PERFECT THREAD MILLS LTD, MUMBAI V. ITO WD 8(2)(4), MUMBAI

ITA 349/MUM/2011

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 8060 (ITAT-MUMBAI)
• Duration Of Justice: 11 year(s) 1 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-02-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2007-2008
• Appeal Filed On: 12-01-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Diversion of income; Cost of acquisition; Competent authority; TDS; Set aside; Capital Gains

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (VIRTUAL COURT) “C” BENCH, MUMBAI BEFORE S. RIFAUR RAHMAN, HON'BLE ACCOUNTANT MEMBER AND SHRI AMARJIT SINGH, HON'BLE JUDICIAL MEMBER ITA NO. 349/MUM/2011 (A.Y: 2007-08) & ITA.No. 4903/MUM/2014 (A.Y. 2011-12) M/s. Perfect Thread Mills Limited 205-A, Trade Corner Saki Vihar Road, Saki Naka Andheri (E), Mumbai – 400072 PAN: AAACP6449F v. Income Tax Officer – 8(2)(4) Aayakar Bhavan, Mumbai (Appellant) (Respondent) Assessee by : None Department by Shri Mehul Jain Date of Hearing : 23.12.2021 Date of Pronouncement : 24.02.2022 O R D E R PER S. RIFAUR RAHMAN (AM) 1. This appeal is filed by the assessee against order of the Learned Commissioner of Income Tax (Appeals)–17, Mumbai [hereinafter in short “Ld.CIT(A)”] dated 12.10.2010 for the A.Y. 2007-08. 2 ITA NO. 349/MUM/2011 (A.Y: 2007-08) TA.No. 4903/MUM/2014 (A.Y. 2011-12) M/s. Perfect Thread Mills Limited 2. None appeared on behalf of the assessee and these appeals are pending, since non-appearance for the assessee for a long period of time. Bench decided to proceed with the case with the submissions of Ld.DR and material available on record as well as written submissions of the assessee. We also noted that the assessee is a sick industrial unit. 3. Assessee has raised following grounds in its appeal: - “1. On the facts and the circumstances of the case, the learned CIT (A) has erred in upholding the order passed by the Ld. ITO, which is bad in law and against justice and liable to be quashed. 2 (a) On the facts and circumstances of the case and in law, the learned CIT (A) has erred in upholding the order passed by the Ld. ACIT, who has erred in disallowing the deduction of Rs. 12,696,360 being claimed as expenses while determined the capital gain. (b) The learned CIT (A) has failed to appreciate the fact that the said amount was paid directly to the bankers towards principal amount of loans from compensation amount awarded as per Rajasthan High Court Order as such bank had pre existing overriding title on company’s fixed assets. (c) The learned CIT (A) has failed to appreciate the judicial pronouncement of Hon’ble Calcutta High Court in the case of Gopee Nath Paul & Sons vs. Deputy CIT [2005] 278 ITR 240 where it was held that on the sale of firm’s business as a going concern the amount paid to banks to have the charge lifted was treated the expenses in relation to transfer. 3. The appellant craves leave to right of alter, amend and add the grounds of appeal on or before the hearing of appeal” 4. Brief facts related to the grounds of appeal raised by the assessee are, during the assessment proceedings Assessing Officer observed from 3 ITA NO. 349/MUM/2011 (A.Y: 2007-08) TA.No. 4903/MUM/2014 (A.Y. 2011-12) M/s. Perfect Thread Mills Limited the revised computation of income filed by the assessee that assessee has shown to have earned the compensation of ₹.2,73,35,724/- on acquisition of land for construction of NH-76. From the said amount of compensation of ₹.2,73,35,724/-, the assessee has reduced sum of ₹.62,90,149/- on account of compensation received for existing depreciable assets which has been dealt separately under the Short term capital gain. Further, the assessee has also reduced the indexed cost of land and incidental expenses therefrom. On further scrutiny Assessing Officer observed that the assessee has reduced sum of ₹.1,26,96,360/- on account of payment made directly to financial institutions and banks towards principle amount of loans out of compensation amount in pursuance of Hon'ble Rajasthan High Court's order. On examination of the details furnished by the assessee, Assessing Officer observed that a part of factory loans earned was acquired by the Central Government for NHAI for construction of NH- 76. Further, it is seen that the said amount of ₹.1,26,96,360/- has been directly paid to the banks and financial institutions as per order of the Hon'ble Rajasthan High Court. Further, it is pertinent to mention here that assessee company is owner of subject land. Moreover, the payment made directly to banks and financial institutions in pursuance of judicial order is still towards discharge of principle amount of loan and interest 4 ITA NO. 349/MUM/2011 (A.Y: 2007-08) TA.No. 4903/MUM/2014 (A.Y. 2011-12) M/s. Perfect Thread Mills Limited thereon. Moreover, the assessee has not claimed any interest in earlier years, but same has been claimed only for the year under consideration on payment basis. As such the sum of ₹.1,26,96,360/- cannot be allowed as deduction under the head "Capital Gains". Accordingly, Assessing Officer rejected the assessee's claim for a sum of ₹.1,26,96,360/- as claimed by the assessee. 5. Aggrieved assessee preferred an appeal before the Ld.CIT(A) and Ld.CIT(A) considered detailed submissions and dismissed the appeal filed by the assessee with the following observations:- “(i) It is argued that the payment to banks was diversion by overriding title and hence should be allowed. It has been held in CIT vs. Attili N. Rao (2001) [252 ITR 880] (SC), that where the assessee mortgaged his immovable property to state for payment of kist and the Government sold the property for Rs.5.63 lakhs, deducted its due of Rs.1.29 lakhs and the balance of rs.4.34 lakhs was given to the assessee. The assessee contended that the amount realized by the Government adjusted towards its kist was diverted by overriding title. It was held by the Apex Court that what was sold by the State at the auction was the immovable property that belonged to the assessee. The price that was realized therefor belonged to the assessee. From out of that price, the State deducted its dues towards ‘kist' and interest due from the assessee and paid over the balance to him. The capital gain that the assessee made was on the immovable property that belonged to him. Therefore, it is on the full price realized (less admitted deductions) that the capital gain, and the tax thereon has to be computed and not the full price reduced by the mortgage amount. In CIT vs. Sharad Sharma (2008) 305 ITR 24 (All) inheritance/acquisition along with the mortgage, perfecting his title by getting mortgage discharged, the assessee would be entitled to get the deduction of the mortgage debt but where the charge is created by the assessee himself, it cannot be said that the amount of mortgage debt out of the sale proceeds be deductible while calculating the capital gains. It was a case of application of 5 ITA NO. 349/MUM/2011 (A.Y: 2007-08) TA.No. 4903/MUM/2014 (A.Y. 2011-12) M/s. Perfect Thread Mills Limited income and not diversion of income by overriding charges. Therefore, assessee was held not entitled to deduction of amount paid for discharge of debt in computation of capital gains. Applying the ratio of these decisions to the appellant's case the claim cannot be accepted. (ii) The argument that such claim was expenditure in connection with transfer or for perfecting title is also not acceptable in view of above decisions. (iii) Regarding the contention that further appeals are pending and the receipt of enhanced compensation cannot be assessed, it is seen that in Dy. CIT vs. Padarna Prakash (HUF) (2007) (2008) [288 ITR 1] (Del Trib), the land of the assesses was acquired under the Land Acquisition Act and compensation was awarded by the Land Acquisition Officer. The said award was not accepted and challenged before the civil court to claim higher compensation. The civil court (Addl. Distt. Judge) awarded higher compensation along with interest in all the cases. Enhanced compensation along with interest and certain other amounts was received by the assessee was assessed on receipt basis in terms of section 45(5)(b) of Income Tax Act. This was objected on the ground, that decree/order of the civil court was challenged by the State in further appeal before the Hon'ble High Court and, therefore, enhanced compensation cannot be treated as final. It was held that as per sub- section(5) of section 45 of the Income tax Act, enhanced or further enhanced compensation was to be taxed on receipt basis. It does not make any difference whether compensation was received as per Interim order with certain conditions or without any condition. Relying on the same and in view of provisions section 45(5)(c) the assessment of enhanced compensation received is sustained. (iv) The argument for adopting cost of acquisition as on 01.1981 cannot be accepted in view of tile fact that appellant has become owner of the land only after that date as noted in para 3.3 above. (v) The contention that the receipt was not liable to tax in view of section 47(xii) is also not acceptable as it applies only to a sick industrial company being managed by its workers’ cooperative. The condition specified in that section are not satisfied. In the circumstances the computation of long term capital gains by the A.O. is sustained.” 6 ITA NO. 349/MUM/2011 (A.Y: 2007-08) TA.No. 4903/MUM/2014 (A.Y. 2011-12) M/s. Perfect Thread Mills Limited 6. Aggrieved assessee is in appeal before us and Ld.AR of the assessee filed written submissions, the same is reproduced below:- “1. Due to continuous losses, the net worth of the assessee company wiped out and it became a sick industrial company within the meaning of Sec. 3(1)(0) of Sick Industrial Companies (Special Provisions) Act, 1985. 2. It was declared a sick company by the Board of Industrial and Financial Reconstructions (BIFR), New Delhi vide its order dated 21.11.1988. 3. BIFR sanctioned a scheme of rehabilitation vide order dated 19.12.1990 which was modified by order dated 18.02.1993. 4. As the scheme of rehabilitation could not be implemented as envisaged due to factor beyond assessee's control, the BIFR passed an order dt.20.03.1996 for winding up of the company. 5. On assessee's appeal before Appellate Authority for Industrial and Financial Reconstruction (AAIFR), the order of BIFR was stayed and a new rehabilitation scheme was sanctioned by it vide order dt.11.09.1997. 6. As the new scheme also could not be implemented due to factors beyond assessee’s control, the BIFR confirmed its earlier opinion regarding winding up of the company u/s.20(1) of the SICA Act. The assessee’s appeal before AAIFR was dismissed vide order dt.22.12.1999. 7. Against the orders of BIFR and AAIFR, the company filed a writ petition before the honourable Rajasthan High Court which ordered maintenance of status quo vide an order dt.07.01.2000. 8. Thereafter, the assessee filed a petition (No.9/2003) before the honourable Rajasthan High Court u/s.391 of the Companies Act, 1956 for sanction of scheme of arrangement and compromise with secured creditors of the company who held paripassujoint equitable mortgage over the company’s immovable properties. 9. The honourable Rajasthan High Court passed an order dt.19.04.2004 sanctioning the scheme of arrangement and compromise with the secure creditors. Under the scheme, the time for payment of balance One Time Settlement (OTS) dues was extended and directions were issued for deposit of land acquisition compensation receivable from Central Government [National 7 ITA NO. 349/MUM/2011 (A.Y: 2007-08) TA.No. 4903/MUM/2014 (A.Y. 2011-12) M/s. Perfect Thread Mills Limited Highway Authority of India (NHAI)] in a designated bank account for distribution among secured creditors in terms of the sanctioned scheme. 10. Meanwhile the Rajasthan Financial Corporation issued a notice u/s. 29/30 of SFC Act on 15/16 February 2005 invoking their powers for recovery of their loan. Similarly, legal actions were initiated by Provident Fund Authorities and Employees State Insurance Authorities for recovery of statutory dues. 11. The Central Government issued a notification u/s.3A of the National Highways Act, 1956 declaring its intention to acquire 12,600 sq.mtr. of company’s land and issued a notification u/s.3D on 16.12.2005 for acquisition of land. 12. The land of the assessee, acquired by NHAI was under pre- existing and prior charge in favour of secured creditors viz. financial institutions and banks, by way of equitable mortgage created on 01.06.1994. 13. As there were seven secured creditors who held paripassu charge on the company’s assets including land under acquisition by NHAI, it advised the secured creditors to obtain appropriate order from the honourable Rajasthan High Court for disbursement of compensation. 14. The honourable High Court passed an order dt.10.07.2006 directing the compensation amount to be deposited with Canara Bank for distribution amongst secured creditors as per its directions. 15. The honourable High Court, in terms of scheme of arrangement and compromise passed an order dt.18.01.2007 that out of amount lying with Canara Bank, Rs.2,12,71,119/- should be distributed to the secured creditors towards 50% of the principle amount and 50% of the simple interest accrued till 30.01.2007. As per the directions of the honourable High Court, Canara Bank remitted the respective amount to six secured creditors and transferred the respective amount to their loan account. 16. The total amount due to the secured creditors under OTS as per the Scheme of Arrangement and Compromise (sanctioned by the Honourable Rajasthan High Court vide order dated 19.04.2004) was Rs.3,29,00,000/-. The company paid 15% of OTS amount as upfront deposit which worked out to Rs.50,98,948/-. The balance amount of Rs.2,78,01,052/- was payable to the secured creditors. 8 ITA NO. 349/MUM/2011 (A.Y: 2007-08) TA.No. 4903/MUM/2014 (A.Y. 2011-12) M/s. Perfect Thread Mills Limited 17. The assessee received compensation amount of Rs.163.39 lacs from the competent authority vide order and award dt.11.08.2006 out of which, after deduction of TDS, Rs.1,45,05,885/- were deposited with Canara Bank as per the directions of the honourable Rajasthan High Court. On company’s appeal under the provisions of the Highways Act, and Arbitration and Conciliation Act, 1996, the award and compensation was enhanced by Rs.1,09,96,587/-. After deduction of tax at source, Rs.1,07,51,332/- were deposited with Canara Bank as per the directions of the honourable Rajasthan High Court and paid to the secured creditors. The company further filed an appeal before the Session Court for enhancement of compensation which is still pending. 7. Further, Ld. AR submitted in written submissions that while computing capital gains, the assessee reduced ₹.1,26,96,360/-, being principle amount of loan repaid to financial institutions from the compensation received from NHAI because it got diverted at source because of pre-existing paripassu right of banks and financial institutions created by joint equitable mortgage executed on 01.06.1994. Alternatively, the assessee claimed deduction of the impugned amount u/s.48(1)(i) for removal of encumbrance and perfecting the title of the property to be given to NHAI. The computation of total income is at Page No.96 to 98 of the paper book filed. 8. Further, he relied on the decision of Hon'ble Supreme Court in the case of SitaladasTirathdas (41 ITR 367) by referring to the judgement of Honourable Privy Council in the case of Raja Bejoy Singh Dudhuria v. CIT 9 ITA NO. 349/MUM/2011 (A.Y: 2007-08) TA.No. 4903/MUM/2014 (A.Y. 2011-12) M/s. Perfect Thread Mills Limited (1 ITR 135) and P.C.Mullick (6 ITR 206) submitted that the income of the assessee is nothing but the diversion of income by overriding title. He submitted that assessee has transferred the property in favour of the secured creditors and assessee has not received any consideration and only authorised bank i.e. Canara Bank has received the same and distributed the sale proceeds mentioning the secured creditors. He submitted that the above sale proceeds were distributed based on the direction of the Hon'ble Rajasthan High Court. He prayed that the addition made by the Assessing Officer may be set aside. 9. On the other hand, Ld. DR brought to our notice the facts of this case and relied on the orders passed by the lower authorities. 10. Considered the rival submissions and material placed on record, we observed that assessee is a sick company under Sick Industrial Companies (Special Provisions) Act, 1985. We observe from the record that no doubt the land belongs to the company was transferred and assessee has received sale proceeds out of the above said sale proceeds and assessee has transferred ₹.1,26,96,360/- being principal loan amount towards repayment to financial institutions from the compensation received from the NHAI based on the direction of Hon'ble High Court of Rajasthan. On 10 ITA NO. 349/MUM/2011 (A.Y: 2007-08) TA.No. 4903/MUM/2014 (A.Y. 2011-12) M/s. Perfect Thread Mills Limited a careful consideration of the Hon'ble Rajasthan High Court order, we observe that: - “5.1. ..... 5.2 That there is a pre existing overriding title and interest in the property of the company in favour of its seven Secured Creditors comprising of Financial Institutions and Banks on pari passu basis, by virtue of Joint Equitable Mortgage created on 1 st June, 1994 on the company's immoveable properties described in the First Schedule to the Memorandum of entry together with buildings and structures thereon and all plant and machinery attached to the earth or permanently fastened to anything attached to the earth and also by virtue of relevant provisions of Banking Regulation Act, State Financial Corporations Act, 1951 and other relevant laws safeguarding the interest of the said Financial Institutions & Banks. Consequently the payment of balance OTS amount to the secured creditors is a necessary pre condition for enabling automatic vesting, right and title in favour of the Central Government. In the circumstances the amount which the company had become entitled to receive was deposited by the Competent Authority in a No Lien Deposit Account with Canara Bank being one of the Secured Creditor, as per orders of Hon'ble High Court of Rajasthan, Jodhpur, who has distributed the amount so deposited to the Secured Creditors (including to themselves and amount kept in reserve for remittance to Kotak Mahindra Bank Ltd.). Further in the similar circumstances any further compensation amount would become entitled to receive would be deposited by the Competent Authority in a no lien deposit account with any one of the Secured Creditor. The balance surplus amount if any, after paying to the creditors, who have pre existing. Overriding title and interest in the property of the company, would be paid forthwith directly to the company by the Competent Authority and/or such secured creditor”. 11. From the above observation of the Hon'ble Rajasthan High Court it is clear that there is a pre-existing overriding title and interest in the property of the company in favour of its secured creditors comprising of Financial Institutions and Banks on paripassu basis by virtue of joint 11 ITA NO. 349/MUM/2011 (A.Y: 2007-08) TA.No. 4903/MUM/2014 (A.Y. 2011-12) M/s. Perfect Thread Mills Limited equitable mortgage credit on 1 st June 1994. Since assessee has defaulted and not able to service any of the loan to the financial institutions, by virtue of failure, the assets belong to the assessee with the overriding title and interest in the property is already passed to the secured creditors. Based on the direction of the Hon'ble Rajasthan High Court the financial institutions are directly secured the property and collected the sale proceeds. The sale proceeds were distributed among the financial institutions without there being any involvement of the assessee. Since the property transferred was with pre-existing lien with the overriding title and technically assessee is not the owner of the property which was duly transferred. Therefore, the assessee cannot be asked to pay the tax on the same. Accordingly, we are not in agreement with the finding of the Ld.CIT(A). 12. Further, we also observe that in the similar situation the Hon'ble Supreme Court in the case of SitaladasTirathdas (41 ITR 367) held as under: - “In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the 12 ITA NO. 349/MUM/2011 (A.Y: 2007-08) TA.No. 4903/MUM/2014 (A.Y. 2011-12) M/s. Perfect Thread Mills Limited obligation income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one’s own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable.” 13. Respectfully following the said decision, the facts in the present appeal also similar, accordingly, we allow the grounds raised by the assessee. 14. The facts in the appeal filed in ITA.No. 4903/MUM/2014 for the A.Y. 2011-12, the issue involved is exactly similar, the decision in Para No. 9-11 are applicable mutatis muandis. Therefore, appeal filed by the assessee is allowed. 15. In the result, appeal filed by the assessee is allowed. Order pronounced on 24.02.2022 as per Rule 34(4) of ITAT Rules by placing the pronouncement list in the notice board. Sd/- Sd/- (AMARJIT SINGH) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai / Dated 24/02/2022 Giridhar, Sr.PS 13 ITA NO. 349/MUM/2011 (A.Y: 2007-08) TA.No. 4903/MUM/2014 (A.Y. 2011-12) M/s. Perfect Thread Mills Limited Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. The CIT(A), Mumbai. 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. //True Copy// BY ORDER (Asstt. Registrar) ITAT, Mum