ACIT, CHENNAI V. NNL Networks Pvt. Ltd., CHENNAI

ITA 2474/CHNY/2014

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 96223 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-10-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 30-09-2015
• Assessment Year: 2002-2003
• Appeal Filed On: 30-09-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P RADHAKRISHNAN IRS
• Keywords: Capital asset; Scheme of amalgamation
• Section: 143(3)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : CHENNAI . . . , ! ' , # $% & [ BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER ] ./ I.T.A.NO.2474/MDS/2014 / ASSESSMENT YEAR : 2002-2003 THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE IV(4), CHENNAI VS. M/S. NNL NETWORKS PVT. LTD, NO.1, KALYANAI NAGAR, KOTTIVAKKAM, CHENNAI 600 041. [PAN AAACN 9150F] ( '( / APPELLANT) ( )*'( /RESPONDENT) / APPELLANT BY : SHRI. P. RADHAKRISHNAN, IRS, JCIT. /RESPONDENT BY : NONE / DATE OF HEARING : 30-09-2015 / DATE OF PRONOUNCEMENT : 09-10-2015 / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST T HE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-IV, CHENN AI DATED 12.09.2013 FOR THE ASSESSMENT YEAR 2002-2003. ITA NO.2474/MDS/2014 :- 2 -: 2. THE DEPARTMENT HAS RAISED THE FOLLOWINGS GROUNDS:- 2.1. THE LEARNED CIT(A) ERRED IN DELETING THE ADDI TION ON STCG OF 32.30 LAKHS/- MADE U/S. 2(1B) READ WITH EXPLANATION 7 BELOW SECTION 43(1) OF THE ACT. 2.2 THE LEARNED CIT(A) FAILED TO APPRECIATE THE CATEGORICAL FINDING OF THE A.O THAT THE VALUE OF TH E PRODUCT AS FIXED ORIGINALLY WAS ONLY 5.80 LAKHS AND MERELY ON REVALUATION OF THE PRODUCT, ITS VALUE HAD BEEN RE FIXED AT 38.10 LAKHS. 2.3. THE LEARNED CIT(A) OUGHT TO HAVE APPRECIATED T HE FACT THAT AS THE ASSESSEE HAD REVALUED THE ASSET, I T CANNOT CLAIM THE BENEFIT U/S.47 IN RESPECT OF TRANSFER OF THE ABOVE PRODUCT AND CONSEQUENTLY THE EXCESS AMOUNT WORKED OUT ON REVALUATION HAS TO BE TAXED AS SHORT TERM CAPITAL GAINS. 2.4. THE LEARNED CIT(A) OUGHT TO HAVE APPRECIATED T HE LANGUAGE EMPLOYED IN EXPLANATION 7 TO SEC.43(1) WHI CH READS THUS: WHERE, IN A SCHEME OF AMALGAMATION, ANY CAPITAL ASSET IS TRANSFERRED BY THE AMALGAMATING' COMPANY TO THE AMALGAMATED COMPANY AND THE AMALGAMATED COMPANY IS AN INDIAN COMPANY, THE ACTUAL COST OF THE TRANSFERRED CAPITAL ASSET TO THE AMALGAMATED COMPANY SHALL BE TAKEN TO BE THE SAME AS IT WOULD HAVE BEEN IF THE AMALGAMATING COMPANY HAD CONTINUED TO HOLD THE CAPITAL ASSET FOR THE PUR POSES OF ITS OWN BUSINESS. 3. THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS IN THE BUSINESS OF SOFTWARE DEVELOPMENT, AND IT HAS DEVELO PED A PRODUCT CALLED CYGNET' WHICH DEALS WITH NETWORK MAN AGEMENT SYSTEMS AND IN ORDER TO DEVELOP AND MARKET THE PROD UCT, THE COMPANY WAS MERGED WITH NMS WORKS SOFTWARE LIMITED, ON 19- ITA NO.2474/MDS/2014 :- 3 -: 01-2002. THE PRODUCT 'CYGNET' WAS HELD AS A CAPITAL ASSET BY THE ASSESSEE COMPANY. BUT THE AO CONTENDED THAT IN THE NOTES TO ACCOUNT FILED WITH THE RETURN, IT HAS BEEN STATED T HAT THE BOARD HAD REVALUED THE VALUE OF THE PRODUCT DEVELOPED ON THE BASIS OF VALUATION CARRIED OUT BY THE PROFESSIONS FROM D5.80 LAKHS TO D 38.10 LAKHS. THIS IS CONSIDERED TO ARRIVE AT CONSID ERATION PAYABLE TO THE SHAREHOLDERS OF THIS COMPANY'. IT HAS BEEN FURTHER STATED BY THE AO THAT THE BOARD OF DIRECTORS HAD REVALUED 'THE PRODUCT' ON THE BASIS OF VALUATION CARRIED OUT BY THE PROFES SIONALS TO D 38.10 LAKHS AND THAT IT WAS TRANSFERRED TO THE AMAL GAMATED COMPANY AT A RE-FIXED VALUE OF D 38.10 LAKHS AND TH E AMALGAMATED COMPANY TOOK INTO ACCOUNT THE SAID VALU E TO ARRIVE AT CONSIDERATION PAYABLE TO SHAREHOLDERS OF THE ASS ESSEE COMPANY. THE AO HAS FURTHER NOTED THAT AS PER SECT ION 2(1B) READ WITH EXPLANATION(7) TO SECTION 43(1) OF THE AC T, IN THE CASE OF AMALGAMATION, THE ACTUAL COST OF THE TRANSFERRED CAPITAL ASSET SHALL BE TAKEN TO BE THE SAME IN THE CASE OF THE AM ALGAMATED COMPANY. THE AO HAS CONTENDED THAT, SINCE THE ASSES SEE HAD REVALUED THE ASSET, IT COULD NOT CLAIM THE BENEFIT U/S 47 IN RESPECT OF THE TRANSFER OF THE SAME AND CONSEQUENTLY THE EX CESS AMOUNT WORKED OUT ON REVALUATION HAD TO BE TAXED AS SHORT TERM CAPITAL GAINS. CONSEQUENTLY, THE AO HAS TREATED THIS EXCESS AMOUNT OF ITA NO.2474/MDS/2014 :- 4 -: D38.10 LAKHS AS LIABLE TO BE TAXED AS SHORT TERM CA PITAL GAIN AND COMPLETED THE ASSESSMENT U/S 143(3) DETERMINING INC OME AT D38,73,015/- DEMANDING TOTAL TAX OF D.20,96,621/-. AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE COMMISS IONER OF INCOME TAX (APPEALS). 4. THE COMMISSIONER OF INCOME TAX (APPEALS) OBSERVED T HAT THAT THE SCHEME OF AMALGAMATION WAS APPROVED BY THE HIGH COURT OF MADRAS AS PER WHICH THE ASSESSEE COMPANY AMALGAMATED WITH M/S NILGIRIS NETWORKS PRIVATE LIMI TED AND THEIR SCHEME IS WELL WITHIN THE DEFINITION OF SECTION 2(1 B) OF THE ACT AND THEREFORE CAPITAL GAINS, IF ANY, ON THE TRANSFE R ON AMALGAMATION IS EXEMPT FROM TAX U/S 47(VI). AS PE R THE ACT, NOTHING CONTAINED IN SEC. 45 OF THE ACT IS APPLICAB LE TO TRANSACTIONS AS DESCRIBED UNDER SEC. 47(VI). AS SUC H THERE IS NO QUESTION OF ANY CAPITAL GAIN ARISING OUT OF ITS TRA NSFER EVEN IF THERE WAS A REVALUATION, AS CONTENDED BY THE ASSESS ING OFFICER. A PLAIN READING OF THE SECTION SUGGESTS THAT REVALUAT ION PER SE WOULD NOT DENY THE ASSESSEE THE EXEMPTION PROVIDED U/S 47(VI) WHEN IT IS CLEARLY LAID OUT THAT FOR THE LIMITED PU RPOSE OF SECTION 45, NOTHING CONTAINED IN THAT SECTION (I.E., SEC. 4 5) IS APPLICABLE TO SUCH TRANSFER AND THEREFORE IF SUCH 'TRANSFER' D OES NOT RESULT IN ITA NO.2474/MDS/2014 :- 5 -: ANY CAPITAL GAINS AS PER SEC. 47(VI), UNDER WHICH T HE INSTANT TRANSACTION IS NOT EVEN REGARDED AS TRANSFER IN THE FIRST PLACE. IT APPEARS THAT THE ASSESSING OFFICER HAS CONFUSED TH E COST AS PER THE PROVISIONS OF SEC. 43(1) R.W. EXPLANATION 7 THE RETO WHICH IS APPLICABLE FOR CALCULATING COST FOR THE PU RPOSES OF PROFITS AND GAINS OF BUSINESS OR PROFESSION AND NOT FOR THE PURPOSES OF CAPITAL GAINS. THEREFORE, THE AO'S ACTION IN TREATI NG THE DIFFERENCE IN THE COST OF THE TRANSFERRED CAPITAL ASSET ON REV ALUATION, AS SHORT TERM CAPITAL GAIN IS QUITE CLEARLY AN ERRONEOUS INT ERPRETATION OF SEC. 47(VI) AND IS THEREFORE LEGALLY NOT TENABLE AN D THE COMMISSIONER OF INCOME TAX (APPEALS) DELETED THE AD DITION. AGAINST THIS, THE REVENUE IS IN APPEAL BEFORE US. 5. NONE APPEARED ON BEHALF OF THE ASSESSEE. THEREFORE, WE PROCEED TO DECIDE THE CASE ON MERITS AFTER HEARING THE LD. DEPARTMENTAL REPRESENTATIVE. AS OBSERVED BY THE CO MMISSIONER OF INCOME TAX (APPEALS), THIS IS A CASE OF AMALGAMATIO N WITHIN THE DEFINITION OF SECTION 2(1B) OF THE ACT AND THEREFOR E CAPITAL GAINS, IF ANY, ON THE TRANSFER ON AMALGAMATION IS EXEMPT U/S. 47(VI) OF THE ACT. BEING SO, THE COMMISSIONER OF INCOME TAX (APPEALS) FINDINGS IS CORRECT AND THE SAME IS CONFIRMED. THE GROUND OF THE APPEAL OF THE REVENUE IS REJECTED. ITA NO.2474/MDS/2014 :- 6 -: 6. IN THE RESULT, THE APPEAL OF THE REVENUE IN ITA NO.2474/MDS/2014 IS DISMISSED. ORDER PRONOUNCED ON FRIDAY, THE 9TH DAY OF OCTOBER, 2015, AT CHENNAI. SD/- SD/- ( . . . ! ) (N.R.S. GANESAN) / JUDICIAL MEMBER ( ! ' ) (CHANDRA POOJARI) # / ACCOUNTANT MEMBER '# / CHENNAI $% / DATED:09.10.2015 KV %&'' ()'*) / COPY TO: ' 1 . / APPELLANT 3. ' +',! / CIT(A) 5. )-.' / / DR 2. / RESPONDENT 4. ' + / CIT 6. .0'1 / GF