Category: Direct Taxes

37 ITO v. Tamilnadu Minerals Ltd.
(2010) 124 ITD 156 (Chennai TM)
A.Ys. : 2001-02 & 2002-03. Dated : 13-10-2009

The assessee company is a Government of Tamil Nadu
undertaking engaged in the manufacture and export of granites. During the year
under consideration, the total income declared by the assessee was
Rs.2,97,86,549. This total income constituted entirely of income from other
sources. There was no positive income under the head ‘business income’.
Subsequently the assessment was reopened u/s.147 and the AO made certain
disallowance u/s.43B and u/s.14A. This resulted into positive business income.
The assessee thus contended that it should be allowed deduction u/s. 80HHC. The
Assessing Officer rejected the plea on the ground that the deduction was not
claimed in the original return despite there being a positive income, the
assessee had also not filed the audit report and the proceedings u/s.147 are for
the benefit of the revenue and so the assessee cannot claim a benefit which it
had not claimed in the original return.

(i) S. 147 being for the benefit of the revenue, the
assessee cannot be permitted to convert the reassessment proceedings into an
appeal or revision in disguise, and seek relief in respect of items not
claimed into the original assessment proceedings. However, in the given case,
the assessee could not have claimed the deduction in absence of any business
profits. Further, no sooner the disallowance u/s.43B was proposed by the AO,
the assessee immediately put forth its claim for deduction u/s.80HHC. This it
did because as a result of disallowance, the business income turned positive.
The assessee thus claimed a rightful deduction.

(ii) The argument of the Revenue that the assessee could
have filed a revised return has no force.

(iii) In original return since the deduction was not
claimed, there was no question of filing the audit report as well. But when
the business income became positive and when the assessee made a claim for the
deduction, it is well within its right to file the audit report at the time of
making the claim.

35 DCIT v. JMD Advisors (P) Ltd.
(2010) 124 ITD 223 (Delhi)
A.Y. : 2003-04. Dated : 8-2-2008

The assessee-company was engaged in the business of real
estate. It purchased a property and carried on construction work on the same.
The constructed building alongwith the land was then sold at a loss. This loss
was claimed as business loss by the company. The Assessing Officer observed that
the said property was shown in the balance sheet as ‘fixed assets’ and not as
stock in trade. He thus held that the loss incurred was a long-term capital loss
and not business loss. He further referred the matter to the DVO to estimate the
sale consideration and the cost of construction of the property. Based on the
valuation figures given by the DVO, the AO worked out figure of long-term
capital loss.

He also initiated penalty proceedings u/s.271(1)(c) of the
Act.

(a) The Assessing Officer ignored the fact that the
assessee-company was incorporated with the main object of carrying on real
estate business. Further, the assessee had shown the property as ‘work in
progress’ in the balance sheets of prior years. Hence the action of the AO to
treat the property as capital asset was not well founded.

(b) Even though the action of the AO was not challenged in
the quantum proceedings as the income assessed was finally a loss, this cannot
draw any adverse inference in the penalty proceedings. Also, a mere change in
the head of income cannot be construed as concealment of income.

(c) Further, for reference to the DVO for valuation of the
fair market value, the AO first needs to bring the material on record to prove
that the assessee has received more consideration than that declared by him.
Since there was no material on record, the action of AO was not tenable in law
and addition made on this basis cannot be treated as concealed income of the
assessee to attract penalty.

(d) The AO had further substituted the cost of construction
recorded in the books of the assessee with the valuation of DVO. However, no
material was brought on record by the AO that the cost of construction was an
inflated one in the books of account of the assessee. Hence, the addition made
by the AO by substituting the cost of construction by the valuation of DVO was
not justified, much less the imposition of penalty.

The assessee, while computing long-term capital gain arising
on transfer of office premises purchased by him for Rs.69,000 on 1st October,
1978, considered the fair market value of this property as on 1st April, 1981 to
be its cost of acquisition. The fair market value claimed to be Rs.16,20,000 was
backed by a valuation report by an approved valuer which report relied upon
certain press reports about prevailing market prices and not on any comparable
sale instances.

The Assessing Officer (AO) found the value as per comparable
sale instances in the same society to be much lower. The assessee on being
confronted with these instances submitted that these transactions apparently had
cash element in the consideration and that the valuation of the assessee was
also in consonance with Indian Valuer Directory and Reference Book. The AO
referred the matter to the DVO who valued the premises at Rs.3,00,000 on the
basis of certain sale transactions at Cuffe Parade area. The AO adopted this
amount of Rs.3,00,000 as fair market value of the property on 1-4-1981 and
computed long-term capital gains on that basis. He rejected the assessee’s
objection to the DVO report by stating that this report is binding on the AO.

Aggrieved the assessee preferred an appeal to the CIT(A) who
rejected the appeal of the assessee.

Aggrieved the assessee preferred an appeal to the Tribunal.

(i) A Third Member decision of the Tribunal in the case of
Rubab M. Kazerani v. JCIT, 91 ITD 429 (TM) has concluded that reference to DVO
u/s.55A can be made when value of the property as disclosed by the assessee is
less than the fair market value and not vice-versa. In the present case, on
the contrary, AO was of the prima facie view that the fair market value is
less than the value disclosed by the assessee. Thus, the learned CIT(A)’s
emphasis on binding nature of DVO valuation is wholly devoid of legally
sustainable basis.

(ii) It is not even in dispute that at least in eighties,
it was a common practice to pay a part of sale consideration by unaccounted
cash and it was because of this practice several legislative measures had to
be taken to combat tax evasion in property sale transactions. Bearing this in
mind, the rates given by independent media and press like Times of India/Accomodation
Times is certainly more reliable indicator of the prevailing market value of
properties. The market prices given in ‘Indian Valuer Directory & Reference
Book’, also partly supports the valuation by valuation report as filed by the
assessee.

(iii) The Tribunal noted that as against the assessee’s
valuation @ Rs.2,700 per sq.ft., the Directory & Reference Book states the
value of office premises in Nariman Point area @ Rs.2000 per sq.ft. The
valuation as per ‘Accommodation Times’, ranges from Rs.2,400 per sq.ft. to
Rs.3,200 per sq.ft. for commercial area.

(iv) The Tribunal adopted the rate of Rs.2,000 per sq.ft.
as given in the refrencer as against the valuation @ Rs.500 per sq.ft, adopted
by D.V.O. and valuation @ Rs.2,700 per sq.ft. as adopted by the assessee’s
valuer.

The assessee-firm sold its industrial unit to the sister
concern and surplus of Rs.3,90,75,996 arising was claimed to be exempt on the
ground that it was a slump sale of its business. The price for transfer was
arrived at by capitalisation of profits method. The weighted average of net
profits for 3 preceding years has been capitalised and the consideration is
arrived at on the basis of 5 times of such weighted average. Accordingly the
sale consideration of Rs.5,64,79,500 was fixed. Individual value of assets and
liabilities was not considered in computation of price of sale of business.

The AO noted that the assessee had got its assets revalued at
Rs.1,71,85,000 as on 31st March, 1995 on the basis of valuation report of an
independent valuer. It was thus clear that the value of assets was not more than
Rs.1,71,85,000 shortly before the date of transfer of assets. The difference
between Rs.1,71,85,000 and WDV of assets was taxed as short-term capital gain
and difference between the consideration i.e., Rs.5,64,79,500 and Rs.1,71,85,000
was taxed as long-term capital gain as goodwill u/s.55(2)(ii).

Aggrieved, the assessee carried the matter in appeal before
the CIT(A) but without any success. Not satisfied with the order of the CIT(A),
the assessee carried the matter in appeal before the Tribunal. There was a
difference of opinion between the members, and the matter was referred to the
Third Member.

None of the authorities below had any issues with genuineness
or bona fides of the valuation method adopted for sale of the unit. It has never
been the case of any of the authorities below that the consideration arrived at
was part of the sham arrangement and that inter se relationship between the
buyer and the seller has vitiated the bona fides of the sale agreement.

There is no dispute that valuation as on 1st May 1996, which
was the date of transfer of the business, for individual assets is not
available, and the valuation report relied upon by the authorities below is
dated 12th April, 1995 estimating value of the assets as on 31st March, 1995.
The value of an asset as on 1st May 1996 cannot be the same as on 31st March,
1995. The decision of CIT v. Artex Manufacturing Co., 227 ITR 260 (SC), which
has been relied upon by the lower authorities will be relevant only in a case in
which sale consideration of the business is computed on the basis of values of
specific assets and liabilities.

The other aspect of the matter is that the unit has been
transferred as a going concern. Even the manpower, registrations, contracts,
permissions and sanctions were to be transferred to the buyer. The unit has been
transferred to the buyer in a fully functional state along with all the
employees and all the contracts.

Regarding the argument raised that the sale transaction is a
collusive transaction between the sister concerns and the whole theory of
valuation on the basis of capitalisation of profits is an afterthought, it has
not been the case of any of the authorities below that the sale agreement is a
sham agreement or that valuation method adopted by the assessee is not bona
fide. The payments have been made in accordance with this agreement on 1st May,
1996 itself, and therefore it cannot be said that the quantification of sales
consideration was an afterthought. As for the assessee and the buyer being
sister concerns, merely because an agreement is entered into by related parties
the effect of the agreement cannot be ignored. Therefore, the impugned
transaction is not a case of itemised sale and it is clearly a case of slump
sale of the business.

The assessee is engaged in the business of manufacturing
calcium carbonate since 1978 with a starting production capacity of 5,000 MT
annually, which was enhanced in various stages — to 7,500 MT in 1986-97 — to
9,600 MT in the year 1988-89 — to 11,000 MT in 1990-91 and 70,000 MT in 1991-92,
which resulted in corresponding increase in the production. The assessee claimed
deductions u/s.80HH and u/s.80-I in these years on the basis that with each
expansion a new industrial undertaking came into existence in the year in which
the production capacity was increased and the period of allowability of
deductions will increase accordingly.

For A.Y. 1991-92 and 1992-93, the AO rejected such claims of
the assessee holding that it was a case of gradual expansion and reconstruction
of existing unit and the increase in the production capacity cannot be held as
establishment of new industrial undertaking. The CIT(A) confirmed the view of
the AO in A.Y. 1991-92. However for A.Y. 1992-93, the CIT(A) took a different
view than his predecessor and allowed the claim of the assessee.

The Tribunal decided the appeal for A.Y. 1991-92 in favour of
the assessee relying on the observations of the CIT(A) for A.Y. 1992-93. Whereas
for A.Y. 1992-93 the Tribunal considered the matter afresh without being
influenced by the earlier order on the ground that the fact that the appeal
against the order of the CIT(A) for A.Y. 1992-93 was pending before the Tribunal
was not brought to the notice of the Tribunal at the time when the appeal for
A.Y. 1991-92 was heard. Upon considering the matter afresh, the Tribunal decided
against the assessee.

Upon further appeal to the High Court, it was directed to
form a Special Bench to resolve the controversy.

The true test is, there must emerge a new and identifiable
undertaking, separate and distinct from the existing unit. In the present case,
there is no dispute that so-called expanded new plant and machinery were
installed in the existing building, on same process line-up and infrastructure
and new equipments were connected to the old machinery set-up. The rotary gas
producer was common for the old and the new plant. Similarly, all the raw
material processed passed through a common lime holding tank. The old and the
new plant were integrated in such a manner that it was difficult to identify the
input of raw material and final product whether it was produced through the
so-called expanded plant and machinery or through the old plant and machinery.
Raw material, finished products, employees, electric connection, maintenance of
books of accounts, etc. were all common and could not be identified as coming
from new or old plant. Further, the assessee was not able to ascertain the exact
profits independently from old and expanded plant, that is why the assessee
computed its profits on proportionate basis. Therefore no independent and
distinct unit came into existence for the purpose of claiming deduction either
u/s.80HH or u/s.80-I.

The assessee incurred expenditure at an event at Hannover,
Germany, which was claimed as application of income within the meaning of S.
11(1)(a). The AO and CIT(A) were of the opinion that the expenditure should have
been incurred in India in order to be eligible for exemption.

A perusal of the provisions of S. 11(1)(a) of the Act clearly
shows that the words used are ‘is applied to such purpose in India’. The words
are not ‘is applied in India’. The fact that the Legislature has put the words
‘to such purpose’ between ‘is applied’ and ‘in India’ shows that the application
of income need not be in India, but the application should result and should be
for the purpose of charitable and religious purpose in India. It is not the case
of the Revenue that the expenditure incurred by the assessee in Hannover,
Germany has not resulted in the benefit being derived in India. In these
circumstances, it cannot be said that the expenditure incurred by the assessee
in Hannover, Germany, which resulted in and which was for the purpose of
attaining the charitable object in India, is not application of income. The
decision in the case of Gem & Jewellery Export Promotion Council v. ITO, 68 ITD
95 (Mum.) was followed.