LLM Appliances Limited, CHENNAI V. DCIT, CHENNAI

ITA 324/CHNY/2012

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 8597 (ITAT-CHENNAI)
• Duration Of Justice: 10 year(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-02-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: C
• Assessment Year: 2008-2009
• Appeal Filed On: 14-02-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Business income; Cost of acquisition; Capital Gains
• Section: 143(3)

Judgement Text

आयकर अपीलीय अिधकरण ‘सी’ ायपीठ चे ई म । IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH, CHENNAI माननीय +ी महावीर िसंह, उपा01 एवं माननीय +ी मनोज कु मार अ6वाल ,लेखा सद9 के सम1। BEFORE HON’BLE SHRI MAHAVIR SINGH, VICE PRESIDENT AND HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM आयकर अपील सं./ ITA No.324/Chny/2012 (िनधाBरण वषB / Assessment Year: 2008-09) M/s. LLM Appliances Ltd., New# 377 (Old #: 272), Anna Salai, Teynampet, Chennai – 600 018. बनाम/ V s. DCIT Company Circle-II(4), Chennai. थायी लेखा सं./जीआइ आर सं./P AN /GI R No . AAAC L -1 9 0 0 -F (अपीलाथ /Appellant) : ( थ / Respondent) & आयकर अपील सं./ ITA No.686/Chny/2012 (िनधाBरण वषB / Assessment Year: 2008-09) ACIT Company Circle-II(4), Chennai. बनाम/ V s. M/s. LLM Appliances Ltd., Seshachalam Centre, No.636/1, 9 th Floor, Anna Salai, Nandanam, Chennai-600035. थायी लेखा सं./जीआइ आर सं./P AN /GI R No . . AAAC L -1 9 0 0 - F (अपीलाथ /Appellant) : ( थ / Respondent) अपीलाथ की ओरसे/ Appellant by : Shri Meenakshisundaram (Advocate)-Ld. AR थ की ओरसे/Respondent by : Ms. R. Helan Ruby Jesintha (Addl. CIT)-Ld. DR सुनवाई की तारीख/ Date of Hearing : 15-02-2022 घोषणा की तारीख / Date of Pronouncement : आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member) 1.1 Aforesaid cross-appeals for Assessment Year (AY) 2008-09 arises out of the order of learned Commissioner of Income Tax (Appeals)-IV, ITA Nos.324 & 686/Chny/2012 - 2 - Chennai [CIT(A)] dated 19-12-2011 in the matter of assessment framed by Ld. Assessing Officer [AO] u/s. 143(3) of the Act on 30-12-2010. 1.2 The grounds raised by the assessee are as under: 1. The order of the Commissioner of Income Tax (Appeals)-IV, Chennai insofar as it confirms the order of the Assessing Officer in respect of the disallowance of interest of Rs.3,31,1877- and loss on reduction in face value of shares amounting to Rs.4,83,44,020/- held by the appellant company on investments is erroneous, against the provisions of law and contrary to the facts and circumstances of the case. 2. The Commissioner of Income Tax (Appeals) should have found that no interest can be disallowed on the ground that the assessee need not have borrowed money when they have got sufficient non-interest bearing funds. He should have found that borrowing money is to be looked into not from the view of necessity according to the Assessing Officer but on the basis of business requirements as seen through the eyes of the businessman. In the circumstances, the Commissioner of Income Tax (Appeals) erred in confirming the order of the Assessing Officer based on the premises of necessity of borrowing. 3. The Commissioner, of Income Tax (Appeals) erred in confirming the disallowance of interest of Rs.3,31,187/-. He should have found that on the admission of the Assessing Officer himself, the assessee has sufficient interest-free funds to advance interest-free loans to sister concerns and diversion of interest bearing funds for giving interest-free advances is not a ground for disallowing the interest paid by the appellant. He should have found that the decision of Punjab St Haryana High Court in the case of Abishek Industries 286 ITR 1 is not applicable to the facts of the present case and hence, the reliance placed on the said decision by the Commissioner is incorrect. 4. Without prejudice to the above contention, the Commissioner of Income Tax (Appeals) should have found that even assuming without conceding that the view of the Assessing Officer on the necessity of borrowing is sustainable, he should have found that the borrowing is only from Andhra Bank in respect of which the interest works out to Rs.92,628/- only and the balance of Rs.2,38,559/- represents interest paid on security deposits received from the customers of the appellant. In the circumstances, the Commissioner of Income Tax (Appeals) erred in confirming the disallowance in toto without applying his mind even though this aspect has been clearly explained to the Commissioner in the 'Note on Submission' dated 13 th October 2011 which is annexed hereto and may be treated as forming part of the appeal papers. 5. The order of the Commissioner of Income Tax (Appeals) in sustaining the rejection of the appellant's claim of Capital loss of Rs.4,83,44,020/- on the reduction in face value of shares of the ITA Nos.324 & 686/Chny/2012 - 3 - company 'M/s Gangadharam Appliances Limited', held by the appellant as investment, is erroneous, not sustainable either in law or on the facts of the case. He should have found that the decision of the Supreme Court relied on by the appellant in support of the case is directly on the issue and the distinction made by the Assessing Officer and sustained by the Commissioner in respect of the two cases namely, the Supreme Court was dealing with the reduction of preference share capital whereas in the present case, the reduction was in respect of equity share capital is not sustainable. As far as the investment in shares is concerned, it makes no difference as to the question whether there is transfer as envisaged under the provisions of Section 2(47) of the Income Tax Act. There is no distinction between preference or equity shares on the proposition that there is transfer by way of extinguishment of right as held by the Supreme Court in the case relied on by the appellant. The Commissioner erred in sustaining the disallowance in respect thereof made on the imaginary ground of the Assessing Officer which is not sustainable either in law or on the facts of the case. For these reasons and for any other reasons that may be adduced at the time of hearing, it is prayed that the Hon'ble Tribunal may be pleased to set aside the order of the Commissioner of Income Tax (Appeals) confirming the order of the Assessing Officer in respect of the disallowance of interest and Capital loss on reduction in face value of shares held by the appellant company on investments as erroneous, against the provisions of law and contrary to the facts and render justice. 1.3 The grounds raised by the Revenue are as under: 1. The Order of the learned Commissioner of Income Tax(Appeals) is contrary to the Law and facts of the case. 2. The learned CIT(A) has erred in deleting the disallowance made towards transfer of trade mark and levy of long term capital gain to the extent of Rs.3.2 crores and in directing to treat Rs.16 lakhs as business income. 2.1 The learned CIT(A) failed to appreciate the fact that assessee was admitting the income of Rs.16 lakhs towards usage of trade mark upto Asst Year 2007-08. Since the asset was sold during the financial year 2007-08, the same amount cannot be admitted as business income. 2.2 The learned CIT(A) ought to have appreciated the fact since the asset was not purchased by the assessee, the cost of acquisition of the asset has to be taken as nil. 2.3 The learned CIT(A) failed to appreciate the fact though the amount of Rs.4 crores was not paid during the year unde r consideration, it was nothing but conversion of balance advance which has been adjusted towards sale consideration. ITA Nos.324 & 686/Chny/2012 - 4 - As evident, the subject matter of assessee’s appeal is interest disallowance and capital loss arising out of reduction in face value of the shares. The grievance of the revenue is computation of long-term capital gains (LTCG). 2. Regarding interest disallowance, Ld. AR pleaded to restrict the disallowance to the extent of payment made to bank. Regarding capital loss, Ld. AR submitted that the assessee could not produce relevant papers before lower authorities and therefore the matter may be remanded back to the file of Ld. AO. The Ld. DR, on the other hand, justified the stand of lower authorities and also assailed the relief provided in the impugned order. 3. Having heard rival submissions and after going through the orders of lower authorities, our adjudication would be as given in succeeding paragraphs. 4. The assessee being resident corporate assessee is stated to be engaged in manufacturing and distribution of household appliances like pressure cookers and other household utilities. An assessment was framed u/s 143(3) of the Act on 30.12.2010 wherein various adjustment s / additions / disallowance were made. The issues which form the subject matter of cross-appeals are as under: - (i) Disallowance of interest expenditure The assessee advanced interest free loans for Rs.650.13 Lacs to its sister concern. Considering the fact that the assessee had own funds, Ld AO held that there was no necessity for the assessee to borrow from the Bank and pay interest of Rs.3.31 Lacs. Accordingly, the interest was disallowed. The same has been confirmed by Ld. CIT(A). The limited plea of Ld. AR is that the disallowance may be restricted to Rs.92,628/-, ITA Nos.324 & 686/Chny/2012 - 5 - being actual interest paid to the banks. It is the plea of Ld. AR that the balance interest represent interest on security deposit taken from customers in normal course. Concurring with the same, we direct Ld. AO to verify the same and restrict the disallowance to the extent of Rs.92,628/-. This ground stand partly allowed for statistical purposes. (ii) Long-Term Capital Loss of Rs.483.44 Lacs The assessee invested in the shares of M/s Gangadharam Appliances Ltd. (GAL) in the year 1991-92. That entity became sick and a scheme was formulated by BIFR under which GAL was permitted to write-off 90% of its existing Paid-up Equity Share Capital. Thus, there was capital reduction and the assessee suffered capital loss of Rs.483.44 Lacs which was computed as Long-Term Capital loss after claiming benefit of indexation. However, in the absence of satisfactory documentary evidences, the claim was rejected by Ld. AO. The same, upon confirmation by Ld. CIT(A) is under challenge before us. The limited prayer of Ld. AR is that the assessee is in a position to substantiate this claim and therefore, the matter may be remanded back to the file of Ld. AO. Concurring with the same, we set-aside the impugned order on this issue and restore the matter back to the file of Ld. AO for re-adjudication with a direction to the assessee to substantiate its claim. The ground thus raised stand allowed for statistical purposes. The appeal of the assessee stands partly allowed for statistical purposes. 5.1 The sole subject matter of revenue’s appeal is computation of capital gains. The assessee is the registered owner of the trademark ‘Butterfly’. The assessee entered into an agreement on 31.03.2002 with another entity namely Gandhimathi Appliances Ltd. (GMAL) for a non- exclusive use of the trademark for a period of 25 years on payment of ITA Nos.324 & 686/Chny/2012 - 6 - Rs.16 Lacs per annum. The payment was to be adjusted out of lump sum payment of Rs.400 Lacs received by the assessee from GMAL during AY 2003-04. The lump sum amount of Rs.400 Lacs was recognized in the accounts as consideration for transfer of Trade Mark on non-exclusive basis, being part of Intellectual property Asset. Accordingly, in earlier years the assessee offered income of Rs.16 Lacs as Business Income and reduced the same from the lump sum advances received from GMAL. In this year, in the statement of total income, the assessee considered the amount of Rs.320 Lacs as sale consideration and claimed the ‘nil’ capital gains. However, rejecting the same, Ld. AO treated the amount of Rs.320 Lacs as Long-Term Capital Gains in the hands of the assessee. In other words, the cost of acquisition was taken as ‘nil.’ 5.2 The Ld. CIT(A) noted that as per the terms of the agreement, the assessee was entitled to receive only Rs.16 Lacs per annum and therefore, only this amount was to be brought to tax in this AY. The assessee was treating the amount of Rs.16 Lacs as its income every year up-to AY 2007-08. There was no change in the facts and therefore, the assessee should offer the amount of Rs.16 Lacs as business income. Accordingly, the LTCG as computed by Ld AO was deleted. Aggrieved, the revenue is in further appeal before us. 5.3 Upon due consideration of material facts, we find the Ld. CIT(A) has overlooked the fact that the assessee has computed Long-Term Capital Gains on sale of trademark. The sale consideration as well as cost of acquisition has been taken to be Rs.320 Lacs. The Ld. AO has denied the cost of acquisition and computed Capital Gains at Rs.320 Lacs. From the perusal of records, it appears that there is supplementary ITA Nos.324 & 686/Chny/2012 - 7 - agreement which has remained to be considered by lower authorities. We find that correct factual matrix of the issue has not been brought on record and the issue has not been clinched in the correct perspective. Therefore, we set-aside the impugned order on this issue and restore the matter back to the file of Ld. AO fresh consideration after appreciating correct factual matrix. The assessee is directed to substantiate its claim. The appeal of the revenue stand allowed for statistical purposes. Conclusion 6. The assessee’s appeal stand partly allowed for statistical purposes whereat the revenue’s appeal stands allowed for statistical purposes. Order pronounced on (MAHAVIR SINGH) उपा01 /VICE PRESIDENT (MANOJ KUMAR AGGARWAL) लेखा सद9 / ACCOUNTANT MEMBER चे+ई / Chennai; िदनांक / Dated : EDN/- आदेश की Vितिलिप अ 6ेिषत/Copy of the Order forwarded to : 1. अपीलाथ /Appellant 2. यथ /Respondent 3. आयकर आयु (अपील)/CIT(A) 4. आयकर आयु /CIT 5. िवभागीय ितिनिध/DR 6. गाड फाईल/GF