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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 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.
7. 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 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).
8. 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 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.
9. 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.
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 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:-
“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.
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.
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 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 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 dated 12.06.2015 and found that Section 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 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/-.
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 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 is partly allowed for statistical purposes, in I.T.A. No. 1170/Mds/2015 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.