M/S. SIVANANDHA MILLS LTD.,COIMBATORE vs. DCIT, COIMBATORE

आदेश /O R D E R

PER CHANDRA POOJARI, ACCOUNTANT MEMBER

These appeals by the assessee are directed against different orders of the Commissioner of Income-tax(Appeals) for the assessment years 2009-10 and 2010-11.

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ITA No.1216/Mds/2013 :

sustaining the following additions by the Commissioner of

Income-tax(Appeals):

i) Disallowance of payment of Rs 18 crores incurred for the transfer of land paid to the Bank of Baroda and payment of workmen compensation for settlement at Rs 807,43,083/-.

ii) Disallowance of claim of set off of business expenditure against long term capital gains at ` 3,68,30,254/-

iii) Disallowance of bad debts of rs 14,21,618/-

limited company with objects, inter alia, of manufacturing yarn.

The Assessee filed the return of income on 30/03/2011 for the

Assessment year 2009-10, admitting a total income of `10,28,03,164/-. The return was initially processed u/s 143(1)

of the Income Tax Act, 1961. The case was selected for scrutiny and a notice u/s 143 (2) was issued on 15/09/2011. It

is observed that the Assessee company had been incurring

losses, since late eighties. There was a strike resorted to by the

Labour union of the Assessee Company, way back in 1993,

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which later resulted in a lockout declared by the Management.

The Management could not continue to carry on the business,

primarily owing to the continued strike by the labour union.

Owing to the above the Company had gone sick and the

Company was constrained to approach BIFR, for remedial

measures. However, BIFR had passed an ex-parte order,

ordering winding up of the Assessee Company and had

accordingly sought to appoint an official receiver.

3.1 The Company challenged the order of the BIFR, by a

writ petition before the Madras High Court, being WP No 19907

of 2001. In the meantime owing to the sickness, the Assessee

company could not meet expectations of its employees in terms

of increment, bonus and other labour measures. The

employees post-strike and lockout, erected barbed wire fence

around the premises, housing, factory and corporate office

thereby virtually preventing all from ingress and egress. In the

meantime the secured creditor – Bank of Baroda, which had

earlier advanced loan against the security of all the assets,

including Stock-in-Trade, had moved petition before DRT

(Debts Recovery Tribunal) and also under SARFAESI Act (The

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Securitization and Reconstruction of Financial Assets and

Enforcement of Security Interest Act), to recover its loan that

was earlier advanced. The Bank had already taken over the

possession of the properties of the Assessee Company,

including the property that was sought to be transferred/sold.

3.2 The Labour Union vis a vis Workmen, to recover its

dues, had also impleaded itself in the writ petition filed by the

Assessee Company. In the course of proceedings before the

Madras High Court, and with the direct involvement and under

supervision of the Madras High Court, a Memorandum of

Compromise was reached on 29/11/2007, between the

Assessee and the Coimbatore District Mill Labour Union,

representing the striking labour union of the Assessee, and the

secured creditor bank, whereby the Assessee, on the

suggestion and helplessly, had agreed to dispose a piece of

land at Saravanampatti and to utilize the proceeds to settle

dues to workmen and to the secured creditor – vis a vis the

Bank.

3.3 In pursuance of the compromise, a formal petition was

filed before the Madras High Court, seeking for permission to

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implement the Scheme of the Compromise / MOC. The Order

of the Madras High Court was necessary as the property was

under the possession of the secured creditor. The Assessee

had engaged certain persons, to enable and facilitate all

aspects surrounding sale of the property, with better terms and

conditions. It was with the assistance of services from these

persons that the Assessee was able to obtain better price,

which was much higher than the guideline value, which would

normally have ended as a distress sale, under such

circumstances, with much lesser consideration, the sale

extracted much higher value which was incredible, considering

overall circumstances under which such sale took place. The

Assessee had paid these persons for such services, by way of commission, which totaled to about ` 1,98,17,992/-. These

commission payments were made by account payee crossed

cheques after duly deducting TDS from such payments. The

recipients had also duly reflected / accounted for these sums in

their respective accounts and returns as applicable. It will be

pertinent to point out that this commission works out to less

than 5% of the entire sale consideration. It was the contention

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of the assessee that it had to do all the above only to ensure that it continues to carry on the business after avoiding winding

up, after such business was helplessly remained under lull. 3.4 In the course of the assessment proceeding the Assessee, claimed deduction u/s 48(i) for the following payments made: a) Payments made to workmen, of ` 8,07,43,083/- who had physically retained the possession (though the bank had taken token legal possession of the property) of the property by preventing the management from entering the property, by putting barricades etc; b) Payment made to secured creditor – Bank of Baroda, to the tune of ` 18.00 Crores/- to secure legal release of the property prior to sale of the property and also in compliance with the implementation of the MOC. c) Payment made to the sales tax department to the tune of ` 97,49,342/- to secure/raise the attachment made by the sales tax department. d) Payment of commission of ` 1,98,17,992/- e) Business expenditure of Rs 3,68,30,254/- f) Bad debts of Rs 14,21,618/-.

3.5 It is submitted that the above payments, i.e. payments

made to workmen, secured creditor, sales tax department, commission payment to mediators, deserved to be allowed as deductions under section 48(i) of the Income Tax Act 1961 since the same fall under the category of those “expenditure

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incurred wholly and exclusively in connection with such

transfer” as contemplated under section 48(i) of the Income

Tax Act. It is submitted that the section 48 contemplates three

amounts for the purpose of computing income chargeable

under the head “Capital gains”, which is as under :

“The first is the full value of the consideration for which the capital asset has been transferred. The second is the expenditure incurred wholly and exclusively in connection with such transfer and the third and the last is the cost of acquisition of the capital asset including the cost of any improvement thereto.”

3.6 It is submitted that in the present facts and

circumstances, all that the assessee has to prove is that the

expenditure in incurred was wholly and exclusively in

connection with the transfer as contemplated under section

48(i) of the Act. Further the larger question is, whether at all

the assessee would have been able to dispose off the property

without incurring these expenditure and if the assesse is able to

prove the same then the expenditure incurred would form part

section 48 (i). It is the contention of the assessee that

unless the assessee had settled service charges i.e.

commission payments, settle the secured creditor, settle the

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sales tax department and also the workmen, the sale

transaction with M/s Alliance Mall developers Pvt. Ltd. would

not have materialized at all. If this transaction had not

materialized, there would perhaps have been no question of

capital gains. It is submitted that the expression used is “the

expenditure incurred wholly and exclusively in connection with

such transfer”. The expression “in connection with such

transfer” has to be seen in a wider manner and given a larger

liberal interpretation. In the present case, the Assessee shall

endeavor to prove that the expenditure incurred or paid was

absolutely necessary to effect the transfer and such amounts

paid will fall under clause (i).

the payment made to the workmen should be treated as

expenses wholly and exclusively in connection with the transfer

as contemplated under section 48(i) of the Income Tax Act

1961. According to the ld. AR, the workmen had forcefully

taken possession of the factory premises of the assessee

company by erecting barbed wire fence and virtually preventing

ingress and egress from the property. This finding of fact was

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recorded by the Learned Assessing Officer in his Assessment

Order. Thus the forced possession by the workmen had

become an encumbrance which was not created by the

assessee company by itself but thrust upon it. The

management thought it wise, on the grounds of prudence and

commercial expediency, not to take back those employees who

brought about the strike in the year 1993 and continued till

2007. It is a statutory liability imposed on the employer to

redeem by making payment. Thus the employer, the Assessee

Company was constrained to make the payment to secure free

possession of the property, which is a pre-condition for the

transfer, in this context, the payment becomes a necessary to

secure free possession of the property and thus qualifies for

deduction u/s 48 (1).

4.1 It is submitted that the workmen were demanding their

compensation. The workmen were made party to the

proceedings. It is submitted that the workmen have

claimed/right over the immoveable property of the company

and the said right is in pari passu to the extent of the

workmen’s portion as laid down in Section 529(1)(c) proviso

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read with Section 529A of the Companies Act, 1956. It is a

well-established legal position, that the winding up of a

company shall be deemed to commence at the time of

presentation of the petition for winding up of the Company

under Section 20 of the SICA.

4.2 The ld. AR placed reliance on the provisions of sec.529

of the Companies Act, which reads as follows:

“Section 529 – Application of insolvency rules in winding up of insolvent companies, the same rules shall prevail and be observed with regard to- ……….

(c) the respective rights of secured and unsecured creditors; as are in force for the time being under the law of insolvency with respect to the estates of persons adjudged insolvent:

Provided that the security of every secured creditor shall be deemed to be subject to a pari passu charge in favour of the workmen’s portion therein, and, where a secured creditor, instead of relinquishing his security and proving his debt, opts to realize his security,-

(a) the liquidator shall be entitled to represent the workmen and enforce such charge;

(b) any amount realized by the liquidator by way of enforcement of such charge shall be applied rateably for the discharge of workmen’s dues; and

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(c) so much of the debt due to such secured creditor as could not be realized by him by virtue of the foregoing provisions of this proviso or the amount of the workmen’s portion in his security, whichever is less, shall rank pari passu with the workmen’s dues for the purposes of Section 529A.] (2) … (3) For the purposes of this sections, Section 529A and Section 530,- (a) “workmen”, in relation to a company, means the employees of the company, being workmen within the meaning of the industrial Disputes Act, 1947 (14 of 1947);

(b) “workmen’s dues”, in relation to a company, means the aggregate of the following sums due from the company to its workmen, namely: (i) to (iv) … (c) “workmen’s portion”, in relation to the security of any secured creditor of a company, means the amount which bears to the value of the security the same proportion as the amount of the workmen’s dues bears to the aggregate of- (i) the amount of workmen’s dues; and (ii) the amount of the debts due to the secured creditors. Illustration. – The value of the security of a secured creditor of a company is ` 1,00,000. The total amount of the workmen’s dues is ` 1,00,000. The amount of the debts due from the company to its secured creditors is `3,00,000. The aggregate of the amount of workmen’s dues and of the amount of debts due to secured creditors is ` 4,00,000. The workmen’s portion of the security is, therefore, one-fourth of the value of the security, that is ` 25,000.

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e. Section 529A is crucial for consideration of these appeals and it is reproduced as it is: Section 529A – Overriding preferential payment. – (1) Notwithstanding anything contained in any other provision of this Act or any other law for the time being in force, in the winding up of a company-

(a) workmen’s dues; and (b) debts due to secured creditors to the extent such debts rank under Clause (c) of the proviso to Sub- section (1) of Section 529 pari passu with such dues, shall be paid in priority to all other debts.

(2) The debts payable under Clause (a) and Clause (b) of sub-section (1) shall be paid in full, unless the assets are insufficient to meet them, in which case they shall abate proportions.

f. From the above it is clear that it is only limited class of secured creditors who have priority over all others in accordance with Section 529A and the priority of the secured creditor is only to the extent that any part of the said security is lost in favour of the workmen consequent to demands made by the Liquidator under Clauses (a) or (b) or Clause (c) to provide to Section 529(1). It is therefore clear that the workmen’s due is pari passu with the claim of any secured creditor. 4.3 In this regard the following Judgments are relied upon by

the ld. AR:

a. In Jitendra Nath Singh in (2013) 1 SSC 462, wherein

it was held as follows:

“16.1. A secured creditor has only a charge over a particular property or asset of the company. The secured creditor has the option to either realize his security or

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relinquish his security. If the secured creditor relinquishes his security, like any other unsecured creditor, he is entitled to prove the debt due to him and receive dividends out of the assets of the company in the winding-up proceedings. If the secured creditor opts to realize his security, he is entitled to realize in a proceeding other than the winding-up proceeding but has to pay to the liquidator the costs of preservation of the security till he realizes the security.

16.2. Over the security of every secured creditor, a statutory charge has been created in the first limb of the proviso to Clause (c) of Sub-section (1) of Section 529 of the Companies Act in favour of the workmen in respect of their dues from the company and this charge is pari passu with that of the secured creditor and is to the extent of the workmen’s portion in relation to the security of any secured creditor of the company as stated in Clause (c) of Sub-section (3) of Section 529 of the Companies Act.

16.3. Where a secured creditor opts to realise the security then so much of the debt due to such secured creditor as could not be realized by him by virtue of the statutory charge created in favour of the workmen shall to the extent indicated in Clause (c) of the proviso to Sub-section (1) of Section 529 of the Companies Act rank pari passu with the workmen’s dues for the purposes of Section 529-A of the Companies Act. 16.4. The workmen’s dues and where the secured creditor opts to realize his security, the debt to the secured creditor to the extent it ranks pari passu with the workmen’s dues under Clause (c) of the proviso to Sub-section (1) of Section 529 of the Companies Act shall be paid in priority over all other dues of the company.

Section 529A was inserted by Companies (Amendment) Act, 1985. By incorporation of this provision, workmen’s dues rank pari passu with secured creditors. In other

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words, the workmen of the company in winding up acquire the status of secured creditors. Pertinently, while inserting Section 529A in the Companies Act by the Companies (Amendment) Act, 1985, the proviso to Sub-section (1) of Section 529 was also inserted which provides that the security of every secured creditor shall be deemed to be subject to a pari passu charge in favour of the workmen to the extent of the workmen’s portion.

4.4 He also relied on the judgment in the case of Bank of

Maharashtra V/s Pandurang Keshav Gorwardkar and others

reported in (2013) 7 SSC 754, wherein it has been held as

follows:

“63. A cumulative reading of Sections 529A and 529(1)(c) proviso ends to an irresistible conclusion that where a company is in liquidation, a statutory charge is created in favour of workmen in respect of their dues over the security of every secured creditor and this charge is pari passu with that of the secured creditor. Such statutory charge is to the extent of workmen’s portion in relation to the security held by the secured creditor of the company. This position, in our opinion, is equally applicable where the assets of the company have been sold in execution of the recovery certificate obtained by the bank or financial institution against the debtor company when it was not in liquidation but before the proceeds realized from such sale could be fully and finally disbursed, the company had gone into liquidation. Stated differently, pending final disbursement of the proceeds realized from the sale of security in execution of the recovery certificate issued by the DRT, if debtor company becomes company in winding up, Sections 529A and 529(1)(c) proviso come into operation immediately and statutory charge is created in favour of workmen in respect of their dues over such proceeds.

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4.5 Further, he submitted that from the above two

judgments it is very clear that a statutory charge is created in

favour of workmen in respect of their dues over the security of

every secured creditor and this charge is pari passu with that

of the secured creditor. Such statutory charge is to the extent

of workmen’s portion in relation to the security held by the

secured creditor of the debtor company. Further without

removal of this charge, the property cannot be sold and there

would be no takers also. The statutory charge acts as an

encumbrance over the property and therefore it is necessary

that the company first settles the dues of the workmen thus

enabling the company to dispose off the property. He drew our

attention to the following judgments:

4.6 Alternatively he submitted that the payment also

qualifies for deduction u/s. 37(1), as the same was made on the

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grounds of commercial expediency. The need for such

payments was imposed by a statutory liability. As a corollary

the existence and continuity of the business has to be inferred.

It was a fact that the Assessee Company would not have been

able to secure release/possession of the property but for the

compromise reached and approved by Madras High Court and

the payment made. Thus the payment made to secure the

release of the property and further to comply with the

compromise reached qualifies for deduction u/s. 48(1). He

also relied on the judgment of the Madras High Court in the

case of CIT vs A. Venkataraman (1982) 137 ITR 846, wherein

it was held that retrenchment compensation paid to the

employees in terms of the agreement to sell was an allowable

deduction incurred wholly and exclusively in connection with

the sale of the asset. The case of Bawa Cherian Vs ITO

(Cochin) was also considered among similar lines. He further

relied on the judgment of the Punjab & Haryana High Court in

the case of Ambala Cantt Electric supply corporation Vs CIT

133 ITR 343.

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was submitted that the settlement made to the secured creditor

was essential and without which the property would not have

been sold at all. It is also submitted that the said property was

mortgaged to the Bank as a security for the loans taken. It is

also submitted fact that SARFAESI proceedings were initiated

by the Bank. It is settled proposition of law once SARFAESI

proceedings are initiated then the same operates as an

attachment over the said property and the property can be sold

without satisfying or duly discharging the dues to the secured

creditor. In this context it would be more than useful to reply in

Section 13(13) of the SARFAESI Act. It reads as follows: No

borrower shall, after receipt of notice referred to in sub-section

(2), transfer by way of sale, lease or otherwise (other than in

the ordinary course of his business) any of his secured assets

referred to in the notice, without prior written consent of the

secured creditor.

5.1 It is submitted that no borrower shall, after receipt of

notice under Section 13(2), transfer by way of sale, lease or

otherwise any of his secured assets referred to in the notice,

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without prior written consent of the secured creditor. This also

means that Section 13(13) of the SARFAESI Act operates as

an attachment/injunction restraining the borrower from

disposing of the secured assets and therefore, any right

created after such notice would be null and void.

5.2 In this context the ld. AR relied on the judgment in the

case of Transcore v. Union of India (UOI) Anr., 1 SSC 125 –

wherein it has been held by the Supreme court as follows:

“Para 23 : Reading the scheme of Section 13(2) with Section 13(4), it is clear that the notice under Section 13(2) is not a mere show cause notice and it constitutes an action taken by the bank/FI for the purposes of the NPA Act. Section 13(6) inter alia provides that any transfer of secured asset after taking possession or after taking over of management of the business, under Section 13(4), by the bank/FI shall vest in the transferee all rights in relation to the secured assets as if the transfer has been made by the owner of such secured asset. Therefore, Section 13(6) inter alia provides that once the bank/FI takes possession of the secured asset, then the rights, title and interest in that asset can be dealt with by the bank/FI as if it is the owner of such an asset. In other words, the asset will vest in the bank/FI free of all encumbrances and the secured creditor would be entitled to give a clear title to the transferee in respect thereof. Section 13(7) refers to recovery of all costs, charges and expenses incurred by the bank/FI for taking action under Section 13(4). Section 13(7) provides for priority in the matter of recovery of dues from the borrower . It inter alia provides for payment of surplus to the person entitled thereto. Section 13(8) inter alia states that if the dues of the secured creditor together with all costs, charges and expenses incurred are tendered

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to the secured creditor before the date fixed for sale/ transfer the secured asset shall not be sold or transferred by the Bank/FI to the asset reconstruction company and no further steps shall be taken in that regard. Section 13(9) inter alia states that where a financial asset is funded by more than one bank/FI or in case of joint financing by a consortium, no single secured creditor from that consortium shall be entitled to exercise right under Section 13(4) unless exercise of such right is agreed upon by all the secured creditors. Section 13(9) provides for one more instance when permission of DRT may be required under the First proviso to Section 19(1) of the DRT Act. The agreement between the secured creditors in such cases is required to be placed before the DRT not as a fetter on the rights of the secured creditors but out of abundant caution. Generally, such agreements are complex, in measure, particularly because rights of each of the secured creditor in the consortium may be required to be looked into. However, if before the DRT, all the secured creditors in such consortium enter into an agreement under Section 13(9) then no such further inquiry is required to be made by the DRT. In such cases, the DRT has only to see that all the secured creditors in the consortium are represented under the agreement. The point to be noted is that the scheme of the NPA Act does not deal with disputes between the secured creditors and the borrower. On the contrary, the NPA Act deals with the rights of the secured creditors inter se. The reason is that the NPA Act proceeds on the basis that the liability of the borrower has crystalized and that his account is classified as non- performing asset in the hands of the bank/FI. Section 13(9) also deals with pari passu charge of the workers under Section 529-A of the Companies Act, 1956, apart from banks and financial institutions, who are secured creditors. Section 13(10) inter alia states that where the dues of the secured creditors are not fully satisfied by the sale proceeds of the secured assets, the secured creditor may file an Application to DRT under Section 17 of the NPA Act for recovery of balance amount from the borrower. Section 13(10), therefore, shows that the bank/FI is not only free to

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move under NPA Act with without leave of DRT but having invoked NPA Act, liberty is given statutory to the secured creditors (banks/FIs) to move the DRT under the DRT Act once again for recovery of the balance in case where the action taken under Section 13(4) of the NPA Act does not result in full liquidation of recovery of the debts due to the secured creditors. Section 13(10) fortifies our view that the remedies for recovery of debts under the DRT Act and the NPA Act are complementary to each other. Further, Section 13(10) shows that the First Proviso to Section 19(1) of DRT Act is an enabling provision and that the said provision cannot be read as a condition precedent to taking recourse to NPA Act. Section 13(11) of the NPA Act inter alia states that, without prejudice to the rights conferred on the secured creditor under Section 13, the secured creditor shall be entitled to proceed against the guarantor/pledger; that the secured creditor shall be entitled to sell the pledged assets without taking recourse under Section 13(4) against the principal borrower in relation to their secured assets under the NPA Act. Section 13(3) states that, no borrower shall, after receipt of notice under Section 13(2), transfer by way of sale, lease or otherwise any of secured assets referred to in the notice, without prior written consent of the secured creditor. Thus, Section 13(13) further fortifies our view that notice under Section 13(2) is not merely a show cause notice. In fact, Section 13(13) indicates that the notice under Section 13(2) in effect operates as an attachment/injunction restraining the borrower from disposing of the secured assets and, therefore, such a notice, which in the present case is dated 6-1-12003 is not a mere show cause notice but it is an action taken under the provision of the NPA Act.

5.3 The ld. AR, relied on another judgment reported in Sree

Lakshmi Products rep. by its Partner Vs. State Bank of India

2007(2) CTC 193 and according to him, from the above

judgment, it is clear that the bank/FI is entitled to take actual

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possession of the secured assets from the borrower or from

any other person in terms and Section 13(4) of the SARFAESI

Act. Any transfer of secured assets after taking possession of

the same by the Bank/FI shall vest in the transferee all rights in

relation to the secured assets as if the transfer has been made

by the owner of such secured assets. Any party aggrieved by

such dispossession will have to take recourse to approaching

the DRT under Section 17(4) of the SARFAESI Act. If the party

is dispossessed, not in accordance with the provisions of the

Act, then the DRT is entitled to put the clock back by restoring

the status quo ante. By virtue of Section 17(4) read with

Section 35 of the SARFAESI Act, if in a given case the

measures undertaken by the secured creditor under Section

13(4) come in conflict with the provisions of any State law, then

notwithstanding to such conflict, the provisions of Section 13(4)

shall override the local law. Section 13(13) of the SARFAESI

Act operates as an attachment/injunction restraining the

borrower from disposing of the secured assets and therefore,

any tenancy created after such notice would be null and void.

Any tenancy created by the mortgager after the mortgage in

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contravention of Section 65-A would not be binding on the

bank/FI, and in any event such tenancy rights shall stand

determined once action under Section 13(4) has been taken by

the bank/FI. When the petitioner is claiming a tenancy prior to

the creation of mortgage and such tenancy is disputed by the

bank the remedy of the petitioner is to approach DRT by way of

an application under Section 17 of the SARFAESI Act to

establish its rights.

5.4 From a reading of the above two judgments , he inferred

that the assessee after receipt of SARFAESI notice, without

prior consent of the secured creditor, could not have done

anything at all to dispose the property. According to the ld. AR,

sec.13(13) indicates that the notice under sec.13(2) in effect

operates as an attachment/injunction restraining the borrower

from disposing of the secured assets and for that property to

fetch a higher rate dues of the bank had to be settled. The

notice under SARFAESI acted as an encumbrance and the

expenditure incurred to remove the said encumbrance certainly

would fall within sec.48(i) of the Act. It is well admitted fact that

the payment was made to Bank of Baroda only to clear the

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encumbrance it held in its favour, to facilitate transfer. It is also

a fact that without removing this encumbrance, which was

enforceable and the bank had already initiated measure to

enforce the same, the transfer of property would have been

impossible.

5.5 In this regard, he made reference to the following

judgments:

made by the sales tax department, it is submitted that there

was a further charge over the property by the Sales tax

department. Since there was an outstanding due towards

sales tax, the department, had initiated action and had created

charge over the property of the company. The sales tax

department made it very clear by their letter dated 10.4.2008,

that only on depositing the necessary monies, the charge and

the attachment on the land will be lifted. Thereafter the

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assesse entered into negotiations and availed the SAMADHAN

SCHEME and settled the entire dues of the sales tax department by depositing a sum of ` 97,49,342/- and only after

the entire attachment and charges over the land were removed

on 25.2.2009, thus facilitating this assesse to proceed with the

sale of land with a third party as mentioned above. It is

submitted that without lifting of the attachment/charge, this

assesse could not have done anything with the lands and there

would have been no takers for the land also. The

attachment/charge orders of the sales tax department acted as

an encumbrance in order to sell the property and for that

property to fetch a higher rate dues of the Sales tax department

had to be settled. It is submitted that the encumbrance and the

expenditure incurred to remove the said encumbrance certainly

would fall within sec.48(i). It is well admitted fact that the

payment was made to Sales tax department only to clear the

encumbrance it held in its favour , to facilitate transfer. It is

also a fact that without removing this encumbrance, which was

enforceable the transfer of property would have been

impossible. According to the ld. AR, therefore the monies paid

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to the sales tax department would fall within the category of

sec.48(i) of the Act.

facilitated in completing the transaction, it is submitted that the

payment of commission to brokers for facilitating smooth

transaction would fall under the category of “the expenditure

incurred wholly and exclusively in connection with such

transfer”. However, the expenditure incurred towards payment

of commission has been disallowed on the ground that the

most of the recipients were related to the assessee and that of

lack of evidence / material regarding the services rendered by

these persons, without appreciating that there was no other

reason for the assessee to make the payment. It should be

seen that the assessee had produced all the evidences which

are more than adequate to establish such fact, genuineness,

necessity and purpose of such payment, which were further

corroborated by the fact of filing of returns thereof by the

recipients.

7.1 It was submitted that with the production of fairly

reasonable evidences pointing to such fact or even raising

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probabilities thereof would amount to discharge of onus by the

assessee and thereafter the onus shift to the Department to

disprove the same with more cogent and material evidence,

supporting rejecting of evidences produced by the assessee.

Further it was submitted that no reasons have been recorded in

the impugned order to show that the assessee has not utilized

the services of the recipients, except predominant prevalence

of presumption of bad faith about the assessee and conjectures

that no services would have been rendered by those brokers,

to reject the all the good evidences produced by the assessee

and the confirmations thereon made by the respective

recipients. Further the AO and the CIT(A) had not rejected the

payments of commission on the grounds that the same was

excessive.

7.2 It was submitted that the commission totally worked out

to less than 5% of the total sale consideration which is

reasonable considering he difficulties surrounding the sale of a

property which had a chequered history.

7.3 It is submitted that both the Assessing Officer and the

Learned Commissioner of Income Tax, had not doubted the

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veracity (genuineness) of the payments made. The only

ground attributed to was that evidences that were let in were

inadequate, forgetting the fact that the higher (if not the

highest) sale consideration received amidst the adverse

circumstances (of adverse conditions in which the assessee

found itself in), and that, too within an incredibly shorter time

constitute a kind of unimpeachable evidence which cannot be

arbitrarily reject ted.

7.4 It is submitted that the assessee had furnished all the

details like, (i). payments were made through account payee

cheques, which reflected in the bank statements of both the

assessee and payees, (ii). payments were subject to TDS, (iii)

all the recipients confirmed the commission of payments and

(iv) the recipients had also appropriately shown these receipts

in their respective income tax returns.

7.5 According to the ld. AR, the AO had selectively

summoned some of the recipient, examined hem and also

recorded their statement. The entire scenario was explained.

In spite of this, both the AO and CIT(A) have rejected on the

ground that (i) some of the recipients were relatives of the MD

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of the assessee company, (ii) some have accounted the

payments in the next assessment year, (iii) the buyer has also

paid commission. It is pertinent to point out that the books of

accounts of the assessee have not been questioned. Nor the

genuineness and regularity have been doubted. He relied on

the following judgments :

(i) In Medical Technologies Ltd (2013) 32 taxmann.com 386

(Guj), it was held that when the assessee had payments of

commission to agents and the same was approved by the

management it was an allowable expenditure.

(ii) In CIT vs. Rama Multitech Ltd. 33 taxmann.com 13(Guj),

it was held that when there was no defect in maintenance of

books of account on the part of the assessee there could not

be any disallowance.

(iii) In Asgar Jain vs. CIT (2008) 298 ITR 60 (Kar) , it was

held that where commission was paid for sale of property and

amount of commission paid had been reflected by recipient of

commission in his income tax returns and same was accepted

by the department, disallowance of such commission while

computing capital gain in assessee’s hands was not justified.

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(iv) It was held in Dhansiram Agarwala vs. CIT 217 ITR 4

(Gau) that where the genuineness and regularity of the

accounts have not been challenged, the accounts are prima

facie proof of the entries and the correctness thereof under

section 34 of the Evidence Act, 1872.

assessee could not carry on its business, owing to factors

beyond its control, as already stated supra. The Management

was forced to sell the property only to pave the way for

resumption of business, at the earliest. The Technological

obsolescence was yet another primary factor that also forced

the management of the assessee to dispose of the old and

obsolete machineries. Just because certain properties were

either sold or planned to be sold, it cannot be a ground to draw

an inference that the Company is in the process of winding up.

Winding up is a process of law and it cannot be assumed,

unless the same has happened.

8.1 The Companies Act provides for sale of its entire

undertaking or part of its undertaking, through Sec.293 of

Companies Act and yet remain in the thick of its business and

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its existence is not disturbed. The Companies Act does not

provide for compulsory winding up, even in the wake of

disposal of its undertaking. The Companies Act does not even

assume that in the wake of such sale of its undertaking, the

primary business of the Company would come to an end or

ceased to be carried on. Thus even disposal of its undertaking

cannot lead to an inference of winding up.

8.2 He submitted that the Income Tax Act, too, provides for an

occasion, through Sec.54G, wherein the assessee may

dispose of its entire undertaking and even remain without any

assets and yet continue to remain as a business entity, to

resume its business. Thus both the Companies Act and the

Income Tax Act do not provide for any ground for any

assumption that disposal of majority (even all) of its assets,

would amount to winding up. The winding up being a legal

process it cannot be assumed otherwise.

8.3 It is submitted that what had happened was a temporary

suspension of its business activities, albeit longer period. The

Act of the management in challenging the winding up

petition/direction of BIFR, is a clear indication in this direction.

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Even disposal of its assets or termination of its employees

would not provide for an inference to the contrary.

8.4 According to the ld. AR, the authorities below erred on an

incorrect notion assumed the assessee was on the brink of

winding up and as there was no manufacturing activity all the

expenditure need to be disallowed and had accordingly

disallowed, including those pertaining to bad debts written of,

depreciation etc., Generation of revenue is neither important

nor a necessity to claim expenses, if such expenditure is

otherwise claimable. Generation of revenue is not a sine qua

non, for allowance of expenditure.

8.5 The assessee relied on the CIT v. Vikram Cotton Mills

Ltd. (1988) 169 ITR 597 (SC), wherein extreme conditions

prevailed wherein the Company was closed down and a

petition for winding up was presented. A major secured

creditor intervened, took possession of the fixed assets and to

pay off the creditors and a scheme of lease of the mills was

evolved by the High Court, the Supreme Court held that there

had been temporary suspension of business only.

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CIT(A) had confirmed the disallowance of bad debts claimed on

the ground that the assesse did not furnish details to show that

these amounts were offered as income in the earlier years.

9.1 It is submitted that the Learned Commissioner of Income

Tax (Appeals) failed to appreciate that the bad debt,

considering its nature, would not have come up in the first

place, without offering the same as income either in an earlier

year or in the same year. It may be noted that the amount of

debt, written off as bad debts, etc. on the genesis of this

account/amount, before the Assessing Officer.

9.2 It is submitted that the only ground on which this amount

was disallowed by the Assessing Officer was that there no

manufacturing activity during the year. It is to be seen that the

Learned Commissioner of Income Tax (Appeals), did not even

allude to the same ground to confirm the disallowance made by

the Assessing Officer, instead Learned Commissioner of

Income tax(Appeals) has stated as his grounds of confirmation

of disallowance that “the assessee could not furnish the details

to show that these amounts were offered as income in the

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earlier years. During the course of appellate proceedings, the

assessee could not furnish any details to satisfy the conditions

of sections 36(1)(vii) rws 36(2) of the Income Tax Act”.

9.3 Further, it is submitted that no such information was

ever asked for in the course of appellate proceedings. He

submitted that the claim of bad debts needs to be allowed in

view of the following judgments:

(i) CIT vs. Ahmedabad Electricity Company Limited (262 ITR 97(Guj.)

(ii) Jethahirji and Jethabhaj Ramdas vs. CIT (120 ITR 792)(Bom).

(iii) Kamala Cotton vs. CIT (226 ITR 605)(Guj.)

(iv) TRF Limited vs. CIT (2010) 323 ITR 397(SC) & (2010) 190 Taxman 321(SC).

(v) Southern Technologies Limited vs. Joint CIT (20120) 320 ITR 577 (SC).

expenditure/loss against long term capital gain, it is submitted

that this claim was disallowed on the ground that there was no

business activity of spinning and manufacturing of yarn and the

expenses could not be claimed. However the department has

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not produced any evidence to prove that the assessee was

making efforts not to continue the business activities.

deterioration in value of stock-in-trade, it was submitted that

the assessee’s claim of loss arising out of deterioration in the

value of goods/stock in trade, which was disallowed by the

Assessing Officer on the ground that there was no

manufacturing activity during the year was confirmed on the

same ground without considering the contentions of the

assessee that it was only undergoing lull and the business was

not discontinued. Indeed the assessee was forced to defer the

resumption of the business activities owing to high pitched

assessment order and consequent harsh recovery measures

taken by the department which resulted in incorrigible and

substantial reduction in required financial resources required to

resume business activities with new plant and machineries.

other sources instead of business income as claimed by the

assessee. It is to be seen that the department has not

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produced any evidence to prove that the assessee was not

making efforts to continue the business activities. 13. The additional ground raised by the assessee is as follows:

“The Commissioner of Income-tax(Appeals) ought to have considered the legal position that the company has earned business income in the form of interest receipts and consequently the business loss arising out of the business activities should be set off against the capital gain on sale of business assets.” He prayed that above additional ground to be admitted in

view of the judgment of the Supreme Court in the case of

NTPC v. CIT (229 ITR 383)(SC) and according to him, it

was inadvertently not raised before the CIT(Appeals).

13.1 It was submitted that the Commissioner of Income- tax(Appeals) ought to have considered the amount of ` 56.17

lakhs credited to profit and loss account as interest which has

arisen in the course of carrying on of normal business activities.

The Commissioner of Income-tax(Appeals) ought to have

considered the fact that in the subsequent years the business

activities of the company have been revived and consequently,

as the business of the company has been started again, the

loss from business activities should be allowed. The above

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sales have been supported by sale bills and TNVAT Returns and which have been over looked by the assessing authority also. 13.2 The Commissioner of Income-tax(Appeals) ought to have considered the fact that the licenses and registrations such as Sales Tax (TIN) were all in currency and this indicates that the company is engaged in the process of revival activities. The Commissioner of Income-tax(Appeals) ought to have considered the fact that the company has vehemently contested the winding up order passed by BIFR before the High Court of Madras and the company has got favourable by dismissal winding up order of BIFR. This clearly shows the company’s genuine intention of reviving its business activities. In l.VE. Vairavan Chettiar v. CIT (1969) 72 ITR 114, the Madras High Court held that maintaining the establishment and waiting for improved market conditions in a business which the assessee had temporarily stopped, the business must be deemed to have continued as there was nothing to show that he had completely abandoned or closed that business.

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13.3 The CIT(Appeals) has erroneously concluded that the business activities are totally stopped by voluntary action of the Board of Directors which is factually incorrect and because of the labour unrest/outcry the Directors could not enter into the mills premises and do business. The CIT(Appeals) ought to have considered the fact that the statutory auditors have certified the status of going concern of the company. The CIT(Appeals) has overlooked the fact that the business expenditure debited to the profit and loss account represent expenditure which in the nature of revenue and which have been crystalized in the financial year ended 31.03.2009 and 31.3.2010 and hence property claimed in those years. The Assessing Officer has disputed the allowability or otherwise of the expenditure in the assessment order. 13.4 The Commissioner of Income Tax(Appeals) has failed to consider the fact that the expenditure have never been claimed in any earlier years and only when it became crystalized the company has claimed the same which is clearly admissible in law. In the case of CIT v.

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Hariprasad & Co. (P) Ltd. (99 ITR 118,), the following observations of the Apex Court could be relevant “From the charging provisions of the Act, it is discernible that the words ‘income’ or ‘profits and gains’ should be understood as including losses also, so that, in one sense ‘profits and gains’ represent plus ‘income’ whereas losses represent ‘minus income’. In other words, loss is negative profit. Both positive and negative profits are of a revenue character. Both must enter into computation, wherever it becomes material, in the same mode of the taxable income of the assessee” 14. The ld. AR submitted that the CIT(Appeals) ought to have considered the amount of ` 56.17 lakhs credited to profit and loss account as interest which has arisen in the course of carrying on of normal business activities. The CIT(Appeals) ought to have considered the fact that in the subsequent years the business activities of the company have been revived and consequently, as the business of the company has been started again, the loss from business activities should be allowed. The above

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sales have been supported by sale bills and TNVAT Returns and which have been over looked by the assessing authority also. The Commissioner of Income Tax (Appeals) ought to have considered the fact that the licences and registrations such as Sales Tax (TIN) were all in currency and this indicates that the company is engaged in the process of revival activities. The CIT(Appeals) ought to have considered the fact that the company has vehemently contested the winding up order passed by BIFR before the High Court of Madras and the company has got favourable by dismissal winding up order of BIFR. This clearly shows the company’s genuine intention of reviving its business activities. 15. Regarding the disallowance of commission payment, the learned DR has made very elaborate submissions. The Assessing Officer in his assessment order has stated “The AR was specifically asked to produce the list of persons engaged in the transfer of land to M/s Alliance Mall Developers Co. Pvt. Limited. The assessee vide letter dated 6.12.2011 has submitted the details of commission paid to 51 persons totaling

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to `1,98,17,992/-”. The Assessing Officer based on this

information verified few of the persons namely six persons and

concluded that these people are either relatives or associates

of the Managing Director of M/s Sivananda Mills Limited, Shri

P.Murugesan. None of the commission agents were involved

in the broking of the transfer of land with Alliance Mall. The

Assessing Officer further stated that most of the persons have

filed revised return or accounted receipt in the next year as

they were following cash method of accounting. The Assessing

Officer obtained clarification from M/s Alliance Mall Developers

Co. Pvt. Ltd., Mumbai regarding the commission agents who

were mediating transfer between M/s Sivananda Mills Ltd and

M/s Alliance Mall Developers Co. Pvt. Ltd. M/s Alliance Mall

Developers Co. Pvt. Ltd has sent a ledger copy of the

commission agent name M/s Hind Wastra Bandar who was paid ` 55,15,100/- as brokerage for the purchase of the said

property. Hence, the Assessing Officer concluded that the

commission was not paid for the services rendered and the

expenditure incurred was not wholly and exclusively in

connection with such transfer.

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also asked to furnish the nature of services rendered by the

persons to whom the amounts were paid. An opportunity was

also given to the AR to also furnish the Income tax details and

bank accounts of the agents to prove the claim. The AR only

stated that the services include referral services, services on

providing access to network of targeted audience, convening or

making arrangements for a meeting between the parties

concerned or their agents, providing information or providing

means for exchange of information required for proper

evaluation of facts and / or for decision making, identification of

parties / things / assets / properties concerned and providing

assistance in bringing about transaction or conclusion of

transaction on mutually acceptable terms and conditions. The

AR has made elaborate submissions without specifically

mentioning the services rendered by the 51 agents to whom

brokerage / commission payments were made. One of the

fundamental requirements for allowing deduction in respect of

commission payment is that there should be evidence of some

services being rendered. He relied on the order of the Kolkatta

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Bench, ITAT in the case of United Traders Vs TRO 27

Taxman.com 293 (2012), wherein it was held that “It is a

compulsory requirement for allowing deduction in respect of

commission payment that there should be evidence of some

services being rendered”. The AR could not specify the

services rendered by any agents and also did not produce any

of the agents to whom commissions were paid for necessary

verification during the course of appellate proceedings. It is

also surprising that 51 persons who are closely associated with

the MD were paid these commission payments without services

being rendered by these persons, and prayed to confirm the

disallowance made by the Assessing Officer.

workmen, the ld. DR submitted that the assesse company was

incurring losses from the year 1989 and was closed because of

workmen agitation in the year 1991. The workmen

compensation / retrenchment were on account of business

liability of the assesse company. It has nothing to do with the

transfer of the property done by the company. A letter was also

addressed to the assesse company on 24.01.2013 wherein

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clarifications were sought from the assesse company. As seen

from the Memorandum of Compromise, wages were to be paid

from June to December 1993. The bonus was to be paid for

the year 1991-92 and 1992-93 and the earned leave

encashment for the year 1992 and 1993. The assesse was

asked to clarify with regard to the amounts claimed in the

regular return of income for the assessment year 1991-92,

1992-93 and 1993-94 with respect to the wages and bonus.

The wages, if they were claimed in the profit and loss account

for the assessment year mentioned at, the claim to allow the

same against the capital gain will amount to double deduction. Hence, the assesse was asked to clarify and provide evidence

with regard to details of returns filed for the assessment year 1991-92 to 2007-08. The assesse in his reply dated 8th

February 2013 submitted that the amounts were not claimed by

the management in any of the previous years. However, no

evidence with regard to this was filed before me to appreciate

the facts. It is also to be mentioned that any retrenchment

compensation paid to ex-employees on sale of business assets

is not allowable u/s.48(1) as compensation so paid has no

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connection with the transaction of sale of land building and it is

connected only with the closure of the business. The Bombay

High Court made this observation in the case of CIT v. Radia

Talkies (238 ITR 872). On examination of the facts of the case,

it is very clear that the retrenchment compensation was on

account of closure of business and the arrears of wage / bonus

was related to the business of the assesse and has nothing to

do with the sale of business assets. He placed reliance on the

judgment of the Delhi High Court in the case of Sitananda vs.

CIT (2001) 251 ITR 575, wherein it was held that the assesse

has to pay the interest to the lessor for the delayed payment of

lease amount. It was held that it was not an expenditure

incurred wholly and exclusively in connection with the transfer.

In the case of the assessee also there were interest payments

to the workers and this expenditure cannot be said to be wholly

and exclusively incurred in connection with the transfer and

cannot be allowed as deduction while computing the capital

gain. Hence, the Assessing Officer has rightly disallowed the

expenditure claimed on account of payments made to workmen

and settlement of staff.

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Baroda, the ld. DR submitted that from the details furnished by

the assessee, it is seen that the dues as on 31.3.2007 with the Bank of Baroda as on 28.4.2007 was ` 34,83,76,311/-. It is

also seen from the credit facilities of Bank of Baroda, the

security agreement shows the hypothecation of stocks, book

debts, plant and machinery, pledge of stocks, equitable

mortgage of factor land and buildings. It is pertinent to see

from the nature of loan obtained by the assessee that they

were in the nature of cash credit and term loans. Term loans

are usually utilized by the company for purchase of plant and

machinery and other assets of the company. The assesse

could have claimed depreciation in the earlier years on the

assets purchased from the loans taken by the company. The

major amount was on account of term loans and also demand

loans. As on 31.10.1991 only, the assessee had given

equitable mortgage of all the fixed assets of the company and

the charge on the equitable mortgage was originally credit on

16.7.1982 which was modified from time to time. The equitable

mortgage of fixed assets of the company was modified in May

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1991 by reduction of charge from `6,04,71,000/- to `5,94,51,000/- and extension of charges for securing sufficient demand loans of ` 10,00,000/- thereby increasing the total amount secured by the charge from `5,94,51,000/- to `6,04,51,000/-. The rate of interest per annum was at 16%.

There was also an opening interest of 16% per annum per quarter since the assesse has not paid the dues regularly. As per letter dated 28.4.2007 filed by the assessee, the loan

account has been classified as non-performing assets as on 31.3.1991 in accordance with the RBI directives and guidelines. As seen from the facts in this letter, the assessee has

defaulted in payment of interest on the above loans during the assessment year 1989-90, 1990-91 and 1991-92. 18.1 He submitted that in view of the above failure of the assesse to pay the dues of loan along with interest, the bank has in letter dated 28.04.2007 stated to discharge the liabilities to bank aggregating to ` 34,83,311/-. Taking this letter into

consideration, a letter was addressed to the assessee by the CIT(Appeals) on 24.01.2013 asking the assesse to file the details regarding the charge with respect to the land and

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buildings, Plant and Machinery and stock pledged to the bank

till December 2007. The assesse was also requested by the

CIT(Appeals) to clarify regarding the utilization of the term loan

during the various financial years. However, in the letter dated

08.12.2013 filed before the CIT(Appeals) by the assessee did

not file any of the required details but only stated that the banks

invariably took all the properties as a single security cover for

all the advances / loans lent by it and does not distinguish or

differentiate either the properties or lands and the entire

amount of loan repayment needs to be allowed u/s 48(i).

18.2 The assessee did not furnish any details regarding

utilization of term loan from which Plant and Machinery and

other assets were purchased and also the details of

depreciation claimed in the earlier years on all those assets. In

the absence of these details, it is not possible to know whether

the assessee has claimed deduction in the earlier years on

account of depreciation on the assets purchased by utilizing the

term loan. As discussed earlier, the assessee has approached

the High Court for according permission to sell the vacant land

of 14.68 acres out of the total extent of 25.66 acres. In the

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judgment of the Hon’ble High Court delivered on 3.12.2007 (at

Page 4, Para 2), it is clearly mentioned that the bank has accepted the one time settlement and received the amount of `

18 crores towards the one time settlement in no lien account.

This clearly proves that the assesse has received Rs.18 crores

from the prospective buyer i.e., M/s Alliance Mall Developers

Co. Pvt. Ltd. before approaching the High Court to sell the

vacant lands. Since the BIFR proceedings are pending before

the High Court, the assesse has filed the application before the

High Court to permit the assesse to sell the vacant land. This

clearly proves that the payment to the bank is not an

expenditure related to the transfer of the property. As seen

from the information filed during the course of assessment

proceedings, a letter was filed from the Bank of Baroda (August

6, 2012) stating that the said finance limits have been closed

and settled in full, out of the sale proceeds of the property on

17.12.2007. A letter was addressed by the Bank of Baroda on 17th December 2007 to M/s Alliance Mall Developers Co. Pvt.

Ltd. stating as follows :

“As per your letter of even date addressed to us, we state that we have debited your account for the sum of

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`18 crores only against the one time settlement of ` 18 crores in respect of dues of M/s Sivananda Mills Ltd. and further that we have credited the balance of maturity amount of fixed deposit held by you under TD108 Scheme bearing Receipt No. 799948 in the current account held by you with us. We shall hand over all the title deeds of the scheduled properties in our possession directly to you on receipt of the sale from the Debts Recovery Tribunal.” 18.3 According to the Departmental Representative, this clearly proves that the amount was paid on account of debt of the company and has nothing to do with the payments in connection with the transfer. Before the High Court, the bank has accepted that the amounts of ` 18 crore was received and

kept in a no lien account. This was before the proceedings of the High Court on 3rd December 2011. As seen from the assessment order, the assesse made an agreement for sale on 12th December 2007. This states that the purchaser had deposited the amount of ` 18 crores in a no lien account before

the date of sale of agreement. All these facts clearly state that the expenditure incurred with regard to the payment to the bank has nothing to do with the transfer of the land and is not an allowable expenditure u/s 48(1) of the Income Tax Act. It is not an expenditure incurred wholly and exclusively in connection

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with such transfer. The words “in connection with such transfer”

are very relevant to allow the transfer. Mere payment to

discharge the mortgage cannot be allowed as either cost of

improvement or as deduction from consideration as held by the

High Court of Madras in the case of CIT Vs Vajrapani Naidu

242 ITR 560. The High Court followed the decision of the

Supreme Court in the case of Arunachalam Vs CIT (1997) 227

ITR 222. The Apex Court held that outstanding dues, against

mortgaged property, not to be deducted (CIT Vs Attil N Rao

(2001) 252 ITR 880 (SC)]. The CIT(Appeals) agreed with the

Assessing Officer in disallowing the expenditure relating to the

bank payment and the order is confirmed.

Commissioner of Income-tax(Appeals) erred in sustaining the

disallowance made by the Assessing Officer regarding the

claim of set off of business expenditure/loss against Long Term

capital gain, on the ground that there was no business activity

of spinning and manufacturing of yarn and the Departmental

Representative supported the orders of the lower authorities.

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material on record. The claim of the assessee in this appeal is

with regard to payment of Rs. 18 crores to Bank of Baroda and

Rs. 8,07,43,083/- to workmen as a deduction out of

consideration received from sale of capital asset.

the head “capital Gains” shall be computed by deducting from

the full value of the consideration received or accrued as a

result of the transfer of asset following the amounts viz.,

i) expenditure incurred wholly and exclusively in connect ion with such transfer, ii) the cost of acquisition of the capital asset and cost of any improvement thereto.

Sec.48 of the Act, broadly contemplates three amounts for the

purpose of computing income chargeable under the head

“Capital Gains”. The first is the full value of the consideration

for which the capital assets has been transferred. The second

is the expenditure incurred wholly and exclusively in

connection with such transfer and the third and last is the cost

of acquisition of the capital asset including the cost of any

improvement thereto.

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facts of the case as in Authorised Representative of

assessee’s submissions. It cannot be disputed that the

property in dispute was mortgaged with Bank of Baroda. They

also taken the symbolic possession of the assets charged to

them under the provisions of SARFAESI 2002 which is

evidenced from the letter dated 7.7.2007 kept on record at

page 2 of the paper book. Further, they have also given

possession notice vide letter dated 7.7.2007 which is kept on

record at page 3 of the paper book. Thus, it cannot be

disputed that unless the assessee had settled the dispute with Bank of Baroda, the sale transaction with M/s. Alliance Mall Developers Co. Pvt. Ltd. vide sale deed dated 11th June, 2008

could not have materialized, there would perhaps have no

question of capital gains. The sale would not have taken

place. Being so, the full value of consideration in this case

was not apparent consideration. The Legislature while using

the expression “full value of consideration” in our opinion, has

contemplated both additions to, as well as deductions from the

apparent value. What it means is the real and effective

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consideration. That apart, so far as clause (i) of sec.48 is

concerned, we find that the expression used by the Legislature

in their wisdom is “the expenditure incurred wholly and

exclusively in connection with such transfer”. The expression

“in connection with such transfer” is, in our opinion, certainly

wider than the expression “for the transfer”. Once again, we

are of the view that any amount the payment of which is

absolutely necessary to effect the transfer will be an

expenditure covered by this clause. In other words, if, without

removing any encumbrance, sale or transfer could not be

effected, the amount paid for removing that encumbrance will

fall under clause (i). In this case, sale of transfer could not be

effected and the amount paid for removing that encumbrance

will fall under clause (i) of sec.48 of the Act. The same view

was taken by the Bombay High Court in the case of CIT v.

Shakuntala Kantilal (190 ITR 56). This decision is followed by

the Madras High Court in the case of CIT v. Bradford Trading

Co. P. Ltd. (261 ITR 222), wherein it was held that the amount

paid by the assessee to a third party to settle the pre-existing

claim against transfer of asset as also litigation expenses

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constitute the expenditure incurred wholly and exclusively for

transfer of capital asset and was deductible in computation of

capital gain; amount reimbursed by the vendee towards such

claim constitute part of sale consideration but deductible while

computing capital gain. Similar view was taken by the Bombay

High Court in the case of CIT v. Abrar Alvi (247 ITR 312).

Further, Calcutta High Court in the case of Gopee Nath Paul

And Sons And Another v. DCIT (278 ITR 240), held that the

criteria is the perfection of title in order to effect the sale. In

that case, without removing the liability of the Allahabad Bank,

the title of the purchaser could not be perfected. Having

regard to the facts and circumstances of that case and the

position in law, the meeting of the liability of the Allahabad

Bank relating to the assets of Gobindo Sheet Metal was an

expenditure incurred wholly and exclusively in connection with

the transfer. Further the Delhi High Court in the case of CIT v.

Eagle Theatres (205 taxman 278), wherein it was held that the

amount paid to the tenants for vacating the premises for

effecting the sale of building is required to be deducting in

computing the capital gains of the building sold as incurred

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wholly an exclusively in connection with transfer. Further, the

Andhra Pradesh High Court in the case of Naozar Chenoy v.

CIT (234 ITR 95), observed as under :

“As regards the expenditure incurred by the assessee towards payment of the amount to the tenants for vacating the premises, which is the subject-matter of the sale transaction, we are of the view that it has nexus with the transaction as without the tenants vacating the premises, the building cannot be sold. Therefore we are of the view that the said expenditure was incurred for effecting the transaction and therefore he is entitled for deduction of the amounts incurred towards vacation of the tenants, in computing the capital gain of the building sold.”

in the case of CIT v. A. Venkatraman And Others (137 ITR

846) . In view of the above discussions, we are of the opinion

that the above two payments to be allowed. It is needless to

say that had the assessee not paid to the workmen, who had

taken the possession of factory premises of the assessee

could not be allowed to transfer the said capita asset.

However, if the assessee had claimed any amount out of this,

in any assessment year , same to be reduced from this

amount i.e. Rs. 8,07,43,083/- by AO while giving effect to this

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order. Accordingly, the grounds relating to these issues are

allowed.

commission payment.

not properly vouched and doubted the services rendered by

the recipients. Further, the contention of the ld. Departmental

Representative is that most of the recipients of this commission

are either relatives or associates of the Managing Director of

Sivananda Mills, Mr. Murugesan. The AO has given a finding

that none of the commission payments were involved in the

brokering of the transfer with Alliance Mall Developers Co. P.

Ltd. (purchaser). Most of the persons have filed revised return

or accounted the receipts in the next year as they were

following cash method of accounting. Further, the contention

of the ld. DR is that the purchaser had a broker viz. M/s. Hind

Wastra Bandar, who has received the payment of Rs 25.15

lakhs as brokerage. From this, the DR inferred that there is no

necessity of payment of commission by the assessee. In our

opinion, the reason given by the AO to deny the payment of

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commission is not proper. It is not unusual that both,

purchaser and seller having separate brokers or middlemen to

complete the transaction of transfer. The CIT(Appeals) has

given a finding that the assessee has not produced brokers to

show that they have rendered services. The power of the

CIT(Appeals) is coterminous that of the AO and he should

have issued summons, once the assessee has furnished the

names and addresses of the parties. This exercise has not

been done by the revenue authorities. Hence, out rightly

disallowing the entire commission payment is not appropriate.

However, there is lapse on the assessee also as noticed by the

AO as mentioned in earlier para. In our opinion, the payment

of commission of rs 1,98,17,992/- is very excessive. As per

trade practice, when the transaction of such volumes took

place, usually in real estate field, commission payment is at

one percent of the sale value of the property would be paid.

Accordingly, we direct the AO to allow one percent of the total

sale value of the property as commission payment towards

transfer of property. This ground is partly allowed.

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disallowance made by the AO in respect of claim of set off of

business expenditure/loss against long term capital gain, on

the ground that there was no business activity of spinning and

manufacturing of yarn.

stopped manufacturing of yarn since 1993 and the liabilities and

expenditure relating to those earlier years have been claimed as

expenditure in the assessment year 2009-10. According to the

assessee, there was an intention to resume the same and the

company was not wound up as there was transfer of company,

land selling, selling of machineries, settlement of bank and

employees demand. Further, the contention of the assessee’s

counsel is that in subsequent year, the activities of the company

have been revived and suddenly, the company was started

against and the loss from the business activities should be

allowed. There is nothing on record to show that the assessee

has completely closed the business of the assessee. However,

the copy of the assessment order for the assessment year

2012-13 to show that wherein the AO taxed the cessation

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of liability u/s.41(1) of the Act. The ld. AR submitted that the

expenditure claimed by the assessee was capitalized in the

assessment year under consideration. Being so, in our opinion,

this issue requires re-examination by the AO. Since the above

evidence was brought on record, we suggest that the company

only withhold the business activity due to strike and other factors

and there was no intention to carry on the business activity, for

the time being and it was not wound up the business. Therefore,

issue is to be reexamined by the AO, whether it is reasonable or

excessive. Accordingly, he is directed to disallow only that

portion of the expenditure if he finds any amount excessive or

unreasonable. Further, regarding the claim of bad debts, the

same to be examined in terms of sec.36(1)(vii) r.w.sec. 36(2) of

the Act. With regard to statutory liability like sales tax, ESI, PF

etc., is to be allowed on actual payment basis in the assessment

year under consideration in terms of sec.43B of the Act. Hence,

we remit this issue to the file of the AO for fresh consideration.

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business activities should be set off against the capital gain on sale of business assets. 29. In our opinion, the assessee deposited certain fund out of the amount received from sale of land and interest earned from that deposit as income from other sources and in view of the judgment of the Supreme Court in the case of Tuticorin Alkali Chemicals And Fertilizers Ltd. v. CIT (227 ITR 172), wherein it was held that interest earned by the assessee on short term deposit in bank out of term loan is income under the head ‘other sources’. Hence, this issue is dismissed. 29.1 In the result, the assessee’s appeal in ITA No.1216/Mds/2013 is partly allowed for statistical purposes.

ITA N0.2106/Mds/13: 30. The first ground in this appeal is with regard to the disallowance of the claim of expenditure towards payment of commission at 100% and site clearing charges at 75% while calculating long term capital gains. 31. The facts of the case are that the assessee has disposed off land measuring about 10.98 acres. The assessee has also realised that all the plant and machineries which in turn became rusty due to years of non-operation and also became unviable because of

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obsolescence of the machinery. During the sale of this property, the assessee made commission payments to about 39 persons. According to the assessee, it has provided a list of persons to whom such payments have been made together with corresponding quantum of payments made to each of such persons. All the payments were made through bank channels and all the payments were subjected to TDS. The Assessing Officer was of the opinion that the evidence brought on record is not sufficient to show the services rendered by these persons and the commission payments of ` 1,42,24,000/- and the AO was of the opinion that the expenditure cannot be considered as wholly and exclusively incurred with the transfer of the land. He disallowed the same. Against this, the assessee is in appeal before the CIT(Appeals). 32. The CIT(Appeals) observed that none of the parties who have received the payments were produced for examination. and most of the persons who have received payments said to be relatives and the assessee has not furnished details before the CIT(Appeals). Further, the

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observed that Shri Sivaraj Chetty, HUF, Shri Sivaraj Chetty, Individual, Smt. Ananthalakshmi Sivaraj CHetty and M/s. Vishnu Vardhini Agencies were received ` 8 lakhs each totalling ` 32 lakhs on 31.3.2010. Further, address of all the persons mentioned as at 11, Bharathi Park Road, Coimbatore – 641 043. Further, S/Shri Ram Ganesan Venkatesan, HUF, V. Kathikeyan, Mrs. Meenakshi Venkatesan were also paid ` 8 lakhs, all said to be having address of No.10, Archbishop Mathias Avenue, R.A.Puram, Chennai – 600 028. Similarly, Smt. Vidya Rahul Reddy and Mr. Dipur Krishnamurthi were also paid ` 8 lakhs and both are staying at 12, Sathyanarayana Avenue, R.A.Puram, Chennai – 600 028. This made suspicious in the mind of CIT(Appeals) and disallowed the claim of commission payment. Against this, the assessee is in appeal before us. 33. Regarding the payments made to the workers for clearing the premises, the facts are that the assessee claimed this expenditure for the land sold to M/s. Alliance Mall Developers Co. (P) Ltd. This amount was reduced

63 - - ITA 1216 & 2106/13

from the total sale consideration of the land at ` 40.78 crores in the computation of income from long term capital gains by the assessee. According to the AO, that expenditure is not supported by proper evidence and disallowance ` 48,80,215/-. 34. On appeal, the CIT(Appeals) observed that these amounts are paid by cash. However, the vouchers have been made in the month of April to June 2009 but the ledger shows cash payments were made in March 2010. According to the CIT(Appeals), the daily wage labour does not wait for so much time to receive wages. However, there is no evidence to show that the assessee engaged in labour contract to carry out this work. Hence, CIT(Appeals) directed the AO top allow 25% of the expenditure on account of site clearing charges. Against this, the assessee is in appeal before us.

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payments were made by account payee crossed cheques and

all the payments were subjected to TDS requirements as

required. It is also submitted position and well settled position

of law that payment of commission to brokers for facilitating

smooth transaction would fall under the category of “the

expenditure incurred wholly and exclusively in connection with

such transfer”.

35.1 It is further submitted that the expenditure incurred

towards payment of commission has been disallowed on the

ground that the most of recipients were related to the Assessee

and that of lack of evidence / material regarding the services

rendered by these persons, without appreciating that there was

no other reason for the Assessee to make the payment. It

should be seen that the Assessee had produced all the

evidences which are more than adequate to establish such

fact, genuineness, necessity and purpose of such payment,

which were further corroborated by the fact of filing of returns

thereof by the recipients.

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35.2 The ld. Authorised Representative of assessee further

submitted that in many cases that with the production of fairly

reasonable evidences pointing to such fact or even raising

probabilities thereof would amount to discharge of onus by the

Assessee and thereafter the onus shift to the Department to

disprove the same with more cogent and material evidence,

supporting rejecting of evidences produced by the Assessee.

35.3. According to the ld. AR, no reasons have been

recorded in the impugned order to show that the Assessee has

not utilized the services of the recipients, except predominant

prevalence of presumption of bad faith about the Assessee and

the conjectures that no services would have been rendered by

those brokers, to reject the all good evidences produced by the

Assessee and the confirmations thereon made by the respective recipients. It is submitted that both the Assessing

Officer and the Learned Commissioner of Income Tax, had not

doubted the veracity (genuineness) of the payments made.

35.4 The ld. Authorised Representative of assessee further

submitted that the Assessee had engaged the persons, who

had rendered services and the Assessee had also paid for their

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services. In the process of the sale of land, the assessees had

to cause cleaning up of the land to enable exact measurement

of land, marking of boundaries and present the subject matter

of land for sale, comprehensive, clean and clear. In such

process the assessees had to employ scores of personnel to

cut, remove and weed out bushes, remove debris from the

areas over several period of days, intermittently. The assessee

had to engage personnel specially skilled in doing such kind of

jobs who were illiterate and working in an unorganized manner.

These personnel did not normally come and work regularly but

were coming and working erratically. Besides they had to be

paid in cash only. However the CIT (A) has allowed only 25%

of the expenditure for the cleaning charges. The CIT (A) ought

to have allowed fully the expenditure. According to the ld. AR

the CIT (A) wrongly allowed only 25% Learned Assessing

Officer has grossly erred in disallowing all the claims of the

Assessee on the commission payment made to facilitate

conclusion of the sale of immovable property u/s 48(i) of the

Act, and site clearing charges also under sec. 48(i) of the Act,

drawing untenable non-existent inference, purely based on

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suspicions, surmises, conjectures, presumption of bad faith

etc., which runs contrary to the facts obtaining very much from

the return of income and explanations offered.

the CIT(Appeals).

36.1 We have heard both the parties and perused the

material on record. The issue relating to the payment of

commission was already decided by us in ITA No.1216/Mds/13

for the assessment year 2009-10. Accordingly, we direct the

AO to allow commission payment at 1% of the sale value of the

capital asset.

36.2 Regarding clearing charges of the site, we are of the

opinion that the assessee has not placed contemporaneous

evidence before the lower authorities so as to prove the

genuineness of the claim of the assessee. Hence, we are

inclined to remit this issue to the file of the AO with direction to

the assessee to place necessary evidence in support of its

claim. This issue is partly allowed.

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of the assessee on the right to set off of the business losses

against the long term capital gains and also the claim of

payment of interest made in the previous year under sec.40(ia)

of the Act.

have been conducted in the year 2010-11. However, the

assessee claimed expenses of Rs. 15,08,35,525/- during the

assessment year 2010-11. The expenditure which was no

nexus with manufacturing of yarn cannot be allowed as

expenditure for the purpose of business. Winding up of the

company was in progress and no business activity was carried

out by the assessee and the above expenditure was disallowed

and no set off of long term capital gains of the assessee.

Against this, the assessee carried the matter before the

CIT(Appeals), who confirmed the order of the AO. Against this,

the assessee is in appeal before us.

material on record. This issue was considered by us in ITA

69 - - ITA 1216 & 2106/13

No.1216/Mds/13 in earlier para. Accordingly, this issue is remitted to the AO to disallow only the expenditure which he finds excessive or unreasonable as per our direction in ITA No.1216/Mds/13.

Sd/- Sd/- (जी. पवन कुमार) (चं� पूजार�) (G. Pavan Kumar) (Chandra Poojari) �या�यक सद�य/Judicial Member लेखा सद�य/Accountant Member

चे�नई/Chennai, �दनांक/Dated, the 17th June, 2016. mpo* आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु�त (अपील)/CIT(A) 4. आयकर आयु�त/CIT 5. �वभागीय ��त�न�ध/DR 6. गाड� फाईल/GF.