Income Tax Appellate Tribunal - Mumbai
M/S. Laffans Petrochemicals Ltd., ... vs Dcit Range- 10(2)(1), Mumbai on 29 May, 2019
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ITA.No. 1464/Mum/2018
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES "A", MUMBAI
BEFORE SHRI G.S. PANNU, VICE PRESIDENT
AND
SHRI RAVISH SOOD, JUDICIAL MEMBER
ITA No. 1464/Mum/2018
Assessment Year : 2012-13
Laffans Petrochemicals Limited, Depyty Commissioner of
10, Luthra Indul. Complex Income Tax, Range-10(2)(1)
Vs.
Andheri Kurla Road, Safed Phool Room No.509, 5th Floor
Mumbai-400 072 Aaykar Bhavan, M.K.Road
[PAN : AAACL 0645 D] Mumbai-400 020
(Appellant) (Respondent)
Appellant by : Shri.Deepak Tralshawala &
Shri. Shekar Gupta
Respondent by : Ms. Nilu Jaggi
Date of Hearing : 22-03-2019 Date of Pronouncement : 29-05-2019
ORDER
PER G.S. PANNU, VICE PRESIDENT:
1. The captioned appeal filed by the assessee is directed against an order passed by the CIT(A)-17, Mumbai dated 26.02.2018 pertaining to the Assessment Year 2012-13, which in turn, has arisen from an order passed by the Assessing Officer under section 143(3) of the Income Tax Act, 1961 (in short 'the Act') dated 30.03.2015.2 ITA.No. 1464/Mum/2018
2. Grounds of appeal raised by the assessee read as under:-
"1. (a) The learned CIT (Appeals) has erred in law and on the facts of the case in sustaining the order of the assessing officer computing long term capital gain on demerger of Ankleshwar unit at Rs. 41,16,73,633/- as against Rs. 9,01,94,2077- declared by the assessee company.
(b) The learned CIT (Appeals) has erred in law and on the facts of the case in not appreciating the fact that the net sale consideration received by the assessee against the demerger was Rs.
47,01,10,609/- as against the gross sale-consideration of Rs. 78,98,20,000/-.
(c) The learned CIT (Appeals) has erred in law and on the facts of the case in not appreciating the fact that as per clause 3.2 of the agreement with M/s. Huntsman Investments (Netherlands) B. V. the total consideration was to be reduced by the debts payable by the assessee.
(d) The learned CIT (Appeals) has erred in law and on the facts of the case in not appreciating the fact that the assessee has only one manufacturing unit at Ankleshwar which was demerged and the demerger involved transfer of all fixed assets, current assets, secured loans and current liabilities.
2. The learned CIT (Appeals) has erred in law and on the facts of the case in sustaining the order of the assessing officer disallowing repairs and maintenance Rs. 94,11,574/-.
3. The learned CIT (Appeals) has erred in law and on the facts of the case in sustaining the order of the assessing officer disallowing depreciation on motor car and other related expenses to the tune of Rs. 6,17,865/-.
4. The assessee company craves leave to add, alter or amend the above grounds of appeal".
3. In this appeal, the grievance raised by the assessee is against the actionof the income tax authorities in rejecting the manner of computing Long Term Capital Gain in terms of section 50B of the Act, disallowance of repairs and maintenance expenses and disallowance of depreciation and related expenses on motor car, which we shall deal in seriatim.
4. The first Ground raised in appeal which pertains to the manner of computing Long Term Capital Gain in terms of section 50B of the Act. In this context, the relevant facts are that the assessee is a company incorporated under the provisions of the Companies Act, 1956 and it is, inter alia, engaged in the business of manufacturing of petrochemical products. The assessee company along with Shri. Sandeep Seth (shareholder and managing director of 3 ITA.No. 1464/Mum/2018 the assessee company) entered into a Master Agreement dated 31.07.2010 with M/s. Huntsman Investments (Netherlands) B.V (hereinafter referred to as "purchaser") to demerge its manufacturing unit at Ankleshwar. Pursuant to the approval of the Hon'ble Gujarat High Court to the Scheme of demerger vide order dated 11.03.2011, the assessee incorporated a wholly owned subsidiary company named Laffans Fine Chemicals Pvt. Ltd. (hereinafter referred to as "resulting company") and during the year under consideration, demerged its manufacturing unit at Ankleshwar into said company and all the shares of this company was transferred by way of a slump sale to the purchaser, M/s. Huntsman Investments (Netherlands) B.V. The Long Term Capital Gain on the above transaction under section u/s 50B of the Act was worked-out by the assessee at Rs. 9,01,94,288/-.The assessee-company filed its return of income for Assessment Year 2012-13 on 24.09.2012declaring total income of Rs. 8,96,04,701/- under the head Capital Gain,computed in terms of section 50B of the Act, after setting off business loss of Rs. 5,89,506/-. In the course of assessment proceedings finalised u/s 143(3)of the Act on 30.03.2015, the Assessing Officer, inter alia, rejected the assessee's manner of computing Long Term Capital Gain in terms of section 50B of the Act and recomputed the Long Term Capital Gain at Rs. 41,16,73,633/-.In doing so, the Assessing Officer denied reduction for the liabilities of the unit which were paid for by the assessee, reduction for bank guarantee provided by the assessee and loss on sale of vehicle. In this context, the Assessing Officer noted that assessee had filed two reports of the Accountant dated 06.09.2012 in Form 3CEA in terms of sub-section (3) of section 50B of the Act reporting different figures for computation of Long Term Capital Gains under section 50B of the Act. The 4 ITA.No. 1464/Mum/2018 Assessing Officer further noted that the Master Agreement provides for certain adjustments to the total consideration stated in the agreement, but in absence of any details and explanation, the adjustments mentioned in the Master Agreement for computation of total sale consideration was not taken into consideration and gross consideration of Rs.78,98,20,000/- was taken as base to compute Long Term Capital Gain. The assessee, in the course of assessment proceedings explained the reason for difference in two reports in Form 3CEA. The CIT(A), however, noticing that no adjustment is permissible to consideration as per section 50B of the Act, rejected the submissions of the assessee and confirmed the action of Assessing Officer.
5.1 Before us, the learned representative for the assessee explained that in terms of the Master Agreement, the total consideration is to be determined after making certain adjustments provided therein, and accordingly the assessee was justified in claiming adjustment for the same while computing the consideration for the purpose of computing capital gain. The learned representative for the assessee referred to page no. 86 of the Paper Book and explained that 'Total Consideration', as per Master Agreement dated 31.07.2010, is to be computed as follows:
• INR 78,98,20,000/-
• reduced by the Share Purchase Price;
• reduced by the Total Debt;
• plus the Purchaser's ETP Contribution;
• plus, if applicable, any reimbursement of amounts equal to the Optional Capital Expenditure; and • adjusted by the Audited Net working Capital Differential.5 ITA.No. 1464/Mum/2018
The Total Consideration payable by the Company to the Vendor on Closing shall be computed using the Estimated Net Working Capital Differential and will be paid in accordance with Clauses 3.7.2 and 3.7.3 below. The Total Consideration will be adjusted using the Audited Net Working Capital Differential and Audited Variance set out in the Reconciliation Statement and any adjustments will be dealt with in accordance with Clause 4 below.
Accordingly, firstly, assessee reduced Rs. 99,890/-, being Share Purchase Price of the assessee, while arriving at total consideration. Secondly, the learned representative for the assessee explained that Total Debt, which is to be reduced from the consideration, has been defined in the Master Agreement to mean "all liabilities of the Business excluding the current liabilities but including those liabilities classified under the headings Secured Loans and Unsecured Loans as per the classification specified under Part 1 (Form of Balance Sheet) of Schedule VI to the Companies Act, 1956 at Closing. Total Debt shall also include the sales tax incentive loan which the Purchaser has understood as the gross sales tax liability."As per the Audited financial statements of the assessee as on 31.03.2011, the Short Term Borrowings comprising of secured cash credits stood at Rs. 22,73,45,855/-. This being in the nature of secured loans, assessee reduced the same while arriving at total consideration for the purpose of section 50B of the Act. Thirdly, in terms of the Clause 7 of the Master Agreement, assessee provided a Bank Guarantee in favour of the Purchaser for an amount of Rs. 9,29,20,000/- for the purpose of paying and bearing the Purchaser Losses for a period of 18 Months from Closing date. The Purchaser invoked the Bank Guarantee provided by the assessee and withdrawn the amount of Rs.
9,29,20,000/-. The copy of the bank guarantee provided by the assessee is 6 ITA.No. 1464/Mum/2018 placed at page no. 120-125 of the Paper Book. Further, letter from the bank confirming invocation of the bank guarantee by the Purchaser is placed at page no. 127 of the Paper Book.The learned representative for the assessee explained that the payment for bank guarantee is covered under the head "adjusted by the Audited Net working Capital Differential",and thus, was also reduced while arriving at the total consideration. In this context, the learned representative for the assessee referred to letter addressed by the Purchaser for invoking bank guarantee. Further, assessee reduced miscellaneous liabilities of Rs. 95,646/-. Lastly, assessee deducted the loss on sale of vehicle of Rs. 17,70,034/-.
5.2 The learned representative for the assessee further submitted that in principle, the Assessing Officer agreed with the fact that Master Agreement provides for adjustments to be made for arriving at total consideration. However, he himself did not made any such adjustment to arrive at 'Total Consideration' for want of details and explanation. The action of the Assessing Officer was also influenced by the fact that assessee filed two reports of the Accountant in Form - 3CEA in terms of sub-section (3) of section 50B of the Act, even though the reason for filing revised report was explained to him in the course of assessment proceedings. On appeal to CIT(A), the CIT(A) without appreciating the merits of the case, upheld the action of Assessing Officer and further went on to hold that no adjustment is permissible in arriving at 'Total Consideration' for the purpose of section 50B of the Act.The learned representative for the assessee, thus, contended that the computation of the Long Term Capital Gain made by the 7 ITA.No. 1464/Mum/2018 assessee was as per the Master Agreement with the Purchaser, and it should be accepted.
5.3 The learned DR on the other hand relied on the order of authorities below to support the action of the Assessing Officer in denying the reduction of liabilities and bank guarantee amount while computing the Long Term Capital Gain.
5.4 We have heard the rival submissions. The short controversy in this case relates to the manner in which Long Term Capital Gain is to be computed under section 50B of the Act. More precisely, the area of difference between the assessee and the Revenue is on the calculation of 'Total Consideration' for the purpose of computation of Long Term Capital Gain in terms of section 50B of the Act. The Assessing Officer while calculating the 'Total Consideration' has not made adjustments by way of reducing the total debts of the undertaking and amount of bank guarantee as stipulated in the Master Agreement primarily on the ground that the details with respect to the same were not available with him. On the other hand, as per the assessee, such liabilities which are primarily towards the bank loan, and the amount of bank guarantee given in favour of the purchaser for the indemnifying losses are admissible as an adjustment against the consideration received, for the purpose of computing Long Term Capital Gain.
5.5 On perusal of the Master Agreement dated 31.07.2010, it is clear that the Clause no. 3.2 of the Agreement clearly provides for the manner of determination 8 ITA.No. 1464/Mum/2018 of the total consideration for the sale of undertaking, which fact is not disputed by the Assessing Officer. The said clause provides for certain adjustment to be made to the consideration of Rs. 78,98,20,000/- stated in the Agreement to arrive at the amount of 'Total Consideration'. Admittedly, the Assessing Officer has not made those adjustments and has directlytaken consideration at Rs. 78,98,20,000/-.As can be seen from the assessment order, even Assessing Officer states that certain adjustments were in fact required to be made as per the agreement, however in absence of details and explanation with respect to those adjustments he has not carried out the same. The CIT(A) has also confirmed the action of the Assessing Officer and further held that no adjustment to the amount of consideration is permissible in terms of section 50B of the Act. Before us, the learned representative for the assessee explained the adjustments carried out by the assessee while arriving at the amount of total consideration along with the supporting documents, which are placed in the Paper Book. Thus, limited issue before us is whether assessee is justified in carrying out the adjustments as per the Master Agreement while arriving at the amount of total consideration from sale of undertaking.
5.6 In our considered view, when the Agreement itself provides for the manner of computing 'Total Consideration' for transfer of undertaking, the same should govern the manner of adopting 'Total Consideration' and no other method should be substituted for the same. The consideration is the amount that is determined to be payable by the buyer to the seller and is agreed upon by the seller, as such. The manner of determination of the consideration is mutually decided by the buyer and seller and stated in the Agreement and once it is 9 ITA.No. 1464/Mum/2018 adopted by the assessee, the same cannot be faulted by the income tax authorities. In fact, it is not the case of the Assessing Officer that assessee has made adjustments to 'Total Consideration' over and above what is provided for in the Agreement. In any case, the observation of the CIT(A) that no adjustment to 'Total Consideration' is permissible in terms of section 50B of the Act is not relevant in deciding the present controversy. Before us, the Ld. Representative for the assessee furnished documents in the form of Master Agreement dated 31.07.2010, financial statements of the assessee for Financial Year 2010-11 and Financial Year 2011-12, Bank guarantee, letter for invocation of bank guarantee, etc. to support the claim of adjustments stipulated in the Master Agreement. We, thus, hold that assessee has correctly reduced the secured liabilities and bank guarantee, which was invoked by the purchaser, while arriving at total consideration for the purpose of computation of capital gains in terms of section 50B of the Act. Thus, we set-aside the orders of the lower authorities in this aspect. Thus, assessee succeeds on this ground, as above.
6. The second Ground of appeal relates to disallowance of repairs and maintenance expenses of Rs. 94,11,574/- claimed by the assessee. The Assessing Officer noticed that during the year under consideration assessee has not carried out any business activity. The Assessing Officer further noticed that in the immediately preceding year, when the company was fully operational, the amount debited under the head "repairs and maintenance" was only Rs. 9.19 lacs. Further, as per the details of repairs and maintenance expenses submitted by the assessee, the Assessing Officer noted that these expenses are one time expenditures, the benefit of which is not restricted to one year. The Assessing 10 ITA.No. 1464/Mum/2018 Officer, thus, treated these expenses to be capital in nature and disallowed the same under section 37(1) of the Act. It was explained that during the year assessee was engaged in the warehousing business; the godown was in a dilapidated condition, the same was got repaired and was brought to a condition acceptable to the lessee i.e. Laffans Fine Chemicals Pvt. Ltd. During the year under consideration, the assessee has declared income from warehousing of Rs. 45,50,000/-, which is offered as business income and thus, corresponding business expenses should be allowed. So it cannot be said that assesse has not carried out any business activities. Before CIT(A), assessee reiterated the submission made before the Assessing Officer, however same did not find any favour with the assessee.
6.1 Before us, the learned representative for the assessee pointed out that the assessee has entered into logistic agreement with the resulting company, M/s. Laffans Fine Chemicals Pvt. Ltd. Pursuant to the said agreement, the assessee is to provide warehousing and transportation services to M/s. Laffans Fine Chemicals Pvt. Ltd. To fulfil its commitments under the said agreement, the assessee incurred huge repairs and maintenance expenses which should be allowed as revenue expenses. It was also pointed out that assessee has also offered income from providing logistic services to the tune of Rs. 86,20,998/-. 6.2 The learned DR on the other hand relied on the findings of the lower authorities to state that expenditure incurred by the assessee are capital in nature.
11ITA.No. 1464/Mum/2018 6.3 We have heard the rival contentions. The relevant section which requires consideration here is section 37(1) of the Act. As per section 37(1) of the Act, deduction for expenditure of capital nature is not allowed. The capital expenditure are the expenditures, which provide benefit of enduring nature and which is not confined to one year.The details of the work for which repairs and maintenance expenses wereincurred by the assessee is listed by the Assessing Officer at para 5.2 of the assessment order. As can been from the assessment order, payments were made for carrying out following work:
i) J.C.B. excavation of foundation, providing and PCCP FPR Mix 1.3.6 for foundation including compaction curing etc., PCC below plinth beam, etc.
ii) Providing dray trap rubble solting in position including ramming.
iii) Providing and dressing and clyiding stone wall, providing bank filling, flooring PCC etc.
iv) Professional fees for project carried out at LPL, GIDC,Panoli., etc. The main argument of the Assessing Officer was that assessee has not carried out any business activity during the year under consideration. Further, the Assessing Officer was driven by the fact that repair expenses of the current year were substantial as compared to previous year. On perusal of the Logistic Agreement entered into by the assessee with M/s. Laffans Fine Chemicals Pvt.
Ltd and Profit and Loss Account of the assessee, it can be seen that assessee has in fact carried out business activities and earned income from warehousing services. Pursuant to the Logistic Agreement entered into by the assessee,it was required to provide warehousing services to M/s. Laffans Fine Chemicals Pvt. Ltd. The assessee was required to carry out various repairs work at its godown, which was in dilapidated conditions to make it acceptable to the lessee. 12 ITA.No. 1464/Mum/2018 6.4 It is pertinent here to refer to the decision of the Hon'ble Bombay High court in the case of CIT v. Chowgule& Co. Pvt. Ltd. (1995) 214 ITR 523 (Bom) wherein court has considered the expression 'current' preceding 'repairs' as under :-
"(i) The amount should be paid on account of repairs.
(ii) 'Current repairs' means repairs undertaken in the normal course of user for the purpose of preservation maintenance or proper utilization or for restoring it to its original condition.
(iii) 'Current repairs' do not mean only petty repairs or repairs necessitated by wear and tear during the particular year.
(iv) Such repairs should not bring into existence nor obtain a new or different advantage.
(v) The quantum of expenditure nor the fact that in the process of repairs, there was substantial replacement of the parts of machine or ship is decisive of the true nature of the expenditure.
(vi) The original cost of the asset is not at all relevant of or ascertainment of the true nature of the expenditure on repairs.
(vii) The replacement cost of the asset may however, at times may be used as indicator of the true character of the expenditure. If the expenditure on repairs added to the written down value or disposal value exceeds the replacement cost of the asset, a presumption is possible that it is not a revenue expenditure but expenditure of capital nature. Such presumption, of course, would be rebuttable.
(viii) The expression 'current' preceding 'repairs' appears to have been used by the legislature with a view to restricting the allowance to expenditure incurred for preservation and maintenance thereof in its current state in contradiction to that incurred on any improvement or an addition thereto.13 ITA.No. 1464/Mum/2018
Admittedly, it is not the case of the Assessing Officer that the impugned expenditure has resulted into creation of a new asset. The quantum of expenditure cannot be the guiding factor to decide whether the expenditure is in the nature of capital expenditure or revenue expenditure. The expenditure incurred by the assessee is towards maintenance of the existing godown and was thus in the nature of current repair. Further more, the benefit to the assessee is in the revenue field in as much as assessee is earning income which is being assessed as business income. We, thus, set-aside the order of the CIT(A) and allow the assessee's claim of repairs and maintenance expenses. In result, this Ground of the appeal is allowed.
7. The third ground relates to the disallowance of depreciation of Rs. 4,06,641/- on motor car purchased during the year in the name of Director and expenses incurred by the assessee on motor car. The Assessing Officer pointed out that during the year under consideration assessee purchased car in the name of its director,which is reflected as addition to Fixed Assets of the assessee, and claimed deprecation on the same in the hands of the company. For claiming depreciation u/s 32 of the Act, assessee should be the owner of the assets.Further, assessee has not provided the RC book, date of put to use of the asset. Since, assessee is not the owner of asset, the Assessing Officer disallowed entire depreciation of Rs.4,06,641/-. The Assessing Officer further disallowed 50% of the motor car expenses of Rs. 4,11,910/- claimed by the assessee, holding the same to be related to the motor car purchased during the year in the name of director and thus not wholly and exclusively incurred for the purpose of business of the assessee company. The assessee explained that 14 ITA.No. 1464/Mum/2018 though the car was purchased in the name of the director, payment for the same was made by the assessee and the car was used for the purpose of business.The assessee also relied on the decision of Hon'ble Bombay High Court in the case of CIT vs. Dilip Singh Sardar singh Bagga [1993] 201 ITR 995 (Bombay), decision of coordinate bench in the case of Kisan Ratilal Choksey Shares & Securities P. Ltd. vs. ACIT [2015] 41 ITR(1) 114 (Mumbai- Trib) and various other decisions. On appeal to CIT(A), CIT(A) agreed with the contention of the assessee that the depreciation cannot be disallowed merely on the ground that the asset is in the name of the director. However, CIT(A) stated that the assessee has not submitted the details such as RC book, date on which car was put to use and has not established that it was used for the purpose of assessee's business. The CIT(A), thus, disallowed the claim of depreciation. 7.1 Before us, the learned representative for the assessee reiterated the submission made before CIT(A) and Assessing Officer.
7.2 We have heard the rival submissions. It is a well settled proposition that merely because the asset is purchased in the name of director, the company cannot be denied depreciation on the same, if the asset is otherwise found to be used for the purpose of business. The decision relied upon by the assessee in the case of CIT vs. Dilip Singh Sardarsingh Bagga [1993] 201 ITR 995 (Bombay) clearly supports the stand of the assessee. We, thus, set aside the order of CIT(A) and direct the Assessing Officer to allow depreciation on the motor vehicle and related expenses on motor vehicle. Accordingly, this Ground of appeal is also treated as allowed.
15ITA.No. 1464/Mum/2018
8. In the result, appeal of the assessee is party allowed.
Order pronounced in the open court on 29th May, 2019.
Sd/- Sd/-
(Ravish Sood) (G.S. PANNU)
JUDICIAL MEMBER VICE PRESIDENT
Mumbai, Date : 29th May, 2019
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Copy to :
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1) The Appellant
2) The Respondent
3) The CIT(A) concerned
4) The CIT concerned
5) The D.R, "A" Bench, Mumbai
6) Guard file
By Order
Dy./Asstt. Registrar
I.T.A.T, Mumbai
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