TOSCANA LASTS LTD.,NEW DELHI vs. ITO, NEW DELHI

1 IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH “F” NEW DELHI) BEFORE SHRI I.C. SUDHIR AND SHRI L.P. SAHU

ITA No. 670/Del/2012 Assessment Year: 2007-08 Toscana Lasts Ltd., vs. ITO, (Since amalgamated with Avantha Ward 16(3), Reality Ltd.), Thapar House, New Delhi. 124-Janpath, New Delhi. (PAN: AAACT3805H) (Appellant) (Respondent)

ITA No. 2776/Del/2011 Assessment Year: 2007-08 ITO, vs. Toscana Lasts Ltd., Ward 16(3), (Since amalgamated with New Delhi. Avantha Reality Ltd.), Thapar House, 124-Janpath, New Delhi. (PAN: AAACT3805H) (Appellant) (Respondent)

Assessee by: Shri P.C. Yadav, Adv. Department by: Shri Manoj K. Chopra, Sr. DR Date of hearing : 29 .09.2015 Date of pronouncement: 22 :12.2015 ORDER PER I.C. SUDHIR: JUDICIAL MEMBER These are the cross-appeals preferred by the parties against the

common First Appellate Order. The assessee has impugned First Appellate Order on the following grounds: 1. On the facts and in the circumstances of the case, the Learned CIT(Appeals) has erred in confirming the order of A.O. wherein the A.O. has disallowed the sum of Rs.22,47,306 claimed by the assessee as Revenue expenses under various heads.

2 2. Learned CIT(Appeals) has failed to appreciate that similar nature of expenses were claimed by the assessee in the various years and no disallowance has ever been made from these expenses. 3. Learned CIT(Appeals) had erred in ignoring that under the new provision of sec. 36(1)(vii) of a bona fide write off of bad debt is sufficient to claim write off of bed debt and there is no need to prove the same. 4. Learned CIT(Appeals) had erred in ignoring that expenses under the head communication, house-keeping, festival, charity * donation and trade fair expenses were paid by a/c payee cheques and the assessee has also deducted TDS, where ever the provisions of TDS are applicable. 5. Learned CIT(Appeals) while affirming the disallowance completely overlooked that the A.O. has not provided sufficient opportunity to assessee for proving the genuineness of these expenses and has framed the assessment in an arbitrary manner. 6. Learned CIT(Appeals) has passed the appellate order in a hurried manner and erred in not remanding the matter to the A.O. for verification of the claim of the appellant vis-à-vis these expenses. 7. Learned CIT(Appeals) has also overlooked the ledger a/c. and has not asked any further explanation from the assessee during the appellate proceedings before passing the appellate order.”

parties in view of orders of the authorities below, material available on record and the decisions relied upon.

the assessee, the Assessing Officer disallowed following expenses basically on the basis that assessee had not tried evidence in support: a) Communication expenses: Rs.3,56,633 b) House-keeping expenses. Rs.3,03,232 c) Festival expenses Rs.2,16,855 d) Charity and donation exp. Rs.15,000

sufficient opportunity on the basis that the assessment was going to be time barred. Regarding donation of Rs.15,000, the assessee claimed that such an expenditure was allowable under sec. 37. It was submitted

that no such disallowances were made in previous years and subsequent years. The Assessing Officer thus did not satisfy with the submissions of the assessee disallowed all these expenses in total at Rs.12,36,096. The Assessing Officer also disallowed Rs.5,32,390 towards bad debts, Rs.4,34,380 and Rs.44,440 towards repair and maintenance of building and towards repair and maintenance of

computers respectively. The Learned CIT(Appeals) has also confirmed the disallowances. Thus, the confirmed disallowances are as under: Confirmed: Communication exp. Rs.3,56,633 House-keeping Exp. Rs,3,03,232 Festival Exp. Rs.2,16,855 Charity & Donation Exp. Rs. 15,000 Trade fair expenses Rs.3,44,376

4 Bed debts written off Exp. Rs.5,32,390 Repair and maintenance Exp. on Rs.4,34,380 Building.

Repair & maintenance exp. Rs. 44,440 on computed.

the Assessing Officer, sufficient time was not provided to present the

case of the assessee with the evidence in support. He submitted that

similar nature of expenses were claimed by the assessee in previous

year and no disallowance has ever been made from these expenses.

The Learned CIT(Appeals) has also ignored that under the new

provisions of sec. 36(1)(vii), a bona fide right off of bad debts is

sufficient to claim right of and there is no need to prove the same. The

Learned CIT(Appeals) has also erred in ignoring the expenses under

the head “communication, house-keeping, festival, charity and

donation and trade fair expenses which were paid by account payee

cheques and the assessee had also deducted TDS, wherever the

provisions of TDS were applicable. The Learned CIT(Appeals) has

also affirmed the disallowances made by the Assessing Officer in

hurried manner and without calling for remand report from the

Assessing Officer for verification of the claim of the assessee vis-à-vis

these expenses. The Learned CIT(Appeals) also overlooked the ledger

account and has not asked any further explanation from the assessee

during the appellate proceedings. The Learned AR submitted that

5 sufficient evidences were there to support the claimed expenses

regarding the disallowance of bad debts written off, the Learned AR

cited the decision of Hon'ble Supreme Court in the case of T.R.F. Ltd.,

323 ITR 297 (S.C) holding that a bona fide right off of the bad debt is

enough to treat the amount as dead. Under the new provisions of law,

the only aspect is as to whether the amount of bad debts was offered

for taxation in earlier years is crucial but unfortunately the lower

authorities below did not bother themselves to look into this aspect. He

submitted that books of account of the assessee are audited which have

been accepted by the Assessing Officer as correct. Merely because

some vouchers were not produced by the assessee that ipso facto could

not prove that the expenses were bogus or not incurred for the purpose

of business. He submitted further that assessee had paid FBT on

communication and festival expenses as it was evident from the FBT

return and other documents. In support, he referred page Nos. 51 item

No. 12, page No. 65 item No. 14 of the paper book which are in

relation to FBT return on communication and festival expenses. In this

regard, he also placed reliance on the decision of Delhi Bench of the

ITAT in the case of Hansraj Mathura Dass vs. ITO in ITA No.

2397/Del/2010 holding that once FBT is deduction on some expenses

then purpose test is not necessary for the allowance of an expense

regarding trade fair expenses he referred page No. 67 of the paper

book showing that substantial payments were made by cheques to

Indian Trade Promotion Organization, A Govt. of India organization.

6 Regarding expenses incurred on house-keeping, the Learned AR

referred pave No. 63 and 64 of the paper book with the submission that

substantial amount of payments have been made by cheque after

deduction of TDS on these amounts. He submitted further that

Assessing Officer has not doubted the genuineness of the expenses

claimed on repair and maintenance as he has allowed depreciation on

these expenses. Regarding the nature of thee expenses, the Learned

AR submitted that no new assets has come into existence and the

expenses are incurred for repairing the old assets for the smooth

running of business. In support, he cited the decision of Hon'ble

Supreme Court in the case of Alemic Chemical Works Co. Ltd. vs.

CIT (1989) – 177 ITR 377 (S.C) and of Hon'ble Delhi High Court in

the case of Delhi Press Samachar Patra Pvt. Ltd. – 322 ITR 590 (Del.).

The Learned AR submitted further that assessee was in possession of

huge losses, therefore, it can be safely assumed that no prudent person

will claim expenses on higher side to enhance the accumulated losses.

Consumption of law material of worth Rs.85.67 lacs has been accepted

by the Department and hence it is not permissible to disallow certain

expenses merely because certain vouchers were not produced.

orders of the authorities below. He submitted that every assessment

year is an independent unit, hence, it would be of no help to the

assessee in saying that similar expenses were allowed in other

7 assessment years. He submitted that the bills were not produced in

support of the claimed expenses and so far as the claim of bad debts is

concerned, the assessee failed to establish that it was part of Revenue

expenses. He submitted that the decisions relied upon by the Learned

AR are having different facts and are thus not relevant.

CIT(Appeals) has simply upheld the disallowances made by the

Assessing Officer, the assessee has filed copies of those documents

filed before the Assessing Officer made available at page No.51 to 201

of the paper book besides audited accounts for the financial years

ended 31.3.2007, 31.3.2006 and 31.3.2005. These were also filed

before the Learned CIT(Appeals). We prima facie find substance in

the above contentions of the Learned AR that submissions of the

assessee made in support of the claimed expenses have not been

properly considered in view of the documents filed in support of these

claims. For instances, the assessee had paid FBT on communication

and festival expenses, trade fair expenses have been made by cheque

to a Government of India organization i.e. Indian Trade Promotion

organization, expenses incurred on house-keeping have been paid by

cheque after deduction of TDS, the Assessing Officer has not doubted

the genuineness repair and maintenance expenses as he himself has

allowed depreciation on these expenses, and the claimed bad debt has

been written off in the books of account. We thus in the interest of

8 justice set aside the matter to the file of the Assessing Officer to verify

the above claim in view of the submissions of the assessee supported

with evidence and decide the issue afresh after affording opportunity

of being heard to the assessee. These grounds are thus allowed for

statistical purposes.

Appellate Order on the sole ground that the Learned CIT(Appeals) has

erred in not upholding the action of the Assessing Officer in

determining long term capital gains earned from slum sales at

Rs.2,94,29,272 as against Rs.1,58,72,901 admitted to by the assessee,

by ignoring and not adjudicating entirely on merits the contentions of

the Assessing Officer in the assessment order.

view of orders of the authorities below, material available on record

and the decisions relied upon.

term capital gain at Rs.2,94,29,272 against Rs.1,58,72,901 (revised)

declared by the assessee towards long term capital gains in respect of

slump sales under sec. 50B of the Act. The Assessing Officer observed

that as per report under sec. 50B(3) and computation of income filed

by the assessee along with letter dated 28,.9.2009, the amount of sales

consideration receipts from slump sales was shown at Rs.3 crores only,

whereas the actual amount as per copy of slump sales agreement

9 submitted by the assessee should have been Rs.3 crores + value of net

current assets (excluding cash in hands) and bank balance and advance

recoverable from government) as per closing balances. The Assessing

Officer observed further that computation of income filed by the

assessee reveals that the total value of net current assets and WDV of

fixed assets transferred are taken as Rs.1.85 crores and Rs.72,70,728

respectively for the purpose of determining the long term capital gains

and after deducting them amounts from Rs.3 crores, the long term

capital gain of Rs.41,50,800 has been determined. Vide letter dated

29.12.2009 in response to letter dated 15.12.2009 issued by the

Assessing Officer, the assessee while accepting the mistake requested

the Assessing Officer to frame the assessment taking into account long

term capital gain at Rs.1,58,72,901 in place of Rs.41,50,800 as

claimed earlier in the computation of income.

assessee vide its letter dated 29.12.2009 that long term capital gain

recomputed by the assessee at Rs.1,58,72,901 was after taking the

value of sales consideration at Rs.4,18,07,661 which included,

Sales consideration as mentioned in Rs. 3,00,00,000 the agreement + Value of financial assets on cost basis Rs.1,18,07,661 Total sales consideration

Rs.4,18,07,661

value of financial assets of Rs.1,18,07,661 after reducing the value of

raw material of stock amounting to Rs.68,56,371 from the value of net

current assets. However, as per copy of slump sales agreement, only

cash in hand and bank balance and advances recoverable from

government were to be excluded. The Assessing Officer noted that it is

no where written in sale agreement and addendum filed by the

assessee that stock is to be excluded while determining the value of

sales consideration. He noted further that in the addendum slump sale

agreement, the effective date of transaction was taken as 31.1.2007 in

place of 31.12.2006 as per original slump sales agreement. The

Assessing Officer noted that the date of execution of the said

addendum was not written in the copy of the addendum slump sales

agreement filed by the assessee vide letter dated 29.12.2009. The

Assessing Officer asked the assessee to furnish the original addendum

slump sale agreement to which the assessee showed its inability to

produce. The Assessing Officer noted that the said addendum was

filed by the assessee only after query raised vide order sheet entry

dated 15.12.2009 regarding submissions of balance sheet and profit

and loss account as on 31.12.2006 and 01.01.2007, which were the

effective date of transaction as per the original slump sale agreement.

Under these circumstances, the Assessing Officer concluded that the

value of net current assets was Rs.1,85,78,472 which the assessee itself

11 had taken while computing long term capital gain in a statement

showing computation of total income and after taking the same, the

total sales consideration comes to Rs.4,85,78,472 which was Rs.3

crores plus value of net current assets (excluding cash in hand and

bank balance and advances recoverable from government) as per

closing balance sheet, in place of Rs.3 crores as taken by the assessee.

The Assessing Officer accordingly recomputed long term capital gain

as under:

Total sales consideration Rs.4,85,78,472 (Minus) WDV fixed assets Rs.72,70,728 (Minus) net current assets Rs.1,18,78,472 Rs.1,91,49,200

Rs.2,94,29,272

gain at Rs.2,94,29,272 on account of slump sales. The Learned

CIT(Appeals) has, however, not approved the action of the Assessing

Officer, which has been questioned by the Revenue before us.

reliance on the assessment order. He submitted that the Learned

CIT(Appeals) has failed to appreciate that money paid on account of

inventory as per slump sales agreement was also to be taken in

consideration. The Learned CIT(Appeals) has, however, reduced this

amount from consideration.

Appellate Order. He has summarized the position of capital gains on

slump sales as under:

As per original return As revised As per & taken by the A.O. by the assessment for arriving at the assessee order (taken figure of Sale during asst. for Consideration. (Actual computing figures as per Net current balance sheet assets) as on 31.01.2007) Sales 3,00,000 4,18,07,661 4,85,78,472 consideration Less: 72,70,728 72,70,728 72,70,728 WDV of Fixed assets

Current Assets- Inventories 68,56,371 68,56,371 - Debtors 97,82,975 97,82,975 97,82,975 Advances 48,91,052 50,34,867 50,47,424 recoverable 2,15,30,398 2,16,74,213 1,48,30,399

Current liabilities Sundry 19,69,677 20,27,932 19,69,677 Creditors Provision for 9,82,249 9,82,249 9,82,249 Gratuity 29,51,926 30,10,181 29,51,926 Net Current 1,85,78,472 1,86,64,032 1,18,78,473 Assets

Capital 41,50,800 1,58,72,901 2.94,29,271 Gains

13 17. Considering the above submission, we find that the Learned

CIT(Appeals) has dealt with the issue in detail meeting out the cases of

the parties and has come to the following conclusions: “6. I have gone through the assessment order and the detailed written submissions in this regard.

7.1 The appellant company was engaged in the business of manufacturing and sale of shoe lasts. During the year the appellant company has transferred its shoe lasts manufacturing business as a going concern 'as is where is' by way of slump sale.

7.2 For the aforesaid 'purpose the appellant had entered into a slump sale agreement dated 23.01.2007 and an addendum slump sale agreement dated 20.02.2007 with Mls Toscana Footwear components Limited.

7.3 As per the aforesaid agreements and the addendum thereto, the purchaser acquired the entire business undertaking of the seller situated at E-6,7,8, sector 59, District Gautam Budh Nagar (Noida) UP pertaining to manufacturing, sale and distribution of shoe lasts with all assets (excluding land &Buildings) & Liabilities and past arrears of taxes (excluding property taxes), charges, levies, outstanding dues or claims, benefits and Zor liabilities under pending cases.

7.4 Thus, the purchaser acquired the "business" by way of slump sale along with all assets and liabilities (excluding land, Buildings, Investments and past arrears of taxes) with continuity of the services of all the employees as a going concern at the closing date i.e 31.01.2007.

7.5 In consideration thereof, the purchaser was required to pay Rs.3 crores towards the cost of business. In addition to the above, the purchaser was also required to pay a sum equivalent to value of net current assets excluding cash in hand and bank balance and advance recoverable from Govt. as per the closing balance sheet as on 31.01.2007.

7.6 The purchaser i.e. Mls Toscana Footwear components Limited recorded the transaction of the purchase of business at Rs.4, 18,07,6611-.

7.7 The appellant company had also recorded the sale of the business at Rs.4,lS,07,661j-. The breakup of the sale consideration is as under.-

Amounts (Rs.) Particulars Fixed Assets 2,37,92,6701- Inventory 62,07,3301- 3,00,00,0001- Other Current Assets as on 31.03.07 Advances to employees 21,00,353/- Advances to Suppliers 7,03,0221- Debtors 97,82,975/- Advance to Mzs Toscana Footwear 22,31,4921- 1,48,17,842/- components Ltd Other Current Liabilities as on 31.03.07 Sundry Creditors 4,42,815/- Advances from customers 2,73,198/- Provision for Gratuity 9,82,249/- Liability for expenses 13,11,919/- (30,10,1811-) Net Sales Consideration 4,18,07,6611-

7.8 However at the time of filing the Return of Income the appellant company on the basis of the Form 3CEA i.e Report of an accountant under Section SOB (3) relating to computation of Capital Gains in case of Slump Sale returned Capital gains ujs SOB at Rs.41,50,SOOj-. In the course of Assessment proceedings the appellant company revised the computation of Capital Gain which is as under:

Particulars Amount (Rs.)

Sale Consideration 4,18,07,6611-

Less:- Net worth of the undertaking

WDV of Fixed assets 72,70,728/-

Value of net current assets 1,86,64,032/- 2,59,34,7601-

Net Long Term Capital Gains 1,58,72,9011-

7.9 Value of the net current assets has been worked out as under:-

Book value as on 31.01.07(Rs.) Inventories 68,56,371 Debtors 97,82,975 Advances recoverable 50,34,867 (A) 2,16,74,213 Sundry Creditors 20,27,932 Provision for Gratuity 9,82,249 Total Current Liabilities (B) 30,10,181

Net Current assets transferred (A-B) 1,86,64,032

7.10 The AO computed the LTCG is] s 50B as under:-

Particulars Amount (Rs.)

Sale Consideration 4,85,78,472/-

Less:- Net worth of the undertaking

WDV of Fixed assets 72,70,728/-

Value of net current assets 1,18,78,472/- 1,91,49,200/-

Net Long Term Capital Gains 2,94,29,272/-

7.11 The assessee has taken Rs. 4,18,07,661/- as sale consideration, the breakup of which is as under: 3,00,00,000/- Sale consideration as mentioned in the agreement Plus Value of Financial assets on the cost basis 1,18,07,661/- Total Sale consideration 4,18,07,661/-

·7.12 However, the AO has taken sale consideration at Rs. 4,85,78,472/- the break up which is as under: Total Sale Consideration 4,85,78,472/- (Minus) WDV of fixed assets transferred 72,70,728 (Minus) Net current assets 1,18,78,4 72/- l,91,49,200/- 2,94,29,272/

7.13 The main contention of the AR is that the consideration received was only Rs.4,18,07,661/-. Nothing more than what was recorded in the books of account was received. The AR has drawn my attention to the ’Notes to accounts' in the Auditors Report as on 31.03.2007 in the case of appellant which reads as under: . "( c) The Company has sold its entire business operations except Land and Building to Toscana Footwear Components Limited with effect from 1st February 2007 at value of Rs. 4,18,07,6611- as per the Slump Sale Agreement. "

7.14 The same is reflected in the Books of account of the buyer i.e. M/s Toscana Footwear Components Limited. My attention has been dr-awn to 'Notes to account' of the Auditors Report as on 31.03.07 - in the C3 se of M/ s Toscana Footwear Components Limited - which reads as under: "(b) The company has purchased entire business from Toscana Lasts Limited for Rs. 41,807,661/- with effect from 1st February 2007 under Slump Sale Agreement."

7.15) The AO cannot tax an amount of Rs. 67,70,811/-(4,85,78,472- 4,18,107,661) on notional basis. There is no evidence to suggest that the assessee was in receipt of more than what was declared. In thecase M.P. Ramachandran vs. DCIT 32 SOT 592 (Mum), it was held that no hypothetical exercise is permissible to declare an income as accrued. Accordingly, the AO is hereby directed to accept the Sale consideration returned by the assessee. ! ' r : 7.16 The AO has not given any basis for determining the cost of net current assets at Rs. 1,18,78,472/- in place of 1,86,64,032/- adopted by the asseesee. It is not clear as to why the value of net current assets of Rs. 1,85,78,472/- (which was taken into account while determining the sale consideration) was not given due credit while reducing the value of net current assets. It has led to taxing the amount of Rs. 67,00,000/- (1,85,78,472 - 1,18,78,472) twice. Hence, the action of the AO is not approved.”

only issue involved in the ground is as to whether the value of long term

capital is Rs.2,94,29,272 as computed by the Assessing Officer or

Rs.1,58,72,901 as computed by the assessee. The assessee had furnished

document in support of its claim. The Assessing Officer has included cost of

acquisition (inventories under current assets at Rs.68,56,371) in the sales

consideration ignoring that the amount is cost of acquisition of the

inventories and not the sale value of inventories. It is very much evident

from the slump sales agreement made available at page Nos. 55 and 58 of

the paper book. The Assessing Officer while arriving at the figure of sales

consideration has also adopted the figure of advances as reflected originally.

He has taken lesser amount of advances (Rs.1,43,851). The assessee had

also furnished the reasons for difference in net current assets. The Assessing

Officer on one hand has enhanced the figures of sales consideration from

Rs.4,18,07,661 to Rs.4.85 crores by including the book value of inventory in

sales consideration and on the other hand while computing long term capital

gain, he has not reduced the cost of acquisition of inventories from value of

considerations received attributable to inventories, which is apparently a

wrong approach on the part of the Assessing Officer. The Assessing Officer

was of the view that the assessee has separately received extra amount of

inventory along with sales consideration and the assessee was not entitled

for the credit of cost of acquisition of inventory while computing long term

capital gain. The Assessing Officer has completely overlooked that the sales

consideration of Rs.3 crores consisted the amount of inventory which fact

was evident from the slump sales agreement. Besides, the audited results of

the assessee and the buyer both were showing the amounts of Rs.4,18,07,661

as sales consideration received and paid. The Learned CIT(Appeals) after

discussing the respective cases of the parties has thus come to the conclusion

that the value of sales consideration at Rs.4,86,64,032 adopted by the

Assessing Officer was without any material. Under the facts and

circumstances of the case as discussed in detail hereinabove, we fully concur

with this finding of the Learned CIT(Appeals). The same is upheld. The

ground is accordingly rejected.

purposes and that of the Revenue is dismissed.

Order pronounced in the open court on 22.12.2015

Sd/- Sd/- ( L.P. SAHU ) ( I.C. SUDHIR ) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated: 22/12/2015 Mohan Lal