SM Chemicals and Electronics Pvt. Ltd., Baroda V. The Income tax Officer, Ward-1(4), Baroda

ITA 1525/AHD/2005

• Counselvise Citation: 152520514 RSA 2005
• Duration Of Justice: 6 year(s) 7 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-01-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 20-12-2011
• Assessment Year: 1978-1979
• Appeal Filed On: 01-06-2005
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: RAVINDRA KUMAR
• Assessee Lawyers: M K PATEL
• Keywords: Capital asset; Depreciation; Opportunity of being heard; Wholly owned subsidiary; Revenue expenditure; Capital expenditure
• Section: 143(3)

Judgement Text

-1- IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH 'C' BEFORE SHRI D K TYAGI - JM & A MOHAN ALANKAMONY - AM ITA NO.1525/AHD/2005 (ASSESSMENT YEAR:-1978-79) S M CHEMICALS AND ELECTRONICS (P) LTD., AMALGAMATED WITH AMBALAL SARABHAI ENTERPRISES LTD., WADI WADI, BARODA-390 023 V/S THE INCOME-TAX OFFICER, WARD-1(4), BARODA PAN: AABCA 6893 K [APPELLANT] [RESPONDENT] ASSESSEE BY :- SHRI M K PATEL, AR REVENUE BY:- SHRI RAVINDRA KUMAR, CIT DR DATE OF HEARING:- 20-12-2011 DATE OF PRONOUNCEMENT:- O R D E R PER D K TYAGI (JM) :-THIS IS ASSESSEES APPEAL AGAINST THE ORDER OF LD. CIT(A) DATED 3/3/2005. 2 AT THE TIME OF HEARING, THE LEARNED COUNSEL OF TH E ASSESSEE SUBMITTED A CHART ACCORDING TO WHICH THE FOLLOWING ISSUES ARE SUBJECT MATTER OF THIS APPEAL:- (1) TAXING OF PROFIT U/S 41(2) - RS.87,26,224/- (2) TAXING OF RIGHT TO RECEIVE 2 ROYALTY/FEES - RS.4,75,000/- (3) TAXING OF EXPENDITURE ON SCIENTIFIC RESEARCH U/S 41(1) - RS.25,00,000/- (4) INCREASE IN VALUE OF CLOSING STOCK OF FINISHED GOODS - RS.18,20,000/- (5) TAXING OF PROFIT U/S 41(3) BEING CAPITAL EXPENDITURE ON SCIENTIFIC RESEARCH - RS. 1,50,000/- (6) LEGALITY OF ORDER HOWEVER, ISSUE NO.(6) REGARDING LEGALITY OF ORDER W AS NOT PRESSED AT THE TIME OF HEARING AND, THEREFORE, IT DOES NOT REQUIRE ANY ADJUDICATION. 3 FOR THE SAKE OF CONVENIENCE, WE WILL DEAL WITH IS SUE NOS.(1), (3), (4) AND (5) TOGETHER. BRIEF FACTS OF THE CASE ARE THAT THE RETURN OF INCOME WAS FILED BY THE ASSESSEE-COMP ANY ON 31- 03-1979 SHOWING TOTAL INCOME OF RS.27,40,806/-. THE ORIGINAL ASSESSMENT WAS MADE U/S 143(3) READ WITH SECTION 14 4B ON 24- 09-1981 DETERMINING THE TOTAL INCOME OF RS.1,87,96, 100/-. THIS ASSESSMENT WAS SET-ASIDE BY THE ITAT MUMBAI AND MAT TER WAS RESTORED TO THE LEARNED CIT(A) WITH A DIRECTION TO DECIDE THE APPEAL ON MERIT ON EACH OF THE ISSUES RAISED BY THE ASSESSEE AFTER AFFORDING AN OPPORTUNITY OF BEING HEARD TO BOTH THE PARTIES. ACCORDINGLY, THE LEARNED CIT(A), BARODA DECIDED THE APPEAL VIDE HIS ORDER DATED 25-02-1991. AGAINST THIS ORDER, THE ASSESSEE WENT IN APPEAL BEFORE THE ITAT, AHMEDABAD AGITATING THE FOLLOWING ADDITIONS:- 3 (A) PROFIT U/S 41(2) BEING DEPRECIATION ON PLANT & MACHINERY - RS.87,26,224/- (B) PROFIT U/S 41(3) BEING CAPITAL EXPENDITURE ON SCIENTIFIC RESEARCH - RS. 1,50,000/- (C) PROFIT U/S 41(1) BEING REVENUE EXPENDITURE ON SCIENTIFIC RESEARCH - RS.25,00,000/- (D) DIFFERENCE IN VALUE OF FINISHED PRODUCTS - RS. 18,20,000/- THE TRIBUNAL VIDE ITS ORDER DATED 25-10-2001 IN ITA NO.3009/AHD/1991, SET-ASIDE THE ISSUES OF ABOVEMENT IONED ADDITIONS TO THE FILE OF THE AO WITH A DIRECTION FO R FRESH ADJUDICATION IN THE LIGHT OF DETAILED GUIDELINES GI VEN BY THE HONBLE GUJARAT HIGH COURT IN THE CASE OF SHAHIBAUG ENTERPRENEURS PVT. LTD. [I.T. REFERENCE NO.243 OF 1 985]. THE RELEVANT PORTION OF THE TRIBUNALS ORDER, WHICH REA D AS UNDER:- 2. GROUND NO.1 TO 4 INVOLVE THE FOLLOWING ADDITIO NS AGGREGATING TO RS.1,31,96,224/- MADE BY THE AO IN CONNECTION WI TH THE SALE OF THREE DIVISIONS OF THE ASSESSEE COMPANY TO ITS HOLD ING COMPANY OFISADE PVT. LTD., W.E.F. 1-3-77 AS UNDER:- (A) PROFIT U/S 41(2) BEING DEPRECIATION ON PLANT & MACHINERY - RS.87,26,224/- (B) PROFIT U/S 41(3) BEING CAPITAL EXPENDITURE ON SCIENTIFIC RESEARCH - RS. 1,50,000/- (C) PROFIT U/S 41(1) BEING REVENUE EXPENDITURE ON SCIENTIFIC RESEARCH - RS.25,00,000/- (D) DIFFERENCE IN VALUE OF FINISHED PRODUCTS - RS. 18,20,000/- ---------------- RS.131,96,224 4 THE HOLDING COMPANY AGREED TO PURCHASE THE TRANSFE R AND ASSIGNMENT AND GOODWILL OF THESE BUSINESS AND ACTIVITIES AS WE LL AS OTHER INTANGIBLE BENEFITS THEREOF ACCRUING OR APPURTENANT THERETO UNDER ALL LICENCE AND QUOTAS ETC. AS PER AGREEMENT ALL STOCKS OF FINISHED GOODS, RAW MATERIALS ETC. WERE TRANSFERRED TO THE PURCHASI NG COMPANY AT ITS BOOK VALUE. IN THE DEED OF ASSIGNMENT DATED 28-6-77 THE VALUES HAVE BEEN SHOWN FOR FIXED ASSETS, CURRENT ASSETS, GOODWI LL ETC. WHEREAS WITH REGARD TO OTHER INTANGIBLE ASSETS VALUE HAS BEEN AD OPTED AS NIL. BEFORE THE AO IT WAS CLAIMED THAT THE THREE UNITS HAVE BEE N TRANSFERRED AS GOING CONCERNS FOR A LUMPSUM CONSIDERATION AND NO P ART OF THE CONSIDERATION CAN BE ALLOCATED OR ATTRIBUTED TO SPE CIFIC ASSETS TRANSFERRED THEREUNDER. THE AO PROCEEDED TO ESTIMAT E THE GOODWILL OF S M CHEMICAL DIVISION ON THE BASIS OF 5 YEARS PURCH ASE OF SUPER PROFITS AND ARRIVED AT THE VALUE OF RS.3 CRORES IN ROUND FIGURE. THE AO, AFTER DETAILED DISCUSSION OF VARIOUS FACTS REGARDIN G TRANSFER OF ASSETS TO THE HOLDING COMPANY PROCEEDED TO MAKE THE IMPUGNED ADDITION OF RS.1,31,96,224/- WHICH HAS BEEN DETAILED HEREINBEFO RE AND ASSAILED BY THE ASSESSEE COMPANY VIDE GROUND NOS.1 TO 4. THE LD . CIT(A) HAS UPHELD THE AFORESAID ADDITIONS BEING CONTESTED BY T HE ASSESSEE VIDE FIRST FOUR GROUNDS BEFORE US. 3. SHRI R K PATEL, THE LD. COUNSEL FOR THE ASSESSE E FILED DURING THE COURSE OF HEARING BEFORE US A COPY OF THE RECENT DE CISION OF GUJARAT HIGH COURT IN THE CASE OF CIT VS. SHAHIBAUG ENTERPR ENEURS PVT. LTD. IN I.T. REFERENCE NO.243 OF 1985 WHEREIN THE GUJARA T HIGH COURT VIDE ITS ORDER DATED 8-3-2001 HAS DECIDED SIMILAR ISSUE UNDER IDENTICAL FACTS AND CIRCUMSTANCES OF THE CASE AND RESTORED THE ISSU E REGARDING ASSESSMENT OF PROFITS U/S 41(2) TO THE FILE OF THE AO FOR FRESH ADJUDICATION IN THE LIGHT OF DETAILED GUIDELINES GI VEN IN THE SAID DECISION. THE LD. COUNSEL POINTED OUT THAT THIS DEC ISION HAS BEEN FOLLOWED IN OTHER GROUP CASES BY THE HONBLE GUJARA T HIGH COURT AND THEREFORE SIMILAR GUIDELINES MAY BE LAID DOWN FOR F RESH DETERMINATION OF THE ISSUES BY THE AO. THE LD. COUNSEL INVITED OU R ATTENTION TO PARA 20 OF THE DECISION OF HIGH COURT WHICH READS AS UND ER: BEFORE CONCLUDING, WE MUST NOTE THAT EVEN WHILE NO T ACCEPTING THE MAJOR ARGUMENTS URGED ON BEHALF OF THE ASSESSEE , THERE IS SOME SUBSTANCE IN THE CONTENTION OF MR. R K PATEL F OR THE ASSESSEE THAT THE PROVISIONS OF SEC. 41(2) GOVERN O NLY BUILDING, MACHINERY, PLANT OR FURNITURE AND THAT, THEREFORE, OTHER ASSETS CANNOT BE INCLUDED WITHIN THE SCOPE OF SEC. 41(2) F OR TAXING THE DIFFERENCE BETWEEN THE WRITTEN DOWN VALUE AND THE A CTUAL COST. 5 WE ALSO FIND THAT IN VIEW OF THE PROVISIONS OF SECT ION 47 OF THE ACT TRANSFER WILL NOT ATTRACT THE PROVISIONS OF SEC . 45 RELATING TO CAPITAL GAINS IF THE TRANSFER OF CAPITAL ASSETS IS BY A COMPANY TO ITS WHOLLY OWNED SUBSIDIARY COMPANY AND THE HOLDING COMPANY AS WELL AS THE SUBSIDIARY COMPANY ARE INDIAN COMPAN IES. THE LD. COUNSEL ALSO FILED BEFORE US COPIES OF DEC ISIONS OF GUJARAT HIGH COURT IN THE OTHER CASES OF THE GROUP WHEREIN THE AFORESAID DECISION HAS BEEN FOLLOWED: 1. CIT VS. KALINDI INVESTMENTS PVT. LTD. I.T. REFERENCE NO.237 OF 1985 DATED 11-6-2001 2 CIT VS. SARABHAI SONS PVT. LTD. I.T. REFERENCE NO.239/1985 4. COPIES OF THE AFORESAID DECISIONS HAVE BEEN FILE D BEFORE US. SHRI PIRTHILAL, THE LD. DR DID NOT OPPOSE THE SUBMISSION S OF THE LD. COUNSEL AND AGREED THAT THE ISSUES AS RAISED BY THE REVENUE VIDE GROUND NO.1 TO 4 MAY BE SET ASIDE TO THE AO FOR FRESH CONSIDERATI ON IN THE LIGHT OF THE GUIDELINES PROVIDED BY THE HONBLE GUJARAT HIGH COU RT AS ABOVE. WE WOULD ACCORDINGLY SET ASIDE THE AFORESAID ADDITIONS AS PER GROUND NO.1 TO 4 TO THE FILE OF THE AO FOR FRESH ADJUDICATION A S ABOVE. 4 IN PURSUANCE OF THIS ORDER OF THE TRIBUNAL, THE A O ISSUED A NOTICE U/S 143(2) READ WITH SECTION 254 OF THE ACT. THE AO AFTER TAKING INTO CONSIDERATION THE SUBMISSIONS OF THE AS SESSEE, REPEATED THE ADDITIONS BY OBSERVING AS UNDER:- I HAVE CONSIDERED SUBMISSIONS AND DETAILS GIVEN B Y THE ASSESSEE. ASSESSEE HAS SIMPLY GIVEN THE DETAILS OF DEPRECIATI ON ON KNOW HOW, VEHICLES, LIFT, LABORATORY EQUIPMENTS, HOWEVER, ASS ESSEE HAS NOT SUBSTANTIATED THEIR CLAIMS AND HAS ALSO NOT GIVEN A NY DETAILS AS REGARDS SALE CONSIDERATION OF INDIVIDUAL ITEMS OF ASSETS. I N THE ABSENCE OF THESE DETAILS AND SINCE ASSESSEE HAS NOT SUBSTANTIATED TH E CLAIMS, THE PROFITS U/S 41(2) AS TAXED ORIGINALLY RS.87,26,224/- ARE NO T DELETED. (B) PROFIT U/S 41(3) BEING CAPITAL EXPENDITURE ON SCIENTIFIC RESEARCH - RS. 1,50,000/- 6 (C) PROFIT U/S 41(1) BEING REVENUE EXPENDITURE ON SCIENTIFIC RESEARCH - RS.25,00,000/- (D) DIFFERENCE IN VALUE OF FINISHED PRODUCTS - RS. 18,20,000/- AS REGARDS ITEM (B), (C) & (D), ASSESSEE HAS NOT P RODUCED ANY ADDITIONAL DETAILS AND HENCE HE HAS NOTHING TO SAY AGAINST THE IMPUGNED ADDITION. THEREFORE, THE ADDITION OF AS ME NTIONED IN ITEM (B), (C) AND (D) ARE NOT DELETED. 5 THIS ACTION OF THE AO WAS CONFIRMED BY THE LEARNE D CIT(A) WHEN THE ASSESSEE WENT IN APPEAL BEFORE HIM. FURTHE R AGGRIEVED NOW THE ASSESSEE IS IN APPEAL BEFORE US. 6 AT THE TIME OF HEARING BEFORE US, THE LEARNED COU NSEL OF THE ASSESSEE RELIED ON PAGE-80 OF THE PAPER BOOK IN THE NAME OF DETAILS IN RESPECT OF FIRST ADDITION. AS FAR AS THE OTHER ADDITIONS ARE CONCERNED, NO DETAILS WERE FILED OR RELIED ON. 7 THE LEARNED DR SUBMITTED THAT THE DETAILS RELIED UPON BY THE ASSESSEE ARE SIMPLY FIGURES OF DEPRECIATION AND NO FURTHER DETAILS TO SUBSTANTIATE THE CLAIMS HAS EITHER BEEN FILED BEFORE THE TRIBUNAL OR BEFORE THE LOWER AUTHORITIES. THEREFORE , THE ORDER PASSED BY THE LOWER AUTHORITIES MAY KINDLY BE UPHEL D. 8 AFTER HEARING BOTH THE PARTIES AND PERUSING THE R ECORDS, WE FIND THAT THE TRIBUNAL VIDE ITS ORDER DATED 25-10-2 001 IN ITA NO.3009/AHD/1991HAS SET ASIDE THE MATTER BACK TO TH E FILE OF THE AO TO DECIDE THE ISSUES IN THE LIGHT OF DIRECTIONS GIVEN BY THE HONBLE GUJARAT HIGH COURT IN THE CASE OF SHAHIBAUG ENTERPRENEURS PVT. LTD. (SUPRA). THE AO GAVE DUE OP PORTUNITY TO 7 THE ASSESSEE TO GIVE THE DETAILS SO THAT THE AO COU LD DECIDE THE ISSUES IN THE LIGHT OF THE GUJARAT HIGH COURT DECIS ION. HOWEVER, WE FIND THAT THE ASSESSEE HAS FAILED TO GIVE ANY DE TAILS WORTH THE NAME IN RESPECT OF ITS CLAIMS AND, THEREFORE, WE AR E NOT INCLINED TO INTERFERE WITH THE ORDERS PASSED BY THE LOWER AU THORITIES, AND THE SAME ARE HEREBY UPHELD. THE GROUNDS IN RESPECT OF ISSUE NOS. 1, 3, 4 & 5 ARE DISMISSED. 9 AS REGARDS THE ADDITION OF RS.4,75,000/-, THE TRI BUNAL VIDE ITS ORDER DATED 25-10-1991 HAS DEALT WITH THE ISSUE AS UNDER:- 5. GROUND NO.5 IS AGAINST SUSTAINING THE ADDITION OF RS.4,75,000/- ON ACCOUNT OF RIGHT TO RECEIVE ROYALTY FEES. THE AO HAS DEALT WITH THE MATTER VIDE PARA 16 OF THE ASSESSMENT ORDER AS UNDE R: THE ASSEASEE COMPANY ENTERED INTO AGREEMENT WITH DR . SYED MOHD. WON SYED HUSSEIN AND DR. LOURDENEDIN OF KAULA LUMPUR ON 28.8.7S. THE COMPANY AGREED TO PROVIDE TECHNICAL KNOW- HOW. THE COMPANY HAD ALREADY RENDERED SERVICES AND WERE ENTITLED TO RECEIVE ROYALTY IN TWO INSTALMENT OF 50 ,000 MALAYSIAN SHILLINGS IN THE YEAR 1978 AND 1979. THE PRESENT VALUE OF THE RIGHT TO RECEIVE THE ROYALTY HAS BEEN ESTIMATED BY M/S. RAMANLAL G.SHAH & CO. AT RS.2,25,000. THE COMP ANY HAS RECEIVED THE CONSIDERATION FROM THE HOLDING COMPANY UNDER THE DEED OF ASSIGNMENT. THE ASSESSEE HAS RENDERED SERVI CES AND TECHNICAL KNOW-HOW PRIOR TO THE DATE OF SALE. THIS RECEIPT IS IN LIEU OF REVENUE RECEIPT AND IS LIABLE TO TAX AS A R EVENUE INCOME. EVEN OTHERWISE THIS HAS TO BE CONSIDERED AS A BE NEFIT RECEIVED IN RESPECT OF THE EXPENDITURE INCURRED IN THIS REGA RD AND STOOD ALLOWED IN EARLIER YEARS, SIMILARLY, THE RIGHT TO R ECEIVE ROYALTY FROM 'INDONESIA IN INDONESIA IN 1979 AT THE TIME O F COMMERCIAL PRODUCTION HAS BEEN VALUED AT RS.2,50,0 00/-. THE ASSESSEE COMPANY HAS RECEIVED TOTAL CONSIDERATION O F RS.4.75,000/- FOR BOTH THE AGREEMENTS WHICH HAS BEE N ADDED TO THE VALUE OF THE GOODWILL. THIS PART OF CONSIDERATI ON IS LIABLE TO BE TAXED AS AMOUNT RECEIVED IN LIEU OF INCOME. AN A MOUNT OF RS.4,75,000/- IS THEREFORE ADDED TO THE ASSESSEES TOTAL INCOME. 8 THE AO HAS INCLUDED A SUM OF RS.2,25,000/- ON ACCO UNT OF ROYALTY RECEIVABLE FROM THE FIRST PARTY DURING THE AY 78-79 AND FURTHER AMOUNT OF RS.2,50,000/- ON ACCOUNT OF ROYALTY ACCRU ING IN 1979. THUS TOTAL ADDITION OF RS.4,75,000/- HAS BEEN MADE. THE CONTENTION OF THE LD. COUNSEL BEFORE US IS THAT RIGHT TO RECEIVE INCO ME IN THE SUBSEQUENT ASSESSMENT YEARS CANNOT BE TAXED IN THE PRESENT ASS ESSMENT YEAR. FROM THE ORDER OF THE AO IT IS NOT ASCERTAINABLE AS TO T HE AMOUNT OF ROYALTY FEE WHICH HAS ACCRUED DURING THE YEAR AND HOW THE S AME HAVE BEEN ACCOUNTED FOR IN THE DEED OF ASSIGNMENT IN RESPECT OF THREE UNITS OF THE ASSESSEE COMPANY TO THE HOLDING COMPANY. SINCE MAJO R ISSUES ARISING IN THE PRESENT APPEAL AS ABOVE HAVE BEEN SET ASIDE BY US TO THE FILE OF THE AO, WE WOULD SET ASIDE THIS ISSUE ALSO TO THE A O FOR FRESH ADJUDICATION AFTER GOING INTO THE FACTS AND EVIDENC E TO BE PRODUCED BY THE ASSESSEE. 10 IN PURSUANCE OF THIS ORDER, THE AO GAVE AN OPPOR TUNITY TO THE ASSESSEE. BEFORE HIM, THE ASSESSEE REITERATED T HE SUBMISSIONS MADE AND DOCUMENTS PRODUCED AT THE TIME OF ORIGINAL ASSESSMENT. THE ASSESSEE DID NOT PRODUCE ANY FURTHER EVIDENCE O R MATERIAL JUSTIFYING THEIR CASE FOR NON-TAXABILITY OF THE AMO UNT IN QUESTION. IN VIEW OF THIS, THE ADDITION MADE OF RS.4,75,000/- ON ACCOUNT OF ROYALTY FEES IN THE ORIGINAL ASSESSMENT WAS NOT DEL ETED BY THE AO. 11 THIS ACTION OF THE AO WAS CONFIRMED BY THE LEARN ED CIT(A). 12 BEFORE US ALSO NO SUBSTANTIAL ARGUMENTS WERE ADV ANCED TO ENABLE US TO DEVIATE FROM THE VIEW TAKEN BY THE LOW ER AUTHORITIES. WE ACCORDINGLY UPHOLD THE ORDERS OF THE LOWER AUTHO RITIES. 9 13 IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS DISMISSED. ORDER PRONOUNCED IN THE COURT TODAY ON 25-01-2012 SD/- SD/- (A MOHAN ALANKAMONY) ACCOUNTANT MEMBER (D K TYAGI) JUDICIAL MEMBER DATE : 25-01-2012 COPY OF THE ORDER FORWARDED TO: 1. S M CHEMICALS AND ELECTRONICS (P) LTD., AMALGAMA TED WITH AMBALAL SARABHAI ENTERPRISES LTD., WADI WADI, BARODA-390 023 2. THE INCOME-TAX OFFICER, WARD-1(4), BARODA 3. CIT CONCERNED 4. CIT(A)-I, BARODA 5. DR, ITAT, AHMEDABAD BENCH-C, AHMEDABAD 6. GUARD FILE BY ORDER DEPUTY REGISTRAR ASSISTANT REGISTRAR ITAT, AHMEDABAD