M/S. BHARAT BIJLEE LIMITED, MUMBAI v. ADDL.C.I.T., RANGE 6(1), MUMBAI

ITA 6410/MUM/2008 | 2005-2006
Pronouncement Date: 11-03-2011 | Result: Partly Allowed

Appeal Details

RSA Number 641019914 RSA 2008
Assessee PAN AAACB2900K
Bench Mumbai
Appeal Number ITA 6410/MUM/2008
Duration Of Justice 2 year(s) 4 month(s) 7 day(s)
Appellant M/S. BHARAT BIJLEE LIMITED, MUMBAI
Respondent ADDL.C.I.T., RANGE 6(1), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 11-03-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted B
Tribunal Order Date 11-03-2011
Date Of Final Hearing 22-02-2011
Next Hearing Date 22-02-2011
Assessment Year 2005-2006
Appeal Filed On 04-11-2008
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH B MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI J.SUDHAKAR R EDDY(A.M) ITA NO.6410/MUM/2008(A.Y.2005-06) M/S.BHARAT BIJILEE LIMITED 6 TH FLOOR ELECTRIC MANSION APPASAHEB MARATHE MARG PRABHADEVI MUMBAI 400 025. PAN:AAACB 2900K (APPELLANT) VS. THE ADDL. CIT RANGE 6(1) MUMBAI. (RESPONDENT) APPELLANT BY : SHRI JOGESH A. THAR RESPONDENT BY : SHRI NARESH KUMAR BALODIA ORDER PER N.V.VASUDEVAN J.M THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDE R DATED 25/7/2008 OF CIT(A)-6 MUMBAI RELATING TO ASSESSMENT YEAR 2005 -06. GROUND NO.1 RAISED BY THE ASSESSEE READS AS UNDER: GROUND 1: DISALLOWANCE OF EXPENSES OF RS. 12 89 00 0/- UNDER SECTION 14A BY TREATING THEM AS HAVING BEEN INCURRED FOR E ARNING TAX-FREE DIVIDEND. 1.ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT(A) ERRED IN UPHOLDING THE ACTION OF THE ADDITIONAL COMMISSIONER OF INCOME TAX RANGE 6(1) MUMBAI (TH E AO) OF DISALLOWING U/S. 14A OF THE ACT A SUM OF RS.12 89 0 00/-. 2. HE FURTHER ERRED IN DIRECTING THE AO TO APPLY T HE METHODOLOGY PRESCRIBED IN RULE 8D(1) FOR COMPUTING THE DISALLOW ANCE U/S.14A OF THE ACT. 3. THE APPELLANT PRAYS THAT THE AO BE DIRECTED TO D ELETE THE AFORESAID DISALLOWANCE AND TO QUASH THE DIRECTIONS OF CIT(A) FOR APPLYING RULE 8D. ITA NO.6410/MUM/2008(A.Y.2005-06) 2 2. THE ASSESSEE IS A COMPANY. IT IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND MARKETING OF MOTORS PUMPS TRANSFO RMERS LIFTS INDUSTRIAL ELECTRONIC PRODUCTS CRC AND EXECUTION O F TURNKEY PROJECTS. THE ASSESSEE EARNED DIVIDEND INCOME. THE DIVIDEND INCO ME DID NOT FORM PART OF THE TOTAL INCOME OF THE ASSESSEE AND IN VIEW OF THE PROVISIONS OF SECTION 14A OF THE ACT THE AO WAS OF THE VIEW THAT EXPENDITURE INCURRED FOR EARNING DIVIDEND INCOME SHOULD BE DISALLOWED AND ADDED TO T HE TOTAL INCOME OF THE ASSESSEE. THE ASSESSEE SUBMITTED BEFORE THE AO THA T NO EXPENSES WERE INCURRED IN MAKING INVESTMENT IN SHARES WHICH YIEL DED THE DIVIDEND INCOME AND THEREFORE NO DISALLOWANCE COULD BE MADE UNDER SECTION 14A OF THE ACT. THE ASSESSEE ALSO POINTED OUT THAT IN A.Y 2004-05 T HE HONBLE ITAT IN 1999- 00 IN ITA NO.6017/M/03 HAS DECIDED SIMILAR ISSUE I N FAVOUR OF THE ASSESSEE AND THAT DECISION HAS ALSO BEEN FOLLOWED BY THE CIT (A) IN A.Y 2004-05. THE AO HOWEVER HELD THAT THE ASSESSEE DID NOT IDENTIFY THE SOURCE OF FUNDS USED FOR MAKING INVESTMENT AND HE HELD THAT PART OF THE BORROWED FUNDS CAN BE ATTRIBUTED TO THE MAKING OF INVESTMENT IN SHARES WH ICH YIELDED THE DIVIDEND INCOME. THE AO ACCORDINGLY DISALLOWED PROPORTIONAT E INTEREST OF RS. 12.89 LACS AND THE SAME WAS ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 3. ON APPEAL BY THE ASSESSEE THE CIT(A) DIRECTED TH E AO TO APPLY THE PROVISIONS OF RULE 8D OF THE IT RULES 1962 AND MAK E SUITABLE DISALLOWANCE UNDER SECTION 14A OF THE ACT. 4. AGGRIEVED BY THE ORDER OF THE CIT(A) THE ASSESSE E HAS RAISED GROUND NO.1 BEFORE THE TRIBUNAL. 5. BEFORE US LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT IN A.Y 2004-05 IN ITA NO.6359/M/07 THIS TRIBUNAL BY ITS ORDER DATE D 30/7/2009 HELD THAT NO EXPENDITURE WAS INCURRED TO EARN THE DIVIDEND IN COME AND THEREFORE DISALLOWANCE OF INTEREST EXPENSES UNDER SECTION 14A COULD NOT BE MADE. THE LD. COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO THE BALANCE SHEET OF THE ITA NO.6410/MUM/2008(A.Y.2005-06) 3 ASSESSEE AS ON 31/3/2004 AND 31/3/2005 AND SUBMITTE D THAT THE INVESTMENT THAT CONSIDERED IN A.Y. 2005 AND THE INV ESTMENT IN THE PRESENT ASSESSMENT YEAR (A.Y. 2005-06) ARE IDENTICAL. THER E WAS ONLY AN INVESTMENT OF RS. 1.00 LAC BY THE ASSESSEE IN 10000 EQUITY SHA RES OF RS. 10 EACH OF NORTH KANARA GSP CO-OPERATIVE BANK LTD. THE DIVID END IF AT ALL FROM THIS INVESTMENT IS CHARGEABLE TO TAX AND THEREFORE THE RE IS NO QUESTION OF APPLICABILITY OF SECTION 14A OF THE ACT. IN THESE CIRCUMSTANCES THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE DIRECTI ON OF THE CIT(A) DIRECTING THE AO TO MAKE DISALLOWANCE BY INVOKING THE PROVISI ONS OF RULES 8D OF THE IT RULES 1962 IS WITHOUT ANY BASIS. IN THIS REGARD LD . COUNSEL FOR THE ASSESSEE ALSO SUBMITTED THAT RULE 8D OF IT RULES IS ADMITTE DLY NOT APPLICABLE TO A.Y 2005-06 AS HELD BY HONBLE BOMBAY HIGH COURT IN IN COME TAX APPEAL NO.626 OF 2010 IN THE CASE OF GODREJ & BOYCE MFG.CO.LTD. MUMBAI. VS. DY. COMMISSIONER OF INCOME TAX RANGE 10(2) MUMBAI & AN R. 6. THE LD. D.R RELIED ON THE ORDER OF THE CIT(A). 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE FI ND THAT THE CONTENTIONS PUT FORTH BY THE ASSESSEE ARE ACCEPTABL E. THE ASSESSEE HAS DEMONSTRATED THAT THERE WERE NO EXPENSES INCURRED I N MAKING INVESTMENT IN SHARES WHICH YIELDED THE TAX FREE DIVIDEND INCOME. IN A.Y. 2004-05 ON IDENTICAL FACTS THIS TRIBUNAL HAS ALREADY HELD T HAT NO DISALLOWANCE UNDER SECTION 14A IS CALLED FOR. IN THESE CIRCUMSTANCES WE ARE OF THE VIEW THAT THE DISALLOWANCE MADE BY THE AO SHOULD BE DELETED. WE ACCORDINGLY DIRECT THAT THE ADDITION MADE BY THE AO UNDER SECTION 14A BE DE LETED. GROUND NO.1 RAISED BY THE ASSESSEE IS ALLOWED. 8. GROUND NO.2 RAISED BY THE ASSESSEE READS AS FOLL OWS: GROUND.2: DISALLOWANCE OF PROVISION FOR WARRANTY AMOUNTING TO RS. 78 91 000/-/ ITA NO.6410/MUM/2008(A.Y.2005-06) 4 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED CIT(A) ERRED IN UPHOLDING THE ACTION OF THE AO OF DISALLOWING RS. 78 91 000/- BEING THE CLAIM TOWARDS PROVISION F OR WARRANTY. 2. THE APPELLANT PRAYS THAT THE FOREGOING DISALLOW ANCE OF RS.78 91 000/- MADE BY THE AO IN RESPECT OF PROVISI ON FOR WARRANTY OUGHT TO BE DELETED. 9. THE ASSESSEE HAD DEBITED IN THE P&L ACCOUNT A SU M OF RS. 78.91 LACS ON ACCOUNT OF ANTICIPATED LIABILITY THAT MAY ARISE IN FUTURE IN RESPECT OF THE GOODS SOLD. THE ASSESSEE EXPLAINED BEFORE THE AO T HAT IN KEEPING WITH THE ACCOUNTING STANDARD (AS 29) ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA WHICH WAS APPLICABLE FOR THE P ERIOD COMMENCING FROM 1/4/2004 IT HAD MADE A PROVISION ON ACCOUNT OF WARR ANTY CLAIM THAT MAY BE RAISED AGAINST THE ASSESSEE IN RESPECT OF THE WARRA NTY OBLIGATIONS GIVEN BY THE ASSESSEE AT THE TIME OF SALE OF THE PRODUCTS MA NUFACTURED BY IT. ACCORDING TO THE ASSESSEE THE OBLIGATION UNDER THE WARRANTEE IS A LIABILITY IN PRESENTI AND ONLY THE DISCHARGE OF SUCH LIABILITY I S AT A FUTURE DATE. THE ASSESSEE THEREFORE SUBMITTED THAT IT IS ENTITLED T O MAKE A FAIR ESTIMATE OF SUCH LIABILITY AND THE SAME SHOULD BE ALLOWED AS A DEDUCTION. THE ASSESSEE EXPLAINED THAT IT WAS MANUFACTURING ELECTRICAL MOTO RS TRANSFORMERS AND INDUSTRIAL COMPONENTS (MAINLY ELEVATOR COMPONENTS). THESE PRODUCTS HAVE A LONG LIFE CYCLE AND ARE GENERALLY CAPITAL GOODS F OR THE PURCHASERS. THESE PRODUCTS CARRIES MANUFACTURERS GUARANTEE FOR 2-3 YE ARS I.E. THE FAULTS IN THE PRODUCTS WITHIN THE WARRANTY PERIOD HAVE TO BE REC TIFIED BY THE MANUFACTURERS FREE OF COST. THE ASSESSEE ALSO POIN TED OUT THAT IT PROVIDES BANK GUARANTEE TO ITS CUSTOMERS COVERING 5-10% OF T HE CONTRACT PRICE TOWARDS WARRANTEE PERFORMANCE. IN CASE THE ASSESSE E DOES NOT FULFILL THE WARRANTY OBLIGATION TO CUSTOMERS WILL INVOKE THE BANK GUARANTEE. THE ASSESSEE ALSO GAVE A TABLE OF CHART SHOWING THE LIA BILITY IT HAD ACTUALLY INCURRED IN THE PAST TOWARDS DISCHARGE OF WARRANTY OBLIGATION AND THE BASIS ON WHICH THE PROVISION FOR WARRANTY CLAUSE WAS MAD E BY IT FOR THE PRESENT ASSESSMENT YEAR. ITA NO.6410/MUM/2008(A.Y.2005-06) 5 PERIOD SALES WARRANTY 2004-05 COST % SALES W.COST RS. IN LAKHS RS. IN LAKHS MOTORS 02-03 4318.40 25.90 0.39% 03-04 5536.55 21.67 0.60% TOTAL 9854.95 47.57 0.48% 8911.06 43.01 TRANSFORMERS 02-03 4621.00 6.59 0.15% 03-04 5777.93 8.87 0.15% 9671.90 14.38 TOTAL 10398.93 15.46 0.15% ICD 03-04 5231.76 41.58* 0.79% 5340.59 21.52# TOTAL 78.91 * COST INCURRED DURING FREE MAINTENANCE PERIOD. # 50% RATE CONSIDERED AS EFOD TRANSFERRED LIABILI TY RESTRICTED ON SUPPLIES TO TEPL. IN TERMS OF THE ACCOUNTING STANDARD IT IS MORE LIK ELY THAN NOT ON PAST EXPERIENCE THAT THERE WILL BE SOME CLAIMS UNDER WAR RANTIES. THE PAST OBLIGATING EVENT IS THE SALE OF OUR PRODUCTS WITH A WARRANTY WHICH GIVES RISE TO A PRESENT OBLIGATION AND OUTFLOW OF RESOURCES IS PROBABLE. HENCE A PROVISION IS TO BE RECOGNIZED FOR THE BEST ESTIMATE OF THE COST OF MAKING GOOD UNDER THE WARRANTY PRODUCTS SOLD BEFORE THE BALANCE SHEET DATE. 10. IN NOTE NO.5 TO THE COMPUTATION OF TOTAL INCOME FILED ALONG WITH THE RETURN OF INCOME THE ASSESSEE GAVE THE FOLLOWING NO TE: AN AMOUNT OF RS.78.91 LAKHS HAS BEEN PROVIDED FOR THE COSTS OF ANTICIPATED LIABILITIES UNDER OUTSTANDING WARRANTIE S IN RESPECT OF GOODS SOLD DURING THE PREVIOUS YEAR. RELYING ON THE DECI SIONS IN THE FOLLOWING CASES THE COMPANY HAS TREATED THIS AMOUN T AS THE DEDUCTIBLE EXPENDITURE FOR THE PREVIOUS YEAR: CIT VS MISTUBISHI MOTORS (222 ITR 697) (PRIVY COU NCIL) BHARAT EARTH MOVERS V. CIT (245 ITR 428)(SC) CALCUTTA CO. LTD. VS. CIT (37 ITR 1)(SC) METAL BOX CO. OF INDIA LTD. V. WORKMEN (73 ITR 53)( SC) 11. THE AO WAS OF THE VIEW THAT THE LIABILITY IN QU ESTION IS ONLY CONTINGENT LIABILITY. THE AO ALSO DISTINGUISHED THE DECISION RELIED UPON BY THE ASSESSEE ITA NO.6410/MUM/2008(A.Y.2005-06) 6 IN THE CASE OF BHARAT EARTH MOVERS LTD.(SUPRA) BY P OINTING OUT THAT THE LIABILITY IN THE SAID CASE WAS ON ACCOUNT OF EARNE D LEAVE OF EMPLOYEES COVERED UNDER ESIC SCHEME AND THE FACTS OF THE ASSE SSEES CASE WAS DIFFERENT. 12. THE CIT(A) HELD THAT IN THE EARLIER YEARS AS 29 WAS NOT FOLLOWED BY THE ASSESSEE AND NO PROVISION WAS MADE ON ACCOUNT OF WA RRANTEE COST. HE WAS OF THE VIEW THAT THERE WAS NO JUSTIFICATION FOR ALL OWING DEDUCTION BY WAY OF PROVISION FOR WARRANTEE COST FROM THIS YEAR. 13. AGGRIEVED BY THE ORDER OF THE CIT(A) THE ASSESS EE HAS RAISED GROUND NO.2 BEFORE THE TRIBUNAL. 14. WE HAVE HEARD THE SUBMISSIONS OF THE LD. COUNSE L FOR THE ASSESSEE AND THE LD. D.R. THE LD. COUNSEL FOR THE ASSESSEE RELI ED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF ROTORK CONTROL S INDIA PVT. LTD. VS. CIT 314 ITR 62(SC) WHEREIN IT WAS HELD THAT ESTIMATED PROVISION FOR WARRANTEE PROPERLY ASCERTAINED IS AN ALLOWABLE DEDUCTION UNDE R SECTION 37 OF THE ACT. HE ALSO POINTED OUT THAT AS-29 OF ICAI CAME INTO FO RCE ONLY ON 1/4/2004 AND THEREFORE THIS IS THE FIRST YEAR IN WHICH THE ASSESSEE COULD HAVE MADE A PROVISION ON ACCOUNT OF WARRANTEE COST AND CLAIMED THE SAME AS DEDUCTION. HE ALSO BROUGHT TO OUR NOTICE THAT AS-1 OF ICAI WHI CH HAS ALREADY NOTIFIED UNDER SECTION 145(2) OF THE ACT AS AN ACCOUNTING ST ANDARD TO BE FOLLOWED BY ALL ASSESSES FOLLOWING MERCANTILE SYSTEM OF ACCOUNT ING PROVIDES THAT AN ACCOUNTING POLICY ADOPTED BY AN ASSESSEE SHOULD BE SUCH AS TO PRESENT A TRUE AND FAIR VIEW OF THE STATE OF AFFAIRS OF THE BUSINESS AND IN DOING SO THE POLICY OF PRUDENCE SHOULD BE ADOPTED I.E. PROVISION SHOULD BE MADE FOR ALL NON-LIABILITIES AND LOSSES EVEN THOUGH THE AMOUNT C ANNOT BE DETERMINED WITH CERTAINTY AND REPRESENTS ONLY A BEST ESTIMATE IN THE LIGHT OF AVAILABLE INFORMATION. ACCORDING TO HIM APPLYING THE PRINCIP LE OF PRUDENCE ALSO THE DEDUCTION CLAIMED SHOULD BE ALLOWED. THE LD. D.R S UBMITTED THAT THE AO DID ITA NO.6410/MUM/2008(A.Y.2005-06) 7 NOT EXAMINE THE QUESTION AS TO WHETHER THE ESTIMATE OF LIABILITY BY THE ASSESSEE WAS PROPER AND THEREFORE THE MATTER SHOU LD BE REMANDED FOR FRESH CONSIDERATION BY THE AO TAKING INTO CONSIDERATION A LSO THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF ROTORK CONTROL S INDIA PVT. LTD.(SUPRA). 15. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE HONBLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA PVT. LTD . HAD AN OCCASION TO CONSIDER A CASE WHERE A DEDUCTION ON ACCOUNT OF A P ROVISION FOR WARRANTY EXPENSES WAS MADE BY THE ASSESSEE AND BASED ON THAT PROVISION DEDUCTION WHILE COMPUTING INCOME WAS CLAIMED BY THE ASSESSEE. THE REVENUE AUTHORITIES DISALLOWED THE CLAIM ON THE GROUND THAT THE LIABILITY WAS ONLY CONTINGENT LIABILITY. THE HONBLE SUPREME COURT HE LD THAT IN A CASE WHERE THERE WAS WARRANTY OBLIGATION SUCH OBLIGATION WAS P ART OF THE SALE PRICE AND STOOD ATTACHED TO THE SALE PRICE OF THE PRODUCT. W ARRANTY OBLIGATION IS A PRESENT OBLIGATION AS A RESULT PAST EVENTS RESULTI NG IN AN OUT FLOW OF RESOURCES AND A RELIABLE ESTIMATE COULD BE MADE OF THE AMOUNT OF OBLIGATION. IF IT IS SO MADE IT IS A LIABILITY ALLOWABLE AS DED UCTION UNDER SECTION 37 OF THE ACT. THE HONBLE SUPREME COURT HAS ALSO LAID DOWN THAT THE ESTIMATE OF LIABILITY HAS TO BE ON THE BASIS OF STATISTICAL DAT A OF THE ASSESSEE AVAILABLE IN THE PAST. APPLYING THE ABOVE PRINCIPLE THE CLAIM O F THE ASSESSEE IN THE PRESENT CASE HAS TO BE ALLOWED. IN THE PRESENT CAS E THE ASSESSEE HAD FIELD THE NECESSARY DATA BEFORE THE AO BUT THE AO DID NOT THINK IT FIT TO EXAMINE THE CLAIM MADE BY THE ASSESSEE ON ITS MERITS. AS W E HAVE ALREADY SEEN THE PROVISION ON ACCOUNT OF WARRANTY COST WAS MADE BY T HE ASSESSEE BASED ON THE PAST EXPERIENCE AND THE AO DID NOT FIND ANY FA ULT IN SUCH ESTIMATION MADE BY THE ASSESSEE. IN SUCH CIRCUMSTANCES WE ARE OF THE VIEW THAT THE REQUEST OF THE LD. D.R TO REMAND THE MATTER TO THE AO FOR FRESH CONSIDERATION CANNOT BE ACCEPTED. WE ARE OF THE VIEW THAT PRIMA FACIE THE ESTIMATE OF LIABILITY BASED ON WHICH THE PROVISION FOR WARRANT COST WAS MADE BY THE ASSESSEE IS REASONABLE AND HAS TO BE ACCEPTED. WE THEREFORE DIRECT THAT THE ITA NO.6410/MUM/2008(A.Y.2005-06) 8 DEDUCTION CLAIMED BY THE ASSESSEE BE ALLOWED. GROU ND NO.2 IS ACCORDINGLY ALLOWED. 16. GROUND NO.3 & 4 RAISED BY THE ASSESSEE READS AS FOLLOWS: GROUND 3: TRANSFER OF LIFT DIVISION WHETHER LIAB LE FOR CAPITAL GAINS ADDITION OF RS. 1 83 61 060/-. 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LEARNED CIT(A) ERRED IN NOT CONSIDERING THE APPELLA NTS CLAIM THAT SINCE THE COST OF THE UNDERTAKING IS NOT ASCERTAINA BLE THE MACHINERY FOR COMPUTATION OF CAPITAL GAIN FAILS AN D THEREFORE CAPITAL GAINS ARE NOT CHARGEABLE AT ALL. 2. THE APPELLANT PRAYS THAT IN THE ABSENCE OF ASCERTAI NABLE COST OF ACQUISITION / COST OF IMPROVEMENT OF THE UNDERTAKIN G NO CAPITAL GAIN AMOUNTING TO RS.1 93 61 060/- ASSESSED BY THE AO OUGHT TO BE DELETED. WITHOUT PREJUDICE TO GROUND NO.3 GROUND NO.4 : DENIAL OF INDEXATION BENEFITS: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LEARNED CIT(A) ERRED IN HOLDING THAT THE TRANSACTIO N OF TRANSFER OF LIFT FIELD OPERATION UNDERTAKING IS THAT OF A SLUM P SALE AND THEREBY COMPUTING CAPITAL GAINS BY APPLYING PROVISI ONS OF SECTION 50B AND CONSEQUENTLY DENYING THE BENEFIT OF INDEXAT ION THAT WOULD BE OTHERWISE AVAILABLE UNDER THE PROVISO TO SECTION 48 OF THE ACT. 2. THE APPELLANT PRAYS THAT THE TRANSACTION OF TRANSFE R OF LIFT FIELD UNDERTAKING IS A TRANSACTION OF A SLUMP EXCHANGE AND THEREFORE IF GROUND 3 IS HELD AGAINST THE APPELLANT THEN THE BENEFIT OF INDEXATION OUGHT TO BE GRANTED IN COMPUTATION OF CA PITAL GAINS. 17. DURING THE YEAR THE ASSESSEE TRANSFERRED ITS LI FT DIVISION TO M/S. TIGER ELEVATORS PVT. LTD. IN THE COMPUTATION OF INCOME F ILED THE ASSESSEE CLAIMED THAT THE TRANSFER IS NOT TAXABLE UNDER THE HEAD CAP ITAL GAIN. DURING THE FINANCIAL YEAR AS ON 23 RD 2004 THE ASSESSEE TRANSFERRED ITS LIFT FIELD OPERATIONS UNDERTAKING (THE UNDERTAKING) TO TIGER ELEVATOR PVT. LTD. UNDER THE COURT APPROVED SCHEME OF ARRANGEMENT U/S. 391 READ WITH SECTION 394 OF THE COMPANIES ACT 1956. RELYING ON THE DECISIO N IN THE FOLLOWING CASES THE ASSESSEE TREATED THE UNDERTAKING AS A CAPITAL A SSET: 1. WEST COAST ELECT. V. CIT (107 ITR 483)(MAD) 2. SYNDICATE BANK V. CIT (155 ITR 681)(KAR) ITA NO.6410/MUM/2008(A.Y.2005-06) 9 3. KARVALVES LTD. VS. CIT (197 ITR 95)(KER) AND 4. CIT VS. MASTER RAGHVEER TRUSTS ( 151 ITR 368)(K AR) THE PLEA OF THE ASSESSEE WAS THAT IF THE UNDERTAKIN G IS TREATED AS A CAPITAL ASSET THEN THE TRANSFER IS OF THE VARIOUS ASSETS B USINESS CONTRACTS ETC. OF THE TRANSFEROR. SINCE THE PRICE FOR TRANSFER IS A LUMP SUM CONSIDERATION WITHOUT ANY VALUE ASSIGNED TO INDIVIDUAL ITEMS THE SALE CONSIDERATION AS WELL AS THE COST OF ACQUISITION OF THE VARIOUS ASSETS CO MPRISED IN THE TRANSFER COULD NOT BE ASCERTAINED. IN SUCH CASE THE COMPUT ATION PROVISIONS WOULD FAIL AND THEREFORE THERE CAN BE NO CHARGE TO TAX ON CAPITAL GAIN. IN OTHER WORDS IT WAS SUBMITTED THAT THE COST OF THE UNDERT AKING IS NOT ASCERTAINABLE AND THEREFORE THE MACHINERY FOR COMPUTING CAPITAL GAINS FAILS. RELIANCE WAS PLACED ON THE DECISION OF THE HONBLE ADHMEDABA D TRIBUNAL IN THE CASE OF INDUSTRIAL MACHINERY ASSOCIATES VS. CIT (81 ITD 482). THE ASSESSEE ALSO POINTED OUT THAT TRANSFER OF THE UNDERTAKING TOOK P LACE IN EXCHANGE FOR PREFERENCE SHARES AND BONDS ISSUED BY TIGER ELEVATO R PVT. LTD. THEREFORE THE ASSESSEE CLAIMED THAT THE TRANSFER IS AN EXCHAN GE AND NOT A SALE AND THEREFORE DOES NOT FALL WITHIN THE PURVIEW OF THE D EFINITION OF SLUMP SALE U/S. 2(42C) OF THE ACT. RELIANCE WAS PLACED ON THE DECI SION OF THE HONBLE SUPREME COURT IN THE CASE OF R.R.RAMKRISHNA PILLAI (66 ITR 725). 18. WITHOUT PREJUDICE TO THE ABOVE THE ASSESSEE CAL CULATED THE INDEXED COST OF ACQUISITION OF THE UNDERTAKING AND COMPUTED THE LONG TERM CAPITAL GAINS. THE ASSESSEE DEPOSITED AN AMOUNT OF RS. 15. 50 CRORES IN THE BONDS NOTIFIED U/S. 54EC OF THE ACT WITHIN SIX MONTHS FRO M THE DATE OF THE TRANSFER OF THE UNDERTAKING BEING DECEMBER 23 2004 WHICH IS THE DATE OF TRANSFER. THEREFORE THE RESULTANT LONG TERM CAPITAL GAINS SH OULD BE EXEMPT FROM TAX. 19. IN THE COURSE OF ASSESSMENT PROCEEDINGS THE AS SESSEE POINTED OUT THAT IT HAD TRANSFERRED THE LIFTS FIELD OPERATIONS UNDERTAKING AS A WHOLE AND THE UNDERTAKING IN SUCH CASES WOULD BE THE CAPITAL ASSET WITHIN THE MEANING ITA NO.6410/MUM/2008(A.Y.2005-06) 10 OF SECTION 2(14) OF THE ACT. THE PROCESS BY WHICH THE UNDERTAKING WAS TRANSFERRED WAS EXCHANGE. THEREFORE THERE WAS A TR ANSFER OF A CAPITAL ASSET BY WAY OF EXCHANGE. WITH REGARD TO OTHER INGREDIEN TS WHICH REQUIRED FOR LEVY OF CAPITAL GAINS NAMELY PROFITS OR GAINS ARIS ING FROM THE TRANSFER OF THE UNDERTAKING THE ASSESSEE SUBMITTED THAT NO PART OF CONSIDERATION WAS INDICATED AGAINST DIFFERENT AND DEFINITE ITEMS HAVI NG REGARD TO THEIR VALUATION ON THE DATE OF TRANSFER. THERE IS NO BASIS FOR EVEN APPORTIONING ANY CONSIDERATION FOR VARIOUS ASSETS COMPRISED IN THE T RANSFER. SINCE INDIVIDUAL ITEMS OF CAPITAL ASSETS HAVING NOT BEEN SOLD AND AG GREGATE OF INDIVIDUAL ASSETS IN THE FORM OF AN UNDERTAKING WAS A CAPITAL ASSET WHICH WAS TRANSFERRED THE TRANSFER BEING ONE OF THE GOING CO NCERNS IT IS NOT POSSIBLE TO ASCERTAIN THE PROFIT OR GAIN FROM TRANSFER OF UNDER TAKING. THE COST OF ACQUISITION AND THE COST OF IMPROVEMENT OF THE UNDE RTAKING CANNOT BE ASCERTAINED. IT THEREFORE BECOMES DIFFICULT TO AP PLY COMPUTATION UNDER PROVISIONS OF SECTION 48. THE ASSESSEE ARGUED THAT A BUSINESS UNDERTAKING AS A GOING CONCERN INCLUDES ALL RIGHTS ASSETS CON TINGENT OR DEFINITE CORPOREAL AND INCORPOREAL AND ALL INTEREST IN ADVAN TAGE PRESENT OR FUTURE. IT ALSO INCLUDES THE MANAGEMENT EXECUTIVE EMPLOYEES A ND ANYTHING WHICH GOES AS PART OF ORGANIZATION INCLUDING THE POTENTIA LITY OF THE ORGANIZATION TO GROW. IT CONTAINS A VARIETY OF ELEMENTS BOTH TANGI BLE AND INTANGIBLE. IT REMAINS IN INSUBSTANTIAL IN FORM AND NEBULOUS IN CH ARACTER. A GOING CONCERN IS A DYNAMIC CONCEPT CHARACTERIZED BY PEREN NIAL CHANGE INFLUENCED BY SOCIO-ECONOMIC ECOLOGY. A GOING CONCERN IS ESSEN TIALLY A FUNCTIONING LIVING ORGANISM POSSESSING ATTRIBUTES OF VITALITY GROWTH AND EVOLUTION. OBVIOUSLY IT WOULD NOT BE POSSIBLE TO CONCEPTUALIZE THE COST OF ACQUISITION OF SUCH A GOING CONCERN AS WELL AS DATE OF ACQUISITION THEREO F. IF THE COST OF ACQUISITION AND/OR THE DATE OF ACQUISITION OF THE ASSET CANNOT BE DETERMINED THEN IT CANNOT BE BROUGHT WITHIN THE PURVIEW OF SECTION 45 FOR LEVY AND COMPUTATION OF CAPITAL GAINS. LOOKING TO THE NATURE AND CHARACT ER OF THE CAPITAL ASSET BEING THE GOING CONCERN CONSIDERATION REALIZED BY THE ASSESSEE WOULD BE OUTSIDE THE PURVIEW OF CAPITAL GAINS UNDER SECTION 45. THE ASSESSEE RELIED ITA NO.6410/MUM/2008(A.Y.2005-06) 11 ON THE DECISION OF THE HON'BLE KARNATAKA HIGH COURT IN THE CASE OF SYNDICATE BANK LTD. VS. ADDL. CIT 155 ITR 681 WHEREIN IT WAS HELD THAT THERE IS A TRANSFER OF WHOLE CONCERNS AND WHERE NO PART OF THE AGREED PRICE IS INDICATED AGAINST DIFFERENT AND DEFINITE ITEMS HAVING REGARD TO THAT VALUATION AND CONSIDERATION CANNOT BE APPORTIONED ON CAPITAL ASSE TS IN SPECIE. IN SUCH CASES CAPITAL ASSETS CONSISTING OF BUSINESS OF WHO LE CONCERNS ARE TRANSFERRED IN SUCH CASE THE CONSIDERATION REALIZ ED BY AN ASSESSEE WOULD OUTSIDE THE PURVIEW OF CAPITAL GAINS U/S. 45. THE H ON'BLE HIGH COURT IN COMING TO THE ABOVE CONCLUSION FOLLOWED THE DECISIO N OF HON'BLE SUPREME COURT IN THE CASE OF CIT VS.B.C. SRINIVASA SHETTY 128 ITR 294. (SC). 20. THE ASSESSEE SUBMITTED THAT THE CONSIDERATION I S RECEIVED FOR THE INTEGRATED BUNCH OF ASSETS AND LIABILITIES WHICH C ONSTITUTED THIS PROFIT- MAKING APPARATUS IN THE FORM OF THE UNDERTAKING. T HE LIST OF ASSETS AND LIABILITIES OF THE UNDERTAKING TRANSFERRED THOUGH M AINLY COMPRISED OF CURRENT ASSETS YET THE ENTIRE CONSIDERATION CANNOT BE TREAT ED AS TOWARDS THE TANGIBLE ASSETS TRANSFERRED IN THE FORM OF CURRENT ASSETS AN D DOING SO WOULD BE AN ABSURD CONCLUSION. THE ASSESSEE REITERATED THAT IT IS NOT POSSIBLE TO APPORTION THE CONSIDERATION OVER THE ASSETS AND LIA BILITIES OF THE UNDERTAKING. WHAT WAS TRANSFERRED IS THE UNDERTAKI NG LOCK STOCK AND BARREL WHICH COMPRISED OF TANGIBLE AND INTANGIBLE ASSETS AND LIABILITIES WITHOUT ANY VALUES ASSIGNED TO ANY SPECIFIC ASSET O R LIABILITY. THE ASSESSEE ALSO POINTED OUT THAT THE FACT THAT THE CONSIDERATI ON IS NOT FOR SPECIFIC ASSETS OR LIABILITIES AS APPEARING IN THE BOOKS IS EVIDENT FROM THE AGREEMENT FOR THE TRANSFER OF BUSINESS EXECUTED BY THE ASSESSEE WHIC H SPECIFICALLY PROVIDES THAT THE CONSIDERATION IS BASED ON THE VALUE OF THE CONTRACTS ON HAND. THIS IS A SUFFICIENT PROOF THAT CONSIDERATION CANNOT BE APPORTIONED OVER SPECIFIC ASSETS LIABILITIES APPEARING IN THE BOOKS. THEREFO RE THE ASSESSEE SUBMITTED THAT THE ENTIRE CONSIDERATION IS TOWARDS CURRENT AS SETS TRANSFERRED IS INCORRECT. THE ASSESSEE FURTHER POINTED OUT THAT T HE NET CURRENT ASSETS IF VALUED AT THE CARRYING VALUES IN THE BOOKS WAS RS. 17.65 CRORES AS ON THE ITA NO.6410/MUM/2008(A.Y.2005-06) 12 EFFECTIVE DATE. AGAINST THE SAME THE ASSESSEE WAS ALLOTTED INSTRUMENTS CARRYING FACE VALUE OF RS.33 CRORES WHICH WERE VA LUED AT RS. 35.8 CRORES. CLEARLY IF THE TRANSFER INVOLVED ONLY TRANSFER OF NET CURRENT ASSETS WHAT WOULD HAVE BEEN PAID TO THE ASSESSEE WOULD HAVE BEE N ONLY THE CARRYING VALUES OF THE NET CURRENT ASSETS WHICH WOULD BE RS . 17.65 CRORES. 21. THE ASSESSEE SUBMITTED THAT IN A CASE WHERE A T RANSFER OF CAPITAL ASSET BEING AN UNDERTAKING TAKES PLACE BY WAY OF EXCHANGE THEN THERE IS NO INCIDENCE OF CAPITAL GAIN AND IN THIS REGARD THE A SSESSEE RELIED ON DECISION OF HONBLE SUPREME COURT IN THE CASE OF COMMISSION ER OF INCOME-TAX V. RAMAKRISHNA PILLAI (R.R.) 66 ITR 725 (SC). IN THE SAID DECISION THE QUESTION WAS WHEN SHARES ARE ALLOTTED IN CONSIDERATION OF TR ANSFER OF ASSETS THAT WOULD BE A CASE OF EXCHANGE AND NOT SALE. THE QUES TION AROSE IN THE CONTEXT OF PROVISO (II) TO SECTION 10(2)(VII) OF THE INDIAN INCOME-TAX ACT 1922 WHICH PROVIDED THAT IF THERE IS A SALE OF CAPITAL ASSET A ND IF THE SALE CONSIDERATION EXCEEDED THE IF THE PRICE PAID FOR OR ATTRIBUTABLE TO AN ASSET EXCEEDS THE WRITTEN DOWN VALUE OF THE ASSET THE DIFFERENCE WAS CHARGEABLE TO TAX. THE HONBLE COURT FURTHER OBSERVED A TRANSACTION BY WHICH A PERSON CARRYING ON BUSINE SS TRANSFERS THE ASSETS OF THAT BUSINESS TO ANOTHER ASSESSABLE ENTIT Y MAY TAKE DIFFERENT FORMS AND MAY HAVE DIFFERENT LEGAL EFFECTS. THE ASS ETS OF A BUSINESS MAY BE SOLD AT A FIXED PRICE TO A COMPANY PROMOTED BY A PERSON WHO CARRIED ON THE BUSINESS: WHERE THE PERSON CARRYING ON THE BUSINESS TRANSFERS THE ASSETS TO A COMPANY IN CONSIDERATION OF ALLOTMENT OF SHARES IT WOULD BE A CASE OF EXCHANGE AND NOT OF S ALE AND THE TRUE NATURE OF THE TRANSACTION WILL NOT BE ALTERED BECA USE OF STAMP DUTY OR OTHER REASONS THE VALUE OF THE ASSETS TRANSFERRED I S SHOWN AS EQUIVALENT TO THE FACE VALUE OF THE SHARES ALLOTTED . A PERSON CARRYING ON BUSINESS MAY AGREE WITH A COMPANY FLOATED BY HIM TH AT THE ASSETS BELONGING TO HIM SHALL BE TRANSFERRED TO THE COMPAN Y FOR A CERTAIN MONEY CONSIDERATION AND THAT IN SATISFACTION OF THE LIABILITY TO PAY THAT MONEY CONSIDERATION SHARES OF A CERTAIN FACE VALUE SHALL BE ALLOTTED TO THE TRANSFEROR. IN THAT CASE THERE ARE IN TRUTH TWO TRANSACTIONS ONE A TRANSACTION OF SALE AND THE OTHER A CONTRACT UNDER WHICH THE SHARES ARE ACCEPTED IN SATISFACTION OF THE LIABILITY TO PA Y THE PRICE. SECTION ITA NO.6410/MUM/2008(A.Y.2005-06) 13 10(2)(VII) PROVISO (II) ON THE PLAIN TERMS USED T HEREIN IS ATTRACTED IF THERE BE A SALE OF THE BUILDING MACHINERY OR PLANT AND THE AMOUNT FOR WHICH THE SALE TAKES PLACE EXCEEDS THE WRITTEN DOWN VALUE OF THE ASSETS TRANSFERRED. IF THERE BE NO SALE THE PROVIS O HAS NO APPLICATION. FOR THE APPLICATION OF THE PROVISO IT IS NECESSARY TO PRECISELY DETERMINE THE FACTS AND TO ASCERTAIN IN WHICH OF TH E DIFFERENT CATEGORIES THE TRANSACTION FALLS. 22. WE HAVE TO CLARIFY HERE THAT IF THE TRANSFER OF THE UNDERTAKING BY THE ASSESSEE IS CONSIDERED AS A SALE THEN THE PROVISION S OF SEC.2(42C) WOULD BE APPLICABLE AND BY VIRTUE OF SEC.50-B OF THE ACT WH ICH PROVIDES A MACHINERY FOR COMPUTATION OF CAPITAL GAIN ON SLUMP SALE IT I S POSSIBLE TO COMPUTE CAPITAL GAIN AND THE GAIN ON TRANSFER WOULD BE CHAR GEABLE TO TAX AS CAPITAL GAIN. 23. THEREFORE THE QUESTION BEFORE THE AO WAS WHETHE R THE TRANSFER BY THE ASSESSEE OF THE UNDERTAKING WAS BY WAY OF SALE OR E XCHANGE. IF IT IS BY SALE THEN THE PROVISIONS OF SEC.50-B OF THE ACT WOULD AP PLY AND CAPITAL GAIN CAN BE COMPUTED AND BROUGHT TO TAX. IF IT IS AN EXCHAN GE THEN THERE IS NO MACHINERY PROVISION FOR COMPUTING COST OF ACQUISITI ON OF THE UNDERTAKING AS INDIVIDUAL COSTS CANNOT BE ALLOCATED TO VARIOUS ASS ETS COMPRISED IN THE UNDERTAKING. SINCE THE MACHINERY PROVISION FAILS THE CHARGE TO TAX UNDER THE HEAD CAPITAL GAIN ALSO FAILS. 24. THE A.O DREW ATTENTION TO CERTAIN DECISIONS AND CALLED UPON THE ASSESSEE TO SHOW CAUSE AS TO WHY BASED ON THOSE DEC ISIONS THE TRANSACTION SHOULD NOT BE REGARDED AS A SALE. THE ASSESSEE SUB MITTED ITS RESPONSE AS FOLLOWS: 1. CIT VS. MOTORS AND GENERAL MOTORS PVT. 66 ITR 6 92(SC) THIS IS A SUPREME COURT DECISION WHEREIN IT HAS BEE N CLEARLY HELD THAT THE PRESENCE OF MONEY CONSIDERATION IS AN ESSENTIAL ELE MENT IN A TRANSACTION OF SALE. IF THE CONSIDERATION IS NOT MONEY BUT SOME O THER VALUABLE CONSIDERATION IT MAY BE AN EXCHANGE OR BARTER BUT N OT A SALE. THE ASSESSEE SUBMITTED THAT THIS DECISION IN FACT SUPPORTS ITS CASE IN ALL RESPECT. ITA NO.6410/MUM/2008(A.Y.2005-06) 14 2. CIT VS. AMAR TRANSPORT SERVICES 162 ITR 1(MP). IT WAS SUBMITTED THAT THIS DECISION AS WELL SUPPO RTS ITS CASE AND NOT THE CASE OF THE DEPARTMENT. IT WAS A CASE WHERE THE AG REEMENT FOR TRANSFER IN ITS SCHEDULE GAVE THE PARTICULARS OF EACH MOTOR VEHICLE TRANSFERRED AND MENTIONED ITS PRICE AGAINST IT. THE TOTAL PRICE OF RS. 1 51 565/- WAS CALCULATED ON THE BASIS OF PARTICULARS SPECIFIED AG AINST EACH OF THESE MOTOR VEHICLES IN THE SAID SCHEDULE. THEREAFTER THE AGRE EMENT PROVIDED THAT THE SALE PRICE WOULD BE PAID TO THE ASSESSEE FIRM BY TH E COMPANY IN THE FORM OF SHARES OF THE COMPANY OF THE VALUE OF RS.500 EACH I N THE NAMES OF THE PARTNERS OF THE ASSESSEE FIRM AS INDICATED IN THE A GREEMENT. THE ASSESSEE POINTED OUT THAT IT IS ON THIS BASIS THAT THE MP HI GH COURT HELD THAT THE TRANSACTION IS IN THE NATURE OF SALE AND NOT AN EXC HANGE. THE ASSESSEE POINTED OUT THAT IN ITS CASE THE CONSIDERATION WAS NOT MEASURED IN MONETARY TERMS AT ALL. ATTENTION OF THE AO WAS INVITED TO C LAUSE 14.1 OF THE COURT APPROVED SCHEME OF ARRANGEMENT WHICH PROVIDED FOR I SSUANCE OF PREFERENCE SHARES AND BONDS IN CONSIDERATION OF THE TRANSFER O F THE RELEVANT BUSINESS. THUS THE ASSESSEE DISTINGUISHED ITS CASE FROM THAT OF THE MP HIGH COURT. 3. ORIENT TRADING CO. LTD. 224 ITR 371 (SC). THIS IS ALSO A SUPREME COURT DECISION. HERE THE AS SESSEE WAS A DEALER IN SHARES. HE HELD SHARES IN COMPANY A. A NEW COMPA NY WAS FLOATED AND IT MADE AN OFFER TO OBTAIN SHARES OF A CO. A IN EXCHA NGE FOR ALLOTMENT OF ITS OWN SHARES AT A PARTICULAR PRICE PER SHARES. THE S UPREME COURT HELD THAT DIFFERENCE BETWEEN THE MARKET PRICE OF THE NEW COMP ANIES SHARES OVER THE COST PRICE OF THE SHARES OF COMPANY A IS TAXABLE AS BUSINESS PROFIT. THE ASSESSEE POINTED OUT THAT IN THE SAID CASE IT WAS U NDISPUTED CASE OF SHARES HELD AS STOCK IN TRADE AND THAT IN THE CASE OF THE ASSESSEE IT WAS NOT SO. SECONDLY IN THIS DECISION THE MONEY CONSIDERATION FOR THE SHARES OF COMPANY A WAS NOT DETERMINED AND HENCE IT WAS CLEAR LY AND EXCHANGE. IN ITA NO.6410/MUM/2008(A.Y.2005-06) 15 OUR CASE AS WELL THE MONEY CONSIDERATION WAS NOT D ETERMINED AND HENCE IT WILL HAVE TO BE REGARDED AS AN EXCHANGE. 4. 190 CTR 569 (SC) THIS IS A SUPREME COURT DECISION WHICH HOLDS THAT T HE DOT PROVIDING TELEPHONE CONNECTIONS CONSTITUTES SALE INVOLVING TR ANSFER OF RIGHT TO USE GOODS AND IT IS OBLIGED TO FILE RETURN UNDER THE UP TRADE TAX ACT NOTWITHSTANDING THE FACT THAT THE RECEIPTS ARE ALRE ADY SUBJECT TO SERVICE TAX. THE ASSESSEE SUBMITTED THAT THE SAID DECISION WAS N OT OF ANY RELEVANCE TO THE ISSUE INVOLVED IN ITS ASSESSMENT. 25. THE ABOVE SUBMISSIONS OF THE ASSESSEE WAS CONSI DERED BY THE AO. THE AO INVITED ATTENTION OF THE ASSESSEE TO ANOTHER DEC ISION OF SUPREME COURT IN CIT VS. MOTOR GENERAL STORES PVT. LTD. (66 ITR 692) AND REQUESTED TO SUBSTANTIATE WHY THE TRANSACTION UNDER CONSIDERATIO N SHOULD NOT BE HELD AS THAT OF SALE. ACCORDING TO THE AO IN THE SAID CAS E THE CONSIDERATION FOR TRANSFER OF CINEMA HALL WAS FIXED IN MONEY AT RS. 1 20 000/- . THEREAFTER THE CONSIDERATION WAS PAID BY WAY OF TRANSFER OF SHARES . MOREOVER THE TRANSFER DEED WAS CALLED EXCHANGE DEED. ACCORDING TO THE AO THE TRANSFER DEED IN THE CASE OF THE ASSESSEE WAS NOT CALLED AN EXCHANG E DEED BUT IT WAS A DEED OF TRANSFER OF BUSINESS AS A GOING CONCERN AND THE TRANSFER HAS BEEN APPROVED BY BOMBAY HIGH COURT. 27. FURTHER ACCORDING TO THE AO THE FACTS OF THE C ASE OF THE DECISION ORIENT TRADING CO. LTD.(SUPRA) AND THE FACTS OF THE ASSESSEES CASE WERE ALSO SIMILAR AND THE SURPLUS ON TRANSFER OF SHARES BY WA Y OF EXCHANGE HAS BEEN HELD TO BE TAXABLE. SIMILARLY IN SUPREME COURT IN ANARKALI SARABHAI VS. CIT (224 ITR 422) HAS HELD THAT REDEMPTION OF PREFERENC E SHARES SQUARELY COMES WITHIN SALE AS DEFINED IN SECTION 2(47) AND THEREFO RE IT IS LIABLE TO CAPITAL GAIN TAX. CONSIDERING THE ABOVE THE CLAIM OF THE ASSES SEE THAT TRANSFER OF ITS LIFT ITA NO.6410/MUM/2008(A.Y.2005-06) 16 DIVISION IS AN EXCHANGE AND NOT SALE AND THEREFORE NOT LIABLE TO TAX WAS HELD BY THE AO TO BE NOT CORRECT AND THE SAME WAS HENCE REJECTED. THE AO HELD THAT IN SECTION 2(42C) OF THE I.T. ACT SLUMP SALE MEANS THE TRANSFER OF ONE OR MORE UNDERTAKING AS A RESULT OF THE SALE FOR A LUMP SUM CONSIDERATION WITHOUT VALUES BEING ASSIGNED TO THE INDIVIDUAL ASS ETS AND LIABILITIES IN SUCH SALES. THE TRANSACTION OF THE ASSESSEE FITS INTO T HE ABOVE DEFINITION OF SLUMP SALE SQUARE. THEREFORE THE AO HELD THAT THE TRANS ACTION OF TRANSFER OF LIFT DIVISION AS A TRANSACTION OF SLUMP SALE AND THIS WA S TAXABLE AS PER PROVISIONS OF SECTION 50B OF I.T. ACT AND THE SAME WAS TAXED ACCORDINGLY. 28. THEREAFTER AO BASED ON THE COMPUTATION OF CAPIT AL GAIN WHICH WAS GIVEN BY THE ASSESSEE WITHOUT PREJUDICE TO ITS CONT ENTION THAT NO CAPITAL GAIN IS NOT CHARGEABLE TO TAX IN ITS CASE DETERMINED CA PITAL GAIN. 29. THE CIT(A) CONFIRMED THE ORDER OF THE AO OBSERV ING AS FOLLOWS: 4.3 I HAVE DULY CONSIDERED THE SUBMISSION OF THE A.R. HOWEVER I DO NOT AGREE THAT THE TRANSFER OF LIFT DIVISION AMOUNT S TO EXCHANGE. THE AO HAS RIGHTLY CONCLUDED THAT THE TRANSFER BY ANY M ODE AS DEFINED IN SECTION 2(42C) IS TO BE REGARDED AS SALE FOR THE PU RPOSE OF I.T. ACT AND LTCG IS TO BE LEVIED U/S. 50B. THE DECISION OF SRI NIVAS SHETTY(128 ITR 294) IS PRIOR TO INTRODUCTION OF SECTION 50B WHICH WAS INCORPORATED IN ORDER TO TIDE OVER THE DIFFICULTY OF TAXING CAPITAL GAIN ON SALE OF RUNNING BUSINESS WHERE THE VALUE OF INDIVIDUAL ASSET IS NO T ASCERTAINABLE. HENCE THE DECISIONS CITED BY THE A.R ARE NOT APPLI CABLE TO THE FACTS OF THE CASE. I ALSO DO NOT AGREE WITH THE SUBMISSION OF THE A.R THAT THE INDEXATION IS REQUIRED TO BE MADE FOR CHARGING LONG TERM CAPITAL GAIN IN THIS CASE. LONG TERM CAPITAL GAIN U/S. 50B DOES NOT REQUIRE ANY INDEXATION. HENCE THE ADDITION MADE BY THE AO IS CONFIRMED AND THE APPEAL ON THESE GROUNDS ARE DISMISSED. 30. AGGRIEVED BY THE ORDER OF THE CIT(A) THE ASSES SEE HAS RAISED GROUND NO.4 AND 5 BEFORE THE TRIBUNAL. ITA NO.6410/MUM/2008(A.Y.2005-06) 17 31. THE LEARNED COUNSEL FOR THE ASSESSEE DREW OUR A TTENTION TO THE SCHEME OF ARRANGEMENT WHICH WAS APPROVED BY THE HONBLE HI GH COURT WHEREBY THE UNDERTAKING WAS TRANSFERRED BY THE ASSESSEE TO TIGE R ELEVATORS (P) LTD. AND SUBMITTED THAT THE TRANSFER WAS IN CONSIDERATION OF ISSUE OF PREFERENCE SHARES BY THE LATER TO THE ASSESSEE. HE THEN DREW OUR ATTENTION TO THE DEFINITION OF SLUM SALE AS GIVEN IN SECTION 2(42C) OF THE ACT AND SUBMITTED THAT THE DEFINITION CONTEMPLATE TRANSFER OF ONE OR MORE UNDERTAKINGS AS A RESULT OF SALE FOR A LUMP SUM CONSIDERATION. HE LA ID EMPHASIS ON THE FACT THAT THE TRANSFER OF THE UNDERTAKING SHOULD BE AS A RESULT OF SALE. IN THIS REGARD HE ALSO SUBMITTED THAT EXPRESSION OF TRANSF ER IN RELATION TO THE CAPITAL ASSET HAS BEEN DEFINED UNDER SECTION 2(47) OF THE ACT TO INCLUDE MANY FORMS OF TRANSFER LIKE EXCHANGE RELINQUISHMENT CO NVERSION OF THE CAPITAL ASSETS INTO STOCK IN TRADE ETC. HIS SUBMISSION WAS THAT THE TRANSFER OF CAPITAL ASSET COULD BE IN SEVERAL FORMS; BUT LEGISL ATURE WHILE DEFINING SLUMP SALE HAS THOUGHT IT FIT TO INCLUDE ONLY TRANSFER BY WAY OF SALE AND NOT IN ANY OTHER MODE OF TRANSFER. IT WAS SUBMITTED BY HIM THA T EXPRESSION SALE HAS NOT BEEN DEFINED IN THE ACT; AND THEREFORE THE DEFINIT ION OF TERM SALE AS APPEARING IN SECTION 54 OF THE TRANSFER OF PROPERTY ACT 1882 AND SECTION 4 OF THE SALE OF GOODS ACT 1930 HAVE TO BE LOOKED INTO. UNDER THE TRANSFER OF PROPERTY ACT THE EXPRESSION SALE HAS BEEN DEFINE D AS A TRANSFER OF OWNERSHIP IN EXCHANGE FOR A PRICE PAID OR PROMISED OR PART PAID AND PART PROMISED. THE DEFINITION OF THE SALE UNDER THE S ALES OF GOODS ACT SALE HAS BEEN DEFINED AS CONTRACT WHEREBY THE SELLER TRANSF ERS OR AGREES TO TRANSFER THE PROPERTY IN GOODS TO THE BUYER FOR A PRICE. THE AGREEMENT TO SALE BECOME A SALE WHEN THE TIME ELAPSES OR THE CONDITIONS ARE FULFILLED SUBJECT TO WHICH THE PROPERTY IN GOODS IS TO BE TRANSFERRED. SECTION 2(1) OF THE SALES OF GOODS ACT DEFINES PRICE TO MEANS THE MONEY CONSIDERATIO N FOR A SALE OF GOODS. 32. REFERRING TO THE AFORESAID DEFINITION OF SALE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT SALE IS ALWAYS A CONTRACT B ETWEEN 2 PERSONS. HE SUBMITTED THAT IN THE CASE OF THE ASSESSEE THE UND ERTAKING WAS TRANSFERRED ITA NO.6410/MUM/2008(A.Y.2005-06) 18 IN CONSIDERATION OF ISSUE OF PREFERENCE SHARES AND NOT FOR MONETARY CONSIDERATION. IN THE CIRCUMSTANCES HE SUBMITTED T HAT THERE WAS NO SALE OF THE UNDERTAKING; AND THEREFORE THE TRANSFER OF UND ERTAKING OF COULD NOT SAID TO BE A SLUMP SALE FOR THE PROPOSITION THAT TRANSFE R OF UNDERTAKING. PURSUANT TO THE ORDERS OF COURT CANNOT SAID TO BE A SALE. H E RELIED ON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF CIT VS. MOTORS AND GENERAL STORES (P) LTD. 66 ITR 692 (SC) WHEREIN IT HAS BEEN LAID DOW N THAT THE EXPRESSION SALE NOT HAVING BEEN DEFINED IN THE INCOME TAX AC T 1922; THE MEANING OR THE WORDS HAVE TO BE CONSTRUED BY REFERENCE TO OTHE R ENACTMENTS. 33. THE LEARNED COUNSEL THEN SUBMITTED THAT WHEN ON CE IT IS HELD THAT THE TRANSFER IN THE PRESENT CASE DOES NOT FALL WITHIN T HE AMBIT OF SECTION 50B OF THE ACT THE SAME WOULD HAVE TO BE TESTED IN THE LI GHT OF THE PARAMETERS LAID DOWN IN SECTION 45 AND SECTION 48 OF THE ACT. THE S ALE IN THE PRESENT CASE BEING OF A GOING CONCERN IT WAS NOT POSSIBLE TO AS CERTAIN COST OF ACQUISITION AND THE COST OF IMPROVEMENT. APART FROM THE ABOVE THERE WAS ALSO NO CONSIDERATION RECEIVED ON TRANSFER. IN VIEW OF THE ABOVE SINCE COMPUTATION PROVISIONS CANNOT BE APPLIED IN THE PRESENT CASE C HARGE OF CAPITAL GAIN TO TAX SHOULD ALSO FAIL. IN SUPPORT OF THE ABOVE PROPO SITION LEARNED COUNSEL FOR THE ASSESSEE RELIED ON THE DECISION OF ITAT IN THE CASE OF INDUSTRIAL MACHINERY ASSOCIATES VS. CIT 81 ITD 482 (AHD) 34. THE AFORESAID DECISION RELIED ON TO THE COMPUTA TION OF CAPITAL GAIN IN THE CASE OF SALE OF A GOING CONCERN. THE AFORESAID CASES ALSO RELATED TO THE PERIOD PRIOR TO INSERTION OF SECTION 50B OF THE ACT . IN THE AFORESAID DECISIONS THE PRINCIPLES THAT IN THE ABSENCE OF PROVISIONS OF SECTION 50B OF THE ACT SALE OF BUSINESS UNDERTAKING (TRANSFER) AS GOING CONCERN S WILL NOT ATTRACT CHARGE OF TAX UNDER THE HEAD CAPITAL GAINS FOR THE REASO N THAT IT WAS NOT POSSIBLE TO CONCEPTUALIZED COST OF ACQUISITION AS WELL AS DATE OF ACQUISITION. THE SUBMISSION OF LEARNED COUNSEL FOR THE ASSESSEE WAS THAT THE CHARGE OF CAPITAL GAINS IN THE CASE OF ASSESSEE SHOULD ALSO BE FAILS FOR IDENTICAL REASONS. ITA NO.6410/MUM/2008(A.Y.2005-06) 19 35. THE LEARNED D.R. ON THE OTHER HAND SUBMITTED TH AT SCHEME OF ARRANGEMENT BY WHICH THE UNDERTAKING WAS TRANSFERRE D DETERMINES THE VALUE IN TERMS OF MONEY AND ONLY THE MODE OF DISCHARGE TH AT LIABILITY WAS BY ISSUE OF PREFERENCE SHARES AND THEREFORE IT IS NOT A CASE OF EXCHANGE. IT WAS HIS SUBMISSION THAT THE AGREEMENT BETWEEN THE PARTIES B Y WHICH PREFERENCE SHARES WERE ISSUED WAS A VEIL AND THE REAL NATURE O F THE TRANSACTION IS SALE. IN THIS REGARD HE POINTED OUT THAT IMMEDIATELY AFTE R THE TRANSACTION THE PREFERENCE SHARES WERE REDEEMED. IT WAS ALSO SUBMI TTED THAT IT COULD BE CONSIDERED AS ITEMIZED SALE OF ASSETS AS THE ASSESS EE HAS LISTED INDIVIDUAL ITEMS OF ASSETS TRANSFERRED AND COMPUTED CAPITAL GA IN. LEARNED DR OF THE REVENUE PLACED STRONG RELIANCE ON THE DECISIONS OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF PREMIER AUTOMOBILE LTD. VS. IT O 264 ITR 193 (BOM).THE AFORESAID DECISION RELATES TO THE ASSESSMENT YEAR P RIOR TO INSERTION OF SECTION 50B OF THE ACT. THE TRANSFER OF CAPITAL ASSETS IN T HE FORM OF AN UNDERTAKING WAS SOUGHT TO BE BROUGHT TO TAX BY THE REVENUE. THE STAND OF THE REVENUE WAS THAT THERE WAS A SALE OF INDIVIDUALIZED ITEMS O F ASSETS; WHEREAS THE STAND OF THE ASSESSEE WAS THAT THERE WAS A SALE OF THE ENTIRE UNDERTAKINGS FOR A LUMP SUM CONSIDERATION. THE COURT HELD THAT IT WA S A CASE OF SALE OF UNDERTAKING AS A WHOLE AND THAT THE SALE OF AN UNDE RTAKING AS A WHOLE WOULD BE SALE OF A CAPITAL ASSET. THE COURT THEREF ORE HELD THAT IT WAS SLUMP SALE AND REMANDED THE MATTER TO THE TRIBUNAL FOR FR ESH CONSIDERATION REGARDING COMPUTATION OF CAPITAL GAINS. ACCORDING T O THE LEARNED DR OF THE REVENUE THE AFORESAID DECISION IS AN AUTHORITY FOR PROPOSITION THAT EVEN PRIOR TO INSERTION OF SECTION 50B OF THE ACT SLUMP SALE OF THE BUSINESS UNDERTAKING AS A WHOLE IS LIABLE TO TAX TO CHARGE O F CAPITAL GAIN TAX. THE LEARNED D.R. ALSO TRIED TO ARGUE THAT IT WAS CASE O F ITEMIZED SALE OF ASSETS BUT THIS ARGUMENT AS RIGHTLY CONTENDED BY THE LEARNED C OUNSEL FOR THE ASSESSEE IS CONTRARY TO THE AOS ORDER THAT SEC.50-B OF THE ACT APPLIES. ITA NO.6410/MUM/2008(A.Y.2005-06) 20 36. LEARNED COUNSEL FOR THE ASSESSEE ON THE OTHER H AND SUBMITTED THAT THE FACTS IN THE CASE OF PREMIER AUTOMOBILE LTD. (S UPRA) ARE CLEARLY DISTINGUISHABLE IN AS MUCH AS THE TRANSFER IN THE A FORESAID CASE WAS IN THE FORM OF A SALE; WHEREAS IN THE CASE OF THE ASSESSE E IT WAS A TRANSFER CONSEQUENT TO SCHEME OF ARRANGEMENT. THE NEXT ASPEC T WHICH WAS POINTED OUT BY LEARNED COUNSEL FOR THE ASSESSEE WAS THE FAC T THAT THE COURT WAS NOT CALLED UPON TO DECIDE THE QUESTION OF COMPUTATION O F CAPITAL GAINS OR CHARGE OF CAPITAL GAINS IN RESPECT OF TRANSACTION; BUT WAS ONLY CALLED UPON TO DECIDE AS TO WHETHER THE SALE IN QUESTION WAS SALE OF INDI VIDUALIZED ITEMS OR SALE OR A SLUMP SALE I.E. SALE OF THE UNDERTAKING FOR LUMP SUM CONSIDERATION WITHOUT VALUES BEING ASSIGNED TO THE INDIVIDUAL ASSET AND L IABILITIES. THE COURT ANSWERED THE AFORESAID QUESTION HOLDING THAT THE TR ANSACTION WAS A SLUMP SALE. WITH REGARD TO QUESTION WHETHER THE SAME WAS CHARGEABLE TO TAX U/S. 45 THE COURT REMANDED THE MATTER TO THE ASSESSING OFFICER TO DECIDE WHETHER ANY CAPITAL GAIN TAX LIABILITY ARISES. IT W AS THEREFORE SUBMITTED THAT IN RESPECT OF THE ASSESSMENT YEAR PRIOR TO INSERTIO N OF SECTION 50B OF THE ACT THERE CAN BE NO CHARGE OF CAPITAL GAIN WHEN THERE IS TRANSFER OF AN UNDERTAKING IN THE FORM OF SLUMP SALE. 37. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE E XPRESSION TRANSFER AS DEFINED IN SECTION 2(47) OF THE ACT INCLUDES SEVER AL FORMS OF TRANSFER; AND SALE IS ONLY ONE FORM OF TRANSFER. THE DEFINITION O F SLUMP SALE IN SECTION 2(42C) OF THE ACT READS AS FOLLOWS :- SLUMP SALE MEANS THE TRANSFER OF ONE OR MORE U NDERTAKINGS AS A RESULT OF THE SALE FOR A LUMP SUM CONSIDERATION WIT HOUT VALUES BEING ASSIGNED TO THE INDIVIDUAL ASSETS AND LIABILITIES I N SUCH SALES. EXPLANATION 1 :- FOR THE PURPOSE OF THIS CLAUSE UN DERTAKING SHALL HAVE THE MEANING ASSIGNED TO IT IN EXPLANATION 1 TO CLAUSE (19AA). ITA NO.6410/MUM/2008(A.Y.2005-06) 21 EXPLANATION 2 :- FOR THE REMOVAL OF DOUBTS IT IS H EREBY DECLARED THAT THE DETERMINATION OF THE VALUE OF AN ASSET OR LIABI LITY FOR THE SOLE PURPOSE OF PAYMENT OF STAMP DUTY REGISTRATION FEES OR OTHER SIMILAR TAXES OR FEES SHALL NOT BE REGARDED AS ASSIGNMENT OF VALUES TO INDIVIDUAL ASSETS OR LIABILITIES. 38. FROM THE READING OF THE ABOVE DEFINITION IT IS CLEAR THAT IT IS ONLY A TRANSFER AS A RESULT OF SALE THAT CAN BE CONSTRUED AS A SLUMP SALE. THEREFORE ANY TRANSFER OF AN UNDERTAKING OTHERWISE THEN AS A RESULT OF SALE WILL NOT QUALIFY AS A SLUMP SALE. THE QUESTION THAT ARISES F OR CONSIDERATION IS AS TO WHETHER TRANSFER OF TFD BY THE ASSESSEE TO ITEL COU LD BE CONSTRUED AS A SALE. 39. HON'BLE SUPREME COURT IN THE CASE OF MOTOR GENE RAL STORES PVT. LTD. (SUPRA) WAS CONCERNED WITH THE CASE WHERE THE ASSE SSEE COMPANY TRANSFERRED ALL ASSETS OF CINEMA HOUSE TO ONE A A ND IN EXCHANGE GOT PREFERENCE SHARES IN A SUGAR COMPANY IN CONSIDERATI ON OF TRANSFER OF ASSETS. UNDER THE PROVISIONS OF SECTION 10(2)(VII) OF THE I .T. ACT 1922 PROFITS OR GAINS ON SALE OF BUILDING WHERE THE AMOUNT OF SALE CONSID ERATION EXCEEDS THE WRITTEN DOWN VALUE OF THE ASSETS CAN BE BROUGHT TO TAX AS BUSINESS INCOME. THE COMPANY OF THE ASSESSEE WAS THAT THERE WAS NO S ALE AND THE TRANSACTION IN QUESTION WAS ONLY A EXCHANGE; AND THEREFORE THE SAME CANNOT BE BROUGHT TO TAX. HON'BLE SUPREME COURT HELD AS FOLLOWS :- SALE IS A TRANSFER OF PROPERTY IN GOODS OR OF THE OWNERSHIP IN IMMOVABLE PROPERTY FOR A MONEY CONSIDERATION. BUT IN EXCHANGE THERE IS A RECIPROCAL TRANSFER OF INTEREST IN IMMOVABLE P ROPERTY A CORRESPONDING TRANSFER OF INTEREST IN MOVABLE PROPE RTY BEING DENOTED BY THE WORD BARTER. THE DIFFERENCE BETWEEN A SALE AND AN EXCHANGE IS THIS THAT IN THE FORMER THE PRICE IS PAID IN MONEY WHILST IN THE LATTER IT IS PAID IN GOODS BY WAY OF BARTER. ITA NO.6410/MUM/2008(A.Y.2005-06) 22 THE PRESENCE OF MONEY CONSIDERATION IS AN ESSENTIAL ELEMENT IN A TRANSACTION OF SALE. IF THE CONSIDERATION IS NOT MO NEY BUT SOME OTHER VALUABLE CONSIDERATION IT MAY BE AN EXCHANGE OR BAR TER BUT NOT A SALE. 40. IN THE LIGHT OF THE PRINCIPLES LAID DOWN IN THE AFORESAID JUDICIAL PRONOUNCEMENTS WE ARE OF THE VIEW THAT THE TRANSFE R OF THE UNDERTAKING BY THE ASSESSEE CONSEQUENT TO SCHEME OF ARRANGEMENT AP PROVED BY HON'BLE BOMBAY HIGH COURT CANNOT SAID TO BE A SALE OF UNDER TAKING BY THE ASSESSEE. IN THIS REGARD IT IS NECESSARY TO LOOK INTO THE VA RIOUS CLAUSE OF THE SCHEME OF ARRANGEMENT APPROVED BY THE HONBLE COURT: CLAUSE-3.1 OF THE SCHEME PROVIDES AS FOLLOWS: WITH EFFECT FROM THE APPOINTED DATE ALL OF THE TR ANSFEROR COMPANYS RIGHTS TITLE AND INTEREST IN AND TO THE TRANSFERRE D ASSETS SHALL PURSUANT TO SECTIONS 391 AND 394 OF THE ACT AND WIT HOUT ANY FURTHER ACT OR DEED BE TRANSFERRED TO AND BE VESTED IN OR BE DEEMED TO HAVE BEEN TRANSFERRED TO AND VESTED IN THE TRANSFEREE CO MPANY SO AS TO BECOME AS AND FROM THE APPOINTED DATE THE ASSETS RIGHTS TITLE AND INTEREST OF THE TRANSFEREE COMPANY. CLAUSE 1.36 DEFINES TRANSFERRED ASSETS TO MEAN THE FOLLOWING: 1.36 TRANSFERRED ASSETS MEANS ALL OF THE ASSETS PROPERTIES AND GOODWILL OWNED BY THE TRANSFEROR COMPANY AND USED P RIMARILY IN CONNECTION WITH THE TRANSFERRED BUSINESS AS A GOING CONCERN WHETHER IN POSSESSION OR REVERSION CORPORAL OR INCORPORAL TANGIBLE OR INTANGIBLE REAL PERSONAL OR MIXED ACCRUED OR OT HERWISE AND WHETHER SHOWN OR REFLECTED ON THE BOOKS AND RECORDS OF THE TRANSFEROR COMPANY(EXCLUDING ONLY THE EXCLUDED ASSETS) INCLUD ING ALL OF THE TRANSFEROR COMPANYS RIGHT TITLE AND INTEREST IN A ND TO THE FOLLOWING AS THE SAME MAY EXIST AT THE APPOINTED DATE. 1.36.1 ALL MOVABLE ASSETS THAT IS TO SAY VEHICLES EQUIP MENT FURNITURE COMPUTER HARDWARE TOOLS MACHINES AND O THER ITEMS OF MOVEABLE ASSETS OF EVERY KIND OWNED OR LEA SED BY THE TRANSFEROR COMPANY TOGETHER WITH ANY WARRANTY BY T HE MANUFACTURERS OR THE SELLERS OR LESSORS OF ANY ITEM THEREOF AND ALL MAINTENANCE RECORDS AND OTHER DOCUMENTS RELATI NG THERETO; 1.36.2 ALL ACCOUNTS RECEIVABLES NET OF PROVISIONS AS SHOW N IN 2004 FINANCIAL STATEMENTS SUNDRY DEBTORS BILLS OF EXCH ANGE DEPOSITS INCLUDING SECURITY DEPOSITS EARNEST MONEY S AND DOWN-PAYMENTS FROM CUSTOMERS LOANS AND ADVANCES P REPAID ITA NO.6410/MUM/2008(A.Y.2005-06) 23 EXPENSES AND OTHER CURRENT ASSETS (OTHER THAN CASH AND CASH EQUIVALENTS) OF THE TRANSFEROR COMPANY ARISING FRO M THE OPERATION OF THE TRANSFERRED BUSINESS; 1.36.3 ALL INVENTORIES OF RAW MATERIALS WORK-IN-PROGRESS SPARE PARTS REPLACEMENT AND COMPONENT PARTS (INCLUDING INVENTOR IES HELD BY CUSTOMERS ON A CONSIGNMENT BASIS) AND OFFICE P ACKAGING AND OTHER SUPPLIES; 1.36.4 ALL PERMITS THAT ARE TRANSFERABLE AND ARE RELATING TO THE TRANSFERRED BUSINESS AS LISTED IN SCHEDULE SOA 1.36 .4. 1.36.5 ALL TENANCIES LEASEHOLDS AND LEASEHOLD IMPROVEMENT S LISTED IN SCHEDULE SOA 1.36.5 ( TO THE EXTENT SUCH TENANCIES LEASEHOLDS ARE TRANSFERABLE BY VIRTUE OF THE CONTRACTS OF TENA NCY). 1.36.6 ALL TRADE MARKS SERVICE MARKS BUSINESS NAMES TRA DE NAMES (INCLUDING IN PARTICULAR OLYMPUS ELEVATORS) PATENT S AND INVENTIONS THAT MAY BE PATENTABLE COPY RIGHTS IN T HE INTERNET WEBSITE OLYMPUSELEVATORS COM AND DOMAIN NAMES KNO W-HOW CONFIDENTIAL OR PROPRIETARY INFORMATION ( SUCH AS C USTOMER LISTS TECHNICAL INFORMATION DATA DRAWINGS PLANS AND BLUEPRINTS) LICENSES AND RIGHTS WHICH ARE NECESSAR Y FOR USE IN CONNECTION WITH THE TRANSFERRED BUSINESS AND ALL OT HER INTELLECTUAL PROPERTY RIGHTS PRIVILEGES ALL OTHER RIGHTS BENEFITS AND ENTITLEMENTS AND OTHER BENEFITS (INCLUDING THE BENEFIT OF ANY APPLICATIONS MADE THEREFORE) POWERS AND FACILIT IES OF EVERY KIND NATURE AND DESCRIPTION WHATSOEVER; 1.36.7 BENEFITS OF ALL AGREEMENTS CONTRACTS BIDS ORDERS PROPOSALS AND OTHER ARRANGEMENTS WHETHER WRITTEN OR ORAL TO WHICH THE TRANSFEROR COMPANY IS A PARTY AS OF THE APPOINTED D ATE INCLUDING IN PARTICULAR CONTRACTS OR AGREEMENTS FO R SUPPLY AND MAINTENANCE OF ELEVATORS AS CERTIFIED BY THE STAT UTORY AUDITORS OF THE TRANSFEROR COMPANY FORTHWITH UPON T HE EFFECTIVE DATE. 1.36.8 ALL COMPUTER SOFTWARE AND PROGRAMS INCLUDING EXECU TABLE CODE SOURCE CODE GRAPHICAL USER INTERFACES DATAB ASES ALL ASSOCIATED DOCUMENTATION WHETHER ELECTRONIC OR PA PER COPIED FORM WHICH RELATE PRIMARILY TO THE TRANSFERRED BU SINESS. 1.36.9 ALL RECORDS FILES PAPERS ENGINEERING AND PROCESS INFORMATION MANUALS DATA CATALOGUES QUOTATIONS SALES AND AD VERTISING MATERIALS LIST OF PRESENT AND FORMER CUSTOMERS AND SUPPLIERS CUSTOMER CREDIT INFORMATION CUSTOMER PRICING INFOR MATION AND OTHER RECORDS IN CONNECTION WITH OR RELATING TO THE TRANSFERRED BUSINESS; 1.36.10 ALL ASSETS SCHEDULE SOA 1.36.10 PROVIDED FOR BY THE TRANSFEROR COMPANY TO FUND ALL OF THE LIABILITIES RELATED TO T HE EMPLOYEES TO BE TRANSFERRED TO THE TRANSFEREE COMPANY UNDER T HE SCHEME ( THE EMPLOYEE ASSETS) AND ITA NO.6410/MUM/2008(A.Y.2005-06) 24 1.36.11 ALL OTHER INTEREST IN CONNECTION WITH OR RELATING T O THE TRANSFERRED BUSINESS. CLAUSE-14.1 OF THE SCHEME PROVIDES AS FOLLOWS: 14.1 IN CONSIDERATION FOR THE TRANSFER OF THE TRA NSFERRED BUSINESS THE TRANSFEREE COMPANY SHALL ALLOT TO THE TRANSFER OR COMPANY; 14.1.1 24 750 000 PREFERENCE SHARES OF THE FACE VALUE OF R S. EACH AT PAR IN THE CAPITAL OF THE TRANSFEREE COMPANY REDEE MABLE AT PAR AT THE OPTION OF THE TRANSFEROR COMPANY OR THE TRANSFEREE COMPANY AT ANY TIME AFTER THE EFFECTIVE DATE; AND 14.1.2 990 BONDS OF THE FACE VALUE OF RS. 50 000 EACH CARR YING AN INTEREST RATE OF 0% P.A. FROM THE DATE OF ISSUE T ILL DATE OF REDEMPTION REDEEMABLE BY THE TRANSFEREE COMPANY AT THE OPTION OF THE TRANSFEROR COMPANY OR THE TRANSFEREE COMPANY AT ANY TIME WITHIN A PERIOD OF 4 MONTHS FROM THE EF FECTIVE DATE ON SUCH TERMS AND CONDITIONS AS ARE OR MAY BE MUTU ALLY AGREED BY AND BETWEEN TRANSFEROR COMPANY AND THE TR ANSFEREE COMPANY; AND 14.1.3 660 BONDS OF THE FACE VALUE OF RS. 50 000 EACH CAR RYING AN INTEREST RATE OF 0% P.A FROM THE DATE OF ISSUE UNTI L DATE OF REDEMPTION REDEEMABLE BY THE TRANSFEREE COMPANY AT THE OPTION OF THE TRANSFEROR COMPANY OR THE TRANSFEREE COMPANY AT ANY TIME WITHIN A PERIOD OF 15 MONTHS AFTER THE EFFECTIVE DATE ON SUCH TERMS AND CONDITIONS AS ARE OR MAY BE MUTU ALLY AGREED BY AND BETWEEN TRANSFEROR COMPANY AND THE TR ANSFEREE COMPANY. 41. A READING OF THE ABOVE CLAUSES IN THE SCHEME OF ARRANGEMENT IN OUR VIEW WOULD MEAN THAT THE TRANSFER OF THE UNDERTAKI NG HAD TAKEN PLACE IN EXCHANGE FOR ISSUE OF PREFERENCE SHARES AND BONDS. THE FACT THAT THERE WAS A QUANTIFICATION WHEN BONDS/PREFERENCE SHARES WERE ISSUED WOULD NOT MEAN THAT THE MONETARY CONSIDERATION WAS DETERMINED AND ITS DISCHARGE WAS ONLY BY WAY OF ISSUE OF BONDS/PREFERENCE SHARES. THE SC HEME OF ARRANGEMENT AT NO PLACE MENTIONS THE MONETARY CONSIDERATION FOR TH E TRANSFER. THE PARTIES WERE AD IDEM THAT THE SCHEME OF ARRANGEMENT WAS THA T THE ASSESSEE WAS TO TRANSFER THE UNDERTAKING AND TAKE BONDS/PREFERENCE SHARES AS CONSIDERATION. THUS IT WAS A CASE OF EXCHANGE AND NOT SALE. CONSEQUENTLY ITA NO.6410/MUM/2008(A.Y.2005-06) 25 THE PROVISIONS OF SECTION 2(42C) OF THE ACT DID NOT APPLY. THEREFORE THE PROVISIONS OF SECTION 50B WERE ALSO NOT APPLICABLE TO THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE. 42. THE NEXT QUESTION IS WHETHER THE TRANSFER OF TH E UNDERTAKING BY THE ASSESSEE WOULD RESULT IN CAPITAL GAIN U/S. 45 OF TH E ACT OR WHETHER THERE CAN BE NO CHARGE TO TAX OF CAPITAL GAIN BECAUSE OF IMPO SSIBILITY OF COMPUTING CAPITAL GAINS U/S. 48 OF THE ACT. 43. U/S. 45 OF THE ACT ANY PROFIT OR GAIN ARISING FROM THE TRANSFER OF A CAPITAL ASSET SHALL BE CHARGEABLE TO INCOME TAX UND ER THE HEAD CAPITAL GAINS. U/S. 48 OF THE ACT THE MODE OF COMPUTING THE CAPIT AL GAINS HAS BEEN PRESCRIBED. IT IS LAID DOWN THEREIN THAT CAPITAL G AIN SHALL BE COMPUTED BY DEDUCTING FROM THE FULL VALUE OF THE CONSIDERATION RECEIVED AS RESULT OF TRANSFER OF CAPITAL ASSET EXPENDITURE INCURRED IN CONNECTION WITH SUCH TRANSFER AND THE COST OF ACQUISITION OF THE ASSET A ND THE COST OF IMPROVEMENT THERETO. THUS FOR IMPOSING CHARGE ON CAPITAL LEGIS LATURE HAS INDICATED DETAILED PROVISIONS IN ORDER TO COMPUTE PROFITS OR GAINS UNDER THE HEAD CAPITAL GAINS. IN THE PRESENT CASE WHAT WAS TRANSF ERRED BY THE ASSESSEE WAS THE UNDERTAKING AS A WHOLE IT IS A CAPITAL ASSETS WITHIN THE MEANING OF SECTION 2(14) OF THE ACT. THE PROCESS BY WHICH THI S UNDERTAKING WAS TRANSFERRED WAS UNDER A SCHEME OF ARRANGEMENT. WIT H REGARD TO OTHER INGREDIENTS WHICH REQUIRED FOR LEVY OF CAPITAL GAI NS NAMELY PROFITS OR GAINS ARISING FROM THE TRANSFER OF THE UNDERTAKING IT IS SEEN THAT NO PART OF CONSIDERATION WAS INDICATED AGAINST DIFFERENT AND D EFINITE ITEMS HAVING REGARD TO THEIR VALUATION ON THE DATE OF TRANSFER. THERE IS NO BASIS FOR EVEN APPORTIONING ANY CONSIDERATION FOR VARIOUS ASSETS C OMPRISED IN THE TRANSFER. SINCE INDIVIDUAL ITEMS OF CAPITAL ASSETS HAVE NOT BEEN TRANSFERRED AND AGGREGATE OF INDIVIDUAL ASSETS IN THE FORM OF AN UN DERTAKING WAS A CAPITAL ASSET WHICH WAS TRANSFERRED. THE TRANSFER BEING ONE OF THE GOING CONCERNS IT IS NOT POSSIBLE TO ASCERTAIN THE PROFIT OR GAIN FRO M TRANSFER OF UNDERTAKING. ITA NO.6410/MUM/2008(A.Y.2005-06) 26 COST OF ACQUISITION AND THE COST OF IMPROVEMENT OF THE UNDERTAKING CANNOT BE ASCERTAINED. IT THEREFORE BECOMES DIFFICULT TO APPLY COMPUTATION UNDER PROVISIONS OF SECTION 48. A BUSINESS UNDERTAKING A S A GOING CONCERN INCLUDES ALL RIGHTS ASSETS CONTINGENT OR DEFINITE CORPOREAL AND INCORPOREAL AND ALL INTEREST IN ADVANTAGE PRESENT OR FUTURE. I T ALSO INCLUDES THE MANAGEMENT EXECUTIVE EMPLOYEES AND ANYTHING WHICH GOES AS PART OF ORGANIZATION INCLUDING THE POTENTIALITY OF THE ORGA NIZATION TO GROW. IT CONTAINS A VARIETY OF ELEMENTS BOTH TANGIBLE AND I NTANGIBLE. IT REMAINS IN INSUBSTANTIAL IN FORM AND NEBULOUS IN CHARACTER. A GOING CONCERN IS A DYNAMIC CONCEPT CHARACTERIZED BY PERENNIAL CHANGE I NFLUENCED BY SOCIO- ECONOMIC ECOLOGY. A GOING CONCERN IS ESSENTIALLY A FUNCTIONING LIVING ORGANISM POSSESSING ATTRIBUTES OF VITALITY GROWTH AND EVOLUTION. OBVIOUSLY IT WOULD NOT BE POSSIBLE TO CONCEPTUALIZE THE COST OF ACQUISITION OF SUCH A GOING CONCERN AS WELL AS DATE OF ACQUISITION THEREO F. IF THE COST OF ACQUISITION AND/OR THE DATE OF ACQUISITION OF THE ASSET CANNOT BE DETERMINED THEN IT CANNOT BE BROUGHT WITHIN THE PURVIEW OF SECTION 45 FOR LEVY AND COMPUTATION OF CAPITAL GAINS. LOOKING TO THE NATURE AND CHARACT ER OF THE CAPITAL ASSET BEING THE GOING CONCERN CONSIDERATION REALIZED BY THE ASSESSEE WOULD BE OUTSIDE THE PURVIEW OF CAPITAL GAINS UNDER SECTION 45. THE HON'BLE KARNATAKA HIGH COURT IN THE CASE OF SYNDICATE BANK LTD. VS. ADDL. CIT 155 ITR 681 WHEREIN IT WAS HELD THAT THERE IS A TRANSFE R OF WHOLE CONCERNS AND WHERE NO PART OF THE AGREED PRICE IS INDICATED AGAI NST DIFFERENT AND DEFINITE ITEMS HAVING REGARD TO THAT VALUATION AND CONSIDERA TION CANNOT BE APPORTIONED ON CAPITAL ASSETS IN SPECIE. IN SUCH CA SES CAPITAL ASSETS CONSISTING OF BUSINESS OF WHOLE CONCERNS ARE TRANSF ERRED IN SUCH CASE THE CONSIDERATION REALIZED BY AN ASSESSEE WOULD OUTSIDE THE PURVIEW OF CAPITAL GAINS U/S. 45. THE HON'BLE HIGH COURT IN COMING TO THE ABOVE CONCLUSION FOLLOWED THE DECISION OF HON'BLE SUPREME COURT IN T HE CASE OF CIT VS.B.C. SRINIVASA SHETTY 128 ITR 294. (SC). THE TRANSF ER IN THE PRESENT CASE BEING OF A GOING CONCERN IT WAS NOT POSSIBLE TO ASCERTAI N COST OF ACQUISITION AND THE COST OF IMPROVEMENT. APART FROM THE ABOVE THER E WAS ALSO NO ITA NO.6410/MUM/2008(A.Y.2005-06) 27 CONSIDERATION RECEIVED ON TRANSFER. IN VIEW OF THE ABOVE SINCE COMPUTATION PROVISIONS CANNOT BE APPLIED IN THE PRESENT CASE C HARGE OF CAPITAL GAIN TO TAX SHOULD ALSO FAIL. IN INDUSTRIAL MACHINERY ASSOC IATES VS. CIT 81 ITD 482 (AHD) THE PRINCIPLE THAT IN THE ABSENCE OF PROVISI ONS OF SECTION 50B OF THE ACT TRANSFER OF BUSINESS UNDERTAKING (TRANSFER) AS GOING CONCERNS WILL NOT ATTRACT CHARGE OF TAX UNDER THE HEAD CAPITAL GAINS FOR THE REASON THAT IT WAS NOT POSSIBLE TO CONCEPTUALIZED COST OF ACQUISITION AS WELL AS DATE OF ACQUISITION. IN OUR VIEW THE DECISIONS OF THE TRIB UNAL RELIED UPON BY LEARNED COUNSEL FOR THE ASSESSEE ARE AUTHORITY FOR THE PROP OSITION THAT PRIOR TO INSERTION OF SECTION 50B OF THE ACT IN THE EVENT OF TRANSFER OF BUSINESS UNDERTAKING AS A GOING CONCERN THERE WAS IMPOSSIBI LITY OF COMPUTATION OF COST OF ACQUISITION DATE OF ACQUISITION ETC.; AND THEREFORE COMPUTATION PROVISIONS COULD NOT BE APPLIED. CONSEQUENTLY LEVY OF CAPITAL GAINS COULD ALSO FAIL. THE DECISIONS OF THE TRIBUNAL REFERRED T O ABOVE ARE BASED ON THE DECISION RENDERED BY HON'BLE KARNATAKA HIGH COURT A ND HON'BLE MADRAS HIGH COURT IN THE CASE OF SYNDICATE BANK LTD. (SUP RA) & K.P.V. SHAIKH MOHAMMED ROWTHER (SUPRA). THESE DECISIONS IN TURN H AVE BEEN RENDERED BY FOLLOWING THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF B.C. SRINIVASA SHETTY (SUPRA). WITH REGARD TO THE SUBMISSION OF LE ARNED DR OF THE REVENUE BY PLACING RELIANCE ON THE DECISION OF HON'BLE BOMB AY HIGH COURT IN THE CASE OF PREMIER AUTOMOBILES LTD. (SUPRA) WE ARE OF THE VIEW THAT THE SAME CANNOT BE ACCEPTED. IN THE CASE OF PREMIER AUTOMOBILES L TD. (SUPRA) THE ISSUE BEFORE THE HON'BLE BOMBAY HIGH COURT WAS WHETHER TH ERE WAS A SLUMP SALE OF BUSINESS AS GOING CONCERN OR WAS IT A CASE OF AN ITEMIZED SALE OF ASSETS AND THEIR LORDSHIPS HELD IN THE FACTS AND CIRCUMST ANCES OF THAT CASE THAT ENTIRE BUSINESS WAS SOLD BY THE ASSESSEE AS A GOING CONCERN WITHOUT ANY INTENTION OF SALE OF ITEMIZED ASSETS. AS REGARDS TH E COMPUTATION OF CAPITAL GAINS ARISING FROM THE SALE OF A GOING CONCERN HON 'BLE BOMBAY HIGH COURT HOWEVER DID NOT RENDER MY VERDICT AND SENT BACK TH E MATTER TO THE ASSESSING OFFICER WITH A DIRECTION TO DECIDE WHETHE R ANY CAPITAL GAINS TAX LIABILITY ARISES FROM SUCH SALE AND IF SO TO COMPU TE THE QUANTUM OF CAPITAL ITA NO.6410/MUM/2008(A.Y.2005-06) 28 GAINS UNDER SECTION 45 TO 50. THUS THE ISSUE PERTA INING T THE CHARGEABILITY OF PROFIT ARISING FROM SLUMP SALE OF BUSINESS AS A GOING CONCERN TO TAX AS CAPITAL GAINS WAS NOT DECIDED BY HON'BLE BOMBAY HIG H COURT IN THE CASE OF PREMIER AUTOMOBILES LTD. (SUPRA) AND THE SAID DECIS ION CITED BY LEARNED DR OF THE REVENUE IS THEREFORE OF NO HELP TO SUPPORT THE REVENUES CASE ON THE SAID ISSUE. 44. IN VIEW OF THE ABOVE WE HOLD THAT COMPUTATION PROVISIONS FAIL IN THE PRESENT CASE AND CONSEQUENTLY THERE CAN BE NO CAPIT AL GAIN THAT COULD BE BROUGHT TO TAX. GROUND NO.3 RAISED BY THE ASSESSEE IS ALLOWED. IN VIEW OF THE DECISION ON GROUND NO.3 THE ALTERNATE PLEA RAI SED IN GROUND NO.4 DOES NOT CALL FOR ANY ADJUDICATION. 45. GROUND NO.5 RAISED BY THE ASSESSEE READS AS FOL LOWS: GROUND 5: ADJUSTMENT IN THE VALUE OF STOCK U/S. 14 5A OF RS. 20 92 601/- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LEARNED CIT(A) ERRED IN UPHOLDING THE ACTION OF TH E AO OF MAKING AN ADDITION OF RS. 20 92 601/- BY APPLYING THE PRO VISIONS OF SECTION 145A OF THE ACT. 2. THE APPELLANT PRAYS THAT THE ADDITION OF RS. 20 92 601/- MADE BY INVOKING SECTION 145A OF THE ACT OUGHT TO BE DELETE D. 46. THIS IS WITH REFERENCE TO THE METHOD OF ACCOUNT ING AS STIPULATED UNDER SECTION 145A. THE ASSESSEE HAS FOLLOWED ACCOUNTIN G STANDARD (AS) 2 ON VALUATION OF INVENTORIES AND THE GUIDANCE NOTE ON A CCOUNTING TREATMENT FOR MODVAT/CENVAT ISSUED BY THE ICAI AND ACCORDINGLY TH E EXCLUSIVE METHOD FOR ACCOUNTING HAS BEEN FOLLOWED. HENCE THE ASSESSEE H AS VALUED ITS INVENTORY AS ON 31/3/2005 EXCLUSIVE OF TAXES DUTIES ETC. PAI D OR INCURRED ON SUCH CLOSING STOCK. THE EFFECT OF SECTION 145A HAS BEEN GIVEN IN THE TAX AUDIT REPORT. THE AO HAS MADE AN ADJUSTMENT OF RS. 20 92 601/- IN THE VALUE OF CLOSING STOCK PURPORTED BY APPLYING THE PROVISIONS OF SECTION 145A OF THE ACT ITA NO.6410/MUM/2008(A.Y.2005-06) 29 BY INCLUDING THE UNUTILIZED CENVAT CREDIT IN CLOSIN G STOCK OF RAW MATERIALS. THE AO HAS RELIED ON THE WORKING PUBLISHED IN AN AR TICLE AUTHORIZED ONE MR. K.L.JHANWAR IN THE MONTH OF DECEMBER 2007 ISSUE OF THE ICAI MAGAZINE. FOR THE PURPOSE OF STATUTORY ACCOUNTS THE ASSESSEE HAS FOLLOWED THE AS-2 ON VALUATION OF INVENTORIES AND THE GUIDANCE NOTE ON A CCOUNTING TREATMENT FOR MODVAT/CENVAT ISSUED BY ICAI AND ACCORDINGLY IT FOL LOWED THE EXCLUSIVE METHOD FOR ACCOUNTING. HOWEVER FOR THE PURPOSE OF TAX RETURN THE ASSESSEE HAS WORKED OUT THE IMPACT OF GROSSING UP OF TAX DUT Y CESS ETC. BY RESTATING THE VALUES OF PURCHASES AND INVENTORIES BY INCLUDIN G INTERALIA THE EFFECT OF CENVAT CREDIT. THE WORKING GIVEN ON PAGE NO.143 OF THE PB-1 COMPARING THE EXCLUSIVE METHOD FOLLOWED AND SECTION 145A PROVISIO NS. THEREFORE SINCE THE ASSESSEE ALSO DRAWS THE ATTENTION TO PAGE NOS.140 143 OF PB-1 WHICH APTLY BRINGS OUT THAT SINCE THE ADJUSTMENT AS PER SECTIO N 145A HAS ALREADY BEEN DONE THERE IS NO FURTHER ADJUSTMENT REQUIRED. FU RTHER THE ASSESSEE ALSO RELIES ON THE DECISION OF THE DELHI HIGH COURT IN C ASE OF CIT VS. MAHAVIR ALUMINIUM LTD. (DEL)(SPL BENCH) WHEREIN IT IS HELD THAT FOR THE PURPOSE OF SECTION 145A THE MODVAT ELEMENT IN OPENING STOCK SH OULD ALSO BE ADJUSTED AND THE ADDITION ONLY TO CLOSING STOCK IS NOT APPRO PRIATE. BESIDES THE BOMBAY ITAT HAS HELD IN THE CASE OF J.B.CHEMICALS V . ACIT (10 SOT 362) THAT FOR GIVING EFFECT TO SECTION 145A THE ADJUSTM ENT SHOULD BE MADE NOT ONLY TO THE CLOSING STOCK BUT ALSO TO PURCHASES. T HE ASSESSEE SUBMITS THAT THE WORKING SHOWN IN TAX AUDIT REPORT IS IN ACCORDA NCE WITH THESE TWO DECISIONS AND HENCE THE ADDITION MADE BY THE AO ONL Y TO CLOSING STOCK DESERVES TO BE DELETED. HENCE THE ASSESSEE PRAYS T HAT THE AFORESAID ADJUSTMENT BE DELETED. 47. THE CIT(A) HOWEVER DID NOT AGREE WITH THE SUBMI SSIONS OF THE ASSESSEE. HE HELD THAT OPENING STOCK OF THE PRESEN T WILL BE THE VALUE OF THE CLOSING STOCK OF THE EARLIER YEAR AND IT CANNOT BE VARIED. HE THEREFORE CONFIRMED THE ORDER OF THE AO. ITA NO.6410/MUM/2008(A.Y.2005-06) 30 48. BEING AGGRIEVED BY THE ORDER OF THE CIT(A) THE ASSESSEE HAS RAISED GROUND NO.5 BEFORE THE TRIBUNAL. 49. WE HAVE HEARD THE RIVAL SUBMISSIONS. A PERUSAL OF THE COMPUTATION OF INCOME AT PAGE 48 OF THE PAPER BOOK SHOWS THAT FROM THE PROFIT AS PR THE P&L ACCOUNT WHICH WAS ARRIVED AT BY THE ASSESSEE BY FOLLOWING EXCLUSIVE METHOD OF VALUATION OF INVENTORY THE ASSESSEE HAD ADDED THE IMPACT ON THE P&L ACCOUNT BY FOLLOWING THE EXLCUSIVE METHOD. THE SAME IS AS FOLLOWS: PROFITS & GAINS OF BUSINESS: RS. RS. 1. PROFIT/(-) LOSS BEFORE TAXATION AS PER PROFIT & LOSS A/C. UNDER EXCLUSIVE METHOD 355 690 635 14 281 881 369 972 516 CLAUSE 12(A) AND 12(B) :STATEMENT GIVING DETAILS OF METHOD OF VALUATION OF OPENING STOCK AND THE EFFECT OF DEVIATION FROM SECTION 145A. S.NO. ITEM MODVAT CREDIT/ IMPACT SALES TAX SET OFF (INCREASE IN PRO FIT/ DECREA SE IN PROFIT. RS. RS. A. RAW MATERIAL 1. OPENING STOCK 11477558 2. PURCHASE 231272829 242750387 3. LESS: CLOSING STOCKS 14 4 04 062 228346325 B. STORES & SPARES 1. OPENING STOCKS - 2. PURCHASES - 3. LESS; CLOSING STOCK - C. WORK IN PROGRESS 1. OPENING STOCK 13 473 836 2. LESS: CLOSING STOCK 14 110 643 (636807) D. FINISHED GOODS ITA NO.6410/MUM/2008(A.Y.2005-06) 31 1. OPENING STOCKS 4 947 568 2. PURCHASES - 3. LESS: CLOSING STOCK 7 929 290 (2979722) 224729 796 LESS: MODVAT & ST SET OFF UTILIZED ON MATERIALS CONSUMED 224729796 ADD: EXCISE DUTY PAYABLE ON CLOSING STOCK 14281881 NET IMPACT ON PROFIT & LOSS ACCOUNT 14281881 50. THE ASSESSEE HAS ALSO NOT CLAIMED DEDUCTION ON ACCOUNT OF EXCISE DUTY ON CLOSING STOCK AMOUNTING TO RS.86 28 214/-. THUS THE ASSESSEE HAD DULY GIVEN EFFECT TO THE PROVISIONS OF SECTION 145A AS W ELL AS THE PROVISIONS SECTION 43B OF THE ACT. IN OUR VIEW THE AO IGNORED THE SUB MISSIONS AND HAS PROCEEDED ON THE BASIS THAT ONLY CLOSING STOCK OUGH T TO HAVE BEEN REVALUED. IN OUR VIEW THIS IS CONTRARY TO THE DECISION RELIED UPON BY THE ASSESSEE BEFORE THE CIT(A). EVEN THE HONBLE BOMBAY HIGH COURT IN THE CASE OF MAHALAXMI GLASS WORKS HAS TAKEN THE VIEW AS WAS TAKEN BY THE HONBLE DELHI HIGH COURT IN THE CASE OF MAHAVIR ALLUMINIUM (SUPRA). I N VIEW OF THE ABOVE WE HOLD THAT THE ADDITION MADE BY THE AO AND CONFIRMED BY THE CIT(A) SHOULD BE DELETED. WE ACCORDINGLY DIRECT THAT THE ADDITIO N MADE BE DELETED. GROUND NO.5 RAISED BY THE ASSESSEE IS ALLOWED. 51. GROUND NO.6 RAISED BY THE ASSESSEE READS AS FOL LOWS: GROUND 6: ADDITION AS INCOME AS PER AIR NOT RECON CILED OF RS.4 36 700/- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LEARNED CIT(A) ERRED IN UPHOLDING THE ACTION OF THE AO OF MAKING AN ADDITION OF RS.4 36 700/- AS INCOME AS PER AIR NOT RECONCILED WITHOUT DISCUSSING ANYTHING IN THAT BEHALF IN THE A SSESSMENT ORDER AND WITHOUT GIVING ADEQUATE OPPORTUNITY TO THE APPE LLANT FOR EXPLAINING THE ALLEGED DIFFERENCE. 2. THE APPELLANT PRAYS THAT THE ADDITION OF RS. 4 36 7 00/- IS UNCALLED FOR AND OUGHT TO BE DELETED. ITA NO.6410/MUM/2008(A.Y.2005-06) 32 52. ON THIS GROUND WE FIND THAT THE AO HAS NOT GIVE N ANY BASIS ON WHICH THIS ADDITION WAS MADE. THE CIT(A) DID NOT ADJUDIC ATE ON THIS ASPECT. WE THEREFORE SET ASIDE THE ORDER OF CIT(A) ON THIS AD DITION AND DIRECT THE AO TO FURNISH THE BASIS ON WHICH THE IMPUGNED ADDITION IS SOUGHT TO BE MADE BY THE AO. THE ASSESSEE WILL THEREAFTER EXPLAIN THE DISCREPANCY AND THE AO WILL CONSIDER AND DECIDE THE ISSUE IN ACCORDANCE WI TH LAW. THE ASSESSEE WILL BE GIVEN OPPORTUNITY OF BEING HEARD BEFORE THE DEC ISION IS ARRIVED AT BY THE AO. 53. GROUND NO.7 RAISED BY THE ASSESSEE IS AS FOLLOW S: GROUND 7: ADDITION OF INCOME UNDER VARIOUS HEADS S UCH AS TECHNICAL SERVICES INTEREST DIVIDEND AS PER AIR OF RS.17 15 222/- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LEARNED CIT(A) ERRED IN UPHOLDING THE ACTION OF THE AO OF MAKING AN ADDITION OF RS. 17 15 222/- AS INCOME UNDER VARIOUS HEADS SUCH AS TECHNICAL SERVICES INTEREST DIVIDEND ETC. AS PER AIR WITHOUT EXPLAINING ANY BASIS FOR SUCH ADDITION AND WITHOUT CONSIDERING THE VARIOUS SUBMISSIONS MADE BY THE APPELLANT. 2. THE APPELLANT PRAYS THAT THE ADDITION OF RS. 17 15 222/- OUGHT TO BE DELETED. 54. THE AO BASED ON THE ANNUAL INFORMATION REPORT ( AIR) DATABASE NOTICED THAT ON THE FOLLOWING INCOME TAX HAS BEEN D EDUCTED AT SOURCE BY THE PERSON MAKING PAYMENT TO THE ASSESSEE BUT THE ASSES SEE HAS NOT OFFERED SUCH RECEIPTS TO TAX. THE DETAILS MAY BE SUMMARIZED AS FOLLOWS: (I) FEES FOR PROFESSION & TECHNICAL SERVICES : RS. 16 46 102/- (II) DIVIDEND : RS. 55 620/- (III) INTEREST : RS. 12 500/- (IV) TOTAL : RS. 17 14 222/- OUT OF THE ABOVE THE ASSESSEE HAD ACTUALLY RECONCI LED AND EXPLAINED THE AMOUNT OF RS.12 27 826/- VIDE ITS LETTER TO THE AO DATED NOVEMBER 30 ITA NO.6410/MUM/2008(A.Y.2005-06) 33 2007. THE RECONCILIATION SO PROVIDED IS COMPLETELY IGNORED BY THE LEARNED AO AND THE ADDITION IS MADE ON THE WHOLE AMOUNT OF RS.17 15 222/-. 55. THE RECONCILIATION PROVIDED BY THE ASSESSEE BEF ORE THE AO IS AT PAGE 287 OF THE ASSESSEES PAPER BOOK. NEITHER THE AO N OR THE CIT(A) CONSIDERED THIS RECONCILIATION. IN THESE CIRCUMSTANCES WE SET ASIDE THE ORDER OF THE CIT(A) ON THIS ISSUE AND REMAND THE ISSUE FOR FRESH CONSIDERATION BY THE AO IN THE LIGHT OF THE RECONCILIATION PROVIDED BY THE ASSESSEE. THE AO WILL AFFORD OPPORTUNITY OF BEING HEARD TO THE ASSESSEE CONSIDE R THE RECONCILIATION FILED BY THE ASSESSEE AND DECIDE THE ISSUE AFRESH IN ACCO RDANCE WITH LAW. 56. IN THE RESULT THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 11 TH DAY OF MARCH 2011. SD/- SD/- (J.SUDHAKAR REDDY) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI DATED. 11 TH MARCH 2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RB BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR I TAT MUMBAI BENCHES MUMBAI. VM. ITA NO.6410/MUM/2008(A.Y.2005-06) 34 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 25/02&7/3 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 8/3/11 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER