Harita Seating Systems Ltd., CHENNAI V. DCIT, CHENNAI

ITA 2857/CHNY/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 8675 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 8 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-07-2016
• Appeal Filed By: Assessee
• Bench Allotted: A
• Next Hearing Date: 09-05-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 20-11-2014
• Court: TRIBUNAL
• Department Lawyers: PARMINDER
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Sale consideration of property below Jantri Value; Capital asset; Gift; Business expenditure; Earning of tax free income; Cost of acquisition; Wholly owned subsidiary; Fair market value; Valuation report; Revised return
• Section: 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI , . . . . ! ' ! ' ! ' ! ' , # # # # '$ '$ '$ '$ BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER . /ITA NO. 2857/MDS/2014 # % &% / ASSESSMENT YEAR : 2010-11 M/S. HARITA SEATING SYSTEMS LTD., JAYALAKSHMI ESTATES, 29, (OLD NO.8), HADDOWS ROAD, CHENNAI 600 006. PAN AAACH2492N ( '( /APPELLANT) V. THE DEPUTY COMMISSIONER OF INCOME-TAX, COMPANY CIRCLE-II(2), CHENNAI - 34. (*+'(/ RESPONDENT) . /ITA NO. 2970/MDS/2014 # % &% / ASSESSMENT YEAR : 2010-11 THE DEPUTY COMMISSIONER OF INCOME-TAX, CHENNAI - 34. ( '( /APPELLANT) V. M/S. HARITA SEATING SYSTEMS LTD., CHENNAI 600 006. (*+'(/ RESPONDENT) ASSESSEE BY : SHRI R. VIJAYARAGHAVAN, ADVOCATE DEPARTM ENT BY : SMT. PARMINDER, CIT ! 4 5 / DATE OF HEARING : 09.05.2016 67& 4 5 / DATE OF PRONOUNCEMENT : 29.07.2016 - ITA 2857 & 2970/14 2 8 8 8 8 / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THESE CROSS APPEALS BY THE ASSESSEE AND BY THE REVENUE ARE DIRECTED AGAINST THE ORDER OF THE COMMI SSIONER OF INCOME-TAX(APPEALS) DATED 31.7.2014. 2. IN THIS CASE, THE ASSESSEE, ORIGINALLY FILED E-R ETURN ON 14.10.2010 FOR THE ASSESSMENT YEAR 2010-11 DECLARIN G TOTAL INCOME OF 1,75,67,833/-. SUBSEQUENTLY, THE ASSESSEE FILED A REVISED RETURN OF INCOME CLAIMING LOSS OF 19,16,48,320/-. THE SAME WAS PROCESSED U/S.143(1) OF THE ACT. LATER, T HE RETURN WAS SUBJECT TO SCRUTINY AND THE AO ASSESSED THE INC OME AT 53,29,46,238/- BY DETERMINING THE LONG TERM CAPITAL GAINS AT 64,09,78,248/- AND ALSO INVOKING THE PROVISIONS OF SEC.14A R.W.RULE 8D OF THE I.T.RULES, DISALLOWED EXPENSES O F 1,98,94,281/-. IN ADDITION TO THIS, THE AO ALSO DI SALLOWED R & D EXPENSES OF 1,54,19,903/-. AGAINST THIS, THE ASSESSEE CARRIED THE MATTER BEFORE THE CIT(APPEALS). - ITA 2857 & 2970/14 3 3. REGARDING THE COMPUTATION OF LONG TERM CAPITAL G AINS, THE FACTS ARE THAT THE ASSESSEE COMPANY, M/S. HARITA SE ATING SYSTEMS LTD.(HSSL) IS ENGAGED IN THE BUSINESS OF MA NUFACTURE OF SEATING SYSTEMS FOR AUTOMOBILES VIZ., TWO WHEELE RS, THREE WHEELERS, THREE WHEELERS AND FOUR WHEELERS.M/S. HAR ITA POLYMER LTD.(HPL) WAS THE 100% SUBSIDIARY COMPANY OF HSSL. THE SHARE CAPITAL IN HPL WAS 5 LAKHS AND ON 28.5.2009, A JOINT VENTURE AGREEMENT WAS MADE BETWEEN HSSL AND FS FEHR ER AUTOMOTIVE GMBH GERMANY (FSFA). HPL HAD BEEN CONVE RTED INTO M/S. HARITA FEHRER LTD.(HFL) BY WAY OF JOINT V ENTURE AGREEMENT BETWEEN HSSL AND FSFA. THE NAME OF HPL W AS CHANGED INTO HFL ON 19.8.2009. THE AUTHORIZED SHAR E CAPITAL WAS INCREASED FROM 5 LAKHS TO 20 CRORES ON 30.12.2009. IN THE JOINT VENTURE AGREEMENT, THE SUBSCRIBED AND PAI D UP CAPITAL OF JOINT VENTURE COMPANY WAS ON 60:40 BASIS (60% HS SL, 40% FSFA). HOWEVER, SUBSEQUENTLY, IN THE REVISED JOINT VENTURE AGREEMENT, THE SUBSCRIBED AND PAID UP CAPITAL OF JO INT VENTURE COMPANY WAS ON 51:49 BASIS (51% HSSL, 49% FSFA). T HE HSSL HAD BEEN ALLOTTED 51% OF EQUITY SHARES IN HFL, EQUIVALENT TO 1,02,00,000 EQUITY SHARES VALUED AT 27.54 CRORES VALUED - ITA 2857 & 2970/14 4 AT 27 PER SHARE, WITH FACE VALUE AT 10 AND PREMIUM OF 17/EACH. FSFA HAD BEEN ALLOTTED 49% OF EQUITY SH ARES IN HFL (EQUIVALENT TO 98,48,040 EQUITY SHARES VALUED A T 83.30 CRORES). OUT OF 49% OF SHARES, 40% OF SHARES EQUIV ALENT TO 68,33,364 EQUITY SHARES HAD BEEN ALLOTTED ON 8.2.20 10 FOR A FACE VALUE OF 10/- PER SHARE AND AT A PREMIUM OF 91.54 PER SHARE. ANOTHER 9% OF SHARES EQUIVALENT TO 30,14,67 6 EQUITY SHARES HAD BEEN ALLOTTED ON 31.3.2011 FOR A FACE VA LUE OF 10/- PER SHARE AND AT A PREMIUM OF 41.74 PER SHARE. 3.1 IN THE ORIGINAL JOINT VENTURE AGREEMENT, THE EN TERPRISE VALUATION OF THE BUSINESS TRANSFERRED TO THE JOINT VENTURE COMPANY WAS MADE AT 170 CRORES. SUBSEQUENTLY, THE ENTERPRISE VALUATION OF THE BUSINESS TRANSFERRED WA S QUOTED AS 173.36 CRORES IN THE REVISED JOINT VENTURE AGREEMEN T. 3.2 THE HSSL HAD MADE SLUMP SALE OF SOME OF ITS BUS INESS UNITS TO HFL AND OFFERED SALE CONSIDERATION OF 46.50 CRORES. THE LONG TERM CAPITAL GAIN OF 15,53,78,249/- WAS COMPUTED AS PROVIDED IN SEC.50B OF THE ACT. BESIDES CASH OF 18.90 CRORES, THE SALE CONSIDERATION WAS ALSO RECEIVED BY WAY OF SHARES VIZ. 51% OF SHARES OF HFL (EQUIVALENT TO 1,02,00,000 EQU ITY SHARES - ITA 2857 & 2970/14 5 VALUED AT 27.54 CRORES AT 27/- PER SHARE, WITH FACE VALUE AT 10/- AND PREMIUM OF 17/- EACH). THESE SHARES HAD BEEN ALLOTTED ON THE DATE OF TRANSFER (22.1.2010) ITSELF . THE FOLLOWING BUSINESSES VIZ. FOAMING BUSINESS, TWO WHEELER SEATS , THREE WHEELER SEATS, SEAT CUSHIONS, LONG FIBRE INJECTIONS (LFI) AND MICROCELLULAR URETHANE (MCU) PRODUCTS, WERE TRANSFE RRED BY THE HSSL THROUGH SLUMP SALE TO HFL. 3.3 ACCORDING TO THE AO, A S PER SECTION 50B, THE MODE OF COMPUTATION OF CAPITAL GAINS HAS TO BE CALCULATED AS PER SECTION 48 AS PER WHICH, THE CAPITAL GAINS SHALL BE COMPUTED BY ADOPTING THE FULL VALUE OF THE CONSIDERATION REC EIVED OR ACCRUING AFTER DEDUCTING EXPENDITURE, IF ANY, INCUR RED WHOLLY AND EXCLUSIVELY IN CONNECTION WITH SUCH TRANSFER AND AL SO THE COST OF ACQUISITION I IMPROVEMENT. FOR ARRIVING AT THE SLUMP SALE CAPITAL GAIN, THE FULL VALUE OF SLUMP SALE CONSIDERATION RE CEIVED HAS TO BE REDUCED TO THE EXTENT OF NET WORTH OF THE UNDERT AKING TRANSFERRED IN THE SLUMP SALE. NET WORTH OF THE UND ERTAKING HAS TO BE CALCULATED BY WAY OF DEDUCTING TOTAL FROM LIA BILITIES FROM TOTAL ASSETS WHICH ARE RELATED TO THE UNDERTAKING T RANSFERRED ON SLUMP SALE. HENCE, THE NET WORTH OF THE TRANSFERRED UNIT IS - ITA 2857 & 2970/14 6 EQUIVALENT TO COST OF ACQUISITION AND COST OF THE T RANSFER OF THE CAPITAL ASSET WHICH IS TRANSFERRED UNDER SLUMP SALE. 3.4 INITIALLY, THE ASSESSEE HAS STATED THAT THERE I S NO BASIS FOR DETERMINING THE SHARE PREMIUM ALLOTTED TO THE HSSL AND FSFA. VIDE LETTER DATED 13.02.2013, THE ASSESSEE HAS SUBM ITTED THE COPY OF THE VALUATION REPORT OF THE JOINT VENTURE C OMPANY BASED ON THE DISCOUNTED CASH FLOW METHOD (DCF) PREPARED B Y M/S. PRICE WATER HOUSE COOPERS. 3.5 THE ASSESSEE HAS STATED THAT THE DIFFERENTIAL P REMIUM WAS DETERMINED BY TAKING INTO CONSIDERATION THE VAR IOUS STRENGTH AND. WEAKNESSES AND BUSINESS OPPORTUNITIES OF THE H SSL AND FSFA. THE HSSL IS HAVING BETTER HOLD IN THE AUTOMO BILE SECTOR IN INDIAN MARKET COMPARED TO FSFA. THE ASSESSEE COM PANY HAS FURTHER STATED THAT, AT THE POINT OF HSSL INVES TMENT IN HFL, FUTURE FREE CASH FLOWS OF THE BUSINESS WERE LIMITED AND POTENTIAL FOR EXPONENTIAL GROWTH OF THE BUSINESS WAS LIMITED, WHEREAS, AT THE POINT OF FSFA INVESTMENT IN HFL, THE FREE CASH FLOWS OF THE HFL WOULD SIGNIFICANTLY INCREASE AS THE COMPANY WOU LD BECOME IARGELY DEBT FREE. THE ASSESSEE COMPANY FURTHER ADD ED THE VALUE OF THE JOINT VENTURE COMPANY WAS LESS AT THE TIME OF - ITA 2857 & 2970/14 7 INVESTMENT BY THE ASSESSEE WHEREAS THE VALUE OF THE JOINT VENTURE COMPANY WAS HIGH AT THE TIME OF INVESTMENT BY FSFA. HENCE, THE LESSER PREMIUM HAS BEEN DETERMINED FOR T HE SHARES ALLOTTED TO THE HSSL AND HIGHER PREMIUM HAS BEEN DE TERMINED FOR THE SHARES ALLOTTED TO FSFA. 3.6 THE ASSESSEE HAS STATED THAT THE POTENTIAL FOR NEW BUSINESS BASED ON ACCESS TO NEW TECHNOLOGY INCREASE D SUBSTANTIALLY WITH THE TECHNOLOGY BROUGHT IN BY FEH RER. BASED ON THE REVISED FREE CASH FLOW AVAILABILITY, THE VALUAT ION OF HFL CHANGED SUBSTANTIALLY. ACCORDING TO THE AO, THIS C ONTENTION OF THE ASSESSEE CANNOT BE ACCEPTED FOR THE REASON THAT THE VALUATION OF THE JOINT VENTURE COMPANY BASED ON THE DCF METHOD HAS BEEN MADE AT THE TIME OF JOINT VENTURE A GREEMENT ITSELF. ALL THESE FACTORS SUCH AS ASSET CONTRIBUTE D BY HSSL AND TECHNOLOGY BROUGHT IN BY FSFA HAVE BEEN TAKEN INTO CONSIDERATION AT THE TIME OF VALUATION OF THE JOINT VENTURE COMPANY BY DCF METHOD. 3.7 THE JOINT VENTURE COMPANY WAS FORMED ON MAY 200 9 BY WAY OF AGREEMENT BETWEEN HSSL AND FSFA. THE VALUAT ION OF JOINT VENTURE COMPANY HAD BEEN MADE AT 173.36 CRORES AT - ITA 2857 & 2970/14 8 THE TIME OF JOINT VENTURE AGREEMENT ITSELF. THE AB OVE VALUATION HAD NOT BEEN CHANGED AT THE TIME OF INVESTMENT BY T HE PROMOTERS OF THE JOINT VENTURE COMPANY. THE ASSESS EE COMPANY HAS GOT 51% OF SHARES IN JOINT VENTURE COMP ANY ON 28.1.2010 AND FSFA HAS INVESTED IN JOINT VENTURE CO MPANY ON 8.2.2010. THE TOTAL INVESTMENT RECEIVED BY JOINT V ENTURE COMPANY FROM FSFA WAS 85 CRORES WHICH IS EQUIVALENT TO 49% OF 173.36 CRORES WHICH IS THE VALUATION OF THE JOINT VENTURE COMPANY AS PER THE DISCOUNTED CASH FLOW MET HOD. ACCORDING TO THE AO, THE BASIS FOR DETERMINING THE SHARE PREMIUM FOR THE SHARES ALLOTTED TO FSFA WAS BY VALU ATION OF THE JOINT VENTURE COMPANY BY DISCOUNTED CASH FLOW METHO D. THE TIME GAP BETWEEN THE INVESTMENT BY HSSL AND FSFA IS ONLY 12 DAYS. BEFORE THE TRANSFER OF THE BUSINESS UNITS TO HFL ON SLUMP SALE, THE VALUE OF THE JOINT VENTURE COMPANY IS NEG LIGIBLE. THE VALUE OF THE JOINT VENTURE COMPANY HAS BEEN INCREAS ED BECAUSE OF SOME OF THE BUSINESS UNITS WERE TRANSFER RED BY HSSL TO THE JOINT VENTURE COMPANY UNDER SLUMP SALE AND THE TECHNICAL KNOW-HOW WAS BROUGHT BY FSFA. IN THE DIS COUNTED CASH FLOW METHOD, ALL THESE FACTORS HAVE BEEN TAKEN INTO - ITA 2857 & 2970/14 9 CONSIDERATION FOR VALUATION OF THE JOINT VENTURE CO MPANY. THE ASSESSEE COMPANY HAS CONTRIBUTED TO THE JOINT VENTU RE COMPANY BY WAY OF TRANSFER OF BUSINESS UNITS ON SLU MP SALE BASIS AND FSFA HAS CONTRIBUTED TO THE JOINT VENTURE COMPANY BY WAY OF TECHNICAL KNOW-HOW. THE ASSESSEE COMPANY AND FSFA HAVE ADDED EQUAL VALUE TO THE JOINT VENTURE CO MPANY. THE VALUE OF THE SHARES WHICH WERE ALLOTTED TO FSFA HAD BEEN DETERMINED BASED ON THE VALUATION BY DISCOUNTED CAS H FLOW METHOD, WHEREAS, THERE IS NO BASIS FOR DETERMINATIO N OF THE VALUE OF SHARES WHICH WERE ALLOTTED TO HSSL. SINCE THE SHARES WERE ALLOTTED TO HSSL AND FSFA AT THE SAME TIME, TH E PREMIUM DETERMINED FOR FSFA OUGHT TO HAVE BEEN APPLIED FOR HSSL. ACCORDING TO THE AO, THERE IS NO VALID GROUND TO DE TERMINE A LESSER VALUE FOR THE SHARES ALLOTTED TO THE ASSESSE E COMPANY ON SLUMP SALE CONSIDERATION. 3.8 THE ASSESSEE HAS STATED THAT THE FAIR MARKET VA LUE OF SLUMP SALE UNIT COULD NOT BE ADOPTED IN PLACE OF TH E CONSIDERATION ACTUALLY RECEIVED. THE ASSESSING OFFI CER HAS NOT ADOPTED THE FAIR MARKET VALUE OF THE SLUMP SALE UNI T TRANSFERRED BUT INSTEAD, TAKEN INTO ACCOUNT THE FULL VALUE OF S ALE - ITA 2857 & 2970/14 10 CONSIDERATION RECEIVE BY WAY OF SHARES AND CASH. HS SL RECEIVED 51% OF THE SHARES FROM HFL IN EXCHANGE TO TRANSFER OF SLUMP SALE UNITS TO HFL. SINCE HSSL HAS RECEIVED 51 % OF SHARES IN EXCHANGE TO TRANSFER OF THE SLUMP SALE UN ITS, THE FAIR MARKET VALUE OF THE SHARES HAS TO BE CALCULATED FO R ASCERTAINING THE FULL VALUE OF CONSIDERATION. FURT HER, THE ASSESSEE HAS STATED THAT DCF METHOD CAN BE USED FOR VALUATION OF SHARES UNDER RULE 11UA RWS 56 WHICH IS NOT APPLI CABLE TO THE PRESENT CASE FOR THE ASSESSMENT YEAR IN QUESTION. S INCE THE ASSESSEE COMPANY HAD ADOPTED DCF METHOD FOR VALUATI ON OF SHARES WHICH WERE ALLOTTED TO FSFA, THE ASSESSING O FFICER HAS ADOPTED THE SAME DCF METHOD FOR DETERMINATION OF TH E VALUE OF SHARES ALLOTTED TO HSSL. 3.9. THE ASSESSEE HAS RELIED UPON SOME OF THE CASE LAWS IN WHICH IT WAS HELD THAT THE TERM 'FULL VALUE OF CONS IDERATION' COULD NOT BE CONSTRUED AS THE MARKET VALUE OF THE P ROPERTY WHICH HAD BEEN TRANSFERRED. ACCORDING TO THE AO, T HE FACTS OF THE CASE LAWS WHICH ARE RELIED BY THE ASSESSEE IS DISTINGUISHABLE FROM THIS CASE INASMUCH AS THE CASE LAW RELATES TO A CASE WHERE THERE WAS NO EXCHANGE OF PROPERTY F OR THE - ITA 2857 & 2970/14 11 TRANSFER OF THE SLUMP SALE UNITS, WHEREAS IN THIS C ASE, HSSL HAS RECEIVED 51 % OF SHARES FROM HFL IN EXCHANGE TO TRANSFER OF SLUMP UNITS TO HFL. ACCORDING TO THE AO, THE CASE L AWS RELIED UPON DOES NOT SUPPORT THE ASSESSEE'S CASE. 3.10 THE AO OBSERVED THAT THE ASSESSEE HAS TRANSFER RED SOME OF THE BUSINESS UNITS ON SLUMP SALE BASIS ON 2 2.01.2010. THE SALE CONSIDERATION HAS BEEN RECEIVED BY WAY OF CASH AND ALSO BY WAY OF ALLOCATION OF SHARES. THE ASSESSEE C OMPANY HAS RECEIVED 51 % OF SHARES IN THE JOINT VENTURE COMPANY ON THE DATE OF TRANSFER ITSELF. THE ASSESSEE HAS OFFERED TOTAL SALE CONSIDERATION OF 46.50 CRORES. OUT O F THE TOTAL SALE CONSIDERATION OF 46.50 CRORES, 18.90 CRORES HAS BEEN RECEIVED AS CASH AND 51 % OF SHARES RECEIVED HAVE BEEN VALUED AT 27.54 CRORES. AS PER SECTION 48, FULL VALUE OF SA LE CONSIDERATION RECEIVED HAS TO BE TAKEN INTO CONSIDE RATION AND CAPITAL GAINS SHOULD BE COMPUTED ACCORDINGLY. IN TH IS CASE, THE FULL VALUE OF SALE CONSIDERATION INCLUDES CASH COM PONENT AS WELL AS SHARES. 3.11 FULL VALUE OF CONSIDERATION IS THE CONSIDERATI ON RECEIVED OR RECEIVABLE BY THE TRANSFEROR IN LIEU OF ASSETS, WHICH THE - ITA 2857 & 2970/14 12 TRANSFEROR HAS TRANSFERRED. SUCH CONSIDERATION MAY BE RECEIVED IN CASH OR IN KIND. IF IT IS RECEIVED IN KIND, THE FAIR MARKET VALUE OF ASSETS IS TAKEN AS FULL VALUE OF CONSIDERATION. FULL VALUE OF CONSIDERATION MEANS WHAT THE TRANSFEROR RECEIVES OR IS ENTITLED TO RECEIVE AS CONSIDERATION FOR THE CAPITAL ASSET T RANSFERRED. THE EXPRESSION FULL VALUE, MEANS THE WHOLE PRICE WITHO UT ANY DEDUCTION. THE LEGISLATURE USED THE EXPRESSION 'FU LL VALUE OF CONSIDERATION INSTEAD OF MERELY SAYING CONSIDERAT ION BECAUSE TRANSFER FOR THE PURPOSE OF SECTION 45(L) INCLUDES NOT MERELY SALE, BUT ALSO OTHER MODE OF TRANSFER, SUCH AS, EXC HANGE, RELINQUISHMENT OF THE ASSET, EXTINGUISHMENT OF RIGH TS IN THE CAPITAL ASSET ETC. WHERE THERE WAS AN EXCHANGE OF P ROPERTY, THE FAIR MARKET VALUE OF THE PROPERTY GRANTED IN EX CHANGE TO BE ASCERTAINED IN' ORDER TO ARRIVE AT THE FULL VALUE O F CONSIDERATION. IN CASE OF AN EXCHANGE, IT WOULD BE NECESSARY TO VA LUE THE PROPERTY OR GOODS RECEIVED IN EXCHANGE. 3.12 ACCORDING TO THE AO, THE ASSESSEE HAS RECEIVED SALE CONSIDERATION PARTLY AS SHARES AND PARTLY AS CASH. SINCE THE ASSESSEE COMPANY HAS RECEIVED SHARES AS PART OF THE SALE CONSIDERATION, THE FAIR MARKET VALUE OF THE SHARES HAS TO BE - ITA 2857 & 2970/14 13 DETERMINED FOR THE PURPOSE OF ARRIVING AT THE FULL SLUMP SALE CONSIDERATION. IN THIS CASE, THE ASSESSEE COULD NO T FURNISH ANY VALUATION REPORT ON THE ASSET WHICH HAS BEEN TRANSF ERRED ON SLUMP SALE TO THE JOINT VENTURE COMPANY. THE TOTAL INVESTMENT RECEIVED FROM FSFA IS 85 CRORES, WHICH IS EQUIVALENT TO 49% OF 173.36 CRORES. THE SHARE PREMIUM OF 91.54 ON THE SHARES ALLOTTED TO FSFA HAS BEEN DETERMINED BASED O N THE VALUATION OF JOINT VENTURE COMPANY BY DISCOUNTED CA SH FLOW METHOD. THE SHARES HAVE BEEN ALLOTTED TO THE ASSESS EE COMPANY ON 28.01.2010 AND THE SHARES WERE ALLOTTED TO FSFA ON 08.02.2010. AS COULD BE SEEN, THE TIME GAP BETW EEN THE SHARE ALLOTMENT IS ONLY 12 DAYS . THERE WOULDN'T B E MUCH CHANGE IN THE NET WORTH OF THE COMPANY WITHIN SUCH A SHORT PERIOD WHICH MAY HAVE IMPACT ON THE VALUATION OF SH ARE. ON THE ONE HAND, THE DETERMINATION OF PREMIUM OF 91.54 ON THE 40% OF SHARES, AND PREMIUM OF 41. 74 ON THE 9% OF SHARES FOR THE SHARES ALLOTTED TO FSFA WAS BASED ON THE VA LUATION OF 173.36 CRORES CALCULATED AS PER DISCOUNTED CASH FLO W METHOD, ON THE OTHER HAND, THE ASSESSEE COMPANY COULD NOT E STABLISH THE BASIS OF DETERMINING THE PREMIUM OF 17/- ON 51% OF - ITA 2857 & 2970/14 14 SHARES WHICH HAS BEEN ALLOTTED TO IT FOR TRANSFER O F SLUMP SALE UNIT. THE AO OBSERVED THAT THE FAIR MARKET VALUE O F SHARES IS BEING DETERMINED BASED ON THE ENTERPRISE VALUATION MADE AS PER DCF METHOD. THE ASSESSEE COMPANY HAS SUPPRESSED THE SALE CONSIDERATION BY WAY OF DETERMINING AT A LESSE R PREMIUM OF 17/- ON 51 % OF SHARES RECEIVED TOWARDS SLUMP SALE CONSIDERATION. FOR DETERMINING THE FULL VALUE OF SA LE CONSIDERATION RECEIVED ON TRANSFER OF BUSINESS UNIT S, THE FAIR MARKET VALUE HAS TO BE ASCERTAINED FOR THE 51% OF S HARES RECEIVED BY THE ASSESSEE. WHEN THE SHARES WERE ALLO TTED TO FSFA, THE PREMIUM OF SHARES HAS BEEN DETERMINED ON THE VALUATION OF THE JOINT VENTURE COMPANY BY DCF METHOD. ADOPTING THE SAME ANALOGY, THE SHARE PREMIUM OF 76.63 [WEIGHTED AVERAGE OF PREMIUM ADOPTED RESPECTIVELY F OR 40% SHARES AND 9% SHARES TO FSFA] IS CONSIDERED FOR CAL CULATING THE FAIR MARKET VALUE OF THE SHARES RECEIVED BY THE ASS ESSEE COMPANY AS SLUMP SALE CONSIDERATION. ACCORDINGLY, T HE FULL VALUE OF SALE CONSIDERATION IS ARRIVED AS UNDER :- 51% OF SHARES VALUED AS PER THE ABOVE DISCUSSION (1,02,00,000 X 86.63 88.36 CRORES FACE VALUE 10/-; PREMIUM - 76.63) ------------------ - ITA 2857 & 2970/14 15 FULL VALUE OF SALE CONSIDERATION 88.36 CRORES ========== THE VALUATION OF THE JOINT VENTURE COMPANY AS PER D CF METHOD IS 173.36 CRORES. THE FULL VALUE OF SALE CONSIDERATI ON OF 88.36 CRORES MATCHES WITH THE 51% OF 173.36 CRORES. 3.13 ACCORDINGLY, THE LONG TERM CAPITAL GAINS AR ISING OUT OF SLUMP SALE IS REWORKED AS UNDER BY THE AO: FULL VALUE OF SALE CONSIDERATION AS DETERMINED SUPRA 88.36 CRORES LESS: NET WORTH OF THE SLUMP SALE UNIT (TOTAL ASSETS TOTAL LIABILITIES) (54,87,53,057 30,61,31,299 = 24.26 CRORES 24,26,21,758) ------------------- REVISED LONG TERM CAPITAL GAIN 64.10 CRORES LESS: LONG TERM CAPITAL GAIN OFFERED 15.53 CR ORES BY THE ASSESSEE ------------------- ADDITIONAL LONG TERM CAPITAL GAIN 48.57 CRORES =========== AGAINST THIS, THE ASSESSEE WENT IN APPEAL BEFORE TH E CIT(APPEALS). 4. THE CIT(APPEALS) OBSERVED THAT THE SALE CONSIDER ATION RECEIVED OR ACCRUED MEANS THE FULL VALUE OF CONSIDE RATION NEGOTIATED AND AGREED UPON BETWEEN THE TRANSFEROR A ND - ITA 2857 & 2970/14 16 TRANSFEREE OF THE ASSETS. WHENEVER AGREEMENTS ARE REDUCED TO WRITTEN DOCUMENTS, THE VALUE SO RECORDED IN THE TRA NSFER DOCUMENTS IS TO BE CONSIDERED AS THE FULL VALUE OF CONSIDERATION RECEIVED OR ACCRUED TO THE SELLER OF THE ASSETS. I N THE PRESENT CASE, THE ASSESSEE COMPANY TRANSFERRED ITS HOSUR, B ANGALORE AND PUNE UNITS TO ITS SUBSIDIARY COMPANY, HPPL FOR A TOTAL CONSIDERATION OF 46.50 CRORES. THIS IS MENTIONED IN THE TRANSFER DOCUMENT AND THERE IS NO DISPUTE IN THIS R EGARD. 4.1 NORMALLY, WHEN A NEW EQUITY PARTNER IS TAKEN INTO AN EXISTING BUSINESS, THE INCOMING PARTNER HAS TO CONTRIBUTE A CAPITAL PROPORTIONATE TO THE PERCENTAG E OF INTEREST OFFERED TO HIM IN THE BUSINESS. FOR THIS P URPOSE, NORMALLY, THE MARKET VALUE OF THE BUSINESS TOGETHER WITH GOODWILL, ETC., IS TAKEN INTO CONSIDERATION. HOWEVER, IF THE INCOMING PARTNER IS A NON-RESIDENT, THE CRITERIA WILL BE TOTALLY DIFFERENT. FOR THIS PURPOS E, THE RBI HAS PRESCRIBED A 'DISCOUNT CASH FLOW' OR DCF METHOD TO DETERMINE THE VALUE OF BUSINESS AND BASED ON SUC H VALUE, THE NON-RESIDENT HAS TO PARTICIPATE IN THE E QUITY OF THE INDIAN COMPANIES. IN THIS DISCOUNT CASH FLOW OR - ITA 2857 & 2970/14 17 DCF METHOD, ONLY THE PROJECTED ANNUAL TURNOVERS OF THE BUSINESS FOR A SPECIFIED NUMBER OF YEARS AND TH EIR PROFITS ALONE ARE TAKEN INTO CONSIDERATION. THE VAL UE OF THE FIXED ASSETS, INVESTMENTS AND OTHER INTANGIBLES , ETC. IS NOT FORMING PART OF THE DCF METHOD OF VALUATION. THUS, THE DCF METHOD IS TOTALLY DIFFERENT FROM THE REAL MARKET VALUE OF BUSINESS. ALL THE TRANSFERS OF ASSETS/BUSINESSES INVOLVING INDIAN PARTIES ARE PURE LY BASED ON THE MARKET PRICES. HOWEVER, THIS PRACTICE IS NOT PERMITTED IF THE INCOMING EQUITY PARTNER IS A N ON- RESIDENT. FOR NON-RESIDENTS, THE DCF METHOD OF VALUATION IS THE ONLY PRESCRIBED AND MANDATORY METH OD OF VALUING THE BUSINESS. THUS, THE 'MARKET PRICE' METHOD AND THE DCF METHOD OF VALUING THE BUSINESS ARE TWO DIFFERENT TYPES OF SITUATIONS AND THAT TOO FOR TWO DIFFERENT TYPES OF PERSONS. THEREFORE, THE DCF METH OD, WHICH IS PRESCRIBED FOR THE NON-RESIDENTS FOR THE PURPOSE OF EQUITY PARTICIPATION IN THE INDIAN COMPA NIES, CANNOT DEPICT THE TRUE AND REAL VALUE OF THE 'FAIR MARKET PRICE' OF THE BUSINESS. THEREFORE, THE BUSINESS VAL UE OF - ITA 2857 & 2970/14 18 173.46 CRORES, DETERMINED UNDER THE DCF METHOD, BY THE FSFA GMBH FOR ITS EQUITY PARTICIPATION IN HPPL, CANNOT BE CONSIDERED AS THE 'FAIR MARKET VALUE' OF THE ASSESSEE'S TRANSFER OF THE ABOVE HOSUR, BANGALORE A ND PUNE UNITS TO HPPL, FOR THE PURPOSE OF DETERMINING THE CAPITAL GAINS. 4.2 FURTHER, AS CONTESTED BY THE ASSESSEE, ONLY THE ACTUAL SALE CONSIDERATION RECEIVED OR ACCRUED SHOUL D BE ASSESSED TO 'CAPITAL GAINS' UNDER CHAPTER IV-E OF T HE ACT. THE METHOD OF COMPUTATION OF CAPITAL GAINS IS PROVIDED IN THE PROVISIONS OF SECTION 48 OF THE LT. ACT, WHICH ARE REPRODUCED AS UNDER: MODE OF COMPUTATION. SEC. 48. THE INCOME CHARGEABLE UNDER THE HEAD 'CAPITAL GAINS' SHALL BE COMPUTED) BY DEDUCTINGFROM THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER OF THE CAPITAL ASSET THE FOLLOWING AMOUNTS} NAMELY :- (I) EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY IN CONNECTION WITH SUCH TRANSFER; (II) THE COST OF ACQUISITION OF THE ASSET AND THE COST OF ANY IMPROVEMENT THERETO: - ITA 2857 & 2970/14 19 4.3 ACCORDING TO THE CIT(APPEALS), FULL VALUE OF CONSIDERATION RECEIVED / ACCRUED ON TRANSFER OF A C APITAL ASSET, ALONE CAN BE BROUGHT TO TAX UNDER THE HEAD CAPITAL GAINS. THE EXPRESSION FULL VALUE MEANS THE WHOL E PRICE WITHOUT ANY DEDUCTION WHATSOEVER AND IT CANNOT REFE R TO THE ADEQUACY OR INADEQUACY OF THE PRICE BARGAINED F OR. NOR HAS IT ANY NECESSARY REFERENCE TO THE MARKET VA LUE OF THE CAPITAL ASSET WHICH IS THE SUBJECT MATTER OF TH E TRANSFER. FOR THIS PURPOSE, HE RELIED ON THE JUDGM ENT OF THE GUJARAT HIGH COURT IN THE CASE OF CIT V. JAYKRI SHNA HARIVALLABHDAS (231 ITR 108), SUPREME COURT JUDGMEN T IN THE CASE OF CIT V. GILLANDERS ARBUTHNOT & CO. (87 I TR 407), ANDHRA PRADESH HIGH COURT JUDGMENT IN THE CAS E OF CIT V. SMT. BILQUIS JAHAN BEGUM (150 ITR 508) AND T HE JUDGMENTS OF THE BOMBAY HIGH COURT IN THE CASE OF C IT V. SHAKUNTALA KANTILAL (190 ITR 56) & CIT V. TEXSPIN E NGG. & MFG. WORKS (263 ITR 345). 4.4 THUS, IN VIEW OF THE ABOVE DECISIONS, FULL VALUE OF CONSIDERATION RECEIVED I ACCRUED AS CONTAINED IN THE PROVISIONS OF SEC.48 MEANS THE ACTUAL CONSIDERATION - ITA 2857 & 2970/14 20 RECEIVED BY THE ASSESSEE. THE FAIR MARKET VALUE OR THE MARKET VALUE OR ANY OTHER ESTIMATION OF VALUE HAS N O RELEVANCE FOR THE PURPOSE OF DETERMINING THE TAXABL E CAPITAL GAINS UNDER THIS CHAPTER. THE ONLY EXCEPTIO N IN THIS REGARD IS THE PROVISIONS OF SEC.50C OF THE ACT . 4.5 IN THE INSTANT CASE, THE 'BUSINESS PURCHASE AGREEMENT' DATED 22.01.2010 BETWEEN THE ASSESSEE AND HPPL, CLEARLY AND UNAMBIGUOUSLY CONTAINED THE SALE CONSIDERATION OF THE ABOVE BUSINESS UNITS (I.E . HOSUR, BANGALORE AND PUNE UNITS) AT 46.50 CRORES; IN VIEW OF THE SPECIFIC PROVISIONS OF SECTION 48 OF THE ACT AND ALSO THE ABOVE JUDICIAL PRONOUNCEMENTS, THE SALE CONSIDERATION OF 46.50 CRORES, AS SHOWN IN THE SALE DEED/ AGREEMENT, ALONE HAS TO BE CONSIDERED AS THE 'FULL VALUE OF CONSIDERATION RECEIVED OR ACCRUE D' FOR THE PURPOSE OF DETERMINING THE CAPITAL GAINS. THEREFORE, THE CIT(APPEALS) DIRECTED TO THE AO TO ADOPT THE ACTUAL SALE CONSIDERATION OF 46.50 CRORES AS SHOWN IN THE BUSINESS PURCHASE AGREEMENT DATED 22.01.2010 AS THE FULL VALUE OF CONSIDERATION RECEI VED - ITA 2857 & 2970/14 21 OR ACCRUED FOR THE PURPOSE OF DETERMINING THE TAXAB LE CAPITAL GAINS FROM THE TRANSFER OF THE ABOVE (HOSUR , BANGALORE AND PUNE) UNITS TO HPPL. 4.6 THE CIT(APPEALS), W ITHOUT PREJUDICE TO THE ABOVE FACTS AND LEGAL POSITIONS, EVEN IF THE ASSESSING OFFICER'S CONTENTIONS THAT THE BUSINESS VALUE OF 173.46 CRORES, AS DETERMINED UNDER DCF METHOD, IS T O BE CONSIDERED AS THE DEEMED 'FAIR MARKET VALUE' OF THE BUSINESS AND A PROPORTIONATE VALUE IS TO BE CONSIDE RED AS THE DEEMED SALE CONSIDERATION OF THE ABOVE HOSUR , BANGALORE AND PUNE UNITS, ARE TO BE ACCEPTED, STILL THERE IS A HUGE GAP BETWEEN THE ASSESSING OFFICER'S ADOPTION OF 88.36 CRORES AND THE REAL PROPORTIONATE VALUE. THIS CAN BE SHOWN AS BELOW: 4.7 THE VALUATION OF BUSINESS BY FSFA GMBH, UNDER DCF METHODS, WAS WITH REFERENCE TO THE ENTIRE BUSINESS OF THE HPPL, WHICH INCLUDES THE EXISTING U NIT OF CHENNAI AND THE ABOVE UNITS OF HOSUR, BANGALORE AND PUNE, WHICH ARE UNDER PROPOSAL FOR TRANSFER FRO M - ITA 2857 & 2970/14 22 THE ASSESSEE. BUSINESSES OF ALL THESE UNITS WERE PU T TOGETHER AND THE VALUE OF THE BUSINESS WAS DETERMIN ED UNDER DCF METHOD. IN OTHER WORDS, THE BUSINESS VALU E OF 173.46 CRORES DETERMINED BY FSFA GMBH, NOT ONLY PERTAINS TO THE BUSINESS UNITS (HOSUR, BANGALO RE AND PUNE) UNDER THE PROPOSED TRANSFER, BUT ALSO PERTAINS TO THE EXISTING BUSINESS OF CHENNAI UNIT O F HPPL. THEREFORE, IF THE PROPORTIONATE DCF VALUE, A S CONTEMPLATED BY THE ASSESSING OFFICER, IS TO BE ADOPTED, A PROPORTIONATE DCF VALUE OF THE EXISTING BUSINESS (OF CHENNAI UNIT) IS TO BE DETERMINED FIRS T AND REDUCED FROM THE TOTAL DCF VALUE OF 173.46 CRORES SO AS TO ARRIVE AT THE DCF VALUE OF THE BUSI NESS UNITS (HOSUR, BANGALORE AND PUNE UNITS) WHICH ARE UNDER THE PROPOSED TRANSFER. ONLY FROM SUCH DCF VALUE OF THE HOSUR, BANGALORE AND PUNE UNITS, THE CONTEMPLATED PROPORTIONATE VALUE OF 51 % CAN BE THE DEEMED VALUE OF SALE CONSIDERATION. HOWEVER, THE ASSESSING OFFICER HAS TOTALLY FORGOTTEN THE EXISTEN CE OF THE EXISTING BUSINESS OF THE CHENNAI UNIT, WHICH WA S - ITA 2857 & 2970/14 23 ACQUIRED BY HPPL WAY BACK IN 2008. INSTEAD, THE ASSESSING OFFICER APPARENTLY PRESUMED THAT THE HOSU R, BANGALORE AND PUNE UNITS ARE ONLY THE AVAILABLE BUSINESS UNITS (IGNORING THE CHENNAI UNIT) AND LOAD ED THE ENTIRE DCF BUSINESS VALUE OF 173.46 CRORES TO THE HOSUR, BANGALORE AND PUNE UNITS AND PROCEEDED TO DETERMINE THE TAXABLE CAPITAL GAINS. THUS, THE ASSESSING OFFICER ADOPTED THE 51% OF 173.46 CRORES, AMOUNTING TO 88.63 CRORES, AS THE DEEMED SALE CONSIDERATION FOR THE TRANSFER OF THESE HOSUR, BANGALORE AND PUNE UNITS TO HPPL, FOR THE PURPOSE O F DETERMINING THE TAXABLE CAPITAL GAINS. THIS METHOD ADOPTED BY THE ASSESSING OFFICER IS TOTALLY WRONG. 4.8 AS MENTIONED IN THE EARLIER PARAS, HPPL ACQUIRED THE CHENNAI UNIT OF BUSINESS FROM PEPL ON 10.11.200 8 FOR A CONSIDERATION OF 47.30 CRORES. ON THE SAME DAY, THE PRESENT ASSESSEE (HSSL) ALSO ACQUIRED THREE BUSINESS UNITS (I.E. TWO UNITS IN BANGALORE AND ONE UNIT IN PUNE) FOR CONSIDERATIONS OF 3.10 CRORES. 17.70 CRORES AND 1.90 CRORES, RESPECTIVELY, FROM PEPL. THE - ITA 2857 & 2970/14 24 ASSESSEE HAS ITS OWN EXISTING UNIT AT HOSUR. IN 200 9, THE ASSESSEE AND FSFA GMBH ENTERED INTO A JOINT VENTURE AGREEMENT (DATED 28.05.2009), AS PER WHICH THE ASSESSEE COMPANY HAD TO TRANSFER ITS HOSUR, BANGALORE (ONE UNIT ONLY) AND PUNE UNITS FOR A TOTA L SALE CONSIDERATION OF 46.50 CRORES, TO HPPL, AND FSFA GMBH, IN TURN, HAD TO INFUSE A CAPITAL OF 85.00 CRORES TO ACQUIRE 49% SHAREHOLDING IN THE JOINT VENTURE COMPANY HPPL. THUS, THE TOTAL PURCHASE COST OF THE. BUSINESSES IN THE HANDS OF HPPL IS AS UNDER: (I) CHENNAI UNIT - COST OF ACQUISITION (CONSIDERATION PAID TO PEPL) ON 10.11.2008 47.30 CRORES (II) HOSUR, BANGALORE AND PUNE UNITS - COST OF ACQUISITION (CONSIDERATION) PAID TO HSSL AS PER SALE DATED 22.01.2010 46.50 CRORES -------------------- TOTAL COST 93.80 CRORES 4.9 THUS, THE COST OF PURCHASE OF THE TOTAL BUSINES S (AT ACTUAL COST PRICE) OF ALL THE UNITS (I.E. EXIST ING CHENNAI UNIT AND THE UNITS UNDER THE PROPOSED ACQUISITION OF HSOUR, BANGALORE AND PUNE UNITS), IN THE - ITA 2857 & 2970/14 25 HANDS OF HPPL IS 93.80 CRORES. THIS IS THE POSITION OF THE HPPL BEFORE THE ENTRY OF FSFA GMBH AS EQUITY PARTICIPANT IN JOINT VENTURE HPPL. IN OTHER WORDS, BEFORE THE ENTRY OF FSFA GMBH, THE TOTAL VALUE OF THE BUSI NESS (AT ACTUAL COST PAID) OF HPPL WAS 93.80 CRORES. SINCE, AT THIS STAGE, HPPL IS A 100% SUBSIDIARY OF THE ASSESSEE COMPANY, THE ABOVE COST OF PURCHASES OF BUSINESS OF 93.80 CRORES IS DEEMED TO BE THE VALUE OF INVESTMENT MADE BY THE ASSESSEE COMPANY IN THE HPPL. THEREFORE, THIS VALUE OF 93.80 CRORES FORMS THE BASIS FOR ALLOWING A NON-RESIDENT INTO EQUITY PARTICIPATION. FURTHER, THE COST OF EXISTING UNIT O F CHENNAI WAS 47.30 CRORES WHICH WAS IN 2008. THERE MUST HAVE BEEN SOME APPRECIATION OR INCREASE IN THE VALUE AND NET-WORTH OF THIS EXISTING CHENNAI UNIT. SINCE THE MARKET VALUE OF THE CHENNAI UNIT IS NOT READILY AVAILABLE, THE RATE OF APPRECIATION OF THE BANGAIORE AND PUNE UNITS CAN ALSO BE TREATED AS THE RATE OF APPRECIATION OF THE CHENNAI UNIT (AS ALL THESE UNIT S ARE ULTIMATELY UNDER THE SAME MANAGEMENT. - ITA 2857 & 2970/14 26 NAME OF THE UNIT PURCHASE COST (AS ON 10.11.2008 SALE CONSIDERATION AS ON 22.01.2010 AMOUNT OF APPRECIATION RATE OF APPRECIATION EXISTING UNIT OF HPPL: 1.CHENNAI UNIT 47.30 CRORES NA UNITS UNDER TRANSFER FROM HSSL: 1.HOSUR UNIT NA -- -- -- 2.BANGALORE UNIT 3.10 CRORES 10.71 CRORES 7.61 CRORES 245.48% 3.PUNE UNIT 1.90 CRORES 2.23 CRORES 0.33 CRORES 17.37% TOTAL OF BLORE + PUNE UNITS 5.00 CRORES 12.94 CRORES 7.94 CRORES 158.80% 4.10 THUS, THE AVERAGE RATE OF APPRECIATION OF BANG ALORE AND PUNE UNITS (@ 158%) CAN ALSO BE CONSIDERED AS T HE RATE OF APPRECIATION IN THE BUSINESS VALUE OF THE C HENNAI UNIT. ALSO THERE IS AN ALTERNATIVE METHOD OF CALCU LATING THE APPRECIATION IN THE BUSINESS VALUE OF THE UNITS, I. E. BASED ON THE NET WORTH OF THE BUSINESS UNITS. THE RATE O F APPRECIATION, BASED ON THE COST OF ACQUISITION, AND ALSO THE NET WORTH OF VARIOUS BUSINESS UNITS IS AS UNDER : NAME OF THE UNIT NET WORTH AS ON 22.01.2010 1. HOSUR UNIT 22.35 CRORES 2. BANGALORE UNIT 7.13. CRORES 3. PUNE UNIT 1.48 CRORES SUB-TOTAL 30.96 CRORES 4. CHENNAI UNIT 43.24 CRORES * GRAND TOTAL 74.20 CRORES - ITA 2857 & 2970/14 27 4.11 THE TOTAL NET WORTH OF THE BUSINESS OF HPPL, JUST BEFORE ALLOWING THE FSFA GMBH AS 49% EQUITY PARTNER , IS 74.20 CRORES . OUT OF THIS NET WORTH, 43.24 CRORES REPRESENT THE NET WORTH OF THE EXISTING BUSINESS OF CHENNAI UNIT AND THE BALANCE OF 30.96 CRORES , REPRESENTS THE NET WORTH OF THE BUSINESS UNITS UNDER TRANSFER FROM HSSL TO HPPL, W.E.F. 22.01.2010. WHEN A BUSINESS IS UNDER PROPOSAL FOR SALE AS A 'GOING CONCERN', THE NEGOTIA TION FOR SALE PRICE NORMALLY DEPENDS ON THE NET WORTH OF THE BUSINESS, AS INCREASED BY THE PROSPECTS OF THE BUSI NESS AND OTHER ITEMS LIKE INTANGIBLES, MARKET VALUE OF ITS F IXED ASSETS, ETC. HOWEVER, IN THE INSTANT CASE, WHEN THE NEGOTIA TED VALUE OF THE BUSINESS, FOR THE PURPOSE OF INVITING FSFA G MBH AS AN EQUITY PARTNER, WAS FIXED AT 173.46 CRORES, IT WAS NOT PRIMARILY BASED ON THE NET WORTH OF THE BUSINESS AN D OTHER PROSPECTS OF THE BUSINESS. SINCE THE INCOMING EQUIT Y PARTNER IS A NON-RESIDENT, THE METHOD OF VALUING THE BUSINE SS IS BASED ON THE DCF METHOD, A MANDATORY METHOD PRESCRI BED BY THE RBI. - ITA 2857 & 2970/14 28 4.12 THE CIT(APPEALS) OBSERVED THAT THE DETERMINATION OF THE BUSINESS VALUE UNDER DCF METHOD IS ONLY FOR ALLOWING THE NON-RESIDENTS IN TO THE EQUITY PARTICI PATION IN THE INDIAN COMPANIES. IT IS ONLY TO DENOTE THE AMOU NT OF EQUITY AND THE RATES OF SUCH EQUITY TO BE BROUGHT I N BY THE INCOMING NON-RESIDENTS. IT HAS NOTHING TO DO WITH T HE MARKET VALUE OF THE EXISTING BUSINESS OF THE CONCER NED INDIAN COMPANIES. FURTHER, IT IS ALSO VERY IMPORTAN T TO MENTION HERE THAT THE 'BUSINESS VALUE' UNDER DCF METHOD, PER SE WILL NOT REPRESENT THE 'MARKET VALUE' OF THE BUSINESS FOR THE PURPOSES OF SALE, IF ANY. THIS FACT CAN EVEN BE SEEN IN THE EQUITY PARTICIPATION BY THE NON- RESIDENT FSFA GMBH. FOR EXAMPLE, IN THE INSTANT CAS E, THE BUSINESS VALUE UNDER DCF METHOD HAS BEEN FIXED AT 173.46 CRORES. IF THIS IS TO BE TREATED AS THE MAR KET VALUE OF THE BUSINESS OF HPPL, ANY INCOMING NON- RESIDENT PERSON, IT INVITED FOR 50% EQUITY PARTICIP ATION, HAS TO INFUSE 173.46 CRORES AS HIS CAPITAL IN ORDER TO GET 50% SHARE HOLDING. IF THE INCOMING NON-RESIDENT IS OFFERED 49% OF THE EQUITY, HE HAS TO INFUSE A CAPIT AL OF - ITA 2857 & 2970/14 29 166.66 CRORES (BEING 173.46 CRORES X 49%/51%). THIS IS PARTICULARLY SO BECAUSE, AFTER THE INFUSION OF T HE FRESH CAPITAL BY THE INCOMING NON-RESIDENT EQUITY PARTNER , THE SHARES HOLDING OF THE NON-RESIDENT SHOULD BE 49% AN D THE EXISTING SHARES HOLDERS WILL BE 51%, AS UNDER: BEFORE FORMATION OF JOINT VENTURE (I.E. BEFORE THE ENTRY OF NON-RESIDENT): DEEMED INVESTMENTS IN HPPL BY HSSL (IF PRESUMED ) : 173.46 CRORES (100% SHARE HOLDING) AFTER FORMATION OF JOINT VENTURE (I.E. AFTER THE EN TRY OF NON-RESIDENT): DEEMED INVESTMENTS BY HSSL (IF PRESUMED): 173.46 CRS. (51% SHARE HOLDING) SHARE CAPITAL TO BE INTRODUCED BY THE NON-RESIDENT 166.66 CRS (49% SHARE HOLDING) TOTAL SHARE CAPITAL IN THE JOINT VENTURE 340.12 CRS (100% SHARE HOLDING) BUT THE ABOVE DID NOT HAPPEN HERE IN THE PRESENT CA SE. THE INCOMING NON-RESIDENT EQUITY PARTNER (FSFA GMBH ) HAS ONLY INFUSED 85.00 CRORES AS ITS SHARE CAPITAL TO ACQUIRE 49% SHARE HOLDING IN THE JOINT VENTURE. THE REFORE, - ITA 2857 & 2970/14 30 IF THE ASSESSING OFFICER'S PRESUMPTION THAT THE BUS INESS VALUE UNDER DCF METHOD IS GOING TO REPRESENT THE MARKET VALUE, THEN THE FOLLOWING ANOMALY WILL RESUL T: DEEMED INVESTMENTS BY HSSL (IF PRESUMED): 173.46 CRS. (67% SHARE HOLDING) SHARE CAPITAL TO BE INTRODUCED BY NON-RESIDENT 85.00 CRS (33% SHARE HOLDING) TOTAL SHARE CAPITAL IN THE JOINT VENTURE 258.46 CRS (100% SHARE HOLDING) THUS, THE ABOVE PRESUMPTION OF THE ASSESSING OFFIC ER IS NOT CORRECT. THEREFORE, THE 'FAIR MARKET VALUE OF T HE BUSINESS SHOULD BE PROPORTIONATE TO THE PERCENTAGE OF THE EQUITY (SHARE HOLDING) OFFERED TO THE NON-RESID ENT EQUITY PARTNER AND THE SHARE CAPITAL TO BE INFUSED BY IT. IN THE INSTANT CASE, SINCE THE INCOMING NON-RESIDENT E QUITY PARTNER (FSFA GMBH) HAS ONLY INFUSED 85.00 CRORES AS ITS SHARE CAPITAL TO ACQUIRE 49% SHARE HOLDING I N THE JOINT VENTURE, THE PROPORTIONATE VALUE OF THE EXIST ING BUSINESS (ALL UNITS) WILL BE: SHARE CAPITAL ACTUALLY INTRODUCED BY NON-RESIDENT 85.00 CRS (49%SHARE HOLDING) - ITA 2857 & 2970/14 31 PROPORTIONATE VALUE OF THE ASSESSEES SHARE VALUE 88.46CRS (51% SHARE HOLDING) = 85.00 CRORES X 51% 49% TOTAL SHARE CAPITAL IN 173.46CRS(100% SHAREHOLDING) THE JOINT VENTURE =========== 4.13 THUS, WHEN A NON-RESIDENT EQUITY PARTICIPANT WANTS TO JOIN AN INDIAN COMPANY BY INFUSING A FRESH CAPITAL OF 85.00 CRORES TO ACQUIRE 49% OF THE SHARE HOLDING, THE 'FAIR MARKET VALUE' OF THE BUSINESS OF THE INDIAN COMPANY WILL BE 88.46 CRORES, EVEN BY APPLYING THE DCF METHOD. IN OTHER WORDS, THE TOTAL BUSINESS VALUE DETERMINED UNDER DCF METHOD NOT ONLY INCLUDES THE MARKET VALUE OF THE BUSINESS BUT ALSO INCLUDES THE PROSPECTS OF THE FUTURE BUSINESS FOR WHICH THE NON- RESIDENT EQUITY PARTNERS ARE GOING TO INFUSE FRESH SHARE CAPITAL. THEREFORE, EVEN IF THE BUSINESS VALUE OF 173.46 CRORES (DETERMINED UNDER DCF METHOD) IS TO BE CONSIDERED AS THE BASIS FOR DETERMINING THE 'FAIR M ARKET VALUE' OF THE BUSINESS, IT SHOULD BE PROPORTIONATE TO THE TO THE 49% OF THE EQUITY (SHARE HOLDING) OFFERED TO THE NON-RESIDENT EQUITY PARTNER AND THE SHARE CAPITAL O F - ITA 2857 & 2970/14 32 85.00 CRORES TO BE INFUSED BY IT. THUS THE DEEMED ' FAIR MARKET VALUE' OF THE BUSINESS OF ALL THE UNITS, 'BA SED ON THE DCF METHOD, COMES TO 88.46 CRORES. 4.14 FURTHER, THE ABOVE 'MARKET VALUE' OF 88.46 CRORES (BASED ON THE BUSINESS VALUE UNDER DCF METHO D) IS TO BE CONSIDERED AS THE DEEMED CONSIDERATION FOR ALLOWING THE FSFA GMBH INTO THE JOINT VENTURE, THE SAME VALUE ( 88.46 CRORES) IS TO BE APPORTIONED BETWEEN THE EXISTING CHENNAI UNIT OF HPPL AND THE O THER UNITS UNDER PROPOSAL FOR TRANSFER FROM THE ASSESSEE TO HPL. IF THE ABOVE MARKET VALUE OF 88.46 CRORES (BASED ON THE BUSINESS VALUE UNDER DCF METHOD) IS APPORTIONED, BASED ON THE NET WORTH OF THE UNITS, I T WILL BE AS UNDER : NET WORTH OF CHENNAI UNIT AS ON 10.11.2008 43.24 CRORES NET WORTH OF HOSUR, BANGALORE & PUNE UNITS (UNDER TRANSFER FROM HSSL) AS ON 22.01.2010 30.96 CRORES TOTAL NET WORTH 74.20 CRORES TOTAL BUSINESS VALUE (UNDER DCF METHOD AS DETERMINED FOR EQUITY PARTICIPATION 173.46 CRORES PROPORTIONATE MARKET VALUE BASED ON THE BUSINESS VALUE UNDER DCF METHOD 88.46 CRORES THEREFORE, THE PROPORTIONATE MARKET VALUE OF CHENNAI UNIT (UNDER DCF METHOD) AS ON 22.01.2010 - ITA 2857 & 2970/14 33 88.46 CRORES X 43.24 CRORES 74.20 CRORES 51.55 CRORES SIMILARLY, THE PROPORTIONATE MARKET VALUE OF OTHER BUSINESS UNITS UNDER TRANSFER FROM HSSL TO HPPL, AS ON 22.01.2010 - 88.46 CRORES X 30.96 CRORES 74.20 CRORES 36.91 CRORES TOTAL FAIR MARKET VALUE OF ALL THE FOUR UNITS 88.46 CRORES 4.15 THUS, THE FAIR MARKET VALUE OF THE ABOVE HOSUR, BANGALORE AND PUNE UNITS UNDER TRANSFER FROM HSSL T O HPPL WILL BE 36.91 CRORES ONLY, EVEN IF THE DCF METHOD OF VALUING THE BUSINESS IS TO BE APPLIED. HO WEVER, THE ASSESSING OFFICER HAS ERRONEOUSLY CONSIDERED TH E ENTIRE 'MARKET VALUE' OF 88.46 CRORES, AS THE 'MARKET VALUE' OF THE HOSUR, BANGALORE AND PUNE UNITS UNDER TRANSFER FROM HSSL TO HPPL ON 22.01.2010. THIS APPROACH OF THE ASSESSING OFFICER IS NOT CORRECT. T HE ASSESSING OFFICER IS REQUIRED TO CONSIDER ONLY 36.91 CRORES AS THE MARKET VALUE' (UNDER DCF METHOD) OF HOSUR, BANGALORE AND PUNE UNITS WHICH ARE UNDER TRANSFER. THIS AMOUNT CAN BE TREATED AS THE DEEMED SALE CONSIDERATION, IF DCF METHOD OF VALUATION OF THE BU SINESS IS TO BE TAKEN INTO ACCOUNT. THE BALANCE OF 51.55 CRORES - ITA 2857 & 2970/14 34 (I.E. 88.46 CRORES - 36.91 CRORES) REPRESENTS THE 'MARKET VALUE' OF THE EXISTING CHENNAI UNIT OF HPPL . WHEREAS, THE ACTUAL SALE CONSIDERATION OF HOSUR, BANGALORE AND PUNE UNITS, AS SHOWN BY THE ASSESSEE IN ITS HOOKS OF ACCOUNT AND OFFERED FOR TAXATION IS 46.50 CRORES. THUS, THE ACTUAL SALE CONSIDERATION OF THE HOSUR, BANGALORE AND PUNE UNITS DECLARED BY THE ASSESSEE I S HIGHER THAN THE PROPORTIONATE DEEMED SALE CONSIDERA TION (OF 36.91 CRORES) BY APPLYING THE BUSINESS VALUE DETERMINED UNDER DCF METHOD. THEREFORE, THE ACTUAL SALE CONSIDERATION OF HOSUR, BANGALORE AND PUNE UNI TS OF 46.50 CRORES, DECLARED BY THE ASSESSEE, IS JUSTIFI ED AND NEEDS TO BE UPHELD. THE DEEMED SALE CONSIDERATION OF 88.36 CRORES, BASED ON THE DCF METHOD, DETERMINED B Y THE ASSESSING OFFICER, IN HIS ORDER IS, THEREFORE, NOT JUSTIFIED AND DELETED. 4.16 ACCORDING TO THE CIT(APPEALS), THERE IS ANOTHER ANGLE TO LOOK INTO THE TRANSACTION AND DETERMINATIO N OF TAXABLE CAPITAL GAINS. AS MENTIONED ABOVE, THE ASSESSEE TRANSFERRED ITS HOSUR, BANGALORE AND PUNE - ITA 2857 & 2970/14 35 UNITS TO HPPL FOR A TOTAL CONSIDERATION OF 46.50 CRORES. THE CONSIDERATION WAS RECEIVED IN THE FORM OF TWO COMPONENTS, I.E. (I) CASH COMPONENT OF 18.96 CRORES AND (II) THE BALANCE OF 27.54 CRORES WAS RECEIVED BY WAY OF 1,02,00,000 EQUITY SHARES OF 27/- PER SHARE (FACE VALUE OF 10/- PLUS PREMIUM OF 17/-). HERE, THERE ARE TWO SEPARATE AND DISTINCT TRANSACTI ONS, I.E. (I) FIRSTLY, TRANSFER OF HOSUR, BANGALORE AND PUNE UNITS FOR 46.50 CRORES; AND (IL) ALLOTMENT OF SHARES FOR 27.54 CRORES. 4.17 U NDER THE PROVISIONS OF INCOME TAX ACT, AS AND WHEN AN ASSESSEE EFFECTS A SALE, HE IS LIABLE FOR TAXATION ON THE SALE CONSIDERATION. IF THE SALE IS ON ACCOUNT OF A BUSINESS TRANSACTION, IT WILL BE LIABL E FOR TAX UNDER THE HEAD 'INCOME FROM BUSINESS'. IF IT IS A SALE OF CAPITAL ASSET, IT WILL BE LIABLE FOR TAX UN DER THE HEAD 'CAPITAL GAINS'. SALE OF BUSINESS AS A 'GOING CONCERN', IS LIABLE FOR TAX UNDER THE HEAD 'CAPITAL GAINS', AS THE 'BUSINESS' APPARATUS PER SE WILL AMOUNT TO A CAPITAL ASSET. THIS IS SPECIFICALLY PROVIDED UNDER THE - ITA 2857 & 2970/14 36 PROVISIONS OF SECTION 50B OF THE ACT. THEREFORE, TH E LIABILITY TO CAPITAL GAINS TAX ARISES AS AND WHEN A 'BUSINESS' IS TRANSFERRED AS A 'GOING CONCERN'. 4.18 THE CIT( APPEALS) OBSERVED THAT AS CONTAINED IN THE PROVISIONS OF THE ACT, THE PROFIT WHICH IS ASSE SSABLE TO TAX UNDER THE HEAD 'CAPITAL GAINS', IS THE TOTAL SALE CONSIDERATION AS REDUCED BY THE COST OF ACQUISITION , COST OF IMPROVEMENT AND EXPENSES INCURRED IN RELATI ON TO TRANSFER. THEREFORE, AS FAR AS THE DETERMINATION .OF TAXABLE CAPITAL GAINS IS CONCERNED, IT IS THE ACTUA L SALE CONSIDERATION WHICH HAS TO BE TAKEN INTO CONSIDERAT ION. HERE, THE SALE CONSIDERATION MEANS THE CONSIDERATIO N OR THE SUM FOR WHICH THE TRANSACTION IS NEGOTIATED. IN THE PRESENT CASE, THE ASSESSEE, WHILE TRANSFERRING THE HOSUR, BANGALORE AND PUNE UNITS TO HPPL, HAS CLEARL Y AND UNAMBIGUOUSLY FIXED THE SALE CONSIDERATION AT 46.50 CRORES. THEREFORE, FOR THE PURPOSE OF DETERMI NING THE 'CAPITAL GAINS' THE ABOVE AMOUNT OF 46.50 CRORES FORMS THE BASIS. - ITA 2857 & 2970/14 37 4.18 ON THE OTHER HAND, THE ALLOTMENT OF SHARES IS A MODE OF PAYMENT OF SALE CONSIDERATION. THIS IS A TO TALLY INDEPENDENT AND SEPARATE TRANSACTION, THOUGH CONSEQUENTIAL TO THE ABOVE TRANSFER OF HOSUR, BANGALORE AND PUNE UNITS. AS PER THE JOINT VENTURE AGREEMENT BETWEEN THE ASSESSEE AND FSFA GMBH, THE SHARE HOLDING RATIO BETWEEN THEM WILL BE 51% AN D 49% RESPECTIVELY, IN THE JOINT VENTURE COMPANY HPPL. I N THESE TYPES OF CASES, THE TOTAL VALUE OF CAPITAL TO BE INFUSED BY THE INCOMING NON-RESIDENT EQUITY PARTNER IS TO BE D ETERMINED BY THE DCF METHOD. THE TOTAL NUMBER OF SHARES TO BE HE LD, IN TOTAL, IS ALSO PRE-DETERMINED. THEREFORE, THE TOTAL CAPITA L TO BE INFUSED BY THE INCOMING NON-RESIDENT EQUITY PARTNER DIVIDED BY THE TOTAL NUMBER OF SHARES TO BE ALLOTTED TO HIM WI LL BE THE PRICE OF SHARES TO BE ALLOTTED TO THE NON-RESID ENT EQUITY PARTNER, FSFA GMBH. 4.19 WHEN THE INCOMING EQUITY PARTNER IS A1IOTTED SHARES EQUIVALENT TO 49% OF THE PROPOSED SHARE HOLD ING, THE EXISTING EQUITY PARTNERS SHOULD HOLD THE BALANC E OF 51% OF THE TOTAL PROPOSED SHARE HOLDING. IN ALL THE CASES, - ITA 2857 & 2970/14 38 THE EXISTING EQUITY PARTNER(S) WILL ALREADY BE HAVI NG SOME SHARES. THEREFORE, THE EXISTING PARTNERS WILL BE AL LOTTED FURTHER SHARES IN SUCH A WAY THAT THE TOTAL NUMBER OF SHARES (EXISTING PLUS NEW) WILL CONSTITUTE 51% OF T HE TOTAL PROPOSED SHARE HOLDING. THE ALLOTMENT OF SHARES TO THE EXISTING EQUITY PARTNERS CAN BE IN VARIOUS MODES AN D AT DIFFERENT RATES TO SUIT THE SPECIFIC REQUIREMENTS A ND TERMS AND CONDITIONS OF JOINT VENTURE AGREEMENTS. SOME OF THE WAYS WILL BE: IF THE INCOMING NON-RESIDENT EQUITY PARTNER IS INFUSING CAPITAL PROPORTIONATE TO HIS SHARE OF EQUITY BASED ON THE DCF METHOD OF BUSINESS VALUATION, THE EXISTING EQUITY PARTNER(S) NEED NOT INFUSE ANY FRESH CAPITAL. THE ALLOTMENT OF FRESH SHARES TO THE EXISTING EQUITY PARTNER(S), TO MAKE UP THEIR REQUIRED RATIO OF SHARE HOLDING, CAN BE BY ALLOTMENT OF BONUS SHARES, OR RIGHTS OR IN ANY OTHER MANNER. OR IT CAN BE BY WAY OF ALLOTMENT OF SHARES AT LOWER RATES. OR IT CAN BE BY WAY OF COMBINATION OF SEVERAL POSSIBLE WAYS. 4.20 THUS, THE PRICE AT WHICH THE FRESH SHARES ARE ALLOTTED TO THE EXISTING EQUITY PARTNER(S) CANNOT B E COMPARED TO THE PRICE AT WHICH THE SHARES WERE ALLO TTED TO THE INCOMING NON-RESIDENT EQUITY PARTNERS. AFTER ALL, - ITA 2857 & 2970/14 39 THE FRESH ALLOTMENT OF SHARES TO THE EXISTING EQUIT Y PARTNER(S) IS ONLY TO MAKE-UP THEIR SHARE HOLDING R ATIO' IN THE TOTAL SHARE HOLDINGS OF THE JOINT VENTURE. SUCH ALLOTMENT OF SHARES TO THE EXISTING EQUITY PARTNER( S), EITHER FREE OF COST (LIKE BONUS SHARES OR SWEAT EQU ITY, ETC.) OR AT LOWER RATES, CANNOT BE CONSIDERED AS ABNORMAL OR AGAINST THE ACCEPTED PRINCIPLES. ALSO, SUCH / ALLOTMENT OF SHARES WILL NOT GIVE RISE TO ANY TAXAB LE INCOME (AT CAPITAL GAINS) IN THE HANDS OF THE EXIST ING EQUITY PARTNER(S) AT THE TIME OF RECEIVING (ALLOTME NT) OF SHARES. FOR EXAMPLE, MR.A AND MR.B ARE THE ONLY TWO SHAREHOLDERS IN M/S . XYZ LTD. WITH 500 SHARES EACH, AND THE SHARES WERE ALLOTTED AT PAR LATER ON, MR.C JOIN ED AS A NEW EQUITY PARTNER (FOR 50% SHAREHOLDING) AND WAS ALLOTTED 1000 SHARES @ FACE VALUE OF 10/- PLUS PREMIUM OF 90/- PER SHARE. CONSEQUENT TO THE ADMISSION OF MR. C INTO THE EQUITY HOLDING, THE VAL UE OF SHARES HELD BY MR. A AND MR.B GET INCREASED BY 45/- PER SHARE, AS UNDER: EXISTING (OLD) SHARES : 1000 SHARES : 10,000/- - ITA 2857 & 2970/14 40 NEW SHARES : 1000 SHARES : 1,00,000/- TOTAL : 2000 SHARES : 1,10,000/- VALUE OF EACH SHARE (1,10,000 / 2000) = 55/- 4.21 BUT THE ABOVE INCREASE (OF 45/ - PER SHARE) IN VALUE OF EXISTING SHARES OF MR.A & MR.B, I.E. FROM 10/- TO 55/- WILL NOT RESULT IN ANY TAXABLE INCOME OR CAPI TAL GAINS IN THE HANDS OF MR.A OR MR.B AT THIS STAGE. S AME IS THE CASE WITH THE ALLOTMENT OF BONUS SHARES OR ALLOTMENT OF SHARES AT LOWER RATES TO THE EXISTING EQUITY PARTNER(S) OF THE COMPANIES. 4.22 I N SUPPORT OF THE ABOVE POSITION, THE LD. AR, PLACED RELIANCE ON THE DECISION OF THE APEX COURT I N THE CASE OF KHODAY DISTILLERIES LTD V. CIT (2008)(307 I TR 312)(SC). IN THIS CASE, THE HON'BIE SUPREME COURT H AD CLEARLY HELD THAT ALLOTMENT OF BONUS SHARES OR RIGH TS (ALLOTMENT AT LOWER VALUE THAN THE PREVAILING MARKE T PRICE) WILL NOT AMOUNT TO TRANSFER OF ASSETS. EVEN DEEMED GIFT CANNOT BE PRESUMED IN SUCH CASES. AS HELD BY THE APEX COURT, THERE IS A VITAL DIFFERENCE BETWEEN 'CREATION' AND 'TRANSFER' OF SHARES. THE WO RDS - ITA 2857 & 2970/14 41 'ALLOTMENT OF SHARES' HAVE BEEN USED TO INDICATE TH E 'CREATION' OF SHARES BY APPROPRIATION OUT OF THE UNAPPROPRIATED SHARE CAPITAL TO A PARTICULAR PERSON . A SHARE IS A CHOSE IN ACTION WHICH IMPLIES EXISTENCE OF SOME PERSON ENTITLED TO THE RIGHTS IN ACTION IN CONTRADISTINCTION FROM RIGHTS IN POSSESSION. THERE IS A DIFFERENCE BETWEEN ISSUE OF A SHARE TO A SUBSCRIBER AND THE PURCHASE OF A SHARE FROM AN EXISTING SHAREHOLDE R. THE FIRST CASE IS THAT OF 'CREATION', WHEREAS THE S ECOND CASE IS THAT OF 'TRANSFER' OF CHOSE IN ACTION. IN T HE INSTANT CASE, WHEN TWENTY SHAREHOLDERS DID NOT SUBSCRIBE TO THE RIGHTS ISSUE, THE ASSESSEE ALLOTTED THEM TO SEV EN INVESTMENT COMPANIES; SUCH ALLOTMENT WAS NOT TRANSFER. IN THE CIRCUMSTANCES, SECTION 4(1)(A) WAS NOT APPLICABLE. SAME IS THE CASE WITH BONUS SHARES ALSO . 4.23 THEREFORE, IN VIEW OF THE ABOVE DISCUSSIONS, THE CIT(APPEALS) OBSERVED THAT THE ALLOTMENT OF SHARES TO THE EXISTING EQUITY PARTNER(S) AT NIL OR LOWER RATE S, THAN THOSE ALLOTTED TO THE NEW INCOMING EQUITY PARTNERS, CANNOT BE TAKEN AS A BASIS TO DRAW ANY ADVERSE - ITA 2857 & 2970/14 42 INFERENCES. IN OTHER WORDS, MERE ALLOTMENT OF SHARE S AT NIL OR LOWER RATES TO THE EXISTING EQUITY PARTNER(S ) PER SE WILL NOT GIVE RISE TO ANY TAXABLE INCOME (OR CAPITA L GAINS) IN THE HANDS OF ALLOTTEE(S). 4.24 THE CIT(APPEALS) OBSERVED THAT IT IS CLEA R THAT IT IS THE ACTUAL SALE CONSIDERATION OF THE HOSUR; BANG ALORE AND PUNE UNITS OF 46.50 CRORES, WHICH SHOULD BE TAKEN AS THE BASIS TO DETERMINE THE TAXABLE CAPITAL GAINS. THE ASSESSING OFFICER'S CALCULATION OF SALE VALUE OF THE HOSUR, BANGALORE AND PUNE UNITS AT 88.63 CRORES, BASED ON THE DCF METHOD IS, THEREFORE, NOT JUSTIFIED. 4.25 FURTHER, THE CIT(APEALS) CONCLUDED THE DISCUSS IONS AS UNDER : (I) THE DCF METHOD OF VALUATION OF BUSINESS PRESCRI BED BY THE RBI IS FOR A SPECIAL PURPOSE OF DETERMINING THE SHARE VALUE. FOR INDUCTING THE NON-RESIDENT EQUITY PARTNERS IN TO THE INDIAN COMPANIES. SINCE THIS DCF METHOD IS MEANT FOR THE NON-RESIDENTS, THE BUSINESS VALUATION SO DETERMINED UNDER DCF METHOD CANNOT BE - ITA 2857 & 2970/14 43 PRESUMED OR IMPOSED AS THE ACTUAL SALE CONSIDERATIO N OF THE BUSINESS TRANSACTED BETWEEN TWO INDIAN (RESIDENT) PERSONS. THE SALE CONSIDERATION OF BUSIN ESS AS A GOING CONCERN(OR ANY OTHER SALE) SHOULD BE BAS ED ON THE PREVAILING MARKET CONDITIONS AND COMMERCIAL CONSIDERATIONS. (II) AS PER THE PROVISIONS OF SECTIONS 45 AND 48, ONLY THE ACTUAL SALE CONSIDERATION RECEIVED OR ACCRUED I S TO BE TAKEN INTO ACCOUNT FOR THE PURPOSES OF DETERMINI NG THE TAXABLE CAPITAL GAINS. THE SALE CONSIDERATION RECEIVED OR ACCRUED MEANS THE CONSIDERATION NEGOTIATED FOR AND SHOWN IN THE SALE DOCUMENTS/DEED S. THE PROVISIONS DO NOT PERMIT TO PRESUME OR DEEM ANY OTHER VALUE FOR DETERMINING THE CAPITAL GAINS, AS H ELD BY SEVERAL JUDICIAL AUTHORITIES INCLUDING THE APEX COU RT. AS PER THE 'BUSINESS PURCHASE AGREEMENT' BETWEEN THE ASSESSEE AND THE JOINT VENTURE COMPANY HPPL, THE TOTAL SALE CONSIDERATION IS 46.50 CRORES. THEREFORE, THE SALE CONSIDERATION RECEIVED / ACCRUED WILL BE 46.50 CRORES ONLY. - ITA 2857 & 2970/14 44 (III) THE ALLOTMENT OF SHARES IS ONLY A CONSEQUENT IAL BUT INDEPENDENT TRANSACTION. THE TOTAL CONSIDERATION F OR WHICH THE SHARES ARE TO BE ALLOTTED IS PREDETERMINE D, I.E. THE SALE CONSIDERATION OF THE BUSINESS AS PER BUSINESS PURCHASE AGREEMENT. THE DETERMINATION OF NUMBER OF SHARES TO BE ALLOTTED TO THE EXISTING EQU ITY PARTNERS IS NOT BASED ON THE SALE CONSIDERATION, BU T TO BE BASED ON THE NUMBER OF SHARES GOING TO BE ALLOTT ED TO THE INCOMING NON-RESIDENT EQUITY PARTNER IN SUCH A WAY THAT THE ASSESSEE WILL GET 51 % SHARE HOLDING. THUS, THE FACE VALUE AND THE PREMIUM SHOWN ON THE SHARES ALLOTTED TO THE ASSESSEE IS ONLY A BALANCING ACT TO ADJUST THE SALE CONSIDERATION OF THE BUSINESS. FURTHER, MORE THAN 50% OF THE SHARES ALLOTTED TO TH E ASSESSEE IN THE JOINT VENTURE ARE ATTRIBUTABLE TO T HE EXISTING BUSINESS UNIT (I.E. CHENNAI UNIT) OF HPPL, WHERE THE COST OF ALLOTMENT OF SHARES TO THE ASSESS EE IS NIL. (IV) THE ASSESSING OFFICER PRESUMED THAT THE ENTIR E BUSINESS VALUATION OF 173.46 CRORES (UNDER DCF - ITA 2857 & 2970/14 45 METHOD) IS ATTRIBUTABLE TO THE BUSINESS UNITS OF HO SUR, BANGALORE AND PUNE. THIS IS TOTALLY WRONG. THERE WA S AN ALREADY EXISTING UNIT (CHENNAI UNIT) WITH HPPL, WHICH WAS PURCHASED IN 2008 FOR 47.30 CRORES FROM A THIRD PARTY (PEPL). THUS, MORE THAN 50% OF THE BUSINESS VALUE OF 173.46 CRORES (UNDER DCF METHOD) IS ATTRIBUTABLE TO THE EXISTING BUSINESS (CHENNAI UNIT) OF HPPL. FURTHER, THE BANGALORE AND PUNE UNITS WHICH WERE PURCHASED ON 10.11.2008 FROM PEPL, FOR 3.10 CRORES AND 1.90 CRORES , RESPECTIVELY, HAVE BEEN VALUED AT 10.71 CRORES AND 2.23 CRORES AND INCLUDED IN THE TOTAL SALE CONSIDERATION OF 46.50 CRORES. THE RATE OF APPRECIATION OF BUSINESS OF BANGALORE AND PUNE UNIT S IS 158.80% (AVERAGE). SINCE THE BANGALORE AND PUNE UNITS (BY THE ASSESSEE) AND THE CHENNAI UNIT (BY HPPL) WERE ACQUIRED ON THE SAME DAY (I.E. ON 10.11.2008) AND ARE UNDER THE SAME MANAGEMENT, THE RATE OF APPRECIATION OF CHENNAI UNIT WILL ALSO BE T HE SAME. THUS, IF ALL THESE FACTS ARE CONSIDERED, THE REAL - ITA 2857 & 2970/14 46 COST OF THE SHARES ALLOTTED TO THE ASSESSEE, ON ACC OUNT OF SALE OF HOSUR, BANGALORE AND PUNE UNITS, WILL BE HIGHER THAN THE RATE AT WHICH THE SHARES WERE ALLOT TED TO THE NON-RESIDENT EQUITY PARTNER. THUS, THE ASSES SING OFFICER'S ESTIMATION OF VALUE OF SHARES ALLOTTED TO THE ASSESSEE @ RS.86.63 PER SHARE IS NOT JUSTIFIED. 4.26 THUS, IN VIEW OF THE ABOVE REASONS, THE CIT(APPEALS) OBSERVED THAT THE ACTION OF THE ASSESS ING OFFICER IN DETERMINING THE SALE VALUE OF THE TRANSF ER OF HOSUR, BANGALORE AND PUNE UNITS AT 88.36 CRORES AND CALCULATING THE TAXABLE CAPITAL GAINS AT 64.10 CRORES, IS NOT ONLY UNTENABLE IN THE EYES OF THE LA W, BUT ALSO FACTUALLY INCORRECT. THEREFORE, THE ASSESSING OFFICER IS DIRECTED TO ADOPT THE SALE CONSIDERATION OF HOSUR, BANGALORE AND PUNE UNITS AT 46.50 CRORES, AS THE SALE CONSIDERATION RECEIVED / ACCRUED FOR THE PURPOSES OF DETERMINING THE 'CAPITAL GAINS'. THE ASSESSEE SUCCEEDS IN ITS APPEALS IN THIS REGARD. 4.27 THE NEXT ISSUE TO BE ADDRESSED IS THE DETERMINATION OF THE NET WORTH OF THE BUSINESS OF H OSUR, - ITA 2857 & 2970/14 47 BANGALORE AND PUNE UNITS TRANSFERRED TO HPPL, WHILE COMPUTING THE TAXABLE CAPITAL GAINS. THE ASSESSEE I N ITS RETURN OF INCOME, WHILE COMPUTING THE CAPITAL GAINS FROM THE SALE OF THE ABOVE BUSINESS UNITS, CONSIDERED TH E NET WORTH OF THESE UNITS AT 30.96 CRORES AND REDUCED THE SAME FROM THE TOTAL SALE CONSIDERATION OF 46.50 CRORES AND ARRIVED AT THE TAXABLE LONG TERM CAPITAL GAINS OF 15.54 CRORES. HOWEVER, THE ASSESSING OFFICER IN HIS ORDER DID NOT ACCEPT THE ASSESSEE'S CLAIM OF NET WO RTH OF THESE UNITS AT 30.96 CRORES. 4.28 THE ASSESSEE, WHEN TRANSFERRING THE HOSUR, BANGALORE AND PUNE UNITS TO HPPL HAS ALSO TRANSFERR ED THE CURRENT LIABILITIES OF 23.91 CRORES PERTAINING TO THESE UNITS. HOWEVER, THE ASSESSEE RETAINED CURRENT LIABILITIES OF 55.88 CRORES PERTAINING TO OTHER BUSINESS ACTIVITIES WHICH WERE NOT UNDER TRANSFER TO HPPL. W HEN THE DETAILS OF THE LIABILITIES RETAINED BY THE ASSE SSEE WERE CALLED FOR, THE ASSESSEE COULD PRODUCE THE PAR TY- WISE DETAILS OF 34.40 CRORES ONLY. THE BALANCE OF 21.47 CRORES (OUT OF 55.88 CRORES) WAS SHOWN AS - ITA 2857 & 2970/14 48 OTHER CURRENT LIABILITIES, FOR WHICH THERE WERE NO PARTY WISE DETAILS. FURTHER, THERE WAS A WORKING CAPITAL OF 9.76 CRORES FOR WHICH THE DETAILS ARE NOT AVAILABLE . HENCE, THE ASSESSING OFFICER, FOR THE WANT OF DETAI LS, CONSIDERED 21.47% OF THESE LIABILITIES (I.E. 21.47CRORES + 9.76 CRORES) AMOUNTING TO 6.70 CRORES AND ADDED TO THE TRANSFERRED HOSUR, BANGALOR E AND PUNE UNITS AS ADDITIONAL LIABILITY FOR THE PURP OSE OF DETERMINING THE NET WORTH OF THESE TRANSFERRED UNIT S. ACCORDINGLY, THE ASSESSING OFFICER, IN HIS ORDER, ARRIVED AT THE NET WORTH OF THESE HOSUR, BANGALORE AND PUNE UNITS AT 24.26 CRORES (I.E. 30.96 CRORES - 6.70 CRORES). 4.29 T HE ASSESSEE, BEFORE THE CIT(APPEALS), SUBMITTED THAT WHILE TRANSFERRING THE ABOVE HOSUR, BANGALORE AND PUNE UNITS, ONLY CERTAIN LIABILITIES, AMOUNTING TO 23.91 CRORES WERE TRANSFERRED AND ALL OTHER LIABILITIES WERE RETAINED BY IT. THE ASSESSEE ALSO STATED THAT IT HAS ALREADY FURNISHED ALL THE REQUISITE INFORMATION AND DETAILS BEFORE THE ASSESSING OFFICE R, - ITA 2857 & 2970/14 49 VIDE ITS LETTER DATED 20.02.2013. HOWEVER, THE ASSESSING OFFICER WITHOUT LOOKING INTO THE SAID DET AILS, REJECTED PART OF THE NET WORTH OF THE ABOVE BUSINES S UNITS, CONTENDING THAT THE NECESSARY DETAILS WERE N OT FURNISHED BY THE ASSESSEE. HENCE, THE ASSESSEE CLAIMED THAT ALL THE DETAILS OF THE NET WORTH OF TH E UNITS WERE ALREADY MADE AVAILABLE TO THE ASSESSING OFFICE R AND HENCE, REJECTING PART OF THE NET WORTH, ON A PROPORTIONATE BASIS, IS NOT JUSTIFIED. 4.30 T HE ASSESSEE HAD FURNISHED THE DETAILS OF THE LIABILITIES TRANSFERRED TO HPPL ALONG WITH THE TRAN SFER OF THE HOSUR, BANGALORE AND PUNE UNITS AND THOSE RETAINED BY THE ASSESSEE COMPANY. 4.31 THE LD. AR, CONTENDED THAT THE LIABILITIES OF 21.47 CRORES WERE RETAINED BY THE ASSESSEE EVEN AFTER THE TRANSFER OF THE HOSUR, BANGALORE AND PUNE UNITS. THESE DETAILS ARE SUFFICIENT FOR DETERMINATI ON OF THE NET WORTH OF THE HOSUR, BANGALORE AND PUNE UNITS. HENCE, IT IS NOT PROPER TO SAY THAT THE ASSESSEE FA ILED TO FURNISH THE REQUISITE DETAILS. EVEN OTHERWISE ALSO, THE DETAILS OF ALL THE ASSETS AND LIABILITIES ARE A VAILABLE IN THE BALANCE SHEETS AND OTHER DOCUMENTS FROM - ITA 2857 & 2970/14 50 WHICH THE NET WORTH OF THE HOSUR, BANGALORE AND PUNE UNITS CAN EASILY BE DEDUCED. EVEN THE BOOKS OF THE ASSESSEE CONTINUED TO REFLECT THESE LIABILITIES, EV EN AFTER 22.01.2010, CLEARLY INDICATING THAT THESE LIA BILITIES ARE NOT TRANSFERRED TO THE JOINT VENTURE HPPL. HENC E IT IS IMPROPER TO SAY THAT THE ASSESSEE FAILED TO FURN ISH THE DETAILS OF THE ABOVE LIABILITIES. THEREFORE THE CIT(APPEALS) DIRECTED THE ASSESSING OFFICER TO EXAMINE THE ABOVE DETAILS OF THE CURRENT LIABILITIE S OF 21.47 CRORES AND ALSO THE WORKING CAPITAL OF 9.76 CRORES, ONCE AGAIN, IF REQUIRED, AND ALLOW THEM AS THE LIABILITIES OF THE BUSINESS RETAINED BY THE ASSESSE E. IN OTHER WORDS, THESE CURRENT LIABILITIES OF 21.47 CRORES AND THE WORKING CAPITAL OF 9.76 CRORES ARE NOT INCLUDED IN THE BUSINESS 'PURCHASE AGREEMENT' WHILE TRANSFERRING TH E HOSUR, BANGALORE AND PUNE UNITS TO HPPL. THEREFORE, THESE LIABILITIES CANNOT BE APPORTIONED TO THE TRANSFERRE D UNITS TO HPPL. CONSEQUENTLY, NO PORTION OF THESE LIABILITIES CAN BE ADDED TO THE LIABILITIES FOR THE PURPOSE OF DETERMI NING THE NET WORTH OF THE HOSUR, BANGALORE AND PUNE UNITS TRANSF ERRED TO HPPL. 4.32 IN VIEW OF THE ABOVE DETAILS, IT IS CLEAR THAT THE ASSESSEE'S CALCULATION OF NET WORTH OF THE HOSUR, BANGALORE AND PUNE UNITS AT 30.96 CRORES IS PROPER AND AS PER THE LAW. THEREFORE, THE CIT(APPEALS) OBSERVED THAT SUBJECT TO VERIFICATION AS ABOVE, IF - ITA 2857 & 2970/14 51 REQUIRED, THE ASSESSING OFFICER SHOULD ADOPT THE NE T WORTH OF THE HOSUR, BANGALORE AND PUNE UNITS AT 30.96 CRORES. 4.33 ACCORDING TO THE CIT(APPEALS) IN VIEW OF THE ABOVE REASONS AND DISCUSSIONS, THE TAXABLE CAPITAL GAINS FROM THE SALE OF HOSUR, BANGALORE AND PUNE UN ITS TO HPPL ON 21.01.2010 WILL BE AS UNDER : TOTAL SALE CONSIDERATION OF THE UNITES 46.50 CRORES LESS: NET WORTH OF THE UNITS AS ON 30.96 CRORES 21.01.2010 TAXABLE CAPITAL GAINS 15.54 CRORES 4.34 HOWEVER, HE OBSERVED THAT THE TRANSFER RESULTE D IN SHORT TERM CAPITAL GAINS AS THE BANGALORE & PUNE UN ITS WERE ACQUIRED ONLY ON 10.11.2008 AND AGAIN BANGALOR E AND PUNE UNITS TO BE CONSIDERED AS SHORT TERM CAPIT AL GAINS AS THE WHOLE PERIOD OWNED BY THE ASSESSEE COMPANY IS LESS THAN 36 MONTHS. AGAINST THESE FIND INGS OF THE CIT(APPEALS), THE ASSESSEE IS IN APPEAL BEFORE US. THE REVENUE IS ALSO IN APPEAL BEFORE US AGAINST THE CANCELLING THE ADDITION TO THE FULL VALUE OF SALE CONSIDERATION MADE IN THE ASSESSMENT AND FIXING IT AT 88.36 CRORES AS AGAINST 46.50 CRORES DECLARED BY THE ASSESSEE. - ITA 2857 & 2970/14 52 5. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. ADMITTEDLY, THE FACTS OF THE C ASE ARE THAT THE ASSESSEE SOLD ITS FOAMING BUSINESS, TWO WH EELER AND THREE WHEELER SEATS, CUSHIONS LONG FIBRE INJECT ION AND MICRO CELLULAR URETHANE PRODUCTS TO ITS 100% SUBSID IARY COMPANY VIZ., HARITA POLYMER LTD. (SUBSEQUENTLY REN AMED AS HARITA FEHRER LTD.) ON 22.2.2010 FOR A CONSIDERA TION OF 46.50 CRORES, WHICH IS SAID TO BE ON A SLUMP SALE B ASIS. THE SAID CONSIDERATION OF 46.50 CRORES IS TO BE PAID AS FOLLOWS : (A) 27.54 CRORES BY WAY OF ALLOTMENT OF SHARES (B) 18.96 CRORES BY WAY OF PAYMENT OF CASH TOTAL 46.50 CRORES ============= 5.1 AS PER AGREEMENT, THE ASSESSEE HAS TO GET 1.02 LAKHS SHARES OF 10/- EACH AT A PREMIUM OF 17/- PER SHARE, TOTALLING TO 27.54 CRORES ON 22.1.2010 TOWARDS THE PART PAYMENT AS STATED ABOVE. THE AO NOTICED THAT IN MAY 2009, THE ASSESSEE HAS EXECUTED JOINT VENTURE AGREE MENT WITH FSFA FOR CREATING JOINT VENTURE UNIT OF HFL. IN HFL, - ITA 2857 & 2970/14 53 49% OF SHARES HAS BEEN ALLOTTED TO FSFA FOR A CONSIDERATION OF 85 CRORES. OUT OF 49% OF SHARS, 40% OF SHARES EQUIVALENT TO 68,33,364 EQUITY SHARES HAS BE EN ALLOTTED ON 8.2.2010 FOR A FACE VALUE OF 10/- PER SHARE AND A PREMIUM OF 91.54 PER SHARE. ANOTHER 9% OF SHARS EQUIVALENT TO 30,14,676 EQUITY SHARES HAD BEEN ALLO TTED ON 31.3.2011 FOR A FACE VALUE OF 10/- PER SHARE AND AT A PREMIUM OF 41.74 PER SHARE. 5.2 IN THE ORIGINAL JOINT VENTURE AGREEMENT DATED 28.5.2009, THE ENTERPRISE VALUATION OF THE BUSINESS WAS VALUED AT 170 CRORES. LATER, IT WAS REVISED AT 173.36 CRORES. ACCORDING TO THE AO, IT WAS A SLUMP SALE CONSIDERATION RECEIVED BY THE ASSESSEE AND VALUATIO N OF SHARES HAS TO BE CALCULATED AT DISCOUNTED CASH FLOW STATEMENT AND THEREFORE, SHARE PREMIUM IS TO BE ARR IVED AT 91.54 PER SHARE IN RESPECT OF SHARES RECEIVED BY T HE ASSESSEE. IN OUR OPINION, THE UNDERTAKING WAS TRA NSFERRED AS A WHOLE FOR SLUMP SALE CONSIDERATION WITHOUT ASS IGNING VALUE TO INDIVIDUAL ASSETS. IN OTHER WORDS, TOTAL CONSIDERATION OF SALE WAS FOR 46.50 CRORES, WHICH IS PAID - ITA 2857 & 2970/14 54 BY WAY OF CASH PAYMENT OF 18.96 CRORES AND BALANCE BY WAY OF ALLOTMENT OF 1.02 LAKHS SHARES OF FACE VALUE OF 10/- EACH AT A PREMIUM OF 17/- AMOUNTING TO 27.54 CRORES. AS SEEN FROM THE ABOVE, THE ASSESSEE SOLD THREE UNITS VIZ., HOSUR, BANGALORE & PUNE ON SLUMP SALE B ASIS, FOR WHICH THE PROVISIONS OF SEC.2(42C) OF THE ACT A RE APPLICABLE AND THERE IS SLUMP SALE AS PER SEC.2(42C ) OF THE ACT. WHERE THERE IS TRANSFER OF UNDERTAKING AS A W HOLE FOR LUMPSUM CONSIDERATION, THAT CONSIDERATION ONLY TO B E CONSIDERED WHEN IT IS QUANTIFIED IN THE INSTRUMENT OF TRANSFER.THE VALUE MENTIONED IN THE INSTRUMENT OF T RANSFER IS THE VALUE OF CONSIDERATION TO BE RECEIVED BY THE ASSESSEE. IT CANNOT BE SUBSTITUTED BY ANY OTHER VA LUE,AS RIGHTLY RELIED ON BY THE LD. AR ON VARIOUS CASE LAW WHICH IS SUPPORTING THE ASSESSEES CASE AND THE SAME IS REPRODUCED HEREIN BELOW: (1) IN THE CASE OF CIT V. BHARAT BIJLEE LTD. (365 I TR 268), THE BOMBAY HIGH COURT HAS HELD AS UNDER: ASSESSEE COMPANY TRANSFERRED ITS LIFT FIELD OPERATIONS UNDERTAKING TO TIGER ELEVATORS PVT. LTD. UNDER SCHEME OF ARRANGEMENT. THAT SCHEME WAS SANCTIONED BY THIS COURT, TRIBUNAL ANALYSED TRANSACTION/TRANSFER INPRESENT CASE IN BACKDROP OF LEGAL - ITA 2857 & 2970/14 55 PRINCIPLES AFTER REFERRING DEFINITION OF TERM SLUM P SALE GIVEN IN SECTION 2(42C) TOGETHER WITH EXPLANATIONS. IN LIGHT OF PRINCIPLES LAID DOWN IN DECISION OF SUPREM E COURT IN CASE OF COMMISSIONER OF INCOME TAX, ANDHRA PRADESH V/S MOTORS & GENERAL STORES (P) LTD., [(196 7) VOL.66 ITR 692, TRIBUNAL CONCLUDED THAT SCHEME OF ARRANGEMENT APPROVED BY THIS COURT IN PRESENT CA SE, CANNOT BE SAID TO BE A SALE OF LIFT DIVISION OR UNDERTAKING BY ASSESSEE. TRIBUNAL HELD THAT, TRANS FER OF UNDERTAKING TOOK PLACE IN EXCHANGE FOR ISSUE OF PREFERENCE SHARES AND BONDS AND, MERELY BECAUSE THERE WAS QUANTIFICATION WHEN BONDS/PREFERENCE SHARES WERE ISSUED, WOULD NOT MEAN THAT MONETARY CONSIDERATION WAS DETERMINED. THE TRIBUNAL HELD TH AT IT WAS A CASE OF EXCHANGE AND NOT A SALE AND ACCORDINGLY, SECTION 2(42C) WAS INAPPLICABLE. IF T HAT WAS NOT APPLICABLE AND WAS NOT ATTRACTED, THEN, SECTION 50B WAS ALSO INAPPLICABLE. IN FACTS AND CIRCUMSTANCES AND GOING BY CLAUSES OF SCHEME, TRIBUNAL HELD THAT TRANSFER OF LIFT DIVISION COMES WITHIN PURVIEW OF SECTION 2(47) OF THE ACT BUT CANNOT BE TERMED AS A SLUMP SALE. THIS FINDING OF FACT CANNO T BE SAID TO BE PERVERSE OR BASED ON NO MATERIAL. IT AL SO CANNOT BE SAID TO BE VITIATED BY AN ERROR OF LAW APPARENT ON FACE OF RECORD. APPEAL DISMISSED. (2) IN THE CASE OF ITO V. ZINGER INVESTMENTS (P) LT D.(27 ITR (TRIB) 218 (HYDERABAD), IT WAS HELD BY THE TRIB UNAL AS UNDER: SECTION 2(42C) MAKES IT CLEAR THAT TO QUALIFY AS S LUMP SALE, TWO CONDITIONS HAVE TO BE SATISFIED VIZ., THE RE MUST BE TRANSFER OF ONE OR MORE UNDERTAKING AS A RESULT OF SALE AND THE SALE SHOULD BE FOR A LUMPSUM CONSIDERATION WITHOUT VALUES BEING ASSIGNED TO THE INDIVIDUAL ASSETS AND LIABILITIES. IN THE CASE OF THE ASSESSEE IT WAS NOT DISPUTED THAT THERE WAS NO MONETARY CONSIDERATION RECEIVED FOR TRANSFER OF THE - ITA 2857 & 2970/14 56 ASSETS AND LIABILITIES OF THE MANUFACTURING DIVISIO N THOUGH THERE MAY BE A TRANSFER OR AN UNDERTAKING. IN THE CASE OF CIT VS. MOTORS AND GENERAL STORES PVT. LTD(SUPRA) IT WAS HELD THAT SALE IS A TRANSFER OF P ROPERTY IN GOODS OR OF THE OWNERSHIP IN IMMOVABLE PROPERTY FOR A MONEY CONSIDERATION. BUT, IN EXCHANGE THERE IS A RECIPROCAL TRANSFER OF INTEREST IN IMMOVABLE PROPER TY, A CORRESPONDING TRANSFER OF INTEREST IN MOVABLE PROPE RTY BEING DENOTED BY THE WORD BATTER. THE DIFFERENCE BETWEEN A SALE AND AN EXCHANGE IS THIS THAT IN THE FORMER THE PRICE IS PAID IN MONEY, WHILST IN THE LA TTER IT IS PAID IN GOODS BY WAY OF BARTER. THE PRESENCE OF MONEY CONSIDERATION IS AN ESSENTIAL ELEMENT TO A TRANSACTION OF SALE. IF HE CONSIDERATION IS NOT MO NEY BUT SOME OTHER VALUABLE CONSIDERATION IT MAY BE AN EXCHANGE OR BARTER BUT NOT A SALE. CIT VS. MOTORS & GENERAL STORES PVT. LTD. 66 ITR 692(SC). (3) IN THE CASE OF CIT VS. MOTORS & GENERAL STORE S PVT. LTD. 66 ITR 692(SC), IT WAS OBSERVED BY THE SUPREM E COURT AS UNDER : PRESENCE OF MONEY CONSIDERATION IS ESSENTIAL FOR SALE WITHIN THE MEANING OF SECOND PROVISO TO S.10(2)(VII) AND WHERE THE ASSET WAS TRANSFERRED IN EXCHANGE OF SHARES OF EQUIVALEN PRICE, IT WAS AN EXCHANGE AND NOT SALE AND SECOND PROVISO TO S.10(2)(VII) WAS NOT ATTRACTED. (4) IN THE CASE OF AVAYA GLOBAL CONNECT LTD. V. AC IT (122 TTJ 300), MUMBAI BENCH OF THE TRIBUNAL HELD AS FOLL OWS : UNDER S. 50B ANY PROFITS OR GAINS ARISING FROM THE SLUMP SALE EFFECTED IN THE PREVIOUS YEAR SHALL BE CHARGEABLE TO INCOME-TAX AS CAPITAL GAINS. FROM TH E READING OF THE DEFINITION OF SLUMP SALE, IT IS CL EAR THAT, IT IS ONLY A TRANSFER AS A RESULT OF SALE THAT CAN BE - ITA 2857 & 2970/14 57 CONSTRUED AS A SLUMP SALE. THEREFORE, ANY TRANSFER OF AN UNDERTAKING OTHERWISE THAN AS A RESULT OF SALE W ILL NOT QUALIFY AS A SLUMP SALE. 5.3 FURTHER, AS PER THE PROVISION OF SEC.50B OF THE ACT, CAPITAL GAINS ARISING FROM SLUMP SALE AS REDUCED BY NET WORTH IS TAXABLE S CAPITAL GAINS, SEC.48 AND 49 AR E NOT APPLICABLE TO THIS CASE. THE LUMPSUM CONSIDERATION PAYABLE FOR SALE OF THE UNDERTAKING WOULD CONSTITUT E THE FULL VALUE OF CONSIDERATION. FOR COMPUTING THE CAPITAL GAIN U/S.45, FULL VALUE OF CONSIDERATION MEANS THE STATE D CONSIDERATION IN THE INSTRUMENT OF TRANSFER AND NOT MARKET VALUE OF CONSIDERATION. THIS VIEW OF OURS IS SUPPO RTED BY THE DECISION OF THE TRIBUNAL, DELHI BENCH IN THE CA SE OF ACIT V. SMT. DIVYA JAIN (45 CCH 109), WHEREIN IT WA S HELD THAT ADOPTION OF FAIR MARKET VALUE OF SHARE IN LIEU OF V ALUE OF SALE CONSIDERATION AS DECLARED BY ASSESSEE WAS N OT VALID PARTICULARLY WHEN THERE WAS NO PROVISION UNDE R THE LAW TO INCLUDE PROSPECTIVE BENEFIT IN AMBIT OF THE WORD INCOME. 5.4 THE AO HEREIN WANTED TO SUBSTITUTE THE VALUE OF SHARES ALLOTTED TO THE THIRD PARTY(FSFA) ON SUBSEQU ENT TO - ITA 2857 & 2970/14 58 THE DATE 22.1.2010, I.E. ON 8.2.2010 AT 91.54 PER SHARE. IN OUR OPINION, THE VALUE ON WHICH THE SHARES ARE A LLOTTED ON 8.2.2010 TO THIRD PARTY CANNOT BE CONSIDERED AS VALUE OF SHARES ALLOTTED TO THE PRESENT ASSESSEE. LUMPSUM CONSIDERATION WHICH IS FIXED AT THE TIME OF SALE BY THE INSTRUMENT OF TRANSFER SHOULD THE CONSIDERATION STA TED TO BE RECEIVED BY THE ASSESSEE AND IT CANNOT BE DETERMINE D ON THE BASIS OF FUTURE TRANSACTION BETWEEN THE PARTIES . THE SUBSEQUENT TRANSACTION CANNOT BE BASIS FOR FIXING T HE VALUE OF SHARES AS ON 22.1.2010. 5.5 IT IS PERTINENT TO MENTION HERE THAT IN THE CAS E OF CIT V. VELANKANI INFORMATION SYSTEMS (P) LTD. (265 CTR 250, THE KARNATAKA HIGH COURT HAS HELD THAT THE PROPERTY SOLD TO THIRD PARTY CANNOT BE BASIS FOR DETERMINING THE CAP ITAL GAIN TAX IN RESPECT OF SALE IN FAVOUR OF THE SISTER CONC ERNS . IN THAT CASE, PARA 29 IS VERY RELEVANT WHICH IS REPROD UCED HEREIN BELOW : THE SALE OF LAND TO THE SISTER CONCERN IS NOT IN D ISPUTE. THE LEGALITY OF THE SAID TRANSACTION IS NOT QUESTIO NED. THE CONSIDERATION RECEIVED UNDER THE SAID AGREEMENT IS ALSO ADMITTED. FURTHER, ADMITTEDLY, THE SAID CONSIDERATION IS MORE THAN GUIDANCE VALUE PRESCRIBE D BY THE GOVERNMENT FOR SALE OF SUCH PROPERTY. AS IT IS - ITA 2857 & 2970/14 59 CLEAR FROM THE MATERIAL ON RECORD THAT THE ASSESSEE HAS BORROWED MONEY FROM FINANCIAL INSTITUTI8ON, IT HAS CROSSED ITS LIMIT, IT NEEDED FURTHER FUNDS. THE LA ND WHICH IS SOLD TO THE SISTER CONCERN WAS LYING IDLE. IT IS IN THOSE CIRCUMSTANCES, THE SAID SALE TRANSACTION C AME INTO EFFECT. THE EARLIER SALE MADE IN FAVOUR OF TH E SISTER CONCERN IS NOT VITIATED IN ANY MANNER WHATSOEVER. THEREFORE, THE ASSESSING AUTHORITY WA S NOT JUSTIFIED IN TAKING THE MARKET VALUE. THE PROP ERTY SOLD TO A THIRD PARTY CANNOT BE THE BASIS FOR DETERMINING THE CAPITAL GAIN TAX IN RESPECT OF A SA LE IN FAVOUR OF THE SISTER CONCERN. BOTH THE LOWER APPEL LATE AUTHORITY AND THE TRIBUNAL WERE JUSTIFIED IN SETTIN G ASIDE THE ORDER. ACCORDINGLY, THE SUBSTANTIAL QUES TION OF LAW IS ANSWERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. (PARA 29) 5.6 FURTHER, IT IS TO BE NOTED THAT THE VALUE OF SH ARES HAS TO BE COMPUTED ON THE DAY OF ALLOTMENT OF SHARES AN D NOT ON FUTURE DATE ON WHICH THE SHARES ARE ALLOTTED TO THIRD PARTY. IT IS ALSO TO BE NOTED THAT RULE 11UA OF TH E I.T.RULES, 1962 PRESCRIBES THE APPROACH OF VALUATIO N OF SHARES IN CASE OF DOMESTIC BUSINESS WHICH IS TO BE ON THE BASIS OF BOOK VALUE OR DIVIDEND CALCULATION METHOD. THE VALUATION OF SHARES BY DCF IS ONLY IN CASE OF SALE OF SHARE TO NON-RESIDENT BUT NOT DOMESTIC COMPANIES AND DUE TO CHANGE IN CIRCUMSTANCES. FROM 22.1.2010 TO 8.2.201 0, THERE IS AN INTRODUCTION OF NEW CAPITAL IN THE BUSI NESS IN HFL. HENCE, SHARES OF HFL HAVE BEEN CHANGED BECAUS E - ITA 2857 & 2970/14 60 OF INFUSION OF 85 CRORES TO JOINT VENTURE PARTNER IN THE HFL. THE SIGNIFICANT CHANGES TO BE CONSIDERED WHIL E VALUING THE SHARES, WHICH WAS ALLOTTED TO FSFA ON 8.2.2010 AND THIS CANNOT BE BASIS FOR VALUE OF SHAR ES ALLOTTED TO THE ASSESSEE-COMPANY. IN VIEW OF THIS, THE CIT(APPEALS) CONSIDERED THE SAME AND HAS GIVEN A FI NDING THAT THE SALE CONSIDERATION OF HOSUR, BANGALORE AND PUNE IS TO BE CONSIDERED AT 46.50 CRORES AS DETERMINED BY THE ASSESSEE AFTER TAKING THE NETWORTH OF 30.96 CRORES AND NET TAXABLE LONG TERM CAPITAL GAINS ARRIVED AT 15.54 CRORES. HOWEVER, THE CIT(APPEALS) HAS GIVEN A FIND ING THAT THE CAPITAL GAINS IN RESPECT OF BANGALORE & PU NE TO BE COMPUTED AS SHORT TERM CAPITAL IN VIEW OF THE HOLDI NG OF THE CAPITAL ASSET IS LESS THAN 36 MONTHS. IN OUR OPINI ON, THIS FINDING OF THE CIT(APPEALS) IS NOT APPROPRIATE. TH E ASSESSEE SOLD ALL THE THREE UNITS, BANGALORE, PUNE AND HOSUR BY A SLUMP SALE AND THERE IS NO TRANSFER OF I NDIVIDUAL UNITS BUT ALL THE THREE UNITS WERE SOLD AS A WHOLE, AS A GOING CONCERN. WHEN THERE IS SLUMP SALE, SEC.2(42C) OF THE ACT IS ATTRACTED, WHICH STATES THAT WHERE AN - ITA 2857 & 2970/14 61 UNDERTAKING WAS SOLD ON LUMPSUM CONSIDERATION WITHO UT ASSIGNING ANY VALUE TO THE INDIVIDUAL ASSETS, IT IS NOT JUSTIFIED IN BIFURCATING GAIN AS LONG TERM AND SHOR T TERM CAPITAL GAINS. 5.7 THE LD. DR DREW OUR ATTENTION TO SEC.50B(1) AND SPECIFICALLY THE PROVISO TO THAT SECTION READS AS F OLLOWS : PROVIDED THAT ANY PROFITS OR GAINS ARISING FROM T HE TRANSFER UNDER THE SLUMP SALE OF ANY CAPITAL ASSET BEING ONE OR MORE UNDERTAKINGS OWNED AND HELD BY AN ASSESSEE FOR NOT MORE THAN THIRTY-SIX MONTHS IMMEDIATELY PRECEDING THE DATE OF ITS TRANSFER SHAL L BE DEEMED TO BE THE CAPITAL GAINS ARISING FROM THE TRANSFER OF SHORT-TERM CAPITAL ASSETS. IN OUR OPINION, TO APPLY THAT PROVISION, THE ASSESS EE MUST HAVE SOLD EACH UNIT INDEPENDENTLY AND DISTINCTLY BY SEPARATE INSTRUMENT OF TRANSFER. IN OTHER WORDS, H AD THE ASSESSEE EFFECTED THE SALE SEPARATELY FOR HOSUR UNI T, BANGALORE UNIT AND PUNE UNIT BY SEPARATE INSTRUMENT OF TRANSFER, THEN WE WOULD HAVE AGREED WITH THE CONTEN TION OF THE LD. DR. IN THE PRESENT CASE, IT IS AN ADMITTED FACT THAT ALL THE ABOVE THREE UNITS OF THIS UNDERTAKING WAS TRANSFERRED COMBINEDLY FOR LUMPSUM CONSIDERATION OF 46.50 CRORES WITHOUT ASSIGNING VALUE FOR INDIVIDUAL - ITA 2857 & 2970/14 62 ASSETS. BEING SO, THERE IS NO QUESTION OF SEGREGAT ION OF SALE VALUE OF EACH UNIT OF THIS UNDERTAKING. HENCE , WE HOLD THAT THE ENTIRE CAPITAL GAINS HAS TO BE CONSIDERED AS LONG TERM AND TO BE ASSESSED ACCORDINGLY. THIS GROUND O F APPEAL OF THE REVENUE IS DISMISSED AND GROUND RAISE D BY THE ASSESSEE IN ITS APPEAL IS ALLOWED ON THIS ISSUE . 6. NEXT GRIEVANCE IN THE APPEAL OF THE ASSESSEE IS WITH REGARD TO INVOKING THE PROVISIONS OF SEC.14A R.W.RU LE 8D OF THE I.T.RULES TO THE EXTENT OF 17,77,810/-. THE GRIEVANCE OF THE REVENUE IS WITH REGARD TO RECOMPUTATION OF D ISALLOWANCE U/S.14A R.W.R.8D(II) OF THE IT RULES. 7. THE FACTS OF THE CASE ARE THAT THE ASSESSEE HAS RECEIVED PROFIT ON SALE OF INVESTMENTS OF 24,32,000/-. AS PER NOTES AND ACCOUNTS FROM THE BREAK-UP OF MISCELLANEOUS INCOME, THE ASSESSEE COMPANY HAS NO T RECEIVED ANY DIVIDEND DURING THE YEAR. THE ASSESSE E COMPANY HAS NOT SHOWN TO HAVE INCURRED ANY DIRECT EXPENDITURE RELATING TO THE RECEIPT OF THE ABOVE IN COME. THE AO NOTICED THAT THE ASSESSEE HAS MADE SUBSTANTI AL INVESTMENTS IN PURCHASE OF SHARES/MUTUAL FUNDS, THE - ITA 2857 & 2970/14 63 INCOME FROM WHICH IS EXEMPT FROM TAX IN THE HANDS O F THE ASSESSEE. HOWEVER, THE ASSESSEE HAS NOT SEGREGATE D ANY EXPENDITURE PERTAINING TO THE EARNING OF THE SA ID EXEMPTED INCOME FROM THE INVESTMENTS MADE IN SHARES AND MUTUAL FUNDS. HENCE, THE AO INVOKED THE PROVIS IONS OF SEC.14A R.W. RULE 8D OF THE IT RULES AND COMPUTE D THE DISALLOWANCE OF 1,98,94,281/-, WHICH IS AS UNDER : RULE 8D(II) 1,90,82,128/- RULE 8D(III) 8,12,153/- 1,94,94,281/- ============== 8. ON APPEAL, THE CIT(APPEALS) OBSERVED THAT NO INT EREST BEARING FUNDS ARE USED FOR THE INVESTMENT WHICH IS YIELDING EXEMPT INCOME. HENCE, NO INTEREST EXPENSES OR OTHE R EXPENSES ARE ATTRIBUTABLE FOR INVESTMENTS IN SHARES AND FUNDS. FURTHER, THE RECEIPTS OF SHARES OF 27.54 CRORES OF HPPL WAS NOT DIRECT PURCHASE OF SHARES AND IT IS RELATING TO SALE CONSIDERATION OF THE BUSINESS UNITS TRANSFERRED TO HPPL. HENCE, NO EXPENSE ARE ATTRIBUTABLE FOR THE SAID SHARES. 8.1 REGARDING INVOKING OF SEC.14A R.W. RULE 8D OF T HE IT RULES, HE OBSERVED THAT AS COULD BE SEEN FROM THE B ALANCE SHEET OF THE ASSESSEE COMPANY, THE TOTAL INVESTMENT S AS ON - ITA 2857 & 2970/14 64 31.3.2009 AND 31.3.2010 ARE 259.85 LAKHS AND 2,988.76 LAKHS RESPECTIVELY. FURTHER, THESE INVESTMENTS ARE NOT IN ONE COUNTER. THESE ARE SPREAD OVER A NUMBER OF COUNTER S (SHARES OF VARIOUS COMPANIES). THIS CLEARLY SHOWS THAT THE ASSESSEE COMPANY HAS BEEN REGULARLY INVESTING IN SHARES/FUND S. THE NUMBER OF TRANSACTIONS IS VOLUMINOUS. THEREFORE, T HERE IS A NEED FOR THE ASSESSING OFFICER TO EXAMINE THE POSSI BLE EXPENSES ATTRIBUTABLE FOR EARNING THE EXEMPT INCOME FOR THE PURPOSES OF SECTION 14A OF THE ACT. THE AO, THUS, RIGHTLY INVOKED THE PROVISIONS OF SEC.14A R.WR.8D. 8.2 FURTHER, THE CIT(APPEALS) OBSERVED THAT THE TOT AL INVESTMENTS MADE BY THE ASSESSEE COMPANY IN THE FOR M OF SHARES/MUTUAL FUNDS ETC., AS ON 31.3.2009 AND 31.3. 2010 ARE 259.85 LAKHS AND 2,988.76 LAKHS RESPECTIVELY. THE ASSESSEE IS NOT MAINTAINING ANY SEPARATE BOOKS OF A CCOUNTS FOR THE INVESTMENTS IN SHARES/MUTUAL FUNDS. NOR THERE WAS A SEPARATE ESTABLISHMENT TO LOOK AFTER THE INVESTMENT IN SHARES/FUNDS. THE ASSESSEE MAY BE HAVING SUBSTANTI AL INTEREST FREE OWN FUNDS (IN THE FORM OF CAPITAL/RESERVES AND SURPLUSES ETC.) BUT THIS DOES NOT MEAN THAT THE INVESTMENTS ARE MADE - ITA 2857 & 2970/14 65 ONLY FROM THESE OWN INTEREST FREE FUNDS, ESPECIALLY WHEN THE BOOKS ARE NOT MAINTAINED SEPARATELY. FURTHER, MOST OF THE FUNDS, I.E. THE INTEREST-FREE OWN FUNDS AND THE INT EREST BEARING BORROWED FUNDS ARE PUT INTO A COMMON POOL OF FUNDS. FROM THIS COMMON KITTY ALL THE OUTGOINGS (I.E. INVESTMENTS IN SHARES, REGULAR BUSINESS EXPENSES ETC.) ARE MET WITH. IN O THER WORDS, ONCE THE FUNDS, I.E. WHETHER THE INTEREST-FREE OWN FUNDS OR THE INTEREST BEARING BORROWED FUNDS, ARE PUT INTO A COM MON POOL OF FUNDS, THEY WILL LOSSES THEIR DISTINCTION AND ALL T YPES OF FUNDS WILL BE TREATED ALIKE. IN SUCH A SITUATION, THE ONLY WA Y TO ASCERTAIN THE INVESTMENTS MADE FROM THE BORROWED FUNDS, IF AN Y, IS ON A PROPORTIONATE BASIS. THEREFORE, THE INTEREST EXPEN SES, WHICH COULD NOT BE DIRECTLY LINKED TO ANY ACTIVITY, ARE T O BE TREATED AS COMMON INTEREST EXPENSES AND CONSIDERED IN THE STEP -2 OF THE FORMULA GIVEN IN RULE-8D FOR THE PURPOSE ATTRIBUTIN G THE INDIRECT INTEREST BURDEN ON THE INVESTMENTS MADE, ON A PROPO RTIONATE BASIS. 8.3 ACCORDING TO THE CIT(APPEALS), THE TOTAL INVEST MENTS IN SHARES BY THE ASSESSEE COMPANY AS ON 31.3.2009 AND 31.3.2010 ARE 2.60 CRORES AND 29.89 CRORES, RESPECTIVELY. - ITA 2857 & 2970/14 66 FURTHER, THE SHARES OF HPPL TO THE EXTENT OF 27.54 CRORES WERE RECEIVED ON ACCOUNT OF SALE OF BUSINESS UNITS ON 21.1.2010. HENCE, THESE SHARES OF 27.54 CRORES ARE TO BE EXCLUDED FROM THE WORKING OF INVESTMENTS, FOR THE PURPOSE OF APPORTIONING/ATTRIBUTING ANY INTEREST EXPENSES, UND ER THE STEP-II OF THE FORMULA GIVEN IN RULE 8D. ACCORDINGLY, THE CLOSING BALANCE OF INVESTMENTS AS ON 31.3.2010 WILL WORK OU T TO 2,34,76,000/- (I.E. 29,88,76,000 - 27,54,00,000). THE AO IS REQUIRED TO ADOPT 2,34,76,000/- AS THE CLOSING BALANCE OF INVESTMENTS AS ON 31.3.2010 FOR THE PURPOSE OF A TTRIBUTING THE INTEREST EXPENSES UNDER STEP-II OF THE FORMULA GIVE N UNDER RULE 8D. 8.4 FURTHER, THE CIT (APPEALS) OBSERVED THAT THE LO ANS AVAILED BY THE ASSESSEE FOR THE SPECIFIC PURPOSE CA NNOT BE CONSIDERED FOR THE PURPOSE OF COMPUTING DISALLOWANC E U/S.14A R.W.R. 8D OF THE IT RULES. ACCORDING TO HIM, THE T OTAL INTEREST PAYMENT IS 12.96 CRORES AND INTEREST RECEIPTS WERE 5.92 CRORES. HE CONSIDERED ONLY THE NET INTEREST OF 7.04 CRORES, WHICH IS DEBITED IN THE PROFIT AND LOSS ACCOUNT. O UT OF THIS, HE DEDUCTED INTEREST ON LOANS WHICH IS AVAILED FOR SPE CIFIC PURPOSE - ITA 2857 & 2970/14 67 AT 2.74 CRORES. FINALLY, HE CONSIDERED THE NET INTER EST OF 4.31 CRORES AS COMMON INTEREST EXPENSES FOR THE PUR POSE OF RULE 8D(II) OF THE ACT. REGARDING RULE 8D(III) OF THE I.T.RULES, HE CONFIRMED THE FINDINGS OF THE A.O. 9. ACCORDING TO THE LD. AR, OUT OF INVESTMENTS, 27.54 CRORES WAS PART OF SALE CONSIDERATION IN THE FORM O F SHARES FROM HFL AND SHOULD BE EXCLUDED FOR THE PURPOSE OF COMPU TATION OF DEDUCTION U/S.14A. FURTHER, HE SUBMITTED THAT INVE STMENT IN SUBSIDIARY CANNOT BE CONSIDERED FOR DISALLOWANCE U/ S.14A. THE ASSESSEE IS HAVING SUFFICIENT RESERVE AND SURPLUS. WITHOUT PREJUDICE TO THE ABOVE, HE SUBMITTED THAT THE NET I NTEREST TO BE CONSIDERED AFTER SETTING OFF THE INTEREST RECEIPTS FROM INTEREST PAYMENT AND NOT THE GROSS INTEREST. REGARDING ADMI NISTRATIVE EXPENDITURE, HE SUBMITTED THAT THERE IS NO EXPENDIT URE INCURRED AND SHOULD BE EXCLUDED WHILE COMPUTING THE AVERAGE INCOME AS PER FORMULA UNDER SEC.14A R.W.RULE 8D. 10. THE LD. DR SUBMITTED THAT THE CIT(APPEALS) WAS NOT JUSTIFIED IN MODIFYING THE COMPUTATION PROVISIONS I N RULE 8D FOR WHICH HE DOES NOT HAVE ANY POWER AND AFTER HOLDING THAT RULE 8D IS MANDATORY FROM A.Y. 2008-09 ONWARDS. FURTHER , THE LD. - ITA 2857 & 2970/14 68 DR SUBMITTED THAT SINCE THE CIT(APPEALS) HELD THAT THE ASSESSEE IS NOT MAINTAINING SEPARATE BOOKS OF ACCOU NT FOR THE INVESTMENTS IN SHARES/MUTUAL FUNDS AND THAT THERE I S NO EVIDENCE TO SHOW THAT SUCH INVESTMENTS WERE MADE OU T OF INTEREST FREE FUNDS AND THE CIT(APPEALS) OUGHT TO H AVE FOLLOWED THE DECISION IN DHANUKA & SONS (KOL) 201 TAXMAN 105 RELIED ON BY THE A.O. ACCORDING TO THE LD. AR, THE CIT(APPEA LS) OUGHT TO HAVE ADOPTED THE FIGURE USED BY HIM IN PART 3 OF TH E COMPUTATION GIVEN FOR PART 2 ALSO SINCE THE NOMENCL ATURE IS SAME. 11. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. IN OUR OPINION, APPLICATION O F RULE 8D OF THE I.T.RULES DOES NOT ALLOW FOR NETTING OF ANY INTERE ST INCOME WITH INTEREST EXPENDITURE. IF NETTING OF INTEREST INCOM E IS ALLOWED, IT WOULD BE EQUIVALENT TO ADDING SOMETHING WHICH IS NO T THERE IN THE RULE BOOK, ACCORDINGLY IMPERMISSIBLE. THUS, WE UPHOLD THE AOS APPLICATION OF RULE 8D(2)(II) READ WITH SEC.14 A ON GROSS INTEREST, THROUGH AO DID NOT CONSIDER INTEREST RECE IPTS AS INCOME FROM OTHER SOURCES; THE TREATMENT OF INTER EST BY AO WOULD NOT CHANGE THE NATURE OF TRANSACTION OR CHARA CTER OF RECEIPTS. ACCORDINGLY, WE REVERSE THE FINDING OF T HE CIT(APPEALS), ON THIS ISSUE. - ITA 2857 & 2970/14 69 11.1 THE AO HAS TO CONSIDER THE AVAILABILITY OF SHARE CAPITAL, RESERVES AND SURPLUS WHILE INVOKING THE PR OVISIONS OF SEC.14A READ WITH RULE 8D OF THE INCOME-TAX RULES, AS THIS IS THE NON-INTEREST BEARING OWN FUNDS AVAILABLE WITH T HE ASSESSEE FOR INVESTMENTS. 12. WITH REGARD TO THE INTEREST ON BORROWINGS USED FOR THE SPECIFIC PURPOSE, IT IS TO BE NOTED THAT THIS ISSUE CAME FOR CONSIDERATION BEFORE THIS TRIBUNAL IN THE CASE OF A CIT V. M/S. FARIDA SHOES PVT. LTD. IN ITA NOS.2102 & 2103/MDS/2 015 DATED 8.1.2016, WHEREIN FOLLOWING THE TRIBUNAL ORDER IN ITANO.1603/MDS/2012 DATED 16.7.2013, IT WAS HELD AS UNDER : 5.1 COMING TO THE MERITS OF THE ISSUE REGARDING DISALLOWANCE U/S.14A R.W. RULE 8D OF THE I.T.RULES, IN OUR OPINION, SIMILAR ISSUE WAS CONSIDERED BY THIS TRIBUNAL IN THE CASE OF ACIT V. M/S. BEST & CROMPTO N ENGINEERING LTD. IN ITA NO.1603/MDS/2012 DATED 16.7.2013, WHEREIN IT WAS OBSERVED THAT INTEREST ON BORROWINGS USED FOR THE BUSINESS PURPOSE CANNOT BE CONSIDERED FOR THE PURPOSE OF COMPUTING DISALLOWANC E U/S.14A R.W. RULE 8D(2)(II) OF THE IT RULES AND TH E RELEVANT PORTION IS REPRODUCED AS BELOW: 10. HEARD BOTH SIDES. PERUSED THE ORDERS OF LOWER AUTHORITIES AND THE DECISION OF CALCUTTA BENCH OF T HIS TRIBUNAL RELIED ON BY THE ASSESSEES COUNSEL. THIS ISSUE HAS BEEN CONSIDERED ELABORATELY BY THE COMMISSIONER OF INCOME TAX(APPEALS) AND DELETED THE INTEREST ON BANK LOAN AND TERM LOANS WHICH WERE NOT UTILIZED FOR MAKING ANY INVESTMENTS HAVING TAX - ITA 2857 & 2970/14 70 FREE INCOME. WHILE HOLDING SO, THE COMMISSIONER OF INCOME TAX (APPEALS) HELD AS UNDER:- 5.2.1 HAV I NG HELD THAT PROVIS I ONS OF RU L E 0D ARE APPLICABLE , LET US NOW EXAMINE WHETHER THE AMOUNT HAS BEEN CORRECTLY QUANT I FIED. THE AO HAD CALCU LAT ED THE DISALLOWANCE AT ` NIL, 1,04,38,000/- AND 26,87,000/- UNDER (I), (I I ) & (III) OF RULE 80 ( 2)RESPECTIVELY . THERE IS NO DISPUTE REGARDING THE FIRST COMPONENT , BECAUSE IT IS N I L . WITH REGARD TO THESECOND COMPONENT BE I NG THE EXPENDITURE BY W A Y O F INTEREST WHICH IS NOT DIRECT L Y AT T RIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT , THE AO HAS DE T ERMINED THE AMOUNT AT 1,04,38,000/ . THE AO HAS TAKEN I NTO ACCOUNT T H E ENT I RE IN T EREST EXPEND I TURE OF 5 , 79 , 46 ,000 /- FOR COMPUT I NG THE ABOVE D I SALLOWA N CE . THE I D . AR , IN H I S SUBMISS I ON , HAS G I VEN THE BREAK-UP OF INTEREST WH I CH INCLUDES ( 1) I NTEREST ON BANK LOANS: 67,92 , 000/- (2) I NTEREST ON TERM LOANS 3,82 , 11 , 000/- AND (3) I NTEREST ON OTHER ACCOUNTS: 1,29 , 43,000/- . IF LOANS HAVE BEEN SANCT I ONED FOR SPEC I FIC PROJECTS/EXPANS I ON AND HAVE BEEN UT I LIZED TOWARDS THE SAME , THEN O B VIOUSLY THEY COULD NOT HAVE BEEN UTI L IZED FOR MAKING ANY INVESTMENTS HAVING TAX - FREE I NCOMES . FROM THE COPY OF THE SANCT I ON LETTERS FROM STATE BANK OF BIKANER & JAIPUR I T CAN BE SEEN THA T THE LOAN WAS GRANTED WITH A SPECIFIC R EQU I REMEN T T HA T THE LOAN SHAL L BE UTI L IZE D FOR PURCHASE OF IMPOR T ED M A CHINERY WHI L E IN THE CASE OF LOAN FR O M FE D ERA L B ANK , I T I S SE E N T HAT T HE LOAN WAS TO BE U T I LI ZED FO R EXPANSION OF P R O J EC T S. S AN C T ION O F B OTH THESE LOANS PROHIB I T U T I L IZAT I ON OF FUNDS FOR PURPOSES OTHER THAN FOR THE U TILIZAT I ON F OR WHICH T HEY ARE S A NCTIONED . FROM THE LEDGER EX T RACT FOR THE YEAR ENDED 3 1. 03 . 2008 FOR BOTH LOAN ACCOU N TS, IT I S SEEN THAT NO AMOUNT HAS BEEN UT I LIZED F OR INVES T MENT IN SUBSID I ARIES WH I C H EARNS TAX-FREE INCOME . T HE LOAN AMOUNTS WERE FUL L Y D I SBU R S ED A N D U T IL IZ ED IN T H E YEA R ENDED 3 1. 03.2008 (A . Y . 2008-09) I T SE L F. TAK I NG IN T O A L L THE F A CTS AS ST AT ED - ITA 2857 & 2970/14 71 ABOVE, I AM OF THE CONS I DERED OPINION THAT IF LOANS/BO R ROWED AMOUNTS ARE G RANTED F OR SPEC IF IC P R O J EC T S/EXPANS I ON AND NO AMOUNT FROM THE SAME H A S BEEN D IRECTLY U TILI ZED FOR I NVESTMEN T S , TH EN THE F I RS T AN D SECOND LIMB OF RU L E 80 A TT RI BUT ING THE I N T EREST PAYMENTS T O T HE I N VES T MEN T S WI L L NOT BE APPLICABLE. ACCORDING L Y, IN TE RES T ON BANK LOAN AND TERM LOAN AMOUNT I NG TO 67 , 92 , 000/- AND 3,82, 1 1,000/- R ESPECTIVE L Y ARE TO BE EXC L UDED FROM T HE CA L CULATION TO DETERM I NE THE D I SAL L OWANCE UNDER RULE 8D(2)(II). THE AO IS , THEREFORE, DIREC T ED TO T AKE INTO ACCOUNT ONLY T HE R EMAINING INTERES T ON OTHER ACCOUNTS AMOUNTING TO 1 , 29 , 43,000/- FOR COMPUTING THE PROPO R TIONATE DISA L LOWANCE UNDER RULE 8D(2)( I I) . 11. ON GOING THROUGH THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS), WE FIND THAT THE COMMISSIONER OF INCOME TAX (APPEALS) EXCLUDED THE INTEREST ON BANK LOAN AND TERM LOANS FROM THE CALCULATION OF DISALLO WANCE UNDER RULE 8D(2)(II) AS THE ASSESSEE HAS UTILIZED T HE BANK LOAN AND TERM LOAN FOR THE PURPOSE OF PURCHASE OF MACHINERIES AND FOR EXPANSION OF PROJECTS AND THESE LOANS WERE SPECIFICALLY SANCTIONED FOR SPECIFIC PRO JECT AND SUCH LOANS WERE ALSO USED FOR THE PURPOSE FOR WHICH THEY WERE SANCTIONED. IN THE CIRCUMSTANCES, W E FIND THAT THE COMMISSIONER OF INCOME TAX (APPEALS) HAS RIGHTLY EXCLUDED SUCH INTEREST FROM THE PURVIEW OF COMPUTATION OF DISALLOWANCE UNDER RULE 8D(2)(II). 12. THE DECISION OF CALCUTTA BENCH OF THIS TRIBUNAL IN THE CASE OF CHAMPION COMMERCIAL CO.LTD. (SUPRA) ALS O SUPPORTS THE VIEW OF THE COMMISSIONER OF INCOME TAX (APPEALS). THE TRIBUNAL HAD CONSIDERED A SITUATION WHEN THE LOANS WERE UTILIZED FOR THE PURCHASE OF MACHINERIES, INTEREST ARISING OUT OF SUCH LOANS, WH ETHER SUCH INTEREST IS TO BE EXCLUDED FOR THE PURPOSE OF COMPUTING DISALLOWANCE UNDER RULE 8D(2)(II), THE TRIBUNAL HELD THAT SUCH INTEREST HAS TO BE EXCLUDED . WHILE HOLDING SO, IT HAS HELD AS UNDER:- - ITA 2857 & 2970/14 72 11. THERE IS NO DISPUTE ABOUT WORKING OF THIS METHOD SO FAR AS RULE 8D(2)(I) AND (III) IS CONCERNED. IT IS ONLY WITH REGARD TO THE COMPUTATIO N UNDER RULE 8D(2)(II) THAT THE ASSESSING OFFICER AND THE CIT(A) HAVE DIFFERENT APPROACHES. THIS PROVISION ADMITTEDLY DEALS WITH A SITUATION IN WHIC H THE ASSESSEE HAS INCURRED EXPENDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT . CLEARLY, THEREFORE, THIS SUB CLAUSE SEEK S TO ALLOCATE COMMON INTEREST EXPENSES TO TAXABLE INCOME AND TAX EXEMPT INCOME. IN OTHER WORDS, GOING BY THE PLAIN WORDINGS OF RULE 8D(2)(II) WHAT IS SOUGHT TO BE ALLOCATED IS EXPENDITURE BY WAY OF INTEREST..WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT AND THE ONLY CATEGORIES OF INCOME AND RECEIPT, SO FAR AS SCHEME OF RULE 8 D IS CONCERNED, ARE MUTUALLY EXCLUSIVE CATEGORIES OF TAX EXEMPT INCOME AND RECEIPT AND TAXABLE INCOME AND RECEIPT. NO OTHER CLASSIFICATI ON IS GERMANE TO THE CONTEXT IN WHICH RULE 8 D IS SET OUT, NOR DOES THE SCHEME OF SECTION 14 A LEAVE ANY AMBIGUITY ABOUT IT. 12. IRONICALLY, HOWEVER, THE DEFINITION OF VARIABLE A EMBEDDED IN FORMULA UNDER RULE 8D(2)(II) IS CLEARLY INCONGRUOUS INASMUCH WHILE IT SPECIFICALLY EXCLUDES INTEREST EXPENDITURE DIRECTLY RELATED TO TAX EXEMPT INCOME, IT DOES NOT EXCLUDE INTEREST EXPENDITURE DIRECTLY RELATED TO TAXABLE INCOME. RESULTANTLY, WHILE RULE 8D(2)(II) ADMITTEDLY SEEKS TO ALLOCATE EXPENDITURE BY WAY OF INTEREST, WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT IT ENDS UP ALLOCATING EXPENDITURE BY WAY OF INTEREST, WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, PLUS INTEREST WHICH IS DIRECTLY ATTRIBUTABLE TO TAXABLE INCOME (EMPHASIS BY UNDERLINING SUPPLIED BY US). THIS INCONGRUITY WILL BE MORE GLARING WITH THE HELP OF FOLLOWING SIMPLE EXAMPLE: IN THE CASE OF A & CO - ITA 2857 & 2970/14 73 LTD, TOTAL INTEREST EXPENDITURE IS 1,00,000, OUT OF WHICH INTEREST EXPENDITURE IN RESPECT OF ACQUIRING SHARES FROM WHICH TAX FREE DIVIDEND EARNED IS 10,000. OUT OF THE BALANCE 90,000, THE ASSESSEE HAS PAID INTEREST OF 80,000 FOR FACTORY BUILDING CONSTRUCTION WHICH CLEARLY RELATES TO THE TAXABLE INCOME. THE INTEREST EXPENDITURE WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR RECEIP T OR INCOME IS THUS ONLY 10,000. HOWEVER, IN TERMS OF THE FORMULA IN RULE 8D (2)(II), ALLOCATION OF IN TEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULA R INCOME OR RECEIPT WILL BE FOR 90,000 BECAUSE, AS PER FORMULA THE VALUE OF A (I.E. SUCH INTEREST EXPENSES TO BE ALLOCATED BETWEEN TAX EXEMPT AND TAXABLE INCOME) WILL BE A = AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTERES T INCLUDED IN CLAUSE (I) [ I.E. DIRECT INTEREST EXPEN SES FOR TAX EXEMPT INCOME] INCURRED DURING THE PREVIOUS YEAR. LET US SAY THE ASSETS RELATING TO TAXABLE INCOME AND TAX EXEMPT INCOME ARE IN THE RATIO OF 4:1. IN SUCH A CASE, THE INTEREST DISALLOWABLE UNDER RULE 8 D(2)(II) WILL BE 18,000 WHEREAS ENTIRE COMMON INTEREST EXPENDITURE WILL ONLY BE 10,000/-. 13. THE INCONGRUITY ARISES BECAUSE, AS THE WORDINGS OF RULE 8D(2)(II) EXIST, OUT OF TOTAL INTE REST EXPENSES, INTEREST EXPENSES DIRECTLY RELATABLE TO TAX EXEMPT INCOME ARE EXCLUDED, INTEREST EXPENSES DIRECTLY RELATABLE TO TAXABLE INCOME, EVEN IF ANY, ARE NOT EXCLUDED. 14. THE QUESTION THEN ARISES WHETHER WE CAN TINKER WITH THE FORMULA PRESCRIBED UNDER RULE 8D(2)(II) OF THE INCOME TAX RULES, OR CONSTRUE IT ANY OTHER MANNER OTHER THAN WHAT IS SUPPORTED BY PLAIN WORDS OF THE RULE 8 D (2)(II). 15. WE FIND THAT NOTWITHSTANDING THE RIGID WORDS OF RULE 8D(2)(II), THE STAND TAKEN BY THE REVENUE AUTHORITIES ABOUT ITS APPLICATION, AS WAS BEFORE - ITA 2857 & 2970/14 74 HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG CO LTD VS DCIT (328 ITR 81) WHEN CONSTITUTIONAL VALIDITY OF RULE 8 D WAS IN CHALLENG E, IS THAT IT IS ONLY THE INTEREST ON BORROWED FUNDS THAT WOULD BE APPORTIONED AND THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST THAT WILL BE TAKEN (AS 'A' IN THE FORMULA) WILL EXCLUDE ANY EXPENDITURE BY WAY OF INTEREST WHICH IS DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT (FOR EXAMPLEANY ASPECT OF THE ASSESSEE'S BUSINESS SUCH AS PLANT/MACHINERY ETC.). THEREFORE, IT IS NOT ONLY THE INTEREST DIRECTLY ATTRIBUTABLE TO TAX EXEMPT INCOME, I.E. UNDER RULE 6D(2)(I), BUT ALSO INTEREST DIRECTLY RELATABLE TO TAXABLE INCOME, WHICH IS TO BE EXCLUDED FROM THE DEFINITION OF VARIABLE A IN FORMULA AS PER RULE 6D(2)(II), AND RIGHTLY SO, BECAUSE IT IS ONLY THEN THAT COMMON INTEREST EXPENSES, WHICH ARE TO BE ALLOCATED AS INDIRECTLY RELATABLE TO TAXABLE INCOME AND TAX EXEMPT INCOME, CAN BE COMPUTED. THIS IS CLEAR FROM THE FOLLOWING OBSERVATIONS MADE BY THEIR LORDSHIPS OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE (SUPRA): 60. IN THE AFFIDAVIT-IN-REPLY THAT HAS BEEN FILED O N BEHALF OF THE REVENUE AN EXPLANATION HAS BEEN PROVIDED OF THE RATIONALE UNDERLYING R. 8D. IN THE WRITTEN SUBMISSIONS WHICH HAVE BEEN FILED BY THE ADDL. SOLICITOR GENERAL IT HAS BEEN STATED, WITH REFERENCE TO R. 8D(2)(II) THAT SINCE FUNDS ARE FUNGIBLE, IT WOULD BE DIFFICULT TO ALLOCATE THE ACT UAL QUANTUM OF BORROWED FUNDS THAT HAVE BEEN USED FOR MAKING TAX-FREE INVESTMENTS. IT IS ONLY THE INTEREST ON BORROWED FUNDS THAT WOULD BE APPORTIONED AND THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST THAT WILL BE TAKEN (AS 'A' IN THE FORMU LA) WILL EXCLUDE ANY EXPENDITURE BY WAY OF INTEREST WHICH IS DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT (FOR EXAMPLEANY ASPECT OF THE ASSESSEE'S BUSINESS SUCH AS PLANT/MACHINERY ETC.) THE JUSTIFICATION THAT HAS BEEN - ITA 2857 & 2970/14 75 OFFERED IN SUPPORT OF THE RATIONALE FOR R. 8D CANNO T BE REGARDED AS BEING CAPRICIOUS, PERVERSE OR ARBITRARY. APPLYING THE TESTS FORMULATED BY THE SUPREME COURT IT IS NOT POSSIBLE FOR THIS COURT TO HOLD THA T THERE IS WRIT ON THE STATUTE OR ON THE SUBORDINATE LEGISLATION PERVERSITY, CAPRICE OR IRRATIONALITY. T HERE IS CERTAINLY NO 'MADNESS IN THE METHOD'. 16. ONCE THE REVENUE AUTHORITIES HAVE TAKEN A PARTICULAR STAND ABOUT THE APPLICABILITY OF FORMULA SET OUT IN RULE 8 D(2)(II), AND BASED ON SUCH A STA ND CONSTITUTIONAL VALIDITY IS UPHELD BY HONBLE HIGH COURT, IT CANNOT BE OPEN TO REVENUE AUTHORITIES TO TAKE ANY OTHER STAND ON THE ISSUE WITH REGARD TO TH E ACTUAL IMPLEMENTATION OF THE FORMULA IN THE CASE OF ANY ASSESSEE. VIEWED THUS, THE CORRECT APPLICATION OF THE FORMULA SET OUT IN RULE 8D(2)(II) IS THAT, A S HAS BEEN NOTED BY HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE (SUPRA), AMOUNT OF EXPENDITURE BY WAY OF INTEREST THAT WILL BE TAKEN (AS 'A' IN THE FORMULA) WILL EXCLUDE ANY EXPENDITURE BY WAY OF INTEREST WHICH IS DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT (FOR EXAMPLEANY ASPECT OF THE ASSESSEE'S BUSINESS SUCH AS PLANT/MACHINERY ETC.) . ACCORDINGLY, EVEN BY REVENUES OWN ADMISSION, INTEREST EXPENSES DIRECTLY ATTRIBUTABLE TO TAX EXEMPT INCOME AS ALSO DIRECTLY ATTRIBUTABLE TO TAXABLE INCOME, ARE REQUIRED TO BE EXCLUDED FROM COMPUTATION OF COMMON INTEREST EXPENSES TO BE ALLOCATED UNDER RULE 8D(2)(II). 17. TO THE ABOVE EXTENT, THEREFORE, WE HAVE TO PROCEED ON THE BASIS THAT RIGOUR OF RULE 8 D (2)(II ) IS RELAXED IN ACTUAL IMPLEMENTATION, AND REVENUE AUTHORITIES, HAVING TAKEN THAT STAND WHEN CONSTITUTIONAL VALIDITY OF RULE 8 D WAS IN CHALLENG E BEFORE HONBLE HIGH COURT, CANNOT NOW DECLINE THE SAME. IDEALLY, IT IS FOR THE CENTRAL BOARD OF DIREC T TAXES TO MAKE THE POSITION CLEAR ONE WAY OR THE - ITA 2857 & 2970/14 76 OTHER EITHER BY INITIATING SUITABLE AMENDMENT TO RU LE 8D(2)(II) OR BY ADOPTING AN INTERPRETATION AS PER PLAIN WORDS OF THE SAID RULE, BUT EVEN ON THE FACE OF THINGS AS THEY ARE AT PRESENT , IN OUR HUMBLE UNDERSTANDING, REVENUE AUTHORITIES CANNOT TAKE ONE STAND WHEN DEMONSTRATING LACK OF PERVERSITY, CAPRICE OR IRRATIONALITY IN RULE 8D BEFORE HONBLE HIGH COURT, AND TAKE ANOTHER STAND WHEN IT COMES TO ACTUAL IMPLEMENTATION OF THE RULE IN REAL LIFE SITUATIONS. THEREFORE, EVEN AS WE ARE ALIVE TO THE FACT THAT THE STAND OF THE LEARNED DEPARTMENTAL REPRESENTATIVE IS IN ACCORDANCE WITH THE STRICT WORDING OF RULE 8D(2)(II), WE HAVE TO HOLD THAT, FO R THE REASONS SET OUT ABOVE, THIS RIGID STAND CANNOT BE APPLIED IN PRACTICE. 13. IN VIEW OF THE DECISION OF THE CALCUTTA BENCH O F THIS TRIBUNAL CITED ABOVE, WE UPHOLD THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) IN EXCLUDING T HE INTEREST ON BANK LOAN AND TERM LOANS FOR THE PURPOS E OF COMPUTING DISALLOWANCE UNDER RULE 8D(2)(II). THE GROUNDS RAISED BY THE REVENUE ARE REJECTED ON THIS ISSUE. IN VIEW OF THE ABOVE, THIS GROUND OF APPEAL OF THE REVENUE IS DISMISSED. HENCE, THE TRIBUNAL CONSISTENTLY HOLDING THAT THE F UNDS FOR SPECIFIC PURPOSE CANNOT BE CONSIDERED WHILE APPLYIN G THE PROVISIONS OF SEC.14A R.W. RULE 8D OF THE I.T.RULES AND TO THAT EXTENT, WE AGREE WITH THE SUBMISSION OF THE LD. AR. 13. REGARDING RULE 8D(2)(III) OF THE IT RULES, WE A RE OF THE OPINION THAT THE AO HAS TO RECOMPUTED THE SAME IN T HE LIGHT OF THE DECISION OF THE TRIBUNAL IN THE CASE OF M/S. CO MPUTER AGE MANAGEMENT SERVICES (P) LTD. IN ITA NOS.1236 & - ITA 2857 & 2970/14 77 1240/MDS/2014 AND 1259 TO 1261/MDS/2014 DATED 28.11 .2014. THE RELEVANT PORTION OF THAT ORDER IS AS FOLLOWS : 10. WE HAVE HEARD RIVAL CONTENTIONS OF BOTH THE PA RTIES AND PERUSED ORDERS OF LOWER AUTHORITIES AND THE DEC ISION RELIED ON. ON A CAREFUL CONSIDERATION OF THE FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE NOT IN AGREEMENT WITH THE ASSESSEE THAT NO EXPENDITURE WAS INCURRED IN MA NAGING THE PORTFOLIO OF THE ASSESSEE. THE ASSESSEE COMPANY IS INTO THE BUSINESS OF REGISTRARS AND SHARE TRANSFER AGENT. IT IS NOT IN DISPUTE THAT MANAGEMENT OF THE ASSESSEE COMP ANY PERIODICALLY MONITORS THROUGH ITS BOARD OF DIRECTOR S ABOUT THE INVESTMENTS. IN SUCH CIRCUMSTANCES, IT CANNOT B E SAID THAT ASSESSEE HAS NOT AT ALL INCURRED ANY EXPENSES IN MANAGING ITS PORTFOLIOS. 11. THE KOLKATA BENCH OF THIS TRIBUNAL IN REI AGRO LTD. VS. DCIT (SUPRA) HELD THAT DISALLOWANCE UNDER SECTI ON 14A READ WITH RULE 8D CAN BE MADE ONLY BY TAKING INTO CONSIDERATION THE INVESTMENTS WHICH HAS GIVEN RISE TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME . WHILE HOLDING SO, THE TRIBUNAL OBSERVED AS UNDER:- 8. IN RESPECT OF PROVISIONS OF RULE 8D(2)(III) WHICH IS THE SUBJECT MATTER OF THE ASSESSEES APPEAL IN THE ASSESSEES HAND, A PERUSAL OF THE SAID PROVISION SHOWS THAT WHAT IS DISALLOWABLE UNDER RULE 8D(2)(III) IS THE AMOUNT EQUAL TO PERCENTAGE OF THE AVERAGE VALUE OF THE INVESTMENT THE INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME. THUS, UNDER SUB-CLAUSE (III) WHAT IS DISALLOWED IS PERCENTAGE OF THE NUMERATOR B IN RULE 8D(2)(II). AGAIN THIS IS TO BE CALCULATED IN THE SAME LINE AS MENTIONED EARLIER IN RESPECT OF NUMERATOR B IN RULE 8D(2)(II) OF THE ACT. 8.1 THUS, NOT ALL INVESTMENTS BECOME THE SUBJECT MATTER OF CONSIDERATION WHEN COMPUTING DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D. THE DISALLOWANCE UNDER SECTION 14A READ WITH RULE - ITA 2857 & 2970/14 78 8D IS TO BE IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME AND THIS CAN BE DONE ONLY BY TAKING INTO CONSIDERATION THE INVESTMENT WHICH HAS GIVEN RISE TO THIS INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. UNDER THE CIRCUMSTANCES, THE COMPUTATION OF THE DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D(2)(III) WHICH IS ISSUE IN THE ASSESSEES APPEAL IS RESTORED TO THE FILE OF THE ASSESSING OFFICER FO R RECOMPUTATION IN LINE WITH THE DIRECTION GIVEN ABOVE. NO DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D(2)(II) AND (II) CAN BE MADE IN THIS CASE. 12. FOLLOWING THE SAID DECISION, WE DIRECT THE ASSESSING OFFICER TO RECOMPUTE THE DISALLOWANCE UND ER RULE 8D(2)(III) BY TAKING THE AMOUNT EQUAL TO PE RCENTAGE OF THE AVERAGE VALUE OF THE INVESTMENT WHICH HAS G IVEN RISE TO THE INCOME WHICH DOES NOT FORM PART OF TOTA L INCOME. ACCORDINGLY, WE REMIT THE ISSUE OF APPLICABILITY OF SEC.14A R.W.RULE 8D (2)(III) OF THE I.T.RULES, TO THE FILE OF THE AO IN ASSESSEES APPEAL AS WELL AS IN REVENUE APPEAL. 14. IN THE RESULT, THE APPEAL OF THE ASSESSEE AND T HE APPEAL OF THE REVENUE ARE ALLOWED FOR STATISTICAL PURPOSES . ORDER PRONOUNCED ON FRIDAY, THE 29 TH OF JULY, 2016 AT CHENNAI. SD/- SD/- ( . ! ' ) ( ) (G. PAVAN KUMAR) (CHANDRA POOJARI) # /JUDICIAL MEMBER /ACCOUNTANT MEMBER - ITA 2857 & 2970/14 79 /CHENNAI, J /DATED, THE 29 TH JULY, 2016. MPO* 8 4 *#5KL ML&5 /COPY TO: 1. '( /APPELLANT 2. *+'( /RESPONDENT 3. ! N () /CIT(A) 4. ! N /CIT 5. LOP *#5# /DR 6. PQ% R /GF.