M/s. Digivision Electronics Ltd., CHENNAI V. ACIT, CHENNAI

ITA 1379/CHNY/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 51884 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-09-2011
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 06-09-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 23-08-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: AVINASH K SAHAY
• Assessee Lawyers: S SRIDHAR
• Keywords: Capital asset; Audit objection; Cost of acquisition; Difference of opinion; Scheme of amalgamation; Change of opinion; Reassessment proceedings; Capital expenditure
• Section: 143(3); 147; 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BENCH B CHENNAI BEFORE SHRI N.S. SAINI, AM AND SHRI GEORGE MATHAN, J.M I.T.A. NO. 1379/MDS/2010 ASSESSMENT YEAR 2003-04 M/S DIGIVISION ELECTRONICS LTD 4, MORRISON FOURTH STREET ALANDUR CHENNAI 600 016 (PAN NO. AAACD 2691 K) VS. THE A.C.I.T COMPANY CIRCLE 1(4) CHENNAI I.T.A. NO. 1929/MDS/2010 ASSESSMENT YEAR 2003-04 THE A.C.I.T VS. M/ S DIGIVISION ELECTRONICS LTD COMPANY CIRCLE 1(4) 4, MOR RISON FOURTH STREET CHENNAI ALANDUR CHENNAI 600 016 (PAN NO. AAACD 2691 K) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI S. SRIDHAR DEPARTMENT BY : SHRI AVINASH K. SAHAY O R D E R PER N.S. SAINI, AM:- THESE ARE CROSS APPEALS FILED BY THE ASSESSEE AND REVENUE DIRECTED AGAINST THE ORDER OF THE LD. CIT(A)-III, C HENNAI DATED 06.08.2010 PERTAINING TO ASSESSMENT YEAR 2003-04. PAGE 2 OF 25 I.T.A. NO 1379/MDS/2010 ITA NO.1929/MDS/2010 2. IN THE ASSESSEES APPEAL, THE ASSESSEE HAS TAKEN 12 GROUNDS OF APPEAL. AT THE TIME OF HEARING, THE LD. A.R. OF TH E ASSESSEE SUBMITTED THAT HE WILL BE ARGUING GROUNDS NOS. 2, 6 AND 11 OF THE APPEAL. HENCE, THE OTHER GROUNDS OF APPEAL ARE DISM ISSED FOR WANT OF PROSECUTION. 3. GROUND NO. 2 OF THE APPEAL OF THE ASSESSEE READS AS UNDER: THE LD. CIT(A) ERRED IN CONFIRMING THE VALIDITY OF THE REASSESSMENT ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE WITHOUT ASSIGNING PROPER REASONS AND JUSTIFICATI ON. 4. THE LD. CIT(A) HAS DECIDED THIS ISSUE AS UNDER: THE FIRST ISSUE PERTAINS TO VALIDITY OF JURISDICTION U/S 147 OF THE ACT. THE APPELLANT SUBMITTED THAT THE REOPENING WAS NOT VALID SINCE THERE WAS NO ESCAPEMENT OF INCOME AND T HE COMPUTATION OF LONG TERM CAPITAL GAIN WAS CORRECT AN D PROPER. IT WAS ALSO SUBMITTED THAT THE REOPENING WA S ON ACCOUNT OF CHANGE OF OPINION BASED ON AUDIT OBJECTION AND THEREFORE, NOT VALID. THE ID. AR ALSO CONTENDED THA T THERE WAS NO FAILURE ON THE PART OF THE APPELLANT TO DISCL OSE FULLY AND TRULY ALL MATERIAL FACTS NECESSARY FOR ASSESSMEN T AND PAGE 3 OF 25 I.T.A. NO 1379/MDS/2010 ITA NO.1929/MDS/2010 THEREFORE, THE REOPENING WAS BEYOND JURISDICTION. RE LIANCE WAS PLACED ON THE DECISIONS REPORTED IN 100 ITR 285 AND 8 SOT 242. 4.1 I HAVE CAREFULLY CONSIDERED THE FACTS PERTAININ G TO THE CASE AND THE SUBMISSIONS MADE BY THE ID. AR. I HAVE ALSO GONE THROUGH THE DECISIONS RELIED ON BY THE ID. AR. IN THIS CASE PROCESSING U/S 143(1) WAS DONE BUT NO ASSESSMENT U/S 143(3) WAS MADE. THEREAFTER; NOTICE U/S 148 HAS BEEN ISSUED WITHIN 4 YEARS .FROM THE END OF THE SUBJECT ASSESSMENT YEAR. ON SIMILAR FACT SITUATION, THE HON' BLE SUPREME COURT IN RAJESH JHAVERI STOCK BROKERS PVT. L TD, 291 ITR 500 (SC) HAS HELD THAT PROCEEDINGS INITIATED U/S 147 ARE VALID. AS INTIMATION U/S 143(1)(A) IS NOT AN 'ASSESS MENT', THERE IS NO QUESTION OF TREATING REASSESSMENT IN SUCH A CASE AS BASED ON CHANGE OF OPINION. THE CLAIM OF DEDUCTIO N U/S 48 OF THE ONE TIME SETTLEMENT PAID (OTS) PAID TO TH E BANK, CLAIM OF EXPENSES IN RESPECT OF ABANDONED PROJECT A ND SET OFF' OF BROUGHT FORWARD LOSSES CONSTITUTE TANGIBLE M ATERIAL TO REOPEN THE ASSESSMENT. THE HON'BLE SUPREME COURT IN THE CASE OF CIT V. KELVINATOR INDIA LTD, 320 ITR 561 (S C) HAS HELD THAT THE AO HAS NO POWER TO REVIEW BUT HE CAN REASSE SS THE INCOME. SINCE NO ORDER HAD BEEN PASSED, THERE IS NO QUESTION OF REVIEWING IT. IT WAS ONLY REASSESSMENT O F INCOME. FURTHER, IN THE CASE OF SUN ENGINEERING WORKS PVT. LTD 198 ITR 297 (SC), THE HON'BLE SUPREME COURT HAS HELD THAT REASSESSMENT PROCEEDINGS ARE FOR THE BENEFIT O F PAGE 4 OF 25 I.T.A. NO 1379/MDS/2010 ITA NO.1929/MDS/2010 REVENUE AND ARE AIMED AT GATHERING THE ESCAPED INCO ME. IN VIEW OF THE FACTUAL POSITION AND AUTHORITATIVE PRONOUNCEMENTS, I AM OF THE CONSIDERED OPINION THAT THE REOPENING HAS BEEN VALIDLY INITIATED. THIS GROUND OF APPEAL IS ACCORDINGLY DISMISSED. 5. AT THE TIME OF HEARING, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT HE IS NOT INTERESTED IN AGITATING TH IS GROUND OF APPEAL SERIOUSLY AND NO SPECIFIC SUBMISSION WAS MAD E BY THE LD. A.R. IN RESPECT OF THIS GROUND OF APPEAL. THEREFORE , THIS GROUND OF APPEAL IS DISMISSED FOR LACK OF PROSECUTION. 6. GROUND NO. 6 OF THE APPEAL READS AS UNDER: THE LD. CIT(A) ERRED IN SUSTAINING THE REJECTION OF THE CLAIM OF EXPENSES TO THE EXTENT OF RS. 1,62,75,000/- INC URRED IN CONNECTION WITH THE TRANSFER OF THE ASSET IN THE CO MPUTATION OF LONG TERM CAPITAL GAINS WITHOUT ASSIGNING PROPER REASONS AND JUSTIFICATION. PAGE 5 OF 25 I.T.A. NO 1379/MDS/2010 ITA NO.1929/MDS/2010 7. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E CLAIMED EXPENSES OF RS. 1,62,75,000/- IN COMPUTING LONG TE RM CAPITAL GAINS WHICH INCLUDED RS. 20 LAKHS TOWARDS REIMBURSEMENT OF VARIOUS EXPENSES INCURRED BY MAHINDRA GESCO UNDER PROJECT SERVICES AGREEMENT DATED 20.1.1997 WHICH WAS TERMINATED BY MUTUAL AGREEMENT ON 31.3.2002. THE OTHER COMPONENT OF RS. 1,42,75,000/- WAS REIMBURSEMENT OF INTEREST TO MAHI NDRA GESCO. THE INTEREST WAS ON THE ADVANCE OF RS. 1 CRORE REC EIVED BY THE ASSESSEE FROM MAHINDRA GESCO ON 16.6.1997. THE ASS ESSING OFFICER DISALLOWED THE SAID SUMS ON THE GROUND THAT THEY WE RE PAID UNDER THE PROJECT SERVICE AGREEMENT WHICH HAD BEEN TERMIN ATED BY THE ASSESSEE ON MUTUAL CONSENT WITH THE DEVELOPER AND T HEREFORE, THE SAID SUMS WERE EXPENDITURE INCURRED FOR AN ABANDONE D PROJECT WHICH COULD NOT BE ALLOWED IN COMPUTING THE CAPITAL GAINS. THE ASSESSING OFFICER RELIED ON THE DECISION OF THE HON 'BLE CALCUTTA HIGH COURT IN THE CASE OF KANORIA CHEMICALS AND INDUSTRI ES LTD. VS CIT 78 TAXMANN 455. PAGE 6 OF 25 I.T.A. NO 1379/MDS/2010 ITA NO.1929/MDS/2010 8. BEFORE THE LD. CIT(A), THE ASSESSEE CONTENDED TH AT THE SAID EXPENDITURE SHOULD BE CONSTRUED AS AN EXPENDITURE I N CONNECTION WITH TRANSFER OF PROPERTY AND RELYING ON THE DECISI ON OF THE HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT VS. BRADFORD T RADING COMPANY P. LTD. REPORTED IN 261 ITR 222 [MAD] SUBMITTED THA T COST OF REMOVING AN ENCUMBRANCE IS A DEDUCTIBLE COST UNLESS IT IS SELF CREATED. 9. THE LD. CIT(A), AFTER CONSIDERING THE SUBMISSION S, HELD AS UNDER: 6.1 I HAVE CONSIDERED THE FACTS OF THE ABOVE AND T HE SUBMISSIONS MADE BY THE ID. AR. I AM UNABLE TO AGREE WITH THE CONTENTIONS OF THE ID. AR THAT THE ABOVE EXPEND ITURE SHOULD BE CONSTRUED AS AN' EXPENDITURE INCURRED IN CON NECTION WITH THE TRANSFER OF THE PROPERTY. THE AMOUNT REPRES ENTS EXPENDITURE INCURRED FOR A PROJECT WHICH NEVER TOOK P LACE AND HAD BEEN ABANDONED BY MUTUAL CONSENT OF THE PARTI ES. THE 'PROJECT SERVICE AGREEMENT' DATED 20197 WAS TERMINATED BY MUTUAL AGREEMENT WITH EFFECT FROM 31.3. 2002. ON THE OTHER HAND, AGREEMENT FOR SALE TOOK PLACE ON 27032003. THUS, THERE WAS NO ENCUMBRANCE AS ON THE DATE OF PAGE 7 OF 25 I.T.A. NO 1379/MDS/2010 ITA NO.1929/MDS/2010 SALE. THE DEDUCTION PERMISSIBLE U/S 48 ARE ONLY THE C OST OF ACQUISITION OF THE CAPITAL ASSET OR COST OF IMPROVEM ENT THERETO OR EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY IN CONNECTION WITH THE TRANSFER OF THE ASSET. BY NO ST RETCH OF IMAGINATION THE ABOVE EXPENSES INCURRED CAN BE CONSI DERED AS FALLING UNDER ANY OF THESE CATEGORIES. THE AO HAS RI GHTLY HELD THAT IT WAS A CAPITAL EXPENDITURE INCURRED TOWARDS A N ABANDONED PROJECT AND HENCE NOT ALLOWABLE AS A DEDU CTION U/S 48 FOR THE PURPOSE OF CAPITAL GAIN. THEREFORE, T HIS GROUND OF APPEAL IS DISMISSED. 10. THE LD. A.R. REITERATED THE SUBMISSIONS MADE BE FORE THE LOWER AUTHORITIES WHEREAS THE LD. D.R. RELIED ON THE DECI SION OF THE HON'BLE SUPREME COURT IN THE CASE OF V.S. MALHOTRA VS. CIT REPORTED IN 227 ITR 240 [SC] WHEREIN IT WAS HELD AS UNDER: IN THE INSTANT CASE, THE MORTGAGE WAS CREATED BY TH E ASSESSEE HIMSELF. IT IS NOT A CASE WHERE THE PROPE RTY HAD BEEN MORTGAGED BY THE PREVIOUS OWNER AND THE ASSESSE E HAD ACQUIRED ONLY THE MORTGAGORS INTEREST IN THE PROPER TY MORTGAGED AND BY CLEARING THE SAME HE HAD ACQUIRED T HE INTEREST OF THE MORTGAGEE IN THE SAID PROPERTY. TH E QUESTIONS PAGE 8 OF 25 I.T.A. NO 1379/MDS/2010 ITA NO.1929/MDS/2010 RAISED BY THE ASSESSEE IN THE APPLICATION SUBMITTED U/S 256(2) OF THE ACT DO NOT, THEREFORE, RAISE ANY ARGUABLE QUES TION OF LAW AND THE SAID APPLICATION WAS RIGHTLY REJECTED B Y THE HIGH COURT. 11. HE ALSO RELIED ON THE DECISION OF THE HON'BLE S UPREME COURT IN THE CASE OF CIT VS. ALLADI N RAO REPORTED IN 252 IT R 880 [SC] WHEREIN IT WAS HELD AS UNDER: WHAT WAS SOLD BY THE STATE AT THE AUCTION WAS THE IMMOVABLE PROPERTY THAT BELONGED TO THE ASSESSEE. THE PRICE THAT WAS REALIZED THEREFORE, BELONGED TO THE ASSESS EE. FROM OUT OF THAT PRICE, THE STATE DEDUCTED THE DUES TOWARD S KIST AND INTEREST DUE FROM THE ASSESSEE AND PAID OVER THE BALANCE TO HIM. THE CAPITAL GAIN THAT THE ASSESSEE MADE WA S ON THE IMMOVABLE PROPERTY THAT BELONGED TO HIM. THEREFORE , IT IS ON THE FULL PRICE REALIZED [LESS ADMITTED DEDUCTIONS] THAT THE CAPITAL GAIN AND THE TAX THEREON HAS TO BE COMPUTED. PAGE 9 OF 25 I.T.A. NO 1379/MDS/2010 ITA NO.1929/MDS/2010 12. THE LD. CIT(A) THUS HELD THAT SINCE THE ENCUMBR ANCE WAS CREATED BY THE ASSESSEE IN THE INSTANT CASE, THEREF ORE, NO DEDUCTION OF THE COST FOR REMOVING CAN BE ALLOWED AS DEDUCTIO N TO THE ASSESSEE. 13. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIAL AVAILABLE ON RECORD. THE UNDISPUTED FACTS ARE THAT THE ASSESSEE SOLD A PLOT OF LAND SITUATED AT LATTICE BRIDGE ROAD, CHENNAI AND COMPUTED LONG TERM CAPITAL GAINS THEREON. THE ASSESSEE INTER ALIA CLAIMED DEDUCTION FOR RS. 1,62,75,000/- WHICH WAS DISALLOWED IN THE ASSESSMEN T BY THE ASSESSING OFFICER. THE SAID AMOUNT OF RS. 1,62,75 ,000/- WAS COMPRISED OF TWO COMPONENTS, NAMELY, RS. 1,42,75,0 00/- TOWARDS INTEREST ON ADVANCE RECEIVED AND RS. 20 LAKHS AGAI NST REIMBURSEMENT OF EXPENSES. THE ASSESSEE ENTERED IN TO AN AGREEMENT WITH MAHINDRA GESCO TO DEVELOP THE LAND I N QUESTION BY BUILDING A RESIDENTIAL CUM COMMERCIAL PROJECT THERE ON. AGREEMENT WAS ENTERED INTO ON 20.1.1997. THE ASSESSEE RECEIV ED RS. 1 CRORE AS ADVANCE UNDER THE SAID AGREEMENT. RS. 1,42,75,0 00/- REPRESENTS INTEREST ON THE ABOVE ADVANCE FOR THE PERIOD OF REC EIPT OF ADVANCE PAGE 10 OF 25 I.T.A. NO 1379/MDS/2010 ITA NO.1929/MDS/2010 TO THE DATE OF SALE OF LAND. RS. 20 LAKHS REPRESEN TS ASSESSEES SHARE OF EXPENSES IN RESPECT OF THE SAID PROJECT. HOWEVE R, THE PROJECT AGREED ON 20.1.1997 COULD NOT TAKE OFF AND ULTIMATE LY THE ASSESSEE SOLD THE LAND IN QUESTION TO MAHINDRA GESCO. ACCOR DING TO THE ASSESSING OFFICER, THE AFORESAID EXPENDITURE OF RS. 1,62,75,000/- IS NOT ALLOWABLE U/S 48 OF THE AT AND THEREFORE, DISAL LOWED THE SAME FOR COMPUTING LONG TERM CAPITAL GAINS. 14. ON APPEAL, THE LD. CIT(A) CONFIRMED THE ACTION OF THE ASSESSING OFFICER. 15. BEFORE US, THE LD. A.R. OF THE ASSESSEE CONTEND ED THAT BECAUSE OF THE ABOVE AGREEMENT, AN ENCUMBRANCE WAS CREATED ON THE LAND IN QUESTION AND THEREFORE, TO CLEAR THAT ENCUMBRANC E, THE EXPENDITURE IN QUESTION WAS INCURRED BY THE ASSESSE E AND THEREFORE, OUGHT TO HAVE BEEN ALLOWED U/S 48 OF THE ACT. 16. WE FIND THAT THE EXPENDITURE IN QUESTION OF RS. 1,62,75,000/- HAS NO CONNECTION WITH THE ACQUISITION OF LAND IN Q UESTION. THE AFORESAID LOSS WAS INCURRED BECAUSE OF UNDERTAKING A HOUSING PAGE 11 OF 25 I.T.A. NO 1379/MDS/2010 ITA NO.1929/MDS/2010 PROJECT WHICH DID NOT MATERIALIZE. IN THE PRESENT CASE, WE ARE NOT CONCERNED WITH THE QUESTION WHETHER THE SAID EXPEND ITURE OF RS. 1,62,75,000/- CAN BE ALLOWED AS BUSINESS LOSS TO TH E ASSESSEE OR NOT. WE ARE REQUIRED TO ADJUDICATE WHETHER THE SAM E CAN BE ALLOWED AS DEDUCTION U/S 48 OR NOT FOR COMPUTING CA PITAL GAINS IN THE HANDS OF THE ASSESSEE. 17. WE FIND THAT EVEN ASSUMING AN ENCUMBRANCE WAS C REATED ON THE LAND, THEN ALSO, AS THE SAID ENCUMBRANCE WAS CR EATED BY THE ASSESSEE ITSELF AFTER ACQUIRING THE LAND, THEREFORE , THE AMOUNT INCURRED FOR ACQUIRING THAT ENCUMBRANCE CANNOT BE A LLOWED AS DEDUCTION FOR COMPUTING CAPITAL GAINS. IT IS NOT T HE CASE OF THE ASSESSEE THAT THE ADVANCE OF RS. 1 CRORE RECEIVED BY THE ASSESSEE WAS UTILIZED FOR ACQUIRING OR DEVELOPING LAND IN QU ESTION. THEREFORE, IN OUR CONSIDERED OPINION, INTEREST OF R S. 1,42,75,000/- CANNOT BE ALLOWED AS DEDUCTION FOR COMPUTING CAPITA L GAINS ARISING OUT OF SALE OF LAND IN QUESTION. SIMILARLY, IN RES PECT OF EXPENDITURE OF RS. 20 LAKHS, WE FIND THAT NO MATERIAL WAS BROU GHT BEFORE US TO SHOW THAT THE SAID EXPENDITURE WAS INCURRED FOR MAK ING ANY DEVELOPMENT OF THE LAND IN QUESTION. IN THE CIRCUM STANCES, WE FIND PAGE 12 OF 25 I.T.A. NO 1379/MDS/2010 ITA NO.1929/MDS/2010 NO ERROR IN THE ORDERS OF THE LOWER AUTHORITIES IN NOT ALLOWING DEDUCTION OF RS. 1,62,75,000/- WHILE COMPUTING CAP ITAL GAINS. WE, THEREFORE, DISMISS THIS GROUND OF APPEAL OF THE ASS ESSEE. 18. GROUND NO. 11 OF THE APPEAL READS AS UNDER: THE LD. CIT(A) ERRED IN SUSTAINING THE REJECTION OF SET OFF OF LOSSES PERTAINING TO THE ASSESSMENT YEAR 1999-2000 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE WITHOUT AS SIGNING PROPER REASONS AND JUSTIFICATION. 19. BRIEF FACTS OF THE CASE ARE THAT THE LD. CIT(A) OBSERVED THAT THE ASSESSING OFFICER HAS NOT ALLOWED SET OFF OF LO SSES PERTAINING TO ASSESSMENT YEAR 1999-2000 SINCE THE RETURN WAS BELA TEDLY FILED FOR THE ABOVE ASSESSMENT YEAR. THE LD. CIT(A) HAS FURT HER OBSERVED THAT THE LD. A.R. CONTENDED THAT THE RETURN HAD BEE N HANDED OVER TO THE POST OFFICE BEFORE THE DUE DATE OF FILING AN D HENCE SHOULD NOT BE CONSIDERED AS A BELATED RETURN. PAGE 13 OF 25 I.T.A. NO 1379/MDS/2010 ITA NO.1929/MDS/2010 20. THE LD. CIT(A), AFTER CONSIDERING THE SUBMISSIO NS OF THE LD. A.R., HELD THAT THE LD. A.R. HAS FAIRLY ADMITTED TH AT THE APPEAL ON THE ABOVE ISSUE FOR ASSESSMENT YEAR 1999-2000 WAS D ISMISSED BY THE LD. CIT(A) AND THE JURISDICTIONAL TRIBUNAL AND THE MATER WAS PENDING BEFORE THE HIGH COURT HENCE HE DISMISSED THIS GROUN D OF APPEAL. 21. THE LD. A.R. SUBMITTED THAT THE MATTER SHOULD B E RESTORED TO THE FILE OF THE ASSESSING OFFICER FOR ADJUDICATING THE ISSUE AFRESH IN LIGHT OF THE DECISION TO BE TAKEN BY THE HON'BLE MA DRAS HIGH COURT. 22. THE LD. D.R. ON THE OTHER HAND RELIED ON THE OR DER OF THE LOWER AUTHORITIES. 23. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIAL AVAILABLE ON RECORD. NO ERROR COULD BE POINTED OUT BY THE LD. A.R. IN THE O RDER OF THE LD. CIT(A). THE ONLY PLEA OF THE LD. A.R. OF THE ASSES SEE IS THAT THE ISSUE BE RESTORED TO THE FILE OF THE ASSESSING OFFI CER TO GIVE EFFECT TO THE ORDER PASSED BY THE HON'BLE HIGH COURT. IN OUR CONSIDERED OPINION, HON'BLE HIGH COURTS ORDER IS BINDING ON E VERY AUTHORITY PAGE 14 OF 25 I.T.A. NO 1379/MDS/2010 ITA NO.1929/MDS/2010 FUNCTIONING UNDER THE JURISDICTION OF THE HIGH COUR T. THEREFORE, NO DIRECTION IS REQUIRED TO BE GIVEN BY THE TRIBUNAL F OR FOLLOWING THE DECISION OF THE HIGH COURT SEPARATELY. THE LD. A.R . OF THE ASSESSEE COULD NOT BRING ANY MATERIAL TO SHOW THAT THE DECIS ION OF THE TRIBUNAL AS STATED IN THE ORDER OF THE LD. CIT(A) I N THE CASE OF THE ASSESSEE PASSED FOR ASSESSMENT YEAR 1999-2000 HAS B EEN VARIED BY THE HIGH COURT TILL DATE. THEREFORE, WE DO NOT FIN D ANY GOOD REASON TO INTERFERE WITH THE ORDER OF THE LD. CIT(A). HEN CE THIS GROUND OF APPEAL OF THE ASSESSEE IS DISMISSED. 24. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS DI SMISSED. 25. IN THE REVENUES APPEAL, THE SOLE GROUND OF APP EAL TAKEN BY THE REVENUE IS THAT THE LD. CIT(A) ERRED IN ALLOWIN G THE ASSESSEES CLAIM FOR DEDUCTION OF RS. 3.75 CRORES U/S 48 WHIL E COMPUTING CAPITAL GAINS. 26. THE BRIEF FACTS OF THE CASE ARE THAT THE M/S HI VELM INDUSTRIES LTD [HIL] WAS AMALGAMATED WITH THE ASSESSEE COMPANY BY THE ORDER OF HIGH COURT OF MADRAS ON 2.5.1986. THE APPOINTED DATE WAS FIXED PAGE 15 OF 25 I.T.A. NO 1379/MDS/2010 ITA NO.1929/MDS/2010 AS 17.6.1985. HIL HAD ACQUIRED A PROPERTY AT LATTI CE BRIDGE ROAD, CHENNAI IN 1961. M/S HIL ON SECURITY OF THE SAID PR OPERTY HAD BORROWED MONEY FROM STATE BANK OF INDIA BY DEPOSITI NG THE TITLE DEEDS. THE ABOVE PROPERTY SUBSEQUENTLY BECAME THE PROPERTY OF THE APPELLANT CONSEQUENT TO THE AMALGAMATION OF HIL WITH THE ASSESSEE COMPANY PURSUANT TO A SCHEME OF AMALGAMATI ON APPROVED BY THE HON'BLE MADRAS HIGH COURT. DURING 1988, THE LOAN FACILITIES AVAILED BY HIL WAS TAKEN OVER FROM STATE BANK OF IN DIA BY INDIAN BANK. THE LOAN FROM INDIA BANK WAS CLEARED UNDER O TS AT THE TIME OF SALE OF THE PROPERTY, WHICH WAS CLAIMED AS DEDUC TION FROM THE SALE PROCEEDS FOR THE PURPOSE OF COMPUTATION OF LON G TERM CAPITAL GAINS. THE BUYER PAID THE OTS AMOUNT DIRECTLY TO T HE BANK AND ONLY THE REMAINING PART OF THE CONSIDERATION WAS PAID TO THE ASSESSEE. THE ASSESSING OFFICER DID NOT ALLOW DEDUCTION IN RE SPECT OF THE SAID OTS AMOUNT ON THE GROUND THAT IT WAS A SELF CREATED CHARGE AND WAS NOT PRE-EXISTING LIABILITY WHICH ALONE COULD BE ALL OWED AS A DEDUCTION U/S 48 OF THE ACT. IN COMING TO THIS CON CLUSION, THE ASSESSING OFFICER WAS OF THE OPINION THAT ENCUMBRAN CE WAS NOT EXISTING AT THE TIME OF ACQUISITION OF THE PROPERTY IN 1961 BUT WAS CREATED SUBSEQUENTLY. THE ASSESSING OFFICER REFERR ED TO THE PAGE 16 OF 25 I.T.A. NO 1379/MDS/2010 ITA NO.1929/MDS/2010 PROVISIONS OF SECTION 49(1) OF THE ACT AND HELD THA T IF THE PROPERTY IS TRANSFERRED BY AMALGAMATION, THE COST TO THE PREVIO US OWNER IS TO BE TAKEN. WHEN SUCH COST IS TAKEN UNLESS THERE IS A SUBSISTING CHARGE ON THE DATE OF ACQUISITION OF PROPERTY, NO A MOUNT CAN BE DEDUCTED IN COMPUTING THE CAPITAL GAINS. THE ASSES SING OFFICER ALSO OBSERVED THAT THERE WAS DIFFERENCE BETWEEN SUCCESSI ON, INHERITANCE ETC AND AMALGAMATION SINCE IN THE FIRST CATEGORY TH E PREVIOUS OWNER CEASES TO EXIST WHEREAS IN THE LATTER CASE THE PREV IOUS OWNER CONTINUES TO EXIST. THE ASSESSING OFFICER CAME TO THIS CONCLUSION SINCE THE TRANSFER OF THE PROPERTY TO AMALGAMATED C OMPANY WAS WITHOUT TRANSFER OF TITLE BY WAS OF REGISTRATION. T HE ASSESSING OFFICER OBSERVED THAT THE SINCE AT THE TIME OF AMAL GAMATION IT WAS NOT A TRANSFER AS PER SECTION 47(VI) OF THE ACT, NO CAPITAL GAIN TAX WAS PAID. THE ASSESSEE CANNOT AGAIN CLAIM THE BENE FIT OF DEDUCTION OF ENCUMBRANCE BY THE AMALGAMATED COMPANY. THE ASS ESSING OFFICER HAS ALSO STATED THAT SINCE THE AMALGAMATION IS NOT A TRANSFER, THE BENEFIT OF INDEXATION FROM THE YEAR O F PURCHASE IS MADE AVAILABLE. THE ASSESSING OFFICER RELIED ON TH E DECISION IN THE CASE OF CIT VS. ALLADI N. RAO 252 ITR 880 [SC] AND L.M. DEVARE, OFFICIAL LIQUIDATOR OF BANK OF KARAD VS. CIT 234 IT R 813 [BOM]. PAGE 17 OF 25 I.T.A. NO 1379/MDS/2010 ITA NO.1929/MDS/2010 27. ON THE ABOVE REASONING, THE ASSESSING OFFICER C ONCLUDED THAT THE PAYMENT OF RS. 3.75 CRORES TO INDIAN BANK UNDE R OTS WAS NEITHER COST OF ACQUISITION NOR EXPENDITURE IN CONN ECTION WITH TRANSFER AND THEREFORE, COULD NOT BE ALLOWED AS DED UCTION IN COMPUTING THE CAPITAL GAINS. 28. ON APPEAL BEFORE THE LD. CIT(A), THE ASSESSEE S UBMITTED THAT THE REFERENCE TO THE PROVISIONS OF SECTION 49(1) OF THE ACT BY THE ASSESSING OFFICER IS MISLEADING AS WELL AS THE SAID PROVISIONS ARE QUOTED OUT OF CONTEXT. THE SAID PROVISION ENVISAGE S ONLY THE ASCERTAINMENT OF COST OF ACQUISITION UNDER CERTAIN CIRCUMSTANCES AND HENCE THE CLAIM FOR DEDUCTION OF PAYMENT OF OTS FROM SALE CONSIDERATION TO ARRIVE AT ASSESSABLE CAPITAL GAINS WAS PERFECTLY IN ORDER AND THE SAID PAYMENT SHOULD BE CONSTRUED AS A NOTHER COMPONENT OF THE COST TO THE ASSESSEE IN THE SUCCES SION TO THE PROPERTY ALLOWABLE IN THE COMPUTATION OF CAPITAL GA INS. 29. THE LD. CIT(A) AFTER CONSIDERING THE SUBMISSION S HELD AS UNDER: PAGE 18 OF 25 I.T.A. NO 1379/MDS/2010 ITA NO.1929/MDS/2010 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE A ND THE SUBMISSIONS MADE BY THE LD. A.R. I HAVE ALSO GONE T HROUGH THE DECISIONS RELIED UPON BY THE ASSESSING OFFICER AND THE LD. A.R. I HAVE ALSO PERUSED THE SCHEME OF AMALGAMATION AND THE OTHER DOCUMENTS SUBMITTED BY THE APPELLANT. IN M Y CONSIDERED OPINION, THE IMPUGNED AMOUNT IS A PRE-EXI STING LIABILITY THAT HAS BEEN TAKEN OVER BY THE APPELLANT CONSEQUENT TO THE AMALGAMATION WHICH WAS APPROVED BY THE HON'BLE HIGH COURT OF MADRAS. AS EVIDENT FROM THE SCHEME OF AMALGAMATION, THE APPELLANT HAD TAKEN OVER BOTH THE ASSETS AND THE LIABILITIES. THEREFORE, THE CONTENTION OF T HE AO THAT THE LIABILITIES CANNOT BE TREATED AS PRE-EXISTING I S NOT SUPPORTED BY THE FACTS OF THE CASE. THE LOAN HAD BE EN TAKEN BY HIL PRIOR TO THE AMALGAMATION AND WAS EXISTING A S ON THE DATE OF AMALGAMATION. UNLESS THE SAID LIABILITY IS DISCHARGED THE APPELLANT WOULD NOT BE ABLE TO SELL THE PROPERT Y. I AM ALSO NOT IN AGREEMENT WITH THE CONTENTION OF THE AO THAT THE PREVIOUS OWNER CONTINUES TO EXISTS IN AMALGAMATION: A S PER CIAUSE 8 OF THE SCHEME OF MERGER, 'ON THE SCHEME BEC OMING EFFECTIVE THE TRANSFEROR COMPANY (HIL) SHALL 'BE DI SSOLVED WITHOUT WINDING UP'. THIS CLEARLY INDICATES THAT THE TRANSFEROR COMPANY CEASES TO EXIST ONCE THE SCHEME IS APPROVED BY THE HIGH COURT. SIMILARLY, THERE IS NO F ORCE IN THE CONTENTION OF THE AO THAT BECAUSE THE TRANSFER O F PROPERTY IS WITHOUT TRANSFER OF TITLE BY WAY OF REG ISTRATION, THE LIABILITY TAKEN OVER IS NOT A PREEXISTING CHAR GE. ONCE THE PAGE 19 OF 25 I.T.A. NO 1379/MDS/2010 ITA NO.1929/MDS/2010 SCHEME OF AMALGAMATION IS APPROVED BY THE HON'BLE H IGH COURT, ALL THE RIGHTS AND PROPERTIES STAND VESTED IN THE HANDS OF THE AMALGAMATED COMPANY AND NO REGISTRATION IS REQUIRED FOR SUCH TRANSFERS. FURTHER, THE OTHER OBSERVATIONS O F THE AO REGARDING CAPITAL GAINS AT THE TIME OF AMALGAMATION AND CHANGE IN THE CHARACTER OF THE ASSET HAVE NO BEARIN G ON THE SUBJECT ISSUE UNDER ADJUDICATION. I ALSO FIND THAT THE HON'BLE SUPREME COURT IN THE CASE OF IN THE CASE OF V.S.M.R . JAGADISHCHANDARAN (DEED) V. CIT, 227 ITR 240 HAD HE LD AS UNDER: HELD, DISMISSING THE APPEAL, THAT IN RM.ARUNACHALAM V. CIT [1997] 227 ITR 222 (SC), THE CORRECTNESS OF THE VIEW OF THE KERALA HIGH COURT IN AMBAT ECHUKUTY MENON V. CIT [1978] 111 ITR 880 HAD BEEN EXAMINED BY THE SUPREME COURT, AND IT HAD BEEN HELD THEREIN THAT THE SAID DECISION DID NOT LAY DOWN THE CORRECT LAW IN SO FAR AS IT HELD THAT WHERE THE PREVIOUS OWNER HAD MORTGAGED THE PROPERTY DURING HIS LIFETIME THE CLEARING OFF OF THE MORTGAGE DEBT BY HIS SUCCESSOR COULD NEITHER BE TREATED AS 'COST OF ACQUISITION' NOR AS 'COST OF IMPROVEMENT' MADE BY THE' ASSESSEE. IT HAS BEEN HELD THAT WHERE A MORTGAGE WAS CREATED BY THE PREVIOUS OWNER DURING HIS LIFETIME AND THE SAME WAS SUBSISTING ON THE DATE PAGE 20 OF 25 I.T.A. NO 1379/MDS/2010 ITA NO.1929/MDS/2010 OF HIS DEATH, THE SUCCESSOR OBTAINED ONLY THE MORTGAGOR'S INTEREST IN THE PROPERTY AND BY DISCHARGING THE MORTGAGE DEBT HE ACQUIRED THE MORTGAGEE'S INTEREST IN THE PROPERTY AND, THEREFORE, THE AMOUNT PAID TO CLEAR OFF THE MORTGAGE WAS THE COST OF ACQUISITION OF THE MORTGAGEE'S INTEREST IN THE PROPERTY WHICH WAS DEDUCTIBLE AS COST OF ACQUISITION UNDER SECTION 48 OF THE ACT.' 30. THE LD. D.R. RELIED ON THE ORDER OF THE ASSESSI NG OFFICER WHEREAS THE LD. A.R. SUPPORTED THE ORDER OF THE LD. CIT(A). 31. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIAL AVAILABLE ON RECORD. THE ASSESSING OFFICER, WHILE COMPUTING CAPITAL GAINS ON SALE OF LAND SITUATED AT LATTICE BRIDGE, CHENNAI, DISALLOWED THE DEDUCTION OF RS. 3.75 CRORES CLAIMED BY THE ASSESSEE. DEDUCTION OF RS. 3.75 CRORES CLAIMED BY THE ASSESSEE REPRESENTS THE AMOUNT PAID TO INDIAN BANK UNDER OTS. PAGE 21 OF 25 I.T.A. NO 1379/MDS/2010 ITA NO.1929/MDS/2010 32. ON APPEAL, THE LD. CIT(A) DELETED THE DISALLOWA NCE BY OBSERVING AS UNDER: I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE A ND THE SUBMISSIONS MADE BY THE LD. A.R. I HAVE ALSO GONE T HROUGH THE DECISIONS RELIED UPON BY THE ASSESSING OFFICER AND THE LD. A.R. I HAVE ALSO PERUSED THE SCHEME OF AMALGAMATION AND THE OTHER DOCUMENTS SUBMITTED BY THE APPELLANT. IN M Y CONSIDERED OPINION, THE IMPUGNED AMOUNT IS A PRE-EXI STING LIABILITY THAT HAS BEEN TAKEN OVER BY THE APPELLANT CONSEQUENT TO THE AMALGAMATION WHICH WAS APPROVED BY THE HON'BLE HIGH COURT OF MADRAS. AS EVIDENT FROM THE SCHEME OF AMALGAMATION, THE APPELLANT HAD TAKEN OVER BOTH THE ASSETS AND THE LIABILITIES. THEREFORE, THE CONTENTION OF T HE AO THAT THE LIABILITIES CANNOT BE TREATED AS PRE-EXISTING I S NOT SUPPORTED BY THE FACTS OF THE CASE. THE LOAN HAD BE EN TAKEN BY HIL PRIOR TO THE AMALGAMATION AND WAS EXISTING A S ON THE DATE OF AMALGAMATION. UNLESS THE SAID LIABILITY IS DISCHARGED THE APPELLANT WOULD NOT BE ABLE TO SELL THE PROPERT Y. I AM ALSO NOT IN AGREEMENT WITH THE CONTENTION OF THE AO THAT THE PREVIOUS OWNER CONTINUES TO EXISTS IN AMALGAMATION: A S PER CIAUSE 8 OF THE SCHEME OF MERGER, 'ON THE SCHEME BEC OMING EFFECTIVE THE TRANSFEROR COMPANY (HIL) SHALL 'BE DI SSOLVED WITHOUT WINDING UP'. THIS CLEARLY INDICATES THAT THE TRANSFEROR COMPANY CEASES TO EXIST ONCE THE SCHEME IS PAGE 22 OF 25 I.T.A. NO 1379/MDS/2010 ITA NO.1929/MDS/2010 APPROVED BY THE HIGH COURT. SIMILARLY, THERE IS NO F ORCE IN THE CONTENTION OF THE AO THAT BECAUSE THE TRANSFER O F PROPERTY IS WITHOUT TRANSFER OF TITLE BY WAY OF REG ISTRATION, THE LIABILITY TAKEN OVER IS NOT A PREEXISTING CHAR GE. ONCE THE SCHEME OF AMALGAMATION IS APPROVED BY THE HON'BLE H IGH COURT, ALL THE RIGHTS AND PROPERTIES STAND VESTED IN THE HANDS OF THE AMALGAMATED COMPANY AND NO REGISTRATION IS REQUIRED FOR SUCH TRANSFERS. FURTHER, THE OTHER OBSERVATIONS O F THE AO REGARDING CAPITAL GAINS AT THE TIME OF AMALGAMATION AND CHANGE IN THE CHARACTER OF THE ASSET HAVE NO BEARIN G ON THE SUBJECT ISSUE UNDER ADJUDICATION. I ALSO FIND THAT THE HON'BLE SUPREME COURT IN THE CASE OF IN THE CASE OF V.S.M.R . JAGADISHCHANDARAN (DEED) V. CIT, 227 ITR 240 HAD HE LD AS UNDER: HELD, DISMISSING THE APPEAL, THAT IN RM.ARUNACHALAM V. CIT [1997] 227 ITR 222 (SC), THE CORRECTNESS OF THE VIEW OF THE KERALA HIGH COURT IN AMBAT ECHUKUTY MENON V. CIT [1978] 111 ITR 880 HAD BEEN EXAMINED BY THE SUPREME COURT, AND IT HAD BEEN HELD THEREIN THAT THE SAID DECISION DID NOT LAY DOWN THE CORRECT LAW IN SO FAR AS IT HELD THAT WHERE THE PREVIOUS OWNER HAD MORTGAGED THE PROPERTY DURING HIS LIFETIME THE CLEARING OFF OF THE MORTGAGE DEBT BY HIS SUCCESSOR COULD NEITHER BE TREATED AS 'COST OF ACQUISITION' PAGE 23 OF 25 I.T.A. NO 1379/MDS/2010 ITA NO.1929/MDS/2010 NOR AS 'COST OF IMPROVEMENT' MADE BY THE' ASSESSEE. IT HAS BEEN HELD THAT WHERE A MORTGAGE WAS CREATED BY THE PREVIOUS OWNER DURING HIS LIFETIME AND THE SAME WAS SUBSISTING ON THE DATE OF HIS DEATH, THE SUCCESSOR OBTAINED ONLY THE MORTGAGOR'S INTEREST IN THE PROPERTY AND BY DISCHARGING THE MORTGAGE DEBT HE ACQUIRED THE MORTGAGEE'S INTEREST IN THE PROPERTY AND, THEREFORE, THE AMOUNT PAID TO CLEAR OFF THE MORTGAGE WAS THE COST OF ACQUISITION OF THE MORTGAGEE'S INTEREST IN THE PROPERTY WHICH WAS DEDUCTIBLE AS COST OF ACQUISITION UNDER SECTION 48 OF THE ACT.' 33. THE LD. D.R. COULD NOT POINT OUT ANY ERROR IN T HE ORDER OF THE LD. CIT(A). 34. WE FIND THAT IT IS NOT IN DISPUTE THAT THE ASSE SSEE COMPANY BECAME THE OWNER OF LAND IN QUESTION IN PURSUANCE T O THE AMALGAMATION OF HIL WITH THE ASSESSEE COMPANY. FUR THER, IT IS ALSO NOT IN DISPUTE THAT BEFORE SUCH AMALGAMATION, THE L AND IN QUESTION WAS MORTGAGED WITH THE STATE BANK OF INDIA. THUS, THE ASSESSEE ACQUIRED ONLY MORTGAGEES INTEREST IN THE LAND AT T HE TIME OF PAGE 24 OF 25 I.T.A. NO 1379/MDS/2010 ITA NO.1929/MDS/2010 AMALGAMATION. THEREFORE, THE AMOUNT PAID TO THE IN DIAN BANK TO ACQUIRE MORTGAGEES INTEREST IN THE LAND CONSTITUTE S COST OF IMPROVEMENT OF LAND. 35. WE FIND THAT IN THE INSTANT CASE WE ARE NOT REQ UIRED TO ADJUDICATE WHAT WAS THE ORIGINAL COST OF THE LAND W HICH WAS ACQUIRED BY THE ASSESSEE AND THE SAME IS NOT IN DIS PUTE BEFORE US. WE ARE ONLY REQUIRED TO ADJUDICATE WHETHER THE AMOU NT PAID UNDER OTS TO INDIAN BANK TO CLEAR THE ENCUMBRANCE WHICH W AS ON THE LAND ON THE DATE ON WHICH THE ASSESSEE ACQUIRED OWNERSHI P OF THE LAND WILL BE ALLOWED AS DEDUCTION WHILE COMPUTING CAPITA L GAINS OR NOT. ON THE ABOVE ISSUE, WE FIND THAT THE DECISION OF TH E LD. CIT(A) IS SQUARELY COVERED BY THE DECISION OF THE HON'BLE SUP REME COURT IN THE CASE OF VSMR JAGDISHCHANDRAN [DECD] VS. CIT 227 ITR 240 [SC]. WE, THEREFORE, DO NOT FIND ANY GOOD REASON TO INTER FERE WITH THE ORDER OF THE LD. CIT(A). IT IS CONFIRMED. THE GRO UND OF APPEAL OF THE REVENUE IS DISMISSED. 36. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. PAGE 25 OF 25 I.T.A. NO 1379/MDS/2010 ITA NO.1929/MDS/2010 37. TO SUM UP, IN THE RESULT, THE APPEAL OF THE ASS ESSEE AS WELL AS THE APPEAL OF THE REVENUE BOTH ARE DISMISSED. ORDER PRONOUNCED IN THE COURT ON 9 TH SEPTEMBER, 2011. SD/- SD/- (GEORGE MATHAN ) (N.S. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 9 TH SEPTEMBER, 2011. VL COPY TO: ASSESSEE/AO/CIT (A)/CIT/D.R./GUARD FILE