Income Tax Appellate Tribunal - Chennai
Mova Consultants Private Ltd., Chennai vs Assessee on 8 June, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
'C' BENCH : CHENNAI
[BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER
AND SHRI VIKAS AWASTHY, JUDICIAL MEMBER]
I.T.A.No. 1563/Mds/2010
Assessment year : 2004-05
M/s Mova Consultants Pvt. Ltd vs The ACIT
F-II, Shoba II Floor Company Circle IV(3)
Second Main Road Chennai
Anna Nagar East
Chennai 600 012
[PAN AADCM7035K]
(Appellant) (Respondent)
I.T.A.No. 1866/Mds/2010
Assessment year : 2004-05
The ACIT vs M/s Mova Consultants Pvt. Ltd
Company Circle IV(3) F-II, Shoba II Floor
Chennai Second Main Road
Anna Nagar East
Chennai 600 012
(Appellant) (Respondent)
Assessee by : Shri T. Banusekar, C.A
Department by : Ms. Anupama Shukla, CIT/DR
Date of Hearing : 08-06-2012
Date of Pronouncement : 15-06-2012
ORDER
PER N.S. SAINI, ACCOUNTANT MEMBER
These are cross appeals filed by the assessee and the Revenue against the order of the CIT(A)-V, Chennai, dated 20.08.2010.
:- 2 -: I.T.A.Nos. 1563 & 1866/10 2. Ground Nos. 1 & 11 of assessee's appeal are general in
nature and requires no separate adjudication by us.
3. Ground Nos.2,3 & 4 of the appeal read as follows:
"2. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the order of the Assessing Officer is without jurisdiction
3. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the reopening is bad in law and that the assessment completed u/s.143(3) r.w.S. 147 and 263 is invalid
4. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the assessment was reopened on a mere change of opinion."
4. In the above grounds of appeal, the assessee has challenged reopening of assessment on the ground that the order passed by the Assessing Officer is without jurisdiction, the assessment order passed u/s 143(3) r.w.s 147 and 263 is invalid and that the assessment was reopened on a mere change of opinion.
5. The A.R of the assessee submitted that the assessment was reopened by issue of notice u/s.148 for the following reasons:
(a) Computation of short term capital loss of ` 6,98,92,552/-
not explained anywhere in the records filed along with the return of income.
(b) Claim of interest expense of ` 37,25,443/- is not an allowable expenditure for computation of income under the head capital gains.
(c) Assessee has deliberately orchestered with Kotak Mahindra for purchase of mutual funds and the immediate redemption of the same within 96 days to avoid income :- 3 -: I.T.A.Nos. 1563 & 1866/10 tax payable on the long term capital gains arising out of transfer of its pharmaceutical business.
6. He submitted that as far as the first reason is concerned, the Assessing Officer has stated that the assessee has not explained the computation of short term capital loss. It may be noted that the mutual fund statements were made available to the Assessing Officer during the course of the original assessment proceedings when the details of dividend earned were called for, from which the Assessing Officer could have arrived at the capital loss. The said statements are placed at pages 68 and 69 of the paper book - 2 as evidences available in the assessment records.
7. The A.R further submitted that though the Assessing Officer has recorded that computation of short term capital loss of ` 6,98,92,552/- was not explained, he, ultimately while completing the reopened assessment, at page 11, para 12.9 stated as follows:
"The above deal has also allowed the assessee a claim of tax free income of mutual fund dividend amounting to ` 4,14,77,000/- and a short term capital loss on sale of mutual fund amounting to ` 6,98,92,552/-."
8. From the above statement it may be noted that the Assessing Officer himself has accepted that the loss on sale of mutual fund amounts to ` 6,98,92,552/- though ultimately he had allowed a :- 4 -: I.T.A.Nos. 1563 & 1866/10 sum of ` 1,09,83,762/- as short term capital loss after disallowing a sum of ` 5,89,08,790/- u/s.94(7) on the total loss claimed of ` 6,98,92,552/-.
9. The first reason for reopening that the computation of short term capital loss not explained, therefore fails as the Assessing Officer himself has accepted that the short term capital loss on sale of mutual fund was ` 6,98,92,552/-. Further where the Assessing Officer had the primary facts in the form of mutual fund statements he requires no further assistance to arrive at the short term capital loss on redemption of the mutual funds. This makes it apparent that the Assessing Officer has reopened the assessment only to make fishing and roving enquiries. It may be noted that the Supreme Court in M.P.lndustries v ITO 57 ITR 637 (SC) and on final appeal in 77 ITR 268 (SC) has held that no fishing or roving enquiries can be made merely with an object of finding out facts which would entitle him to reopen a past year's assessment.
10. The Assessing Officer has also stated that the applicability of section 94(7) was not considered in a relevant manner especially with the revised provisions, which states that units sold within a period of 9 months of such date will also amount to dividend stripping. In this connection it is submitted that where the Supreme Court in CIT v Walforlt Share & Stock Brokers (P) Ltd [2010] 326 ITR 1 (SC) has :- 5 -: I.T.A.Nos. 1563 & 1866/10 clarified that section 94(7) inserted with effect from 01.04.2002 is prospective in operation. Where the insertion of the section itself has been clarified to be prospective in operation the subsequent amendment in section 94(7)(b) with effect from 01.04.2005 can also be only prospective. Therefore the said reason for reopening cannot survive.
11. With regard to the second reason, i.e. the allowability of interest expense of ` 37,25,443/- under the head capital gains, the said issue was subjected to revision u/s.263 and the Tribunal on an appeal in ITA No.50/Mds/2009 against the said order u/s.263, held that the Assessing Officer has applied his mind and has taken a possible view and therefore set aside the order u/s.263 and restored the order of the Assessing Officer. The Tribunal has also stated that the Assessing Officer has properly examined the issues and the correspondence regarding which were filed in the paper book more specifically at pages 7,8,9,10 & 29.
12. Since the said issue has already been decided in favour of the assessee by the Tribunal, the same cannot form a reason to believe that the income has escaped assessment.
13. Even otherwise, the said reason could not survive as it would only amount to a change of opinion since the Tribunal has held that :- 6 -: I.T.A.Nos. 1563 & 1866/10 the Assessing Officer has applied his mind and has taken a possible view. For the proposition that reopening would not be valid when it is made on a mere change of opinion reliance is placed on the decision of the Supreme Court in CIT v Kelvinator of India Ltd [2010J 320 ITR 561 (SC).
14. As far as the third reason is concerned, the purchase and sale of mutual funds is known to the Assessing Officer even during the course of the original assessment proceedings as the assessee has furnished the mutual fund statements along with the details of dividend received. Further the transfer of the assessee's pharmaceutical business was also known to the Assessing Officer as the same was even assessed in the assessment year 2003-04. Further from the revision order of the CIT u/s.263 it could be seen that he had directed the Assessing Officer to examine the allowability of professional charges of ` 28.50 lakhs claimed as deduction against the capital gains and the interest on loans taken for investment in mutual funds as deduction against the capital gains which clearly shows that the CIT was seized of the matter that the income is chargeable to tax only under the head capital gains. He submitted that all the details were already available before the Assessing Officer and there was no new material that has come to the knowledge of the Assessing Officer subsequently to have a reason to believe that the income has escaped :- 7 -: I.T.A.Nos. 1563 & 1866/10 assessment. This reason could therefore not survive as it amounts only to a change of opinion of the facts already known to the Assessing Officer.
15. Therefore, since the three reasons stated by the Assessing Officer for reopening do not survive, the reopening would automatically fail and he cannot proceed to assess any other incomes which were not subject matter of the reasons recorded. For this proposition reliance is placed on the following decisions:
CIT v Jet Airways (I) Ltd [2011J 331 ITR 236 (Born) CIT v Dr.Devendra Gupta [2011 J 336 ITR 59 (Raj) Ranbaxy Laboratories Ltd v CIT [2011J 3361TR 136 (Del) CIT v Shri Ram Singh [2008J 306 ITR 343 (Raj) Where set aside assessment is pending there is no scope for reopening
16. The CIT vide order u/s.263 dated 07.11.2008 directed the Assessing Officer to duly examine the issues in all its perspectives and decide the same afresh in accordance with law. When the set aside assessment proceedings u/s.143(3) r.w.s.263 was pending before the Assessing Officer, the Assessing Officer issued notice u/s.148 for reopening the assessment for the assessment year 2004-05 which is not possible.
17. In this connection reliance is placed on the decision of the Bombay High Court in Ador Technopack Ltd v Dr.Zakir Hussein, DCIT [2004J 271 ITR 50 (Born) :- 8 -: I.T.A.Nos. 1563 & 1866/10 Income assessable in assessment year 2003-04
18. While completing the assessment for the assessment year 2003-04, the Assessing Officer has assessed the consideration received for transfer of intangible assets of Rs.900 lakhs and the non compete covenant of ` 125 lakhs as income for the assessment year 2003-04 whereas the same was shown as income for the assessment year 2004-05 by the assessee. The Tribunal on this issue held that the income is chargeable to tax in the assessment year 2004-05. However the Revenue has filed an appeal before the Hon'ble Madras High Court that the income is chargeable to tax in the assessment year 2003-04.
19. While the CIT himself has filed an appeal before the Hon'ble Madras High Court on the ground that the income is chargeable to tax in the assessment year 2003-04, the Assessing Officer could not have had any reason to believe that the income is chargeable to tax in the assessment year 2004-05 and that the same has escaped assessment in the assessment year 2004-05.
20. The A.R placed reliance on the decision of the Bombay High Court in Metro Auto Corporation v ITO & Ors [2006J 286 ITR 618 (Bom) Order passed u/s.143(3) r.w.s.147 and 263 :- 9 -: I.T.A.Nos. 1563 & 1866/10
21. The Assessing Officer has completed the reassessment vide order passed u/s.143(3) r.w.s.147 and 263. A reassessment order can be passed u/s.143(3) r.w.s.147 and a set aside assessment vide revisionary order can be passed u/s.143(3) r.w.s.263. It is most humbly submitted that there is no scope for passing an order u/s.143(3) r.w.s.147 and 263 and that such assessment is bad in law. Further where a set aside assessment u/s.263 is pending there is no scope for reopening the assessment as it would not be open for an Assessing Officer to initiate multiple proceedings at the same time to make an assessment. For this proposition reliance is placed on the following decisions:
Trustees of H.E.H.Nizam's Trust vs CIT [2000] 242 ITR 381(SC) Smt. Nilofer Hameed & Another vs ITO [1999] 235 iTR161 (ker.)
22. On the other hand, the CIT/DR argued and submitted that original return of income was filed by the assessee on 31.10.2004 showing income of ` 1,30,29,317/-. The same was assessed u/s 143(3) vide order dated 29.12.2006. In the said assessment made, two disallowances were made - one pertained to interest on interest free loan and the other pertained to donation. Thereafter, on 7.11.2008, the CIT passed order u/s 263 and remanded two issues to the Assessing Officer. The first related to payment of ` 28.50 lakhs as :- 10 -: I.T.A.Nos. 1563 & 1866/10 professional charges deductible while computing capital gains and the second issue was regarding interest on loan for investment on units of mutual fund which was ` 37,25,443/- and the same was not deductible u/s 14A of the Act. The assessee filed appeal before the Tribunal against the order passed by the CIT u/s 263. Meanwhile, a notice u/s 148 was issued by the Assessing Officer on 24.3.2009. The assessee filed writ petition before the Hon'ble Madras High Court being Writ Petition Nos.26758 of 2009 against the notice issued u/s 148 and also asked for reasons to be communicated for reopening of the assessment. The reasons were communicated to the assessee which comprised of firstly, the Assessing Officer observed that the assessee has claimed short term capital loss of ` 6,98,92,552/- and interest expenditure on investment under mutual fund at ` 37,25,443/- and assessee has claimed set off of this against short term capital gains on sale of brands of ` 9 crore. Secondly, the Assessing Officer pointed out that investment in mutual fund units was of `.1.40 crores and the redemption of mutual fund units was of ` 94,61,100/- and the capital loss separating one figure from the other should have been ` 4,59,88,900/- and therefore, there was unaccounted capital loss of ` 6,98,92,552/-. The third reason was that while computing capital gains the assessee has claimed deduction of ` 37,25,443/- as interest paid and this was not deductible.
:- 11 -: I.T.A.Nos. 1563 & 1866/10
23. The CIT/DR pointed out that the Hon'ble Madras High Court in para 9 of its order dated 23.4.2010, has observed that on notice, the first respondent has filed a counter before this court pointing out to the extract of the order sheet entries dated 4.12.2009 as well as 7.12.2009. It is contended that contrary to the assertion of the petitioner, there were no documents placed before the assessing authority at the time of original assessment as regards the claim of capital loss of ` 6.98 crores. Hence the contention of the petitioner that they had produced the records and details cannot be sustained. The Hon'ble High Court further noted that the issues of capital loss and interest claim, hence, were rightly raised in the re-assessment proceedings, which were not the subject matter of revision proceedings under section 263 of the Act. The reference to the appearance of the petitioner's authorized representative in the course of the original assessment proceedings, however, does not support the petitioner's claim that necessary details were produced by the authorized representative and it is amply proved by the order sheet entries dated 4.12.2009 and 7.12.2009. The Hon'ble High Court further stated that there are no materials available on record to show that the original assessment had been completed after forming an opinion on the materials produced. Hence, the contention that the material facts were there before the assessing authority and hence, the re-assessment is illegal and is not sustainable. The High Court also :- 12 -: I.T.A.Nos. 1563 & 1866/10 observed that considering the contention of the petitioner, particularly, with reference to the letter dated 19.8.2009 wherein the petitioner had stated that the details of documents and clarifications were furnished and had been duly acknowledged in the assessment order passed u/s 143(3) of the Income-tax Act, 1961 and that in response to the questionnaire given, the petitioner had supplied the details on the mutual fund transactions, this court has called for the filed from the respondents to satisfy as to whether the petitioner had in fact placed the materials as had been claimed by the petitioner in their letter dated 19.8.2009 before the officer concerned as well as before this court in support of the contention of the petitioner that the re- assessment proceedings are without jurisdiction. The court observed that a perusal of the records, particularly with reference to 20.12.2006 shows except for a mere statement, the tabulated statement apart from the statement from the bank, there are no materials to suggest that the petitioner had in fact produced the documents. The High Court further observed that this is contradicted by the learned standing counsel appearing for the respondents by producing the original files before this court to substantiate that the documents in the typed set of papers filed before this court by the petitioner, which are claimed to have been filed by the petitioner's authorized representative are not there at all. Hence, the claim as to the absence of jurisdiction is falsified by the materials available on record of the respondents. The :- 13 -: I.T.A.Nos. 1563 & 1866/10 court also observed that as rightly pointed by the learned standing counsel except for the tabulated details, there are no other materials stated to have been filed by the authorized representative available before the authority concerned. It is relevant to note herein that even in the letter written to the respondents on 19.8.2009 there are hardly any details to show the date on which these details were furnished before the assessing authority in the course of the regular assessment proceedings. Except for a bald statement that all the details, documents and clarifications were furnished during the assessment year as regards the mutual funds alongwith the statement of total income confirming the return of income and further during the hearing, I do not find any material to substantiate what are the details given in the form of statements before the assessing authority. The Hon'ble High Court in the light of the above stated facts held that it has no hesitation in rejecting the plea of the petitioner as to the illegality of the proceedings under section 148 of the Act and the High Court had no hesitation in rejecting the prayer of the petitioner that the reopening is bad and the same is going against the tenor of section 148(7) of the Act. The High Court also noted that in dismissing the writ petition the court is not passing any decision on the merits of the re-assessment proceedings.
:- 14 -: I.T.A.Nos. 1563 & 1866/10
24. We have heard the rival submissions and perused the orders of the lower authorities and materials available on record. We find that the Hon'ble Jurisdictional High Court vide its order dated 23.4.2010 passed in Writ Petition No.26758 of 2009 and 1070 of 2010 has upheld the validity of re-assessment proceedings in the instant case by observing as under:
"12. Learned counsel appearing for the petitioner submitted that the authorized representative, who appeared before the assessing authority, had filed the documents, which are now produced before this Court by the petitioner in the form of typed set of papers. This is contradicted by the learned standing counsel appearing for the respondents by producing the original filed before this Court to substantiate that the documents in the typed set of papers filed before this Court by the Petitioner, which are claimed to have been filed by the petitioner's authorized representative, are not there at all. Hence, the claim as to the absence of jurisdiction is falsified by the materials available on record of the respondents.
13. As rightly pointed by the learned standing counsel, except for the tabulated details, there are no other materials stated to have been filed by the authorized representative available before the authority concerned. It is relevant to note herein that even in the letter written to the respondents on 19.8.2009, there are hardly any details to show the date on which these details were furnished before the assessing authority in the course of the regular assessment proceedings. Except for a bald statement that all the details, documents and clarifications were furnished during the assessment year as regards the mutual funds alongwith the statement of total income confirming the return of income and further during the hearing, I do not find any material to substantiate what are the details given in the form of statements before the assessing authority.
14. In the light of the above said fact, I have no hesitation in rejecting the plea of the petitioner as to the illegality of the proceedings under section 148 of the Income-tax Act. In the circumstances, I have no hesitation in rejecting the prayer of the petitioner that the reopening is bad and the same is going against the tenor of section 148(7) of the :- 15 -: I.T.A.Nos. 1563 & 1866/10 Income-tax Act. In so dismissing the Writ Petition, this Court is not passing any decision on the merits of the re- assessment proceedings."
We, therefore, respectfully following the above decision, dismiss these grounds of appeal of the assessee.
25. Ground Nos.5,6 & 7 of the assessee's appeal read as under:
"5. For that the Commissioner of Income Tax (Appeals) erred in upholding the assessment of consideration received for sale of brands as non compete fee and taking the same as business income -
6. For that the Commissioner of Income Tax (Appeals) erred in upholding the assessment of capital gains as business income in the hands of the appellant.
7. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the income from transfer of business is treated as income under the head capital gains in the hands of another person who is a party to the agreement and has received similar consideration under the said agreement.
26. The assessee has claimed a sum of ` 9 crores as capital gains on sale of brands and IPRs. The Assessing Officer while completing the reopened assessment has assessed the said income as business income for the reason that as per the agreement between the assessee and the purchaser the assessee had agreed to non- compete with the purchaser in the further activities which can only be regarded as Non-compete fees taxable u/s.28(va) of the Act.
27. On appeal, the CIT(A) has observed as under:
:- 16 -: I.T.A.Nos. 1563 & 1866/10 "7. The question is whether the sale consideration will be taxed as "business income "under section 28 on "capital gain" under Section 45 of the Act.
8. To answer this question, we may quote from the assessee's statement of facts in its appeal No. ITA 152/2006-07 to this office against the assessment order for ay 2003-04:
"Tthe appellant company was formerly called Mano Pharmaceuticals Private Limited. At that time, they were engaged In the business of manufacture and sale of pharmaceutical formulations under their own brands. By the end of December 2002, after negotiations, they decided to sell their entire business undertaking consisting of the assets only along with their Associate concerns to M/s Orchid chemicals and Pharmaceuticals Limited (OCPL) In pursuant thereof, an MOU was signed on 02.01.2003 between the appellant and their Associates on the one side and OCPL on the other side. As per the MOU, the appellant was required to convey the following business assets to OCPL: .
1) Immovable properties of the appellant, namely the factory land and building. .
2) Inventories - all items
3) Plant & Machinery and other movable fixed assets.
4) Intangible properties in the form or brands, trade marks and druq licenses Apart from their commitment to convey the aforesaid assets, the appellants were also required to fulfill certain covenants as per the MOU as a pre-condition for completion of the transfer of business. The Important conditions to be fulfilled were as under:
(i)To clear all the encumbrances and charges on the Immovable and movable properties .
(ii) To obtain consent letters from third party manufacturers for continuing to manufacture the formulations for OCPL as they were doing for the appellant.
:- 17 -: I.T.A.Nos. 1563 & 1866/10
(iii) to effect appropriate documentation for conveyance of the individual items of the signing of MOU.
(iv) To observe non-compete covenants for a period of 4 years from the date of signing of MOU.
The consideration payable to the appellant alone for the aforesaid transfer of business assets and observance of various covenants was fixed as under:
a) For transfer of immovable properties, at value to be agreed mutually.
b) For inventories at value to be agreed mutually.
c) For Plant & Machinery and other movable fixed assets, for value to be agreed mutually.
d) For transfer of brands and other intangible property, ` 900 lacs.
e) For observance of non-compete covenant, ` 125 lacs.
9.. It may be noted that the impugned amount of ` 9 crores for transfer of brands and other intangible property is subsumed within the transfer of the entire business of manufacture and sale of pharmaceutical formulation under their own brands engaged by the assessee company. In my view it will not be correct to separate the intangible property from the sale of manufacturing business as it constitutes the most vital component of the assessee's business, the entirety of which Is sold to OCPL as a going concern.
"Business" is defined in S2(13) as follows:
""includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture."
These words are of wide import, the underlying idea being of continuous exercise of an activity.
10. It must be emphasized that In its statement of fact quoted earlier, the assessee admits that intangible properties In the form of brands, trade marks and drug licenses is one of the four components of the "business assets" sold by it to OCPL. (refer para 8)
11. It is vital to note that the assessee company itself admits that it has sold its "business assets" and not capital :- 18 -: I.T.A.Nos. 1563 & 1866/10 asset (refer para 8)
12. Why has the assessee company suddenly turned around in Assessment Year 2004-05 to claim that the gains derived from the sale of its entire business to OCPL must be assessed as capital gain and not business income.
13. To answer this question, one has to look to the provisions of Section 70 of the Act which prohibits the set off of capital loss from any other source except capital gain.
14. The assessee company and its associates mainly, its Managing Director, Shri Y. Jagan Mohan, has received a total of ` 26 cores from the sale of its business to OCPL. To pay tax on the entire sale consideration is to lose almost one-third of the consideration (` 7.8 cores) as taxes. That is probably the reason that the assessee has hit upon the idea of offering the income as capital gain so that it could set off the capital losses engineered by the assessee as discussed by the Assessing Officer in para 12 of the assessment order where the assessee company has resorted to dividend stripping to claim a capital loss of ` 6.98 crores.
15. To those familiar with the capital market, such engineered capital losses were the order of the day before the Government set out to plug the loophole by the insertion of Section 94(7) of the Income-tax Act.
16.. The Honourable Supreme Court has, in fact, propounded the famous theory of 'Notorious Facts' in the celebrated and oft-quoted judgement in the case of CIT vs Sumathi Dayal (214 ITR 80l). The practical world of human affairs is governed by certain 'Notorious Facts' of which the assessees take advantage, and the taxing authorities cannot put on blinkers and be blinded by such 'Notorious Facts'
17. Through such devices the assessee company has succeeded in paying a tax of only about ` 50 lakhs as opposed to the tax of about ` 3 crores it would have to pay had it not hit upon the idea of offering income as capital gain and not as business income.
:- 19 -: I.T.A.Nos. 1563 & 1866/10
18. Therefore, one has to see the entire context in which the assessee company seeks to offer income as capital gain and not as business income. The assessee company has sought to employ a ruse, a device for avoidance of tax by engaging in certain transaction in securities as defined in Section 94 of the Act. This ruse could only have succeeded if the income was offered as capital gain and not as business income.
19. The Assessing Officer has quoted a number of Court decisions in para 12.13 to para 12.21 of his order. It has been unanimously agreed to by the Courts that the Income Tax Authorities have to go behind the apparent to find out the real. No Court can give its stamp of approval to a transaction which is, indeed, a device to avoid the payment of legitimate taxes.
20. Therefore, in view of the facts and circumstances of the case, the Assessing Officer correctly assessed the income of ` 9 crores as 'business income' and not as 'capital gain' as argued by the assessee company. Ground Nos.5 and 6 raised by the assessee is accordingly dismissed."
28. The A.R. submitted that the brands were held by the assessee as capital assets and exploited for production of the respective formulations which alone were marketed to generate sales revenue. These brands are nothing but trademarks as evidenced by the fact that the assessee had applied for registration of the same with the Registrar of Copyrights and Trademarks which fact is also mentioned in the business transfer agreement. It may be noted that trademarks are considered as capital assets and depreciation allowed on the same u/s.32(1 )(ii) if they are acquired for a cost. He, :- 20 -: I.T.A.Nos. 1563 & 1866/10 therefore, submitted that the gain on sale of brands and IPRs are assessable under the head capital gains and not as business income. For this proposition reliance was placed on the decision of the Delhi High Court in CIT v Mediworld Publications (P) Ltd (2011] 337 ITR 178 (Del) where it has been held that once it is accepted that the brand names, trademarks, copy right and goodwill were sold/ transferred by the assessee to the transferee, it would clearly be a case of sale of capital asset and the gain therefore would be computed as capital gains and not as business profits u/s.28(va). It was further submitted that in the revision order of the CIT u/s.263 it could be seen that he had directed the Assessing Officer to examine the allowability of professional charges of ` 28.50 lakhs claimed as deduction against the capital gains and the interest on loans taken for investment in mutual funds as deduction against the capital gains which clearly shows that the CIT was seized of the matter that the income is chargeable to tax only under the head 'capital gains'. Where the CIT was of the opinion that the income is chargeable to tax under the head capital gains, the Assessing Officer cannot assess the same as income under the head profits and gains of business or profession.
29. The CIT/DR supported the orders of lower authorities.
30. We have heard the rival submissions and perused the orders of the lower authorities and materials available on record. We :- 21 -: I.T.A.Nos. 1563 & 1866/10 find that the CIT(A) has observed from the agreement entered into by the assessee with OCPL that the assessee has received ` 9 crores in consideration of transfer of intangible business assets like brands, trademarks and drug licences etc. besides receiving ` 1.25 cores as consideration for non-compete fee. Thus, it is an admitted position that the assessee received ` 1.25 crores as non-compete fee and also separately ` 9 crores on account of transfer of intangible assets like brands, trademarks and drug licences etc. The issue before us is whether ` 9 crores received by the assessee on account of transfer of intangible assets like brands, trademarks and drug licences etc. is assessable under the head 'capital gains' or under the head 'business income'. The CIT(A) held that since the consideration of ` 9 crores received by the assessee was on account of transfer of business assets, the same was not on account of transfer of capital asset and therefore, the amount is assessable under the head 'business income'.
31. We find that the assessee's business was to manufacture and sale of pharmaceutical formulations. Thus, it is an admitted fact that the assessee was not engaged in the business of sale of brand names or intangible assets. The brand name and intangible assets were not stock-in-trade, consumable stores or raw materials, held for the purpose of business or profession of the assessee. Rather the same were in the nature of fixed assets of the assessee's business.
:- 22 -: I.T.A.Nos. 1563 & 1866/10 Thus, in view of provisions of section 2(14) of the Income-tax Act, the said assets were clearly capital assets of the assessee. Therefore, in our considered view, the consideration received on transfer of the said was capital receipt in the hands of the assessee and was liable to be assessed under the head 'capital gains'. Our above view also finds support from the decision of Hon'ble Delhi High Court in the case of CIT vs Mediworld Publications (P) Ltd, [2011] 337 ITR 178 (Del) where it was held that once it is accepted that the brand names, trademarks, copy right and goodwill were sold/transferred by the assessee to the transferee, it would clearly be a case of sale of capital asset and the gain therefore, would be computed as capital gains and not as business profits u/s 28(va). We, therefore, set aside the orders of the lower authorities and direct the Assessing Officer to treat the income arising out of transfer of brand names, trademarks and drug licences etc. for the consideration of ` 9 crores as assessable under the head 'capital gains'. Therefore, these grounds of appeal of the assessee are allowed.
32. Ground Nos.8 & 9 read as under:"
"8. For that the Commissioner of Income Tax (Appeals) erred in disallowing the capital loss of ` 6.98 crores u/s.94(7) of the Income Tax Act.
9. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the amendment made to section 94(7) was with effect from 01.04.2005 and is not applicable in the instant case."
01.04.2005 and is not applicable in the instant case :- 23 -: I.T.A.Nos. 1563 & 1866/10
33. The CIT(A) has decided the issue as under:
27. The assessee has 'claimed capital loss of Rs. 6.98 crores to be set off against the STCg of ` 9.0 crores.
28. The Assessing Officer has disallowed the loss under Section 94(7) of the Act. The assessee company has argued that the Section 94(7)(b)(ii) Is amended by Finance Act 2004 only with effect from 01.04.2005 wherein the embargo for disallowing loss In respect of units was increased from three months to nine months. In. the assessee's case the units were held by a period of 96 days. It therefore argues that It Is not hit by the provisions of section 94(7) as the Finance Act 2004 itself mentions that the amended provisions in respect of units will be effective from 01.04.2005.
29. I do not agree with the contention of the assessee for the following reasons:
CBDT Circular No. 5 dated 15.07.2005 states "Measures to curb tax avoidance via dividend and bonus stripping It was felt that for units, the holding period of three months prior to sale as specified in the said sub-section did not provide sufficient deterrence to tax avoidance.
The Finance (No.2) Act 2004, has amended sub-section (7) of Section 94 so as to increase the holding period in respect of units from three months to nine months after the record date.
The intention behind the enactment was to plug a loophole which facilitated tax avoidance by the assessees. Although it is stated to be applicable with effect from 01.04.2005, the intention of the legislature is to check tax avoidance. Hence, the amended provision is to be applicable to all pending matters. For this proposition, I rely on the following authorities:
(i) CWT vs sharan Kumar Swamp & Sons (1994) 210 ITR 886(SC) :- 24 -: I.T.A.Nos. 1563 & 1866/10 In this case, the Hon'ble supreme Court has held that procedural law, generally speaking, is applicable to all pending cases since no person has a vested interest in the procedure.
Whether the units are held for 90 days or actually, as in the assessee's case, for 96 days are procedural matters and, in view of the decision of the Honourable Supreme Court, cannot be said to be controlling the substantive part of Section 94(7) which is to ignore the loss arising out of some contrived transaction purposely entered into for tax avoidance.
The amendment was made to overcome a mischief resorted to by the assessees for tax avoidance. Hence, the new amendment would be construed as superseding the earlier position which was considered by the legislature to be mischievous. This mischief Rule has been approved by the Honourable Supreme Court in CIT vs Shalbzadan Nand & Sons (1966) 60 ITR 392 (SC) The Honourable Income Tax Appellate Tribunal, Mumbai Special Bench in Income Tax Officer vs Daga Capital Management (P) Limited (117 ITD 169, SC) held as under:
.' "18.3 The normal rule is that any statutory provision is to be treated as prospective unless expressly stated otherwise or is inferred by necessary implication. Only the procedural provisions are regarded as being applicable to the pending proceedings even through such proceedings may have commenced at a point of time anterior to their introduction. However, when a substantive provision is incorporated for the first time, it cannot be considered as retrospective so as to unsettle the position already settled. Thus, it is only in a case where the amendment is clarificatory, procedural or declaratory that such provision is applied in respect of matters relating to periods prior to the date of introduction' of the provisions, even in the absence of express language to that effect. This principle of interpretation of statutes is fairly settled by several judgements including the case of S. Subash vs CIT (2001) 167 CTR (Mad) 484 : (2001) 248 ITR 512 (Mad.). From the enunciation of law in this case, it is clearly borne out that a procedural, clarificatory or declaratory provision is always well as posterior to the amendment. This view has been taken by the Honourable Supreme Court in several judgement including H.H. Sir Rama Verma vs CIT (1994) 116 CTR (SC) 55 : (1994) 205 ITR 433 (SC) and CIT vs Podar Cement (P) Ltd., etc (1997) 141 CTR (SC) 67 : (1997) 226 ITR 625 (SC). Similar view has been reiterated in CIT vs Shelly Products & Anr.
(2003) 181 CTR (SC) 564 : (2003) 261 ITR 367 (SC) in which it has been held that the clarificatory provision inserted to clarify :- 25 -: I.T.A.Nos. 1563 & 1866/10 the law so as to remove the doubt, is retrospective even if it is stated to be applicable from a particular assessment year."
30. We may further note that the Honourable supreme Court in CIT vs Gold Coin Health Food (304 ITR 208) has held that Explanation-4 to Section 271(1)(c)(iii) regarding imposition of penalty is clarificatory and not substantive. Even though It was stated In Finance Act 2002 to be applicable from 01.04.2003, it was held by the Honourable Supreme Court to be applicable to prior Assessment Years.
31. Similar was the view expressed by the Honourable Supreme Court in Brij Mohan Das Laxman Das vs CIT (1997) 223 ITR 825, when it concluded that Explanatlon-2 to Section 40(b), although declared to be effective from 01.04.1985 by Taxation Laws Amendment Act 1984, was held to be declaratory in nature and was held to be available for the period anterior to 01.04.1985.
Thus, the capital losses of ` 6.98 crores claimed by the assessee company is disallowed under the specific provisions of Section 94(7). "
34. The A.R submitted the assessee had invested ` 14 crores funded through their own source of ` 2.10 crores and loan from M/s.Kotak Mahindra Investments Ltd of ` 11.90 crore in mutual funds on 09.08.2003. The mutual fund yielded a sum of ` 4,14,77,000/- and the appellant had redeemed the mutual fund for ` 9,40, 11,100/- on ex-dividend resulting in a short term capital loss of ` 6,98,92,552/-.
35. The A.R. submitted that the mutual funds were redeemed within 96 days from the purchase of the same. Since the amendment made to section 94(7) was with effect from 01.04.2005, the appellant would not be covered by the said amendment as in the assessment :- 26 -: I.T.A.Nos. 1563 & 1866/10 year 2004-05 the provisions of section 94(7) could be invoked only where the units were sold within three months from the date of purchase of the same. Since the appellant had sold the mutual funds after three months the assessee would not be covered by the provisions of sec 94(7). For this proposition reliance is placed on the decision of the Supreme Court in CIT v Walfort Share & Stock Brokers (P) Ltd [2010] 326 ITR 1 (SC.)
36. The CIT/DR supported the orders of the lower authorities.
37. We have heard the rival submissions and perused the orders of the lower authorities and materials available on record. In the instant case, the undisputed facts relevant to the issue under consideration are that the assessee sold units after holding the same for five days prior to the record date and for a period of three months after such record date. The assessee suffered loss of ` 6,98,92,552/-
on sale of such units and the assessee earned a dividend income of ` 5,89,08,790/- on such units which is exempt from tax. On the above undisputed fact, the issue which is required to be adjudicated by us is whether the amendment made in section 94(7)(b) by the Finance(No.2) Act, 2004 w.e.f 1.4.2005 is applicable in the instant case or not. A reading of the Finance (No.2) Act shows that the amendment in section 94(7)(b) was specifically made effective from 1.4.2005 by the Legislature so that this amended law is applicable :- 27 -: I.T.A.Nos. 1563 & 1866/10 from assessment year 2005-06 and onwards. The CIT(A) has held that the amendment made in section 94(7)(b) was an amendment in the procedural law and clarificatory in nature and therefore, applicable in respect of all pending proceedings w.e.f 1.4.2005. In our considered view, the above interpretation of the CIT(A) is clearly unsustainable. In our considered view, provision of section 94(7) enacts a substantive law and not merely a procedural law. Section 94(7) provides for circumstances in which loss to the extent of exempt dividend income is ignored for computing income chargeable to tax of a person. Thus, the provision affects the tax liability of a person and therefore, the same provides substantive law and not merely a procedural law. Our above view also finds support from the decision of Hon'ble Supreme Court in the case of CIT vs Walfort Share & Stock Brokers (P) Ltd, 326 ITR 1(SC) wherein it was held as under:
"The next point which arises for determination is whether the 'loss' pertaining to exempted income was deductible against the chargeable income. In other words, whether the loss in the sale of units could be disallowed on the ground that the impugned transaction was a transaction of dividend stripping. The AO in the present case has disallowed the loss of ` 1,82,12,862 on the sale of 40 per cent tax-free units of the mutual fund. The AO held that the assessee had purposely and in a planned manner entered into a pre-meditated transaction of buying and selling units yielding exempted income with the full knowledge about the guaranteed fall in the market value of the units and the payment of tax-free dividend, hence, disallowance of the loss.
In the lead case, we are concerned with the ssessment years prior to insertion of s. 94(7) vide the Finance Act, 2001 w.e.f. 1st April, 2002. We are of the view that the AO had erred in disallowing the loss. In the case of Vijaya Bank Ltd. vs. Add!. CIT (1991) 94 CTR (SC) 216 :- 28 -: I.T.A.Nos. 1563 & 1866/10 (1991) 187 ITR 541 (SC), it was held by this Court that where the assessee buys securities at a price determined with reference to their actual value as well as interest accrued thereon till the date of purchase the entire price paid would be in the nature of capital outlay and no part of it can be set off as expenditure against income accruing on those securities. The real objection of the Department appears to be that the assessee is getting tax-free dividend; that at the same time it is claiming loss on the sale of the units; that the assessee had purposely and in a planned manner entered into a pre-meditated transaction of buying and selling units yielding exempted dividends with full knowledge about the fall in the NAV after the record date and the payment of tax-free dividend and, therefore, the loss on sale was not genuine. We find no merit in the above argument of the Department. At the outset, we may state that we have two sets of cases before us. The lead matter covers assessment years before insertion of s. 94(7) vide the Finance Act, 2001 w.e.f. 1st April, 2002. With regard to such cases we may state that on the facts it is established that there was a 'sale'. The sale price was received by the assessee. That, the assessee did receive dividend. The fact that the dividend received was tax-free is the position recognized under s. 10(33) of the Act. The assessee had made use of the said provision of the Act. That such use cannot be called 'abuse of law'. Even assuming that the transaction was pre-planned there is nothing to impeach the genuineness of the transaction. With regard to the ruling in McDowell & Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC), it may be stated that in the latter decision of this Court in Union of India vs. Azadi Bachao Andolan (2003) 184 CTR (SC) 450 : (2003) 263 ITR 706 (SC) it has been held that a citizen is free to carry on its business within the four corners of the law. That, mere tax planning, without any motive to evade taxes through colourable devices is not frowned upon even by the judgment of this Court in McDowell & Co. Ltd.'s case (supra). Hence, in the cases arising before 1st April, 2002, Iosses pertaining to exempted income cannot be disallowed."'
38. Further we find that the Amritsar Bench of the Tribunal in the case of Suri Sons vs Addl. CIT, [2009] 124 TTJ (Asr) 800, after :- 29 -: I.T.A.Nos. 1563 & 1866/10 elaborately considering the principles of law, held that amendment made in section 94(7)(b) by the Finance (No.2) Act, 2004 is applicable for the assessment year 2005-06 and subsequent years only and the amended law will not apply in case where the assessment year begins before 1.4.2005. In view of the above settled position of law, in our considered view, the provisions of section 94(7) prior to its amendment w.e.f 1.4.2005 was relevant law which will govern the issue under consideration as the assessment year involved in the instant case is assessment year 2004-05.
39. We find that by applying section 94(7) prior to its amendment w.e.f 1.4.2005 the assessee's case is not hit by the provisions of section 94(7) as because the assessee sold units not within the period of three months after the relevant record date. We, therefore, find that the entire short term capital gain of ` 6,98,92,552/- is allowable as held by the Assessing Officer in the original assessment made u/s 143(3) of the Act and the disallowance of ` 5,89,08,790/- vide order passed u/s 147 r.w.s 143(3) is not sustainable and the CIT(A) erred in confirming such disallowance. We, therefore, allow these grounds of appeal of the assessee.
40. Ground No.10 of the assessee's appeal reads as follows:
" 10. For that the provisions of section 14A are not invocable in the facts and circumstances of the case."
:- 30 -: I.T.A.Nos. 1563 & 1866/10
41. Ground No.2.1 to 2.7 read as under:
"2.1. The learned CIT(A) has erred in directing the AO to disallow 2% of gross dividend u/s.14A
2.2 The CIT(A) has held that the Assessing Officer should have made a bonafide attempt to apportion the expense which could be reasonably ascribed to earning the dividend income. 2.3 Having regard to the provisions of Rule 8D the CIT(A) ought to have confirmed the action of the Assessing Officer 2.4 Without prejudice to the above the CIT(A) at least ought to have remanded the issue to the Assessing Officer to examine the sources for investments yielding exempt income.
"2.5 The learned CIT(A) has erred in deleting the disallowance of ` 28.5lakhs paid to M/s. Earnst & Young as professional charges 2.6 The learned CIT(A) failed to appreciate that the assessee has originally claimed this expenditure against Capital Gains.
2.7 The learned CIT(A) failed to verify whether this expense was indeed made and whether it was made for the purpose of business."
42. Both the parties admitted that the assessment in respect of the issues involved in the above grounds of appeal were made by the Assessing Officer in his order dated 31.12.2009 in pursuance to the directions given by the CIT vide his order dated 7.11.2008 passed u/s 263 of the Act. It was further submitted that since the 263 order passed by the CIT was set aside by this Tribunal vide its order dated 26.3.2010 passed in I.T.A.No. 50 & 199/Mds/2009, the additions made in pursuance thereto cannot survive. A copy of the order of the Tribunal was placed at pages 15 to 26 of the paper book filed by the assessee. On the above facts, the issue raised in these three grounds :- 31 -: I.T.A.Nos. 1563 & 1866/10 of appeal becomes academic in nature and does not survive for adjudication by us. Therefore, these grounds of appeal are dismissed as infructuous.
43. Ground Nos. 1 & 3 of the Revenue's appeal are general in nature, and requires no separate adjudication by us.
44. In the result, the appeal of the assessee is partly allowed and that of the Revenue is dismissed.
Order pronounced on Friday, the 15th of June, 2012, at Chennai Sd/- Sd/-
(VIKAS AWASTHY) (N.S.SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 15th June, 2012 RD
Copy to: Appellant/Respondent/CIT(A)/CIT/DR