could not produce the depreciation
schedule for the individual machinery of the API division. The
written down value of individual assets were also not furnished. The
assets and liabilities of the company as on date of transfer was
`20.26 Crores. The assessee is entitled for depreciation at the rate
of 15% on plant and machinery. In view of these factual aspects
coupled with the fact that API division was transferred as going
concern without valuing the plant and machinery individually, this
Tribunal is of the considered opinion that it is a case of slump sale.
9 I.T.A. No.986/Mds/15 I.T.A. No.1170/Mds/15 I.T.A. No.738/Mds/10
Therefore, the CIT(Appeals) is not correct in saying that it is not a
slump sale. Accordingly, the order of the CIT(Appeals) is set aside
and that of the Assessing Officer is restored.
The next ground of appeal is with regard to computation of
deduction under Section 10B of the Act.
Sh. Pathlavath Peerya, the Ld. Departmental Representative,
submitted that the CIT(Appeals) directed the Assessing Officer to
recompute the deduction under Section 10B of the Act by adopting
the profits arrived as per the provisions of Section 115JB of the Act
and not to adopt the amount computed in the regular method.
According to the Ld. D.R., as per clause (ii) of Explanation to
Section 115JB(2) of the Act, the amount of income to which the
provisions of Section 10B of the Act applied would have to be
reduced from book profit and this amount will be the amount
calculated as per the provisions of Section 10B of the Act.
Therefore, according to the Ld. D.R., the CIT(Appeals) is not
justified in directing the Assessing Officer to take book profit for the
purpose of computation of deduction under Section 10B of the Act.
10 I.T.A. No.986/Mds/15 I.T.A. No.1170/Mds/15 I.T.A. No.738/Mds/10
On the contrary, Sh. R. Vijayaraghavan, the Ld.counsel for
the assessee, submitted that an identical issue was considered by
the Madras High Court in CIT v. Rajnikant Schnelder and
Associates Pvt. Ltd. (302 ITR 22) and the Madras High Court found
that book profits arrived as per the provisions of Section 115JB of
the Act should be the basis for taxation and therefore, computation
under Section 80HHC of the Act should be limited to the eligible
profit. According to the Ld. counsel, Section 10B is similar to
Section 80HHC of the Act, therefore, the judgment of Rajnikant
Schnelder and Associates Pvt. Ltd. (supra) is squarely applicable.
According to the Ld. counsel, the CIT(Appeals) has in fact followed
this judgment of Madras High Court.
We have considered the rival submissions on either side and
perused the relevant material available on record. We have
carefully gone through the provisions of Section 115JB of the Act.
Clause (ii) of Explanation 1 to Section 115JB(2) of the Act clearly
says that the amount of income to which provisions of Section 10 of
the Act other than clause (38) thereof shall be reduced if such
amount is credited to the Profit & Loss account. Therefore, the
claim of the assessee that Section 10B of the Act is equal to Section
11 I.T.A. No.986/Mds/15 I.T.A. No.1170/Mds/15 I.T.A. No.738/Mds/10
80HHC of the Act may not be correct. No similar clause as clause
(ii) of Explanation to Section 115JB of the Act was brought to the
notice of the Tribunal by the assessee. Therefore, this Tribunal is of
the considered opinion that the matter needs to be reconsidered by
the Assessing Officer. Accordingly, the orders of the authorities
below are set aside and the issue of deduction under Section 10B of
the Act is remitted back to the file of the Assessing Officer. The
Assessing Officer shall re-examine the matter afresh after
considering clause (ii) of Explanation 1 to Section 115JB of the Act
and thereafter decide the issue in accordance with law, after giving
a reasonable opportunity to the assessee.
Now coming to the Revenue’s appeal for assessment year
2010-11 in I.T.A. No.1170/Mds/2015, the only issue arises for
consideration is provision for Gratuity.
We have heard Sh. Pathlavath Peerya, the Ld. Departmental
Representative and Sh. R. Vijayaraghavan, the Ld.counsel for the
assessee. The Tribunal in identical set of facts examined the issue
with regard to provisions for Gratuity in ACIT v. Tyco Sanmar Ltd. in
I.T.A. No. 611/Mds/2012 dated 12.06.2015 and found that Section
12 I.T.A. No.986/Mds/15 I.T.A. No.1170/Mds/15 I.T.A. No.738/Mds/10
40A(7) of the Act takes precedence over the provisions of Section
43B of the Act. In view of the above, this Tribunal do not find any
reason to interfere with the order of the lower authority and
accordingly the same is confirmed.
Now coming to the assessee’s appeal for assessment year
2010-11 in I.T.A. No. 986/Mds/2015, the only issue arises for
consideration is disallowance made by the Assessing Officer under
Section 14A of the Act.
Sh. R. Vijayaraghavan, the Ld.counsel for the assessee,
submitted that major investments were made from assessee’s own
funds and not out of the borrowed funds. Therefore, no expenditure
was incurred, hence, there cannot be any disallowance under
Section 14A of the Act read with Rule 8D of the Income-tax Rules,
1962. According to the Ld. counsel, the interest debited to Profit &
Loss account relates to interest paid by the assessee on the
packing credit facilities, cash credit facilities availed from banks. At
the best, according to the Ld. counsel, the disallowance may be
restricted to the extent of exempted income of the assessee at
`15,08,370/-.
13 I.T.A. No.986/Mds/15 I.T.A. No.1170/Mds/15 I.T.A. No.738/Mds/10
On the contrary, Sh. Pathlavath Peerya, the Ld.
Departmental Representative, submitted that the assessee
borrowed funds and invested the same. There is no material
available on record to suggest that the assessee had its own funds
for making investments in shares for the purpose of earning
exempted income. Therefore, according to the Ld. D.R., the
Assessing Officer has rightly computed the disallowance by
applying Rule 8D. The assessee paid interest to the extent of `5,90,33,863/-. According to the Ld. D.R., the average investment
was to the extent of `1,30,35,04,708/-, therefore, by adopting the
provisions of Rule 8D of Income-tax Rules, 1962, the Assessing
Officer made disallowance of `1,00,60,938/-, hence, the
CIT(Appeals) has rightly confirmed the order of the Assessing
Officer.
We have considered the rival submissions on either side and
perused the relevant material available on record. From the order
of the Assessing Officer it appears that the assessee has made investment to the extent of `4 Crores during the year under
consideration and it appears no income was derived from
14 I.T.A. No.986/Mds/15 I.T.A. No.1170/Mds/15 I.T.A. No.738/Mds/10
investments. The assessee incurred interest expenditure to the
extent of `5,90,33,863/-. Therefore, the Assessing Officer made
disallowance by applying Rule 8D of the Income-tax Rules, 1962.
The assessee now claims before this Tribunal that expenditure at
the best be restricted to the extent of `15,08,370/- which is the
exempted income earned. The Assessing Officer on one end
observed that the assessee has not earned any exempted income.
However, the assessee claims that disallowance may be restricted
to exempted income to the extent of `15,08,370/-. Therefore, the
facts are not brought on record. Hence, the matter needs to be re-
examined by the Assessing Officer. Accordingly, the orders of
authorities below are set aside and the disallowance made under
Section 14A of the Act is remitted back to the file of the Assessing
Officer. The Assessing Officer shall re-examine the matter afresh in
the light of the material that may be filed by the assessee and
thereafter decide the issue in accordance with law, after giving a
reasonable opportunity to the assessee.
In the result, Revenue’s appeal in I.T.A. No.738/Mds/2010 is
partly allowed for statistical purposes, in I.T.A. No. 1170/Mds/2015
15 I.T.A. No.986/Mds/15 I.T.A. No.1170/Mds/15 I.T.A. No.738/Mds/10
is dismissed. However, appeal of the assessee in I.T.A. No.986/Mds/2015 is allowed for statistical purposes.
Order pronounced on 18th August, 2017 at Chennai.
sd/ sd/- (अ�ाहम पी.जॉज�) (एन.आर.एस. गणेशन) (Abraham P. George) (N.R.S. Ganesan) लेखा सद�य/Accountant Member �या�यक सद�य/Judicial Member
चे�नई/Chennai, �दनांक/Dated, the 18th August, 2017.
Kri.
आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. �नधा�रती क� ओर से /Assessee 2. Assessing Officer 3. आयकर आयु�त (अपील)/CIT(A)-15, Chennai-34 4. आयकर आयु�त/CIT-6, Chennai-34 5. �वभागीय ��त�न�ध/DR 6. गाड� फाईल/GF.