THE issue before the Bench is - Whether for the eligibility to
the benefits u/s 72A (4) of the Act, the under-taking being demerged ought to be
a going concern at the time of demerger. And the answer favours the
assessee.
The assessee company is engaged in the business of manufacturing of Indian Made Foreign Liquors [IMFL], sugar, cogeneration of power, wind energy and speed zone. The assessee had claimed deprecation on the premise that it had purchased 37 wind mills during the month of March, 2006 from M/s Indowind Energy Limited [IEL] and ‘put to use’ during the period under consideration; and, hence, eligible for depreciation etc.
However, the AO had disallowed the claim of depreciation mainly for the following reasons:
(1) despite a survey was conducted in the business premises of the assessee on 28.3.2006, no bills/invoices relating to the purchase of windmills were found and no entry regarding the windmills was found in its books;
(2) the assessee company furnished the up-dated fixed assets list on 4.5.2006, however, this ‘updated’ list included three windmills which were supposedly returned back to M/s. Indowind on 31.3.2006;
(3) the assessee company claims to have purchased one of the windmills from M/s IEL on 15/3/2006 which Indowind Energy itself claims that it was commissioned only on 31/3/2006;
(4) that the end-users of windmills, viz., M/s. Ashok Leyland Limited, Wheels India Limited, ABI Showtech Limited, Turbo Energy Limited, Wichitra Auto Limited (5 of the 6 lessees consuming power from windmills) have confirmed that they were made aware of the transfer of windmills from IEL to the assessee only in the month of May 2006;
(5) that it was not the revenue’s contention that the windmills were not functioning or generating and supplying electricity; and that most of the windmills (except one) were commissioned long before and change in ownership did not in any way affect either the generation or utilization of power and, hence, the assessee using this as evidence in its favour was highly erroneous;
(6) that there was no physical movement of goods which can be verified for the correct date of transaction. The assessee had used this lacuna and tried to mislead the Department about the correct date of the transaction so as to avoid tax liability; &
(7) that the ruling of the Supreme Court in the case of CIT v. Durga Prasad More (2002-TIOL-877-SC-IT) is squarely applicable to the case on hand.
With regard to the assessee’s claim to set off brought forward loss of rectified spirit unit of MOL on the ground that as per the provisions of s. 72A of the Act which governs that the set off of losses doesn’t warrant that the under-taking being transferred needs to be active etc, the AO had rejected the same on the premise that “if the definition section gives the definition of demerger, the word ‘demerger’ wherever it appears in the Act is to be given that meaning, unless specifically stated in the Act that a transfer is deemed to be demerger or deemed not to be demerger. The mere blessing of the High Court for an amalgamation or demerger does not make it amalgamation or demerger as defined or as required by the I.T. Act. If that would have been the case, the Act wouldn’t need to define the terms amalgamation or demerger. So the position taken by the assessee that as long as the merger is through Court approval, the assessee shall have the benefit of set-off of carry forward loss/unabsorbed depreciation is opposed to law.”
The AO had, further, rejected the assessee’s contention that MOL continues to be before BIFR and the order is awaited etc., for the reasons that on account of misinterpretation of the non-obstante clause and the assessee’s stand despite the transfer not falling within the definition of ‘demerger’ as per I.T. Act, the set off of losses are to be allowed is unacceptable. On appeal, CIT (A) also rejected the assessee’s claim.
During the course of assessment proceedings, the AO had observed, on perusal of the auditor’s report, that the assessee had given loans/advances to other companies etc., for Rs.149.63 crores. All those concerns were inter-connected to the assessee and, thus, no interest was collected except from M/s. Sapthagiri Enterprises to whom Rs.32.23 lakhs was given. After discussion with the assessee, the AO concluded that the assessee had given interest free loans to its related concerns, but, it had paid interest on the loans availed and, accordingly, disallowed a sum of Rs.10,97,85,319/- being proportionate to the loans given by the assessee free of interest. It was the stand of the AO that the assessee could have involved its own money in its business instead of taking bank loans on interest as the assessee had invested Rs.7 crores and had got net current assets of Rs.202 crores.
On appeal, the CIT (A) had come to a conclusion that the interest free loans and advances had come from a mixed kitty of interest free as well as interest bearing funds. He had, accordingly, confirmed the addition on the premise that the assessee was not able to prove the commercial expediency which necessitated in lending such loans.
On further appeal, the ITAT held that,
++ disallowance of depreciation: The transaction of 28 WEGs was put under the scanner by the AO mainly and solely on the premise that the Accountant of the assessee who appeared to have averred that he was unaware of such transaction took place on 15th & 24th of March, 2006. Disputing the AO’s conclusion, it was contended by the assessee that the said transaction was finalized at the level of the MD of the assessee who had the powers to negotiate, finalise and enter into any transaction. This assertion of the assessee cannot be doubted as the MD of a company while negotiating/finalizing any transaction need not and not expected to take his Accountant into confidence for such transaction. As a matter of fact, the Accountant had clearly indicated, on deposition, that only the MD will know about the transaction of purchase of windmills;
++ the assertion of WIL in its letter makes it abundantly clear that the sale did take place during March 2006 itself which has also been accounted for in its books of account for the year ended 31.3.2006. Moreover, the contract of purchase of WEGs was between the assessee and IEL who knew the terms, conditions and obligations of such contract and, thus, as rightly pointed out by the assessee, the end-users were not put to notice of the said contract simultaneously when the contract was actually entered into will have no consequence at all. Assuming for a moment that none of the end-users were put to notice about the transaction and IEL continued to act as owner and as far as the end-users were concerned, the IEL had received the power charges from them and, subsequently, transferred the same to the assessee etc., even then, the transaction cannot be termed as fictitious as the assessee was the actual owner of the asset since the transaction of WEGs was between the assessee and IEL. Furthermore, as long as the seller of WEGs, i.e., IEL had confirmed the transaction which took place on 15th and 24th March, 2006 and as such, the statements of the end-users have of no consequence to determine the date of sale/transaction of WEGs;
++ Further, rebutting the WIL‘s allegation of the sale of 28 WEGs to the assessee was a sham, the assessee had extensively quoted the judgment of the Apex Court in the case of Union of India v. Azadi Bachao Andolan reported in (2003-TIOL-13-SC-IT) wherein the Court had dealt with the issue of ‘sham’ transaction. From the reading of the Apex Court, it is clear that the transaction of purchase of WEGs by the assessee cannot be termed as a sham transaction. In the instant case, the following vital points emerge, after considering the facts and circumstances of the case and judgment of the Apex Court, namely:
Facts of the
case
The assessee company is engaged in the business of manufacturing of Indian Made Foreign Liquors [IMFL], sugar, cogeneration of power, wind energy and speed zone. The assessee had claimed deprecation on the premise that it had purchased 37 wind mills during the month of March, 2006 from M/s Indowind Energy Limited [IEL] and ‘put to use’ during the period under consideration; and, hence, eligible for depreciation etc.
However, the AO had disallowed the claim of depreciation mainly for the following reasons:
(1) despite a survey was conducted in the business premises of the assessee on 28.3.2006, no bills/invoices relating to the purchase of windmills were found and no entry regarding the windmills was found in its books;
(2) the assessee company furnished the up-dated fixed assets list on 4.5.2006, however, this ‘updated’ list included three windmills which were supposedly returned back to M/s. Indowind on 31.3.2006;
(3) the assessee company claims to have purchased one of the windmills from M/s IEL on 15/3/2006 which Indowind Energy itself claims that it was commissioned only on 31/3/2006;
(4) that the end-users of windmills, viz., M/s. Ashok Leyland Limited, Wheels India Limited, ABI Showtech Limited, Turbo Energy Limited, Wichitra Auto Limited (5 of the 6 lessees consuming power from windmills) have confirmed that they were made aware of the transfer of windmills from IEL to the assessee only in the month of May 2006;
(5) that it was not the revenue’s contention that the windmills were not functioning or generating and supplying electricity; and that most of the windmills (except one) were commissioned long before and change in ownership did not in any way affect either the generation or utilization of power and, hence, the assessee using this as evidence in its favour was highly erroneous;
(6) that there was no physical movement of goods which can be verified for the correct date of transaction. The assessee had used this lacuna and tried to mislead the Department about the correct date of the transaction so as to avoid tax liability; &
(7) that the ruling of the Supreme Court in the case of CIT v. Durga Prasad More (2002-TIOL-877-SC-IT) is squarely applicable to the case on hand.
With regard to the assessee’s claim to set off brought forward loss of rectified spirit unit of MOL on the ground that as per the provisions of s. 72A of the Act which governs that the set off of losses doesn’t warrant that the under-taking being transferred needs to be active etc, the AO had rejected the same on the premise that “if the definition section gives the definition of demerger, the word ‘demerger’ wherever it appears in the Act is to be given that meaning, unless specifically stated in the Act that a transfer is deemed to be demerger or deemed not to be demerger. The mere blessing of the High Court for an amalgamation or demerger does not make it amalgamation or demerger as defined or as required by the I.T. Act. If that would have been the case, the Act wouldn’t need to define the terms amalgamation or demerger. So the position taken by the assessee that as long as the merger is through Court approval, the assessee shall have the benefit of set-off of carry forward loss/unabsorbed depreciation is opposed to law.”
The AO had, further, rejected the assessee’s contention that MOL continues to be before BIFR and the order is awaited etc., for the reasons that on account of misinterpretation of the non-obstante clause and the assessee’s stand despite the transfer not falling within the definition of ‘demerger’ as per I.T. Act, the set off of losses are to be allowed is unacceptable. On appeal, CIT (A) also rejected the assessee’s claim.
During the course of assessment proceedings, the AO had observed, on perusal of the auditor’s report, that the assessee had given loans/advances to other companies etc., for Rs.149.63 crores. All those concerns were inter-connected to the assessee and, thus, no interest was collected except from M/s. Sapthagiri Enterprises to whom Rs.32.23 lakhs was given. After discussion with the assessee, the AO concluded that the assessee had given interest free loans to its related concerns, but, it had paid interest on the loans availed and, accordingly, disallowed a sum of Rs.10,97,85,319/- being proportionate to the loans given by the assessee free of interest. It was the stand of the AO that the assessee could have involved its own money in its business instead of taking bank loans on interest as the assessee had invested Rs.7 crores and had got net current assets of Rs.202 crores.
On appeal, the CIT (A) had come to a conclusion that the interest free loans and advances had come from a mixed kitty of interest free as well as interest bearing funds. He had, accordingly, confirmed the addition on the premise that the assessee was not able to prove the commercial expediency which necessitated in lending such loans.
On further appeal, the ITAT held that,
++ disallowance of depreciation: The transaction of 28 WEGs was put under the scanner by the AO mainly and solely on the premise that the Accountant of the assessee who appeared to have averred that he was unaware of such transaction took place on 15th & 24th of March, 2006. Disputing the AO’s conclusion, it was contended by the assessee that the said transaction was finalized at the level of the MD of the assessee who had the powers to negotiate, finalise and enter into any transaction. This assertion of the assessee cannot be doubted as the MD of a company while negotiating/finalizing any transaction need not and not expected to take his Accountant into confidence for such transaction. As a matter of fact, the Accountant had clearly indicated, on deposition, that only the MD will know about the transaction of purchase of windmills;
++ the assertion of WIL in its letter makes it abundantly clear that the sale did take place during March 2006 itself which has also been accounted for in its books of account for the year ended 31.3.2006. Moreover, the contract of purchase of WEGs was between the assessee and IEL who knew the terms, conditions and obligations of such contract and, thus, as rightly pointed out by the assessee, the end-users were not put to notice of the said contract simultaneously when the contract was actually entered into will have no consequence at all. Assuming for a moment that none of the end-users were put to notice about the transaction and IEL continued to act as owner and as far as the end-users were concerned, the IEL had received the power charges from them and, subsequently, transferred the same to the assessee etc., even then, the transaction cannot be termed as fictitious as the assessee was the actual owner of the asset since the transaction of WEGs was between the assessee and IEL. Furthermore, as long as the seller of WEGs, i.e., IEL had confirmed the transaction which took place on 15th and 24th March, 2006 and as such, the statements of the end-users have of no consequence to determine the date of sale/transaction of WEGs;
++ Further, rebutting the WIL‘s allegation of the sale of 28 WEGs to the assessee was a sham, the assessee had extensively quoted the judgment of the Apex Court in the case of Union of India v. Azadi Bachao Andolan reported in (2003-TIOL-13-SC-IT) wherein the Court had dealt with the issue of ‘sham’ transaction. From the reading of the Apex Court, it is clear that the transaction of purchase of WEGs by the assessee cannot be termed as a sham transaction. In the instant case, the following vital points emerge, after considering the facts and circumstances of the case and judgment of the Apex Court, namely:
- WIL sold 28 WEGs to IEL on 15.3.2006 and the same have been accounted for as sale in its books of account for the year-ended 31.3.2006 and also accounted for the income from the said sale proceeds for the AY 2006-07. No depreciation was claimed on those WEGs for the yearended 31.3.2006 by WIL or IEL;
- IEL confirmed the sale of WEGs to the assessee as on 15th and 24th of March 2006 which have been duly accounted for as sale for the year-ended 31.3.2006 (for the AY 2006- 07). As admitted, IEL was not the owner of the said asset as on 31.3.2006 and no depreciation was claimed by it for those WEGs for the year-ended 31.3.2006;
- that the assessee had purchased the WEGs from IEL on 15th and 24th March 2006 and as such it was the actual and legitimate owner of those WEGs as on 31.3.2006 and, accordingly, claimed depreciation for the year-ended 31.3.2006;
- that according to the assessment order, one has to arrive at a conclusion that IEL was the owner of those WEGs as on 31.3.2006. However, IEL had, in its own admission, denied the ownership as on the said date. Neither WIL nor IEL had claimed depreciation. Moreover, the legitimate owner of those 28 WEGs, namely, the assessee has also been denied depreciation;
- that when IEL who owned the assets made a categorical statement to the effect that it had sold those assets to the assessee and thereby confirmed that it had relinquished all valuable right and interest in those WEGs, the AO cannot make a sweeping remark that IEL has been making a selfserving statement;
- that the income from the sale of power generated from WEGs for the period from 15.3.2006 ending on 31.3.2006 has been duly accounted for and offered to tax by the assessee and NOT either by IEL or WIL. This assertion amply exhibits that the assessee was the legitimate owner of those WEGs in the month of March, 2006 itself;
- surprisingly, in the instant case, the survey had taken place before the end of the previous year 2005-06 and also well before the due date for filing of the return of income for the relevant assessment year under dispute and that during the course of survey, the employees of the assessee were subjected to interrogation to ascertain as to whether they have any knowledge of the transaction of the purchase of WEGs by the assessee etc., lead to a feeling that the authority concerned was fully aware of the transaction of WEGs and was looking for any documentary proof of the same;
++
taking into account the above facts and also in conformity with the judgment of
the Supreme Court with regard to ‘sham’ or ‘device’, the assessee was eligible
for depreciation on those WEGs for the year-ending 31.3.2006. It is ordered
accordingly;
++ disallowance of set-off of brought forward of loss: It was the stand of the AO that losses pertaining to an undertaking/unit of business can be allowed, if the under-taking is transferred on a ‘going concern’ basis as per s. 2 (19AA) of the Act. As the operation of MOL was stand-still from 23/12/1999 and as a winding notice was issued by BIFR, it cannot be said that the company is being transferred on a ‘going concern’ basis. Contesting the assessee’s interpretation of ‘non obstante clause’ [of the provisions of s. 72A (4)] as erroneous, the AO went on to add that when the definition section has defined ‘demerger’, the same meaning shall be applied to the said terminology wherever it appears in the Act unless specifically stated so that a transfer is deemed to be a demerger or deemed not to be a demerger. It was the stand of the AO that mere approval of the High Court for amalgamation or demerger does not make the amalgamation or demerger as defined or as required by the Act. If that were the case, it was claimed, there was no need to define the terms ‘amalgamation or demerger’ in the Act. It was, further, stated that the contention of the assessee that once a merger was approved by a Court, the benefit of brought forward losses/unabsorbed depreciation will have to be allowed is opposed to law, and that the ‘going concern’ has been defined in the Auditing and Assurance Standards [AAS], according to which, MOL was not qualified to be of one;
++ it is noticed that the scheme of demerger has been approved by the High Courts of Andhra Pradesh and Karnataka clearly vouch that the transfer of the under-taking was on a ‘going concern’ basis. The assets, liabilities, employees, debts, obligations, rights etc., of the undertaking prior to the demerger stand vested with the assessee upon demerger. The High Court of Karnataka had, in its order u/s 391 to 394 of the Companies Act dated 3.3.2008 has approved unanimously the proposed scheme of arrangement between the assessee and MOL;
++ from a simple reading of the approved Scheme of arrangement, it makes it very clear that the assessee is eligible to the benefits u/s 72A (4) of the Act. The Act does not state that the under-taking being demerged ought to be a going concern at the time of demerger. It only states that the under-taking being demerged should stand transferred in a manner similar to the manner in which a ‘going concern’ is transferred. As mentioned earlier, the demerger scheme was approved by the High Courts of Karnataka and Andhra Pradesh and the scheme clearly stipulates that the demerger is on a ‘going concern’ basis and that it comes into effect w.e.f. 1.1.2006 i.e., relevant to the assessment year 2006- 07. In other words, once demerger is approved, it should be treated as relating back to the appointed date with reference to which the accounts of both demerged and resultant companies are made up. It is so settled by the Apex Court in the case of Marshall Sons & Co (India) Limited v. ITO reported in 223 ITR 809 (SC);
++ furthermore, the assessee’s contention that sections 2(19AA) and 72A (4) of the Act to be read harmoniously is having the backing of the findings of the earlier Bench of this Tribunal in the case of JCIT v. M/s Valdel Engineers & Constructors Pvt Ltd (2012-TIOL-573-ITAT-BANG);
++ taking into account the fact that the merger as such is not in dispute and the issue as discussed in the foregoing paragraphs and also in conformity with the judicial views, the authorities below were not justified in denying the benefit of the set off of the brought forward losses to the extent of Rs.7 crores. It is ordered accordingly;
++ Interest: As could be seen from the details furnished by the assessee during the course of hearing that the chunk of interest free loans to the tune of Rs.117.39 crores were out of non interest bearing funds, comprised of capital, reserves & surplus and interest free unsecured loans to the extent of Rs.170.93 crores. Thus, the question of interest bearing funds being utilised to advance non-interest bearing loans by the assessee did not arise. The AO had opined in the assessment order that ‘the assessee company could have involved its own money in its business instead of taking bank loans on interest. It is, however, the prerogative of the assessee as how to conduct its business. Further, it is very evident from the details furnished by the AR and also perusal of the Schedules to Profit & Loss account as at March, 31, 2007, it is obvious that the interest bearing loans obtained from the banks were availed for specific purposes, namely, working capital, KSBCL Advance, vehicle loans [motor cars, trucks] etc;
++ taking all the above facts into consideration and also in conformity with the judicial views on a similar issue, the authorities below were not justified in resorting to disallow the interest claim of Rs.10,97,85,319/-. It is ordered accordingly.
++ disallowance of set-off of brought forward of loss: It was the stand of the AO that losses pertaining to an undertaking/unit of business can be allowed, if the under-taking is transferred on a ‘going concern’ basis as per s. 2 (19AA) of the Act. As the operation of MOL was stand-still from 23/12/1999 and as a winding notice was issued by BIFR, it cannot be said that the company is being transferred on a ‘going concern’ basis. Contesting the assessee’s interpretation of ‘non obstante clause’ [of the provisions of s. 72A (4)] as erroneous, the AO went on to add that when the definition section has defined ‘demerger’, the same meaning shall be applied to the said terminology wherever it appears in the Act unless specifically stated so that a transfer is deemed to be a demerger or deemed not to be a demerger. It was the stand of the AO that mere approval of the High Court for amalgamation or demerger does not make the amalgamation or demerger as defined or as required by the Act. If that were the case, it was claimed, there was no need to define the terms ‘amalgamation or demerger’ in the Act. It was, further, stated that the contention of the assessee that once a merger was approved by a Court, the benefit of brought forward losses/unabsorbed depreciation will have to be allowed is opposed to law, and that the ‘going concern’ has been defined in the Auditing and Assurance Standards [AAS], according to which, MOL was not qualified to be of one;
++ it is noticed that the scheme of demerger has been approved by the High Courts of Andhra Pradesh and Karnataka clearly vouch that the transfer of the under-taking was on a ‘going concern’ basis. The assets, liabilities, employees, debts, obligations, rights etc., of the undertaking prior to the demerger stand vested with the assessee upon demerger. The High Court of Karnataka had, in its order u/s 391 to 394 of the Companies Act dated 3.3.2008 has approved unanimously the proposed scheme of arrangement between the assessee and MOL;
++ from a simple reading of the approved Scheme of arrangement, it makes it very clear that the assessee is eligible to the benefits u/s 72A (4) of the Act. The Act does not state that the under-taking being demerged ought to be a going concern at the time of demerger. It only states that the under-taking being demerged should stand transferred in a manner similar to the manner in which a ‘going concern’ is transferred. As mentioned earlier, the demerger scheme was approved by the High Courts of Karnataka and Andhra Pradesh and the scheme clearly stipulates that the demerger is on a ‘going concern’ basis and that it comes into effect w.e.f. 1.1.2006 i.e., relevant to the assessment year 2006- 07. In other words, once demerger is approved, it should be treated as relating back to the appointed date with reference to which the accounts of both demerged and resultant companies are made up. It is so settled by the Apex Court in the case of Marshall Sons & Co (India) Limited v. ITO reported in 223 ITR 809 (SC);
++ furthermore, the assessee’s contention that sections 2(19AA) and 72A (4) of the Act to be read harmoniously is having the backing of the findings of the earlier Bench of this Tribunal in the case of JCIT v. M/s Valdel Engineers & Constructors Pvt Ltd (2012-TIOL-573-ITAT-BANG);
++ taking into account the fact that the merger as such is not in dispute and the issue as discussed in the foregoing paragraphs and also in conformity with the judicial views, the authorities below were not justified in denying the benefit of the set off of the brought forward losses to the extent of Rs.7 crores. It is ordered accordingly;
++ Interest: As could be seen from the details furnished by the assessee during the course of hearing that the chunk of interest free loans to the tune of Rs.117.39 crores were out of non interest bearing funds, comprised of capital, reserves & surplus and interest free unsecured loans to the extent of Rs.170.93 crores. Thus, the question of interest bearing funds being utilised to advance non-interest bearing loans by the assessee did not arise. The AO had opined in the assessment order that ‘the assessee company could have involved its own money in its business instead of taking bank loans on interest. It is, however, the prerogative of the assessee as how to conduct its business. Further, it is very evident from the details furnished by the AR and also perusal of the Schedules to Profit & Loss account as at March, 31, 2007, it is obvious that the interest bearing loans obtained from the banks were availed for specific purposes, namely, working capital, KSBCL Advance, vehicle loans [motor cars, trucks] etc;
++ taking all the above facts into consideration and also in conformity with the judicial views on a similar issue, the authorities below were not justified in resorting to disallow the interest claim of Rs.10,97,85,319/-. It is ordered accordingly.
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