M/S. BIRLA GLOBAL FINANCE LTD. vs. THE ACIT CC-1,

These appeals were originally disposed of by the co-ordinate bench on 27.07.2009. Aggrieved by the order passed by the Tribunal, both the parties

Two appeals filed by the revenue have been numbered as Income tax Appeal No.1449 of 2010 and Income tax Appeal No.1454 of 2010 in the Hon’ble High Court. They were disposed of by the Hon’ble High Court, vide its order dated 14/2/2011 as under:- “1. Counsel on both sides agreed that the order of the ITAT against which these appeals have been filed already have been set aside by this Court and the matter is remanded back to the ITAT for de-novo consideration in Income tax Appeal No.685 of 2010 and Writ Petition No.1894 of 2010 decided on 20-09-2010. Hence both these appeals have become infructuous and accordingly dismissed.”

Accordingly, the appeal of the assessee (ITA No.297/M/2005) and the appeal of the revenue (ITA No.2046/M/2005) filed before the Tribunal were listed for fresh hearing consequent to the orders passed by Hon’ble High Court of Bombay. Before us, the Ld Counsel appearing for the assessee submitted that issues that were contested by the revenue before the Hon’ble High Court of Bombay have been dismissed as infructuous and accordingly contended that the appeal of the revenue has not been restored back. Accordingly he contended that the order passed by the Tribunal on the issues contested by the revenue in the first round of proceeding has attained finality and hence the Tribunal is required to restrict itself to the appeal of the assessee. However, we are unable to agree with the said contentions. A careful perusal of the order passed by the Hon’ble High Court in the appeal filed by the assessee would show that the High Court has set aside the orders passed by the Tribunal in the appeal as well as in the Miscellaneous petition, meaning thereby, all the issues disposed of by the Tribunal have been revived. Further the Hon’ble High Court has held that the appeals of the revenue have become infructuous, since the matters have been restored to the Tribunal for de-nova consideration. The reasoning given by the Hon’ble High Court, in our view, shows that it has intended to restore all the issues to the file of the Tribunal. Accordingly, we are of the view that the issues urged by the assessee as well as by the Revenue have been restored to the file of the Tribunal and accordingly the Registry has posted the appeals for hearing.

The assessee treated the above said amount as a receipt towards “Good Will” and accordingly offered the same for taxation under the head Long term capital gain. However, the AO considered the same as a business receipt and accordingly assessed the same under the head “Income from business”. The Ld CIT(A), however, agreed with the contentions of the assessee and accordingly directed the AO to assess the same as Long term capital gains. The revenue is challenging the said decision of Ld CIT(A). Before the Tribunal, the assessee has taken a new stand and now it contends that the said receipt is a Capital receipt and it is not in the nature of Good Will. Accordingly, it is being contended that the same is not taxable under the Income tax Act.

The facts in brief are that the assessee entered into a Joint venture agreement with M/s Sunlife Assurance company of Canada on 19th May 1999 as per which, the Sunlife has agreed to acquire a significant percentage of the total number of issued and outstanding shares in the capital of each of the Birla Group companies stated in the agreement. The agreement also proposed to start an insurance company in accordance with the terms and conditions specified therein. As per Article 3 of the Joint venture agreement, M/s Sunlife

In the immediately preceding year, i.e., in the year relevant to AY 2000- 01, the assessee had received payment towards goodwill and the same was assessed under the head “Capital gains” by the AO. However, the Ld CIT revised the assessment order u/s 263 of the Act, as he was of the view that the same is taxable as business receipts and the assessment order has been rendered erroneous for the reasons stated in the order. Accordingly, the Ld CIT(A) set aside the matter to the file of the AO with the direction to redo the assessment. The revision order passed by Ld CIT was challenged before the Tribunal and the ITAT quashed the revision order passed by the Ld CIT. The order passed by the Tribunal has since been upheld by the Hon’ble Bombay High Court, vide its order dated 17-06-2011 passed in the appeal filed by the revenue in Income tax Appeal No.1099 of 2007.

During the year under consideration, the assessee received a sum of Rs.12.92 crores as premium towards Strategic relationship entered by way of Joint venture agreement. The assessee offered the same as Long term capital gain, but the AO assessed the same as business receipts. The Ld CIT(A) accepted the contention of the assessee and accordingly held that the same is assessable as Long term capital gain. The revenue challenges the said order of Ld CIT(A). The assessee has taken a new stand that the same is not taxable as Long term Capital gain also, as there is no transfer of any capital asset, which is a primary condition for bringing a receipt under the head “Capital gains”. Accordingly, it is being contended that the amount of Rs.12.92 crores is just a capital receipt and it is not taxable at all.

The Ld D.R drew our attention to the order passed by the Tribunal in AY 2000-01 against the revision order passed by Ld CIT(A), wherein the ITAT has held that the identical payments received by the assessee as Good Will exigible to tax as Long term Capital gains. He submitted that the order passed by the ITAT was in the context of revision proceedings u/s 263 of the Act and hence the same cannot be considered to be binding decision. He submitted that the assessee has received this amount in the course of carrying on business and hence the same is assessable as business receipt only.

The Ld A.R, however, submitted that the nature of payment received in AY 2000-01 is different from that one received during the year under consideration and hence there is no parity of facts. The written submissions given by the assessee in this regard is extracted below:- “Facts in AY 2000-01 The Appellant Company, part of Aditya V Birla Group promoted Birla Mutual Fund, stock broking business and distribution business in joint venture with Capital International Inc. of USA. During the relevant

We heard the parties on this issue. Article 3 of the Joint Venture Agreement deals with the “Strategic Relationship” As per Article 3.1, M/s Sunlife has agreed to pay a sum of CDN$7 million, termed as “Premium” in consideration of establishment of strategic relationship and joint venture. The parties has provided a cap in respect of payments made towards acquisition of shares and good will and hence, the amount paid in excess, if any, shall be adjusted against the premium stated above. The dispute is with regard to the nature or character of this premium amount.

The revenue’s view is that the same is a business receipt chargeable under the head Income from business. The assessee’s contention is that it is a capital receipt not taxable at all, even though it initially offered the same as goodwill chargeable under the head Capital Gains.

We notice from the order passed by the Tribunal in AY 2000-01 against the revision order passed by Ld CIT that the parties have obtained approval of Competent Authority for establishing Strategic relationship. The Competent authority has also accorded its approval for payment of Rs.63.25 crores to the Birla Group by M/s Sunlife Canada as “goodwill”, subject to the condition that this amount will not be repatriated. However, it is not clear as to whether the impugned receipt of Rs.12.92 crores is part of Rs.63.25 crores or not.

Be that as it may, a perusal of the Joint Venture Agreement shows that the agreement provides for Respective Roles and Responsibilities, as per which the specific role of the assessee is specified as under:-

M/s Sunlife Canada is aware of the strengths of M/s Birla group and hence the impugned amount has been given by it as premium for establishing strategic relationship. The undisputed fact remains that M/s Sunlife Canada is a new entrant in the Indian markets and it would take considerable time for it to under the complexities of the Indian market. On the contrary, M/s Birla group is an established player with interests in various types of financial markets and other field. Further, it has got branches all over the India and hence it is specifically provided in the joint venture agreement that the business expertise in all the fields shall be contributed by the Birla group to the Joint venture. Hence, the Birla group was considered to have an edge over M/s Sunlife, Canada. The business expertise, experience or edge, in our view, is considered as good will.

The next issue contested by both the parties relates to the disallowance of bad debts claimed by the assessee. The following amounts claimed as bad debts by the assessee were disallowed by the AO:-

The revenue is contesting the allowance of Rs.22.43 lakhs referred above. The facts relating thereto are that the assessee had purchased Government securities through M/s Mafatlal Securities Ltd. When the certificates were sent for transferring the name, some of the securities were returned back as bad. The assessee wrote off a sum of Rs.22.43 lakhs, since it could not recover the certificates or amount. The AO disallowed the claim. The Ld CIT(A) held that the assessee has purchased the securities in the course of carrying on its business of finance company and hence the same is a normal business loss. Accordingly he allowed the claim. In the first round of proceedings, the Tribunal noted that the assessee had recovered this amount subsequently and offered

We have heard the parties on this issue. The undisputed fact is that the assessee has purchased the securities in the course of carrying on the business of finance company. Further it is stated that the assessee has recovered the amount subsequently and offered the same as income in AY 2007-08. Accordingly we are of the view that the Ld CIT(A) was justified in allowing this claim.

In the appeal of the assessee, it is contesting the confirmation of disallowance of Rs.15.88 lakhs written off from debtors balance as unrecoverable. These amounts were also claimed to have been given to various parties towards purchase of securities. The AO as well as Ld CIT(A) took the view that this claim is not allowable as the assessee has not disclosed the same as income in any of the years. In the first round of proceeding, the ITAT has taken the view that the facts relating to this claim are identical with the claim relating to Mafatlal securities Ltd and accordingly allowed the claim. We notice that the assessee has given the advance to various parties for purchase of securities in the course of carrying on business of non-banking finance company. Accordingly, we are of the view that this claim is allowable as trading loss, if not as bad debts. Accordingly we set aside the order of Ld CIT(A) on this issue and direct the AO to allow the claim.

The next issue contested by the assessee pertains to the disallowance of claim relating to TDS certificates. The AO disallowed this claim and the Ld CIT(A) took the view that the assessee should seek remedy u/s 264 of the Act. The Ld A.R submitted that the tax has been deducted by the clients from out of 12 M/s. Aditya Birla Nuvo Ltd. (Successor of M/s Birla Global Finance Ltd.)

The assessee is also contesting the decision of Ld CIT(A) in confirming the disallowance of share issue expenses claimed u/s 35D of the Act. We notice that this disallowance was confirmed by the Tribunal in relating to AY 1994-95 and also in ITA No.5796/Mum/2000 relating to AY 1995- 96 on the reasoning that the provisions of sec. 35D are not applicable to a finance company and further the same is capital in nature in view of the decision of Hon’ble Supreme Court rendered in the case of Brooke Bond India Ltd (225 ITR 798). Consistent with the view taken in the above cited orders, we uphold the order passed by Ld CIT(A) on this issue.

In the result, the appeal filed by the assessee is partly allowed and the appeal of the revenue is dismissed.