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Income Tax Appellate Tribunal, DELHI BENCH ‘G’, NEW DELHI
Before: SH. ANIL CHATURVEDI & SH. ANUBHAV SHARMA
Assessee by Shri Pradeep Dinodia, C.A. Shri R. K. Kapoor, Adv. Revenue by Ms. Sunita Verma, CIT - D.R. Date of hearing: 22.05.2023 Date of Pronouncement: 16.06.2023 ORDER
PER ANIL CHATURVEDI, AM :
The above appeals by Revenue are directed against the separate order of the Ld. CIT(A)-XXI & 30, New Delhi, dated 15.03.2013 & 12.10.2017 in Appeal No.191/10-11/1149 and in Appeal No.200/16- 17/2863 relating to the A.Ys. 2008-09 and 2014-15 respectively. The Assessee filed cross objection for the A.Y. 2008-09 in support of the order of the Ld. CIT(A).
Brief facts of the case as culled out from the material on record are as under :-
Assessee is a company stated to be engaged in the business of manufacturing, trading and Job work of Paints and Allied Products, Printed Tin and Metal Containers & Financing etc. Assessee electronically filed its return of income for A.Y. 2008-09 on 30.09.2008 declaring total income at Rs.10,43,43,498/-. The case of the assessee was selected for scrutiny and thereafter assessment was framed u/s 143(3) of the Act vide order dated 31.12.2010 and the total income was determined at Rs.17,03,20,450/-.
Aggrieved by the order of AO, assessee carried the matter before CIT(A). CIT(A) vide order dated 15.03.2023 in Appeal No.191/10-
3 11/1149 granted partial relief to the assessee. Aggrieved by the order of CIT(A), Revenue is now in appeal and has raised the following grounds:
1. “The CIT(A) erred in law and on facts of the case in admitting the additional evidence without properly appreciating facts and circumstances of the case.
2. The CIT(A) erred in law and on facts of the case in deleting the addition of Rs. 35,121/- without appreciating the fact that assessee failed to deposit the amount of employees contribution to provident fund before the ‘due date’ as defined in Explanation to Section- 36(1)(va) of the Income Tax Act, 1961.
3. The CIT(A) erred in law and on facts of the case in restricting the disallowance u/s 14A of the Act to a lump sum amount of Rs.20,00,000/- without appreciating that the disallowance is to be computed in accordance with the only method prescribed under rule 8D of the Income Tax Rules, 1962.
4. The CIT(A) erred in law and on facts of the case in deleting the addition of Rs.4,34,31,471/- made by the Assessing Officer on account of Short Term Capital Gain.
5. The CIT(A) erred in law and on facts of the case in deleting the disallowance of Rs.1,18,64,678/- of deduction u/s 80IB of the Act and in directing the A.O. to allow deduction as claimed by the assessee.
6. (a) The order of the CIT(A) is erroneous and not tenable in law and on facts. (b) The appellant craves leave to add, alter or amend any/all of the grounds of appeal before or during the course of the hearing of the appeal.”
5. Assessee has also filed a Cross Objection wherein the grounds are as under: “1. That the Ld. CIT(A) has erred in law and on the facts of the case in sustaining addition u/s 14A read with Rule 8D upto Rs.20,00,000/- out of Rs.86,12,120/- disallowed by the AO.
2. That the addition made by the AO and partly sustained by the Ld CIT(A) appeals u/s 14A read with Rule 8D is illegal and the same be deleted.”
As far as for A.Y. 2014-15 is concerned. Assessee electronically filed its return of income for A.Y. 2014-15 on 23.03.2016 declaring total income at Rs.35,19,22,730/-. The case of the assessee was selected for scrutiny and thereafter, assessment was framed u/s 143(3) of the Act determining the total income at Rs.37,88,49,025/-.
Aggrieved by the order of AO, assessee carried the matter before CIT(A) who vide order dated 12.10.2017 in Appeal No.200/16- 17/2863 granted substantial relief to the assessee. Aggrieved by the order of CIT(A), Revenue is now in appeal and has raised the following grounds: “
1. On the facts and circumstances of the case, the Ld CIT(A) has erred in restricting the addition of Rs.1,51,33,937/- to Rs.33,07,953/- and deleting the balance amount of Rs.1,18,25,984/- on account of expenditure incurred in relation to income not includible in total income u/s 14A of the Act.
2. On the facts and circumstances of the case, Ld CIT(A) has erred in deleting the addition of Rs.70,33,825/- on account of disallowance u/s 80IB of the IT Act 1961.
3. That the appellant craves, leave or reserving the right to amend modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal.”
We thus proceed with Revenue.
9. Before us, at the outset, both the parties submitted that ground no.3 in (A.Y. 2008-09) and Ground No.1 in (A.Y. 2014-15) are on a common issue namely disallowance u/s 14A of the Act. Similarly, Ground No.5 (A.Y. 2008- 09) & Ground No.2 (A.Y. 2014-15) are on disallowance u/s 80IB of 5 the Act. The submissions would therefore be common in both the appeals.
Ground No.1 : Revenue is challenging the action of CIT(A) in admitting the additional evidence without properly appreciating the facts and circumstances of the case.
Before us, Learned DR on this issue submitted that during the assessment proceedings, assessee had not filed the details called for by the AO and in such a situation, the AO was fully justified in proceeding with framing of assessment order on the basis of material on record. It is the DR’s submissions that the CIT(A) was not justified in admitting the additional evidences. She thus supported the order of CIT(A).
Learned AR on the other hand submitted that the Learned DR has not pointed as to what was the additional evidences which CIT(A) admitted. He submitted that apart, CIT(A) has followed valid and proper procedure as prescribed under Rule 46A and had called for two remand report before admitting the additional evidences. He therefore, submitted that there was no fault in CIT(A) in admitting of additional evidences. He thus supported the order of CIT(A).
We have heard the rival submissions and perused the material available on record. Revenue is objecting the admission of additional evidences. We find that CIT(A) before admitting the additional evidences had called two remand reports from AO; AO had submitted remand report dated 13/02/2012 & 22.10.2012. We find that CIT(A) for admission of additional evidences had relied on the decision
6 rendered by Hon’ble Delhi High Court in the case of CIT vs. Virgin Securities and Credits P. Ltd. reported in 332 ITR 396 (Delhi) and concluded that the admission of additional evidences was crucial for the disposal of appeal. Before us, no fallacy in the findings of CIT(A) has been pointed out by Revenue nor has Revenue pointed that the required procedure was not followed by CIT(A) before admission of additional evidences. In such a situation, we find no reason to interfere with the order of CIT(A). Thus the ground of Revenue is dismissed.
Ground No.2 is with respect to the deleting of addition of Rs.35,121/- on account of delayed deposit of PF/ESI.
During the assessment proceedings, AO noticed that employee’s contribution to provident fund aggregating to Rs.35,121/- was not deposited with the appropriate authorities before the prescribed due date. He, therefore, considered the delayed deposits to be an income u/s 2(24)(x) of the Act and made its addition. Aggrieved by the order of AO, assessee carried the matter before CIT(A) who following the decision of Delhi High Court in the case of AIMIL reported in 321 ITR 508 decided the issue in favour of the assessee. Aggrieved by the order of CIT(A), Revenue is before Tribunal.
Before us, at the outset, Learned AR fairly submitted that the issue of delayed PF deposits is now covered against the assessee by the decision of Hon’ble Apex Court in the case of Checkmate Services Pvt. Ltd. and others vs. CIT & others (2022) 448 ITR 518 (SC). He, therefore, submitted that the ground be decided accordingly.
7 17. Learned DR on the other hand did not controvert the aforesaid submissions made by Learned AR.
We have heard the rival submissions and perused the material available on record. The issue in the present ground is with respect to delayed deposit of employee’s contribution of PF which was treated as income by AO but deleted by CIT(A) by following the decision of Hon’ble Delhi High Court. Before us, Learned AR has fairly submitted that the issue in the present ground is covered against the assessee by the decision of Hon’ble Apex Court in the case of Checkmate Services Pvt. Ltd. (supra). In view of the aforesaid submissions made by Learned AR, we uphold the action of AO and set aside the order of CIT(A) on this ground. Thus this ground of Revenue is allowed.
Ground No.3 of the Revenue and CO of the assessee are interconnected and is with relation to the disallowance u/s 14A of the Act.
During the course of assessment proceedings, AO noticed that assessee had received dividend income amounting to Rs.8,55,88,493/- which was claimed as exempt u/s 10(34) of the Act. The assessee was asked to show-cause the applicability of Section 14A of the Act to which assessee inter alia submitted that assessee had suo moto disallowed Rs.7,50,000/- as expenses u/s 14A of the Act and therefore, no further disallowance u/s 14A of the Act is called for. The submissions of the assessee was not found acceptable to AO. AO noted that assessee had not calculated the disallowance as per Rule 8D of the Act. He, thereafter, by following the methodology prescribed under Rule 8D worked out the total disallowance at 8 Rs.93,62,120/- and after giving the credit of suo moto disallowance of Rs.7,50,000/- disallowed the balance amount of Rs.86,12,120/-.
Aggrieved by the order of AO, assessee carried the matter before CIT(A). CIT(A) while deciding the issue noted that the suo moto disallowance of Rs.7,50,000/- was not found defective by AO and no adequate satisfaction was recorded by AO before invoking Rule 8D of the Act. He thereafter directed that the maximum disallowance be restricted to Rs.20,00,000/- as against the disallowance of Rs.93,62,120/- made by AO. He further directed to AO to give the credit of Rs.7,50,000/- being the suo moto disallowance made by assessee. Aggrieved by the order of CIT(A), assessee and Revenue are before us.
Before us, Learned DR took us through the findings of AO and submitted that since the assessee had earned tax free income of more than Rs.8.55 crore and as assessee had not followed the working of the methodology prescribed under Rule 8D for working out the disallowance, AO was fully justified in working out the disallowance u/s 14A r.w. Rule 8D of the Act and that the CIT(A) was not justified in restricting the disallowance to Rs.20 lakh and that too on adhoc basis.
Learned AR on the other hand submitted that while working out the disallowance u/s 14A of the Act, AO has not recorded any satisfaction or has explained as to how the suo moto disallowance worked out by assessee was insufficient and had proceeded to apply Rule 8D in a mechanical way. He further pointed to the findings of CIT(A), wherein CIT(A) has noted that no adequate satisfaction was 9 recorded by AO before invoking Rule 8D. As far as the action of CIT(A) in making an ad hoc suo moto disallowance of Rs.20 lac to be disallowed u/s 14A of the Act, he submitted that when once CIT(A) has recorded a finding about non-recording of proper satisfaction by the AO then the CIT(A) should not have proceeded to enhance the disallowance made by assessee. He, thereafter, submitted that identical issue arose in assessee’s own case in A.Y. 2014-15 before the Tribunal and the Hon’ble Tribunal in vide order dated 18.11.2020 had held that no further disallowance over and above that was suo moto made by assessee is called for. He, therefore, submitted that the disallowance u/s 14A be restricted to suo moto disallowance already made by Assessee.
We have heard the rival submissions and perused the material available on record. The issue in the present ground is with respect to the disallowance u/s 14A of the Act. It is an undisputed fact that assessee had made as suo moto disallowance of Rs.7,50,000/- u/s 14A of the Act being the salary of Directors and expenses attributable to the tax free income earned by assessee. It is also a fact that CIT(A) while deciding the issue has noted that suo moto disallowance made by assessee was not found to be defective by AO and no adequate satisfaction as mandated u/s 14A(2) of the Act was recorded by AO before invoking Rule 8D. Before us, no fallacy in the findings of CIT(A) to the extent of his recording a finding that no proper satisfaction was recorded by AO before invoking Rule 8D has been pointed out by Revenue. We are of the view that once the procedure prescribed under Section 14A(2) r.w. Rule 8D has not been followed by Revenue then in that case the Revenue cannot proceed to work out the disallowance on ad hoc basis over and above that has been made by assessee. We,
10 therefore, direct the AO to restrict the disallowance u/s 14A at Rs.7,50,000/- that was made by assessee and thus the ground of Revenue is dismissed and the Ground of assessee in CO is allowed.
Ground No.4 is with respect to the deleting of addition of Rs.4,34,31,471/- made by AO on account of Short Term Capital Gain.
During the course of assessment proceedings, AO on perusing the details on “other income”, noticed that assessee had claimed receipt of Rs.4,34,31,471/- received from PNB Principal (MAURITIUS) as capital receipt. Assessee was asked to explain the nature of capital receipt and why it not be taxed under the head capital gains. Assessee made detailed submissions and inter alia submitted that the assessee along with Punjab National Bank and Vijaya Bank had entered into a Share Subscription Agreement (SSA) with Principal Financial Group (Mauritius) Ltd. to incorporate a company to undertake life insurance business after obtaining necessary approval from various authorities. Since regulatory approval could not be obtained, the business of Joint Venture Company could not commence. PFGM exercised its call option and acquired shares of assessee for which assessee was paid separately. The PFGM paid Rs.4.34 crore for termination of contracts which was capital receipt in nature. The submissions of the assessee was not found acceptable to AO. AO was of the view that the sum received from PFGM as compensation to the assessee on taking over the terminating the capital assets involved i.e. the company’s bundle of rights and obligations under the BCA was by way of guaranteed returns on the investments made and it was taxable as capital gains. He, thereafter,
11 noted that acquisition of capital asset being right to carry in JV Co. has to be computed as per provision of Section 55(2)(a) of the Act. According to AO the cost of acquisition of capital assets being right to carry any business investments and financing was Nil. He, thereafter, considered the amount of Rs.4,34,31,471/- received by the assessee as Short Term Taxable Capital Gains and made its addition.
Aggrieved by the order of AO, assessee carried the matter before CIT(A). CIT(A) decided the issue in favour of the assessee by observing as under: 8.4 “I have carefully considered the impugned assessment order and critically examined appellant’s submissions in light of a) share subscription agreement 6/2/2006, b) Business Cooperation Agreement 14/06/2006 and c) other related documents/agreements. On deep consideration of the entire issue, following questions are framed for adjudication at my end.
8.4.1 Whether the compensation received by appellant amounting to Rs. 434,31,471 for non start up of assured insurance business by PFGM and transfer of bundle of rights/obligations as investment partner, is chargeable to tax under the head capital gains?
8.4.2 In case answer to above is No, whether said compensation can be taxed under the head other sources u/s 56 of the Act?
8.5 In my opinion, the answer to both the issues framed by me, should be in negative, in favor of appellant. The reasoning for the same is:
Supreme Court in CIT versus Motor & General Stores 66 ITR 692 has explained to the effect that the real intention of the parties has to be gathered on the appreciation of a background in its entirety instead of focusing either on the nomenclature or concentrating on certain parts of it; In this connection, following words of Supreme Court in Ishikawa case 288 ITR Page 408 are apposite:
12 “In construing a contract, the terms and conditions thereof are to be read as a whole. A contract must be construed keeping in view the intention of the parties. No doubt, the applicability of the tax laws would depend upon the nature of the contract, but the same should not be construed keeping in view the taxing provisions”
As preoperative start up expenses before carrying on of the business are not allowable as deduction (refer Delhi High Court Hindustan Times 211 Taxman 202), subject compensation is also pre-operative income (before commencement of business) which on analogous reasoning should be capital receipt non chargeable to tax;
AO has conveniently presumed that assessee is in a) business and then b) business of investment and financing and finally c) stated compensation has its roots in said hypothetical business and therefore exigible to capital gains tax. Alternate presumption of AO that stated compensation can be labeled as shares sale consideration is also presumptuous and contrary to material on record/agreements etc. In nutshell AO has inferred on presumptuous basis that appellant has transferred right to carry on “investment business in insurance sector” in favor of PFGM whereas appellant had admittedly no activities of any sort in “insurance business” in past or future; There are multilayer presumptions on basis of which said compensation is treated as taxable under the head capital gains and same cannot be countenanced; There is no cogent material to support remote inferences drawn by AO except figment of imagination. That is, on no basis it can be concluded that assessee was in business of investment and financing and subject compensation is consideration for parting right to carry on said business;
On basis of holistic and earnest reading of entire facts in correct perspective, it is manifest that stated compensation is not merely for transfer of one or the more tangible rights but same is received for transfer of bundle of rights as investing partner, and has nothing to do with capital gains being purely capital receipt non chargeable to tax as whole profit making apparatus is impaired as it includes compensation for not to take any legal action against PFGM, compensation for vanish of hopes of appellant to be actual/real investor/partner in proposed insurance business, which business could not take off; That is, it is not allowable to dissect the consolidated bargained price into trenches/pieces and then fix the notional liability under capital
13 gains with artificial reference to section 55(2)(a) (deemed NIL Cost). This is supported by Supreme Court in Vodafone’s case 341 ITR Page 1 where it is interalia observed as under:
“..As a general rule, in a case where a transaction involves transfer of shares lock, stock and barrel, such a transaction cannot be broken up into separate individual components, assets or rights such as right to vote, right to participate in company meetings, management rights, controlling rights, control premium, brand licences and so on as shares constitute a bundle of rights. [See Charanjit Lai v. Union of India AIR 1951 SC 41, Venkatesh (minor) v. CIT 243 ITR 367 (Mad) and Smt. Maharani Ushadevi v. CIT 131 ITR 445 (MP)] Thus, it was not open to the Revenue to split the payment and consider a part of such payments for each of the above items. The essential character of the transaction as an alienation cannot be altered by the form of the consideration, the payment of the consideration in instalments or on the basis that the payment is related to a contingency ('options', in this case), particularly when the transaction does not contemplate such a split up. that the payment is related to a contingency ('options', in this case), particularly when the transaction does not contemplate such a split up. Where the parties have agreed for a lump sum consideration without placing separate values for each of the above items which go to make up the entire investment in participation, merely because certain values are indicated in the correspondence with FIPB which had raised the query, would not mean that the parties had agreed for the price payable for each of the above items. The transaction remained a contract of outright sale of the entire investment for a lump sum consideration [see: Commentary on Model Tax Convention on Income and Capital dated 28.01.2003 as also the judgment of this Court in the case of CIT (Central), Calcutta v. Mugneeram Bangur and Company (Land Deptt.), (1965) 57ITR 299 (SC)]... That is, right cannot be presumed and has to present in reality. That is, AO’s inference for assessee is in business of investment and financing and has right to carry on investment and financing business in form of JV Co. and thereafter correlating the subject compensation to the said/presumed right, cannot withstand scrutiny of law for the simple reason that no such business is ever intended to be perused by assessee and secondly, there is no termination in assessee’s investment/financing activities by mere quit from JV Co.. Hence entire edifice of AO’s reasoning falls flat. Accordingly, AO’s feeble attempt to bring the subject compensation in category of assets described u/s 55(2)(a) for taxation as short term capital gains, is erroneous and cannot be upheld.
14 Appellant has rightly contended that since it is not the business of appellant company to enter into joint venture agreements or rights for trading in the same, since compensation was received prior to commencement of proposed insurance business, since compensation pertains to impairment of profit making apparatus itself, same is non taxable capital receipt; Reliance is rightly placed by assessee on Supreme Court order in case of Saurashtra Cement 325 ITR 422, Delhi ITAT Sak Industries 1 SOT 798, Also it is rightly stated that in absence of cost of said bundle of rights being computable, no capital gains liability can arise in hands of appellant. Reliance is rightly placed on Supreme Court order in D. P. Sandhu Bros.273 ITR Page 1, that where cost is inderminate, capital gains cannot be charged to tax. Delhi High Court latest verdict in case of Khanna and Anandhanam order dated 29 January 2013 is squarely applicable to present case : 4. The contention put forward on behalf of the assessee is that the amount represents compensation for the sterilisation of a source of income, namely referred work from DHS through the Calcutta firm of chartered accountants and where an amount is received for loss of a source of income it would represent capital receipt. It was contended that the amount did not represent professional income. It is emphasised that for 13 years (1983-1996) the assessee-firm was carrying out the referred work which was quite lucrative and the arrangement with DHS through the Calcutta firm constituted the source and once that source got terminated, the compensation received can only be capital in nature. We think that there is a good deal of force in the contention of the assessee. In Kettlewell Bullen and Co. Ltd. v. CIT: (1964) 53 ITR 261 the Supreme court drew a distinction between the compensation received for injury to trading operations arising from breach of contract or from the exercise of sovereign rights and compensation received as solatium for loss of office. It was held that the compensation received for loss of an asset of enduring value would be regarded as capital The ratio of the above judgment applies to the present case. The Tribunal seems to have been troubled by the fact that despite the termination arrangement with DHS the assessee did not cease to carry> on the profession. This aspect of the matter has also been answered by the Supreme Court in the above judgment and it has been held that the fact that the assessee continued its business or its usual operations even after termination of the agencies was of no consequence. What appears to be the ratio of the judgment is that if 15 the receipt represents compensation for the loss of a source of income, it would be capital and it matters little that the assessee continues to be in receipt of income from its other similar operations When that source was unexpectedly terminated, it amounted to the impairment of the profit-making structure or apparatus of the assessee-firm. It is for that loss of the source of income that the compensation was calculated and paid to the assessee. The compensation was thus a substitute for the source. In our opinion, the Tribunal was wrong in treating the receipt as being revenue in nature.
In the result we answer the substantial question of law by holding that the amount of Rs.1,15,70,000/- received by the assessee in terms of the release agreement dated 14.11.1996 represents a capital receipt, not assessable to income tax. The appeal of the assessee is allowed with no order as to costs.” In instant case, even the appellant is never engaged till date in insurance business with any other party. Further, genuineness of transaction is beyond shadow of doubt. It is no body’s case that subject transaction is sham. Since shares are separately transferred and subject matter of capital gains in subsequent years, no correlation can be established between subject compensation for transfer of bundle of rights and transfer of shares of JV Co.; Since all heads of taxation are mutually exclusive, and since in my opinion subject compensation cannot be taxed under the head capital gains being capital receipt for transfer of bundle of rights with cost indeterminate, same cannot be taxed under the head “other sources” treating it as return on investment where investment was Rs.64,00,000 only as explained by Supreme Court in D. P. Sandhu case 273 ITR Page 1 Since this compensation in substance is akin to liquidated damages and compensation received by a buyer who is not allotted/delivered flat as per agreed time schedule, is held to capital receipt by Himachal Pradesh High Court in case of CIT vs H.P. Housing Board 340 ITR 388 “1. Whether, on the facts and in the circumstances of the case, the Hon’ble Tribunal was right in law that the interest paid/credited by the Housing Board on the amount deposited by the allottees on account of delayed allotment of flats does not fall under the definition of interest as assigned to it in clause (28A) of section 2 of the Income-tax Act, 1961?
16 2. Whether, on the facts and in the circumstances of the case, the hon'ble Tribunal was right in holding that the interest paid or credited by the Housing Board to its allottees (payees) was of capital nature and thus not subject to deduction of tax at source when as per law it is the recipient (payee) who can decide if a particular receipt (interest in this case) is of revenue or capital in nature?" In the present case, the allottees had not given the money to the Board by way of deposit nor had the Board borrowed the amount from the allottees. The amount was paid under a self-financing scheme for construction of the flat and the interest was paid on account of damages suffered by the claimant for delay in completion of the flats. In view of the above discussion, we answer both the questions in favour of the assessee and against the Revenue” Similar are the rulings in following cases: Delhi High Court in case of CIT vs Ram Nath Exports Ltd. 201 Taxation 42 According to the Assessee, the vendor (DCM Ltd.) did not hand over vacant possession of the property by 31st December, 1988 and consequently, it was liable to pay liquidated damages to the Assessee at the rate of 16.5% per annum by way of interest on the amount already paid by the Assessee to the vendor. The question that arose before the Assessing Officer was that whether the liquidated damages amount to a capital receipt or a revenue receipt. The Assessing Officer was of the view that the amount was by way of a revenue receipt and this view was upheld by the Commissioner of Income-tax (Appeals). Before the Tribunal, the Assesses sought leave to raise an additional ground (which was permitted) and that ground was that the amount represents liquidated damages and is, therefore, not taxable being a capita! receipt.
17 The Tribunal looked into the matter and after considering various cases on the subject, it came to the conclusion that the amount received by the Assessee was nothing but liquidated damages in terms of clause 4 of the agreement and was, therefore, in the nature of a capita! receipt. It was found that the vendor (DCM Ltd.) was under an obligation to hand over physical, peaceful and vacant possession of the property to the Assessee but did not do so and because of its failure, it was liable to pay damages to the Assessee. We do not find any error in the view taken by the Tribunal and are of the view that the appeal does not raise any substantial question of law that would warrant our interference under section 260A of the Income- tax Act. Ahd ITAT in case of Shri Rama Multi Tech Ltd. vs. ACIT 92 TTJ 568 A.Y. 2000-01. The interest or liquidated damages received by the assessee on account of delay in supplying capita! goods or for delay in executing construction work was a capital receipt. Delhi High Court in case of CIT vs R.D. Ramnath Co. 164 Taxman 317 Capital Receipt Sub Topic Liquidated damages: For delay in handing over property Summary A.Y. 1990-91. The assessee hadpurchaised an immovable property. On account of delay in handing over the property, it received certain liquidated damages from the seller. The amount received was capita! receipt not liable to tax. In view of above, ground no. 6 & 6.1 are decided in favour of appellant and AO is directed to delete the addition of Rs 4,34,31,471.”
Aggrieved by the order of CIT(A), Revenue is now before us.
Before us, Learned DR took us through the findings of AO and supported the order of AO.
Learned AR on the other hand reiterated the submissions made before lower authorities and further submitted that assessee has subscribed to shares of a JV Company that was floated by Principal
18 Financial Group (Mauritius) Ltd. (PGFM) in which assessee agreed to be 32% stake holder along with other entities. The JV Company was to carry out the business of Insurance subject to regulatory approvals. The business corporation agreement was also signed on 14.06.2006 wherein certain assurances were given by the PGFM. He submitted that since the regulatory approvals could not be obtained, the business of JV Company could not commence. Thereafter, PGFM exercised its call option and acquires shares of assessee for which assessee was to be paid separately. The PGFM also paid a sum of Rs.4.34 crores for terminating the contracts etc. He submitted that assessee is not into the business of getting into JV’s & quitting it. The compensation was received by assessee before start of the business by New Co. & it represented capital receipt & capital gains tax was not leviable as there was no cost of such bundle of rights. He further submitted that the receipts are of pure capital in nature against impairment of profit making operations. He further submitted that the rights have not been included in Section 55(2)(a) of the Act and therefore the receipt are capital in nature and beyond the scope of tax provisions. He further submitted that the shares that were allotted were separately sold in A.Y. 2011-12 and capital gains earned on such transfers was declared in the return of income and has also been assessed. He further submitted that AO had attempted to cover the transactions within the scope of provisions of Section 55(2)(a) of the Act. He submitted that Section 55(2)(a) defines how the cost of acquisition for the proposes of Section 48 & 49 is to be determined in respect of the following capital assets : (i) Acquisition of a business, or (ii) A trade mark or brand name associated with a business or (iii) A right to manufacture, produce or process any article or a thing or 19 (iv) Right to carry on any business, tenancy rights, stage carriage permits loom works.
He submitted that the compensation received by the assessee does not fit or fall into any of the clause of capital assets defined u/s 55(2)(a) of the Act. More so, as the assessee was only investing partner/shareholder of the New Company, the assessee was not to participate in any way in the day to day business and only PNB and Vijaya Bank were engaged in Life Insurance business in India. He submitted that in the absence of regulatory approval, no business activity could take off and therefore the business never came into existence and compensation received by the assessee had no connection with any business that the assessee was either carrying or wanted to carry. He further placed reliance on the decision of Hon’ble Delhi High Court in the case of CIT vs. HCL Inforsystem Ltd. TS- 725-HC-2015 (Delhi) wherein Hon’ble Delhi High Court has held that upon termination of a Joint Venture Agreement, assessee’s income earning apparatus was impaired and its source of income got sterilized and it was held that the receipt by the assessee was of capital in nature. Learned AR placing reliance on the aforesaid decision (The copy of which is placed at pages 22 to 42 of the paper book) and since the facts of the assessee are identical to that of the HCL Infosystem Ltd. (supra), the AO was not justified in making the addition. He thus supported the order of CIT(A).
We have heard the rival submissions and perused the material available on record. The issue in the present ground is with respect to the addition made on compensation received by the assessee. We find that CIT(A) after placing reliance on the decision of Hon’ble Supreme Court in the case of Vodafone 341 ITR 1 has held that the 20 compensation received by the assessee was not merely for transaction of one or more tangible rights but was receipts of bundle of rights as investing partner as the whole profit making process was impaired. He has further given a finding that assessee was never engaged till date in insurance business with any other party and genuineness of the transaction was beyond the shadow of doubt. He after considering the detailed submissions of the assessee and after placing reliance on the decisions cited in the order has given a finding that the compensation received by the assessee was akin to liquidated damages and therefore in the nature of capital receipts. He has for the reasons noted in the order and which have been reproduced hereinabove has held the AO’s attempt to bring the compensation in the category of assets described u/s 55(2)(a) of the Act for taxation as Short Term Capital Gains was erroneous. Before us, no fallacy in the findings of CIT(A) has been pointed out by Revenue and in such a situation, we find no reason to interfere with the order of CIT(A) on this issue. Thus the Ground of Revenue is dismissed.
Ground No.5 is with respect to the denial of deduction u/s 80IB of the Act.
During the course of assessment proceedings, AO noticed that assessee had claimed deduction of Rs.1,57,42,128/- u/s 80IB of the Act. The assessee was asked to justify the claim of deduction to which assessee made the submissions and inter alia it was submitted that assessee had started new unit in Jammu (Sambha) backward district in Jammu & Kashmir, during the F.Y. 2003-04, the first trail production was started on 25.02.2005 for manufacturing of Tin containers of different sizes. It was further submitted that in A.Y.
21 2007-08, the claim of deduction @ 100% u/s 80IB of the Act was allowed by department. The submissions of the assessee was not found acceptable to AO. AO noted that no audit report of Jammu Division was furnished before him, the assessee was holding huge number of shares in Berger Paints Ltd. and therefore there was a direct nexus between the Jammu Division and Berger Paints. He also noted that out of total sale from the Jammu Division, most of the sale was made to Berger Paints only. He also noted that assessee was not earning any income in the Manufacturing of Processing business but on other hand it was claimed deduction u/s 80IB of the Act. He thereafter by invoking the provision of Section 80IB (10) of the Act, concluded that there was close connection between the assessee and Berger Paints Co. to whom most of the sale were made from Jammu Division and assessee was not generating much profits in the business from other business whereas the return generated from Jammu Division was higher than the total income of the Manufacturing and Processing business as per his working tabulated at page 23 of the order. He thereafter recalculated the deduction u/s 80IB of the Act at Rs.38,77,450/- as against the claim of deduction of Rs.1,57,42,128/- made by assessee and thereby denied the claim of deduction to the extent of Rs.1,18,64,678/-.
Aggrieved by the order of AO, assessee carried the matter before CIT(A). Before CIT(A) it was inter alia submitted that the basis for invoking provisions of Section 80IB (10) of the Act was vague, general and based on erroneous conclusions without putting on record the mandatory requirements of the provision. It was further submitted that assessee was making good profits in all manufacturing units and the profits of Jammu Unit was lowest among all other manufacturing
22 units. Assessee also submitted that the sales made to Berger Paints were at the rates which were lower than the rates charged from other unrelated customers and that there was no transfer of profit from other units to Jummu Unit. Before CIT(A) it was further submitted the erroneous working of net loss from manufacturing activity was based on erroneous conclusions and derivations. CIT(A) after considering the submissions of the assessee has given a finding that AO had tinkered with the assessee’s deduction merely on the basis of hunch and suspicion and it was not based on any material evidence. He has further noted that the AO has reduced the deduction claimed without pointing any defect in the working of claim of deduction u/s 80IB of the Act. He has further given a finding that the detailed working of profits produced before CIT(A) showed that the Jammu Unit was operating at lowest rate of profit and sales made to Berger Pains were at lower rates as compared to the rates charged from unrelated customers and on identical facts the deduction have been allowed in earlier year in scrutiny assessment. He, therefore, held that AO had wrongly denied the claim of deduction. He accordingly set aside the order of AO. Aggrieved by the order of CIT(A), Revenue is now before us.
Before us, Learned DR took us through the findings of AO and strongly supported the order of AO.
Learned AR on the other hand reiterated the submissions made before the lower authorities and further submitted that assessee has claimed deduction u/s 80IB of the Act in A.Y. 2007-08 and it was allowed in scrutiny assessment. It was further submitted that assessee was maintaining separate books of accounts for Jammu
23 Unit and the same have been audited and only actual profit earned from the Jammu Division had been considered for claiming deduction u/s 80IB of the Act. He further submitted that before CIT(A) additional evidences were filed under Rule 46A and CIT(A) had called for remand report from the AO. CIT(A) after considering the assessee’s submissions, remand report and assessee’s reply to the remand report had allowed the claim of the assessee. He further submitted that the action for invoking the provision of Section 80IB(10) was not based on record but based on assumption that the manufacturing division of the assessee was not earning profits. He further submitted that AO has not re-determined sales but has re-computed profits of all manufacturing units by allocating all the expenses and depreciation to manufacturing division irrespective of the fact that most of such expenses relate to the other activities of the assessee. He further submitted that if AO wanted to invoke Section 80IB (10) of the Act, he should have determined ALP of sales to related parties to demonstrate that the sales to related parties are made at higher price to claim excess deduction u/s 80IB of the Act. He further pointed to the sample copies of the invoices placed in the paper book and from there he submitted that the average sale price of Metal Container of 20 ltr charged from Berger Paints (related party) is Rs.117.36, Rs.120.48 as compared to Rs.151.11 to Coromandal Paints Ltd. and Rs.181.41 to Akzo Noble, being unrelated parties for similar 20 ltr. Metal Containers. He therefore submitted that rate charged from related parties are on lower side and therefore the provision of section 80IB (10) cannot be applied. He further submitted that AO had enhanced the income by reducing the disallowance u/s 80IB (10) of the Act in A.Y. 2014-15 against which the assessee preferred appeal before CIT(A) and CIT(A) had allowed the claim of assessee and 24 department had not filed any appeal for A.Y. 2014-15 meaning thereby that the department has accepted the order of CIT(A) on identical facts in A.Y. 2014-15. He therefore submitted that issue is thus covered in assessee’s favour by the decision for A.Y. 2014-15 and therefore no interference to the order of CIT(A) is called for.
We have heard the rival submissions and perused the material available on record. The issue in the present ground is with respect to the reducing the claim of deduction u/s 80IB of the Act. The assessee being eligible for deduction u/s 80IB of the Act is not in dispute because AO has not denied the claim of deduction completely but has reduced the claim of deduction u/s 80IB of the Act. For reducing the claim of deduction, AO had invoked the provision of Section 80IB (10) of the Act. We find that CIT(A) after considering the submissions of the assessee, remand report received from the AO, assessee’s submissions to the remand report has given a finding that AO has tinkered with the assessee’s deduction on the basis of hunch and suspicion and the conclusions arrived are not based on evidences. He has noted that AO had reduced the deduction claimed by assessee without pointing any defect in the assessee’s record in relation to the unit for which deduction u/s 80IB of the Act has been claimed. CIT(A) has held that AO was not justified in invoking the provision of Section 80IB (10) of the Act as the foundational facts were not supplied by the AO and the action of AO was not in accordance of law. He has further given a finding that on verifying the detailed working submitted by assessee, the assessee has demonstrated that the Jammu Unit for which the assessee has claimed deduction was operating at lowest rate of profit and sales made to Berger Paints was at lower price as compared to other unrelated customers. He has further given a 25 finding that the deduction was allowed to the assessee in scrutiny assessment proceedings in earlier years on similar facts. Before us, Revenue has not pointed to any fallacy in the findings of CIT(A) nor has placed any material on record to demonstrate that the observations of CIT(A) while allowing the claim of the assessee is not based on the material on record. Considering the totality of the aforesaid facts, we find no reason to interfere with the order of CIT(A) on this ground and thus the ground of Revenue is dismissed.
In the result, appeal of Revenue for A.Y. 2008-09 is partly allowed.
As far as appeal of Revenue for A.Y. 2014-15 in is concerned, before us, both the parties have been admitted that the two issues involved therein relates to the disallowance u/s 14A of the Act and the disallowance of claim of deduction u/s 80IB of the Act and the issues therein are identical to that of A.Y. 2008-09. We have hereinabove and for the reasons stated therein have dismissed the ground of Revenue with respect to the disallowance u/s 14A and deduction u/s 80IB of the Act. Since the facts are identical and for similar reasons the grounds of Revenue are dismissed.
In the result, appeal of Revenue for A.Y. 2014-15 is dismissed.
In the combined result, the appeal of Revenue for A.Y. 2008- 09 is partly allowed, the appeal of Revenue for A.Y. 2014-15 is 26 dismissed and the Cross Objection of assessee for A.Y. 2008-09 is allowed.
Order pronounced in the open court on 16.06.2023