Income Tax Appellate Tribunal - Mumbai
Morarjee Textiles Ltd, Mumbai vs Assessee on 9 April, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
"B" Bench, Mumbai
Before Shri B. Ramakotaiah, Accountant Member
and Dr. S.T.M. Pavalan, Judicial Member
ITA No.1979/Mum/2009
(Assessment Year: 2005-06)
M/s. Morarjee Textiles Ltd. A C I T 6(3)
Peninsula Spenta, 2nd Floor Vs. Mumbai
Mathuradas Mill Compound
Senapat Bapat Marg, Lower Parel
Mumbai 400013
PAN - AAACM2725R
Appellant Respondent
ITA No.2077/Mum/2009
(Assessment Year: 2005-06)
A C I T 6(3) M/s. Morarjee Textiles Ltd.
Mumbai Vs. Peninsula Spenta, 2nd Floor
Mathuradas Mill Compound
Senapat Bapat Marg, Lower Parel
Mumbai 400013
PAN - AAACM2725R
Appellant Respondent
Assessee by: Shri S.E. Dastur &
Shri Niraj Sheth
Revenue by: Shri Pravin Varma
Date of Hearing: 09.04.2013
Date of Pronouncement: 10.05.2013
ORDER
Per B. Ramakotaiah, AM
These are cross appeals by the assessee and the Revenue against the order of the CIT(A)-6, Mumbai dated 20.01.2009.
2. We have heard the learned counsel for the assessee, Shri S.E. Dastur and the CIT-DR, Shri Pravin Varma in detail and their arguments are incorporated wherever required in the order.
2 ITA No.1979 & 2077/Mum/2009M/s. Morarjee Textiles Ltd.
ITA No. 1979/Mum/20093. This is assessee's appeal and assessee raised elaborate grounds on two issues. First issue is on disallowance made under section 14A of the Act and the second issue is with reference to re-determining the capital gains as against capital loss claimed by the assessee. These issues are discussed as under.
4. Ground No. 1 is on the issue of section 14A. In the assessment order the AO noted that the assessee has made investment of `240.35 lakhs during the year in different investments. Assessee also has given loans to its subsidiaries in which its Directors are interested. Since all the borrowings and receipts are through common bank account, the AO has come to the conclusion that borrowed funds have been utilised for the purpose of investments. Accordingly, invoking provisions of section 14A he disallowed an amount of `32,00,358/-. He also disallowed an amount of `53,52,463/- under section 36(1)(iii) in addition to the disallowance under section 14A. The learned CIT(A), after considering the detailed submissions made by the assessee, however, considered the disallowance so made on the reason that Rule 8D is to be applied retrospectively following the decision of the ITAT Special Bench in the case of Daga Capital & Management Co. Pvt. Ltd. vide ITA No. 8057/Mum/2003 dated 20.10.2008. Accordingly he confirmed the disallowance. However, he has given relief with reference to indirect administrative expenses.
5. It was the submission that no disallowance under section 14A is required both under principles of law and also on the facts. Under the principles of law, it was the submission that, decision of Special Bench decision for retrospective application of Rule 8D was not approved by the Hon'ble jurisdictional High Court in the case of M/s. Godrej & Boyce Mfg. Co. Ltd. vs. DCIT 328 ITR 81 for the impugned assessment year. Accordingly, invoking Rule 8D does not arise. The other argument is that there are sufficient funds with the assessee for making investments and no disallowance is called for following the principles laid down by the Hon'ble jurisdictional High Court in the case of Reliance Utilities and Power Ltd. 313 3 ITA No.1979 & 2077/Mum/2009 M/s. Morarjee Textiles Ltd.
ITR 340. With reference to facts, it was submitted that investments are directly related to certain borrowed funds on which no interest was paid and therefore disallowance of interest/14A does not arise. the details of investments are as under: -
Name of the No. of Date of Amount (Rs.) Date Particulars Amount Company Shares Investment Morarjee 1,000,000 28.11.2003 6,410,000 28.11.2003 Out of sum 6,140,000 Castiglioni borrowed from Ltd. Nozaak Investment & Fin. Ltd. on which no interest was paid Morarjee 20,000 9.02.2005 560,500 Payment for 560,500 International purchase of sri Investments is out of receipts from sales to various customers as per bank statement enclosed at page 2 to page 3 Integra 425,000 28.02.2005 17,000,000 Out of advances to 17,000,000 Apparel & Integra Apparels & Textiles (P) Textiles (P) Ltd.
Ltd.
A 23,970,500 23,970,500 Government 2003-2004 63,523 securities B Morarjee 2,000 28.11.2003 1,000 Legler Pvt. ltd. C Total 24,035,023 Investments (A+B+C)
On this issue, the learned counsel relied on the order of the ITAT in the immediately preceding A.Y. 2004-05 where the matter was restored to the file of the AO for arriving at the reasonable disallowance, consequent to the decision of the Hon'ble Bombay High Court in the case of M/s. Godrej & Boyce Mfg. Co. Ltd. vs. DCIT 328 ITR 81 and the consequential order passed by the AO in which he has given a finding that the investments are directly related to the borrowed funds on which no interest was paid. Accordingly, AO did not consider any amount for disallowance under section 14A. With reference to the own funds the following details were placed on record: -
Year ended March 31, Year ended March
Particulars 2005 31, 2004
(Rs. In Lacs) (Rs. In Lacs)
Share Capital 2038.26 4287.6
Advance against equity - 2875
Reserve and Surplus 1767.37 -
Total 3805.63 7162.6
4 ITA No.1979 & 2077/Mum/2009
M/s. Morarjee Textiles Ltd.
Less: Debit Bal. in P&L -3768.37
Account
Net Own Funds 3805.63 3394.23
Total Tax Free Investments 234.75 471.5
6. Since the own funds are to the extent of `38.05 crores and the investments being `2.34 crores, question of disallowance does not arise. It was submitted, both on facts and on legal principles, no disallowance under section 14A is required.
7. The learned D.R., however, relied on the orders of the AO and the CIT(A).
8. We have considered the issue and examined the facts placed on record. As per the findings of the AO in A.Y. 2004-05, the investments made in two companies are out of borrowed funds on which no interest was paid.
The finding of the AO is as under: -
"The major investment made this year was in PMP Components P. Ltd. of Rs.4,07,38,535/- on 28.11.2003 which was made out of funds procured from M/s. Nozaki Finance & Investment P. ltd. - Rs.4,72,00,000/- on 23.11.2003 i.e. the same day. No interest is paid to M/s. Nozaki Finance & Investment P. Ltd. Similarly, another investment of Rs.64,10,000/- was made in Morarjee Castiglani Ltd. on 28.11.2003 which was also made out of funds borrowed from M/s. Nozaki Finance & Investment P. Ltd. on the same day. As the nexus of interest free funds & Investment is proved, the interest is not required to be considered for disallowance u/s 14A."
Therefore, since the investments made in the earlier year are continuing in this year, question of disallowance of interest under section 14A on the above does not arise.
9. With reference to investment in Integra Apparel & Textiles (P) Ltd., these amounts are out of advance received. Therefore, these amounts also do not call for any disallowance. The investment subsidiary Morarjee International Sri was made out of receipts from sales and further the dividend received from this company is taxable. Therefore, question of invoking section 14A does not arise. Apart from the above, assessee also had sufficient common funds as per the table extracted above so as to make investments in the group companies. Following the principles laid down by 5 ITA No.1979 & 2077/Mum/2009 M/s. Morarjee Textiles Ltd.
the Hon'ble jurisdictional High Court in the case of Reliance Utilities and Power Ltd. (supra) disallowance of proportionate interest under section 14A also does not arise on the facts of the case. Apart from that, as rightly held by the Hon'ble jurisdictional High Court in the case of M/s. Godrej & Boyce Mfg. Co. Ltd. (supra) application of Rule 8D cannot be made in this assessment year. Therefore, the disallowance made under section 14A by the AO and partly confirmed by the CIT(A) does not arise. However, as seen from the order of the AO in A.Y. 2004-05, consequent to the directions of the ITAT the AO disallowed an amount of `50,000/- as amount in relation to investment activities under section 14A. Therefore, on the facts of the case we restrict the disallowance under section 14A to a part of administrative expenses at `50,000/-, which is reasonable. Accordingly the disallowance under section 14A was restricted to an amount of `50,000/- only. Ground is partly allowed.
10. Ground No. 2 is with reference to recalculating the long term capital gains in stead of long term capital loss worked out by the assessee. The brief facts of the issue are that the assessee purchased shares of its subsidiary company M/s PMP Components Pvt. Ltd. at `18.10 per share on November 27, 2003. Shares of `22,50,750/- at a cost of `4,07,38,575/- were purchased in the transaction. Subsequently the assessee, during the impugned assessment year, sold all the shares held as investment to M/s. High Mercantile Company P. Ltd. (HMPL), M/s. Surewin Trading Co. P. Ltd. (STPL) and M/s. Supersoft Mercantile Co. P. Ltd. (M/s. Spirax Marshall Pvt. Ltd. (SMPL) at a price of `17.99 with a loss of ` 0.11 paise per share. In the computation of income, due to indexation of cost of acquisition, the actual loss claimed was at `17,34,376/-, which was claimed as long term capital loss to be carried forward as it could not be set off during the year. The AO was of the opinion that the said sale of shares is not a genuine sale and disallowed the loss on the ground that sale is made to related parties to evade tax. Further, he redetermined the sale price of such shares on the basis of (a) book value, (b) price as mentioned at d-mat Bank A/c of HDFC, and (c) yield method and arrived at an average sale price of `74.13 per share. While doing so, he also invoked provisions of section 2(22B)(i) of the 6 ITA No.1979 & 2077/Mum/2009 M/s. Morarjee Textiles Ltd.
I.T. Act. He, further, also made certain observations on the companies having indulged in various tax planning devices to evade tax similar to the observations made in other group companies with reference to sale and purchase of shares. These were noted down specifically in pare 5.7 and also 5.20 as various practices adopted by the assessee company and its other group entities in artificially creating a series of transactions with related parties with an intention to evade taxes and siphon away public funds. In the result, the AO substituted the sale price and worked out the capital gain thereby brining to tax an amount of `12,61,09,523/- as against the loss claimed of `17,34,376/-.
11. Before the CIT(A), the assessee submitted that there was actual loss of `0.11 per share being the purchase and sale price at the same level and the so called d-mat statement of HDFC bank, on which `56.33 price was taken was not correct or it is an error by the bank and the said PMP Components Pvt. Ltd. being the private limited company cannot have any market price. Thereafter, assessee also contended that provisions of section 2(22B)(i) does not apply to assessee's case and under section 48 for computing capital gains the 'full value of consideration' received or accrued is in fact what was received by the assessee and it cannot be modified as was done by the AO. He also relied on the decision in he case of K.P. Verghese vs. ITO 131 ITR 597 (SC) for the claim of levy of tax on capital gains. He contested the working of the AO, both legally and factually.
12. The CIT(A), however, did not agree with assessee's legal contentions and considered it as colourable transaction and relying on the decision in the case of McDowell & Co. Ltd. 154 ITR 148 upheld the action of the AO in substituting the 'fair market value'. However, he did not agree for the value adopted by the AO by taking average price of the three prices quoted by the AO. He determined the book value per share at `56.03 as a reasonable price as it closely corresponds with the value of shares of `53.46 adopted by NSDL for computing the custodial charges. He, therefore, directed the AO to recompute the capital gain by adopting the value of shares at `56.03 per share. The assessee is aggrieved on the above.
7 ITA No.1979 & 2077/Mum/2009M/s. Morarjee Textiles Ltd.
13. It is the submission of the learned counsel that the AO does not have any powers to substitute the 'fair market value' as against the 'full value of consideration' received by the assessee. He referred to the provisions of section 45, 48 and erstwhile section 52 to submit that the AO has no powers to disturb the 'full value of consideration' while computing the capital gains to substitute for 'fair market value'. He also relied on the Coordinate Bench decision in the case of MGM Shareholders Benefit Trust in ITA No. 316/Mum/2009 dated 26.11.2009 wherein on similar issue of revaluation of sale price ITAT did not approve the action of the AO. He further placed on record the de-mat statement of HDFC bank wherein the price per share was shown at `10/- to submit that the value adopted and relied by the AO was not correct.
14. The learned D.R., however, relied to the order passed by the AO as they are also in appeal on the same issue and reiterated the facts, methodology adopted by the assessee and the decision in the case of McDowell & Co. to submit that the action of the AO is correct.
15. We have considered the issue and examined the record. As far as the price adopted by the AO, we cannot approve the value as taken by the demat authorities as there seems to be an error in mentioning the value as the said company is a private limited company and there cannot be any market value as it is not quoted in the Stock Exchange. Therefore, part of AO's finding about the value of demat statement is not correct. With reference to the future profit and also adoption of book value there is nothing brought on record by the AO how these amounts were arrived at. Therefore, we are unable to support the substitution of value even on facts. Be that as it may, first of all, the AO does not have power under the I.T. Act to substitute 'fair market value' for 'full value of consideration'. There are specific provisions for substitution of fair market value for full value of consideration like computation under section 50C and 50D in the I.T. Act at present but in the relevant assessment year, the AO has no power to adopt the 'fair market value' in place of 'full value of consideration'. The method of computation as prescribed under section 48 superficially mention that "income chargeable under the head 'Capital Gains' shall be computed, by deducting from the full 8 ITA No.1979 & 2077/Mum/2009 M/s. Morarjee Textiles Ltd.
value of consideration received or accruing as a result of the transfer of the capital asset the following amount, namely: - (i) expenditure incurred wholly and exclusively in connection with such transfer, and (ii) the cost of acquisition of the asset and the cost of any improvement thereto". The 'full value of consideration' is clearly different from the 'fair market value'. Section 50D inserted w.e.f. 01.04.2013 permits fair market value being the full value of consideration in certain cases where as a result of transfer of capital asset by and assessee the consideration received or accruing is not ascertainable or cannot be determined. Under section 50C, there is special provision for substitution of full value of consideration in cases where Stamp Authorities adopts a particular value, i.e. deemed to be the full value of consideration received or accruing. Reference to Valuation Officer under section 55A is also for the limited purpose of arriving at the cost of asset at the fair market value in certain circumstances but it does not empower the AO to substitute the 'fair market value' to 'full value of consideration'. These two words, 'full value of consideration' and 'fair market value ' are differently used in the Income Tax Act and fair market value cannot be substituted in place of full value of consideration, unless it is specifically empowered by the Act. The AO has also wrongly relied on section 2(22B)(i), which is as under:
"the fair market value, in relation to a capital assets, means - (i) the price that the capital asset would ordinarily fetch on sale in the open market on the relevant date". This fair market value substitution is applicable only to the situation where the AO is empowered to determine the fair market value under the Act. As far as computation of capital gains on sale of shares are concerned under section 48 it does not empower the AO to substitute the fair market value for the full value of consideration..
16. The Hon'ble Supreme Court in CIT vs. George Henderson and Co. Ltd. (1967) 66 ITR 622 (SC) on the issue that the market value of the shares which were allotted at Rs. 136/- per share was Rs. 620/- per share considered the expression " full value of consideration" as occurring in section 12B(2) of the Indian Income Tax Act and , 1922, which is analogous to section 48 of the Act has held as under:-
" ............ It is manifest that the consideration for the transfer of capital asset is what the transferor receives in lieu of the asset he parts with, namely, money or money's worth and, therefore, the very asset transferred or parted with cannot be the consideration for the transfer. It follows that the 9 ITA No.1979 & 2077/Mum/2009 M/s. Morarjee Textiles Ltd.
expression "full consideration" in the main part of section 12B(2) cannot be construed as having a reference to the market value of the asset transferred but the expression only means the full value of the thing received by the transferor in exchange for the capital asset transferred by him. The consideration for the transfer is the thing received by the transferor in exchange for the asset transferred and it is not right to say that the asset transferred and parted with is itself the consideration for the transfer. The main part of section 12B(2) provides that the amount of a capital gain shall be computed after making certain deductions from the "full value of the consideration for which the sale, exchange or transfer of the capital asset is made." In case of a sale, the full value of the consideration is the full sale price actually paid. The legislature had to use the words "full value of the consideration" because it was dealing not merely with sale but with other types of transfer, such as exchange, where the consideration would be other than money. If it is therefore held in the present case that the actual price received by the respondent was at the rate of Rs.136 per share the full value of the consideration must be taken at the rate of Rs.136 per share. The view that we have expressed as to the interpretation of the main part of section 12B(2) is borne out by the fact that in the first proviso to section 12B(2) the expression "full value of the consideration" is used in contradistinction with "fair market value of the capital asset" and there is an express power granted to the Income-tax Officer to "take the fair market value of the capital asset transferred" as "the full value of the consideration" in specified circumstances. It is evident that the legislature itself has made a distinction between the two expressions "full value of the consideration" and "fair market value of the capital asset transferred" and it is provided that if certain conditions are satisfied as mentioned in the first proviso to section 12B(2), the market value of the asset transferred, though not equivalent to the full value of the consideration for the transfer, may be deemed to be the full value of the consideration. To give rise to this fiction the two conditions of the first proviso are(1) that the transferor was directly or indirectly connected with the transferee , and(2) that the transfer was effected with the object of avoidance or reduction of the liability of the assessee under section 12B. If the conditions of this proviso are not satisfied the main part of section 12B(2) applies and the Income-tax Officer must take into account the full value of the consideration for the transfer."
17. In CIT vs. Gillanders Arbuthnot & Co. (1973) 87 ITR 407 (SC) Their Lordships after applying the principles enunciated in George Henderson and Co. Ltd. supra has observed and held as under ( page
419):-
"Now let us see what is the impact of section 12B(2) on the transaction? Under that provision, the amount of capital gains has to be computed after making certain deductions from the full value of the consideration for which the sale is made. What exactly is the meaning of the expression "full value of the consideration for which sale is made"? It is the consideration agreed to be paid or is it the market value of the consideration ? In the case of sale for a price, there is no question of any market value unlike in the case of an exchange. Therefore, in case of sales to which the first proviso to sub-section (2) of section 12B is not attracted, all that we have to see is what is the consideration bargained for. As mentioned earlier, to the facts of the present case, the first proviso is not attracted. As seen earlier, the price bargained for the sale of the shares and securities was only rupees seventy-five lakhs.
The facts of this case squarely fall within the rule laid down by this court in 10 ITA No.1979 & 2077/Mum/2009 M/s. Morarjee Textiles Ltd.
Commissioner of Income-tax vs. George Henderson & Co. Ltd. Therein this Court observed:-
"In case of a sale, the full value of the consideration is the full sale price actually paid. The legislature had to use the words "full value of the consideration" because it was dealing not merely with sale but with other types of transfer, such as exchange, where the consideration would be other than money. If it is therefore held in the present case that the actual price received by the respondent was at the rate of Rs.136 per share the full value of the consideration must be taken at the rate of Rs.136 per share. The view that we have expressed as to the interpretation of the main part of section 12B(2) is borne out by the fact that in the first proviso to section 12B(2) the expression "full value of the consideration" is used in contradistinction with "fair market value of the capital asset" and there is an express power granted to the Income-tax Officer to "take the fair market value of the capital asset transferred" as "the full value of the consideration" in specified circumstances. It is evident that the legislature itself has made a distinction between the two expressions "full value of the consideration" and "fair market value of the capital asset transferred" and it is provided that if certain conditions are satisfied as mentioned in the first proviso to section 12B(2), the market value of the asset transferred, though not equivalent to the full value of the consideration for the transfer, may be deemed to be the full value of the consideration. To give rise to this fiction the two conditions of the first proviso are(1) that the transferor was directly or indirectly connected with the transferee , and(2) that the transfer was effected with the object of avoidance or reduction of the liability of the assessee under section 12B. If the conditions of this proviso are not satisfied the main part of section 12B(2) applies and the Income-tax Officer must take into account the full value of the consideration for the transfer."
Applying the principles enunciated in that decision we think that the full value of the sale price received by the assessee was only rupees seventy- five lackhs. That being so, the capital gains made by the company were Rs. 27,04,772 as held by the High Court."
18 In K.P.Varghese vs. ITO (1981) 7 Taxman 13(SC); (1981) 131 ITR 597 (SC) it has been held vide para 15 and 18 as under:-
"15. It is, therefore, clear that sub-section (2) cannot be invoked by the revenue unless there is understatement of the consideration in respect of the transfer and the burden of showing that there is such understatement is on the revenue. Once it is established by the revenue that the consideration for the transfer has been understated or, to put it differently, the consideration actually received by the assessee is more that what is declared or disclosed by him, sub-section (2) is immediately attracted, subject, of course, to the fulfillment of the condition of 15 per cent or more difference, and the revenue is then not required to show what is the precise extent of the understatement or, in other words, what is the consideration actually received by the assessee. That would in most cases be difficult , if not impossible, to show and hence sub-section (2) relieves the revenue of all burden of proof regarding the extent of understatement of concealment and provides a statutory measure of the consideration received in respect of the transfer. It does not create any fictional receipt. It does not deem as receipt something which is not in fact received. It merely provides a statutory best judgment assessment of the consideration actually received by the assessee and brings to tax capital gains on the footing that the fair market value of the capital asset 11 ITA No.1979 & 2077/Mum/2009 M/s. Morarjee Textiles Ltd.
represents the actual consideration untruly declared or disclosed by him. This approach in construction of sub-section (2) falls in line with the scheme of the provisions relating to tax on capital gains. It may be noted that section 52 is not a charging section but is a computation section. It has to be read along with section 48 which provides the mode of computation and under which the starting point of computation is "the full value of the consideration received or accruing". What in fact never accrued or was never received cannot be computed as capital gains under section 48. Therefore, sub-section (2) cannot be construed as bringing within the computation of capital gains an amount which, by no stretch of imagination, can be said to have accrued to the assessee or been received by him and it must be confined to cases where the actual consideration received for the transfer is understated and since in such cases it is very difficult , if not impossible, to determine and prove the exact quantum of the suppressed consideration, subsection (2) provides the statutory measure for determining the consideration actually received by the assessee and permits the revenue to take the fair market value of the capital asset as the full value of the consideration received in respect of the transfer.
xxxxxx xxxxxx xxxxxxxx
18. We must, therefore, hold that sub-section (2) of section (2) of section 52 can be invoked only where the consideration for the transfer has been understated by the assessee or, in other words, the consideration actually received by the assessee is more than what is declared or disclosed by him and the burden of proving such understatement or concealment is on the revenue. This burden may be discharged by the revenue by establishing facts and circumstances from which a reasonable inference can be drawn that the assessee has not correctly declared or disclosed the consideration received by him and there is understatement or concealment of consideration in respect of the transfer. Sub-section (2) has no application in case of an honest and bona fide transaction where the consideration received by the assessee has been correctly declared or disclosed by him, and there is no concealment or suppression of the consideration........... "
19. . In Rupee Finance & Management (P) Ltd. (2008) 22 SOT 174 (Mum); (2009) 120 ITD 539 (Mum) it has been held in penultimate para of the order that:
" As already held in the order of Rupee Finance & Management Pvt. Ltd. there is no allegation much less, any evidence to show that these assesses before us have received monies in excess of amounts of sale consideration recorded and disclosed in the transaction for the sale of shares. The first appellate authority has rightly noted that under section 48 the starting point for computation of capital gains is the amount of full value of consideration received or accruing as a result of transfer of the capital asset. The Hon'ble Supreme Court in the case of K.P.Varghese (supra) held that sub-section (2) of section 52 can be invoked only when the full value of the consideration is received in respect of a transfer is shown at a lesser figure than that which is actually received by the assessee. It further laid down that the burden of proving such understatement of consideration is on the revenue and that the sub-section has no application in the case of a bona fide transaction, where the true consideration received by the assessee has been declared or disclosed by him. Section 50C, has come into the statute only with effect from 1.4.2003 by Finance Act, 2002 and is not applicable to the impugned assessment years. Hence, for the period prior to the insertion of section 50C no addition can be made by invoking the ratio of this section. The first appellate authority at page 21 of his order has rightly observed that, what in 12 ITA No.1979 & 2077/Mum/2009 M/s. Morarjee Textiles Ltd.
fact never accrued or was never received cannot be computed as capital gain. He relied on the decision of the Calcutta High Court in the case of CIT vs. Smt. Nandini Nopani (1998) 230 ITR 679. He rightly held that it is manifest that the consideration for the transfer of capital asset is what the transferor receives, in lieu of assets he parts with, i.e. money or monies worth and that the expression 'full consideration' cannot be construed as having reference to the market value of the assets transferred but refers to the price bargained for by the parties and it cannot refer to the adequacy of the consideration. He also rightly observed that the Legislature has used the words 'full value of the consideration' and not 'fair market value of the assets trnsferred'. He recorded that the Assessing Officer has not brought on record any material to show that the assessee has received more than what has been disclosed in the books and under these circumstances the difference cannot be brought to tax under the head 'Capital gains'. We fully agree with these findings and the appeals filed by the revenue fail."
20. In view of the principles laid down above, we cannot uphold the orders of the AO and the CIT(A) in redetermining the full value of consideration by adopting the fair market value. Since the provisions of the Act does not provide for substitution of the values and the said provisions for substitution provided under the Act is not applicable to the facts of the case, we cannot approve the action of the AO in revaluing the sale price. Similar view was taken by the Coordinate Bench in the case of MGM Shareholders Benefit Trust (supra) wherein the ITAT ultimately did not approve the substitution of sale price on the facts of that case. The final finding in para 41 is as under: -
"41. There is no quarrel on the principle of law laid down in the other decisions relied on by ld. D.R. However, in view of the principles enunciated by the Hon'ble Supreme Court, in the above decisions referred in para 31 to 36 and the Tribunal decision in para 37 of this order we are of the view that the full value of the sale price received by the assessee was only Rs.0.10p Per share and, hence, the short term capital loss shown by the assessee at Rs.5,21,28,059/- is accepted and the order passed by the Assessing Officer and the ld. CIT(A) in this regard are set aside. The grounds taken by the assessee are, therefore, allowed and the grounds taken by the revenue are rejected."
21. In view of the above, we have no hesitation in allowing the grounds raised by the assessee on the issue and direct the AO to adopt the full value of consideration as received by the assessee and to recompute the long term capital gains or losses accordingly. The orders of the AO and the CIT(A) to that extent are modified. Ground is allowed.
22. Appeal of the assessee is considered partly allowed.
13 ITA No.1979 & 2077/Mum/2009M/s. Morarjee Textiles Ltd.
ITA No. 2077/Mum/200923. Revenue has raised the following grounds: -
"1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO adopt the value of shares of PMP Components Pvt. Ltd. at Rs.56.03 per share instead of Rs.74.13 per share as determined by the AO for the purpose of calculating Long Term Capital Gain."
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs.13,25,00,000/- made on account of forfeiture of shares without appreciating the fact that this transaction clearly falls within the ambit of section 28(iv) which clearly provides for taxation of any benefit or perquisite arising from exercise of business and the transactions of forfeiture were structured in a way to give benefit to the assessee company or in the alternative the same is assessable as income from other source u/s. 56(1) of the I.T. Act.
3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs.4,05,36,593/- being the value of lease hold land received by the assessee company from Morarjee Legler Pvt. Ltd. (MLPL) at Nil value even though the A.O. had rightly taxed the same as per provisions of Section 56(1) of the I.T. Act or in the alternative the same is assessable to tax u/s. 28(iv) of the I.T. Act."
24. Ground No. 1 is with reference to the direction of the CIT(A) in adopting the value of `56.03 per share instead of `74.13 per share as determined by the AO for the purpose of calculating the long term capital gains. This issue is related to ground No. 2 in assessee's appeal. For the reasons stated therein, we hold that the AO has no powers to substitute the value other than what the assessee has received as full value of consideration. In view of this the ground raised by the Revenue does not survive. Accordingly the same is rejected.
25. Ground No. 2 pertains to addition of `13.25 crores on account of forfeiture of shares made by the AO. The issue arises as under:-
In the assessment order, the AO has noted that the assessee company had shown that an advance against equity of `28.75 crores has been settled by making payment of `15.50 crores and the balance `13.25 crores has been cancelled and transferred to General Reserve. The AO has noted that 14 ITA No.1979 & 2077/Mum/2009 M/s. Morarjee Textiles Ltd.
the forfeiture of shares would result as Income from other sources under section 56(1) as the entire transaction has been structured in a way so that the company is benefited and also its related parties and all the while by evading taxes. He has further noted that section 56 has a very wide and encompassing scope. It covers every income and has no scope of letting out anything. As such the waiver of loan is also clearly an income taxable in the ambit of section 56. He has also invoked provisions of section 28(iv) which says that no value of any benefit or perquisite, whether convertable into money or not, arising from business or exercise of profession is to be taxed under section 28(iv). Accordingly, he has treated the forfeiture of share application money of `13.24 crores as income from other sources in the hands of the appellant. He relied on the following decisions: -
a. J.K. Cotton Spinning & Wvg. Mills Co. Ltd. vs. State of Uttar Predesh 19 FJR 436, AIR (1961) (SC) 1170, 1174(2) b. CIT vs. S. Teja Singh 35 ITR 408 (SC) c. Mulji Tribhuvan Sevak V. Dakor Municipality, AIR 1922 (Bombay) 247, 251(2) d. Controller of Estate Duty vs. Ahilya Kasinath Sawant & Ors 134 ITR 268 e. CIT vs. Satyanarayan 238 ITR 855 f. Caltex Oil vs. CIT 202 ITR 375 g. Bajaj Tempo Limited 196 ITR 188
26. Before the CIT(A) it was submitted that the AO is not justified in treating the forfeiture of share application money as income of the assessee under section 56. According to the learned counsel if the income is not taxable under section 45(1) or 28(iv) it cannot be taxed at all. Therefore, forfeiture of shares is not an income taxable under section 56. Since any profit which arises on the forfeiture of shares is neither a revenue receipt nor profit on the working of a company but is simply the circulating capital of the company and as such a capital asset. He further argued that when share application money was treated as capital receipt when it was originally received then now it cannot change the nature and be treated as revenue receipt. He relied on the decisions Lahore High Court in the case of Multan Electric Supply Co. Ltd 13 ITR 457 and ITAT Delhi in the case of Impasat 15 ITA No.1979 & 2077/Mum/2009 M/s. Morarjee Textiles Ltd.
Pvt. Ltd. vs. ITO 276 ITR 136. It was further submitted that the waiver of the amount by the foreign company was not such a subsequent event imprinting a different quality to the original receipt so as to change the nature of the receipt itself. The original receipt was undoubtedly capital and the waiver did not have the quality of changing the same into a revenue receipt. Thus, the share application monies could not also be assessed as casual and non-recurring receipt under section 10(3) of the Act.
27. The learned CIT(A) deleted the addition by holding as under: -
"7.3 I have duly considered the submission of the A.R. and I find that the share application money was a capital receipt when it was received in the initial stage. The share application money was forfeited in order to restructure the capital of the company, then also the nature of the receipt cannot be changed from capital to revenue. It is not correct to say that all sorts of receipt are taxable in the hands of the assessee u/s. 56. Capital receipts are not taxable as Income from Other Sources. Since it is not an income or revenue receipt, section 28(iv) also is not applicable, as only revenue receipt can be taken as income u/s. 28(iv). It is also clear that forfeiture of share application money is not casual or non recurring receipt and hence not taxable u/s. 10(3). Although the share application money was forfeited under the scheme of capital restructuring as provided by the Bombay High Court, the same is capital in nature and not taxable in the hands of the assessee. The A.O. is directed to delete this addition. This ground of appeal is allowed."
28. After considering the rival contentions, we do not see any reason to interfere with the findings of the CIT(A). Since the amount is capital in nature the same cannot be brought to tax. Therefore, we uphold the order of the CIT(A) and reject the ground of the Revenue.
29. Ground No. 3 pertains to deletion of an amount of `4,05,36,593/- being the value of leasehold land received by the assessee company.
30. The facts of this ground are that in the assessment order the AO has noted that the assessee has received leasehold land of `4,05,36,593/- from its associate company M/s. Morarjee Legler Pvt. Ltd. (MLPL). The assessee further submitted that MLPL entered into an agreement with MIDC on 23.11.1995 for a leasehold land for consideration of `1,05,31,100/-. However, due to varius reasons MLPL could not develop the property. It was further noted by the AO that this property was transferred to the assessee at 16 ITA No.1979 & 2077/Mum/2009 M/s. Morarjee Textiles Ltd.
Nil value whereas MLPL had recorded the value of this leasehold land in their books of accounts at `4,05,36,593/- as the value of this land which was acquired by paying `1,05,32,100/- to MIDC as incurred. The AO has further noted that the assessee company has 20% stake in MLPL. Besides 40% of the stake is held by Shri Ajay G. Piramal, Chairman and Shri Pramodkumar K. Gothi, Managing Director of the company (each). Accordingly, AO held that the value of the leasehold land transferred to the assessee at Nil value is to be assessed in the hands of the assessee under section 56(1) at `4,05,36,593/-.
31. Before the CIT(A) it was submitted that the assessee entered into a tripartite agreement with MLPL and Maharashtra Industrial Development Corporation (MIDC) to develop the project on leasehold land which was allotted to MLPL by MIDC. Such an agreement was entered as MLPL did not have sufficient funds and they requested the assessee to develop the project, as failure to develop the project would entail financial penalties and reacquisition of the land by MIDC. Subsequent to entering the agreement, MLPL transferred leasehold land at Nil value and the assessee paid `12,07,926/- to MIDC for assignment of such rights in assessee's favour. This amount was capitalized in the books of account of the assessee under the head Leasehold Land. The AO treated the leasehold land received by the assessee at Nil value as income of the assessee and made an addition of `4,05,36,593/- under section 56(1) of the Act being the value in the books of MLPL, by treating the transaction as non-genuine as it is entered without adequate consideration. He further observed that the assessee has enriched himself by a sum of `4,05,36,593/- as the leasehold land is received at Nil value. The assessee submits that the leasehold land received has been capitalised at Nil value in its book of account and any substitution in its purchase/transfer price will only lead to increase in cost price which will have to be capitalized and thereby it will not affect the income of the assessee. The assessee had received the leasehold land for development of project and hence the same is capital asset in the hands of the assessee and not income of the assessee. The assessee further submitted that it is not open for the Department to impose tax on capital asset of the assessee under any other 17 ITA No.1979 & 2077/Mum/2009 M/s. Morarjee Textiles Ltd.
head, since income derived from a source falling under a specific head has to be computed under appropriate section and no other and if the income cannot be taxed under that particular section it cannot be taxed at all.
32. The learned CIT(A) agreed with the submission of the assessee as under: -
"8.3 I agree with the submission of the A.R. that receipt of leasehold land at Nil value is not an income u/s. 56(1) but a capital receipt in the hands of the assessee. The receipt is on account of leasehold land only as per tri-party agreement with MIDC and MLPL with the assessee. Hence, the nature of receipt is capital in nature and not taxable in the hands of the assessee. The A.O. is directed to delete this addition. This ground of appeal is allowed."
33. After considering the rival submissions we uphold the findings of the CIT(A). The action of the AO cannot be upheld as the amount involved is on capital account and can not be treated as income from other sources.. In view of this, Revenue's ground is rejected.
34. In the result, assessee's appeal is partly allowed and Revenue's appeal is dismissed.
Order pronounced in the open court on 10th May, 2013.
Sd/- Sd/-
(S.T.M. Pavalan) (B. Ramakotaiah)
Judicial Member Accountant Member
Mumbai, Dated: 10th May, 2013
Copy to:
1. The Appellant
2. The Respondent
3. The CIT(A) - VI, Mumbai
4. The CIT- VI, Mumbai City
5. The DR, "B" Bench, ITAT, Mumbai
By Order
//True Copy//
Assistant Registrar
ITAT, Mumbai Benches, Mumbai
n.p.