M/S AKZO NOBEL INDIA LTD. (FORMERLY KNOWN AS ICI INDIA LTD.),KOLKATA vs. THE DCIT, CIRCLE - 10, KOLKATA, KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH: KOLKATA [Before Shri M. Balaganesh, AM & Shri Partha Sarathi Chaudhury, JM]

I.T.A No.1829/Kol/2013 Assessment Year: 2006-07

AKZO Nobel India Ltd. Vs. Deputy Commissioner of Income-tax, (Formerly known as ICI India Ltd.) Circle-10, Kolkata. (PAN: AAACI6297A) (Appellant) (Respondent) & I.T.A No.2121/Kol/2013 Assessment Year: 2006-07

Deputy Commissioner of Income-tax, Vs. AKZO Nobel India Ltd. Circle-10, Kolkata. (Formerly known as ICI India Ltd.) (Appellant) (Respondent) & I.T.A No.1830/Kol/2013 Assessment Year: 2007-08

AKZO Nobel India Ltd. Vs. Assistant Commissioner of Income-tax, (Formerly known as ICI India Ltd.) Circle-10, Kolkata. (PAN: AAACI6297A) (Appellant) (Respondent) & I.T.A No.2122/Kol/2013 Assessment Year: 2007-08

Deputy Commissioner of Income-tax, Vs. AKZO Nobel India Ltd. Circle-10, Kolkata. (Formerly known as ICI India Ltd.) (Appellant) (Respondent)

Date of hearing: 02.03.2017 Date of pronouncement: 08.03.2017

For the Assessee: Shri R. N. Bajoria, Sr. Advocate For the Revenue: Shri Niraj Kumar, CIT, DR

ORDER Per Shri M. Balaganesh, AM: These cross appeals by assessee and revenue are arising out of separate orders of CIT(A)-XII, Kolkata vide appeal No. 942/CIT(A)-XII/Cir-10/09-10 & 434/CIT(A)-XII/R- 10/10-11 dated 11.03.2013 and 12.03.2013 respectively. Assessments were framed by

2 ITA Nos.1829-1830 &2121-2122/K/2013 AKZO Nobel India Ltd., AYs 2006-07 & 2007-08 DCIT & Addl. CIT, Circle-10, Kolkata u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) for Assessment Years 2006-07 and 2007-08 vide their separate orders dated 31.12.2009 and 30.12.2010 respectively. Since both the cross appeals arise out of the same order of CIT(A), we dispose of the same by this consolidated order for the sake of convenience. 2. There is a delay in filing the appeals by the revenue for the Asst years 2006-07 and 2007-08 by 2 days . The reason adduced by the revenue in the condonation petition for the delay is convincing and hence we hereby condone the delay of 2 days and admit those appeals for adjudication.

DISALLOWANCE U/S 14A OF THE ACT

3.1. The brief facts of this issue is that the ld AO observed that the assessee had earned dividend income of Rs. 1,14,72,300/- and interest on tax free bonds for Rs. 4,94,677/- and claimed the same as exempt u/s 10 of the Act. The assessee did not disallow any expenditure incurred for the purpose of earning this income which do not form part of total income. Accordingly the provisions of section 14A read with Rule 8D was sought to be invoked. The assessee replied that investment in ICICI Bank Mutual Fund from where assessee had received dividend of Rs. 1,14,72,300/- was made out of own funds of the assessee and borrowed funds were not utilized for making investments. The ld AO however did not agree to the contentions of the assessee and proceeded to disallow under Rule 8D(2)(ii) to the tune of Rs. 18,59,422/- and under Rule 8D(2)(iii) to the tune of Rs. 2,12,31,500/-. Accordingly the total disallowance u/s 14A of the Act read with Rule 8D of the Rules worked out to Rs. 2,30,90,922/-. In appeal, the ld CIT(A) by placing reliance on the co-ordinate bench decision of this tribunal in the case of EIH Associated Hotels Ltd vs DCIT reported in 126 TTJ 246 (Kol Trib) held that only 1% of exempted income needs to be disallowed in the instant case. Aggrieved, both the assessee as well as the revenue are in appeal before us on the following grounds :-

3 ITA Nos.1829-1830 &2121-2122/K/2013 AKZO Nobel India Ltd., AYs 2006-07 & 2007-08 “ Ground No. 1. For AY 2006-07 (Assessee appeal): 1. “That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in sustaining the disallowance u/s. 14A of the Act.” Ground No. 2 for AY 2006-07 (Revenue appeal): 2. “Whether Ld. CIT(A)-XII, Kolkata, was justified in accepting claim of assessee as slump sale of Rubber Chemical undertaking u/s. 50B considering the decision of the Hon’ble ITAT in the assessee’s own case in ITA No.1020/Kol/2007 dated 29.02.2008 and concluded that the issue of determining opening WDV of Plant & Machinery is consequential to the order passed for AY 2006-07, whereas appeal against the decision of the CIT(A)in respect of issue of sale of rubber chemical undertaking is filed before the Hon’ble ITAT for AY 2006-07.” Ground No. 1 for AY 2007-08 (Assessee appeal): 1. “That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in sustaining the disallowance u/s. 14A of the Act.” Ground No. 3 for AY 2007-08 (Revenue appeal) “3. Whether Ld. CIT(A)-XII, Kolkata was justified in restricting the disallowance u/s. 14A of the I. T. Act, 1961 at Rs.41,48,626/- out of total disallowance determined as at Rs.6,22,29,389/-.”

3.2. The ld AR argued that this issue is squarely covered by the decision of the Hon’ble Jurisdictional High Court in the case of CIT vs R.R.Sen & Brothers (P) Ltd in GA No. 3019 of 2012 I.T.A.T. No. 243 of 2012 dated 4.1.2013 . The ld DR also fairly agreed for adopting the said judgement and dispose off the issue under dispute.

3.3. We have heard the rival submissions. The Provisions of Rule 8D of the Rules was introduced only with effect from 24.3.2008 and the Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co Ltd vs DCIT reported in 328 ITR 81 (Bom) had held that the provisions of Rule 8D could be applied only from Asst Year 2008-09 and onwards and not for the earlier years. However, the provisions of section 14A of the Act has been introduced in the statute with retrospective effect from 1.4.1962 and accordingly some expenditure is required to be disallowed u/s 14A of the Act for asst years prior to Asst Year 2008-09. We find that the issue under dispute is settled by the decision of the Hon’ble Jurisdictional High Court in the case of CIT vs R.R.Sen & Brothers (P) Ltd in GA No. 3019 of 2012 I.T.A.T. No. 243 of 2012 dated 4.1.2013 wherein it was held that 1% of exempted income should have to be disallowed u/s 14A of the Act for asst years prior to Asst Year 2008-09. Respectfully following the said decision, we hold that only 1% of exempted income is to be disallowed u/s 14A of the Act. We find that the ld CIT(A) in

4 ITA Nos.1829-1830 &2121-2122/K/2013 AKZO Nobel India Ltd., AYs 2006-07 & 2007-08 the instant case had rightly directed the ld AO to disallow 1% of exempted income. Hence we hold that the order of the ld CIT(A) in this regard does not call for any interference.

Hence, Ground No.1 raised by the assessee for the Asst Years 2006-07 and 2007-08 is dismissed and Ground No. 2 raised by the revenue for the Asst Year 2006-07 and Ground No. 3 raised by the revenue for the Asst Year 2007-08 is dismissed.

The brief facts of this issue is that the assessee during the year sold its rubber chemicals business to PMC Rubber Chemical India Ltd as a going concern on slump sale basis with effect from 28.12.2005, a joint venture company (JV) between PMC Group International Inc. USA and the assessee company with 51% and 49% share in the JV respectively. For the transfer of the business, the assessee company shall be entitled for cash consideration of Rs 818 lakhs and securities of Rs 982 lakhs (face value plus premium component) consisting of equity shares and optionally convertible debentures. In addition, the assessee company will also be entitled to receive consideration as ‘earn outs’ aggregating to a maximum of Rs 360 lakhs , if the performance during the three year period 2005-06 to 2007-08 exceeds certain performance parameters. With only provisional figures of performance of Rubber Chemicals business during the year being available and in the absence of certainty about the actual performance meeting the aforesaid parameters for the respective years and following a prudent accounting policy, the securities and additional consideration as stated above were taken at Nil value in the books of accounts and accordingly the same has not been considered while calculating the capital loss on transfer of business. It was explained that as per terms of the sale agreement, the consideration received by the assessee company included securities of Rs 982 lakhs consisting of equity shares and optionally convertible debentures, which were subject to PUT and CALL rights to the company and PMC, respectively and the valuation of which were contingent on certain performance parameters to be achieved by PMC-RC during the years 2005-06 and 2006-07. During the year 2006-07, the company has exercised its PUT option right in respect of the 10,00,000 equity shares held by it on 31 January 2007 at Nil value in view

5 ITA Nos.1829-1830 &2121-2122/K/2013 AKZO Nobel India Ltd., AYs 2006-07 & 2007-08 of PMC-RC not having met the aforesaid performance for 2005-06. The company also exercised its option to convert the optionally convertible debentures of face value Rs 5,98,50,000 into 6,44,450 equity shares for a pre-agreed price of Rs 92.87 per share. The realizable value of these shares were contingent on the achievement of certain performance parameters by PMC-RC during 2006-07. Based on the performance in 2006- 07, these shares have been considered at Nil value in the books of accounts. Pending completion of conversion formalities, the convertible debenture were shown in Schedule 4 of the published accounts at its original terms of issue. Pursuant to the above, the company’s shareholding in PMC-RC stood reduced to 24% . In addition to the above, the company was also entitled to receive consideration as ‘earn outs’ aggregating to a maximum of Rs. 360 lakhs, if the performance of RMC-PC during the three year period 2005-06 to 2007-08 exceeded certain performance parameters. In respect of this, no earn out was earned for the year 2005-06 to 2007-08.

4.1. From the above, it would be clear from the developments subsequent to sale of the Rubber chemicals business of the company as a going concern with effect from 28th Dec 2005 , the company did not realize any additional consideration and therefore the sale of Rubber Chemicals business as a going concern resulted only in the loss of Rs. 1857 lacs as per the computation sheet shown in the return of income. The assessee in support of his contentions filed the following documents before the ld AO :- a) Copy of Business Transfer Agreement between assessee and PMC Group International Inc for sale of Rubber Chemicals business as a going concern for a slump price b) Shareholders agreement pertaining to sale of Rubber Chemicals Business. c) Statement showing details of Written Down Value (WDV) blockwise relating to sale of Rubber Chemicals Business.

4.2. It was also pointed out that in respect of the equity shares and optionally convertible debentures, the PUT and CALL rights to the company and PMC Group International Inc. respectively are explained in Clause 18.4 of the Shareholders Agreement. In accordance with the said clause, there was no further consideration for the shares payable by PMC Group International Inc. as the business did not earn the minimum

6 ITA Nos.1829-1830 &2121-2122/K/2013 AKZO Nobel India Ltd., AYs 2006-07 & 2007-08 Earnings before Interest, Depreciation and Tax (EBIDTA) in respect of (both the first lot or the second lot) of shares.

4.3. The ld AO sought to adopt the total sale consideration on transfer of Rubber Chemicals Business at Rs. 21.6 crores (8.18 + 9.82 + 3.60) . The assessee objected to the same and reiterated that only cash consideration of Rs 8.18 crores is to be taken while computing the loss on transfer of Rubber Chemicals Business and other two considerations stated were never realized by the assessee. It was explained that the cost of acquisition for the computation of capital loss of Rubber Chemicals Business was taken from the Fixed Assets Schedule which gives the WDV for each of the block of assets and the working capital details as per audited accounts. It was pleaded that since the Rubber Chemicals Business was an undertaking within the meaning of Explanation 1 to section 2(19AA) of the Act and the transfer of the undertaking was on slump sale to another company, the same would have to be treated as slump sale of undertaking u/s 50B of the Act. It was pleaded that the shareholding of 49% by the assessee in the Joint Venture company to which the undertaking has been sold as a slump sale in no way vitiates the nature of the transaction being slump sale of the business undertaking u/s 50B of the Act.

4.4. The ld AO adopted the sale consideration of Rubber Chemicals Business at Rs. 21.6 crores. In addition, he also considered the sale consideration for the land at Rs. 22.94 crores based on the conveyance deed dt 29.10.2007 for the said land and adjusted the same against the WDV of building and computed deemed short term capital gains u/s 50 of the Act. The ld AO did not agree to the contention of the assessee that the Rubber Chemicals Business undertaking was sold on slump sale basis. One of the reasons cited by the ld AO for disallowing the slump sale was registration of land by the assessee in favour of the purchaser post the slump sale. He accordingly proceeded to invoke the provisions of section 41(2) of the Act and brought the same as business income by increasing the sale consideration figure which apparently included consideration in the form of shares , optionally convertible debentures and ‘earn outs’ based on future performances. While working out the profit in terms of section 41(2) of the Act, the ld AO also included the sale consideration in respect of sale of Bangalore Land to the tune of Rs. 98,35,830/- and sale of Belvedere Estate to the tune of 70,00,000/- .

7 ITA Nos.1829-1830 &2121-2122/K/2013 AKZO Nobel India Ltd., AYs 2006-07 & 2007-08

4.5. The brief facts in respect of sale of Bangalore Land and Belvedere Estate are that the assessee sold its vacant lands at Bangalore for Rs. 98,35,830/- and since the cost of acquisition of the said lands could not be traced in its books, the assessee offered the entire sale consideration to capital gains. Similarly the assessee had Land and Building at Belvedere Estate which was sold for Rs 70,00,000/- and disclosed long term capital loss to the tune of Rs. 58,19,463/- pursuant to indexation benefit. Accordingly, it offered the net long term capital gains of Rs. 40,16,367/- ( 98,35,830 – 58,19,463) from both Bangalore Lands and Belvedere Estate in the return of income.

4.6. The ld AO observed that the assessee had claimed depreciation of Rs. 1,69,870/- on residential building and Rs. 2,03,21,534/- on non-residential building. As the block of assets with respect to building –residential and building –non residential have been reduced to Nil after taking into consideration the sale consideration with respect to Rubber Chemicals Business as per registered deed, hence the depreciation of Rs. 1,69,870/- and Rs. 2,03,21,534/- are not allowable. Accordingly, the depreciation claimed by the assessee to the tune of Rs. 2,04,91,404/- was disallowed. Similarly the ld AO disallowed the depreciation on plant and machinery, computer and furniture to the tune of Rs. 1,84,15,641/- in the assessment by applying the provisions of section 41(2) of the Act and by increasing the sale consideration for sale of Rubber Chemicals Business.

4.7. The ld AO observed that the assessee sold several of its business undertakings in the past assessment years and claimed capital gain / loss u/s 45 read with section 48 of the Act. For the relevant year also depreciation was claimed on the Woodlands Properties wherein the residential block have been reduced to Nil in the past assessment years. As the department has treated sale of the undertaking u/s 50 of the Act , the depreciation claimed by the assessee was disallowed in the past assessment years based on the WDV of the block of assets arrived at after setting off of the sale consideration of the undertaking transferred. For the current year, the assessee claimed depreciation of Rs. 15,42,44,890/- as per computation whereas as per reduced WDV adopted by the department, the depreciation comes to Rs. 14,53,81,853/-. It was also mentioned that the assessment made on this issue in the earlier years had not reached finality as the same is pending in

8 ITA Nos.1829-1830 &2121-2122/K/2013 AKZO Nobel India Ltd., AYs 2006-07 & 2007-08 appeal. In order to maintain consistency for the time being, the difference of Rs. 88,63,037/- (15,42,44,890 – 14,53,81,853) was disallowed on account of excess depreciation claimed by the assessee.

4.8. The ld AO invoked the provisions of section 41(2) of the Act and included the value of sale consideration of Belvedere Estate and that of Bangalore Land to the increased total sale consideration of Rubber Chemicals Business and arrived at the profit of Rs. 3,50,65,913/- u/s 41(2) of the Act.

4.9. Before the ld CIT(A), the assessee stated that the first allegation leveled by the ld AO that the transfer of its Rubber Chemical Business to PMC Rubber Chemical India Pvt Ltd as a going concern on slump sale basis can under no stretch of imagination be stated that the sale was made to self. It was argued that the said company is a joint venture between the assessee and PMC group with 49% stake of the assessee in the joint venture company and was registered with the Registrar of Companies separately and as such it is a separate legal entity under the Companies Act, 1956. Thus the transfer of Rubber Chemical Business by the assessee to a separate company having a separate legal entity cannot be stated that the transfer was made by the assessee to self. In this regard, reliance was placed on the decision of the Hon’ble Bombay High Court in the case of Premier Automobiles Ltd vs ITO reported in 264 ITR 193 (Bom) wherein the Hon’ble Court approved the sale of the undertaking to a joint venture company in which seller had a stake. With regard to the second allegation leveled on the assessee that sale deed has been registered by the assessee in respect of land and building and hence individual values could be assigned to individual assets so as to fall outside the ambit of slump sale, it was argued during the remand proceedings before the ld AO that in respect of registration of land by the assessee in favour of the purchaser post the slump sale, which was one of the reason for the ld AO to disallow the slump sale, relied on the provisions of Explanation 2 to section 2(42C) of the Act which read as under:- For the removal of doubts, it is hereby declared that the determination of the value of an asset or liability for the purpose of payment of stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities.

9 ITA Nos.1829-1830 &2121-2122/K/2013 AKZO Nobel India Ltd., AYs 2006-07 & 2007-08 Accordingly, it was argued that land value registration should not come in the way of sale of undertaking being treated as slump sale since this exception has been carved out in the statute itself. The assessee also placed reliance on the decision of the co-ordinate bench of Pune Tribunal in the case of J.B.Electronics vs JCIT reported in 130 TTJ 240 (Pune Trib) , wherein it was held that the question of treating a sale as an itemized sale of assets arises only when sale consideration of the business is computed on the basis of values of specific assets and liabilities. Unless, therefore, it can be established that the sale consideration is computed on the basis of value of specific assets and liabilities, the question of treating the sale as an itemized sale does not arise. In the present case, it is amply clear that sale consideration of the business has not been computed on the basis of values of specific assets and liabilities and hence, by no stretch of imagination, it could be stated that the present case is a case of itemized sale. Accordingly both the allegations leveled by the ld AO were assailed by the aforesaid arguments by the assessee.

4.9.1. With regard to the adoption of increased sale consideration of Rs. 21.6 crores by the ld AO as against the real cash consideration of Rs. 8.18 crores, the assessee argued that transferred undertaking did not ultimately reach the desired EBDITA margin due to which the assessee had to exercise PUT option and the shares were valued at Nil value. Further the assessee also did not receive any ‘earn outs’ for the same reason. Hence the consideration of Rs. 9.82 crores and Rs. 3.60 crores thereon respectively were never received by the assessee. The assessee placed reliance on the decision of the Hon’ble Apex Court in the case of CIT vs Gillanders Arbuthnot & Co reported in 87 ITR 407 (SC) wherein the Hon’ble Apex Court had held that the expression ‘full value of consideration’ cannot be construed as the market value but as the price bargained for by the parties to the sale. The dictionary meaning of the word ‘full’ is ‘whole or entire or complete’. The word ‘full’ has been used in this section in contrast to ‘a part of the price’ . The expression ‘full value’ means the whole price without any deduction whatsoever and it cannot refer to the adequacy or inadequacy of the price bargained for, nor has any necessary reference to the market value of the capital asset which is the subject matter of the transfer. The assessee also impressed upon the ld CIT(A) on the real income theory and placed reliance on the decision of the Hon’ble Supreme Court in the case of CIT vs Shoorji Vallabhdas and Co reported in 46 ITR 144 (SC) in that regard. Based on these

10 ITA Nos.1829-1830 &2121-2122/K/2013 AKZO Nobel India Ltd., AYs 2006-07 & 2007-08 submissions, the assessee impressed upon the ld CIT(A) to adopt the sale consideration only at Rs. 8.18 crores on transfer of Rubber Chemical Business as the assessee had not received any amount from securities and ‘earn outs’ from PMC as the performance parameters were not met. The assessee also placed reliance on the decision of the co- ordinate bench of this tribunal in its own case for Asst Year 1994-95 wherein this tribunal had held that the sale of fertilizer / fibre undertaking in the financial year as a going concern was a slump sale and not an itemized sale. It was also pointed out that by placing reliance on the said tribunal order for AY 1994-95, the ld CIT(A) had accepted the contention of the assessee that all the undertaking sales in past years were slump sale while disposing off the appeal for Asst Year 2005-06.

4.9.2. It was also stated that the ld AO ought to have adopted sale consideration only to the extent of Rs 8.18 crores based on real income theory and not the notional consideration which was never received by the assessee since performance parameters in subsequent years were not met. It was stated that after treating the slump sale as itemized sale of assets, the ld AO reworked the depreciation and disallowed the same. In the remand proceedings, the ld AO accepted to the contentions of the assessee by concluding as under:- Comments Combined reading of the ITAT order for AY 1994-95 and the case of Premier Automobiles, brings out that transfer to a company in which assessee has 49% stake should not come in the way of the transaction being treated as a slump sale. Further, it may also be stated that as per Explanation 2 to Sec. 42C, the determination of the value of an asset or liability for the purpose of payment of stamp duty, registration fees etc shall not be regarded as assignment of values for individual assets. Consequently, if the transaction is treated as a slump sale, the depreciation would revert to the amount originally claimed by the assessee in the return of income. The A.O. has also provided relief for AY 1995-96, AY 1996-97 and AY 1997-98 on the basis of the ITAT order for AY 1994-95.

4.9.3. In respect of treatment of sale of Bangalore land as business income, the ld AO in his remand report stated as under:- Additional Ground No. 13 Treating sale of Bangalore Land as business income For AY 2006-07 the assessee treated the gains arising from the sale of Bangalore property as income under the head ‘Capital Gains”. The AO while passing the order issued under section 143(3) of the Act treated the gains from the sale of the

11 ITA Nos.1829-1830 &2121-2122/K/2013 AKZO Nobel India Ltd., AYs 2006-07 & 2007-08 Bangalore Land as ‘Business Income’ by reducing the sale value of the land from the WDV of the Building used for the purpose of the business under section 41(2) of the Act without assigning any reasons in the order passed under section 143(3) of the Act.

Assessee’s Submission: ‘Land’ is a capital asset within the meaning of section 2(14) of the Act and any gains arising from the sale of Land is to be treated as income under the head ‘Capital Gains’.

The AO without any reasons erroneously treated the proceeds as ‘Business Income’ under section 41(2) of the Act.

Comments There is no reasoning given by the AO in his order. The comments of the assessee may be considered.

4.9.4. In respect of disallowance of depreciation, it was pointed out that what has been sold always has been an undertaking along with all the related assets and liabilities without assignment of values to individual assets / liabilities. Hence the same need to be treated as a ‘slump sale’ under the provisions of the Act. The assessee placed reliance on the decision of the co-ordinate bench of this tribunal in its own case for the Asst Year 1997-98 wherein the tribunal allowed the claim of the assessee pertaining to opening WDV. It was also mentioned that the ld CIT(A) for Asst year 1994-95 and 1996-97 had accepted the contention of the assessee that the sale of undertaking is a slump sale and not sale of individual assets. Further, in AY 2000-01 , 2001-02 , 2003-04 , 2004-05 and 2005-06, the ld CIT(A) had directed the ld AO to allow the claim of the assessee for depreciation on adjusted WDV of the assets considering that the past sales should be regarded as slump sale. Similar direction was prayed for the years under appeal also by the assessee before the ld CIT(A).

4.9.5. The ld CIT(A) in respect of issues raised before him vide Grounds 1 to 5 together against the addition of Rs. 3,50,65,913/- u/s 41(2) of the Act granted relief to the assessee by placing reliance on the decision of this tribunal in assessee’s own case for the Asst Year 1994-95.

12 ITA Nos.1829-1830 &2121-2122/K/2013 AKZO Nobel India Ltd., AYs 2006-07 & 2007-08 With regard to the disallowance of Rs. 88,63,037/- on account of depreciation claimed by the assessee on the WDV of the Block of Assets , the ld CIT(A) observed that the details filed by the assessee were sent to ld AO for remand who had agreed to the contentions of the assessee in the remand proceedings that the issue is covered in favour of the assessee by the order of this tribunal for Asst Years 1997-98 and 2004-05. Accordingly, the ld CIT(A) granted relief to the assessee in this regard.

Aggrieved, the revenue is in appeal before us on the following grounds : “Ground Nos. 1 & 3 of Revenue Appeal for AY 2006-07: 1. Whether Ld. CIT(A)-XII, Kolkata was justified in accepting claim of assessee as slump sale of Rubber Chemical undertaking u/s. 50B considering the decision of the Hon’ble ITAT in the assessee’s own case in ITA No. 1020/Kol/2007 dated 29.02.2008, whereas appeal was filed against the Hon’ble ITAT’s decision for AY 1997-98. 3. Whether Ld. CIT(A)-XII, Kolkata was justified in accepting assessee’s claim of depreciation Rs.88,63,037/- on the basis of Hon’ble ITAT Kolkata’s decision in assessee’s own case for AY 1997-98, whereas appeal was filed against the Hon’ble ITAT’s decision for AY 1997-98.”

4.9.6. The assessee stated that the sale consideration of Rs. 98,35,830/- has been included in the total addition figure u/s 41(2) of the Act in the sum of Rs. 3,50,65,913/- by treating the sale consideration of Bangalore Land as part of sale of Rubber Chemicals Business. Infact the Rubber Chemicals Business was sold to PMC Group and where as Bangalore Land was sold to Advanta India Ltd, which is a separate legal entity and not connected with PMC Group. The ld AO erroneously clubbed both the sale transactions of Rubber Chemicals Business and sale of Bangalore Land and brought the same to tax u/s 41(2) of the Act. The assessee pleaded that the sale of Bangalore Land should be brought to tax only under the head ‘capital gains’. It was stated that the property at Bangalore comprised only of ‘land’ and no building was attached thereon and hence the entire consideration of Rs. 98,35,830/- was rightly attributed towards land portion by the assessee. The ld AO treated the gains arising from sale of Bangalore land as business income as reducing the sale value of the land from the WDV of the building used for the purpose of business u/s 41(2) of the Act. The ld CIT(A) negatived the contentions of the assessee by observing as under:-

“I have considered the finding of the A.O. and the written submission filed by the A.R. I think the assessee should not be allowed to take advantage on similar issues

13 ITA Nos.1829-1830 &2121-2122/K/2013 AKZO Nobel India Ltd., AYs 2006-07 & 2007-08 on two different occasions differently. Flat is also a capital asset, but on the sale of flat at Belvedere Estate the assessee has bifurcated the receipt on aldn and building separately and citing various case laws on this issue, taken advantage for the same. Here also the land and building at Bangalore were used for business purposes. Therefore, the action of the A.O. in reducing the sale consideration from the WDV of the building should be accepted by the assessee extending the same logic and argument that assessee itself has given in its favour related to sale of flat at Belvedere Estate. Accordingly, assessee’s appeal on this ground is dismissed.

Aggrieved, the assessee is in appeal before us on the following ground:- “Ground No. 2 of Assessee Appeal for AY 2006-07: 2. That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding the treatment by the AO of sale of Bangalore Land as ‘Business Income’ u/s. 41(2) of the Act by reducing the sale value of the land from the WDV of the Building Block, when the same was correctly treated by the appellant as income from ‘Capital Gains’ u/s. 45 of the Income Tax Act, 1961.”

14 ITA Nos.1829-1830 &2121-2122/K/2013 AKZO Nobel India Ltd., AYs 2006-07 & 2007-08 5.1. The ld AR relied on the decision of the Hon’ble Jurisdictional High Court in the case of East India Electric Supply and Traction Co Ltd vs CIT reported in ( 2003) 263 ITR 243 (Cal) for non-applicability of provisions of section 41(2) of the Act in the event of slump sale of Rubber Chemicals Business undertaking.

7.1. We find that the Bangalore property comprising only land was sold to Advanta India Ltd which is totally independent of sale of Rubber Chemicals Business Undertaking. Similarly Belvedere Estate was also independently sold by the assessee which comprises of both land and building for Rs. 70,00,000/- and values have been distributed by the assessee towards land and building separately. Hence we hold that the ld AO had wrongly

15 ITA Nos.1829-1830 &2121-2122/K/2013 AKZO Nobel India Ltd., AYs 2006-07 & 2007-08 included the sale consideration of Rs. 98,35,830/- in respect of sale of Bangalore Land and Rs 70,00,000/- towards Belvedere Estate while computing the business income u/s 41(2) of the Act. In respect of addition made towards Bangalore Land, the ld AO had accepted the contentions of the assessee in the remand report by stating that the contentions of the assessee may be considered as the ld AO had not adduced any reason in his assessment order for treating the same as business income u/s 41(2) of the Act. In view of this, we hold that the sale consideration of Bangalore Land to the tune of Rs. 98,35,830/- and towards Belvedere Estate at Rs 70,00,000/- should not be treated as part and parcel of slump sale of Rubber Chemicals Business Undertaking and the gains arising from sale of Belvedere Estate and Bangalore Land should be assessed only as Capital Gains as reported by the assessee.

7.2. We find that the arguments advanced by the assessee before the ld CIT(A) and findings given thereon in respect of sale of Rubber Chemicals Business Undertaking on slump sale basis has not been refuted by the ld DR before us. We find that the decision relied upon by the ld AR on the Hon’ble Jurisdictional High Court in the case of East India Electric Supply and Traction Co Ltd reported in 263 ITR 243 (Cal) is well founded on the non-applicability of provisions of section 41(2) of the Act.

7.3. With regard to the disallowance of Rs. 88,63,037/- on account of depreciation claimed by the assessee on the WDV of the Block of Assets , the ld CIT(A) observed that the details filed by the assessee were sent to ld AO for remand who had agreed to the contentions of the assessee in the remand proceedings that the issue is covered in favour of the assessee by the order of this tribunal for Asst Years 1997-98 and 2004-05. Accordingly, the ld CIT(A) granted relief to the assessee in this regard. Hence we do not find any infirmity in the order of the ld CIT(A) in this regard.

7.4. In view of the above and respectfully following the decision of this tribunal in assessee’s own case for the Asst Year 1994-95 in ITA No. 1020/Kol/2007 dated 29.2.2008 we hold as under :- (a) Ground Nos. 1 & 3 raised by the revenue in ITA No. 2121/Kol/2013 are dismissed. (b) Ground No. 2 raised by the assessee in ITA No. 1829/Kol/2013 is allowed.

16 ITA Nos.1829-1830 &2121-2122/K/2013 AKZO Nobel India Ltd., AYs 2006-07 & 2007-08

The brief facts of this issue is that the ld AO observed that assessee had expended an amount of interest to the extent of Rs. 2.95 crores and accordingly was asked why the interest should not be disallowed in the same lines as last year on account of use of funds for investments made by the assessee, capital work in progress and loans to directors. In response, the assessee stated that interest expenditure represented mainly bill discounting charges on account of supplier financing arrangements and collection charges of outstation cheques. The assessee did not borrow any funds during the relevant financial year and hence there could be no question of utilizing borrowed funds for investment purpose and capital work in progress. With regard to loans to directors, it was stated that the loans to working directors were given at a lower rate of interest than the rate prescribed in Rule 3 of the IT Rules as per the employee compensation policy of the assessee company and the differential rate of interest was duly added as perquisites in their respective hands and tax deducted accordingly u/s 192 of the Act. The ld AO disregarded the submissions of the assessee and made an adhoc disallowance to the extent of 20% of interest expenditure just to maintain consistency with the assessment order for Asst Year 2006-07 and added a sum of Rs 59,00,000/- to the total income. The ld CIT(A) upheld the action of the ld AO. Aggrieved, the assessee is in appeal before us on the following grounds :- Ground Nos. 2 to 2.4 of Assessee’s appeal for AY 2007-08: “2. That on the facts and in circumstances of the case and in law, Ld. CIT (Appeals) erred in upholding the disallowance of interest expenditure of Rs. 59,00,000/- made by the AO. 2.1.That on the facts and in circumstances of the case and in law, Ld. CIT(Appeals) erred in upholding disallowance of interest expenditure in the assessment year under consideration when he had deleted similar disallowance made by the AO in AY 2006-07. 2.2.That on the facts and in circumstances of the case and in law, Ld. CIT (Appeals) erred in appreciating that during previous year relevant to assessment year under consideration, the appellant had not borrowed any funds and hence, no interest could be disallowed on the

17 ITA Nos.1829-1830 &2121-2122/K/2013 AKZO Nobel India Ltd., AYs 2006-07 & 2007-08 pretext that borrowed funds were utilized for the purpose of investment and capital work in progress of the appellant 2.3.That on the facts and in circumstances of the case and in law, Ld. CIT (Appeals) erred in not appreciating that interest expended was mainly on account of bill discounting charges for supplier financing arrangement and charges for collection of outstation cheques. 2.4. That on the facts and in circumstances of the case and in law, Ld. CIT (Appeals) erred in hoc disallowance of 20% of the interest amount.”

9.1. The ld AR argued that no loan was taken by the assessee company during the relevant financial year which is evident from the balance sheet of the assessee company. Further the interest expenditure incurred during the relevant financial year did not pertain to interest on borrowings but on account of bill discounting charges for discounting suppliers bills and cheque collection and other charges for payments received from customers spread across India. He placed reliance on the decision of the Hon’ble Apex Court in the case of Dhakeswari Cotton Mills Ltd vs CIT reported in 26 ITR 775 (SC) wherein it was held that the ld AO cannot make disallowance on pure guess work on adhoc basis without reference to any evidence or material. He further placed reliance on the decision of the Hon’ble Delhi High Court in the case of Additional CIT vs Jay Engineering Works Ltd reported in 113 ITR 389 (Del) from which an inference can be drawn that when the audited annual accounts of the company depicted that no laons were availed by it during the relevant financial year, the ld AO should not have forcefully made the disallowance on the assumption that borrowed funds were utilized for making various investments , for capital work in progress and for advancing loans to working directors. He further stated that the loans to working directors were given at concessional rates and the difference in interest rate as per Rule 3 of the IT Rules was duly treated as benefit / perquisite in the hands of the said working directors and treated as salary and tax has been deducted at source in terms of section 192 of the Act. This fact is also mentioned by the ld AO in his order. Moreover, he argued that this addition was deleted by the ld CIT(A) in Asst Year 2006-07 vide para 5 of his order dated 11.3.2013 . Moreover, the ld AO also in the remand report submitted for the Asst Year 2006-07 agreed with the contentions of the ld AO and did not draw any adverse inference with regard to the impugned issue . While this is so, there is no reason for the ld CIT(A) in the year under appeal to shift from his earlier decision rendered on the very same facts for the Asst Year 2006-07. In response to this, the ld DR vehemently relied on the orders of the lower authorities.

18 ITA Nos.1829-1830 &2121-2122/K/2013 AKZO Nobel India Ltd., AYs 2006-07 & 2007-08

9.2. We have heard the rival submissions and perused the materials available on record including the relevant pages of the paper book of the assessee. We find that the ld AO had conceded in his assessment order that the assessee had demonstrated from its audited annual accounts which transpires that the assessee has not borrowed any funds during the year and that the amount of interest of Rs. 2.95 crores represented mainly bill discounting charges on account of supplier financing arrangements and collection charges of outstation cheques. We find that this issue has been decided by the ld CIT(A) for the Asst Year 2006-07 in favour of the assessee by placing reliance on the remand report given by the ld AO for Asst Year 2006-07. For the sake of convenience, the conclusions drawn by the ld AO in the remand report for Asst Year 2006-07 are reproduced hereunder which are enclosed in page 598 of paper book for Asst Year 2006-07 before us :- Comments On a perusal of the order of CIT(A) for AY 2002-03, it transpires that the CIT(A) has decided in favour of the assessee and stated that the investment was out of company’s own funds. From a perusal of the assessment records, it transpires that the company had provided breakup of interest expenditure vide letter dated 22nd December 2009.

From a perusal of the balance sheet for FY 2005-06, it transpires that no loan was outstanding as on 31.03.2006.

From the aforesaid, it transpires that the amount of interest of Rs. 3.86 crores could not have been on account of short term loan taken by the company.

Thus it may be concluded that no loan was outstanding in the books of the company as on 31.03.2006. Further no loan was availed by the company except the loan as stated for 10 days.

In view of the above, since loan itself was not there, there should be no case of attribution of interest to investment in Quest International Ltd and towards Capital Work in Progress.

With regard to notional interest on loan to directors, the company has stated that the said directors were employee directors who had availed loan as per company policy. Only because they were directors, interest should not be disallowed especially since tax had been paid on the interest perquisites.

Based on these categorical findings of the ld AO, the ld CIT(A) deleted the disallowance of interest made on adhoc basis for the Asst Year 2006-07. Against this order, the revenue

19 ITA Nos.1829-1830 &2121-2122/K/2013 AKZO Nobel India Ltd., AYs 2006-07 & 2007-08 had not challenged the issue before us though they had preferred an appeal against other issues for the Asst Year 2006-07. It is pertinent to note that the order of the ld CIT(A) for Asst Year 2006-07 was passed on 11.3.2013 and the very same ld CIT(A) had disposed off the appeal for the Asst Year 2007-08 on 12.3.2013. While this is so, we do not find any justifiable reason for the ld CIT(A) to shift his stand for the Asst Year 2007-08 alone when there is no change in the facts and circumstances of the case. We find lot of force in the argument of the ld AR that no disallowance could be made on an adhoc basis on mere guess work and reliance in this regard was rightly placed on the decision of the Hon’ble Apex Court in the case of Dhakeswari Cotton Mills supra. We are also convinced that in respect of loans to employee directors at concessional rate of interest, the difference in rate thereon as compared with Rule 3 of the Rules has been duly considered as perquisite in the hands of the said employee directors and tax is deducted in terms of section 192 of the Act. This fact has not been refuted by the ld DR before us. In view of the aforesaid findings and in the facts and circumstances of the case, we hereby direct the ld AO to delete the disallowance made in the sum of Rs. 59,00,000/- towards proportionate interest . Accordingly, the Ground Nos. 2 to 2.4 for the Asst Year 2007-08 raised by the assessee are allowed.

The brief facts of this issue is that the assessee company transferred its Uniqema business along with its risks and rewards to Croda Chemicals (India) Private Limited from 2.9.2006. However, for the period from 2.9.2006 to 4.1.2007, the business was run by the assessee company on behalf of Croda Chemicals (India) Private Limited (CCIPL). The income that arose from the operation of the Uniqema business during the period 2.9.2006 to 4.1.2007 was paid by the assessee to CCIPL after adjusting the income tax thereon which was deposited with the income tax authorities. The ld AO sought to bring the profits of Rs. 10,84,00,000/- being the profit during the period 2.9.2006 to 4.1.2007 as income of the assessee on the following grounds :- (a) the assessee company did not bring any thing on record to show how the profits of the business were arrived at.

20 ITA Nos.1829-1830 &2121-2122/K/2013 AKZO Nobel India Ltd., AYs 2006-07 & 2007-08 (b) the assessee company also did not provide details of expenditure and receipts of the business. (c) the company did not provide any evidence to substantiate that CCIPL has treated the profits of the business as its income and paid income tax on the same. (d) the assessee company did not provide any evidence to bring out that the business was carried out on behalf of CCIPL. The Ld CIT(A) upheld the action of the ld AO. Aggrieved, the assessee is in appeal before us on the following grounds :- Ground Nos. 3 to 3.2 of Assessee’s appeal for AY 2007-08: “3. That on the facts and in circumstances of the case and in law, Ld. CIT(A) erred in upholding the treatment by the AO of profits of rs.10,84,00,000/- pertaining to Uniqema Business as profits of the appellant. 3.1. That on the facts and in circumstances of the case and in law, Ld. CIT(A) erred in not appreciating that the risk and rewards of the Uniqema Business were assumed by the buyer from 2nd September 2006 onwards pursuant to the sale of the business and that these profits pertained to the period from 2nd September 2006 to 4th January 2007, when this business was run by the appellant on behalf of the buyer. 3.2. that on the facts and in the circumstances of the case and in law, Ld. CIT(A) erred in not appreciating that the appellant has neither considered profits of the Unequema Business as that of the appellant’s nor has the appellant taken credit of the taxes paid with regard to the aforesaid profits in the return of income.”

10.1. The ld AR argued that the assessee company had already furnished the Business Valuation Report and the Business Transfer Agreement relating to Uniqema Business to the ld AO and hence it could not be said that no information / details at all were filed by the assessee. He referred to Note 11 to Schedule 17 of the Audited Annual accounts which clearly disclosed the computation of profits and other related details relating to the profits of Uniqema Business. The relevant note clearly stated that the business was carried on behalf of CCIPL for the period in question due to which such profits have not been accounted for in the books of the assessee. He placed reliance on the decision of the Hon’ble Delhi High Court in the case of Additional CIT vs Jay Engineering Works Ltd reported in 113 ITR 389 (Del) from which an inference can be drawn that when the audited annual accounts of the company clearly and unambiguously disclose the facts, the ld AO cannot state that no material was produced before him. He fairly stated that let this aspect be examined by the ld AO as to whether the said profits of Rs. 10.84 crores

21 ITA Nos.1829-1830 &2121-2122/K/2013 AKZO Nobel India Ltd., AYs 2006-07 & 2007-08 have been included in the returns of CCIPL as admittedly the assessee cannot be expected to have control over the affairs of CCIPL and their tax matters. He prayed that if on verification of the said fact, it is proved that CCIPL had accounted for the subject mentioned profits for the interregnum period in its books and then the same shall be directed to be deleted in the hands of the assessee company. In response to this, the ld DR vehemently relied on the orders of the lower authorities.

10.2. We have heard the rival submissions and perused the materials available on record. We find that the assessee in his Note 11 to the Notes on Accounts enclosed vide page 34 of the Annual Report for the year ended 31.3.2007 had reported as under:-

Notes to the Accounts

11.Exceptional Items 11. (a) (i) The ‘Uniqema’ chemicals business of the company was transferred to Croda Chemicals (India) Private Limited (‘Croda’) on 5 January 2007, for a consideration of Rs. 286.83 crores (including Rs. 6.83 crores for working capital adjustment as on date of transfer of risk and reward of the business).

(ii) As per the business transfer agreement, since the risks and rewards of the business were assumed by Croda from 2 September 2006, for the period 2 September 2006 to 4 January 2007 , the business was run by the company on behalf of Croda. Accordingly, operating results for the business for the period 2 September 2006 to 4 January 2007 have not been included in the accounts of the current year, the details of which are as below:-

Rs lacs Gross Sales 5814 Other Income 77 Excise Duty (737) Materials Consumed (3193) Other expenditure (877) ------------ Profit before depreciation, interest and taxation 1084 ------------

The above amount was paid to Croda, after : - adjusting tax (including fringe benefits tax) thereon, aggregating to Rs. 347 lacs (which has been deposited with the Income Tax Authorities) , and

22 ITA Nos.1829-1830 &2121-2122/K/2013 AKZO Nobel India Ltd., AYs 2006-07 & 2007-08 - adjusting capital expenditure and working capital movement funded by the Company during the above period.

(iii) Profit on sale of the business (shown as an exceptional item) amounting to Rs. 25085 lacs is after adjusting from the above consideration : - value of net assets as on the date of transfer of risk and reward of the business (assets of rs. 5671 lacs and liabilities of Rs. 2757 lacs ) transferred to the buyer - provision for site separation and other costs related to the transaction , existing / probable obligations arising on sale of business and charging out unamortized expenses towards voluntary retirement scheme aggregating Rs. 684 lacs.

(iv) The operating results of Uniqema business for the current year have been considered up to1 September 2006, and have been shown under ‘ discontinued business’ (Refer to note 24, Schedule 17) .

The aforesaid detailed note attached in the Audited financial statements of the assessee clearly nullifies the various allegations made by the ld AO in his assessment order. We also find that this aspect was brought to the notice of the ld AO by the assessee by filing the tax audit report in Form 3CD wherein the tax auditor in reply to Clause 8(a) and 8(b) thereon had reported about this aspect (enclosed in page 140 of paper book). We find that the ld AO had not examined the aspect as to whether the subject mentioned profits of Rs 10.84 crores have been reported in the total profits of Croda (CCIPL) in its books. Hence as fairly conceded by the ld AR in this regard, we deem it fit and appropriate, to set aside this issue to the file of the ld AO, with a limited direction to verify the books of CCIPL in order to know whether Rs 10.84 crores of profits have been reported by them in their books, and if the same is found to be true, then the said addition made in the hands of the assessee company is to be deleted. Accordingly, the Grounds 3 to 3.2 raised by the assessee for the Asst Year 2007-08 are allowed for statistical purposes.

The brief facts of this issue is that the assessee wrote off bad debts in its books of accounts during the relevant financial year to the tune of Rs. 14,43,106/- and the corresponding income had been duly taken into consideration for calculation of taxable income in the earlier years. The assessee company stated that it had inadvertently omitted to claim the

23 ITA Nos.1829-1830 &2121-2122/K/2013 AKZO Nobel India Ltd., AYs 2006-07 & 2007-08 amount of bad debts in its return and had claimed the same during the course of assessment. The ld AO did not consider the claim of the assessee as it was neither made in the original return nor in the revised return but claimed only by way of a letter at the time of assessment proceedings. The ld CIT(A) upheld the decision of the ld AO on the ground that during the appellate proceedings, the assessee did not file any details regarding the claim of bad debt. Aggrieved, the assessee is in appeal before us on the following grounds:- Ground Nos. 4 to 4.1 of Assessee’s appeal for AY 2007-08: “4. That on the facts and in circumstances of the case and in law, Ld. CIT(A) erred in not admitting the claim of bad debts of the company for Rs.14,43,106/- under the provisions of section 36(1)(vii) read with section 36(2) of the Act. 4.1.That on the facts and in circumstances of the case and in law, Ld. CIT(A) erred in holding that the appellant has not filed any details of Bad Debts without appreciating the fact that the party wise break up of the bad debts were duly filed during the course of the hearing before Ld. CIT(A).”

11.1. The ld AR argued that it was pleaded that the decision of the Hon’ble Supreme Court in the case of Goetze India Ltd vs CIT reported in 284 ITR 323 (SC) does not apply to appellate authorities and the ld CIT(A) ought to have entertained the bonafide claim of the assessee with regard to bad debts. There is no dispute on the point that the assessee had complied with the provisions of section 36(2) of the Act in respect of offering income for this debts in the earlier years. He placed reliance on the decision of the Hon’ble Supreme Court in the case of T.R.F. Ltd vs CIT reported in 323 ITR 397 (SC) in support of his claim of deduction for bad debts. In response to this, the ld DR vehemently relied on the orders of the lower authorities.

11.2. We have heard the rival submissions. We find that the claim of bad debts was not allowed to the assessee only on the ground that it was not claimed by the assessee in the original return as well as in the revised return. From the details of bad debts placed on record, we find that the assessee had duly complied with the provisions of section 36(2) of the Act by offering the income in respect of such debts in earlier years. We find that the decision of the Hon’ble Supreme Court in the case of Goetze India Ltd reported supra does not apply to appellate authorities wherein it has been opined that although it is not open for the ld AO to entertain the claim of the assessee unless the same has been made by a

24 ITA Nos.1829-1830 &2121-2122/K/2013 AKZO Nobel India Ltd., AYs 2006-07 & 2007-08 return / revised return , the appellate authorities have the powers to entertain the same. We also place reliance on the decision of the Hon’ble Apex Court in the case of T.R.F Ltd vs CIT supra wherein it has been opined that it is not necessary for the assessee to establish that the debt, in fact , has become irrecoverable. It is enough if the bad debt has been written off as irrecoverable in the books of accounts of the assessee. Hence respectfully following the said decisions, we direct the ld AO to delete the disallowance of bad debts made in this regard. Accordingly, the Grounds 4 to 4.1 raised by the assessee for the Asst Year 2007-08 are allowed.

Order is pronounced in the open court on 08.03.2017 Sd/- Sd/- (Partha Sarathi Chaudhury) (M. Balaganesh) Judicial Member Accountant Member Dated : 8th March, 2017 Jd.(Sr.P.S.) Copy of the order forwarded to: APPELLANT – AKZO Nobel India Ltd. (formerly known as ICI India 1. Ltd.), 8B, Middleton Street, 1st floor, Kolkata-700 071 2 Respondent – DCIT, Circle-10, Kolkata. 3. The CIT(A), Kolkata 4. CIT, Kolkata. 5. DR, Kolkata Benches, Kolkata

/True Copy, By order,

Asstt. Registrar.