Income Tax Appellate Tribunal - Delhi
Apollo International Ltd., New Delhi vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "A" NEW DELHI
BEFORE SHRI R.P. TOLANI AND SHRI SHAMIM YAHYA
ITA No. 1486/Del/2010
Asstt. Yr: 2005-06
DCIT Cir. 2(1), Vs. M/s Apollo International Ltd.,
New Delhi. F-46, Bhagat Singh Market,
New Delhi.
PAN: AAACA 6447 N
( Appellant ) ( Respondent )
Appellant by : Shri H.G. Sema Sr. DR
Respondent by : Shri Anoop Sharma Adv. &
Shri Manu K. Giri Adv.
ORDER
PER R.P. TOLANI, J.M::
This is revenue's appeal against CIT(A)-V, New Delhi's order dated 14-1-2010 in appeal no. 118/08-09 relating to A.Y. 2005-06. Following effective grounds are raised:
"1. The Ld. CIT(A) has erred on facts and in law by directing to delete addition of Rs. 64,45,245/- on account of disallowance of bad debts/ advances written off ignoring that losses or debts of Fashion Brands International Inc. a subsidiary company and a separate legal entity, could not be allowed to be deducted from the profits of the assessee company.
2. The Ld. CIT(A) has erred on facts and in law by directing to delete addition of Rs. 98,196/- on account of Employee's contribution to PF/ESI fund made u/s 2(24)(x) read with section 36(1)(va) of the Act ignoring that the fact that these sums were deposited by the assessee in the employee's 2 account in the relevant fund beyond the due dates prescribed under the relevant Acts.
3. The Ld. CIT(A) has erred on facts and in law by directing to delete addition of Rs. 18,53,000/- on account of sundry creditors of discontinued operations of Pharma Division of the company which was sold under slump sale ignoring the fact that in the slump sale all the liabilities are accounted for and already transferred. Moreover, the business transfer agreement also does not contain any clause repudiating acceptance of any liability by the purchaser of the unit."
2. Ground no. relatable to payment of PF and ESI is agreed to be covered in favour of the assessee in as much as the amounts were paid before the due date of filing of return. In view thereof, ground no. 2 of the revenue is dismissed.
3. Apropos revenue's ground no. 1 i.e. claim of bad debts/ advances written off, brief facts: The assessee had established a subsidiary company in 2001 in USA by name, Fashion Brands International Inc. ("FBII" in short) to promote the business of export of leather garments. Assessee advances moneys to it for expenses and working capital which were debited as "Apollo USA" a/c. The subsidiary in earlier years carried out important role in the export business of the assessee and earned income also. However, due to rejection of some shipment of leather goods it suffered heavy financial losses. During the course of assessment proceedings the assessee submitted audited copies of annual report of FBII demonstrating the 3 suffering of huge losses and the deficit as on 31-3-2003 which stood at $ 1,94,753 and the total liabilities and shareholders' deficit was reflected as $ 3,54,664. Since the amounts became irrecoverable the assessee wrote off this amount in its books of a/cs as bad debt u/s 36(1)(vii) and claimed it. Before assessing officer an alternative plea was also made that in any case it was a business loss suffered by the assessee during the course of carrying on of its business. The assessing officer disallowed the claim on the ground that the loss was of a totally independent concern which was a separate entity i.e. FBII. The assessing officer was of the view that it was a trite proposition that losses or debts of the assessee company alone can be allowed u/s 37 or 36(1)(vii). Therefore it was disallowed.
3.1. Aggrieved, assessee preferred first appeal where the assessee relied on catena of judgments in its support as under:
- CIT Vs. Dalmia Cement (B) Ltd. (2002) 254 ITR 377;
- Kejriwal Enterprises Vs. CIT 260 ITR 341 (Cal.);
- Vassanji Sons & Co. P. Ltd. 125 ITR 462 (Bom.);
- Essen Pvt. Ltd. Vs. CIT 65 ITR 625 (SC);
- CIT Vs. Amalgamations Pvt. Ltd. 226 ITR 188 (SC);
- Turner Morrison & Co. Ltd. Vs. CIT 245 ITR 724 (Cal.);
- Phaltan Sugar Works Ltd. 208 ITR 989;
- CIT Vs. Wood Ward Governor India P. Ltd. 312 ITR 254 (SC)
- CIT Vs. Malayalam Plantation Ltd. 53 ITR 140 (SC)
- S.A. Builders Vs. CIT 288 ITR 1 (SC)
3.2. Ld. CIT(A) after considering all the facts and circumstances allowed the assessee's claim by following observations:4
"I have considered the submissions made by the appellant and on the basis of facts placed before me and the legal submissions made I hold that since, the amount of Rs. 64,45,245/- representing bad debts written off by the appellant company was advanced by it as a measure of commercial expediency for business proposed, therefore, in view of the decision of the Hon'ble S.C. in the case of S.A. Builders 288 ITR 1 (SC), the same is an allowable business expenditure u/s 37(1) of the IT Act. Therefore, the addition of Rs. 64,45,245/- made by AO is hereby deleted."
3.3. Aggrieved, revenue is before us.
4. Ld. DR reiterated the stand taken by the assessing officer i.e.
(i) FBII was a separate and distinct legal entity and undisputedly the losses incurred pertained to the subsidiary only.
(ii) The assessee had not suffered any loss.
4.1. In view of these factual submissions ld. DR contended that the order of assessing officer deserves to be upheld.
5. Ld. Counsel for the assessee on the other hand vehemently argues that it has not been disputed that the FBII was subsidiary of the assessee, established for promotion of assessee's leather business. The lower authorities have misconceived the facts in holding that the loss can be allowed only to FBII. The crucial fact which has been lost sight of by the assessing officer is that the entire financing to FBII was done by the assessee to promote its business of export of leather garments. In all the 5 earlier years the transactions of the assessee with FBII have been allowed. Thus, the advances given by assessee to FBII on account of the expenses and working capital are simply business advances given by assessee to promote its business to a debtor namely FBII.
5.1. The assessing officer has not disputed the fact that FBII suffered huge losses due to rejection of some shipment of leather goods. Looking at the strict regulations of U.S. once the shipments are rejected, the goods are returned and the port charges and return shipment charges are so huge and onerous. Thus, the fact about FBII shipment having been rejected, consequent losses and its financial position becoming unworkable and unviable has not been disputed by the assessing officer. In these facts and circumstances the ld. Counsel contends that the advances to said FBII having become bad debt qua the assessee and on actual writing off are clearly allowable u/s 36(1)(vii). In other words, loss of advances to the assessee given for promotion of its business, clearly falls u/s 37(1) also as a business loss.
6. We have heard rival contentions and perused the material available on record. The fact about RBII having become financially unviable due to exigencies mentioned have not been disputed by the assessing officer. The fact that assessee advanced amount in its books of account which has been 6 accepted by the department and the amounts have been actually written off as bad debt are clearly allowable u/s 36(1)(vii). We find merit in the alternative plea of the assessee also that in any case it becomes a business loss of the assessee. In view thereof, we see no infirmity in the order of CIT(A) on this issue which is upheld. This ground of the assessee is dismissed.
7. Apropos third ground i.e. addition qua the discontinued operations of pharma division sold under slump sale, brief facts are: The pharma division of the assessee company was sold by way of slump sale accepting the sundry creditors reflected in the books of accounts of the assessee totaling to Rs. 18,53,000/- which are listed in the CIT(A)'s order. The assessing officer had disallowed the same on the grounds:
(i) The slump sale of capital asset was based on net worth which is aggregate value of the total assets of the undertaking as reduced by the value of liabilities. It was implied that these liabilities were already included in the sale and the assessee has necessarily claimed them.
(ii) Business transfer agreement did not contain any clause repudiating acceptance of any liability by the purchaser of the unit and the assessee failed to point out any such stipulation in the agreement.
7.1. The ld. CIT(A) after considering the facts and submissions allowed the claim of the assessee by following observations:
"7.3. I have gone through the business transfer agreement and the provisions of section 2(42C) which define slump sale and 7 section 50B which contain special provision for computation of capital gains in the case of slump sale. The explanation given by the assessee is convincing and the liability was not looked into while transferring the company on slump sale as per the business agreement dated 16-12-2004. In my opinion this transaction is a valid transaction and the assessee will get the benefit of claiming this expenditure in this year, as it was not claimed in the business under the slump sale. Hence the addition of Rs. 18.53 lacs is hereby deleted."
7.2. Aggrieved, revenue is before us.
8. Ld DR contends that CIT(A) has recorded a finding that sundry creditors of Rs. 18.53 lacs did not form a part of slump sale of its pharma division and they were transferred from Vita Life books ( pharma division) to the books of Apollo division. Therefore, the CIT(A) has not considered the facts properly.
9. Ld. Counsel for the assessee on the other hands contends that here again ld. Assessing officer has failed to appreciate the actual facts. Apropos sundry creditors of Rs. 18.53 laks the assessee duly explained the position vide letter dated 5/12/2008 filed before the AO (placed in the paper book at pages 1 & 2). Enclosures with the said letter relating to sundry creditors of Rs. 18,53,000 which are placed at pages 40 to 49. Details of liabilities aggregating to 18.53 lakhs which were not handed over to the vendee, as explained at page 40 of the paper book are:
1. Mitsuya Boeki Ltd. Rs. 15,13,382/-
2. Monarch Catalyst Pvt. Ltd. Rs. 78,398/-8
3. Sundry creditor - Vita Life Rs. 1,64,805/-
4. Vita Misc. Collection Rs. 1,00,338/-
9.1. The amounts were due to the said company on account of raw material imported under LC opened by the assessee. The amount had been transferred from Vita Life books to the head office of the assessee on 30/11/2004 before the execution of the business transfer agreement. The amount was paid by the assessee company in the next financial year on 30/04/2005 to the creditor. Copy of account of Mitsua Boeki Ltd. in the books of Vita Life Division is placed in the paper book at pages 43 to 45.
The amount of consideration paid by the vendee has been indicated in article 5 of the business transfer agreement at Rs. 39,65,45,000/- on the basis of Life Laboratories as handed over to the vendee. These sundry credits were transferred on 30/11/2004 to the head office as there were certain disputes regarding the quantification of the liability and it was considered expedient that the matter may be settled by the assessee itself and not by the vendee. The figure of sale consideration mentioned in article 5 of the agreement has been agreed after the exclusion of sundry credits as above. Had thee be no exclusion from the reference accounts taken over by the vendee, it is quite obvious that consideration agreed between the parties would have come down to the extent of these liabilities. To sum up, there is no effect 9 whatsoever in the ultimate computation of capital gain on slump sale as per section 50B. The addition of Rs. 18,53,000/- is therefore liable to be deleted. 9.2. Thus the amount transferred from Vita Life to the books of the assessee was before the execution of business transfer agreement. The amount was paid by the assessee in next financial year on 30-4-2005 which has been demonstrated to the assessing officer. The amount of sale consideration has been shown in article 5 of the business transfer agreement. Since these creditors were transferred on 30-11-2004 to the head office which is in the name of head of the assessee i.e. Apollo International Ltd., the liabilities have been clearly incurred by the assessee and they were not transferred by way of slump sale as misconceived by the assessing officer. Ld. CIT(A) has rightly appreciated the facts and after elaborate findings has allowed the claim of the assessee.
10. We have heard rival contentions and perused the material available on record. In our considered view the above mentioned facts have not been disputed by the assessing officer. The liabilities qua the sundry creditors have been disallowed on a misconception that they were provided in the business transfer agreement whereas assessee has demonstrated that it is part of the business transfer agreement which has been properly appreciated by the CIT(A). The issue about the amounts having been transferred from the 10 assessee's pharma division carried out in the name of Vita Life (pharma division) and subsequent payments are also demonstrated in the books of account which have been duly verified. Since the relief has been granted after proper verification of the facts, we see no reason to interfere in the finding of CIT(A). This ground of revenue is dismissed.
11. In the result, revenue's appeal is dismissed.
Order pronounced in open court on 29-05-2014.
Sd/- Sd/- ( SHAMIM YAHYA ) ( R.P. TOLANI ) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 29-05-2014. MP Copy to : 1. Assessee 2. AO 3. CIT 4. CIT(A) 5. DR