Sakthi Sugars Limited, CHENNAI V. DCIT Corporate Circle 1, Coimbatore

ITA 1524/CHNY/2017

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 7683 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 9 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-04-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2011-2012
• Appeal Filed On: 13-06-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SAILENDRA MAMIDI
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Capital asset; Depreciation; Wholly owned subsidiary; Revenue expenditure
• Section: 143(3); 37(1); 32

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , C BENCH, CHENNAI . , . , BEFORE SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER ./ I.T.A.NO.1457/CHNY/2017 / ASSESSMENT YEAR: 2011-12) THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE -1, COIMBATORE VS M/S. SAKTHI SUGARS LIMITED, 180, RACE COURSE ROAD, COIMBATORE 641 018. PAN: AADCS0651B ( /APPELLANT) ( /RESPONDENT) & ./ I.T.A.NO.1524/CHNY/2017 / ASSESSMENT YEAR: 2011-12) M/S. SAKTHI SUGARS LIMITED, C/O. M/S. SUBBARAYA AIYAR, PADMANABHAN & RAMAMANI ADVOCATES, NEW NO.75 (OLD NO.105), WINDSOR TOWERS, DR.RADHAKRISHNAN SALAI, MYLAPORE, CHENNAI 600 004. VS THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE -1, COIMBATORE PAN: AADCS0651B ( /APPELLANT) ( /RESPONDENT) /REVENUE BY : SHRI SAILENDRA MAMIDI, CIT /ASSESSEE BY : SHRI R. VIJAYARAGHAVAN, ADVOCATE /DATE OF HEARING : 24.01.2019 /DATE OF PRONOUNCEMENT : 09.04.2019 / O R D E R PER A. MOHAN ALANKAMONY, AM:- THESE APPEALS BY THE REVENUE AS WELL AS BY THE ASSESSEE ARE DIRECTED AGAINST THE ORDER PASSED BY THE LEARNED COMMISSIONER 2 ITA NO. 1457 & 1524/CHNY/2017 OF INCOME TAX (APPEALS)-1, COIMBATORE DATED 31.03.2017 IN APPEAL NO.177/14-15 FOR THE ASSESSMENT YEAR 2011-12 PASSED U/S.250(6) R.W.S. 143(3) OF THE ACT. 2. THE APPEAL FILED BY THE ASSESSEE IS WITH DELAY OF ONE DAY. THE LD.AR PLEADED THAT THE SHORT DELAY IN FILING THE APPEAL MAY BE CONDONED BECAUSE THE DELAY HAD OCCURRED DUE TO THE OVERSIGHT OF HIS STAFF. THOUGH THE LD.DR OBJECTED TO THE SUBMISSION OF THE LD.AR, CONSIDERING THE PRAYER OF THE LD.AR AND IN THE LARGER INTEREST OF JUSTICE WE HEREBY CONDONE THE SHORT DELAY IN FILING THE APPEAL BY THE ASSESSEE AND PROCEED TO HEAR THE APPEAL ON MERITS. 3. REVENUES APPEAL IN ITA NO.1457 OF 2017:- THE REVENUE HAS RAISED FOUR GROUNDS IN ITS APPEAL HOWEVER THE CRUX OF THE ISSUE IS THAT THE LD.CIT(A) HAS ERRED IN GRANTING DEPRECIATION ON MACHINES THAT WAS NOT PUT TO USE FOR PRODUCTION DURING THE RELEVANT ASSESSMENT YEAR. 4. ASSESSEES APPEAL IN ITA NO.1524 OF 2017:- THE ASSESSEE HAS RAISED NINE GROUNDS IN ITS APPEAL HOWEVER THE CRUX OF THE ISSUE IS THAT THE LD.CIT(A) HAS ERRED IN UPHOLDING THE 3 ITA NO. 1457 & 1524/CHNY/2017 ORDER OF THE LD.AO WHO HAD DISALLOWED THE CLAIM OF DEDUCTION U/S.37(1) OF THE ACT WITH RESPECT TO THE LOSS INCURRED TOWARDS THE INVESTMENT MADE IN M/S. TILAN SUGARS LTD AND ALSO REJECTED THE ALTERNATE CLAIM OF THE ASSESSEE FOR TREATING THE SAME AS CAPITAL LOSS. 5. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A PUBLIC LIMITED COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURING OF SUGARS, INDUSTRIAL ALCOHOL AND POWER GENERATION, FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2011-12 ELECTRONICALLY ON 28.09.2011 ADMITTING NIL INCOME. INITIALLY THE RETURN WAS PROCESSED U/S.143(1) OF THE ACT AND SUBSEQUENTLY THE CASE WAS SELECTED FOR SCRUTINY UNDER CASS AND NOTICE U/S.143(2) OF THE ACT WAS ISSUED ON 10.09.2012. FINALLY ASSESSMENT ORDER WAS PASSED U/S.143(3) OF THE ACT ON 31.03.2014 WHEREIN THE LD.AO MADE SEVERAL ADDITIONS. 6. REVENUES APPEAL IN ITA NO.1457 OF 2017: THE CLAIM OF DEPRECIATION TOWARDS SIVAGANGA BEVERAGE UNIT:- DURING THE COURSE OF SCRUTINY ASSESSMENT PROCEEDINGS, IT WAS OBSERVED BY THE LD.AO THAT THE ASSESSEE HAD CLAIMED DEPRECIATION OF RS.53,11,246/- WITH RESPECT TO M/S. SIVAGANGA BEVERAGE UNIT. 4 ITA NO. 1457 & 1524/CHNY/2017 THE LD.AO WAS OF THE VIEW THAT SINCE THERE WAS NO PRODUCTION OR COMMERCIAL ACTIVITY CARRIED ON IN THE BEVERAGE PLANT AT SIVAGANGA BEVERAGE UNIT, THE ASSESSEE WOULD NOT BE ENTITLED FOR THE CLAIM OF DEPRECIATION. THE ASSESSEE COMPANY HAD MADE THE FOLLOWING SUBMISSIONS BEFORE THE LD.AO TO JUSTIFY ITS STAND:- I. AFTER INTRODUCTION OF THE CONCEPT OF BLOCK ASSETS IN THE STATUTE, IT IS ENOUGH IF THE FACTORY IS SHOWN TO HAVE BEEN FUNCTIONING DURING THE RELEVANT ASSESSMENT YEAR FOR CLAIMING THE BENEFIT OF DEPRECIATION. II. IT IS NOT NECESSARY TO FURNISH PROOF REGARDING THE UTILIZATION OF EACH MACHINERY. III. RELIANCE WAS PLACED IN THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE CAPITAL BUS SERVICES REPORTED IN 123 ITR 404, WHEREIN IT WAS HELD THAT MACHINERY WILL DEPRECIATE EVEN WHERE IT IS NOT USED IN THE BUSINESS AND EVEN WHEN IT IS KEPT IDLE. IV. RELIANCE WAS PLACED IN THE DECISION OF THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE CIT VS NAHAR EXPORTS LTD., REPORTED IN 163 TAXMAN 518 WHEREIN IT WAS HELD THAT THE ASSESSEE IS ENTITLED TO CLAIM THE DEPRECIATION WITH RESPECT TO THE MACHINERY KEPT READY FOR USE. 5 ITA NO. 1457 & 1524/CHNY/2017 V. RELIANCE WAS ALSO PLACED IN THE DECISION OF THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2005-06 IN ITA NO.12 & 1280/MDS/2009 VIDE ORDER DATED 31.03.2010 WHEREIN THE CLAIM OF DEPRECIATION WITH RESPECT TO THE BEVERAGE DIVISION OF THE ASSESSEE WAS GRANTED THOUGH THE BEVERAGE UNIT HAS NOT COMMENCED PRODUCTION BUT HAD COMPLETED TRIAL RUN AND WAS READY FOR OPERATION. HOWEVER THE LD.AO RELYING ON THE PROVISIONS OF SECTION 32 OF THE ACT, DENIED THE CLAIM OF DEPRECIATION AS THE ACT STIPULATE THE OWNERSHIP AND USAGE OF THE MACHINERY FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE DURING THE RELEVANT ASSESSMENT YEAR FOR CLAIMING DEPRECIATION AS DEDUCTION. 6.1 ON APPEAL, THE LD.CIT(A) FOLLOWING THE ORDER OF THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2008- 09 IN ITA NO.614/MDS/2012 AND ITA NO.867/MDS/2012 DATED 30.01.2015, GRANTED DEPRECIATION TO THE ASSESSEE AS THE ASSESSEES BEVERAGE UNIT HAD COMPLETED THE TRIAL RUN FOR PRODUCTION OF BEVERAGE AND READY FOR COMMERCIAL OPERATION. 6 ITA NO. 1457 & 1524/CHNY/2017 6.2 AT THE OUTSET, WE FIND THE ISSUE TO BE COVERED BY THE ORDER OF THE TRIBUNAL CITED SUPRA, BECAUSE THE FACTS ARE IDENTICAL AND ON THE VERY SAME ISSUE. THEREFORE WE DO NOT FIND IT NECESSARY TO INTERFERE WITH THE ORDER OF THE LD.CIT(A) WHO HAD GRANTED RELIEF TO THE ASSESSEE BY FOLLOWING THE EARLIER ORDER OF THE TRIBUNAL ON THE IDENTICAL ISSUE. HENCE THE REVENUES APPEAL IS DEVOID OF MERITS AND WE HEREBY CONFIRM THE ORDER OF THE LD.CIT(A) ON THIS ISSUE. 7. ASSESSEES APPEAL IN ITA NO.1524/CHNY/2017 : LOSS ON INVESTMENT MADE IN TILAN SUGARS LTD.:- DURING THE COURSE OF SCRUTINY ASSESSMENT IT WAS OBSERVED BY THE LD.AO THAT THE ASSESSEE HAD CLAIMED DEDUCTION OF RS.5 CRORES TOWARDS REVENUE EXPENDITURE BEING THE LOSS INCURRED ON THE INVESTMENT MADE IN M/S. TILAN SUGARS LTD. ON QUERY IT WAS EXPLAINED THAT THE ASSESSEE HAD INVESTED IN THE EQUITY SHARES OF M/S. TILAN SUGARS LTD., FOR RS.5 CRORES AS WHOLLY OWNED SUBSIDIARY COMPANY. SUBSEQUENTLY M/S. TILAN SUGARS LTD., WAS DISSOLVED IN ACCORDANCE WITH THE COMPANYS ACT EASY EXIT SCHEME, 2010. THEREFORE THE ENTIRE AMOUNT OF INVESTMENT WAS WRITTEN OFF IN THE BOOKS OF ACCOUNTS AS THE ASSESSEE WAS UNDER THE BONAFIDE VIEW THAT THE VALUE OF THE INVESTMENT HAD DIMINISHED TO NIL VALUE. THE 7 ITA NO. 1457 & 1524/CHNY/2017 ASSESSEE FURTHER OPINED THAT THE LOSS HAD OCCURRED DURING THE COURSE OF CARRYING ON THE BUSINESS AND THEREFORE IT WAS ALLOWABLE AS DEDUCTION U/S.37(1) OF THE ACT. THE ASSESSEE FURTHER RELIED IN THE DECISION OF THE HONBLE MADRAS HIGH COURT IN THE CASE CIT VS. SRINIVASA IYER REPORTED IN 192 ITR 50. RELIANCE WAS ALSO PLACED IN THE DECISION OF THE HONBLE APEX COURT IN THE CASE KARTHIKEYA V SARABHAI VS. CIT REPORTED IN 288 ITR 163, WHEREIN IT WAS HELD THE REDUCTION OF SHARE CAPITAL BY COMPANY BY REDUCING FACE VALUE OF THE SHARES AND PAYING THE BALANCE TO THE SHARE HOLDER WOULD RESULT IN EXTINGUISHMENT OF PROPORTIONATE RIGHT IN SHARES HELD BY THE SHAREHOLDER. THEREFORE THE AMOUNT PAID BY THE COMPANY TO THE SHAREHOLDER ON REDUCTION OF SHARE CAPITAL WOULD BE EXIGIBLE TO CAPITAL GAIN TAX IN THE HANDS OF THE SHARE HOLDER. RELIANCE WAS ALSO PLACED IN THE DECISION RENDERED BY THE HONBLE APEX COURT IN THE CASE CIT VS. G. NARASHIMHAN REPORTED IN 236 ITR 327 WHEREIN IT WAS HELD THAT TRANSACTION RESULTING IN REDUCTION OF SHARE CAPITAL BY COMPANY AND PRO-RATE DISTRIBUTION OF AMOUNT / ASSETS TO SHARE HOLDER WOULD AMOUNT TO TRANSFER WITHIN THE MEANING OF SECTION 2(47) OF THE ACT. 8 ITA NO. 1457 & 1524/CHNY/2017 7.1 HOWEVER THE LD.AO REJECTED THE SUBMISSION OF THE ASSESSEE AND OPINED THAT THE LOSS IS PURELY CAPITAL IN NATURE AND THEREFORE DEDUCTION CANNOT BE CLAIMED U/S.37(1) OF THE ACT. ACCORDINGLY THE LD.AO DISALLOWED THE CLAIM OF DEDUCTION OF RS.5 CRORES AND ADDED THE SAME TO THE INCOME OF THE ASSESSEE. ON APPEAL THE LD.CIT(A) CONFIRMED THE ORDER OF THE LD.AO BY OBSERVING AS FOLLOWS:- 9. IN THE INSTANT CASE, THE ASSESSEE HAS NOT TRANSFERRED ANY SHARES OF THE COMPANY. THE CLAIM OF THE ASSESSEE THROUGH THE CASE LAWS THAT REDUCTION OF SHARE CAPITAL AND PRO RATA DISTRIBUTION OF AMOUNT / ASSETS TO SHARE HOLDERS AMOUNTS TO TRANSFER AND REDEMPTION OF PREFERENCE SHARES INVOLVES TRANSFER ETC ARE NOT RELEVANT TO THE ASSESSEE COMPANYS CASE. HERE THERE WAS NO TRANSFER. FURTHER THE DEFINITION OF TRANSFER IN CLAUSE (47) OF SECTION 2 INCLUDES EXTINGUISHMENT BUT THE EXTINGUISHMENT REFERS NOT TO THE EXTINGUISHMENT OF THE ASSET ITSELF BUT TO THE EXTINGUISHMENT OF THE HOLDERS RIGHT TO THE ASSETS. THIS POSITION OF LAW HAS BEEN FINALLY SETTLED BY THE SUPREME COURT IN ITS DECISION IN VANIA SILLK MILLS (P) LTD. V. CIT [1991] 98 CTR(SC) 153 : [1991] 191 ITR 647 (SC). THE ASSESSEE COMPANY HAS ONLY CLAIMED THE DIMINUTION IN VALUE OF THE INVESTMENTS MADE IN M/S. TILAN SUGARS LTD AS A REVENUE EXPENDITURE. IT IS ONLY A CAPITAL LOSS WHICH CANNOT BE ALLOWED AS EXPENDITURE. THEREFORE THE APPEAL IS DISMISSED AND THE ADDITION IS CONFIRMED IN THE HANDS OF THE APPELLANT. 7.2 BEFORE US THE LD.AR REITERATED THE SUBMISSION MADE BEFORE THE LD.REVENUE AUTHORITIES AND PLEADED THAT THE LOSS INCURRED TOWARDS THE INVESTMENT IN SHARES IN M/S.TILAN SUGARS LTD., MAY BE TREATED AS THE REVENUE LOSS AND DEDUCTION MAY BE GRANTED U/S.37(1) OF THE ACT. ALTERNATIVELY THE LD.AR PLEADED THAT IF THE LOSS 9 ITA NO. 1457 & 1524/CHNY/2017 IS NOT TREATED AS REVENUE LOSS THEN IT MAY BE TREATED AS CAPITAL LOSS TO BE SET OFF AGAINST FUTURE CAPITAL GAINS. THE LD.AR PLACED RELIANCE IN THE FOLLOWING DECISIONS:- (I) HONBLE MADRAS HIGH COURT IN THE CASE CIT VS. T.S. SRINIVAS IYER REPORTED IN 191 ITR 50 (MAD). (II) HONBLE APEX COURT IN THE CASE KARTIKEYA V. SARABHAI VS. CIT REPORTED IN [1997] 94 TAXMAN 64 / 228 ITR 163 (SC). (III) HONBLE APEX COURT IN THE CASE CIT VS. G. NARASHIMHAN REPORTED IN [1992] 102 TAXMAN 66 / 236 ITR 327(SC). (IV) HONBLE APEX COURT IN THE CASE ANARKALI SARABHAI VS. CIT REPORTED IN [1997] 90 TAXMAN 509 / 224 ITR 422 (SC) 7.3 THE LD.DR ON THE OTHER HAND ARGUED IN FAVOUR OF THE ORDERS OF THE LD.REVENUE AUTHORITIES AND PLEADED FOR SUSTAINING THE SAME. 7.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY PERUSED THE MATERIALS ON RECORD. FROM THE FACTS OF THE CASE, IT IS APPARENT THAT THE INVESTMENT MADE BY THE ASSESSEE IN M/S. TILAN SUGARS LTD., IN THE FORM OF EQUITY SHARES HAS COMPLETELY ERODED AS THE COMPANY WAS DISSOLVED. ON DISSOLUTION OF THE COMPANY, THE SHARES 10 ITA NO. 1457 & 1524/CHNY/2017 HELD BY THE COMPANY IN M/S. TILAN SUGARS LTD., HAS BEEN EXTINGUISHED WITHOUT REALIZING A PENNY. THESE FACTS ARE NOT IN DISPUTE. THUS IT IS APPARENT THAT THE ASSESSEE HAD INCURRED LOSS OF RS.5 CRORES TOWARDS THE INVESTMENT MADE IN EQUITY SHARES OF M/S. TILAN SUGARS LTD. PROVISION OF SECTION 2(47) OF THE ACT STIPULATES THAT TRANSFER IN RELATION TO A CAPITAL ASSET INCLUDES EXTINGUISHMENT OF ANY RIGHTS THEREIN. THEREFORE AS PER THE PROVISIONS OF THE ACT, IT IS EVIDENT THAT IN THE CASE OF THE ASSESSEE LOSS HAS BEEN INCURRED AS A RESULT OF EXTINGUISHMENT OF THE EQUITY SHARES OF M/S. TILAN SUGARS LTD., HELD BY THE ASSESSEE WHICH AMOUNTS TO TRANSFER OF THE SHARES AS PER SECTION 2(47)(II) OF THE ACT. NOW THE QUESTION ARISES WHETHER THE LOSS IS TO BE TREATED AS REVENUE LOSS OR CAPITAL LOSS. IT IS OBVIOUS THAT IF THE ASSESSEE HAS HELD THE SHARES OF M/S. TILAN SUGARS LTD., AS INVESTMENT AND DISCLOSED THE SAME AS SUCH IN ITS BALANCE SHEET, THE SAME SHALL BE TREATED AS CAPITAL LOSS, SHORT-TERM OR LONG TERM AS THE CASE MAY BE AS PER SECTION 45 OF THE ACT. HOWEVER IF THE SHARES ARE HELD BY THE ASSESSEE AS STOCK-IN-TRADE AND DISCLOSED AS SUCH IN ITS BALANCE SHEET, THE SAME SHALL BE TREATED AS REVENUE LOSS AS PER SECTION 37(1) OF THE ACT. SINCE THE BALANCE SHEET OF THE ASSESSEE COMPANY IS NOT BEFORE WE ARE UNABLE TO DETERMINE WHETHER THE 11 ITA NO. 1457 & 1524/CHNY/2017 SHARES HELD BY THE ASSESSEE IN M/S. TILAN SUGARS LTD., IS INVESTMENT / CAPITAL ASSET OR STOCK-IN-TRADE, HENCE WE HEREBY REMIT THE MATTER BACK TO THE FILE OF LD.AO IN ORDER TO VERIFY THE SAME AND THEREAFTER PASS APPROPRIATE ORDER IN ACCORDANCE WITH LAW AND MERIT AND BASED ON OUR OBSERVATION HEREIN ABOVE AFTER PROVIDING DUE OPPORTUNITY TO THE ASSESSEE OF BEING HEARD. 8. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMISSED AND THE APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE AS INDICATED HEREIN ABOVE. ORDER PRONOUNCED ON THE 9 TH APRIL, 2019 AT CHENNAI. SD/- SD/- ( ) (DUVVURU R.L REDDY) /JUDICIAL MEMBER ( . ) (A. MOHAN ALANKAMONY) / ACCOUNTANT MEMBER /CHENNAI, /DATED 9 TH APRIL, 2019 RSR /COPY TO: 1. /ASSESSEE 2. /REVENUE 3. ( )/CIT(A) 4. /CIT 5. /DR 6. /GF