ACIT, New Delhi V. M/s Alchemist Metals Ltd., Delhi

ITA 208/DEL/2009

• Counselvise Citation: [2010] 119 COUNSELVISE.COM (IT) 5740 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 2 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-03-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 30-12-2009
• Assessment Year: 2005-2006
• Appeal Filed On: 19-01-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JAYANT MISHRA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH A : NEW DELHI BEFORE SHRI R.P.TOLANI AND SHRI A.K.GARODIA ITA NO. 208/DEL/2009 ASSESSMENT YEAR : 2005-06 ASSTT. COMMISSIONER OF INCOME TAX CIRCLE 16(1), NEW DELHI. VS. M/S ALCHEMIST METALS LTD. (FORMERELY TDT COPPER LTD.) 7, JAGRITI ENCLAVE, VIKAS MARG, DELHI. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI JAYANT MISHRA, CIT DR RESPONDENT BY : SHRI R.S.SINGHVI, C.A. ORDER PER A.K.GARODA, AM: THIS IS A REVENUES APPEAL DIRECTED AGAINST THE ORD ER OF LD. CIT(A) XIX, NEW DELHI DATED 03/11/2008 FOR THE ASSESSMENT YEAR 2005-06. 2. THE ONLY GROUND RAISED BY THE REVENUE READS AS U NDER: ON THE FACTS AND CIRCUMSTANCES OF THE CASE, LD. CI T(A) HAS ERRED IN DELETING AN ADDITION OF RS.37,91,10,000/- ADDED BY THE A.O. U/S 41(1) OF THE INCOME TAX ACT. 3. BRIEF FACTS AS NOTED BY THE ASSESSING OFFICER ON PAGES 4 TO 9 OF THE ASSESSMENT ORDER ARE AS UNDER: DURING THE RELEVANT PREVIOUS YEAR ON THE ASSESSEE S PETITIONS BEARING CP NO.307/04 AND CASE NOS. 1325 & 1332/2004, THE HON'B LE HIGH COURT OF DELHI PASSED ORDERS ALLOWING THE CHANGE IN THE FACE VALUE OF THE ASSESSEES EQUITY SHARES FROM RS.10/- TO RS.2.5/-. DURING THE COURSE OF THE SE PROCEEDINGS THE REGIONAL PAGE 2 OF 11 ITA NO. 208/DEL/2009 DIRECTOR, COMPANY LAW BOARD, KANPUR EXPRESSED CONCE RNS ON THE FACT THAT THE ASSESSEE HAD NOT ROUTED THE SUM OF RS.37,91,10,000/ - THROUGH THE P & L ACCOUNT WHILE DISCHARGING ITS TRADING LIABILITIES THEREBY A VOIDING THE PAYMENT OF INCOME TAX ON THIS SUM UNDER THE RESPECTIVE CHARGING PROVISION S. FOR THE SAKE OF CLARITY THE RELEVANT TEXT OF THE AFFIDAVIT FILED BY THE THEN RE GIONAL DIRECTOR, COMPANY LAW BOARD, KANPUR, SH. U.C.NAHTA IS QUOTED HERE-IN-UNDE R VERBATIM:- AFFIDAVIT/REPRESENTATTION OF REGIONAL DIRECTOR, NORTHERN REGION, MINISTYR OF COMPANY AFFAIRS,KANPUR . I, U.C.NAHTA, REGIONAL DIRECTOR, NORTHERN REGION, M INISTRY OF COMPANY AFFAIRS, HAVING MY OFFICE AT 10/499-B, ALLENGANJ, K ANPUR, DO HEREBY SOLEMNLY AFFIRM AND STATE ON OATH AS UNDER: 1. THAT I AM REGIONAL DIRECTOR, NORTHERN REGION, MI NISTRY OF COMPANY AFFAIRS, KANPUR, AND SUBMITTING THIS AFFIDAVIT AS P ER THE DIRECTION OF THIS HON'BLE COURT. 2. THAT THE COPY OF THE PETITION HAVING BEEN RECEIV ED BY THE OFFICE OF THE DEPONENT HAS BEEN EXAMINED AND I HAVE ACQUAINTED MY SELF WITH THE FACTS OF THE MATTER. 3. THAT THE DEPONENT CRAVES LEAVE TO SUBMIT THAT AS PER BALANCE SHEET OF THE PETITIONER COMPANY AS AT 31.3.2004,IT WAS NOT HAVIN G SHARE PREMIUM ON THAT DATE. AS SUCH THE PETITIONER COMPANY WAS REQUE STED TO FURNISH ITS CLARIFICATION IN THIS REGARD. THE PETITIONER COMPAN Y VIDE ITS LETTER DATED 10.12.2004 HAS INTIMATED THAT THE COMPANY VIDE ITS BOARD RESOLUTION DATED 28.6.2004 HAS ALLOTTED 12,63,700 NUMBERS OF E QUITY SHARES OF RS. ONE EACH AT A PREMIUM OF RS.290/- PER SHARE TO M/S HARYANA FIBERS LTD. AND THE AFORESAID ALLOTMENT GENERATED THE SECURITIE S PREMIUM ACCOUNT OF RS.36,64,73,000/-. THE AFORESAID FACTS HAVE, HOWEVE R, NOT BEEN STATED IN THE PETITION. IT IS QUITE SURPRISING THAT M/S HARYA NA FIBERS LTD. HAS PAGE 3 OF 11 ITA NO. 208/DEL/2009 ACQUIRED EQUITY SHARES OF RS.10/- EACH AT A PREMIUM OF RS.290/- PER SHARE OF THE PETITIONER COMPANY WHICH WAS HAVING ACCUMULA TED LOSSES OF RS.73.51 CRORES AS AGAINST ITS PAID UP CAPITAL OF R S.60.73 CRORES AS AT 31.3.2000. IN THIS CONNECTION, IT IS ALSO RELEVANT TO POINT OUT THAT A SUM OF RS.37.51 CRORES PAYABLE BY THE PETITIONER COMPANY T O M/S HARYANA FIBERS LTD. HAS BEEN ADJUSTED BY ISSUING 12,63,700 EQUITY SHARES OF RS.10/- EACH AT A PREMIUM OF RS.290/- PER SHARE AND 75% OF THE P REMIUM GENERATED DUE TO THE SAID ALLOTMENT IS PROPOSED TO BE ADJUSTE D AGAINST THE ACCUMULATED LOSSES OF THE PETITIONER COMPANY. THE DEPONENT IS OF THE VIEW THAT THE AFORESAID ADJUSTMENT HAS BEEN MADE BY THE PETITIONER COMPANY TO SQUARE OF THE AMOUNT PAYABLE TO M/S HARY ANA FIBERS LTD. WITHOUT CREDITING THE SAME TO ITS PROFIT & LOSS ACC OUNT. THIS HONBLE COURT MAY, THEREFORE, LIKE TO SEEK THE VIEWS OF THE INCOME TAX DEPARTMENT IN THE MATTER. 4. THAT IT IS SUBMITTED THAT THE HONBLE COURT MAY KINDLY CONSIDER THE SUBMISSIONS MADE IN PARA 3 HEREINABOVE AND DECIDE T HE CASE ON ITS MERITS. SD/- DEPONEN VERIFICATION THE CONTENTS OF PARAGRAPHS NO.1 TO 4 OF THIS AFFIDA VIT ARE TRUE TO THE BEST OF THE KNOWLEDGE OF THE DEPONENT AND BASED ON RECORD. NOTHING MATERIAL HAS BEEN CONCEALED THEREIN. VERIFIED THIS THE 7 TH FEBRUARY, 2005 AT KANPUR. SD/- DEPONENT IDENTIFIED BY: (PANKAJ SRIVASTAVA) PAGE 4 OF 11 ITA NO. 208/DEL/2009 COMPANY PROSECUTOR GR.III, OFFICE OF THE REGIONAL DIRECTOR (NR) DEPARTMENT OF COMPANY AFFAIRS KANPUR THE HONBLE HIGH COURT OF DELHI AGREED WITH THE APP REHENSION WITH THE REGIONAL DIRECTOR, COMPANY LAW BOARD, KANPUR AN D REFERRED THIS ISSUE TO THE INCOME TAX DEPARTMENT FOR ADJUDICATION. FOR THE SAKE OF CONNIVANCE THE RELEVANT TEXT FROM THE AFORESAID ORDER OF THE H ONBLE HIGH COURT OF DELHI IS REPRODUCED HEREINUNDER VERBATIM: ORDER OF HIGH COURT ..ACCORDING TO THE REGIONAL DIRECTOR IT IS SU RPRISING THAT M/S HARYANA FIBERS LTD. WOULD ACQUIRE EQUITY SHARE OF R S.10 EACH AT A PREMIUM OF RS.290 SHARES IN THE PETITIONER COMPANY WHICH HA S ACCUMULATED LOSSES OF RS.73.51 CRORES AS AGAINST PAID UP CAPITAL OF 60.73 CRORES AS AT MARCH, 2004. IT IS ALSO POINTED OUT THAT AGAINST THE ISSUE OF TH E SHARES TO HARYANA FIBERS LTD. IN THE AFORESAID MANNER, A SUM OF RS. 37.91 CR ORES PAYABLE BY THE PETITIONER COMPANY TO M/S HARYANA FIBERS LTD. HAS B EEN ADJUSTED THEREFORE, REGIONAL DIRECTOR OPINES THAT MATTER BE BROUGHT TO THE NOTICE OF INCOME TAX DEPARTMENT. M/S HARYANA FIBERS LTD. ACQUIRED RS.58,10,37,1 00/- OF BOOK DEBTS PAYABLE TO THE PETITIONER COMPANY BY ASSIGNME NT OF DEBT CREATED IN APRIL,2002 FOR A CONSIDERATION OF RS.5000/- ..IT IS DIRECTED THAT WHILE SUBMITTING THE BAL ANCE SHEET WITH THE INCOME TAX DEPARTMENT, THE PETITIONER COMPANY SHALL ALSO FILE WITH THE DEPARTMENT REPLY OF THE REGIONAL DIRECTOR ALONG WIT H COPY OF THIS ORDER. IN THESE BACKGROUND FACTS THE ASSESSEE ENCLOSED ALO NG WITH ITS RETURN OF INCOME FOR THE P.Y. UNDER CONSIDERATION, THE COP IES OF THE AFFIDAVIT PAGE 5 OF 11 ITA NO. 208/DEL/2009 SUBMITTED BY THE REGIONAL DIRECTOR, COMPANY LAW BO ARD, KANPUR BEFORE THE HONBLE HIGH COURT OF DELHI AND THE DECISION TH ERE UPON BY THE HONBLE HIGH COURT. BEFORE EXAMINING THE APPLICABILITY OF THE PROVISION S CONTAINED U/S 41(1) OF THE I.T.ACT, 1961, IT IS CONSIDERED NECESS ARY TO A HAVE BRIEF LOOK ON THE ASSESSEE RELEVANT FACTS GIVING RISE TO THE APPR EHENSION OF THE COMPANY LAW BOARD AND THE DIRECTIONS OF THE HONBLE HIGH CO URT OF DELHI THERE UPON. DURING THE YEAR UNDER CONSIDERATION, THE SHARE HOLD ING PATTERN OF THE ASSESSEE COMPANY WAS AS UNDER:- NO. OF SHARES PERCENTAGE 1. HARYANA FIBERS LIMITED, DELHI 72323700 54.35 2. BENMOS INVESTMENTS LIMITED, MAURITIUS 60435000 45.42 3. OTHERS 301300 0.23 TOTAL 133060000 100.00 IT CAN THUS BE SEEN THAT 54.35% OF THE EQUITY SHARE CAPITAL OF THE ASSESSEE WAS HELD BENEFICIALLY BY M/S HARYANA FIBER S LTD. THE ASSESSEE HAD INCURRED A TRADING LIABILITY OF RS.57,20,57,002/- T OWARDS M/S RBG ENTERPRISES SA WHICH HAD BEEN CHARGED TO THE REVENU E OF THE ASSESSEE DURING THE EARLIER CORRESPONDING PERIOD, THE CLAIM OF THE ASSESSEE IS THAT IN THE F.Y.2002-03. THE CLAIM OF THE ASSESSEE IS THAT M/S HARYANA FIBERS LTD. PURCHASED THIS LIABILITY TO BE PAID BY THE AS FROM M/S RBG ENTERPRISES SA FOR RS.5000/- ONLY. THEREAFTER IN THE BOOKS OF T HE ASSESSEE, THOUGH THE LIABILITY TO PAY APPEARED BUT THE NAME WAS CHANGED FROM THAT OF RBG ENTERPRISES SA TO M/S HARYANA FIBERS LTD. THE ASSES SEE FURTHER ARGUES THAT DURING THE P.Y. UNDER CONSIDERATION AGAINST TH IS LIABILITY OF PAGE 6 OF 11 ITA NO. 208/DEL/2009 RS.55,67,60,311/- IN THE NAME OF M/S HARYANA FIBERS LTD. A DEBIT ENTRY OF RS.37,91,10,000/- WAS MADE ON 28.06.2004 BY THE ASS ESSEE IN ITS BOOKS OF ACCOUNTS AGAINST THE ISSUE OF 12,63,700 EQUITY SHAR ES OF RS.10/- EACH AT A PREMIUM OF RS.290/-. THE RELEVANT ENTRY REFERRED TO ABOVE WAS MADE AS UNDER: 1-6-2004 DR. OPENING BALANCE 55,67,60,311 28-6-2004 CR (AS PER DETAILS) JOURNAL 37,91,10,000 55,67,60,311 SHARE CAPITAL 1,26,37,000 SHARE PREMIUM 36,64,73,000 BEING AMOUNT OF ALLOTMENT OF 12,63,700 NOS. OF EQUITY SHARES OF RS.10/- EACH AT A PREMIUM OF RS.290/- IN LIEU OF SECURED DEBT. 4. THEREAFTER, ON PAGES 18 AND 19 OF THE ASSESSMENT ORDER, THE ASSESSING OFFICER HAS MADE AN ADDITION OF RS.37,91,10,000/- U /S 41(1) OF THE I.T.ACT BY MAKING THE FOLLOWING OBSERVATIONS:- CESSATION OF TRADING LIABILITY OF THE ASSESSEE U/S 41(1) IT HAS EARLIER BEEN PROVED THAT A SUM OF RS.37,91,1 0,000/- HAS CEASED TO EXIST FROM THE BOOKS OF ACCOUNTS OF THE ASSESSEE DURING THE PREVIOUS YEAR UNDER CONSIDERATION. THE ASSESSEE ARGUES THAT THIS REPRESENTED THE AMOUNT OF PAGE 7 OF 11 ITA NO. 208/DEL/2009 EQUITY SHARE OF THE ASSESSEE AT THE FACE VALUE OF R S.10/- ISSUED AT A PREMIUM OF RS.290/- TO ITS GROUP COMPANY M/S HARYANA FIBERS LTD. WHICH WAS HAVING MORE THAN 50% STAKE INTO ITS EQUITY CAPITAL. HERE A LSO I DO NOT PLACE RELIANCE ON THE ASSESSEES CONTENTION THAT THE ORIGINAL LIAB ILITY OF RS.57,20,57,002/- STANDING IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE I N THE NAME OF M/S RBG ENTERPRISES S.A WAS ASSIGNED IN FAVOUR OF M/S HARYA NA FIBERS LTD. FOR A MERE SUM OF RS.5,000/- ONLY BY M/S RBG ENTERPRISES S.A. IT IS ALSO UNDISPUTED THAT THE ASSESSEE HAD EARLIER CLAIMED DE DUCTION IN ITS BOOKS OF ACCOUNTS BY THE CORRESPONDING AMOUNT OF RS.57,20,57 ,002/-. ALSO THE FACT THAT ASSESSEE WAS SUFFERING HUGE LOSSES SINCE BEGIN NING AND THERE WERE NO PROFITS IN THE FORESEEABLE FUTURE IN ITS BUSINESS A CTIVITIES, NO PRUDENT PERSON WOULD PAY 290% PREMIUM ON ITS EQUITY CAPITAL THAT T OO EVEN WHEN THE ALLEGED REVALUATION EXERCISE WAS NOT COMPLETE (THE SHARES WERE ALLOTTED ON PREMIUM ON 28.6.2004 AND THE REVALUATION CERTIFICAT E WAS ISSUED ON 25.3.2005, COPY ENCLOSED AS ANNEXURE D). THERE IS NOTHING ON RECORD TO PROVE THE ASSESSEES CONTENTION CONFIRMING THE GENU INENESS OF ENTIRE TRANSACTIONS EXCEPT THE WELL ESTABLISHED FACTS THAT THE TRADING LIABILITY OF RS.37,91,10,000/- HAD CEASED TO EXIST IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE WITHIN THE MEANING OF SECTION 41(1) OF THE I.T.ACT, 1961 AS ESTABLISHED IN THE PRECEDING PARAGRAPHS. THE ASSESS EE HAS ALSO NOT BEEN ABLE TO DISPROVE THE SAME DESPITE FURNISHING VARIOUS WRI TTEN REPLIES AND ALSO ORAL ARGUMENTS DURING THE COURSE OF ASSESSMENT PROCEEDIN GS. ACCORDINGLY, IT IS CONCLUDED THAT A SUM OF RS.37,91,10,000/- DISCUSSED SUPRA, REFERRED TO BY THE HONBLE HIGH COURT OF DELHI IS SQUARELY COVERED WIT HIN THE CHARGING SECTION 41(1) OF THE I.T.ACT. THEREFORE, THE ADDITION OF RS .37,91,10,000/- IS MADE TO THE RETURN INCOME OF THE ASSESSEE U/S 41(1) OF THE I.T.ACT, 1961. (ADDITION RS.37,91,10,000/-) PAGE 8 OF 11 ITA NO. 208/DEL/2009 5. BEING AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A) WHO HAS DELETED THIS ADDITION BY MAKING FOLL OWING OBSERVATIONS IN PARAGRAPHS 15 TO 21 OF THE ORDER: 15. I HAVE GONE THROUGH THE ASSESSMENT ORDER, SUBM ISSIONS OF THE AR, DETAILS FURNISHED BY THE ASSESSEE BEFORE THE A.O. A ND THE ORDER OF THE HONBLE HIGH COURT. 16. THE A.O. PROCEEDED ON THE FOLLOWING ISSUES AND MADE ADDITION OF RS.37,91,10,000/- U/S 41(1). 1. GENUINENESS OF THE TRANSACTION. 2. TRANSACTIONS DID NOT PASS THROUGH P&L A/C 3. APPLICABILITY OF PROVISIONS OF S.41(1) 17. GENUINENESS OF THE TRANSACTION: SINCE THE TRANS ACTION WAS EXAMINED BY THE HONBLE HIGH COURT AND THE PETITION OF THE APPE LLANT FOR RESTRUCTURING OF SHARE CAPITAL, INCREASE IN THE NO. OF SHARES ETC., WAS ALLOWED BY THE HONBLE HIGH COURT AFTER CONSIDERIN G THE OBJECTIONS OF THE REGIONAL DIRECTOR, COMPANY LAW BOARD, KANPUR, I T IS BEYOND THE JURISDICTION OF A.O. ONCE AGAIN TO DOUBT THE TRANSA CTION. 18. TRANSACTION DID NOT PASS THROUGH THE P& L A/C: THERE WAS NEITHER EXPENDITURE NOR RECEIPT WARRANTING ANY REQUIREMENT FOR PASSING THE ENTRIES THROUGH THE PROFIT AND LOSS ACCOUNT. THE OB SERVATION OF THE A.O. DOES NOT MERIT ANY CONSIDERATION. 19. APPLICABILITY OF PROVISIONS OF S.41(1) TO THE F ACTS OF THE CASE: EXPENDITURE ELIGIBLE FOR DEDUCTION WHICH WAS DEDUCT ED IN ANY EARLIER PREVIOUS YEAR WHEN RECOVERED BY THE ASSESSEE SUBSEQ UENTLY IS CHARGEABLE TO TAX. 20. SECTION 41(1) OF THE INCOME TAX ACT, 1961 SAYS THAT ANY LOSS, EXPENDITURE OR TRADING LIABILITY INCURRED BY THE AS SESSEE AND PAGE 9 OF 11 ITA NO. 208/DEL/2009 SUBSEQUENTLY RECOVERED BY HIM IS TAXABLE AS INCOME IN THE YEAR OF RECOVERY AND IT IS APPLICABLE NOT ONLY TO THE ASSES SEE WHO CLAIMED SUCH DEDUCTION BUT ALSO TO HIS SUCCESSOR IN BUSINESS. IT COVERS ANY PERSON WHO SUCCEEDS TO THE BUSINESS OF ANOTHER, VIZ IN THE CASE OF COMPANIES AMALGAMATING COMPANY, IN THE CASE OF FIRMS, SUCCEED ING FIRM AND THE RESULTING COMPANY IN THE CASE OF DEMERGER. 21. IN THIS CASE A.O. HAS NOT PROVED THAT THERE WAS RECOVERY OF ANY LOSS OR EXPENDITURE OR TRADING LIABILITY WHICH WAS ALLOWED AS DEDUCTION WHILE COMPUTING THE INCOME IN EARLIER YEARS. IN THE PRESE NT CASE THERE IS CONVERSION OF LIABILITY INTO SHARE HOLDING AND ALL THE TRANSACTIONS ARE IN THE CAPITAL FIELD. THE A.O. MAINLY RELIED ON THE OB JECTIONS OF REGIONAL DIRECTOR, COMPANY LAW BOARD, KANPUR DURING THE PROC EEDINGS BEFORE THE HONBLE HIGH COURT IN RESPECT OF RESTRUCTURING OF CAPITAL 6. NOW, THE REVENUE IS IN APPEAL BEFORE US. 7. THE LD. D.R. OF THE REVENUE SUPPORTED THE ASSESS MENT ORDER. IT WAS ALSO HIS SUBMISSION THAT THE LD. CIT(A) IS NOT CORRECT AND H E HAS MISDIRECTED HIMSELF AND HENCE, ORDER OF THE LD. CIT(A) SHOULD BE REVERSED A ND THAT OF THE ASSESSING OFFICER SHOULD BE RESTORED. 8. AS AGAINST THIS, THE LD. A.R. OF THE ASSESSEE SU PPORTED THE ORDER OF LD. CIT(A). IT WAS ALSO HIS SUBMISSION THAT LIABILITY H AS BEEN CONVERTED INTO SHARE CAPITAL AND THERE IS NO CESSATION OF LIABILITY AND HENCE, THE PROVISIONS OF SEC.41(1) ARE NOT APPLICABLE IN THE PRESENT CASE. 9) WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HAV E GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. WE DO NOT FIND ANY REASON TO INTERFERE IN THE ORDER OF THE PAGE 10 OF 11 ITA NO. 208/DEL/2009 LEARNED CIT (A) FOR THE REASONS DISCUSSED HEREINAFT ER. IN THE PRESENT CASE, THE DISPUTE IS ABOUT THE LIABILITY OF RS. 5720.57 LACS PAYABLE TO M/S RBG ENTERPRISES SA (RBG), WHICH IS ACQUIRED BY M/S HARYANA FIBERS L IMITED (HFL). OUT OF SUCH LIABILITY ACQUIRED BY THAT PARTY FROM RBG, THE LIAB ILITY TO THE EXTENT OF RS. 3791.10 LACS HAS COME TO AN END IN THE PRESENT YEAR ON THE BASIS OF ALLOTMENT OF 12,63,700 EQUITY SHARES OF RS. 10/- EACH AT A PREMIUM OF RS. 290/- PER SHARE HAVING TOTAL VALUE OF RS. 3791.10 LACS. NOW, THE CASE OF THE A. O. IS THAT TO THIS EXTENT, THERE IS CESSATION OF LIABILITY AND PROVISIONS OF SECTION 41 (1) ARE APPLICABLE. WE ARE NOT IN AGREEMENT WITH THE ASSESSING OFFICER IN THIS REGARD BECAUSE AS PER OUR UNDERSTANDING, THE LIABILITY HAS NOT CEASED TO EXIS T BUT IT HAS BEEN PAID OUT BY THE ASSESSEE COMPANY BY WAY OF A CONSTRUCTIVE PAYMENT. IT IS A FACT THAT 12,63,700 SHARES OF THE ASSESSEE COMPANY ARE ISSUED BY THE AS SESSEE COMPANY TO HFL AT A PRICE OF RS. 300/- PER SHARE. THE ASSESSING OFFICER IS DOUBTING ABOUT THE PRICE OF SHARES @ RS. 300/- PER SHARE BECAUSE OF THE ACCUMUL ATED LOSSES OF THE ASSESSEE COMPANY BUT HONBLE DELHI HIGH COURT HAS APPROVED T HE REDUCTION IN SHARE CAPITAL FROM PAID UP VALUE OF RS. 10/-PER SHARE TO RS. 2.50 PER SHARE IN THIS VERY YEAR. SUCH APPROVAL IS AFTER THIS FACT IS POINTED O UT TO HONBLE DELHI HIGH COURT THAT SUCH SHARES OF THE ASSESSEE COMPANY INCLUDES T HESE 12,63,700 SHARES ALSO, WHICH WERE ISSUED @ RS. 300/- PER SHARE IN THE SAME YEAR BUT STILL, HONBLE DELHI HIGH COURT HAS APPROVED THE REDUCTION IN VALUE OF E NTIRE SHARES OF THE ASSESSEE COMPANY AND NOT FOR BALANCE SHARES ONLY AFTER EXCLU DING THESE 12,63,700 SHARES. HENCE, THE CLAIM OF THE ASSESSEE THAT SUCH SHARES W ERE ISSUED TO HFL CANNOT BE DOUBTED. WHEN THE SHARES ARE ISSUED BY THE ASSESSEE COMPANY TO HFL, AMOUNT WAS REQUIRED TO BE PAID BY THAT COMPANY TO THE ASSESSEE COMPANY OF RS. 3791.10 LACS. INSTEAD OF MAKING PAYMENT OF THIS AMOUNT BY HFL TO THE ASSESSEE AND PAYMENT BY THE ASSESSEE COMPANY TO HFL IN SETTLEMENT OF THE OU TSTANDING LIABILITY, THEY HAVE AGREED TO ADJUST THE BOTH BY WAY OF A BOOK ENTRY. I N OUR UNDERSTANDING, TO THAT EXTENT, THE LIABILITY HAS BEEN PAID OUT BY THE ASSE SSEE BY WAY OF CONSTRUCTIVE PAGE 11 OF 11 ITA NO. 208/DEL/2009 PAYMENT AND HENCE IT IS A CASE OF PAYMENT OF LIABIL ITY AND NOT OF CESSATION OF LIABILITY AS UNDERSTOOD BY THE ASSESSING OFFICER. H ENCE, SECTION 41 (1) IS NOT APPLICABLE IN THE PRESENT CASE ALTHOUGH INCOME MAY BE LIABLE TO TAX IN THE HANDS OF HFL BECAUSE THAT COMPANY HAS RECEIVED THIS CONSTRUC TIVE PAYMENT OF RS. 3,791.10 LACS FROM THE ASSESSEE COMPANY ALTHOUGH THE SAME WA S ACQUIRED BY THAT COMPANY FROM RBG FOR A MEAGER AMOUNT OF RS. 5,000/- ONLY. B UT THE FULL FACTS OF HFL ARE NOT BEFORE US AND HFL IS NOT THE ASSESSEE BEFORE US AND HENCE IT IS NOT POSSIBLE FOR US TO MAKE ANY COMMENT ON THIS ASPECT. BUT WE HAVE NO HESITATION IN HOLDING THAT IN THE FACTS OF THE PRESENT CASE, THERE IS NO CESSA TION OF LIABILITY BUT IN FACT THERE IS CONSTRUCTIVE PAYMENT BY THE ASSESSEE COMPANY TO HFL AND HENCE SECTION 41 (1) IS NOT APPLICABLE IN THE PRESENT CASE. WE, THEREFORE, DECLINE TO INTERFERE IN THE ORDER OF LEARNED CIT (A). 11) THE APPEAL OF THE REVENUE STANDS DISMISSED. DECISION PRONOUNCED IN THE OPEN COURT ON 26 TH MARCH,2010. SD/- SD/- (R.P.TOLANI) (A.K.GARODIA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 26 .03.2010. PSP COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT DEPUTY REGISTRAR