Deputy Commissioner of Income Tax- 6, Kanpur V. M/S. R R J Infra Industries Private Limited, Noida

ITA 71/LKW/2019

• Counselvise Citation: [2019] 112 COUNSELVISE.COM (IT) 0288 (ITAT-LUCKNOW)
• Duration Of Justice: 10 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-12-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2015-2016
• Appeal Filed On: 04-02-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Gift; Depreciation; Residential status; Cost of acquisition; Wholly owned subsidiary; Fair market value; Valuation report; Scheme of amalgamation; Unabsorbed depreciation; Revenue expenditure; Set aside; Capital Gains
• Section: 63; 154; 143(3); 142(1); 115JB; 143(1); 201; 251; 64; 43; 48; 73; 72; 13; 22; 20

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW BENCH B, LUCKNOW BEFORE SHRI. A. D. JAIN, VICE PRESIDENT AND SHRI T. S. KAPOOR, ACCOUNTANT MEMBER ITA NO. 578/LKW/2018 ASSESSMENT YEAR: 2015 - 16 DY. CIT - 6 KANPUR V. M/S RRJ INFRA INDUSTRIES PVT. LTD. (FORMERLY KNOWN AS M/S KANPUR CONSTRUCTIONS PVT. LTD.) D-196, SECTOR 63 NOIDA TAN/PAN: AACCK6581F (APPELLANT) (RESPONDENT) ITA NO. 71/LKW/2019 ASSESSMENT YEAR: 2015 - 16 DY. CIT - 6 KANPUR V. M/S RRJ INFRA INDUSTRIES PVT. LTD. (FORMERLY KNOWN AS M/S KANPUR CONSTRUCTIONS PVT. LTD.) D-196, SECTOR 63 NOIDA TAN/PAN: AACCK6581F (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI S. K. MADHUK, CIT (DR) RESPONDENT BY: SHRI R. S. SINGHVI, C.A. DATE OF HEARING: 24 10 201 9 DATE OF PRONOUNCEMENT: 19 1 2 201 9 O R D E R PER A. D. JAIN, V.P.: I.T.A. NO.578/LKW/2018: THIS IS REVENUES APPEAL AGAINST THE ORDER OF THE LD. CIT(A)-II, KANPUR, DATED 16/5/2018 FOR ASSESSMENT YEAR 2015- 16, TAKING THE FOLLOWING GROUNDS: ITA NO.578/LKW/2018 PAGE 2 OF 98 1. THAT THE COMMISSIONER OF INCOME TAX (APPEAIS)-II, KANPUR HAS ERRED IN LAW AS WELL AS ON FACTS AND CIRCUMSTANCES OF THE CASE IN HOLDING THAT THE COST OF ACQUISITION OF CAPITAL ASSET IN THE HANDS OF THE APPELLANT SHALL BE THE FAIR MARKET VALUE OF THE ASSET AS ON 1ST APRIL 1981, WITHOUT APPRECIATING THE FACT THAT THE HOLDING COMPANY M/S SWADESHI COTTON MILLS CO. LTD. CEASED TO HOLD THE 100% OF SHARE CAPITAL OF SUBSIDIARY COMPANY - IN M/S KANPUR BUILDERS PVT. LTD., BEFORE THE EXPIRY OF A PERIOD OF 8 YEARS. 2. THAT THE COMMISSIONER OF INCOME TAX (APPEALS)-II, KANPUR HAS ERRED IN LAW AS WELL AS ON FACTS AND CIRCUMSTANCES OF THE CASE IN NOT APPRECIATING THE FACT SINCE THE PRECISIONS OF SECTION 47A READ WITH SECTION 49(3) OF THE I.T. ACT, 1961 ARE CLEARLY ATTRACTED IN THIS CASE, WHICH PROVIDES THAT EXEMPTION GRANTED U/S 47 OF THE I.T. ACT, 1961 SHALL BE WITHDRAWN AND THE COST OF ACQUISITION IN THE HANDS OF TRANSFEREE COMPANY WILL BE THE COST FOR WHICH SUCH ASSET WAS ACQUIRED BY IT I.E. THE PRICE AT WHICH IT WAS GIVEN TO THE ASSESSEE BY THE TRANSFEROR COMPANY {SECTION 49(3)}. 3. THAT THE COMMISSIONER OF INCOME TAX(APPEALS)-II, KANPUR HAS ERRED IN LAW AS WELL AS ON FACTS AND CIRCUMSTANCES OF THE CASE IN RELYING UPON THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF ARUN SHUNGLOO TRUST VS. CIT (2002) 249 CTR (DEL), WITHOUT APPRECIATING THE FACT THAT IN THIS CASE THERE WAS NO INVOLVEMENT OF PROVISIONS OF SECTION 47A READ WITH SECTION 49(3) OF THE INCOME- TAX; ACT, 1961 WHEREAS IN THE PRESENT CASE, THE DISPUTE ARISES ONLY DUE TO APPLICATION OF PROVISIONS OF SECTION 47A OF THE INCOME-TAX ACT, 1961. 4. THAT THE COMMISSIONER OF INCOME TAX (APPEALS)-II, KANPUR HAS ERRED IN LAW AS WELL AS ON FACTS AND CIRCUMSTANCES OF THE CASE IN NOT APPRECIATING THE RATIO LAID DOWN BY HON*BLE BOMBAY HIGH COURT IN THE CASE OF M/S ESSAR OIL LTD. BEING INCOME-TAX APPEAL NO.3160 OF 2010, THE FACTS OF WHICH ARE IDENTICAL TO THE FACTS OF THIS CASE. 5. THAT THE COMMISSIONER OF INCOME TAX (APPEALS)-II, KANPUR HAS ERRED IN LAW AS WELL AS ON FACTS AND CIRCUMSTANCES OF THE CASE IN DIRECTING THE ASSESSING OFFICER TO TAKE ACTION AS PER LAW IN ORDER TO TAX THE CAPITAL GAIN IN HANDS OF PARENT COMPANY M/S SWADESHI COTTON MILLS CO. LTD., WITHOUT APPRECIATING THE FACTS THAT THE MATTER ITA NO.578/LKW/2018 PAGE 3 OF 98 HAS ALREADY GOT BARRED BY LIMITATION IN VIEW OF THE PROVISIONS AS CONTAINED UNDER SECTION 155(7B) OF THE INCOME TAX ACT, 1961. 6. THAT THE ORDER OF THE LD. CIT(A) BEING ERRONEOUS IN LAW AND ON FACTS NEEDS TO BE VACATED AND THE ORDER OF THE ASSESSING OFFICER BE RESTORED. 2. THE ASSESSEE HAS MOVED AN APPLICATION, DATED 10/5/2019 FOR CHANGE IN THE NAME OF THE ASSESSEE FROM M/S KANPUR CONSTRUCTIONS PVT. LTD. TO M/S RRJ INFRA INDUSTRIES PVT. LTD. IN ITA NO.578/LKW/2018. THE APPLICATION IS REPRODUCED, AS BELOW: 3. CONSIDERING THE REQUEST OF THE ASSESSEE, THE NAME OF THE ASSESSEE IS CHANGED TO READ AS M/S RRJ INFRA INDUSTRIES PVT. LTD. IN PLACE OF M/S KANPUR CONSTRUCTIONS PVT. LTD. 4. DURING THE YEAR, THE ASSESSEE COMPANY, M/S KANPUR CONSTRUCTIONS PVT. LTD. (KCPL FOR SHORT) SOLD IMMOVEABLE ITA NO.578/LKW/2018 PAGE 4 OF 98 PROPERTY, SWADESHI HOUSE, SITUATED AT 16/14, CIVIL LINES, KANPUR, MEASURING 12,399 SQ. M, TO M/S ARA INDIA LLP, FOR A SALE CONSIDERATION OF RS.68,00,00,000/-, VIDE SALE DEED DATED 19/2/2015. THE RETURN OF INCOME WAS FILED AT A TOTAL INCOME OF RS.18,78,36,000/-. THIS INCLUDED LONG TERM CAPITAL GAIN OF RS.17,92,25,580/-. FROM THE REPLY SUBMITTED BY KCPL, THE ASSESSING OFFICER NOTICED, INTER ALIA, THAT THE AFORESAID PROPERTY HAD BEEN PURCHASED BY M/S KANPUR BUILDERS PVT. LTD. (KBPL FOR SHORT), ON 1/12/2003, FROM M/S SWADESHI COTTON MILLS CO. LTD. (SCMCL FOR SHORT) FOR RS.14 LAKHS; THAT AS PER THE PURCHASE DEED DATED 1/12/2003, KBPL WAS THE WHOLLY OWNED SUBSIDIARY COMPANY OF SCMCL; AND THAT SCMCL WAS THE BENEFICIAL OWNER OF 100% ISSUED SHARE CAPITAL OF KBPL, DUE TO WHICH FACT, THE TRANSFER OF THE PROPERTY HAD TAKEN PLACE BETWEEN THE PARENT COMPANY, I.E., SCMCL AND ITS SUBSIDIARY COMPANY, I.E., KBPL. THE ASSESSING OFFICER OBSERVED THAT AN AMALGAMATION SCHEME HAD BEEN SANCTIONED BY THE HON'BLE ALLAHABAD HIGH COURT, VIDE ORDER DATED 1/1/2016, W.E.F. 1/4/2014; THAT BY VIRTUE OF THIS ORDER, KBPL STOOD AMALGAMATED WITH KCPL (THE PRESENT ASSESSEE); AND THAT AS PER THE PROVISIONS OF THE SCHEME, ALL THE ASSETS AND LIABILITIES, AS EXISTED ON 31/3/2014, ALSO STOOD TRANSFERRED FROM KBPL TO KCPL. SINCE KBPL STOOD AMALGAMATED WITH KCPL DURING THE YEAR UNDER CONSIDERATION, THE CAPITAL GAIN ARISING FROM THE TRANSFER OF THE AFORESAID PROPERTY WAS CALCULATED BY KCPL AND INCLUDED IN ITS AFORESAID INCOME TAX RETURN, FILED FOR THE YEAR UNDER CONSIDERATION. THE ASSESSING OFFICER NOTICED FROM THE COMPUTATION OF INCOME FILED BEFORE HIM, THAT KCPL, WHILE CALCULATING THE LONG TERM CAPITAL GAIN, HAD ADOPTED AND WORKED ITA NO.578/LKW/2018 PAGE 5 OF 98 OUT THE COST OF ACQUISITION OF THE PROPERTY BY APPLYING THE INDEXED RATE OF THE YEAR 1981. AS SUCH, THE ASSESSING OFFICER, VIDE NOTICE DATED 19/12/2017, ISSUED UNDER SECTION 142(1) OF THE INCOME TAX ACT, 1961, REQUIRED THE ASSESSEE, KCPL, TO EXPLAIN THE REASONS FOR THE APPLICATION OF INDEXED RATE OF 1981, SINCE THE PROPERTY STOOD PURCHASED BY KBPL ON 1/12/2003 FROM SCMCL. 5. THE ASSESSEE, KCPL, REPLIED BY SUBMITTING THAT AS PROVIDED IN EXPLANATION 1(I)(B) TO SECTION 2(42A) OF THE ACT, FOR COMPUTING THE HOLDING PERIOD OF THE RELEVANT ASSET, THERE SHALL BE INCLUDED THE PERIOD FOR WHICH THE ASSET WAS HELD BY THE PREVIOUS OWNER. THE ASSESSEE STATED THAT ACCORDINGLY, AS PROVIDED IN SECTION 49(1)(III)(C) OF THE ACT, THE COST OF ACQUISITION IN THE HANDS OF THE MERGED COMPANY, I.E., THE PREVIOUS OWNER, KBPL, BECAME THE COST OF ACQUISITION FOR THE ASSESSEE COMPANY. IT WAS SUBMITTED THAT THE PREVIOUS OWNER HAD ACQUIRED THE PROPERTY FROM ITS HOLDING COMPANY, SCMCL, AS IT WAS THE WHOLLY OWNED SUBSIDIARY OF SCMCL; THAT IN KEEPING WITH THE PROVISIONS OF SECTION 49(1)(III)(C) AND SECTION 2(42A) OF THE ACT, THE HOLDING PERIOD IN THE HANDS OF THE PREVIOUS OWNER RELATED BACK TO THE YEAR 1921, THIS BEING THE YEAR IN WHICH THE PROPERTY WAS ACQUIRED BY THE HOLDING COMPANY. IT WAS SUBMITTED THAT THEREFORE, IN TERMS OF EXPLANATION (III) TO SECTION 48 OF THE ACT, THE INDEXED COST OF ACQUISITION IN THE PRESENT CASE WAS TO BE WITH REFERENCE TO THE YEAR BEGINNING ON THE FIRST DAY OF APRIL, 1981; AND THAT NO DEPRECIATION HAD BEEN CLAIMED BY THE ASSESSEE COMPANY IN RESPECT OF THE PROPERTY IN QUESTION, AS WAS EVIDENT FROM THE COMPUTATION OF INCOME ALREADY FILED. IT WAS SUBMITTED THAT AS SUCH, FOR COMPUTATION OF CAPITAL GAIN, THE INDEXED COST OF ITA NO.578/LKW/2018 PAGE 6 OF 98 ACQUISITION HAD BEEN TAKEN WITH REFERENCE TO THE YEAR BEGINNING ON THE FIRST DAY OF APRIL, 1981; THAT THE FAIR MARKET VALUE AS ON 1/4/1981 HAD BEEN TAKEN AS THE COST OF ACQUISITION IN THE HANDS OF THE TRANSFERER, AS PROVIDED IN SECTION 55(2)(B)(I) OF THE ACT, AS WAS EVIDENCED BY THE VALUATION REPORT OF THE APPROVED VALUER, WHICH REPORT STOOD ALREADY FURNISHED; THAT THE HOLDING PERIOD INCLUDED THE PERIOD FOR WHICH THE ASSET WAS HELD BY THE PREVIOUS OWNER, IN ACCORDANCE WITH THE PROVISIONS OF SECTION 2(42A), EXPLANATION 1(I)(B) OF THE ACT; AND THAT THUS, THE COMPUTATION OF LONG TERM CAPITAL GAIN, AS WORKED OUT BY THE ASSESSEE, WAS CORRECT AND DESERVED TO BE ACCEPTED. 6. REFUSING TO ACCEPT THE ABOVE REPLY OF KCPL, THE ASSESSING OFFICER OBSERVED THAT KCPL HAVING FAILED TO SUBMIT THE DETAILS REGARDING THE SHAREHOLDING PATTERN OF KBPL, SUCH SHAREHOLDING PATTERN OF KBPL WAS DOWNLOADED BY THE ASSESSING OFFICER FROM THE SITE OF THE MINISTRY OF CORPORATE AFFAIRS; THAT IT WAS EVIDENT THEREFROM, THAT THERE HAD BEEN CHANGES IN THE SHAREHOLDING PATTERN OF KBPL IN SEVERAL YEARS, I.E., IN 2004, 2005, 2006 AND 2011, OWING TO WHICH, THE HOLDING COMPANY, I.E., SCMCL, HAD SEIZED TO HOLD THE WHOLE OF THE SHARE CAPITAL OF KBPL BEFORE THE EXPIRY OF EIGHT YEARS FROM THE DATE OF THE TRANSFER OF THE CAPITAL ASSET, AS STIPULATED IN SECTION 47A(1) OF THE ACT. THE ASSESSING OFFICER ATTACHED THE AFORESAID SHAREHOLDING PATTERN OF KBPL AS ANNEXURES G, H, I AND J TO HIS ORDER. IN PARA 7.4 OF HIS ORDER, HE HAS GIVEN THE RELEVANT DETAILS, IN A TABULAR FORM, OF THE SHAREHOLDING PATTERN OF KBPL, AS ON 15/9/2004, 30/9/2005, 31/8/2006 (FOR WHICH PERIOD, AS PER THE ASSESSING OFFICER, ITA NO.578/LKW/2018 PAGE 7 OF 98 ACCORDING TO THE ANNUAL RETURN FILED BY THE ASSESSEE COMPANY WITH THE REGISTRAR OF COMPANIES, THE SHAREHOLDING HAD BEEN SHOWN AS NIL), AND AS ON 25/6/2011. THE ASSESSING OFFICER OBSERVED THAT FROM THE ABOVE SHAREHOLDING PATTERN CHART, IT WAS EVIDENT THAT SCMCL HAD CEASED TO HOLD THE WHOLE OF THE SHARE CAPITAL OF KBPL BEFORE THE EXPIRY OF EIGHT YEARS FROM THE DATE OF THE TRANSFER OF THE CAPITAL ASSET, DUE TO WHICH, THE PROVISIONS OF SECTION 47A GOT ATTRACTED AND THE AMOUNT OF PROFITS OR GAINS ARISING FROM THE TRANSFER OF THE CAPITAL ASSET NOT CHARGED UNDER SECTION 45 OF THE ACT BY VIRTUE OF THE PROVISIONS CONTAINED IN EITHER CLAUSE (IV), OR CLAUSE (V) OF SECTION 47, SHALL BE DEEMED TO BE THE INCOME CHARGEABLE AS CAPITAL GAIN OF THE PREVIOUS YEAR IN WHICH SUCH TRANSFER TOOK PLACE. THE ASSESSING OFFICER HELD THAT SINCE IN THE INSTANT CASE, THE HOLDING COMPANY, SCMCL, HAD CEASED TO HOLD THE WHOLE OF THE SHARE CAPITAL OF ITS SUBSIDIARY COMPANY, I.E., KBPL, BEFORE THE EXPIRY OF EIGHT YEARS FROM THE DATE OF THE TRANSFER OF THE CAPITAL ASSET, I.E., THE LAND, THE PROVISIONS OF SECTION 47A OF THE ACT GOT INVOKED ALONG WITH THOSE OF SECTION 49(3), DUE TO WHICH, THE COST AT WHICH THE IMMOVEABLE PROPERTY WAS ACQUIRED BY KBPL IN THE YEAR 2003 FROM SCMCL, BECAME THE COST OF ACQUISITION FOR THE PURPOSE OF THE CALCULATION OF LONG TERM CAPITAL GAIN; AND THAT SO, THE COST AT WHICH THE PROPERTY WAS ACQUIRED BY THE AMALGAMATED COMPANY IN 2003, BECAME ITS COST OF ACQUISITION AND THE PERIOD OF HOLDING WAS ALSO TO BE CONSIDERED FROM THE YEAR 2003. 7. THE ASSESSING OFFICER FURTHER OBSERVED THAT FROM THE COMPUTATION OF INCOME FILED BY THE ASSESSEE COMPANY, KCPL, IT WAS EVIDENT THAT THERE WERE TWO LEGS TO THE TRANSACTION OF SALE OF ITA NO.578/LKW/2018 PAGE 8 OF 98 IMMOVEABLE PROPERTY SALE OF THE CONSTRUCTED PORTION/BUILDING AND SALE OF LAND; THAT THE ASSESSEE HAD ALSO BIFURCATED, IN THE COMPUTATION OF INCOME, THE SALE CONSIDERATION OF RS.68 CRORES, IN TWO PARTS, BUILDING AND LAND. THE ASSESSING OFFICER OBSERVED THAT FURTHER, THE MARKET VALUE OF THE PROPERTY WAS OF RS.37,93,47,155/- AS PER THE SALE DEED, AND THE SALE CONSIDERATION OF THE PROPERTY WAS OF RS.68 CRORES; THAT AS PER THE SALE DEED, THE VALUE OF CONSTRUCTION OF THE BUILDING WAS ONLY OF RS.1,17,78,800/-, OUT OF THE MARKET VALUE OF RS.37,93,47,155/-; THAT IN THE COMPUTATION OF INCOME, THE SALE VALUE OF THE BUILDING STOOD TAKEN AT RS.1,17,78,800/- AND THE SALE VALUE OF THE LAND HAD BEEN TAKEN AT RS.66,82,21,200/- (RS.68,00,00,000 RS.1,17,78,800). 8. APROPOS THE SALE OF THE LAND, THE ASSESSING OFFICER OBSERVED THAT AS PER THE COMPUTATION OF INCOME FILED BY THE ASSESSEE, THE SALE VALUE OF THE LAND WAS RS.66,82,21,200/- AND THE COST OF THE LAND HAD BEEN TAKEN AT RS.3,84,76,065/-, ON WHICH, THE BENEFIT OF INDEXATION STOOD TAKEN FROM THE YEAR 1981, TO ARRIVE AT THE COST OF THE LAND AT RS.39,39,94,906/-. 9. THE ASSESSING OFFICER OBSERVED THAT AS PER THE SALE DEED PROVIDED BY THE ASSESSEE, THE IMMOVEABLE PROPERTY HAD BEEN PURCHASED FOR A TOTAL COST OF RS.14 LAKHS, WHICH INCLUDED THE COST OF THE LAND AS WELL AS THAT OF THE CONSTRUCTED AREA, I.E., THE BUILDING; THAT AS PER THE BALANCE SHEET OF KBPL FOR THE YEAR ENDED ON 31/3/2014, THE VALUE OF THE LAND WAS RS.12.65 LAKHS; THAT THEREFORE, THE COST OF ACQUISITION OF THE LAND FOR THE ASSESSEE COMPANY, KCPL, WAS BEING CONSIDERED AT RS.12.65 LAKHS AND THE PERIOD OF HOLDING OF THE SAME WAS TO BE CONSIDERED FROM ITA NO.578/LKW/2018 PAGE 9 OF 98 1/12/2003, I.E., THE DATE ON WHICH THE LAND WAS ACQUIRED BY KBPL, AND THE INDEXATION BENEFIT WAS TO BE ALLOWED FROM ASSESSMENT YEAR 2003-04, INSTEAD OF FROM 1981, AS CLAIMED BY THE ASSESSEE. 10. THE TOTAL LONG TERM CAPITAL GAIN ON THE SALE OF LAND WAS THUS ARRIVED AT BY THE ASSESSING OFFICER AT RS.66,54,23,447/-, IN THE FOLLOWING MANNER: INCOME FROM LONG TERM CAPITAL GAINS ON SALE OF LAND AS DISCUSSED ABOVE: FULL VALUE OF CONSIDERATION RS.66,82,21,200 LESS: INDEXED COST OF ACQUISITION: COST OF ACQUISITION AS ON 01.12.2003 : AS DISCUSSED ABOVE RS. 12,65,000 INDEXED VALUE AS ON 2014-15 RS.12.65,000 X 1024 463 = RS.27,97,753 LONG TERM CAPITAL GAINS: (RS.66,82,21,200 - 27,97,753) =RS.66,54,23,447 11. BY VIRTUE OF THE IMPUGNED ORDER, THE LD. CIT(A) HAS DELETED THE ADDITION MADE BY THE ASSESSING OFFICER. THIS BRINGS THE DEPARTMENT IN APPEAL BEFORE US BY WAY OF ITA NO.578/LKW/2018. 12. HEARD. THE LD. D.R. HAS CONTENDED THAT THE LD. CIT(A) HAS ERRED IN HOLDING THAT THE COST OF ACQUISITION OF THE CAPITAL ASSET, IN THE HANDS OF THE ASSESSEE, SHALL BE THE FAIR MARKET VALUE OF THE ASSET AS ON 1/4/1981; THAT WHILE DOING SO, THE LD. CIT(A) HAS FAILED TO CONSIDER THE FACT THAT THE HOLDING COMPANY, SCMCL, CEASED TO HOLD 100% OF THE SHARE CAPITAL OF ITS SUBSIDIARY ITA NO.578/LKW/2018 PAGE 10 OF 98 COMPANY, KBPL, BEFORE THE EXPIRY OF EIGHT YEARS FROM THE DATE OF THE TRANSFER OF THE CAPITAL ASSET, DUE TO WHICH, THE PROVISIONS OF SECTION 47A GOT TRIGGERED AND, THEREFORE, THE EXEMPTION UNDER SECTION 47 STOOD WITHDRAWN AND THE PROFITS OR GAINS ARISING FROM THE TRANSFER OF THE CAPITAL ASSET WERE TO BE DEEMED TO BE INCOME CHARGEABLE AS CAPITAL GAINS OF THE PREVIOUS YEAR IN WHICH THE TRANSFER TOOK PLACE; AND THAT HENCE, THE COST OF ACQUISITION IN THE HANDS OF THE TRANSFEREE COMPANY WILL BE THE COST FOR WHICH THE ASSET WAS ACQUIRED BY IT, I.E., THE PRICE AT WHICH IT WAS GIVEN TO THE ASSESSEE COMPANY BY KBPL (THE TRANSFERER COMPANY). 13. PER CONTRA, THE LD. COUNSEL FOR THE ASSESSEE HAS PLACED STRONG RELIANCE ON THE IMPUGNED ORDER IN THIS REGARD. IT HAS BEEN CONTENDED, AS BEFORE THE LD. CIT(A), THAT SINCE THE PROPERTY WAS ACQUIRED BY THE ASSESSEE ON AMALGAMATION OF KBPL WITH THE ASSESSEE ON 1/4/2014, KBPL HAVING ACQUIRED THE SAME FROM SCMCL IN 2003 AND SCMCL, THE HOLDING COMPANY OF KBPL, HAVING PURCHASED THE PROPERTY IN THE YEAR 1921, THE FAIR MARKET VALUE OF THE PROPERTY, AS ON 1/4/1981, HAS RIGHTLY BEEN TAKEN AS THE COST OF ACQUISITION, IN TERMS OF THE OPTION EXERCISED BY THE ASSESSEE UNDER SECTION 55(2)(B)(II) OF THE ACT; THAT THE HOLDING PERIOD OF THE PROPERTY HAS CORRECTLY BEEN TAKEN BY THE ASSESSEE FROM 1/4/1981, WHICH IS ENTIRELY IN ACCORDANCE WITH THE PROVISIONS OF SECTION 49(1)(III)(E) READ WITH THE PROVISIONS OF EXPLANATION 1(I)(B) TO SECTION 2(42A) OF THE ACT; THAT SINCE SCMCL HAD TRANSFERRED THE PROPERTY TO ITS WHOLLY OWNED SUBSIDIARY, KBPL, IN 2003 AT THE BOOK VALUE, IT DID NOT RESULT IN ANY CAPITAL GAIN IN THE HANDS OF SCMCL; THAT THEREFORE, THERE WAS NO OCCASION FOR ANY EXEMPTION IN RESPECT OF SUCH TRANSFER EITHER ITA NO.578/LKW/2018 PAGE 11 OF 98 BEING CLAIMED, OR BEING ALLOWED, UNDER SECTION 47(IV) OF THE ACT; THAT HENCE, NO QUESTION OF ANY VIOLATION OF THE PROVISIONS OF SECTION 47A ARISES; THAT SINCE THE SAID TRANSFER WAS NEVER CALLED IN QUESTION BY INVOCATION OF THE PROVISIONS OF SECTION 47A, ON THE AMALGAMATION OF KBPL WITH THE ASSESSEE, KCPL, THE PROPERTY BECAME THE ASSESSEES PROPERTY AT THE VALUE AT WHICH SCMCL HAD ACQUIRED IT IN 1921; THAT SINCE THE PROVISIONS OF SECTION 47A WERE NEVER VIOLATED, THE PROVISIONS OF SECTION 49(3) COULD NEVER HAVE BEEN INVOKED; AND THAT EVEN OTHERWISE, NO CAPITAL GAIN AROSE ON THE RELEVANT TRANSFER, SINCE THAT TRANSACTION WAS A NORMAL TRANSACTION BETWEEN SCMCL, THE HOLDING COMPANY, AND KBPL, ITS WHOLLY OWNED SUBSIDIARY COMPANY, AT THE COST/BOOK VALUE IN THE BOOKS OF THE TRANSFEROR COMPANY. 14. SO AS TO MAKE THIS ORDER SELF-CONTAINED, ESCHEWING THE BOTHER OF ADVERTENCE TO THE IMPUGNED ORDER PROPER, THE AFORE- DISCUSSED FINDINGS OF THE LD. CIT(A) ARE BEING REPRODUCED, VERBATIM, HEREUNDER: THE APPLICATION OF THE PROVISIONS OF SECTION 47 IS NOT FINAL BUT IS SUBJECT TO THE OCCURRENCE OF EVENTS UNDER SECTION 47A. IF THE EVENTS MENTIONED IN SECTION 47A OCCUR, THE EXEMPTIONS GRANTED UNDER SECTION 47 OF THE INCOME-TAX ACT ARE WITHDRAWN AUTOMATICALLY. WHAT IS THE EFFECT OF SUCH WITHDRAWAL? IN THE CASE OF THE TRANSFEROR COMPANY, THE INCOME IS TO BE TREATED AS INCOME OF THE YEAR IN WHICH THE TRANSFER HAS TAKEN PLACE. THIS SHOWS THAT THE SUBSEQUENT EVENT HAS THE EFFECT OF WITHDRAWING THE EXEMPTION GRANTED UNDER SECTION 47 AND THE INCOME GOES BACK TO THE DATE OF TRANSFER. THUS, PROVISIONS OF SECTION 47 ARE WITHDRAWN ON OCCURRENCE OF THE EVENTS MENTIONED UNDER SECTION 47A; AND THE TRANSACTION IS NOT TO BE TREATED AS A TRANSFER UNDER SECTION 47(IV) OF THE ACT AND THE TRANSFEROR COMPANY IS LIABLE TO PAY THE CAPITAL GAINS TAX. IN THE PRESENT ITA NO.578/LKW/2018 PAGE 12 OF 98 CASE, DUE TO SEIZURE OF THE ASSESSEE-COMPANY BEING A SUBSIDIARY OF THE TRANSFEROR COMPANY, THE PROVISIONS OF SECTION 47(IV) HAVE CEASED TO APPLY, AND THE TRANSACTION HAS TO BE CONSIDERED AS A TRANSFER UNDER SECTION 47A IN THE HANDS OF THE TRANSFEROR COMPANY - SCM, WHAT IS THE CONSEQUENTIAL EFFECT ON THE ASSESSMENT YEAR 2015-16 FOR APPELLANT COMPANY? WHAT SHOULD BE THE VALUE OF COST OF ACQUISITION IN ITS HANDS? THE ANSWER LIES IN SECTION 49(3). SECTION 49(3) READS AS UNDER: '49(3) - NOTWITHSTANDING ANYTHING CONTAINED IN SUB-SECTION (1) WHERE THE CAPITAL GAIN ARISING FROM THE TRANSFER OF A CAPITAL ASSET REFERRED TO IN CLAUSE (IV) OR, AS THE CASE MAY BE, CLAUSE (V) OF SECTION 47 IS DEEMED TO BE INCOME CHARGEABLE UNDER THE HEAD 'CAPITAL GAINS' BY VIRTUE OF THE PROVISIONS CONTAINED IN SECTION 47A, THE COST OF ACQUISITION OF SUCH ASSET TO THE TRANSFEREE-COMPANY SHALL BE THE COST FOR WHICH SUCH ASSET WAS ACQUIRED BY IT. SUB-SECTION (3) PROVIDES THAT IN THE HANDS OF THE TRANSFEREE, THE VALUATION OF THE ASSET, REGARDING WHICH THE EXEMPTION GRANTED UNDER SECTION (IV) HAS BEEN WITHDRAWN, UNDER SECTION 47A OF THE ACT, IT SHALL BE THE COST FOR WHICH SUCH::ASSET WAS ACQUIRED BY. THUS, IN THE PRESENT CASE, THE COST, AT WHICH THE APPELLANTS AMALGAMATING COMPANY, M/S KANPUR BUILDERS PVT. LTD, HAS ACQUIRED THE ASSET SHOULD BE THE COST OF ACQUISITION IN THE HANDS OF APPELLANT FOR THE PURPOSE OF COMPUTATION OF CAPITAL GAIN. .. THE COST OF ACQUISITION IN THE HANDS OF APPELLANT'S AMALGAMATING COMPANY - M/S KANPUR BUILDERS PVT. LTD. SHALL REMAIN THE COST FOR WHICH THE PREVIOUS OWNER OF THE PROPERTY ACQUIRED IT, I.E. COST AT WHICH, THE HOLDING COMPANY M/S SWADESHI COTTON MILLS CO. LTD. ACQUIRED IT IN 1921. COST OF ACQUISITION (COA) MEANS ANY CAPITAL EXPENSE AT THE TIME OF ACQUIRING CAPITAL ASSET UNDER TRANSFER, I.E., TO INCLUDE THE PURCHASE PRICE, EXPENSES INCURRED UP TO ACQUIRING DATE IN THE FORM OF REGISTRATION, STORAGE ETC. EXPENSES INCURRED ON COMPLETING TRANSFER. ITA NO.578/LKW/2018 PAGE 13 OF 98 AS PER S. 49(1) - WHERE THE ASSET HAS BECOME A PROPERTY OF THE ASSESSEE IN ANY OF THE WAYS ENUMERATED BELOW, THE COST OF ACQUISITION SHALL BE DEEMED TO BE THE COST, AT WHICH PREVIOUS OWNER HAD ACQUIRED THE SAME PLUS COST .OF ANY IMPROVEMENT BY THE SAID PREVIOUS OWNER AND AFTER DEDUCING DEPRECIATION ALLOWED BY HIM. THIS CASE IS COVERED BY FOLLOWING PROVISIONS OF S. 49(1)(III)(E)&(J) (III). (E) ANY SUCH TRANSFER FROM A PARENT COMPANY TO ITS WHOLLY OWNED SUBSIDIARY INDIAN COMPANY OR VICE VERSA; OR (J) ANY TRANSFER, IN A SCHEME OF AMALGAMATION, BY THE AMALGAMATED COMPANY FROM THE AMALGAMATING COMPANY SUBJECT TO THE CONDITIONS PRESCRIBED U/S 47(VI), (VIA), (VIAA); OR AS PROVIDED IN SECTION 2(42A), EXPLANATION 1(I)(B), FOR COMPUTING THE HOLDING PERIOD OF THE RELEVANT ASSETS, THE PERIOD FOR WHICH THE ASSET WAS HELD BY THE PREVIOUS OWNER SHALL BE INCLUDED. FOR THE SAKE OF CONVENIENCE, RELEVANT EXTRACT OF THE EXPLANATION 1(I)(B) IS BEING REPRODUCED, HEREUNDER:- 'EXPLANATION 1 IN DETERMINING THE PERIOD FOR WHICH ANY CAPITAL ASSET IS HELD BY THE ASSESSEE '(B) IN THE CASE OF A CAPITAL ASSET WHICH BECOMES THE PROPERTY OF THE ASSESSEE IN THE CIRCUMSTANCES MENTIONED IN SUB-SECTION (1) OF SECTION 49, THERE SHALL BE INCLUDED THE PERIOD FOR WHICH THE ASSET WAS HELD BY THE PREVIOUS OWNER REFERRED TO IN THE SAID SECTION;' AS PER FACTS OF THE CASE, IT IS ESTABLISHED THAT FIRST, THE PARENT COMPANY, M/S SWADESHI COTTON MILLS CO. LTD. TRANSFERRED ASSET TO ITS WHOLLY OWNED SUBSIDIARY INDIAN COMPANY, M/S KANPUR BUILDERS PVT. LTD. SO THE COST IN THE HANDS OF M/S KANPUR BUILDERS PVT. LTD. WILL BE COST IN THE HANDS OF M/S SWADESHI COTTON MILLS CO. LTD. NOW, THE FACT THAT M/S SWADESHI COTTON MILLS CO. LTD. DID NOT PAY TAX ON CAPITAL GAIN DUE TO OPERATION OF S. 47A WILL HAVE NO EFFECT ON THE FACT OF COST OF ACQUISITION IN THE HANDS OF M/S KANPUR BUILDERS PVT. LTD. RATHER THE SITUATION ITA NO.578/LKW/2018 PAGE 14 OF 98 IS REVERSE, UNLESS ANY CAPITAL GAIN IS CALCULATED BY PASSING AN ORDER IN THE HANDS OF M/S SWADESHI COTTON MILLS CO. LTD., COST OF ACQUISITION AS ON THE DATE OF PURCHASE BY THE SUBSIDIARY COMPANY I.E. ON 01.12.2003 AT RS.14,00,000/- CANNOT BE SAID TO BE THE CORRECT VALUE OF THE SATE CONSIDERATION, MORE SO IN VIEW OF THE FACT THAT ON 01.12.2003 THE DM CIRCLE RATE AS PER THE TRANSFER DEED WAS RS.9,86,84,700/-. THIS IN THIS CASE HAS NOT BEEN DONE. HON'BLE SUPREME COURT IN THE CASE OF SMT. SAROJ AGGARWAL V. COMMISSIONER OF INCOME-TAX REPORTED IN (1985) 156 ITR 497 (SC) HELD: 'FACTS SHOULD BE VIEWED IN NATURAL PERSPECTIVE, HAVING REGARD TO THE COMPULSION OF THE CIRCUMSTANCES OF A CASE. WHERE IT IS POSSIBLE TO DRAW TWO INFERENCES FROM THE FACTS AND, WHERE THERE IS NO EVIDENCE OF ANY DISHONEST OR IMPROPER MOTIVE ON THE PART OF THE ASSESSEE, IT WOULD BE JUST AND EQUITABLE TO DRAW, SUCH INFERENCE IN SUCH A MANNER THAT WOULD LEAD TO EQUITY AND JUSTICE. TOO HYPER TECHNICAL OR LEGALISTIC APPROACH SHOULD BE AVOIDED IN LOOKING AT A PROVISION, WHICH MUST BE EQUITABLY INTERPRETED AND JUSTLY ADMINISTERED COURTS SHOULD, WHENEVER POSSIBLE UNLESS PREVENTED BY THE EXPRESS LANGUAGE OF ANY SECTION OR COMPELLING CIRCUMSTANCES OF ANY PARTICULAR CASE, MAKE A BENEVOLENT AND JUSTICE ORIENTED INFERENCE. FACTS MUST BE VIEWED IN THE SOCIAL MILIEU OF A COUNTRY.' THEREFORE, IN ABSENCE OF ANY ESTABLISHED CHANGE IN COST OF ACQUISITION IN THE HANDS OF M/S KANPUR BUILDERS PVT. LTD., NATURALLY THE COST OF ACQUISITION IN THE HANDS OF THE APPELLANT CANNOT BE CHANGED, WHICH SHALL REMAIN TO BE THE COST, IN THE HANDS OF M/S SWADESHI COTTON MILLS CO. LTD. IN ABSENCE OF ANY ORDER ASCERTAINING THE TAXABLE GAINS IN THE HANDS OF SCM, THE PARENT COMPANY, WHICH WOULD HAVE GIVEN AN EXACT FIGURE TO BE CONSIDERED AS SALE PROCEEDS FOR CALCULATING THE CAPITAL GAIN. IF AO'S CONTENTION IS CORRECT, THEN THE PARENT COMPANY SHALL PAY CAPITAL GAINS ON SALE CONSIDERATION OF RS.14,00,000/- WHILE THE DM CIRCLE RATE ON 01.12.2003 WAS RS.9,86,84,700/-. SUCH AN INTERPRETATION WILL CREATE AMBIGUITY. ITA NO.578/LKW/2018 PAGE 15 OF 98 THIS CASE IS COVERED BY PROVISIONS OF S. 49(1)(III)(E) & (J). MEANING THEREBY THAT FIRST SUCH TRANSFER WAS FROM A PARENT COMPANY TO ITS WHOLLY OWNED SUBSIDIARY INDIAN COMPANY AND SECOND THE TRANSFER WAS DUE TO A SCHEME OF AMALGAMATION. AS PER S. 49 THE COST OF ACQUISITION OF THE ASSET SHALL BE THE COST FOR WHICH THE PREVIOUS OWNER OF THE PROPERTY ACQUIRED IT. IF THE PREVIOUS OWNER HAD ALSO ACQUIRED THE CAPITAL ASSET BY ANY OF THE MODES ABOVE, THEN THE COST TO THAT PREVIOUS OWNER, WHO HAD ACQUIRED IT BY MODE OF ACQUISITION OTHER THAN THE ABOVE, SHOULD BE TAKEN AS COST OF ACQUISITION. WHERE ASSET IN AN AMALGAMATED INDIAN COMPANY I.E. APPELLANT BECAME THE PROPERTY OF THE APPELLANT IN A SCHEME OF AMALGAMATION, THE COST OF ACQUISITION OF THE ASSET OF THE AMALGAMATING COMPANY SHALL BE THE COST OF ACQUISITION OF THE ASSET TO THE APPELLANT, WHICH IN THIS CASE SHALL BE THE COST OF ACQUISITION BY THE HOLDING COMPANY IN 1921. THIS COST OF ACQUISITION IS FINAL IRRESPECTIVE OF THE FACT WHETHER CAPITAL GAIN THAT WAS DUE HAS BEEN OR HAS NOT BEEN PAID BY THE HOLDING COMPANY FOR VIOLATION OF S. 47A OF IT ACT; BECAUSE THESE TWO ARE BOTH DIFFERENT TRANSACTIONS. AO'S FINAL ANALYSIS AND CONTENTION WOULD HAVE BEEN CORRECT IF THE AMALGAMATING COMPANY, M/S KANPUR BUILDERS PVT. LTD WOULD HAVE SOLD THIS PROPERTY BEFORE AMALGAMATION, THEN THE COST IN ITS HANDS COULD BE DISTURBED FOR THE REASON THAT THERE WAS CHANGE IN THE SHARE HOLDING PATTERN IN THE L00% SUBSIDIARY COMPANY IN VIOLATION OF S. 47A OF IT ACT. WHERE CAPITAL GAINS IS NOT LEVIED ON A TRANSFER OF CAPITAL ASSET BETWEEN A SUBSIDIARY COMPANY AND A HOLDING COMPANY OR VICE-VERSA BUT THE CONDITIONS LAID DOWN ARE VIOLATED SUBSEQUENTLY AND CAPITAL GAINS IS TO BE LEVIED, THE COST OF ACQUISITION TO THE TRANSFEREE COMPANY WOULD BE THE COST FOR WHICH SUCH ASSET WAS ACQUIRED BY IT. SECTION 47A ONLY CREATES LEGAL FICTION THAT IF THERE IS CHANGE IN SHARE HOLDING BETWEEN HOLDING AND SUBSIDIARY COMPANY, BENEFIT IF ANY ALLOWED TO HOLDING COMPANY IN TERMS OF SEC. 47(IV) SHALL BE WITHDRAWN. FOR INVOKING PROVISIONS OF SEC. 47A, AO MUST WORK OUT THE CAPITAL GAIN THAT IS CHARGEABLE IN THE CASE OF HOLDING COMPANY IN TERMS OF SEC. 45 AND WITHDRAW THE BENEFIT EXTENDED IN TERMS OF SEC. 47(IV) OF THE ACT. S. 47A IS ITA NO.578/LKW/2018 PAGE 16 OF 98 NOT A CHARGING SECTION BUT ONLY A DEEMING PROVISION FOR WITHDRAWAL OF ANY BENEFIT ALLOWED TO THE ASSESSEE BASED ON PROVISIONS OF SEC. 47(IV) OF THE ACT. BUT THIS EXERCISE WOULD HAVE ESTABLISHED THE COST OF ACQUISITION IN THE HANDS OF SUBSIDIARY COMPANY, M/S KANPUR BUILDERS PVT. LTD., WHO FINALLY AMALGAMATED WITH APPELLANT. THEREFORE, THE AO HAS ERRED IN APPLYING THESE PROVISIONS TO THIS TRANSACTION. IT IS THOUGH UPHELD THAT SECTION 49(3) IS SQUARELY APPLICABLE IN THIS CASE BUT SINCE NO ASSESSMENT AS PER THE S. 47A HAS BEEN MADE IN THE HANDS OF HOLDING COMPANY, MIS SWADESHI COTTON MILLS CO. LTD. AND FOR THE REASON THAT SUBSIDIARY COMPANY WAS AMALGAMATED IN THE APPELLANT WITHOUT ESTABLISHING THE COST OF ACQUISITION IN THE HANDS OF AMALGAMATING COMPANY I.E. M/S. KANPUR BUILDERS PVT. LTD., THE COST OF ACQUISITION FOR THE ASSESSEE COMPANY SHALL BE THE COST FOR WHICH SUCH ASSET WAS ACQUIRED BY THE AMALGAMATING COMPANY I.E. M/S KANPUR BUILDERS PVT. LTD. WHICH WILL BE THE COST OF ACQUISITION IN THE HANDS OF HOLDING COMPANY, M/S SWADESHI COTTON MILLS CO. LTD. HERE THE CAPITAL ASSET BECAME THE PROPERTY OF THE HOLDING COMPANY M/S SWADESHI COTTON MILLS CO. LTD. BEFORE 1.4.1981, SO THE COST OF ACQUISITION SHALL MEAN THE COST OF ACQUISITION OF THE ASSET TO THE APPELLANT OR THE FAIR MARKET VALUE OF THE ASSET AS ON 1.4.1981 AT THE OPTION OF THE APPELLANT AND THE INDEXATION OF COST WILL BE AVAILABLE WITH REFERENCE TO SUCH ACTUAL COST OF ACQUISITION OR THE FMV AS OPTED FOR BY THE APPELLANT. THE OPTION IS GIVEN TO THE ASSESSEE TO SUBSTITUTE THE FAIR MARKET VALUE OF THE ASSET ON 1.4.1981, TO ENSURE THAT CAPITAL GAINS ARE NOT COMPUTED WITH REFERENCE TO SOME HISTORICAL COST; AND THUS MITIGATE THE HARDSHIP TO SOME OF THE APPELLANT WHO WOULD HAVE ACQUIRED THE ASSET AT CHEAPER COST, MANY YEARS BACK. FURTHER, THERE BEING NO CAPITAL GAINS CHARGED IN RESPECT OF TRANSFER BETWEEN HOLDING AND SUBSIDIARY COMPANY, AS PER THE PROVISIONS OF SEC. 47A AND THE AO ALSO DID NOT WORK OUT ANY CAPITAL GAINS IN THE HANDS OF HOLDING COMPANY, M/S SWADESHI COTTON FRILLS CO. LTD. AND ALSO DID NOT WORK OUT ANY COST OF ACQUISITION IN THE HANDS OF SUBSIDIARY COMPANY, M/S KANPUR BUILDERS PVT. LTD., DUE TO CHANGE IN SHARE HOLDING ITA NO.578/LKW/2018 PAGE 17 OF 98 PATTERN, IN SUCH FACTS AND CIRCUMSTANCES COST OF ACQUISITION IN THE HANDS OF THE APPELLANT CANNOT BE WORKED OUT AND THEREFORE AS PER THE PROVISIONS OF S. 55(2), THE OPTION TO EXERCISE THE DATE OF ACQUISITION GOES TO THE APPELLANT. AO CANNOT SIT ON THIS AND DECIDE THE DATE OF ACQUISITION IN SUCH A CASE. IN A LATEST DECISION ON 22.02.2018 OF HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF PR. CIT VS. MOBISOFT TELE SOLUTIONS PVT. LTD. 163 DTR 289 HELD: CAPITAL GAINS- TRANSACTION NOT REGARDED AS TRANSFER U/S. 47(XIV)-APPLICABILITY OF SEC. 47A(3). NO BENEFIT OF SEC. 47(XIV) WAS CLAIMED WHILE MAKING TRANSFER FROM THE SOLE PROPRIETARY CONCERN TO THE ASSESSEE COMPANY- IN THE ABSENCE THEREOF, THE DEEMING PROVISIONS OF SUB SEC. (3) OF SEC. 47A CANNOT BE INVOKED. '14. THE ISSUE RAISED HAS NO FOUNDATION TO STAND. THERE ARE NO FINDINGS OF FACT RECORDED THAT THE PROVISIONS OF SECTION 47 WERE INVOKED FOR CLAIMING EXEMPTION FROM CAPITAL GAINS WHILE MAKING TRANSFERS FROM THE SOLE PROPRIETARY CONCERN TO THE ASSESSEE COMPANY. THE APPLICABILITY OF SECTION 47A WOULD ARISE ONLY IF IT IS ESTABLISHED THAT SECTION 47 WAS PRESSED INTO 9 OF 15 SERVICE. IN ABSENCE THEREOF, THE DEEMING PROVISION OF SUB-SECTION (3) OF SECTION 47A CANNOT BE INVOKED. '15. THERE IS ANOTHER ANGLE. FROM THE READING OF ARTICLE 3 OF THE AGREEMENT, IT IS EVIDENT THAT TARUN MOHAN RECEIVED A CONSIDERATION OF 5,81,231/- AND ROYALTY FOR THE USE OF THE BRAND NAME. THIS ITSELF SHOWS THAT EXEMPTION OF SECTION 47 WAS NOT AVAILABLE, AS PROVISO (C) TO CLAUSE (XIV) OF SECTION 47 HAD NOT BEEN COMPLIED WITH. THE APPELLANT HAS NOT CONTENDED OR ESTABLISHED THAT THE ASSESSEE AVAILED THE BENEFIT OF SECTION 47.' THIS CASE IS SQUARELY COVERED BY THE FACTS OF ABOVE CASE. IN THE LIGHT OF THESE FACTS AND LEGAL POSITION, THE CAPITAL GAIN IN THE HANDS OF APPELLANT IS TO BE WORKED OUT ON THE BASIS OF PROVISIONS OF SEC. 45 READ WITH SEC. 49(1) & 55(2)(B)(II). THERE IS NO DISPUTE THAT APPELLANT COMPANY KCPL ACQUIRED THE PROPERTY BY VIRTUE OF AMALGAMATION OF KBL WITH AND KBL ITA NO.578/LKW/2018 PAGE 18 OF 98 ACQUIRED THE SAME FROM VOIDING COMPANY. IN THE CASE UNDER HAND, THE PROPERTY WAS TRANSFERRED FROM ORIGINAL OWNER TO WHOLLY OWNED SUBSIDIARY AND THEREAFTER ACQUIRED BY APPELLANT COMPANY AS PART OF AMALGAMATION. SEC. 49(1) CLEARLY STIPULATE THAT IF PROPERTY IS ACQUIRED AS A RESULT OF TRANSFER UNDER CLAUSE (IV) OR CLAUSE (VI), THE COST TO THE ASSESSEE WILL BE AS TO ORIGINAL OWNER IN TERMS OF PROVISIONS OF SEC. 49(1) READ WITH SEC. 49(1) & 55(2)(B)(II) AND BENEFIT OF INDEXATION WILL BE ALLOWED IN TERMS OF PROVISIONS OF SEC. 48. SEC. 49(1) IS AN OVERRIDING SECTION AND RELEVANT IN CASE OF ACQUISITION OF PROPERTY U/S. 47(IV) AND 47(V). THE LEGAL POSITION TO THIS EFFECT IS WELL SETTLED ON THE BASIS OF DECISION OF ITAT, AHMEDABAD IN THE CASE OF ITO VS. SHREE AMODAYA INVESTMENT LTD. IN THE CASE OF ITO VS. SHREE AMODAYA INVESTMENT LTD., 92 TAXMAN 344 (AHMEDABAD) HELD: 'SECTION 47, INTER ALIA, PROVIDES THAT NO CAPITAL GAINS TAX WOULD BE PAYABLE ON ANY TRANSFER OF CAPITAL ASSET BY A COMPANY TO WHOLLY OWNED INDIAN SUBSIDIARY. SECTION 47A, WITH EFFECT FROM 1-4-1985, PROVIDES THAT IF, WITHIN 8 YEARS AFTER THE TRANSFER, THE SUBSIDIARY, LIKE THE ASSESSEE, IN THE INSTANT CASE, CEASES TO BE WHOLLY-OWNED SUBSIDIARY OF THE TRANSFEROR COMPANY, THE CAPITAL GAINS WOULD BE CHARGEABLE AS INCOME OF THE PREVIOUS YEAR IN WHICH THE TRANSFER TAKES PLACE. UNDER SECTION 49(1), WHERE A CAPITAL ASSET IS TRANSFERRED, THE COST OF ACQUISITION OF THE ASSET IS DEEMED TO BE COST FOR WHICH THE PREVIOUS OWNER OF THE PROPERTY ACQUIRED IT. ON READING SECTION 49(3) WITH SECTION 55(2), IT CAN BE SAID THAT SUCH AN OPTION OF SUBSTITUTION CAN BE SUBSCRIBED BY THE ASSESSEE WHICH WAS EARLIER A WHOLLY OWNED SUBSIDIARY. THE PURPOSE OF ENACTING SECTION 49(3), WAS SINCE THE EXEMPTION UNDER SECTION 47 WOULD BE DENIED TO THE TRANSFEROR- COMPANY IF THE OTHER COMPANY CEASES TO BE WHOLLY OWNED SUBSIDIARY WITHIN 8 YEARS IT WAS NECESSARY TO ENACT THAT THE COST OF ACQUISITION TO THE TRANSFEREE-COMPANY WOULD BE THE COST TO ITSELF BECAUSE OTHERWISE SECTION 49(1) WOULD HAVE APPLIED AND THE COST TO THE TRANSFEREE-COMPANY WOULD BE THE COST TO THE TRANSFEROR-COMPANY. IF SECTION 49(3) HAD ITA NO.578/LKW/2018 PAGE 19 OF 98 NOT BEEN ENACTED THERE WOULD BE DOUBLE TAXATION AND THE SAME PROFITS WOULD BE TAXED BOTH IN THE HANDS OF THE TRANSFEROR-COMPANY AND IN THE TRANSFEREE-COMPANY. M/S. SWADESHI COTTON MILLS CO. LTD, PURCHASED THE SAID LAND IN THE YEAR 1921 AND THE VALUATION OF LAND AS ON 1ST APRIL, 1981 IS DULY SUPPORTED FROM VALUATION REPORT ISSUED BY APPROVED VALUER DATED 25/03/2015 ENCLOSED AT PAPER BOOK PG. 23-26 AND AS SUCH THE COST OF ACQUISITION OF CAPITAL ASSET IN THE HANDS OF THE APPELLANT SHALL BE FAIR MARKET VALUE OF THE ASSET AS ON I5 APRIL, 1981 I.E. RS.3,84,76,065/-. IN THE CASE OF PR. CIT V. SMT. VIDHI AGARWAL [2017] 88 TAXMANN.COM 306 (ALLAHABAD) HELD; 'FROM THE PLAIN READING OF THE PROVISION OF SECTION 55(2)(B)(II), IT IS CLEAR THAT THE LEGISLATURE FIRST CONTEMPLATED A SITUATION WHERE THE ASSESSEE MAY HAVE COME INTO OWNERSHIP OF AN ASSET AFTER 1-4-1981 FROM A PREVIOUS OWNER WHO IN TURN MAY HAVE ACQUIRED THAT ASSET PRIOR TO 1-4-1981. IN SUCH CASE THE COST OF ACQUISITION OF SUCH ASSET BY THE ASSESSEE IS REQUIRED TO BE TAKEN EITHER AS THE FAIR MARKET VALUE OF THE ASSETS AS ON 1.4.1981 OR THE COST OF ACQUISITION OF THAT ASSET BY THE PREVIOUS OWNER. HOWEVER, AN OPTION HAS BEEN GIVEN TO THE ASSESSEE TO CHOOSE BETWEEN THE AFORESAID TWO VALUES AND IT IS NOT FOR THE ASSESSING OFFICER TO ELECT OR CHOOSE ONE OF THE TWO VALUES. (PARA 11) 'IN THE INSTANT CASE, THE ASSESSEE DEARLY DID NOT CHOSE THE VALUE OF THE COST OF ACQUISITION OF THE ASSET BY THE PREVIOUS OWNER, WHICH WAS ONLY RS.45,000/- IN THE YEAR 1970 AS HER COST OF ACQUISITION. IN FACT THE ASSESSEE SPECIFICALLY RELIED ON THE REPORT OF THE APPROVED VALUER DISCLOSING THE FAIR MARKET VALUE OF THE ASSETS AT RS.1,05,02,677/-. 'THE ASSESSING OFFICER ON HIS PART ONLY OBJECTED TO THE VALUATION REPORT FOR THE REASON OF IT NOT BEING SUPPORTED WITH ANY EVIDENCE. HOWEVER, HE PERHAPS LOST SIGHT OF THE FACT THAT THE EXPERT OPINION I.E. APPROVED VALUER'S REPORT WAS ITSELF A PIECE OF EVIDENCE. IT WAS FOR THE ASSESSING OFFICER TO HAVE LED OR REQUIRED SUCH EVIDENCE TO COME ON ITA NO.578/LKW/2018 PAGE 20 OF 98 RECORD AS HE MAY HAVE WISHED TO RELY UPON IF HE DOUBTED THE CORRECTNESS OF THE VALUE DISCLOSED IN THE REPORT OF THE APPROVED VALUER. (PARA 12) 'ON THE OTHER HAND, THE ACT DOES NOT REQUIRE THAT THE OPINION OF THE APPROVED VALUER SHOULD HAVE BEEN SUPPORTED WITH FURTHER EVIDENCE IN THE SHAPE OF CIRCLE RATE OR EXEMPLAR SALE DEEDS ETC. THERE IS NOTHING ON RECORD TO DOUBT THE CORRECTNESS OF THE REPORT OR ITS CONTENTS. THE TRIBUNAL HAS FOUND THAT IN ABSENCE OF ANY EVIDENCE TO DOUBT THE CORRECTNESS OF THE APPROVED VALUER'S REPORT THE SAME SHOULD HAVE BEEN ACCEPTED BY THE DEPARTMENT. (PARAS 13 AND 14) 'ONCE THE ACT HAS GIVEN THE OPTION TO THE ASSESSEE AND THE ASSESSEE HAD ACTED IN ACCORDANCE THEREOF AND EXERCISED HER OPTION TO RELY ON THE FAIR MARKET VALUE OF THE ASSETS AS ON 1-4-1981 WHICH SHE DULY SUPPORTED WITH EVIDENCE, IT WAS NOT OPEN TO THE ASSESSING OFFICER TO TAKE A DIFFERENT VIEW. FURTHER, THE FACT THAT IN THE GIFT DEED VALUE OF THE ASSET WAS MENTIONED AT RS.10,00,000/- IS OF NO CONSEQUENCE. THAT VALUATION IS IRRELEVANT AND EXTRANEOUS TO THE ISSUE INVOLVED SECTION 55(2)(B)(II) DOES NOT REQUIRE SUCH VALUE TO BE CONSIDERED OR EYEN BE RELEVANT. IN ANY CASE THAT VALUE WAS RELEVANT ONLY FOR PURPOSE .OF DETERMINATION OF STAMP DUTY PAYABLE ON THE GIFT DEED AND NOT TO DETERMINE CAPITAL GAINS. (PARAS 15 AND 16)' IN THE CASE OF CIT V. SMT. MINA DEOGUN [2015] 375 ITR 586 (CALCUTTA) HELD: WHERE PROPERTY WAS PURCHASED BY PREDECESSOR IN 1958, IN TERMS OF SECTION 55(2)(1), COST INFLATION INDEX WAS TO BE APPLIED WITH EFFECT FROM 1-4-1981 INSTEAD OF YEAR 1999-2000, IN WHICH ASSESSEE INHERITED PROPERTY. '8. SECTION 49 REFERRED TO IN THE AFORESAID CLAUSE (B) OF EXPLANATION (1) PROVIDES FOR VARIOUS CIRCUMSTANCES INCLUDING ACQUISITION BY SUCCESSION, INHERITANCE OR DEVOLUTION. THEREFORE, THE PERIOD FOR WHICH THE ASSET WAS HELD BY THE PREVIOUS OWNER, NAMELY, THE MOTHER OF THE ASSESSEE CAN ALSO BE INCLUDED TO THE PERIOD OF HOLDING OF THE PROPERTY BY THE ASSESSEE. THE MOTHER HELD THE ITA NO.578/LKW/2018 PAGE 21 OF 98 PROPERTY SINCE 1968 AS INDICATED ABOVE. HERE IS, AS SUCH, THE REASON WHY THE ASSESSEE IN THE CASE BEFORE US CAN BE SAID TO HAVE HELD THE PROPERTY SINCE 1968. IN ORDER TO ASCERTAIN THE COST OF ACQUISITION TO THE ASSESSEE REFERENCE CAN ALSO BE MADE TO SECTION 55(2)(B)(II) WHICH READS AS FOLLOWS: '(IT) WHERE THE CAPITAL ASSET BECAME THE PROPERTY OF THE ASSESSEE BY ANY OF THE MODES SPECIFIED IN [SUB-SECTION(1) OF SECTION 49], AND THE CAPITAL ASSET BECAME THE PROPERTY OF THE PREVIOUS OWNER BEFORE THE [1ST DAY OF APRIL, [1981]], MEANS THE COST OF THE CAPITAL ASSET TO THE PREVIOUS OWNER OR THE FAIR MARKET VALUE OF THE ASSET ON THE [1ST DAY OF APRIL, [1981]], AT THE OPTION OF THE ASSESSEE.' '9. BASED ON THE AFORESAID PROVISION THE COST OF ACQUISITION OF CAPITAL ASSET AT THE OPTION OF THE ASSESSEE IS THE FAIR MARKET VALUE OF THE ASSET ON 1ST APRIL, 1981. WHEN THAT IS PERMISSIBLE IN LAW, INDEXATION ON THE FAIR MARKET VALUE AS ON 1ST APRIL, 1981 UNTIL THE DATE OF TRANSFER HAS TO BE ALLOWED. ANY OTHER INTERPRETATION WILL NOT ONLY LEAD TO ABSURD RESULT BUT SHALL ALSO CAUSE IMMENSE PREJUDICE TO THE ASSESSEE. IF THE PREVIOUS OWNER THAT IS TO SAY THE MOTHER HAD NOT DIED AND IF SHE HERSELF HAD SOLD THE PROPERTY IN THE YEAR 2003, SHE WOULD HAVE GOT THE BENEFIT OF INDEXATION ON THE FAIR MARKET VALUE AS AT 1ST APRIL, 1981. IN THE CASE OF PR. CIT V. PRAKASH KRISHNALAL BHAGWATI [2018] 91 TAXMANN.COM 291 (GUJARAT) HELD: ''SECTION 48, READ WITH SECTION 49, OF THE INCOME-TAX ACT, 1961 - CAPITAL GAIN -COMPUTATION OF (COST INFLATION INDEX) - IN 1945, ASSESSEE'S FATHER ACQUIRED A PROPERTY - ON 8-3- 2004, ASSESSEE INHERITED A CAPITAL ASSET/PROPERTY ON DEATH OF HIS FATHER - WHETHER SINCE CAPITAL ASSET HAD BECOME PROPERTY OF ASSESSEE UNDER A WILL, COST OF ACQUISITION WAS DEEMED TO BE COST FOR WHICH PREVIOUS OWNER, NAMELY ASSESSEE'S FATHER, ACQUIRED IT - HELD, YES - WHETHER SINCE PROPERTY WAS ACQUIRED BY FATHER OF ASSESSEE IN YEAR 1945, INDEXED COST OF ACQUISITION WAS REQUIRED TO BE COMPUTED BY ITA NO.578/LKW/2018 PAGE 22 OF 98 CONSIDERING COST OF ACQUISITION FOR YEAR BEGINNING ON 1-4- 1981 - HELD, YES' IN THE LIGHT OF FACTS AND LEGAL POSITION CLARIFIED ABOVE, THERE IS THUS NO CASE OF ANY INFIRMITY IN THE CAPITAL GAIN AS DECLARED BY THE ASSESSEE AND SAME MAY BE ACCEPTED AS IN ORDER. WHEN WE APPLY THE ABOVE INTERPRETATION TO THE FACTS OF THE PRESENT CASE, IT EMERGES THAT EXPRESSION 'PREVIOUS OWNER OF PROPERTY' USED IN SECTION 49(1) READ EXPLANATION WOULD CLEARLY MEAN M/S. SWADESHI COTTON MILLS COMPANY LTD. ACCORDINGLY, THE APPELLANT WAS JUSTIFIED IN ADOPTING FMV OF THE PROPERTY AS ON 01/04/1981 AS COST OF ACQUISITION FOR THE PURPOSE OF COMPUTATION OF CAPITAL GAIN IN TERMS OF PROVISIONS OF SECTION 55(2)(B)(II) OF THE ACT AS HELD BY HON'BLE ALLAHABAD HIGH COURT IN THE CASE OF PR. CIT V. VIDHI AGARWAL. IT IS ALSO CLARIFIED THAT PERIOD OF HOLDING SHALL ALSO START FROM 01/04/1981 IN ACCORDANCE WITH PRINCIPLE LAID DOWN BY DELHI HIGH COURT IN THE CASE OF ARUN SHUNGLOO TRUST V. CIT [2002] 249 CTR 294 (DEL). THEREFORE APPELLANT'S CALCULATION OF CAPITAL GAIN ON THE BASIS OF VALUATION OF 1981 ON THE BASIS OF INDEXED COST OF PROPERTY AS ON 01.04.1981 IS LEGALLY CORRECT. ON THIS GROUND APPELLANT SUCCEEDS AND ADDITION MADE BY AO IS DELETED. THIS GROUND IS PARTLY ALLOWED. 15. TO REITERATE THE FACTS IN BRIEF, SCMCL PURCHASED THE PROPERTY IN QUESTION IN 1921. ON 1/12/2013, SCMCL TRANSFERRED THE PROPERTY TO ITS WHOLLY OWNED SUBSIDIARY, KBPL, AT A TRANSFER PRICE OF RS.14 LAKHS. IN 2014, KBPL GOT AMALGAMATED WITH THE ASSESSEE, KCPL, AND ALL THE ASSETS AND LIABILITIES, INCLUDING THE PROPERTY IN QUESTION, GOT VESTED IN KCPL. KCPL SOLD THE PROPERTY TO ARA INDIA LLP, VIDE SALE DEED DATED 10/2/2015, FOR RS.68 CRORES. IN THE RETURN OF INCOME FILED, KCPL CLAIMED INDEXATION BENEFIT ON THE BASIS OF VALUATION OF 1981 AND ITA NO.578/LKW/2018 PAGE 23 OF 98 PAID CAPITAL GAINS TAX ON THE BASIS OF THE INDEXED COST OF THE PROPERTY. 16. IT IS SEEN THAT THE PROVISIONS OF SECTION 47A ARE NOT CHARGING PROVISIONS. THESE PROVISIONS PROVIDE FOR WITHDRAWAL OF EXEMPTION GRANTED TO THE HOLDING COMPANY AS PER THE PROVISIONS OF SECTION 47(IV), IF THE TRANSFEROR COMPANY CEASES TO BE A ONE HUNDRED PERCENT HOLDING COMPANY WITHIN EIGHT YEARS FROM THE DATE OF TRANSFER OF THE ASSET. AS CORRECTLY APPRECIATED BY THE LD. CIT(A), THE FACT OF NON-PAYMENT OF ANY CAPITAL GAINS TAX BY SCMCL, THE HOLDING COMPANY, DOES NOT ADVERSELY AFFECT THE COST OF ACQUISITION IN THE CASE OF ITS SUBSIDIARY, I.E., KBPL. NO CHANGE IN THE COST OF ACQUISITION IN THE HANDS OF KBPL HAS BEEN BROUGHTFORTH AND AS SUCH, THE LD. CIT(A) HAS RIGHTLY HELD THAT THE COST OF ACQUISITION IN THE HANDS OF THE ASSESSEE CANNOT BE CHANGED AND IT SHALL REMAIN TO BE THE COST OF THE PROPERTY IN THE HANDS OF SCMCL. NO ORDER QUA THE CAPITAL GAIN WAS EVER PASSED IN THE HANDS OF SCMCL. THAT BEING SO, THE COST OF ACQUISITION ON THE DATE OF PURCHASE BY KBPL, I.E., OF RS.14 LAKHS, ON 1/12/2003, CANNOT BE SAID TO BE THE CORRECT SALE CONSIDERATION, PARTICULARLY WHEN THE CIRCLE RATE AS PER THE TRANSFER DEED, AS ON 1/12/2003, WAS OF RS.9,86,84,700/-. IN VIEW OF THIS CIRCLE RATE AS ON 1/4/2003, THE PAYMENT OF CAPITAL GAIN ON THE SALE CONSIDERATION OF RS.14 LAKHS, CANNOT BE ENVISAGED. 17. AS PER THE PROVISIONS OF SECTION 49, WHERE THE CAPITAL ASSET BECOMES THE PROPERTY OF THE ASSESSEE UNDER ANY SUCH TRANSFER, AS REFERRED TO IN THE RELEVANT PROVISIONS [AS GIVEN IN SECTION 49(1)(III)(E)] OF SECTION 47, THE COST OF ACQUISITION OF THE ASSET SHALL BE DEEMED TO BE THE COST FOR WHICH THE PREVIOUS OWNER ITA NO.578/LKW/2018 PAGE 24 OF 98 OF THE PROPERTY ACQUIRED IT, AS INCREASED BY THE COST OF ANY IMPROVEMENT OF THE ASSESSEE, INCURRED OR BORNE BY THE PREVIOUS OWNER, OR THE ASSESSEE, AS THE CASE MAY BE. THE EXPLANATION TO SECTION 49(1) DESCRIBES PREVIOUS OWNER OF THE PROPERTY IN RELATION TO ANY CAPITAL ASSET OWNED BY AN ASSESSEE, TO MEAN THE LAST PREVIOUS OWNER OF THE CAPITAL ASSET WHO ACQUIRED IT BY A MODE OF ACQUISITION OTHER THAN THAT REFERRED TO IN CLAUSES (I), (II), (III) OR (IV) OF SECTION 49(1) OF THE ACT. 18. IN THE PRESENT CASE, AS SEEN, THE FIRST TRANSFER OF THE PROPERTY WAS BY SCMCL, TO KBPL, ITS WHOLLY OWNED SUBSIDIARY COMPANY AND THE SECOND TRANSFER WAS AS PER THE SCHEME OF AMALGAMATION, AMALGAMATING KBPL WITH THE ASSESSEE, KCPL. AS SUCH, AS PER THE PROVISIONS OF SECTION 49 OF THE ACT, THE COST OF ACQUISITION OF THE AMALGAMATING COMPANY SHALL BE THE COST OF ACQUISITION TO THE ASSESSEE, WHICH, IN TURN, SHALL BE THE COST OF ACQUISITION OF SCMCL, I.E., THAT IN 1921, WHEN THE PROPERTY WAS ACQUIRED BY IT. IT IS THIS COST WHICH IS FINAL. 19. SECTION 49(3) IS A PROVISION OVERRIDING THOSE OF SECTION 49(1), PROVIDED THE CONDITIONS GIVEN IN SECTION 49(3) GET FULFILLED. SECTION 49(3) PROVIDES THAT NOTWITHSTANDING ANYTHING CONTAINED IN SECTION 49(1), WHERE THE CAPITAL GAIN ARISING FROM THE TRANSFER OF A CAPITAL ASSET REFERRED TO IN EITHER SECTION 47(IV), OR SECTION 47(V) OF THE ACT, IS DEEMED TO BE THE INCOME CHARGEABLE AS CAPITAL GAINS BY VIRTUE OF PROVISIONS OF SECTION 47A, THE COST OF ACQUISITION OF SUCH ASSET TO THE TRANSFEREE-COMPANY SHALL BE THE COST FOR WHICH SUCH ASSET WAS ACQUIRED BY IT. UNDISPUTEDLY, SECTION 47A ASSESSMENT WAS NEVER MADE IN THE HANDS OF SCMCL AND ITS SUBSIDIARY COMPANY, KBPL, GOT AMALGAMATED WITH THE ITA NO.578/LKW/2018 PAGE 25 OF 98 ASSESSEE, KCPL. THUS, THE COST OF ACQUISITION HAVING BEEN ESTABLISHED IN THE HANDS OF KBPL, THE AMALGAMATING COMPANY, THE COST AT WHICH THE ASSET WAS ACQUIRED BY KBPL, IS THE COST OF ACQUISITION FOR THE ASSESSEE COMPANY, WHICH, IN TURN, IS THE COST OF ACQUISITION IN THE HANDS OF SCMCL. IT IS NOT UNDER CHALLENGE THAT THE ASSET BECAME THE PROPERTY OF SCMCL IN 1921, I.E., BEFORE 1/4/1981. THEREFORE, IT CANNOT BE DOUBTED THAT THE COST OF ACQUISITION SHALL MEAN THE COST OF ACQUISITION TO THE ASSESSEE, OR THE FAIR MARKET VALUE AS ON 1/4/1981, AT THE OPTION OF THE ASSESSEE. THE INDEXATION OF COST, HENCE, IS AVAILABLE WITH REFERENCE TO SUCH ACTUAL COST OF ACQUISITION OR FAIR MARKET VALUE, AT THE ASSESSEES OPTION. THIS IS ENTIRELY IN CONGRUENCE WITH THE PROVISIONS OF SECTION 55(2) OF THE ACT, AS PER WHICH, THE ASSESSEE HAS EXERCISED ITS OPTION. THE LD. CIT(A), IN THIS VIEW OF THE MATTER, HAS CORRECTLY HELD THAT THE CAPITAL GAIN IN THE HANDS OF THE ASSESSEE IS TO BE WORKED OUT ON THE BASIS OF THE PROVISIONS OF SECTION 45 READ WITH THOSE OF SECTIONS 49(1) AND 55(2)(B)(II) OF THE ACT. OBVIOUSLY, THE PROVISIONS OF SECTION 49(1) STAND ABIDED BY. SECTION 49(1), IT CANNOT BE GAINSAID, IS AN OVERRIDING SECTION. IN THIS REGARD, ITO VS. SHREE AMODYA INVESTMENT LTD., 92 TAXMAN 344 (AHMD) IS ELOQUENT AND HAS RIGHTLY BEEN FOLLOWED BY THE LD. CIT(A). IN THAT CASE, THE TRIBUNAL, INTER ALIA, HELD THAT THE PURPOSE OF SECTION 49(3) WAS THAT SINCE THE EXEMPTION UNDER SECTION 47 IS TO BE DENIED TO THE TRANSFEROR-COMPANY, IF THE OTHER COMPANY CEASES TO BE A WHOLLY OWNED SUBSIDIARY WITHIN EIGHT YEARS FROM THE DATE OF THE TRANSFER OF THE ASSET, IT IS NECESSARY TO INDICATE THAT THE COST OF ACQUISITION TO THE TRANSFEREE-COMPANY WOULD BE THE COST TO ITSELF, OTHERWISE, SECTION 49(1) WOULD HAVE ITA NO.578/LKW/2018 PAGE 26 OF 98 APPLIED AND THE COST TO THE TRANSFEREE-COMPANY WOULD BE THE COST TO THE TRANSFEROR-COMPANY. 20. AS RIGHTLY POINTED OUT ON BEHALF OF THE ASSESSEE, THE PROVISIONS OF SECTIONS 47A AND 49(3) WERE BROUGHT IN SIMULTANEOUSLY, VIDE THE TAX LAWS (AMENDMENT ACT), 1984, W.E.F. 1/4/1985. IT IS ONLY WHEN THERE OCCURS CHARGEABILITY OF CAPITAL GAIN AS PER THE PROVISIONS OF SECTION 47A, THAT SECTION 49(3) WOULD KICK IN, SO AS TO ENSURE AVOIDANCE OF DOUBLE TAXATION. SO, EVIDENTLY, IN CASE THE PROVISIONS OF SECTION 47A THEMSELVES ARE NOT INVOKED, THERE IS NO CASE FOR INVOKING THOSE OF SECTION 49(3) AT ALL. HERE, IT IS RELEVANT TO REITERATE THAT AT THE TIME OF AMALGAMATION OF KBPL WITH KCPL, AS WAS THE CASE AT THE TIME OF TRANSFER OF THE PROPERTY FROM SCMCL TO KBPL, NO CAPITAL GAIN WAS CHARGED. NOW, THEREFORE, EVEN IF KBPL CEASED TO BE THE WHOLLY OWNED SUBSIDIARY OF SCMCL, THERE WAS NO EXEMPTION TO BE WITHDRAWN BY INVOKING THE PROVISIONS OF SECTION 47A. 21. IN VIEW OF THE ABOVE, FINDING NO MERIT THEREIN, GROUND NOS. 1 AND 2 RAISED BY THE DEPARTMENT ARE REJECTED. 22. IT HAS NEXT BEEN CONTENDED ON BEHALF OF THE DEPARTMENT THAT THE LD. CIT(A) HAS ERRED IN RELYING ON THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF ARUN SHUNGLOO TRUST VS. CIT 249 CTR 294 (DEL), WHEREAS IN THAT CASE, THE PROVISIONS OF SECTION 47A READ WITH THOSE OF 49(3) WERE NOT INVOLVED. 23. THIS AVERMENT OF THE DEPARTMENT IS MISCONCEIVED. THE LD. CIT(A) HAS HELD THAT .IT IS ALSO CLARIFIED THAT THE PERIOD OF HOLDING SHALL ALSO START FROM 1/4/1981 IN ACCORDANCE WITH THE ITA NO.578/LKW/2018 PAGE 27 OF 98 PRINCIPLE LAID DOWN BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF ARUN SHUNGLOO TRUST VS. CIT (2002) 249 CTR 294 (DEL).. 24. EVIDENTLY, THEREFORE, IT IS QUA THE PERIOD OF HOLDING THAT ARUN SHUNGLOO TRUST VS. CIT (SUPRA) HAS BEEN REFERRED TO BY THE LD. CIT(A). THEREIN, IT WAS THE PERIOD OF HOLDING WHICH WAS ADJUDICATED ON CONSIDERING THE PROVISIONS OF EXPLANATION 1(I)(B) TO SECTION 2(42A) OF THE ACT, ALONG WITH EXPLANATION 1(III) TO SECTION 48 OF THE ACT AND THE PROVISIONS OF SECTION 49, AND IT WAS HELD THAT THE PERIOD OF HLDING SHALL INCLUDE THE PERIOD FOR WHICH THE ASSET WAS HELD BY THE PREVIOUS OWNER, AS PER THE EXPLANATION TO SECTION 49(1) OF THE ACT. 25. THEREFORE, GROUND NO.3 STANDS REJECTED. 26. THE DEPARTMENT HAS, NEXT, PLACED RELIANCE ON THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. M/S ESSAR OIL LTD., PASSED IN ITA NO.3160 OF 2010, THE FACTS WHEREIN ARE IDENTICAL TO THE FACTS OF THE PRESENT CASE. 27. IT HAS FURTHER BEEN CONTENDED ON BEHALF OF THE DEPARTMENT THAT THE LD. CIT(A) HAS ERRED IN NOT APPRECIATING THE RATIO LAID DOWN BY THE HON'BLE BOMBAY HIGH COURT IN CIT VS. M/S ESSAR OIL LTD. (SUPRA). THE FACTS OF CIT VS. M/S ESSAR OIL LTD., AS PER THE DEPARTMENT, ARE IDENTICAL TO THE FACTS OF THE CASE AT HAND. 28. IN THIS REGARD, IT IS SEEN THAT THE FOLLOWING IS THE ORDER PASSED BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. M/S ESSAR OIL LTD. (SUPRA): 1. HEARD. ITA NO.578/LKW/2018 PAGE 28 OF 98 2. THREE QUESTIONS OF LAW ARE RAISED BY THE REVENUE IN THIS APPEAL: (I) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE TRIBUNAL IS RIGHT IN DIRECTING THE A.O TO ALLOW THE ASSESSEE'S CLAIM OF EXPENDITURE INCURRED ON OIL AND GAS FIELDS OF RS.62,69,042/- AS REVENUE EXPENDITURE WITHOUT APPRECIATING THE FACT THAT THE SAME ARE IN THE NATURE OF PRELIMINARY EXPENSES AND NOT RELATED TO THE BUSINESS ACTIVITY OF THE ASSESSEE? (II) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE TRIBUNAL IS RIGHT IN DIRECTING THE A O TO ALLOW THE ASSESSEE'S CLAIM OF DEPRECIATION WITHOUT APPRECIATING THE FACT THAT THE DEPRECIATION HAS TO BE WORKED OUT ON THE REVISED WDV OF THIS YEAR? (III) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE TRIBUNAL IS RIGHT IN DIRECTING THE A.O TO EXCLUDE THE PROFITS FROM OMAN BRANCH AND QATAR BRANCH WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE IS A RESIDENT OF INDIA AND HAS TO BE TAXED ON ITS ENTIRE INCOME IN INDIA AS PER SECTION 5(1) OF THE I.T. ACT? 3. AS REGARDS QUESTION (I) IS CONCERNED, COUNSEL FOR THE PARTIES STATE THAT SIMILAR QUESTION RAISED BY THE REVENUE IN ASSESSEE'S OWN CASE, BEING TAX APPEAL (L) NO.921 OF 2006, HAS BEEN REJECTED BY THIS COURT VIDE ORDER DATED 16.10.2008. IN THIS VIEW OF THE MATTER, THE FIRST QUESTION CANNOT BE ENTERTAINED. 4. AS REGARDS QUESTION (II) IS CONCERNED, THE DISPUTE RELATES TO ALLOWING DEPRECIATION ON THE WRITTEN DOWN VALUE OF ASSETS TAKEN OVER FROM ESSAR GUJRAT LTD. IN A.Y. 1993-94. IT APPEARS THAT THERE WAS SOME DISPUTE REGARDING THE WRITTEN DOWN VALUE OF THE ASSETS IN A.Y.1993-94. THE TRIBUNAL IN A.Y.1993-94 IN ITA NO.3041/MUM/96 HELD THAT THE WRITTEN DOWN VALUE AS CLAIMED BY THE ASSESSEE HAS TO BE ACCEPTED. ACCORDINGLY, DEPRECIATION HAS BEEN ALLOWED BY FOLLOWING THE DECISION OF THE TRIBUNAL FOR A.Y.1993-94. IN THESE CIRCUMSTANCES NO FAULT CAN BE FOUND IN THE ORDER OF ITAT. ACCORDINGLY THE SECOND QUESTION CANNOT BE ENTERTAINED. 5. AS REGARDS QUESTION (III) IS CONCERNED, COUNSEL FOR THE PARTIES STATE THAT SIMILAR QUESTION RAISED BY THE REVENUE IN THE ASSESSEE'S OWN CASE BEING TAX APPEAL NO.135 OF 2008 HAS BEEN REJECTED BY THIS COURT VIDE ORDER DATED 16.10.2008. IN THIS VIEW OF THE MATTER, THE THIRD QUESTION CANNOT BE ENTERTAINED. 6. ACCORDINGLY, THE APPEAL IS DISMISSED. ITA NO.578/LKW/2018 PAGE 29 OF 98 29. AS IS EVIDENT FROM THE ABOVE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN CIT VS. M/S ESSAR OIL LTD. (SUPRA), IN THAT CASE, AS CORRECTLY CONTENDED, NO RATIO CONCERNING THE ISSUE OF INTERPRETATION OF THE PROVISIONS OF EITHER SECTION 47A, OR SECTION 49(3) HAS BEEN LAID DOWN. RATHER, IT WAS THE TRIBUNAL ORDER CONCERNING THE ISSUE OF WDV FOR THE PURPOSE OF CLAIM OF DEPRECIATION, WHICH WAS CONFIRMED. IT WAS HELD THAT SINCE THE TRIBUNAL HAD FOLLOWED ITS DECISION FOR ASSESSMENT YEAR 1993-94 IN THE CASE OF THE ASSESSEE, WHEREIN, THE WRITTEN DOWN VALUE AS CLAIMED BY THE ASSESSEE HAD BEEN ACCEPTED, NO FAULT COULD BE FOUND WITH THE TRIBUNAL ORDER, SO FOLLOWING ITS EARLIER ORDER (PARA 4 OF THE ORDER OF THE HON'BLE HIGH COURT, AS ABOVE). THUS, THE FACTS IN CIT VS. M/S ESSAR OIL LTD. (SUPRA) ARE, EVIDENTLY, NOT IN PARA MATERIA HEREWITH. THEREIN, THERE WAS NO ISSUE OF CHARGEABILITY OF CAPITAL GAIN, WHICH IS THE QUESTION AT HAND. 30. THEREFORE, FINDING NO ERROR IN THE IMPUGNED ORDER ON THIS COUNT, THIS OBJECTION OF THE DEPARTMENT, BY WAY OF GROUND NO.4 AND THE AVERMENTS MADE BEFORE US, IS REJECTED. 31. THE LD. D.R. HAS ALSO CONTENDED, AS STATED IN GROUND NO.5 TOO, THAT THE LD. CIT(A) HAS ERRED IN DIRECTING THE ASSESSING OFFICER TO TAKE ACTION AS PER LAW, SO AS TO TAX CAPITAL GAIN IN THE HANDS OF SCMCL; AND THAT IN DO SO, THE LD. CIT(A) HAS ERRED IN FAILING TO CONSIDER THAT THE MATTER STOOD BARRED BY LIMITATION IN VIEW OF THE PROVISIONS OF SECTION 155(7B) OF THE ACT. 32. HERE, AT THE OUTSET, IT WOULD BE APPROPRIATE TO TAKE NOTE THAT IN THE ORDER PASSED BY AN APPELLATE AUTHORITY CANNOT ITA NO.578/LKW/2018 PAGE 30 OF 98 OVERRIDE THE EXPRESS PROVISIONS OF THE LAW. THE EXECUTING AUTHORITY (THE ASSESSING OFFICER IN THE PRESENT CASE), AS SUCH, CANNOT TAX THE CAPITAL GAIN IN THE CASE OF AN ASSESSEE WHERE THE LIMITATION FOR DOING SO HAS EXPIRED, AS PER THE STATUTORY PROVISIONS. THE DIRECTION ISSUED BY THE LD. CIT(A), THEREFORE, OBVIOUSLY, CANNOT CAUSE ANY PREJUDICE TO THE DEPARTMENT SO FAR AS THE CASE OF THE PRESENT ASSESSEE IS CONCERNED. FURTHER, IT HAS ALSO BEEN BROUGHT TO OUR NOTICE THAT AN APPLICATION FOR RECTIFICATION STOOD FILED UNDER SECTION 154 BY THE ASSESSING OFFICER BEFORE THE LD. CIT(A), WHICH WAS SUBSEQUENTLY DISMISSED BY THE SAID APPELLATE AUTHORITY. NOTHING CONTRARY TO THIS SUBMISSION HAS BEEN EITHER AVERRED OR BROUGHT ON RECORD. 33. IN VIEW OF THE ABOVE, THIS AVERMENT OF THE DEPARTMENT IS ALSO FOUND TO BE SANS MERIT AND IT IS, ACCORDINGLY, REJECTED. GROUND NO.5, THUS STANDS REJECTED. ITA NO.71/LKW/2019: 34. THIS IS REVENUES APPEAL AGAINST THE ORDER OF THE LD. CIT(A) DATED 30/10/2018 FOR ASSESSMENT YEAR 2015-16, TAKING THE FOLLOWING EFFECTIVE GROUNDS: 1. THAT THE CIT(A)-II, KANPUR HAS ERRED IN LAW AS WELL AS ON FACTS AND CIRCUMSTANCES OF THE CASE IN ALLOWING RELIEF TO THE ASSESSEE WITHOUT APPRECIATING THE FACTS THAT THE .PROVISIONS AS CONTAINED UNDER SECTION 50 R.W.S. 50A OF THE INCOME TAX ACT, 1961 ARE CLEARLY APPLICABLE IN THIS CASE. 2. THAT THE COMMISSIONER OF THE INCOME TAX (A)-2, KANPUR HAS ERRED IN LAW AS WELL AS ON FACTS AND CIRCUMSTANCES OF THE CASE IN ALLOWING RELIEF TO THE ASSESSEE WITHOUT APPRECIATING THE FACTS THAT THE ASSESSEE WAS REGULARLY CLAIMING ITA NO.578/LKW/2018 PAGE 31 OF 98 DEPRECIATION ON BUILDING, WHICH WAS ALLOWED BY THE DEPARTMENT BY WAY OF ACCEPTING THE CLAIM OF CARRY FORWARD OF LOSS OF THE ASSESSEE TO BE SET OFF IN FUTURE AGAINST INCOME. 3. THAT CIT(A)-2 HAS ERRED IN LAW AS WELL AS ON FACTS AND CIRCUMSTANCES OF THE CASE IN NOT APPRECIATING THE FACTS THAT PRIOR TO AMALGAMATION WITH THE ASSESSEE COMPANY, M/S KANPUR BUILDERS PVT. LTD. (AMALGAMATING COMPANY) WAS REGULARLY CLAIMING DEPRECIATION ON BUILDING AND FOR THE PERIOD 01.04.2013 TO 31.03.20141 IT HAD CLAIMED DEPRECIATION ON BUILDING AT RS.4,619/- WHICH, WAS ALLOWED AND IS EVIDENT FROM THE FIXED ASSETS CHART (REPRODUCED IN THE ORDER U/S 251 DATED 04.07.2018). 4. THAT CIT(A)-2 HAS ERRED IN LAW AS WELL AS ON FACTS AND CIRCUMSTANCES OF THE CASE IN NOT APPRECIATING THE FACTS THAT THE ASSESSEE WAS REGULARLY CLAIMING DEPRECIATION ON BUILDING, WHICH WAS ALLOWED BY THE DEPARTMENT BYWAY OF ACCEPTING THE CLAIM OF CARRY FORWARD OF LOSS OF THE ASSESSEE TO BE SET OFF IN FUTURE AGAINST INCOME. 5. THAT CIT(A)-2 HAS ERRED IN LAW AS WELL AS ON FACTS AND CIRCUMSTANCES OF THE CASE IN RELYING ON THE RATIO LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. DOOM DOOM INDIA LTD. (2009) 310 ITR'392(SC) BECAUSE THE FACTS, AND SITUATION OF THE ASSESSEE'S CASE ARE ENTIRELY DIFFERENT, THE DECISIONS OF HON'BLE SUPREME COURT IN THE CASE OF CIT VS. DOOM DOOM INDIA LTD., DEALS WITH THE CASES COVERED UNDER RULE 8 OF THE INCOME TAX RULES, 1962 WHEREAS THE ASSESSEE'S CASE DOES NOT COME WITHIN THE PURVIEW OF RULE 8 OF I.T. RULES, 1962. 6. THAT CIT(A)-2 HAS ERRED IN LAW AS WELL AS ON FACTS AND CIRCUMSTANCES OF THE CASE IN HOLDING THAT THE ISSUE OF BOOK PROFIT UNDER SECTION 115JB WAS THE SUBJECT MATTER OF ITA NO.578/LKW/2018 PAGE 32 OF 98 ASSESSMENT PROCEEDINGS AND NOT DURING PROCEEDINGS UNDER SECTION 251/143(3) OF THE ACT, WITHOUT APPRECIATING THE FACTS THAT AS AND WHEN TAX LIABILITY ON BOOK PROFIT IS MORE THAN THE TAX LIABILITY COMPUTED IN ACCORDANCE WITH NORMAL PROVISIONS, TAX WOULD BE CHARGED ON BOOK PROFIT IN ACCORDANCE WITH THE PROVISIONS OF SECTION 115JB OF THE ACT. 7. THAT CIT(A)-2 HAS ERRED IIN LAW AS WELL AS ON FACTS AND CIRCUMSTANCES OF THE CASE IN HOLDING THAT THE ISSUE OF BOOK PROFIT UNDER SECTION 115JB WAS THE SUBJECT MATTER ASSESSMENT PROCEEDINGS AND NOT DURING PROCEEDINGS UNDER SECTION 251/143(3) OF THE ACT, WITHOUT APPRECIATING THE FACTS THAT COMPUTATION OF BOOK PROFIT WAS MADE DURING THE COURSE OF ASSESSMENT PROCEEDINGS AND SINCE TAX LIABILITY COMPUTED IN ACCORDANCE WITH NORMAL PROVISION OF THE ACT WAS MORE, TAX WAS CHARGED ON NORMAL INCOME, HOWEVER, WHILE PASSING ORDER U/S 25 1/143(3) TAX WAS CHARGED ON BOOK PROFIT AS THE TAX ON BOOK PROFIT WAS MORE. 35. AS NOTED WHILE DEALING WITH ITA NO.578/LKW/2018, DURING THE YEAR, THE ASSESSEE COMPANY, M/S KANPUR CONSTRUCTIONS PVT. LTD. (KCPL FOR SHORT) SOLD IMMOVEABLE PROPERTY, SWADESHI HOUSE, SITUATED AT 16/14, CIVIL LINES, KANPUR, MEASURING 12,399 SQ. M, TO M/S ARA INDIA LLP, FOR A SALE CONSIDERATION OF RS.68,00,00,000/-, VIDE SALE DEED DATED 19/2/2015. THE RETURN OF INCOME WAS FILED AT A TOTAL INCOME OF RS.18,78,36,000/-. THIS INCLUDED LONG TERM CAPITAL GAIN OF RS.17,92,25,580/-. FROM THE REPLY SUBMITTED BY KCPL, THE ASSESSING OFFICER NOTICED, INTER ALIA, THAT THE AFORESAID PROPERTY HAD BEEN PURCHASED BY M/S KANPUR BUILDERS PVT. LTD. (KBPL FOR SHORT), ON 1/12/2003, FROM M/S SWADESHI COTTON MILLS CO. LTD. (SCMCL FOR SHORT) FOR RS.14 LAKHS; THAT AS PER THE PURCHASE ITA NO.578/LKW/2018 PAGE 33 OF 98 DEED DATED 1/12/2003, KBPL WAS THE WHOLLY OWNED SUBSIDIARY COMPANY OF SCMCL; AND THAT SCMCL WAS THE BENEFICIAL OWNER OF 100% ISSUED SHARE CAPITAL OF KBPL, DUE TO WHICH FACT, THE TRANSFER OF THE PROPERTY HAD TAKEN PLACE BETWEEN THE PARENT COMPANY, I.E., SCMCL AND ITS SUBSIDIARY COMPANY, I.E., KBPL. THE ASSESSING OFFICER OBSERVED THAT AN AMALGAMATION SCHEME HAD BEEN SANCTIONED BY THE HON'BLE ALLAHABAD HIGH COURT, VIDE ORDER DATED 1/1/2016, W.E.F. 1/4/2014; THAT BY VIRTUE OF THIS ORDER, KBPL STOOD AMALGAMATED WITH KCPL (THE PRESENT ASSESSEE); AND THAT AS PER THE PROVISIONS OF THE SCHEME, ALL THE ASSETS AND LIABILITIES, AS EXISTED ON 31/3/2014, ALSO STOOD TRANSFERRED FROM KBPL TO KCPL. SINCE KBPL STOOD AMALGAMATED WITH KCPL DURING THE YEAR UNDER CONSIDERATION, THE CAPITAL GAIN ARISING FROM THE TRANSFER OF THE AFORESAID PROPERTY WAS CALCULATED BY KCPL AND INCLUDED IN ITS AFORESAID INCOME TAX RETURN, FILED FOR THE YEAR UNDER CONSIDERATION. THE ASSESSING OFFICER NOTICED FROM THE COMPUTATION OF INCOME FILED BEFORE HIM, THAT KCPL, WHILE CALCULATING THE LONG TERM CAPITAL GAIN, HAD ADOPTED AND WORKED OUT THE COST OF ACQUISITION OF THE PROPERTY BY APPLYING THE INDEXED RATE OF THE YEAR 1981. AS SUCH, THE ASSESSING OFFICER, VIDE NOTICE DATED 19/12/2017, ISSUED UNDER SECTION 142(1) OF THE INCOME TAX ACT, 1961, REQUIRED THE ASSESSEE, KCPL, TO EXPLAIN THE REASONS FOR THE APPLICATION OF INDEXED RATE OF 1981, SINCE THE PROPERTY STOOD PURCHASED BY KBPL ON 1/12/2003 FROM SCMCL. 36. THE ASSESSEE, KCPL, REPLIED BY SUBMITTING THAT AS PROVIDED IN EXPLANATION 1(I)(B) TO SECTION 2(42A) OF THE ACT, FOR COMPUTING THE HOLDING PERIOD OF THE RELEVANT ASSET, THERE SHALL BE INCLUDED THE PERIOD FOR WHICH THE ASSET WAS HELD BY THE PREVIOUS ITA NO.578/LKW/2018 PAGE 34 OF 98 OWNER. THE ASSESSEE STATED THAT ACCORDINGLY, AS PROVIDED IN SECTION 49(1)(III)(C) OF THE ACT, THE COST OF ACQUISITION IN THE HANDS OF THE MERGED COMPANY, I.E., THE PREVIOUS OWNER, KBPL, BECAME THE COST OF ACQUISITION FOR THE ASSESSEE COMPANY. IT WAS SUBMITTED THAT THE PREVIOUS OWNER HAD ACQUIRED THE PROPERTY FROM ITS HOLDING COMPANY, SCMCL, AS IT WAS THE WHOLLY OWNED SUBSIDIARY OF SCMCL; THAT IN KEEPING WITH THE PROVISIONS OF SECTION 49(1)(III)(C) AND SECTION 2(42A) OF THE ACT, THE HOLDING PERIOD IN THE HANDS OF THE PREVIOUS OWNER RELATED BACK TO THE YEAR 1921, THIS BEING THE YEAR IN WHICH THE PROPERTY WAS ACQUIRED BY THE HOLDING COMPANY. IT WAS SUBMITTED THAT THEREFORE, IN TERMS OF EXPLANATION (III) TO SECTION 48 OF THE ACT, THE INDEXED COST OF ACQUISITION IN THE PRESENT CASE WAS TO BE WITH REFERENCE TO THE YEAR BEGINNING ON THE FIRST DAY OF APRIL, 1981; AND THAT NO DEPRECIATION HAD BEEN CLAIMED BY THE ASSESSEE COMPANY IN RESPECT OF THE PROPERTY IN QUESTION, AS WAS EVIDENT FROM THE COMPUTATION OF INCOME ALREADY FILED. IT WAS SUBMITTED THAT AS SUCH, FOR COMPUTATION OF CAPITAL GAIN, THE INDEXED COST OF ACQUISITION HAD BEEN TAKEN WITH REFERENCE TO THE YEAR BEGINNING ON THE FIRST DAY OF APRIL, 1981; THAT THE FAIR MARKET VALUE AS ON 1/4/1981 HAD BEEN TAKEN AS THE COST OF ACQUISITION IN THE HANDS OF THE DONOR, AS PROVIDED IN SECTION 55(2)(B)(I) OF THE ACT, AS WAS EVIDENCED BY THE VALUATION REPORT OF THE APPROVED VALUER, WHICH REPORT STOOD ALREADY FURNISHED; THAT THE HOLDING PERIOD INCLUDED THE PERIOD FOR WHICH THE ASSET WAS HELD BY THE PREVIOUS OWNER, IN ACCORDANCE WITH THE PROVISIONS OF SECTION 2(42A), EXPLANATION 1(I)(B) OF THE ACT; AND THAT THUS, THE COMPUTATION OF LONG TERM ITA NO.578/LKW/2018 PAGE 35 OF 98 CAPITAL GAIN, AS WORKED OUT BY THE ASSESSEE, WAS CORRECT AND DESERVED TO BE ACCEPTED. 37. REFUSING TO ACCEPT THE ABOVE REPLY OF KCPL, THE ASSESSING OFFICER OBSERVED THAT KCPL HAVING FAILED TO SUBMIT THE DETAILS REGARDING THE SHAREHOLDING PATTERN OF KBPL, SUCH SHAREHOLDING PATTERN OF KBPL WAS DOWNLOADED BY THE ASSESSING OFFICER FROM THE SITE OF THE MINISTRY OF CORPORATE AFFAIRS; THAT IT WAS EVIDENT THEREFROM, THAT THERE HAD BEEN CHANGES IN THE SHAREHOLDING PATTERN OF KBPL IN SEVERAL YEARS, I.E., IN 2004, 2005, 2006 AND 2011, OWING TO WHICH, THE HOLDING COMPANY, I.E., SCMCL, HAD SEIZED TO HOLD THE WHOLE OF THE SHARE CAPITAL OF KBPL BEFORE THE EXPIRY OF EIGHT YEARS FROM THE DATE OF THE TRANSFER OF THE CAPITAL ASSET, AS STIPULATED IN SECTION 47A(1) OF THE ACT. THE ASSESSING OFFICER ATTACHED THE AFORESAID SHAREHOLDING PATTERN OF KBPL AS ANNEXURES G, H, I AND J TO HIS ORDER. IN PARA 7.4 OF HIS ORDER, HE HAS GIVEN THE RELEVANT DETAILS, IN A TABULAR FORM, OF THE SHAREHOLDING PATTERN OF KBPL, AS ON 15/9/2004, 30/9/2005, 31/8/2006 (FOR WHICH PERIOD, AS PER THE ASSESSING OFFICER, ACCORDING TO THE ANNUAL RETURN FILED BY THE ASSESSEE COMPANY WITH THE REGISTRAR OF COMPANIES, THE SHAREHOLDING HAD BEEN SHOWN AS NIL) AND AS ON 25/6/2011. THE ASSESSING OFFICER OBSERVED THAT FROM THE ABOVE SHAREHOLDING PATTERN CHART, IT WAS EVIDENT THAT SCMCL HAD CEASED TO HOLD THE WHOLE OF THE SHARE CAPITAL OF KBPL BEFORE THE EXPIRY OF EIGHT YEARS FROM THE DATE OF THE TRANSFER OF THE CAPITAL ASSET, DUE TO WHICH, THE PROVISIONS OF SECTION 47A GOT ATTRACTED AND THE AMOUNT OF PROFITS OR GAINS ARISING FROM THE TRANSFER OF THE CAPITAL ASSET NOT CHARGED UNDER SECTION 45 OF THE ACT BY VIRTUE OF THE PROVISIONS CONTAINED IN ITA NO.578/LKW/2018 PAGE 36 OF 98 EITHER CLAUSE (IV), OR CLAUSE (V) OF SECTION 47, SHALL BE DEEMED TO BE THE INCOME CHARGEABLE AS CAPITAL GAIN OF THE PREVIOUS YEAR IN WHICH SUCH TRANSFER TOOK PLACE. THE ASSESSING OFFICER HELD THAT SINCE IN THE INSTANT CASE, THE HOLDING COMPANY, SCMCL, HAD CEASED TO HOLD THE WHOLE OF THE SHARE CAPITAL OF ITS SUBSIDIARY COMPANY, I.E., KBPL, BEFORE THE EXPIRY OF EIGHT YEARS FROM THE DATE OF THE TRANSFER OF THE CAPITAL ASSET, I.E., THE LAND, THE PROVISIONS OF SECTION 47A OF THE ACT GOT INVOKED ALONG WITH THOSE OF SECTION 49(3), DUE TO WHICH, THE COST AT WHICH THE IMMOVEABLE PROPERTY WAS ACQUIRED BY KBPL IN THE YEAR 2003 FROM SCMCL, BECAME THE COST OF ACQUISITION FOR THE PURPOSE OF THE CALCULATION OF LONG TERM CAPITAL GAIN; AND THAT SO, THE COST AT WHICH THE PROPERTY WAS ACQUIRED BY THE AMALGAMATED COMPANY IN 2003, BECAME ITS COST OF ACQUISITION AND THE PERIOD OF HOLDING WAS ALSO TO BE CONSIDERED FROM THE YEAR 2003. 38. THE ASSESSING OFFICER FURTHER OBSERVED THAT FROM THE COMPUTATION OF INCOME FILED BY THE ASSESSEE COMPANY, KCPL, IT WAS EVIDENT THAT THERE WERE TWO LEGS TO THE TRANSACTION OF SALE OF IMMOVEABLE PROPERTY SALE OF THE CONSTRUCTED PORTION/BUILDING AND SALE OF LAND; THAT THE ASSESSEE HAD ALSO BIFURCATED, IN THE COMPUTATION OF INCOME, THE SALE CONSIDERATION OF RS.68 CRORES, IN TWO PARTS, BUILDING AND LAND. THE ASSESSING OFFICER OBSERVED THAT FURTHER, THE MARKET VALUE OF THE PROPERTY WAS OF RS.37,93,47,155/- AS PER THE SALE DEED, AND THE SALE CONSIDERATION OF THE PROPERTY WAS OF RS.68 CRORES; THAT AS PER THE SALE DEED, THE VALUE OF CONSTRUCTION OF THE BUILDING WAS ONLY OF RS.1,17,78,800/-, OUT OF THE MARKET VALUE OF RS.37,93,47,155/-; THAT IN THE COMPUTATION OF INCOME, THE SALE VALUE OF THE BUILDING ITA NO.578/LKW/2018 PAGE 37 OF 98 STOOD TAKEN AT RS.1,17,78,800/- AND THE SALE VALUE OF THE LAND HAD BEEN TAKEN AT RS.66,82,21,200/- (RS.68,00,00,000 RS.1,17,78,800). 39. THE ASSESSING OFFICER OBSERVED THAT IN THE CASE OF SALE OF THE BUILDING/CONSTRUCTED PORTION, THE ASSESSEE HAD CALCULATED LONG TERM CAPITAL GAIN AND HAD TAKEN THE BENEFIT OF INDEXED RATE, THOUGH THE SAME FORMED PART OF THE DEPRECIABLE ASSETS OF THE COMPANY AND DEPRECIATION HAD BEEN CLAIMED THEREON IN THE EARLIER YEARS, AS WAS ALSO EVIDENT FROM THE AUDITED FINANCIAL STATEMENTS OF THE ASSESSEE COMPANY PERTAINING TO EARLIER YEARS AND TO THE YEAR ENDED ON 31/3/2014. THE ASSESSING OFFICER OBSERVED THAT FOR THE PURPOSES OF CALCULATION OF CAPITAL GAIN ON DEPRECIABLE ASSETS, THE PROVISIONS OF SECTIONS 50 AND 50A ARE APPLICABLE, AS PER WHICH, THE COST OF ACQUISITION IN RESPECT OF DEPRECIABLE ASSETS SHALL BE THE WRITTEN DOWN VALUE CALCULATED IN ACCORDANCE WITH THE PROVISIONS OF SECTION 43(6) OF THE ACT. IT WAS OBSERVED THAT AS PER SECTIONS 50 AND 50A OF THE ACT, THE ASSESSEE WAS NOT ENTITLED TO CLAIM LONG TERM CAPITAL GAIN ON DEPRECIABLE ASSETS AND SO, TO AVAIL THE BENEFIT OF INDEXATION, WHEREAS THE ASSESSEE COMPANY, KCPL, HAD CLAIMED LONG TERM CAPITAL GAIN ON THE SALE OF THE BUILDING, A DEPRECIABLE ASSET, ON WHICH, DEPRECIATION HAD BEEN CLAIMED AND THEN THE BENEFIT OF INDEXATION HAD ALSO BEEN AVAILED ON THE SAME. THE ASSESSING OFFICER, AS SUCH, PROPOSED TO DISALLOW THE CLAIM OF CAPITAL GAIN/LOSS, MADE BY THE ASSESSEE ON THE SALE OF THE BUILDING AND TO ADJUST THE SALE VALUE OF THE BUILDING IN THE COST OF THE BUILDING IN THE DEPRECIATION CHART, AND THEN, TO CALCULATE THE GAIN/LOSS ON THE SAME, AS PER THE PROVISIONS OF SECTIONS 50 AND 50A OF THE ACT. ITA NO.578/LKW/2018 PAGE 38 OF 98 40. THE ASSESSING OFFICER FURTHER OBSERVED THAT ADDITIONALLY, THE COST OF ACQUISITION OF THE BUILDING HAD BEEN TAKEN AT RS.1,04,27,687/- AND AFTER AVAILING THE BENEFIT OF INDEXATION, THE SAME HAD BEEN TAKEN AT RS.10,67,79,515/-; THAT THE BUILDING FORMED PART OF THE DEPRECIABLE ASSETS OF THE COMPANY AND FOR THAT REASON ALSO, NO BENEFIT OF INDEXATION COULD BE ALLOWED TO THE ASSESSEE. IT WAS OBSERVED THAT FURTHER, THERE WAS NO BASIS FOR THE COST OF ACQUISITION OF THE BUILDING HAVING BEEN TAKEN AT RS.1,04,27,687/-; THAT EVEN OTHERWISE, THE VALUE AS ON 1/4/1981 COULD NOT BE TAKEN IN THE ASSESSEES CASE. IT WAS OBSERVED THAT FURTHER, THE NET COST OF THE BUILDING, AS PER THE LAST BALANCE SHEET OF KBPL, I.E., FOR THE YEAR ENDED ON 31/3/2014, WAS RS.87,764/-; THAT KBPL HAD BEEN AMALGAMATED WITH THE ASSESSEE COMPANY, KCPL, DURING THE FINANCIAL YEAR 2014-15; THAT THEREFORE, THE WDV OF THE BUILDING, FOR THE PURPOSES OF CALCULATION OF PROFIT/LOSS ON THE SALE OF SUCH DEPRECIABLE ASSET, AS PER THE PROVISIONS OF SECTIONS 50 AND 50A, WAS BEING TAKEN AT RS.87,764/-; AND THAT HENCE, THE VALUE OF THE BUILDING, AS CLAIMED BY THE ASSESSEE AT RS.1,04,27,687/-, WAS NOT BEING CONSIDERED AND THE WDV OF THE SAME, AS PER THE LAST BALANCE SHEET, AMOUNTING TO RS.87,764/- WAS BEING TAKEN FOR CALCULATION OF PROFIT/LOSS ON THE SALE OF THE DEPRECIABLE ASSET. 41. THE TOTAL CAPITAL GAIN ON THE SALE OF THE BUILDING WAS THUS ARRIVED AT BY THE ASSESSING OFFICER AT RS.67,71,14,483/-, AS FOLLOWS: INCOME FROM SHORT TERM CAPITAL GAIN ON SALE OF BUILDING AS DISCUSSED ABOVE: FULL VALUE OF CONSIDERATION RS.1,17,78,800 ITA NO.578/LKW/2018 PAGE 39 OF 98 LESS: WDV AS ON 31,03.2014 RS.87,764 SHORT TERM CAPITAL GAINS RS. 1,16,91,036 TOTAL CAPITAL GAINS (RS.66,54,23,447 + RS.1,16,91,036) RS.67,71,14,483 42. WITH REGARD TO CALCULATION OF SHORT TERM CAPITAL GAINS ON THE SALE, OF THE BUILDING, THE LD. CIT(A)-2, KANPUR OBSERVED AS UNDER:- 'I HAVE GONE THROUGH SUBMISSIONS OF THE APPELLANT, FACTS OF THE CASE AND OBSERVATION OF THE ASSESSING OFFICER IT IS OBSERVED THAT THE ASSESSING OFFICER BEFORE INVOKING PROVISIONS OF SECTION 50 R.W.S. 50A HAS NOT EXAMINED THE VERY FACT THAT WHETHER THE APPELLANT HAS CLAIMED ANY BENEFIT OF DEPRECIATION U/S 32 ON THE SAID BUILDING. IT OF UTMOST IMPORTANCE TO NOTE THAT SECTION 50A EXPLICITLY TALKS ABOUT THOSE DEPRECIABLE ASSET ON WHICH DEPRECIATION HAS ACTUALLY ALLOWED TO THE ASSESSEE. HOWEVER, IN THE PRESENT CASE, THE NEITHER THE APPELLANT NOR THE TRANSFEROR COMPANIES NAMELY MIS, KANPUR BUILDERS P. LTD. OR MIS. SWADESHI COTTON MILLS COMPANY LTD HAS ALLEGED TO HAVE CLAIMED ANY DEPRECIATION ON BUILDING U/S 32 OF THE INCOME TAX ACT, 1961 AND AS SUCH THE PROVISIONS OF SECTION 50 R.W.S 50A MAY NOT BE APPLICABLE IN THE PRESENT CASE. ACCORDINGLY, I AM OF THE CONSIDERED VIEW THAT THE ASSESSING OFFICER WAS NOT JUSTIFIED IN REJECTING THE CLAIM OF LONG TERM CAPITAL LOSS ON SALE OF BUILDING WITHOUT EXAMINING THE FACT OF CLAIMING OF DEPRECIATION BY THE APPELLANT U/S 32 OF THE ACT. AO IS DIRECTED TO EXAMINE THESE FACTS AND ALLOW THE CLAIM AS PER LAW.' 43. VIDE OFFICE LETTER DATED 22.06.2018, THE ASSESSEE WAS REQUIRED TO APPEAR BEFORE THE ASSESSING OFFICER ON 29.06.2018 ALONG WITH DOCUMENTARY EVIDENCES IN SUPPORT OF ITS CLAIM THAT IT ITA NO.578/LKW/2018 PAGE 40 OF 98 HAD NOT CLAIMED ANY DEPRECIATION U/S 32 ON THE BUILDING AND AS SUCH, THE PROVISIONS OF SECTION 50 R.W.S. 50A ARE NOT APPLICABLE. 44. ON THE GIVEN DATE, THE ASSESSEE DID NOT APPEAR BEFORE THE ASSESSING OFFICER TO REPRESENT ITS CASE, RATHER IT FILED AN ADJOURNMENT APPLICATION THROUGH THE OFFICIAL MAIL OF THE ASSESSING OFFICER, STATING THEREIN THAT, FOUR TO FIVE DAYS MORE TIME MAY BE ALLOWED TO REPRESENT ITS CASE. CONSIDERING THE REQUEST OF THE ASSESSEE, THE HEARING OF THE CASE WAS ADJOURNED BY THE ASSESSING OFFICER TO 02.07.2018. ON 02.07.2018, SHRI B.S. GUPTA, ONE OF THE DIRECTORS OF THE COMPANY, APPEARED BEFORE THE ASSESSING OFFICER ALONG WITH AN ADJOURNMENT APPLICATION ON THE GROUND THAT REQUISITE INFORMATION WAS BEING COLLECTED AND CONSOLIDATED, THEREFORE, FIFTEEN DAYS MORE TIME MAY BE ALLOWED. SINCE IN THIS CASE, THERE WAS NO ISSUE INVOLVED WHICH REQUIRED THE COLLECTION AND CONSOLIDATION OF ANY INFORMATION, AS PER THE ASSESSING OFFICER, THE REQUEST OF THE ASSESSEE WAS DECLINED BY HIM AND, SIMULTANEOUSLY, THE MATTER WAS DISCUSSED WITH SHRI B.S. GUPTA, DIRECTOR, WHO ADMITTED THAT DEPRECIATION UNDER SECTION 32 OF THE ACT ON THE BUILDING IN QUESTION WAS BEING CLAIMED, BUT STATED THAT IT WAS NOT KNOWN WHETHER THE DEPRECIATION WAS ALLOWED OR NOT. 45. FOLLOWING THE DIRECTIONS OF THE LD. CIT(A), THE ASSESSING OFFICER RECORDED THE STATEMENT OF SHRI B.S. GUPTA, DIRECTOR, WHO ADMITTED THAT DEPRECIATION UNDER SECTION 32 OF THE ACT ON THE BUILDING IN QUESTION WAS BEING CLAIMED, HOWEVER, IT IS NOT KNOWN THAT THE DEPRECIATION WAS ALLOWED OR NOT. FOR THE SAKE OF CONVENIENCE, THE RELEVANT PORTION OF ORDER SHEET ENTRY IS REPRODUCED HEREUNDER: ITA NO.578/LKW/2018 PAGE 41 OF 98 2/7/18. SHRI B.S. GUPTA, DIRECTOR HIMSELF APPEARED IN THIS CASE (SIC) SEEKING ADJOURNMENT OF 15 DAYS WHICH IS NOT ALLOWED AND SHRI B. S. GUPTA, DIRECTOR ADMITTED THAT THE COMPANY HAS CLAIMED DEPRECIATION IN THIS CASE. HOWEVER, IT IS NOT KNOWN THAT DEPRECIATION WAS ALLOWED OR NOT. 46. THE CONTENTION PUT FORTH BY THE DIRECTOR OF THE COMPANY WAS VERIFIED BY THE ASSESSING OFFICER FROM THE INCOME TAX RETURNS FILED. HE OBSERVED THAT THE DOCUMENTS AVAILABLE WITH THE DEPARTMENT SHOWED THAT THE BOOK VALUE OF THE PROPERTY (LAND AND BUILDING) AS ON 31/3/2014 IN THE BOOKS OF KBPL BEFORE MERGER WAS AT RS.12,65,000/- AND RS.87,764/-, RESPECTIVELY. UPON AMALGAMATION, THE BOOK VALUE OF THE LAND AND BUILDING AS ON 01.04.2014 IN THE BOOKS OF M/S KANPUR CONSTRUCTIONS PVT. LTD., AS PER THE ASSESSING OFFICER, SHOULD HAVE BEEN AT RS.12,65,000/- AND RS.87,764/-, RESPECTIVELY. THE ASSESSING OFFICER OBSERVED THAT HOWEVER, THE ASSESSEE HAD SHOWN THE BOOK VALUE OF THE LAND AND BUILDING AS ON 01.04.2014 AT NIL IN THE BOOKS OF KCPL; THAT FURTHER, FROM THE PERUSAL OF THE INCOME TAX RETURNS OF KBPL FOR A.Y. 2013-14 AND A.Y. 2014-15, DOWNLOADED FROM DEPARTMENTAL SOFTWARE 'INCOME TAX BUSINESS APPLICATION', THE FOLLOWING POSITION EMERGED:- A.Y 2013-14: WRITTEN DOWN VALUE OF BUILDING ON THE FIRST DAY OF PREVIOUS YEAR I.E. ON 01.04.2012 WAS AT RS.1,02,363/- AND DURING THE YEAR UNDER CONSIDERATION, DEPRECIATION OF RS.5,118/- WAS CLAIMED BY THE ASSESSEE. AFTER CLAIM OF DEPRECIATION, WRITTEN DOWN VALUE ON THE LAST DAY OF PREVIOUS YEAR ITA NO.578/LKW/2018 PAGE 42 OF 98 I.E. AS ON 31.03.2013 WAS REMAINED AT RS.97,245/- (REFER SCHEDULE DOA OF ANNEXURE-A). FURTHER, SCHEDULE BP & DEP OF ANNEXURE-A SHOWS THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS CLAIMED A SUM OF RS.5,364/- (RS.5,118/- ON BUILDING + RS.246/- ON FURNITURE AND FITTINGS) AS DEPRECIATION AND AFTER CLAIM OF DEPRECIATION, NET LOSS HAS BEEN SHOWN AT RS.31,70,918/- (SCHEDULE CFL OF ANNEXURE-A). FURTHER, SCHEDULE-UD OF ANNEXURE A (DETAILS OF UNABSORBED DEPRECIATION) ALSO SHOWS THAT DEPRECIATION ON BUILDING AS WELL AS ON OTHER ASSETS IS BEING CLAIMED BY THE ASSESSEE REGULARLY. SINCE RETURNS WERE BEING FILED SHOWING LOSS, THE AMOUNTS OF UNABSORBED DEPRECIATION WERE CLAIMED TO BE CARRIED FORWARD TO THE NEXT YEAR. THE INCOME TAX RETURN WAS FILED BY THE ASSESSEE SHOWING TOTAL LOSS OF RS.78,04,975/-, WHICH INCLUDES CURRENT YEAR'S LOSS OF RS.31,70,918/- AND BROUGHT FORWARD LOSSES OF EARLIER YEARS TO THE EXTENT OF RS.46,34,057/-. THIS RETURN OF INCOME WAS PROCESSED U/S 143(1) OF THE I.T. ACT, 1961 ON 07.03.2014 AT THE RETURNED LOSS (ANNEXURE-C AND FORMING PART OF THIS ORDER). THUS, IT IS CLEAR THAT THE ASSESSEE HAD CLAIMED DEPRECIATION, WHICH WAS ALLOWED BY THE DEPARTMENT TO BE CARRIED FORWARD AND AMORTIZED FROM INCOME OF SUBSEQUENT YEARS. A.Y. 2014-15: SIMILAR IS THE POSITION IN A.Y. 2014-15. WRITTEN DOWN VALUE OF BUILDING ON THE FIRST DAY OF PREVIOUS YEAR I.E. ON 01.04.2013 WAS AT RS.97,245/- AND DURING THE YEAR UNDER CONSIDERATION, DEPRECIATION OF RS.4,862/- WAS CLAIMED BY THE ASSESSEE. AFTER CLAIM OF DEPRECIATION, WRITTEN DOWN VALUE ON THE LAST DAY OF PREVIOUS YEAR I.E., AS ON 31.03.2014 WAS REMAINED AT RS.92,383/- (REFER SCHEDULE DOA OF ANNEXURE-B). ITA NO.578/LKW/2018 PAGE 43 OF 98 FURTHER, SCHEDULE BP & DEP OF ANNEXURE-B SHOWS THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS CLAIMED A SUM OF RS.5,083/- (RS.4,862/- ON BUILDING + RS.221/- ON FURNITURE AND FITTINGS) AS DEPRECIATION AND AFTER CLAIM OF DEPRECIATION, NET LOSS HAS BEEN SHOWN AT RS.7,99,084/- (SCHEDULE CFL OF ANNEXURE-B). FURTHER, SCHEDULE-UD OF ANNEXURE-B (DETAILS OF UNABSORBED DEPRECIATION) ALSO SHOWS THAT DEPRECIATION ON BUILDING AS WELL AS ON OTHER ASSETS IS BEING CLAIMED BY THE ASSESSEE REGULARLY. SINCE RETURNS WERE BEING FILED SHOWING LOSS, THE AMOUNTS OF UNABSORBED DEPRECIATION WERE CLAIMED TO BE CARRIED FORWARD TO THE NEXT YEAR. THE INCOME TAX RETURN WAS FILED BY THE ASSESSEE SHOWING TOTAL LOSS OF RS.86,04,059/-, WHICH INCLUDES CURRENT YEAR'S LOSS OF RS.7,99,084/- AND BROUGHT FORWARD LOSSES OF EARLIER YEARS TO THE EXTENT OF RS.78,04,975/-. 47. THE ASSESSING OFFICER OBSERVED THAT IN VIEW OF THE ABOVE, IT WAS CLEAR THAT THE ASSESSEE HAD SUBMITTED WRONG/FALSE FACTS BEFORE THE LD. CIT(A)-2, KANPUR; THAT IT COULD THUS EASILY BE INFERRED THAT THE ASSESSEE HAD CLAIMED DEPRECIATION UNDER SECTION 32 OF THE ACT ON THE BUILDING, WHICH WAS ALLOWED BY THE DEPARTMENT; AND THAT THEREFORE, THE PROVISIONS OF SECTION 50 R.W.S. 50A OF THE ACT WERE CLEARLY APPLICABLE IN THIS CASE. 48. THE ASSESSING OFFICER OBSERVED THAT ON AMALGAMATION OF KBPL WITH THE ASSESSEE W.E.F. 01.04.2014, THE WRITTEN DOWN VALUE OF THE LAND AND BUILDING AS ON 01.04.2014 IN THE BOOKS OF KCPL WOULD HAVE BEEN AT RS.12,65,000/- AND RS.92,383/-, RESPECTIVELY; THAT HOWEVER, KCPL HAD SHOWN NIL VALUE OF THE LAND ITA NO.578/LKW/2018 PAGE 44 OF 98 AND BUILDING AS ON 01.04.2014; AND THAT THEREFORE, IT WAS BEYOND IMAGINATION AS TO HOW THE ASSESSEE HAD DONE THE SAME. 49. THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE'S SUBMISSION BEFORE LD. CIT(A)-2, KANPUR WAS TOTALLY FALSE AND MISLEADING AS TO THE FACTS OF THE CASE; AND THAT THEREFORE, WHILE COMPUTING THE SHORT TERM CAPITAL GAINS ON SALE OF BUILDING, THE COST OF ACQUISITION IN THE HANDS OF THE ASSESSEE AS ON 01.04.2014 WAS BEING TAKEN AT RS.92,383/-. 50. THE SHORT TERM CAPITAL GAIN ON THE SALE OF THE BUILDING WAS COMPUTED AT RS.16,91,036/-, IN THE FOLLOWING MANNER: SHORT TERM CAPITAL GAINI ON SALE OF BUILDING. FULL VALUE OF CONSIDERATION RS.1,17,78,800 LESS: WDV AS ON 1/4/2014 RS. 92,383 SHORT TERM CAPITAL GAIN RS.27,42,26,294 51. THE LD. CIT(A), BY VIRTUE OF THE IMPUGNED ORDER, HAS ALLOWED RELIEF TO THE ASSESSEE, HOLDING AS FOLLOWS: NOW COMING TO GROUND NO. 2 OF THIS APPEAL. THE AO HAS MADE THE ADDITION OF SHORT TERM CAPITAL GAIN TO THE EXTENT OF RS.1,16,91,036/-. AND APPELLANT HAS FILED THIS APPEAL AGAINST THE ORDER OF AO GIVING EFFECT TO THE APPELLATE ORDER DATED 16.05.2018 OF APPEAL NO. CIT(A)-II/10157/17-18/45. NOW THE ONE IMPORTANT QUESTION ARISES THAT WHETHER ASSESSEE IS ENTITLED TO FILE APPEAL TO CIT(A) AGAINST WRONG APPEAL EFFECT ORDER OF AO? NORMALLY, WHERE ANY MISTAKE WAS COMMITTED BY AO WHILE GIVING EFFECT TO APPELLATE ORDERS, RECTIFICATION PETITION U/S 154 IS FILLED WITH AO. HOWEVER, AO MAY ITA NO.578/LKW/2018 PAGE 45 OF 98 INTERPRET THE APPEAL ORDER DIFFERENTLY OR NOT CONCUR WITH THE SUBMISSIONS OF THE APPELLANT OR INTERPRET THE DIRECTIONS OF CIT(A) DIFFERENTLY FROM THE DIRECTIONS IN THE APPEAL ORDER. IN SUCH CASES THE QUESTION IS ANSWERED IN FAVOUR OF ASSESSEE BY SEVERAL HIGH COURTS. BECAUSE AN ORDER OF ASSESSMENT IS ONE IN WHICH THERE IS COMPUTATION OF INCOME OR COMPUTATION OF TAX OR BOTH. THAT COMPUTATION OF INCOME AND TAX CAN BE MADE BY AO NOT ONLY IN REGULAR ASSESSMENT MADE U/S 143 BUT ALSO IN ORDERS PASSED GIVING EFFECT TO THE DECISIONS OF APPELLATE AUTHORITIES. THE ORDER PASS BY THE AO GIVING EFFECT TO THE DECISION OF THE APPELLATE AUTHOL1T'IS' AS MUCH AN ASSESSMENT ORDER AS THE ONE PASSED BY HIM BY WAY OF REGULAR ASSESSMENT US 143. HENCE, IT IS HELD THAT WHERE ASSESSEE IS AGGRIEVED BY THE APPEAL EFFECT ORDER OF AO IT IS VERY MUCH APPEALABLE TO CIT (A). NOW COMING TO THE GROUND IN RESPECT OF INVOCATION OF PROVISIONS OF SECTION 50 R.W.S 50A IN RESPECT OF SALE OF BUILDING. AS PER DISCUSSION IN AFORESAID PARA, IT IS CLEAR THAT' VIDE FINDING RECORDED AT PAGE 24 OF THE 'APPELLATE ORDER, THE ASSESSING OFFICER WAS DIRECTED TO VERIFY THE FACT OF CLAIM OF DEPRECIATION BY APPELLANT ON BUILDING WHICH HAS BEEN SOLD IN THE YEAR UNDER REFERENCE. IT WAS DIRECTED THAT SINCE THE AO BEFORE INVOKING PROVISIONS OF SECTION 50 R.W.S. 50A HAD NOT EXAMINED THE FACT OF APPELLANT CLAIMING ANY BENEFIT OF DEPRECIATION U/S 32 ON THE SAID BUILDING, SAME SHOULD BE EXAMINED FORM THE RECORDS AND DECIDE THE APPLICABILITY OF S. 50 & S. 50A OF IT ACT. THE APPELLANT OR THE TRANSFEROR COMPANIES NAMELY M/S. KANPUR BUILDERS PVT. LTD., OR M/S. SWADESHI COTTON MILLS COMPANY LTD., HAD ALLEGED NOT TO HAVE CLAIMED ANY DEPRECIATION U/S 32 OF THE INCOME TAX ACT, 1961 ON BUILDING AND ARGUED THAT AS SUCH THE PROVISIONS OF SECTION 50 R.W.S. 50A WERE NOT APPLICABLE IN THE ITA NO.578/LKW/2018 PAGE 46 OF 98 PRESENT CASE. ACCORDINGLY, THE AO WAS DIRECTED TO EXAMINE THE FACT OF CLAIMING OF DEPRECIATION BY THE APPELLANT AND ALLOW THE CLAIM AS PER' LAW. APPELLANT'S ONLY ARGUMENT IS THAT ASSESSING OFFICE HAS NOT UNDERSTOOD THE DIRECTION IN PROPER PERSPECTIVE AND WHILE EXAMINING THE CLAIM OF DEPRECIATION ON BUILDING, HE HAS OMITTED 'TO TAKE INTO ACCOUNT THE CRUCIAL FACT WHETHER ACTUAL BENEFIT OF DEPRECIATION HAS BEEN ALLOWED TO THE APPELLANT OR NOT. IT IS RELEVANT TO NOTE THAT AMALGAMATING COMPANY M/S. KANPUR BUILDERS P. LTD., AS POINTED OUT BY THE ASSESSING OFFICER, HAS CLAIMED DEPRECIATION ON THE BUILDING SOLD BY THE APPELLANT BUT NO SUCH CLAIM WAS EVER ALLOWED AS M/S. KANPUR BUILDERS P. LTD. WAS UNDER PERPETUAL LOSSES ANID ALL THE DEPRECIATION CLAIMED WAS CARRIED FORWARDED TO NEXT YEAR. IN THESE CIRCUMSTANCES, WHEREIN THE DEPRECIATION OF BUILDING HAS NOT BEEN ACTUALLY ALLOWED, THE PROVISIONS OF SECTION 50 R.W.S 50A ARE NOT APPLICABLE. I AGREE WITH THE APPELLANT'S SUBMISSIONS. SHRI B.S. GUPTA, DIRECTOR ADMITTED BEFORE AO THAT DEPRECIATION U/S 32 OF THE ACT ON THE BUILDING IN QUESTION, WAS BEING CLAIMED, HOWEVER, DEPRECIATION WAS NOT ALLOWED AS DEDUCTION, IN VIEW OF THE BROUGHT FORWARD LOSES AND SAME WAS BEING CARRIED FORWARD AS UNABSORBED DEPRECIATION. AO VERIFIED THESE FACTS FROM THE TAX RETURNS FILED FOR AY 2013-14 & AY 2014-15 BY APPELLANT AND HELD THAT THE ASSESSEE HAD IN FACT DID CLAIM DEPRECIATION, AND FURTHER HELD THAT AS M/S. KANPUR BUILDERS PVT. LTD., (MERGED COMPANY) HAS CLAIMED DEPRECIATION ON BUILDING IN 'ITS RETURN OF INCOME, THE PROVISIONS OF SECTION 50 R.W.S. 50A ARE APPLICABLE. ACCORDINGLY AO RECOMPUTED THE SHORT-TERM CAPITAL GAINS ON SALE OF BUILDING. NOW THE ONLY DISPUTE IS REGARDING THE LEGAL CONTENTION IN CONTEXT OF PROVISIONS OF SECTION 50 R.W.S 50A AS PER ITA NO.578/LKW/2018 PAGE 47 OF 98 WHICH THE DEPRECIATION MUST ACTUALLY BE ALLOWED TO THE APPELLANT. AS PER APPELLANT THE CLAIM OF DEPRECIATION MUST RESULT IN REDUCTION OF TAXABLE INCOME OF THE APPELLANT. HOWEVER, WHERE NO BENEFIT OF DEPRECIATION HAS BEEN ALLOWED TO THE APPELLANT DUE TO LOSSES AND WAS CARRIED FORWARD TO NEXT FINANCIAL YEAR, WILL IT AMOUNT TO DEPRECIATION ALLOWED TO THE APPELLANT OR/AND IT WILL AMOUNT TO 'OBTAINED BY THE ASSESSEE' AS ENVISAGED U/S 50A, WHICH IS THE CHARGING SECTION FOR THIS TRANSACTION. APPELLANT HAS RELIED UPON THE DECISION OF APEX COURT IN THE CASE OF MADEVA UPENDRA SINAI V. UOI [1975] 98 ITR 209 (SC), MADRAS HIGH COURT IN THE CASE OF M. RAGHAVAN V. ACIT [2004] 266 ITR 145 (MAD) AND RAJKOT BENCH OF TRIBUNAL IN THE CASE OF KANDLA PORT TRUST V. AIT [2006] 8 SOT 429. IN THE PRESENT CASE, IT IS AN UNDISPUTED FACT THAT THE APPELLANT (AMALGAMATED COMPANY) AND M/S. KANPUR BUILDERS P. LTD. (AMALGAMATING COMPANY) HAD CLAIMED DEPRECIATION EVERY YEAR AS PER THE FIXED ASSET SCHEDULE AND THAT WAS ALLOWED AS DEDUCTION FOR CALCULATING THE WDV OF THE BUILDING IN QUESTION. THIS IS EVIDENT AS PER THE CALCULATIONS REPRODUCED ABOVE FROM THE ORDER OF THE AO UNDER APPEAL. IT IS ALSO A FACT THAT THIS DEPRECIATION ALLOWED DID NOT RESULT IN REDUCTION OF TAX LIABILITY OF ANY ASSESSMENT YEAR, DUE TO CURRENT AND BROUGHT FORWARD LOSSES AND THEREFORE THE DEPRECIATION CLAIMED ON THE BUILDING BY THE APPELLANT WAS ONLY USED FOR REDUCING THE WDV OF THE ASSET IN QUESTION AND WAS ALWAYS CARRIED FORWARD IN THE RELEVANT ASSESSMENT YEARS. IT IS IMPORTANT TO SEE THE PROVISIONS OF S. 43(6) OF IT ACT IN THIS REGARD, WHICH SAYS: S. 43(6) 'WRITTEN DOWN VALUE' MEANS ITA NO.578/LKW/2018 PAGE 48 OF 98 (A) IN THE CASE OF ASSETS ACQUIRED IN THE PREVIOUS YEAR, THE ACTUAL COST TO THE ASSESSEE; (B) IN THE CASE OF ASSETS ACQUIRED BEFORE THE PREVIOUS YEAR, THE ACTUAL COST TO THE ASSESSEE LESS ALL DEPRECIATION ACTUALLY ALLOWED TO HIM UNDER THIS ACT, OR UNDER THE INDIAN INCOME-TAX ACT, 1922 (11 OF 1922), OR ANY ACT REPEALED BY THAT ACT, OR UNDER ANY EXECUTIVE ORDERS ISSUED WHEN THE INDIAN INCOME-TAX ACT, 1886 (2 OF 1886), WAS IN FORCE: PROVIDED THAT IN DETERMINING THE WRITTEN DOWN VALUE IN RESPECT OF BUILDINGS, MACHINERY OR PLANT FOR THE PURPOSES OF CLAUSE (II) OF SUB-SECTION (1) OF SECTION 32, 'DEPRECIATION ACTUALLY ALLOWED' SHALL NOT INCLUDE DEPRECIATION ALLOWED UNDER SUB-CLAUSES (A), (B) AND (C) OF CLAUSE (VI) OF SUB-SECTION (2) OF SECTION 10 OF THE INDIAN INCOME-TAX ACT, 1922 (11 OF 1922), WHERE SUCH DEPRECIATION WAS NOT DEDUCTIBLE IN DETERMINING THE WRITTEN DOWN VALUE FOR THE PURPOSES OF THE SAID CLAUSE (VI); (C) IN THE CASE OF ANY BLOCK OF ASSETS, - 17 (I) IN RESPECT OF ANY PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR COMMENCING ON THE 1ST DAY OF APRIL, 1988, THE AGGREGATE OF THE WRITTEN DOWN VALUES OF ALL THE ASSETS FALLING WITHIN THAT BLOCK OF ASSETS AT THE BEGINNING OF THE PREVIOUS YEAR AND ADJUSTED, (A) BY THE INCREASE BY THE ACTUAL COST OF ANY ASSET FALLING WITHIN THAT BLOCK, ACQUIRED DURING .THE PREVIOUS YEAR; (B) BY THE REDUCTION OF THE MONEYS PAYABLE IN RESPECT OF ANY ASSET FALLING WITHIN THAT BLOCK, WHICH IS SOLD OR DISCARDED OR DEMOLISHED OR DESTROYED DURING THAT PREVIOUS YEAR TOGETHER WITH THE AMOUNT OF THE SCRAP VALUE, IF ANY, SO, HOWEVER, THAT THE AMOUNT OF SUCH REDUCTION DOES NOT EXCEED THE WRITTEN DOWN VALUE AS SO INCREASED; AND ITA NO.578/LKW/2018 PAGE 49 OF 98 (C) IN THE CASE OF A SLUMP SALE, DECREASE BY THE ACTUAL COST OF THE ASSET FALLING WITHIN: THAT BLOCK AS REDUCED (A)...... (B).... (II) IN RESPECT OF ANY PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR COMMENCING ON OR AFTER THE .1ST DAY OF APRIL, 1989, THE WRITTEN DOWN VALUE OF THAT BLOCK OF ASSETS IN THE IMMEDIATELY PRECEDING PREVIOUS YEAR AS REDUCED BY THE DEPRECIATION ACTUALLY ALLOWED IN RESPECT OF THAT BLOCK OF ASSETS IN RELATION TO THE SAID PRECEDING PREVIOUS YEAR AND AS FURTHER ADJUSTED BY THE INCREASE OR THE REDUCTION, REFERRED TO IN ITEM (I). EXPLANATION 1........ EXPLANATION 2. -WHERE IN ANY PREVIOUS YEAR, ANY BLOCK OF ASSETS IS TRANSFERRED, - (A) BY A HOLDING COMPANY TO ITS SUBSIDIARY COMPANY OR BY A SUBSIDIARY COMPANY TO ITS HOLDING COMPANY AND THE CONDITIONS OF CLAUSE (IV) OR, AS THE CASE MAY BE, OF CLAUSE (V) OF SECTION 47 ARE SATISFIED; OR (B) BY THE AMALGAMATING COMPANY TO THE AMALGAMATED COMPANY IN A SCHEME OF AMALGAMATION, AND THE AMALGAMATED COMPANY IS AN INDIAN COMPANY, THEN, NOTWITHSTANDING ANYTHING CONTAINED IN CLAUSE (1), THE ACTUAL COST OF THE BLOCK OF ASSETS IN THE CASE OF THE TRANSFEREE-COMPANY OR THE AMALGAMATED COMPANY, AS THE CASE MAY BE, SHALL BE THE WRITTEN DOWN VALUE OF THE BLOCK OF ASSETS AS IN THE CASE OF THE TRANSFEROR- COMPANY OR THE AMALGAMATING COMPANY FOR THE IMMEDIATELY PRECEDING PREVIOUS YEAR AS REDUCED BY THE AMOUNT OF DEPRECIATION ACTUALLY ALLOWED IN RELATION TO THE SAID PRECEDING PREVIOUS YEAR. EXPLANATION 2A....... EXPLANATION 2B....... ITA NO.578/LKW/2018 PAGE 50 OF 98 EXPLANATION 2C. ...... . EXPLANATION 3.ANY ALLOWANCE IN RESPECT OF ANY DEPRECIATION CARRIED FORWARD UNDER SUB-SECTION (2) OF SECTION 32 SHALL BE DEEMED TO BE DEPRECIATION 'ACTUALLY ALLOWED'. IT IS CLEAR FROM THE EXPLANATION 3 THAT CARRIED FORWARD DEPRECIATION U/S 32(2) OF THE ACT SHALL BE DEEMED TO HAVE BEEN ACTUALLY ALLOWED TO THE APPELLANT FOR CALCULATING THE WDV IN THE HANDS OF AMALGAMATED COMPANY. SO, IN ARRIVING AT THE WRITTEN DOWN VALUE OF THE ASSETS AT THE HANDS OF THE AMALGAMATED COMPANY, NAMELY, THE ASSESSEE HEREIN, THE AO NOTED THAT THE ASSESSEE HAD TAKEN THE WRITTEN DOWN VALUE BASED ON THE WRITTEN DOWN VALUE OF THE ASSETS AT THE HANDS OF THE AMALGAMATING COMPANY. IN OTHER WORDS, THE WRITTEN DOWN VALUE AT THE HANDS OF THE AMALGAMATED COMPANY WOULD BE THE WRITTEN DOWN VALUE AS ARRIVED AT BY THE ACTUAL COST OF THE ASSETS, AS REDUCED BY THE DEPRECIATION ACTUALLY ALLOWED TO THE AMALGAMATING COMPANY. ONE NEEDS TO SEE THE EXPLANATION 3 TO SECTION 43(6) & SECTION 72A RELEVANCE TO THE CASE. THE WDV OF THE STOCK OF ASSETS OF THE AMALGAMATING COMPANY WOULD BE THE ACTUAL COST OF THE ASSET MINUS THE AMOUNT OF DEPRECIATION ACTUALLY ALLOWED IN RELATION TO THE PRECEDING PREVIOUS YEAR BEFORE THE DATE OF AMALGAMATION. THE CARRY FORWARD UNABSORBED DEPRECIATION OF THE AMALGAMATING COMPANY WOULD BE AVAILABLE TO THE AMALGAMATED COMPANY ONLY ON SATISFYING THE CONDITIONS ENUMERATED UNDER SECTION 72A AND AS PER EXPLANATION 3, SUCH DEPRECIATION CARRIED FORWARD UNDER SUB-SECTION (2) OF SECTION 32 SHALL BE DEEMED TO BE DEPRECIATION 'ACTUALLY ALLOWED'. THUS, THE UNABSORBED DEPRECIATION IS DEEMED TO BE ALLOWED TO THE AMALGAMATING COMPANY AND ACTUAL COST OF THE ABOVE BLOCK OF ASSETS OF THE TRANSFEREE COMPANY ITA NO.578/LKW/2018 PAGE 51 OF 98 SHALL BE THE WRITTEN DOWN VALUE OF THE BLOCK OF ASSETS AT THE HANDS OF THE TRANSFEROR COMPANY AS REDUCED BY THE AMOUNT OF DEPRECIATION ACTUALLY ALLOWED IN RELATION TO THE SAID PRECEDING PREVIOUS YEAR, WHICH SHALL BE FURTHER INCREASED BY INCLUDING THE UNABSORBED DEPRECIATION OF THE AMALGAMATING COMPANY. EXPLANATION 3 IS RELEVANT ONLY IN RESPECT OF THE CARRIED FORWARD DEPRECIATION AS GRANTED UNDER SECTION 32(2) AND WHAT' IS CONTEMPLATED UNDER EXPLANATION 3 IS THE CARRIED FORWARD DEPRECIATION, WHICH IS DEEMED TO HAVE BEEN ACTUALLY ALLOWED. HENCE AFTER DETAILED DISCUSSION AND ANALYZING VARIOUS PROVISIONS OF THE ACT, IT IS HELD THAT THE UN-ABSORBED DEPRECIATION OF THE AMALGAMATING COMPANY IS DEEMED TO BE THE ALLOWANCE OF DEPRECIATION TO THE AMALGAMATED COMPANY FOR THE PREVIOUS YEAR IN WHICH THE AMALGAMATION IS AFFECTED. SECTION 72A IS A SPECIFIC PROVISION TO DEAL WITH CASES OF CARRY FORWARD AND SET OFF OF ACCUMULATED LOSS AND UNABSORBED DEPRECIATION ALLOWANCE IN CASES OF AMALGAMATION OR THE MERGER. AS PER SUB SECTION (1), THE ACCUMULATED LOSS AND UNABSORBED DEPRECIATION OF THE AMALGAMATING COMPANY IS DEEMED TO BE THE LOSS OR THE ALLOWANCE OF DEPRECIATION TO THE AMALGAMATED COMPANY FOR THE PREVIOUS YEAR IN WHICH THE AMALGAMATION IS AFFECTED. UNABSORBED DEPRECIATION IS DEFINED IN THE EXPLANATION TO MEAN SHARE OR ALLOWANCE OF AN AMALGAMATING COMPANY, WHICH REMAINS TO BE ALLOWED AND IT WOULD HAVE BEEN ALLOWED TO THE AMALGAMATING COMPANY UNDER THE PROVISIONS OF THE ACT AS IF THE AMALGAMATION HAD NOT BEEN EFFECTED. APPELLANT HAS BROUGHT ON RECORD THE VIEW TAKEN BY HON'BLE APEX COURT IN THE CASE OF COMMISSIONER OF INCOME-TAX V. DOOM DOOM INDIA LTD. [2009] 310. ITR 392 (SC) & HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT V SILICA! METALLURGIC LTD (2010) 324 ITR .29 (MAD) THAT UNABSORBED DEPRECIATION OF AMALGAMATING ITA NO.578/LKW/2018 PAGE 52 OF 98 COMPANY CANNOT BE DEDUCTED WHILE TAKING WRITTEN DOWN VALUE OF ASSET TAKEN OVER, OF AMALGAMATED COMPANY. HON'BLE APEX COURT IN THE CASE OF COMMISSIONER OF INCOME-TAX V. DOOM DOOM INDIA LTD. [2009] 310 ITR 392 (SC) HELD: ANSWER TO QUESTION NO. (1) - MEANING OF THE EXPRESSION 'DEPRECIATION ACTUALLY ALLOWED' IN SECTION 43(6)(B) OF THE 1961 ACT 7. DEDUCTIONS BY WAY OF DEPRECIATION ALLOWANCE HAVE BEEN SPECIFICALLY RECOGNIZED AND DEALT WITH IN SECTIONS 32, 34 AND 43(6) OF THE 1961 ACT (WHICH DEALS WITH THE DEFINITION OF THE WORDS 'WRITTEN DOWN VALUE'). SECTION 32 ADOPTS TWO METHODS IN ALLOWING DEPRECIATION. IN THE CASE OF OCEAN-GOING SHIPS, DEPRECIATION IS ALLOWED, YEAR AFTER YEAR, AT THE FIXED PERCENTAGE ON THE ORIGINAL COST OF THE ASSET [SEE: SECTION 32(1)(I)]. THIS IS CALLED THE STRAIGHT-LINE METHOD. IN THE CASE OF NON-OCEAN- GOING SHIPS AND BUILDINGS, MACHINERY, PLANT OR FURNITURE, THE PRESCRIBED PERCENTAGE OF DEPRECIATION IS TO BE COMPUTED ON THE BASIS OF 'WRITTEN DOWN VALUE' OF THE ASSET (SEE SECTION 32(1)(IL)]. THIS IS KNOWN AS 'WRITTEN-DOWN VALUE' METHOD. BOTH THESE METHODS SEEK TO ENSURE THAT THE TOTAL DEPRECIATION ALLOWANCE(S) GRANTED, YEAR AFTER YEAR, DOES NOT EXCEED 100 PER CENT OF THE ORIGINAL COST OF THE ASSET. IN THE STRAIGHT-LINE METHOD, THE ENTIRE DEPRECIATION IS WRITTEN OFF SOONER THAN IN THE 'WRITTEN DOWN VALUE' METHOD, IF THE FIGURES OF THE ACTUAL COST AND THE PRESCRIBED PERCENTAGE ARE THE SAME IN EITHER CASE. SECTION 32 (2) ALLOWS THE CARRY FORWARD AND UNABSORBED DEPRECIATION ALLOWANCES TO ANY SUBSEQUENT YEAR, WITHOUT ANY TIME LIMIT, WHERE SUCH NON-ABSORPTION IS OWING TO THERE BEING NO PROFITS OR GAINS CHARGEABLE FOR THAT ITA NO.578/LKW/2018 PAGE 53 OF 98 PREVIOUS YEAR, OR OWING TO THE PROFITS OR GAINS BEING LESS THAN THE ALLOWANCE'. DEPRECIATION LOSS UNDER SECTION 32 (2) STANDS ON THE SAME FOOTING AS ANY OTHER BUSINESS LOSSES. AN ASSESSEE CLAIMING DEPRECIATION OF ASSETS HAS TO SHOW THAT SUCH ASSETS ARE OWNED BY HIM AND ARE USED BY HIM IN THE ACCOUNTING YEAR FOR THE PURPOSE OF HIS BUSINESS, THE PROFITS OF WHICH ARE BEING CHARGED [SEE: SECTION 32(1)(I)]. FURTHER, THE TOTAL OF ALL DEDUCTIONS IN RESPECT OF DEPRECIATION UNDER SECTION 32(1)(I), MADE YEAR AFTER YEAR, SHOULD NOT, IN ANY EVENT, EXCEED THE ACTUAL COST OF THE ASSETS TO THE ASSESSEE [SEE: SECTION 34(2)(I)]. THE DEFINITION OF 'ACTUAL COST' IS TO BE FOUND IN SECTION 43(1) AND THE DEFINITION OF 'WRITTEN DOWN VALUE' IS TO BE FOUND IN SECTION 43(6) OF THE 1961 ACT. THE LATTER DEFINES 'WRITTEN DOWN VALVE' UNDER SECTION 43(6) TO MEAN - (A) IN THE CASE OF ASSETS ACQUIRED IN THE PREVIOUS YEAR, THE ACTUAL COST TO THE ASSESSEE; (B) IN THE CASE OF ASSETS ACQUIRED BEFORE THE PREVIOUS YEAR, THE ACTUAL COST TO THE ASSESSEE LESS ALL DEPRECIATION(S) ACTUALLY ALLOWED UNDER THE 1961 ACT. 8 THE KEY WORD IN SECTION 43(6)(B) OF THE 1961 ACT IS 'ACTUALLY'. WE QUOTE HEREIN BELOW AN IMPORTANT OBSERVATION, MADE BY THIS COURT ON THE MEANING OF THE WORDS 'ACTUALLY ALLOWED' IN SECTION 43 (6)(B) IN THE CASE OF MADEVA UPENDRA SINAI V. UNION OF INDIA AND OTHERS - (1975) 98 ITR 209 AT PAGES 223 & 224, WHICH READS AS UNDER: 'THE PIVOT OF THE DEFINITION OF 'WRITTEN-DOWN VALUE' IS THE 'ACTUAL COST' OF THE ASSETS. WHERE THE ASSET WAS ACQUIRED AND ALSO USED FOR THE BUSINESS IN THE PREVIOUS YEAR, SUCH VALUE WOULD BE ITS FULL ACTUAL COST AND DEPRECIATION FOR THAT YEAR WOULD BE ITA NO.578/LKW/2018 PAGE 54 OF 98 ALLOWED AT THE PRESCRIBED RATE ON SUCH COST. IN SUBSEQUENT YEAR, DEPRECIATION WOULD BE CALCULATED ON THE BASIS OF ACTUAL COST LESS DEPRECIATION ACTUALLY ALLOWED. THE KEY WORD IN CLAUSE (B) IS 'ACTUALLY'. IT IS THE ANTITHESIS OF THAT WHICH IS MERELY SPECULATIVE, THEORETICAL OR IMAGINARY. 'ACTUALLY' CONTRA-INDICATES A DEEMING CONSTRUCTION OF THE WORD 'ALLOWED' WHICH IT QUALIFIES. THE CONNOTATION OF THE PHRASE 'ACTUALLY ALLOWED' IS THUS LIMITED TO DEPRECIATION ACTUALLY TAKEN INTO ACCOUNT OR GRANTED AND GIVEN EFFECT TO, I.E., DEBITED BY THE INCOME-TAX OFFICER AGAINST THE INCOMINGS OF THE BUSINESS IN COMPUTING THE TAXABLE INCOME OF THE ASSESSEE; IT CANNOT BE STRETCHED TO MEAN 'NOTIONALLY ALLOWED' OR MERELY ALLOWABLE ON A NOTIONAL BASIS.' 'FROM THE ABOVE CONSPECTUS, IT IS CLEAR THAT THE ESSENCE OF THE SCHEME OF THE INDIAN INCOME-TAX ACT IS THAT DEPRECIATION IS ALLOWED, YEAR AFTER YEAR, ON THE ACTUAL COST OF THE ASSETS AS REDUCED BY THE DEPRECIATION ACTUALLY ALLOWED IN EARLIER YEARS. IT FOLLOWS, THEREFORE, THAT EVEN IN THE CASE OF ASSETS ACQUIRED BEFORE THE PREVIOUS YEAR, WHERE IN THE PAST NO DEPRECIATION WAS COMPUTED, ACTUALLY ALLOWED, OR CARRIED FORWARD, FOR NO FAULT OF THE ASSESSEE, THE 'WRITTEN-DOWN VALUE' MAY, UNDER CLAUSE (B) OF SECTION 43(6), ALSO, BE THE ACTUAL COST OF THE ASSETS TO THE ASSESSEE.' 9. THEREFORE, THIS COURT HAS CLEARLY LAID DOWN THE MEANING OF THE WORD 'ACTUALLY ALLOWED' IN SECTION 43(6)(B) TO MEAN - 'LIMITED TO DEPRECIATION ACTUALLY TAKEN INTO ACCOUNT OR GRANTED AND GIVEN EFFECT TO, I.E. DEBITED BY THE INCOME-TAX OFFICER AGAINST THE INCOMINGS OF THE BUSINESS IN COMPUTING THE TAXABLE INCOME OF THE ASSESSEE'. ITA NO.578/LKW/2018 PAGE 55 OF 98 IT IS THEREFORE, CLEAR FROM THE FACTS AND THE TWO JUDGMENTS REPRODUCED ABOVE THAT UNDER SECTION 72A THAT THE CARRIED FORWARD DEPRECIATION IS DEEMED TO BE THE DEPRECIATION OF THE PREVIOUS YEAR AT THE HANDS OF THE AMALGAMATED COMPANY AND FOR THE PURPOSE OF ARRIVING AT THE WRITTEN DOWN VALUE AT THE HANDS OF THE AMALGAMATED COMPANY - THE ASSESSEE HEREIN, THE WRITTEN DOWN VALUE SHALL BE ONE WHICH WOULD BE ARRIVED AT, AT THE HANDS OF THE TRANSFEROR COMPANY FOR THE IMMEDIATELY PRECEDING PREVIOUS YEAR AS REDUCED BY THE AMOUNT OF DEPRECIATION ACTUALLY ALLOWED IN RELATION TO THE SAID PRECEDING PREVIOUS YEAR. AND AS EXPLANATION 3 IS RELEVANT FOR THE CARRIED FORWARD DEPRECIATION AS GRANTED UNDER SECTION 32(2) AND WHAT IS CONTEMPLATED UNDER EXPLANATION 3 IS THAT THE CARRIED FORWARD DEPRECIATION, IS DEEMED TO HAVE BEEN ACTUALLY ALLOWED IN CASE OF AN AMALGAMATION. AS PER THE JUDGEMENT IN THE CASE OF EID PARRY (INDIA) LTD. VS. DCIT (MADRAS) TAX CASE APPEAR NO. 1311 AND 1312 OF 2005, IT IS CLEAR THAT THE CARRIED FORWARD UNABSORBED DEPRECIATION IS DEEMED TO HAVE BEEN ALLOWED TO THE AMALGAMATING COMPANY AT THE TIME OF AMALGAMATION, AS IT CEASE TO EXIST. LASTLY, COMING TO THE CONTENTION OF THE APPELLANT THAT THE MEANING OF THE WORDS 'ACTUALLY ALLOWED' IN SECTION 43(6)(B) IS TO MEAN - 'LIMITED TO DEPRECIATION ACTUALLY TAKEN INTO ACCOUNT OR GRANTED AND GIVEN EFFECT TO, I.E., DEBITED BY THE INCOME-TAX OFFICER AGAINST THE INCOMINGS OF THE BUSINESS IN COMPUTING THE TAXABLE INCOME OF THE ASSESSEE OR NOT. FOR THIS SECTION 50A OF THE I.T. ACT IS THE PROVISION WHERE COST OF ACQUISITION IN CASE OF DEPRECIABLE ASSET HAS BEEN DEFINED. IN THE SAID SECTION, THE WORD USED IS 'OBTAINED' FOR THE PURPOSE OF DEDUCTION ON ACCOUNT OF DEPRECIATION UNDER CLAUSE (I) OF SUB-SECTION (1) OF SEC. 32. APPELLANT HAS RELIED UPON THE CASE OF TRAVANCORE CHEMICALS & ITA NO.578/LKW/2018 PAGE 56 OF 98 MANUFACTURING CO. LTD. VS. CIT (1999) 233 ITR 825 (KERALA), WHERE THE WORD 'OBTAIN' HAS BEEN DEFINED WITH REFERENCE TO SECTION 41(1) OF THE ACT. BLACK'S LAW DICTIONARY GIVES THE MEANING OF THE WORD 'OBTAIN' AS 'TO GET POSSESSION OF'. WEBSTER'S COMPREHENSIVE DICTIONARY (INTERNATIONAL EDITION) GIVES THE MEANING AS 'TO GAIN POSSESSION OF'. SHORTER OXFORD DICTIONARY GIVES THE MEANING AS 'TO POSSESS'. THEREFORE, ACCORDING TO THE SAID JUDGEMENT, THE WORDS 'HAS OBTAINED' MUST DENOTE AND SATISFY THE ELEMENT OF PHYSICAL POSSESSION. IT IS NOT ENOUGH THAT A VESTED RIGHT IS ACCRUED IN THE ASSESSEE TO OBTAIN THE AMOUNT. THE AMOUNT SHOULD HAVE BEEN ACTUALLY RECEIVED BY THE ASSESSEE. IN THE INSTANT WHERE THE APPELLANT HAS ADMITTEDLY NOT OBTAINED ANY BENEFIT OF THE DEPRECIATION ON BUILDING FORMING PART OF THE BLOCK AND AS SUCH THE PROVISIONS OF SECTION 50A WILL NOT BE APPLICABLE. IN THE CASE OF KANDALA PORT TRUST VS. ACIT (2006) 104'T77 396 (RAJKOT TRIB.), IT WAS HELD THAT THE PHRASE 'ACTUALLY ALLOWED' IS LIMITED TO DEPRECIATION ACTUALLY TAKEN INTO ACCOUNT OR GRANTED AND GIVEN EFFECT TO I.E., DEBITED BY THE ASSESSING OFFICER AGAINST THE INCOME OF THE BUSINESS WHILE COMPUTING THE TAXABLE INCOME OF THE ASSESSEE. IT CANNOT BE STRETCHED TO MEAN 'NOTIONALLY ALLOWED' OR MERELY ALLOWABLE ON A NOTIONAL BASIS OR PROVIDED IN BOOKS OF ACCOUNT BY HAVING AN ACCOUNTING ENTRY. THE QUESTION OF ALLOWING DEPRECIATION ARISES, ONLY WHEN FOR THE PURPOSE OF ASSESSING INCOME TAX THE PROFITS AND GAINS OF THE BUSINESS ARE TO BE COMPUTED. IF NO INCOME TAX IS PAYABLE, WHETHER ON ACCOUNT OF EXEMPTION OR OTHERWISE, PROFITS AND GAINS OF THE BUSINESS ARE NOT REQUIRED TO BE COMPUTED AND THERE IS NO OCCASION FOR ALLOWING DEPRECIATION. IN THESE CIRCUMSTANCES, WHEREIN THE DEPRECIATION OF BUILDING HAS NOT BEEN ACTUALLY OBTAINED BY APPELLANT, MEANING THEREBY THAT THE CLAIM OF DEPRECIATION MUST ITA NO.578/LKW/2018 PAGE 57 OF 98 RESULT IN REDUCTION OF TAXABLE INCOME OF THE APPELLANT. THIS INTERPRETATION IS IN CONSONANCE WITH THE SPIRIT AND PURPOSE OF SECTION 50 R.W.S. 50A WHICH WERE INTRODUCED TO AVOID DOUBLE BENEFIT TO THE APPELLANT IN THE FORM OF DEPRECIATION AS WELL AS BENEFIT OF COST ON SALE OF DEPRECIABLE ASSET. HOWEVER, WHERE NO BENEFIT OF DEPRECIATION HAS BEEN ALLOWED TO THE APPELLANT, THERE REMAINS NO BASIS FOR INVOCATION OF PROVISIONS OF SECTION 50 R.W.S. 50A OF THE ACT AND ASSESSEE WOULD BE ENTITLED TO CLAIM BENEFIT OF INDEXATION. IN THE PRESENT CASE, IT IS AN UNDISPUTED FACT THAT NEITHER THE APPELLANT NOR M/S. KANPUR BUILDERS P. LTD. HAS EVER BEEN ALLOWED ANY BENEFIT OF DEPRECIATION IN TERMS OF REDUCTION OF TAX LIABILITY AND AS SUCH IT IS HEREBY HELD THAT PROVISIONS OF SECTION 50 R.W.S 50A ARE NOT APPLICABLE. IN LIGHT OF THE FACTS BROUGHT ON RECORD BY AO AND APPELLANT AND THE LAW LAID DOWN BY HON'BLE APEX COURT IN THE CASE OF COMMISSIONER OF INCOME-TAX V. DOOM DOOM INDIA LTD. [2009] 310 ITR 392 (SC) AND OF TRAVANCORE CHEMICALS & MANUFACTURING CO. LTD. VS. CIT (1999) 233 ITR 825 (KERALA), RESPECTFULLY FOLLOWING THEM, AO IS DIRECTED TO ALLOW THE CLAIM OF THE APPELLANT AS DEPRECIATION HAS NOT BEEN OBTAINED BY APPELLANT PER THE LAW LAID DOWN IN S. 50A OF IT ACT. THEREFORE, ADDITION MADE BY AO IS DELETED. THIS GROUND IS ALLOWED ACCORDINGLY. 52. THE ABOVE ORDER OF THE LD. CIT(A) HAS GIVEN RISE TO GROUND NOS. 1 TO 5 BEFORE US. 53. THE LD. D.R. HAS CONTENDED THAT THE CIT(A)-II, KANPUR HAS ERRED IN LAW AS WELL AS ON FACTS AND CIRCUMSTANCES OF THE CASE IN ALLOWING RELIEF TO THE ASSESSEE, WITHOUT APPRECIATING THE FACT THAT THE .PROVISIONS AS CONTAINED UNDER SECTION 50 R.W.S. 50A ITA NO.578/LKW/2018 PAGE 58 OF 98 OF THE ACT, ARE CLEARLY APPLICABLE IN THIS CASE, IN ALLOWING RELIEF TO THE ASSESSEE, WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE WAS REGULARLY CLAIMING DEPRECIATION ON BUILDING, WHICH WAS ALLOWED BY THE DEPARTMENT BY WAY OF ACCEPTING THE CLAIM OF CARRY FORWARD OF LOSS OF THE ASSESSEE, TO BE SET OFF IN FUTURE AGAINST INCOME, IN NOT APPRECIATING THE FACT THAT PRIOR TO AMALGAMATION WITH THE ASSESSEE COMPANY, KBPL (THE AMALGAMATING COMPANY) WAS REGULARLY CLAIMING DEPRECIATION ON THE BUILDING, AND FOR THE PERIOD FROM 01.04.2013 TO 31.03.20141, IT HAD CLAIMED DEPRECIATION ON THE BUILDING AT RS.4,619/- WHICH, WAS ALLOWED, AS IS EVIDENT FROM THE FIXED ASSETS CHART, IN NOT APPRECIATING THE FACT THAT THE ASSESSEE WAS REGULARLY CLAIMING DEPRECIATION ON THE BUILDING, WHICH WAS ALLOWED BY THE DEPARTMENT BY WAY OF ACCEPTING THE CLAIM OF CARRY FORWARD OF LOSS OF THE ASSESSEE, TO BE SET OFF IN FUTURE AGAINST INCOME, AND IN RELYING ON THE RATIO LAID DOWN BY THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. DOOM DOOM INDIA LTD., BECAUSE THE FACTS AND SITUATION OF THE ASSESSEE'S CASE ARE ENTIRELY DIFFERENT, AND, IN FACT, THIS DECISION DEALS WITH CASES COVERED UNDER RULE 8 OF THE INCOME TAX RULES, 1962, WHEREAS THE ASSESSEE'S CASE DOES NOT COME WITHIN THE PURVIEW OF RULE 8 OF I.T. RULES, 1962. 54. THE LD. COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, HAS PLACED STRONG RELIANCE ON THE IMPUGNED ORDER. 55. HEARD. THE ONLY DISPUTE IS WITH REGARD TO THE LEGAL CONTENTION IN THE CONTEXT OF THE PROVISIONS OF SECTION 50 R.W.S 50A OF THE ACT, AS PER WHICH, DEPRECIATION NEEDS MUST ACTUALLY BE ALLOWED TO THE ASSESSEE. AS PER THE ASSESSEE, THE CLAIM OF DEPRECIATION MUST RESULT IN REDUCTION OF THE TAXABLE INCOME OF THE ITA NO.578/LKW/2018 PAGE 59 OF 98 ASSESSEE. HOWEVER, WHERE NO BENEFIT OF DEPRECIATION HAS BEEN ALLOWED TO THE ASSESSEE, DUE TO LOSSES, AND IT WAS CARRIED FORWARD TO THE NEXT FINANCIAL YEAR, WILL IT AMOUNT TO DEPRECIATION ALLOWED TO THE ASSESSEE OR/AND IT WILL AMOUNT TO 'OBTAINED BY THE ASSESSEE' AS ENVISAGED UNDER SECTION 50A, WHICH IS THE CHARGING SECTION FOR THIS TRANSACTION. THE ASSESSEE HAS RELIED ON THE DECISIONS OF THE HON'BLE APEX COURT IN THE CASE OF MADEVA UPENDRA SINAI V. UOI, (SUPRA), THE HON'BLE MADRAS HIGH COURT IN THE CASE OF M. RAGHAVAN V. ACIT (SUPRA) AND THE RAJKOT BENCH OF TRIBUNAL IN THE CASE OF KANDLA PORT TRUST V. AIT (SUPRA). 56. IN THE PRESENT CASE, THE UNDISPUTED FACT IS THAT THE ASSESSEE (THE AMALGAMATED COMPANY) AND KBPL (THE AMALGAMATING COMPANY) HAD CLAIMED DEPRECIATION EVERY YEAR AS PER THE FIXED ASSET SCHEDULE AND THAT WAS ALLOWED AS DEDUCTION FOR CALCULATING THE WDV OF THE BUILDING IN QUESTION. THIS IS CLEARLY EVIDENT FROM THE CALCULATIONS REPRODUCED, AS ABOVE, IN THE ORDER OF THE LD. CIT(A). IT IS ALSO A FACT THAT THIS DEPRECIATION ALLOWED DID NOT RESULT IN ANY REDUCTION OF THE ASSESSEES TAX LIABILITY OF ANY ASSESSMENT YEAR, DUE TO CURRENT AND BROUGHT FORWARD LOSSES, AND THEREFORE, THE DEPRECIATION CLAIMED ON THE BUILDING BY THE ASSESSEE WAS ONLY USED FOR REDUCING THE WDV OF THE ASSET IN QUESTION AND WAS ALWAYS CARRIED FORWARD IN THE RELEVANT ASSESSMENT YEARS. 57. SECTION 43(6) AND EXPLANATION 3 THERETO ARE AS UNDER: 43. DEFINITIONS OF CERTAIN TERMS RELEVANT TO INCOME FROM PROFITS AND GAINS OF BUSINESS OR PROFESSION IN SECTIONS 28 TO 41 AND IN THIS SECTION, UNLESS THE CONTEXT OTHERWISE REQUIRES ITA NO.578/LKW/2018 PAGE 60 OF 98 ********************************************************** ********************************************************** **** (6) 'WRITTEN DOWN VALUE' MEANS-- (A) IN THE CASE OF ASSETS ACQUIRED IN THE PREVIOUS YEAR, THE ACTUAL COST TO THE ASSESSEE ; (B) IN THE CASE OF ASSETS ACQUIRED BEFORE THE PREVIOUS YEAR, THE ACTUAL COST TO THE ASSESSEE LESS ALL DEPRECIATION ACTUALLY ALLOWED TO HIM UNDER THIS ACT, OR UNDER THE INDIAN INCOME-TAX ACT, 1922 (11 OF 1922), OR ANY ACT REPEALED BY THAT ACT, OR UNDER ANY EXECUTIVE ORDERS ISSUED WHEN THE INDIAN INCOME-TAX ACT, 1886 (2 OF 1886), WAS IN FORCE: PROVIDED THAT IN DETERMINING THE WRITTEN DOWN VALUE IN RESPECT OF BUILDINGS, MACHINERY OR PLANT FOR THE PURPOSES OF CLAUSE (II) OF SUB-SECTION (1) OF SECTION 32, 'DEPRECIATION ACTUALLY ALLOWED' SHALL NOT INCLUDE DEPRECIATION ALLOWED UNDER SUB-CLAUSES (A), (B) AND (C) OF CLAUSE (VI) OF SUB-SECTION (2) OF SECTION 10 OF THE INDIAN INCOME-TAX ACT, 1922 (11 OF 1922), WHERE SUCH DEPRECIATION WAS NOT DEDUCTIBLE IN DETERMINING THE WRITTEN DOWN VALUE FOR THE PURPOSES OF THE SAID CLAUSE (VI) ; (C) IN THE CASE OF ANY BLOCK OF ASSETS,-- (I) IN RESPECT OF ANY PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR COMMENCING ON THE 1ST DAY OF APRIL, 1988, THE AGGREGATE OF THE WRITTEN DOWN VALUES OF ALL THE ASSETS FALLING WITHIN THAT BLOCK OF ASSETS AT THE BEGINNING OF THE PREVIOUS YEAR AND ADJUSTED,-- (A) BY THE INCREASE BY THE ACTUAL COST OF ANY ASSET FALLING WITHIN THAT BLOCK, ACQUIRED DURING THE PREVIOUS YEAR ; AND (B) BY A REDUCTION OF THE MONEYS PAYABLE IN RESPECT OF ANY ASSET FALLING WITHIN THAT BLOCK, WHICH IS SOLD OR DISCARDED OR DEMOLISHED OR DESTROYED DURING THAT PREVIOUS YEAR TOGETHER WITH THE AMOUNT OF THE SCRAP VALUE, IF ANY, SO, HOWEVER, THAT THE AMOUNT OF SUCH REDUCTION DOES NOT EXCEED THE WRITTEN DOWN VALUE AS SO INCREASED ; AND (C) IN THE CASE OF A SLUMP SALE, DECREASE BY THE ACTUAL COST OF THE ASSET FALLING WITHIN THAT BLOCK AS REDUCED- (A) BY THE AMOUNT OF DEPRECIATION ACTUALLY ALLOWED TO HIM UNDER THIS ACT OR UNDER THE CORRESPONDING PROVISIONS OF THE INDIAN INCOME-TAX ACT, 1922 (11 OF 1922),IN RESPECT OF ANY PREVIOUS ITA NO.578/LKW/2018 PAGE 61 OF 98 YEAR RELEVANT TO THE ASSESSMENT YEAR COMMENCING BEFORE THE 1ST DAY OF APRIL, 1988 ; AND (B) BY THE AMOUNT OF DEPRECIATION THAT WOULD HAVE BEEN ALLOWABLE TO THE ASSESSEE FOR ANY ASSESSMENT YEAR COMMENCING ON OR AFTER THE 1ST DAY OF APRIL, 1988 AS IF THE ASSET WAS THE ONLY ASSET IN THE RELEVANT BLOCK OF ASSETS, SO, HOWEVER, THAT THE AMOUNT OF SUCH DECREASE DOES NOT EXCEED THE WRITTEN DOWN VALUE (II) IN RESPECT OF ANY PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR COMMENCING ON OR AFTER THE 1ST DAY OF APRIL, 1989, THE WRITTEN DOWN VALUE OF THAT BLOCK OF ASSETS IN THE IMMEDIATELY PRECEDING PREVIOUS YEAR AS REDUCED BY THE DEPRECIATION ACTUALLY ALLOWED IN RESPECT OF THAT BLOCK OF ASSETS IN RELATION TO THE SAID PRECEDING PREVIOUS YEAR AND AS FURTHER ADJUSTED BY THE INCREASE OR THE REDUCTION REFERRED TO IN ITEM (I). ***************************************************** ***************************************************** ************** EXPLANATION 3. ANY ALLOWANCE IN RESPECT OF ANY DEPRECIATION CARRIED FORWARD UNDER SUB-SECTION (2) OF SECTION 32 SHALL BE DEEMED TO BE DEPRECIATION 'ACTUALLY ALLOWED'. 58. IT IS CLEAR FROM EXPLANATION 3 TO SECTION 43(6), THAT THE CARRIED FORWARD DEPRECIATION UNDER SECTION 32(2) OF THE ACT SHALL BE DEEMED TO HAVE BEEN ACTUALLY ALLOWED TO THE ASSESSEE FOR CALCULATING THE WDV IN THE HANDS OF THE AMALGAMATED COMPANY. SO, IN ARRIVING AT THE WRITTEN DOWN VALUE OF THE ASSETS IN THE HANDS OF THE AMALGAMATED COMPANY, NAMELY, KCPL, THE AO NOTED THAT THE ASSESSEE HAD TAKEN THE WRITTEN DOWN VALUE BASED ON THE WRITTEN DOWN VALUE OF THE ASSET IN THE HANDS OF THE AMALGAMATING COMPANY. IN OTHER WORDS, THE WRITTEN DOWN VALUE IN THE HANDS OF THE AMALGAMATED COMPANY WOULD BE THE WRITTEN DOWN VALUE AS ARRIVED AT BY THE ACTUAL COST OF THE ASSET, AS REDUCED BY THE DEPRECIATION ACTUALLY ALLOWED TO THE AMALGAMATING COMPANY. ITA NO.578/LKW/2018 PAGE 62 OF 98 59. THE WDV OF THE STOCK OF ASSETS OF THE AMALGAMATING COMPANY WOULD BE THE ACTUAL COST OF THE ASSET MINUS THE AMOUNT OF DEPRECIATION ACTUALLY ALLOWED IN RELATION TO THE PRECEDING YEAR, BEFORE THE DATE OF THE AMALGAMATION. THE CARRIED FORWARD UNABSORBED DEPRECIATION OF THE AMALGAMATING COMPANY WOULD BE AVAILABLE TO THE AMALGAMATED COMPANY ONLY ON IT SATISFYING THE CONDITIONS ENUMERATED UNDER SECTION 72A AND AS PER EXPLANATION 3, SUCH DEPRECIATION CARRIED FORWARD UNDER SUB- SECTION (2) OF SECTION 32 SHALL BE DEEMED TO BE DEPRECIATION 'ACTUALLY ALLOWED'. THUS, THE UNABSORBED DEPRECIATION IS DEEMED TO BE ALLOWED TO THE AMALGAMATING COMPANY AND THE ACTUAL COST OF THE BLOCK OF ASSETS OF THE TRANSFEREE COMPANY SHALL BE THE WRITTEN DOWN VALUE OF THE BLOCK OF ASSETS IN THE HANDS OF THE TRANSFEROR COMPANY, AS REDUCED BY THE AMOUNT OF DEPRECIATION ACTUALLY ALLOWED IN RELATION TO THE SAID PRECEDING YEAR, WHICH SHALL BE INCREASED BY INCLUDING THE UNABSORBED DEPRECIATION OF THE AMALGAMATING COMPANY. 60. EXPLANATION 3 TO SECTION 43(6) IS RELEVANT ONLY IN RESPECT OF THE CARRIED FORWARD DEPRECIATION AS GRANTED UNDER SECTION 32(2) AND WHAT IS CONTEMPLATED UNDER EXPLANATION 3 IS THE CARRIED FORWARD DEPRECIATION WHICH IS DEEMED TO HAVE BEEN ACTUALLY ALLOWED. THUS, THE UN-ABSORBED DEPRECIATION OF THE AMALGAMATING COMPANY IS DEEMED TO BE THE ALLOWANCE OF DEPRECIATION TO THE AMALGAMATED COMPANY FOR THE PREVIOUS YEAR IN WHICH THE AMALGAMATION IS AFFECTED. 61. SECTION 72A CONTAINS SPECIFIC PROVISIONS TO DEAL WITH CASES OF CARRY FORWARD AND SET OFF OF ACCUMULATED LOSS AND UNABSORBED DEPRECIATION ALLOWANCE IN CASES OF AMALGAMATION OR ITA NO.578/LKW/2018 PAGE 63 OF 98 MERGER. AS PER SECTION 72A(1), THE ACCUMULATED LOSS AND UNABSORBED DEPRECIATION OF THE AMALGAMATING COMPANY IS DEEMED TO BE THE LOSS OR THE ALLOWANCE OF DEPRECIATION TO THE AMALGAMATED COMPANY FOR THE PREVIOUS YEAR IN WHICH THE AMALGAMATION IS AFFECTED. UNABSORBED DEPRECIATION IS DEFINED IN THE EXPLANATION, TO MEAN THAT SHARE OR ALLOWANCE OF AN AMALGAMATING COMPANY, WHICH REMAINS TO BE ALLOWED, AND WOULD HAVE BEEN ALLOWED TO THE AMALGAMATING COMPANY UNDER THE PROVISIONS OF THE ACT, AS IF THE AMALGAMATION HAD NOT BEEN EFFECTED. THE ASSESSEE HAS RELIED ON THE VIEW TAKEN BY THE HON'BLE APEX COURT IN THE CASE OF CIT V. DOOM DOOM INDIA LTD. (SC) (SUPRA) AND THE HON'BLE MADRAS HIGH COURT IN CIT V SILICAL METALLURGIC LTD. (SUPRA), THAT THE UNABSORBED DEPRECIATION OF THE AMALGAMATING COMPANY CANNOT BE DEDUCTED WHILE TAKING THE WRITTEN DOWN VALUE OF THE ASSET TAKEN OVER, OF THE AMALGAMATED COMPANY. 62. DEDUCTIONS BY WAY OF DEPRECIATION ALLOWANCE HAVE BEEN SPECIFICALLY RECOGNIZED AND DEALT WITH IN SECTIONS 32, 34 AND 43(6) OF THE ACT, WHICH DEALS WITH THE DEFINITION OF 'WRITTEN DOWN VALUE'. SECTION 32 ADOPTS TWO METHODS IN ALLOWING DEPRECIATION. IN THE CASE OF OCEAN-GOING SHIPS, DEPRECIATION IS ALLOWED, YEAR AFTER YEAR, AT A FIXED PERCENTAGE ON THE ORIGINAL COST OF THE ASSET, AS IS EVIDENT FROM THE PROVISIONS OF SECTION 32(1)(I). THIS IS CALLED THE STRAIGHT-LINE METHOD. IN THE CASE OF NON-OCEAN-GOING SHIPS AND BUILDINGS, MACHINERY, PLANT OR FURNITURE, THE PRESCRIBED PERCENTAGE OF DEPRECIATION IS TO BE COMPUTED ON THE BASIS OF THE WRITTEN DOWN VALUE OF THE ASSET, AS PER THE MANDATE OF SECTION 32(1)(II). THIS IS KNOWN AS THE WRITTEN-DOWN VALUE METHOD. BOTH ITA NO.578/LKW/2018 PAGE 64 OF 98 THESE METHODS SEEK TO ENSURE THAT THE TOTAL DEPRECIATION ALLOWANCE(S) GRANTED, YEAR AFTER YEAR, DO NOT EXCEED ONE HUNDRED PER CENT OF THE ORIGINAL COST OF THE ASSET. IN THE STRAIGHT-LINE METHOD, THE ENTIRE DEPRECIATION IS WRITTEN OFF SOONER THAN IN THE WRITTEN DOWN VALUE METHOD, IF THE FIGURES OF THE ACTUAL COST AND THE PRESCRIBED PERCENTAGE ARE THE SAME IN EITHER CASE. SECTION 32 (2) ALLOWS THE CARRIED FORWARD AND UNABSORBED DEPRECIATION ALLOWANCES TO ANY SUBSEQUENT YEAR, WITHOUT ANY TIME LIMIT, WHERE SUCH NON-ABSORPTION IS OWING TO THERE BEING NO PROFITS OR GAINS CHARGEABLE FOR THAT PREVIOUS YEAR, OR OWING TO THE PROFITS OR GAINS BEING LESS THAN THE ALLOWANCE. DEPRECIATION LOSS UNDER SECTION 32 (2) STANDS ON THE SAME FOOTING AS ANY OTHER BUSINESS LOSS. AN ASSESSEE CLAIMING DEPRECIATION OF ASSETS HAS TO SHOW THAT SUCH ASSETS ARE OWNED BY HIM AND WERE USED BY HIM IN THE ACCOUNTING YEAR FOR THE PURPOSE OF HIS BUSINESS, THE PROFITS OF WHICH ARE BEING CHARGED. FURTHER, THE TOTAL OF ALL DEDUCTIONS IN RESPECT OF DEPRECIATION UNDER SECTION 32(1)(I), MADE YEAR AFTER YEAR, SHOULD NOT, IN ANY EVENT, EXCEED THE ACTUAL COST OF THE ASSETS TO THE ASSESSEE. THE DEFINITION OF 'ACTUAL COST' IS ENSHRINED IN SECTION 43(1) AND THE DEFINITION OF 'WRITTEN DOWN VALUE' IS MADE AVAILABLE IN SECTION 43(6) OF THE ACT. THE LATTER DEFINES 'WRITTEN DOWN VALVE' TO MEAN, IN THE CASE OF ASSETS ACQUIRED IN THE PREVIOUS YEAR, THE ACTUAL COST TO THE ASSESSEE, AND IN THE CASE OF ASSETS ACQUIRED BEFORE THE PREVIOUS YEAR, THE ACTUAL COST TO THE ASSESSEE, LESS ALL DEPRECIATION(S) ACTUALLY ALLOWED UNDER THE ACT. THE KEY WORD IN SECTION 43(6)(B) OF THE ACT IS 'ACTUALLY'. THE MEANING OF THE WORDS 'ACTUALLY ALLOWED' IN SECTION 43 (6)(B) STANDS EXPLAINED IN THE ITA NO.578/LKW/2018 PAGE 65 OF 98 CASE OF MADEVA UPENDRA SINAI V. UNION OF INDIA AND OTHERS - (1975) 98 ITR 209, WHICH READS AS UNDER: 'THE PIVOT OF THE DEFINITION OF 'WRITTEN-DOWN VALUE' IS THE 'ACTUAL COST' OF THE ASSETS. WHERE THE ASSET WAS ACQUIRED AND ALSO USED FOR THE BUSINESS IN THE PREVIOUS YEAR, SUCH VALUE WOULD BE ITS FULL ACTUAL COST AND DEPRECIATION FOR THAT YEAR WOULD BE ALLOWED AT THE PRESCRIBED RATE ON SUCH COST. IN THE SUBSEQUENT YEAR, DEPRECIATION WOULD BE CALCULATED ON THE BASIS OF ACTUAL COST LESS DEPRECIATION ACTUALLY ALLOWED. THE KEY WORD IN CLAUSE (B) IS 'ACTUALLY'. IT IS THE ANTITHESIS OF THAT WHICH IS MERELY SPECULATIVE, THEORETICAL OR IMAGINARY. 'ACTUALLY' CONTRA-INDICATES A DEEMING CONSTRUCTION OF THE WORD 'ALLOWED', WHICH IT QUALIFIES. THE CONNOTATION OF THE PHRASE 'ACTUALLY ALLOWED' IS THUS LIMITED TO DEPRECIATION ACTUALLY TAKEN INTO ACCOUNT OR GRANTED AND GIVEN EFFECT TO, I.E., DEBITED BY THE INCOME-TAX OFFICER AGAINST THE INCOMINGS OF THE BUSINESS IN COMPUTING THE TAXABLE INCOME OF THE ASSESSEE; IT CANNOT BE STRETCHED TO MEAN 'NOTIONALLY ALLOWED' OR MERELY ALLOWABLE ON A NOTIONAL BASIS.' 63. ERGO, IT IS CLEAR THAT THE ESSENCE OF THE SCHEME OF THE INCOME-TAX ACT QUA DEPRECIATION IS THAT DEPRECIATION IS ALLOWED, YEAR AFTER YEAR, ON THE ACTUAL COST OF THE ASSETS, AS REDUCED BY THE DEPRECIATION ACTUALLY ALLOWED IN EARLIER YEARS. IT FOLLOWS, THEREFORE, THAT EVEN IN THE CASE OF ASSETS ACQUIRED BEFORE THE PREVIOUS YEAR, WHEREIN NO DEPRECIATION WAS COMPUTED, ACTUALLY ALLOWED, OR CARRIED FORWARD, FOR NO FAULT ATTRIBUTABLE TO THE ASSESSEE, THE WRITTEN-DOWN VALUE MAY, UNDER CLAUSE (B) OF SECTION 43(6), ALSO BE THE ACTUAL COST OF THE ASSETS TO THE ASSESSEE. THEREFORE, THE MEANING OF 'ACTUALLY ALLOWED' IN SECTION 43(6)(B) HAS BEEN HELD TO MEAN LIMITED TO DEPRECIATION ACTUALLY TAKEN INTO ACCOUNT OR GRANTED AND GIVEN EFFECT TO, I.E., DEBITED BY THE INCOME-TAX OFFICER AGAINST THE INCOMINGS OF THE BUSINESS IN COMPUTING THE TAXABLE INCOME OF THE ASSESSEE. IT IS THEREFORE, ITA NO.578/LKW/2018 PAGE 66 OF 98 CLEAR THAT AS PER SECTION 72A, THE CARRIED FORWARD DEPRECIATION IS DEEMED TO BE THE DEPRECIATION OF THE PREVIOUS YEAR IN THE HANDS OF THE AMALGAMATED COMPANY, AND FOR THE PURPOSE OF ARRIVING AT THE WRITTEN DOWN VALUE IN THE HANDS OF THE AMALGAMATED COMPANY, THE WRITTEN DOWN VALUE SHALL BE THE ONE WHICH WOULD BE ARRIVED AT, IN THE HANDS OF THE TRANSFEROR COMPANY FOR THE IMMEDIATELY PRECEDING PREVIOUS YEAR, AS REDUCED BY THE AMOUNT OF DEPRECIATION ACTUALLY ALLOWED IN RELATION TO THE SAID PRECEDING PREVIOUS YEAR. EXPLANATION 3 TO SECTION 43(6) IS RELEVANT FOR THE CARRIED FORWARD DEPRECIATION AS GRANTED UNDER SECTION 32(2) AND WHAT IS CONTEMPLATED THEREUNDER IS THAT THE CARRIED FORWARD DEPRECIATION IS DEEMED TO HAVE BEEN ACTUALLY ALLOWED IN CASE OF AN AMALGAMATION. THE JUDGEMENT OF THE HON'BLE MADRAS HIGH COURT IN THE CASE OF EID PARRY (INDIA) LTD. VS. DCIT, TAX CASE APPEAL NOS. 1311 AND 1312 OF 2005, MAKES IT CLEAR THAT THE CARRIED FORWARD UNABSORBED DEPRECIATION IS DEEMED TO HAVE BEEN ALLOWED TO THE AMALGAMATING COMPANY AT THE TIME OF AMALGAMATION, AS IT THEN CEASES TO EXIST. 64. LASTLY, SO FAR AS REGARDS THE CONTENTION OF THE ASSESSEE THAT THE WORDS 'ACTUALLY ALLOWED' IN SECTION 43(6)(B) MEAN DEPRECIATION ACTUALLY TAKEN INTO ACCOUNT OR GRANTED AND GIVEN EFFECT TO, I.E., DEBITED BY THE INCOME-TAX OFFICER AGAINST THE INCOMINGS OF THE BUSINESS IN COMPUTING THE TAXABLE INCOME OF THE ASSESSEE, WE FIND THAT SECTION 50A OF THE ACT IS THE PROVISION WHERE COST OF ACQUISITION IN THE CASE OF DEPRECIABLE ASSETS HAS BEEN DEFINED. IN THE SAID SECTION, THE WORD USED IS 'OBTAINED' FOR ITA NO.578/LKW/2018 PAGE 67 OF 98 THE PURPOSE OF DEDUCTION ON ACCOUNT OF DEPRECIATION UNDER CLAUSE (I) OF SUB-SECTION (1) OF SEC. 32. 65. THE ASSESSEE HAS RELIED ON THE CASE OF TRAVANCORE CHEMICALS & MANUFACTURING CO. LTD. VS. CIT, 233 ITR 825 (KERALA), WHERE THE WORD 'OBTAIN' HAS BEEN DEFINED WITH REFERENCE TO SECTION 41(1) OF THE ACT. THE BLACK'S LAW DICTIONARY DEFINES THE WORD 'OBTAIN' AS 'TO GET POSSESSION OF'. WEBSTER'S COMPREHENSIVE DICTIONARY (INTERNATIONAL EDITION) GIVES ITS MEANING AS 'TO GAIN POSSESSION OF'. THE SHORTER OXFORD DICTIONARY DESCRIBES IT AS 'TO POSSESS'. THEREFORE, ACCORDING TO THE SAID JUDGEMENT, THE WORDS 'HAS OBTAINED' MUST DENOTE AND SATISFY THE ELEMENT OF PHYSICAL POSSESSION. IT IS NOT ENOUGH THAT A VESTED RIGHT IS ACCRUED IN THE ASSESSEE TO OBTAIN THE AMOUNT. THE AMOUNT SHOULD HAVE BEEN ACTUALLY RECEIVED BY THE ASSESSEE. IN THE INSTANT CASE, THE ASSESSEE HAS IRREFUTABLY NOT OBTAINED ANY BENEFIT OF DEPRECIATION ON THE BUILDING FORMING PART OF THE BLOCK AND, AS SUCH, THE PROVISIONS OF SECTION 50A WILL NOT BE APPLICABLE. 66. IN THE CASE OF KANDALA PORT TRUST VS. ACIT, 104 TTJ 396 (RAJKOT TRIB.), IT WAS HELD THAT THE PHRASE 'ACTUALLY ALLOWED' IS LIMITED TO DEPRECIATION ACTUALLY TAKEN INTO ACCOUNT OR GRANTED AND GIVEN EFFECT TO, I.E., DEBITED BY THE ASSESSING OFFICER AGAINST THE INCOME OF THE BUSINESS, WHILE COMPUTING THE TAXABLE INCOME OF THE ASSESSEE; THAT IT CANNOT BE STRETCHED TO MEAN 'NOTIONALLY ALLOWED' OR MERELY ALLOWABLE ON A NOTIONAL BASIS, OR PROVIDED IN THE BOOKS OF ACCOUNT BY HAVING AN ACCOUNTING ENTRY; THAT THE QUESTION OF ALLOWING DEPRECIATION ARISES ONLY WHEN, FOR THE PURPOSE OF ASSESSING INCOME TAX THE PROFITS AND GAINS OF THE BUSINESS ARE TO BE COMPUTED; AND THAT IF NO INCOME TAX IS ITA NO.578/LKW/2018 PAGE 68 OF 98 PAYABLE, WHETHER ON ACCOUNT OF EXEMPTION, OR OTHERWISE, THE PROFITS AND GAINS OF THE BUSINESS ARE NOT REQUIRED TO BE COMPUTED AND THERE IS NO OCCASION FOR ALLOWING DEPRECIATION. 67. ERGO, THE CLAIM OF DEPRECIATION MUST RESULT IN REDUCTION OF THE TAXABLE INCOME OF THE ASSESSEE. THIS INTERPRETATION IS IN CONSONANCE WITH THE SPIRIT AND PURPOSE OF THE PROVISIONS OF SECTION 50 R.W.S. 50A, WHICH WERE INTRODUCED TO AVOID DOUBLE BENEFIT TO THE ASSESSEE IN THE FORM OF DEPRECIATION AS WELL AS BENEFIT OF COST ON SALE OF DEPRECIABLE ASSET. HOWEVER, WHERE NO BENEFIT OF DEPRECIATION HAS BEEN ALLOWED TO THE ASSESSEE, THERE REMAINS NO BASIS FOR PRESSING INTO SERVICE, THE PROVISIONS OF SECTIONS 50 AND 50A OF THE ACT AND THE ASSESSEE WOULD BE ENTITLED TO CLAIM BENEFIT OF INDEXATION. IN THE PRESENT CASE, IT IS A FACT ESTABLISHED ON RECORD THAT NEITHER THE ASSESSEE, NOR KBPL HAS EVER BEEN ALLOWED ANY BENEFIT OF DEPRECIATION IN TERMS OF REDUCTION OF TAX LIABILITY AND, AS SUCH, IT IS HEREBY HELD THAT THE PROVISIONS OF SECTION 50 R.W.S 50A ARE NOT APPLICABLE. IN THE LIGHT OF THE FACTS BROUGHT ON RECORD BY THE AO AND THE ASSESSEE AND THE DECISIONS IN CIT V. DOOM DOOM INDIA LTD., 310 ITR 392 (SUPRA) AND TRAVANCORE CHEMICALS & MANUFACTURING CO. LTD. VS. CIT, 233 ITR 825 (SUPRA), WE FIND NO ERROR IN THE ORDER OF THE LD. CIT(A) IN DIRECTING THE ASSESSING OFFICER TO ALLOW THE CLAIM OF THE ASSESSEE, AS THE DEPRECIATION HAS NOT BEEN OBTAINED BY ASSESSEE. 68. THE ASSESSEES ARGUMENT IN THIS REGARD IS THAT THE ASSESSING OFFICER HAS NOT UNDERSTOOD THE DIRECTION IN PROPER PERSPECTIVE AND WHILE EXAMINING THE CLAIM OF DEPRECIATION ON THE BUILDING, HE HAS OMITTED TAKING INTO ACCOUNT THE CRUCIAL FACT THAT NO ACTUAL BENEFIT OF DEPRECIATION HAS BEEN ALLOWED TO THE ITA NO.578/LKW/2018 PAGE 69 OF 98 ASSESSEE. IT IS RELEVANT TO NOTE THAT THE AMALGAMATING COMPANY, KBPL, AS OBSERVED BY THE ASSESSING OFFICER, HAD CLAIMED DEPRECIATION ON THE BUILDING SOLD BY THE ASSESSEE, BUT NO SUCH CLAIM WAS EVER ALLOWED, AS KBPL WAS UNDER PERPETUAL LOSSES AND ALL THE DEPRECIATION CLAIMED WAS CARRIED FORWARDED TO THE SUBSEQUENT YEARS. IN THESE CIRCUMSTANCES, WHEREIN THE DEPRECIATION OF THE BUILDING HAS NOT BEEN ACTUALLY ALLOWED, AGAIN THE PROVISIONS OF SECTION 50 R.W.S 50A ARE NOT APPLICABLE IN THE PRESENT CASE. 69. IN VIEW OF THE ABOVE, GROUND NOS.1 TO 5 ARE REJECTED. 70. APROPOS GROUND NOS.6 & 7, THE AO NOTED THAT THE COMPUTATION OF BOOK PROFIT, AFTER CONSIDERING THE REPLY OF THE ASSESSEE, FILED DURING THE COURSE OF ASSESSMENT PROCEEDINGS, WAS DONE AS PER 'OFFICE NOTE TO THE ASSESSMENT ORDER'. HOWEVER, SINCE THE TAX OF RS,15,76,85,419/- ON INCOME COMPUTED IN ACCORDANCE WITH THE NORMAL PROVISIONS OF THE ACT WAS MORE THAN THE TAX, I.E., RS.14,21,11,568/- COMPUTED IN ACCORDANCE WITH THE PROVISIONS OF SECTION 115JB OF THE ACT, TAX WAS BEING CHARGED ON THE INCOME COMPUTED IN ACCORDANCE WITH THE NORMAL PROVISIONS OF THE ACT. WE, FOR THE SAKE OF READY REFERENCE, EXTRACT THE CONTENTS OF THE SAID OFFICE NOTE, AS UNDER:- 'DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS NOTICED THAT THE ASSESSEE HAD CREDITED A SUM OF RS.63,66,86,610/- DIRECTLY IN THE BALANCE SHEET UNDER THE HEAD 'RESERVE & SURPLUS'. HOWEVER, WHILE COMPUTING BOOK PROFIT (REFER SCHEDULE MAT TO ITR), THE ASSESSEE HAD NOT INCREASED NET PROFIT BY RS.63,66,86,610/- AS PROVIDED UNDER EXPLANATION-1 TO SECTION 115JB OF THE INCOME TAX ACT., 1961. ITA NO.578/LKW/2018 PAGE 70 OF 98 ACCORDINGLY, THE ASSESSEE VIDE NOTICE U/S 142(1) OF THE ACT DATED 22.12.2017 WAS REQUIRED TO PREPARE 'COMPUTATION OF INCOME' IN ACCORDANCE WITH THE PROVISIONS OF SECTION 115JB OF THE I.T, ACT AND ALSO SHOW CAUSE AS TO WHY THE SUM OF RS.63,66,86,610/-, DIRECTLY CREDITED IN THE BALANCE SHEET MAY NOT BE INCLUDED IN THE NET PROFIT WHILE COMPUTING BOOK PROFIT IN VIEW OF THE PROVISIONS OF SECTION 115JB OF THE I.T. ACT., 1961. THE ASSESSEE SUBMITTED ITS REPLY VIDE LETTER DATED 25.12.2017, WHICH IS PLACED ON RECORD. 'THE REPLY OF THE ASSESSEE HAS BEEN CONSIDERED, HOWEVER, FOUND NOT TENABLE IN VIEW OF THE FACTS AND LEGAL POSITION OF THE CASE. PROVISIONS OF CLAUSE (B) OF THE EXPLANATION (1) OF SEC. 115JB PROVIDES THAT FOR CALCULATING BOOK PROFIT, THE PROFIT AS SHOWN IN THE PROFIT AND LOSS ACCOUNT HAS TO BE INCREASED, BY ALL RESERVES BY WHATEVER NAME CALLED, OTHER THAN A RESERVE SPECIFIED U/S 33AC. IN RESPONSE TO SPECIFIC QUERY, THE ASSESSEE DURING THE COURSE OF ASSESSMENT PROCEEDINGS DID NOT FURNISH COMPUTATION IN ACCORDANCE WITH THE PROVISIONS OF SECTION 115JB OF THE ACT RATHER SUBMITTED THAT THE 'RESERVE AND SURPLUS' DIRECTLY CREDITED IN THE BALANCE SHEET IS IN ACCORDANCE WITH THE AMALGAMATION SCHEME AND FURNISHED WORKING OF 'RESERVE AND SURPLUS OF RS.63,66,86,610/- AS UNDER: VALUATION AS AT 01.04.2014 (AS PER VALUATION REPORT) RS.64,73,00,000 LESS: WDV OF LAND AND BUILDING AS AT 01.04.2014 RS. 13,52,764 EFFECT OF REVALUATION RS.64,59,47,236 RESERVE AS AT 01.04.2014 (RS. 92,60,626) NET CAPITAL RESERVE CREATED RS.63,66,86,610 'HOWEVER, FROM THE PERUSAL OF ORDER OF HON'BLE HIGH COURT SANCTIONING 'AMALGAMATION SCHEME, IT IS FOUND ITA NO.578/LKW/2018 PAGE 71 OF 98 THAT ABOVE WORKING OF THE 'RESERVE & SURPLUS' DONE BY THE ASSESSEE IS NOT IN ACCORDANCE WITH THE AMALGAMATION SCHEME DULY SANCTIONED BY THE HON'BLE HIGH COURT. AS PER AMALGAMATION SCHEME, THE VALUE OF FIXED ASSETS AS ON 01.04.2014 IN THE BOOKS OF M/S KANPUR CONSTRUCTIONS PVT. LTD., WOULD BE THE VALUE OF FIXED ASSETS AS SHOWN IN LAST BALANCE SHEET OF TRANSFER OR COMPANY I.E. M/S KANPUR BUILDERS PVT. LTD. AS PER THE LAST BALANCE SHEET OF M/S KANPUR BUILDERS PVT. LTD., I.E., AS ON 31.03.2014, THE VALUE OF FIXED ASSETS WAS AT RS.14,25,389/-. HOWEVER, SURPRISINGLY, THE ASSESSEE (M/S KANPUR CONSTRUCTIONS PVT. LTD.,) HAS SHOWN THE VALUE OF FIXED ASSETS AS ON 01.04.2014 AS NIL. THUS, THIS ACT ON THE PART OF THE ASSESSEE IS TOTALLY AGAINST THE AMALGAMATION SCHEME. 'THEREFORE, ASSESSEE'S SUBMISSIONS IN THIS REGARD ARE NOT TENABLE IN THE EYES OF LAW. ALSO THE RATIO LAID DOWN BY THE HON'BLE COURT IN THE CASE OF M/S APOLLO TYRES LTD. VS. COMMISSIONER OF INCOME TAX, 255 ITR PAGE 273, AS QUOTED BY THE ASSESSEE, IS NOT APPLICABLE IN THIS CASE AS THE FACTS OF THIS CASE ARE ENTIRELY DIFFERENT THAN THE CASE OF M/S APOLLO TYRES LTD. FURTHER, IN THE CASE OF M/S BOMBAY DIAMOND (ITA NO. 7488/MUM/07 DATED 30.11.2001), THE HON'BLE COURT, AFTER DISCUSSING ELABORATELY ON THE DECISION OF APOLLO TYRES LTD., HAVE HELD THAT THE AMOUNT WHICH HAS NOT BEEN ROUTED THROUGH PROFIT AND LOSS ACCOUNT SHOULD FORM PART OF BOOK PROFITS FOR THE PURPOSES OF MAT. 'THUS, IN VIEW OF THE ABOVE, IT CAN BE INFERRED THAT THE AMOUNT DIRECTLY CREDITED IN THE BALANCE SHEET OF M/S KANPUR CONSTRUCTIONS PVT. LTD., UNDER THE HEAD ITA NO.578/LKW/2018 PAGE 72 OF 98 'RESERVE & SURPLUS' IS NONE OTHER THAN THE PROFIT ON SALE OF PROPERTY IN QUESTION AND PROFIT SO ARRIVED AT, HAS NOT BEEN ROUTED THROUGH PROFIT & LOSS ACCOUNT AND DIRECTLY CREDITED IN THE BALANCE SHEET TO AVOID PROPER TAXATION. THEREFORE, THE CALCULATION OF NET CAPITAL RESERVE AS SUBMITTED BY THE ASSESSEE DURING THE COURSE OF ASSESSMENT PROCEEDINGS IS NOTHING BUT IS AN AFTERTHOUGHT TO AVOID PAYMENT OF DUE TAXES. 'ACCORDINGLY WHILE COMPUTING BOOK PROFIT IN ACCORDANCE WITH THE PROVISIONS OF SECTION 115JB, THE AMOUNT OF 'RESERVE AND SURPLUS' DIRECTLY CREDITED IN THE BALANCE SHEET IS LIABLE TO BE INCLUDED IN THE NET PROFIT OF THE ASSESSEE COMPANY AS PROVIDED UNDER EXPLANATION-1 TO SECTION 115JB OF THE INCOME TAX ACT., 1961. 'ACCORDINGLY, BOOK PROFIT AND TAX THEREON IS COMPUTED AS UNDER: NET PROFIT AS PER PROFIT & LOSS ACCOUNT RS.4,13,10,423 ADD: AMOUNT DIRECTLY CREDITED IN THE BALANCE SHEET UNDER THE HEAD 'RESERVE & SURPLUS' AS DISCUSSED ABOVE RS.63,66,86,610 BOOK PROFIT RS.67,79,97,033 TAX DUE @ 18.5% RS.12,54,29,451 SURCHARGE @ 10% RS.1,25,42,945 EDUCATION CESS @ 3% RS.41,39,172 TOTAL TAX RS.14,21,11,568 'SINCE TAX ON THE INCOME COMPUTED IN ACCORDANCE WITH NORMAL PROVISIONS OF THE ACT COMES TO RS.15,76,85,419/-, WHICH IS MORE THAN THE TAX CALCULATED IN VIEW OF THE PROVISIONS OF SECTION 115JB OF THE I.T. ACT., 1961 ABOVE, THEREFORE, TAX IS BEING CHARGED ON THE INCOME COMPUTED IN ACCORDANCE WITH THE NORMAL PROVISIONS OF THE I.T. ACT, 1961.' ITA NO.578/LKW/2018 PAGE 73 OF 98 'NOW, IN VIEW OF THE DISCUSSION MADE SUPRA WHILE GIVING EFFECT TO THE ORDER OF LD. CIT(A)-2, KANPUR U/S 251 OF THE ACT, TOTAL INCOME REMAINED AT RS.29,45,27,7507- (INCLUDING LONG TERM CAPITAL GAINS OF RS.27,42,26,2947-) ON WHICH TAX COMES TO RS.6,90,40,142/-. HOWEVER, TAX CALCULATED ON BOOK PROFIT IN VIEW OF THE PROVISIONS OF SECTION 115JB OF THE I.T. ACT., 1961 COMES TO RS.14,21,11,568/-, WHICH IS MORE THAN THE TAX ON THE INCOME COMPUTED UNDER NORMAL PROVISIONS OF THE ACT. THEREFORE, TAX IS BEING CHARGED ON THE BOOK PROFIT OF RS.67,79,97,033/-, WHICH HAS BEEN COMPUTED IN ACCORDANCE WITH THE PROVISIONS OF SECTION 115JB OF THE I.T. ACT., 1961. 71. THE LD. CIT(A) HAS HELD AS FOLLOWS:- I HAVE GONE THROUGH THE FACTS AND THE WRITTEN SUBMISSIONS FILED ALONG WITH THE DETAILS FILED ENCLOSE THEREIN. IN THE ASSESSMENT ORDER, THE AO HAS RELIED UPON THE OFFICE NOTE FOR COMPUTATION OF BOOK PROFIT U/S 115JB OF THE IT ACT. IT IS A FACT THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS NOTICED BY AO THAT THE ASSESSEE HAD CREDITED A SUM OF RS.63,66,86,610/- IN THE BALANCE SHEET UNDER THE HEAD 'RESERVE & SURPLUS'. HOWEVER, WHILE COMPUTING BOOK PROFIT THE ASSESSEE HAD NOT INCREASED NET PROFIT BY RS.63.66,86,610/- AS PROVIDED UNDER EXPLANATION-1 TO SECTION 115JB OF THE INCOME TAX ACT., 1961. ACCORDINGLY, THE ASSESSEE VIDE NOTICE U/S 142(1) OF THE ACT DATED 22.12.2017 WAS REQUIRED TO PREPARE 'COMPUTATION OF INCOME 1 IN ACCORDANCE WITH THE PROVISIONS OF SECTION 115JB OF THE I.T. ACT AND ALSO SHOW CAUSE AS TO WHY THE SUM OF RS.63,66,86,610/-, DIRECTLY CREDITED IN THE BALANCE SHEET MAY NOT BE INCLUDED IN THE NET PROFIT WHILE COMPUTING BOOK PROFIT IN VIEW OF THE PROVISIONS OF SECTION 115JB OF THE I.T. ACT., 1961. THE ASSESSEE SUBMITTED ITS REPLY AND AO CONSIDERED THE REPLY OF THE ASSESSEE AND DID NOT FIND IT TENABLE. SECONDLY, ON PERUSAL OF FINAL ACCOUNTS SUBMITTED BY THE APPELLANT DURING APPELLATE PROCEEDINGS, IT IS SEEN THAT ASSESSEE DID SUBMIT ITA NO.578/LKW/2018 PAGE 74 OF 98 COMPUTATION OF 115JB AS PART OF ITS COMPUTATION OF INCOME. APPELLANT HAS SHOWN THE NET PROFIT ARISING OUT OF THIS SALE AS ITS INCOME IN THE P&L ACCOUNT. APPELLANT SOLD THE PROPERTY TO ARA INDIA LLP FOR A TOTAL SUM OF RS.68,00,00,000/-. SINCE THE PURCHASE VALUE OF THE ASSETS, AS PER THE AMALGAMATION ORDER OF HON'BLE ALLAHABAD HIGH COURT, WAS RS.64,73,00,0.00/-, THEREFORE THE DIFFERENCE OF RS.3,27,00,000/- (EXCESS OF SALE PROCEEDS OVER THE COST) BEING PROFIT ON SALE OF ASSETS WAS ADMITTEDLY CREDITED INTO THE PROFIT & LOSS ACCOUNT AS UNDER: S.NO. PARTICULARS PURCHASE VALUE SALE VALUE PROFIT 1. LAND 63,76,03,211 66,82,21,200 3,06,17,989 2. BUILDING 96,96,789 1,17,78,800 20,82,011 TOTAL 64,73,00,000 68,00,00,000 3,27,00,000 HOWEVER, WHILE COMPUTING, LONG TERM CAPITAL GAINS ON SALE OF ASSETS, SURPLUS ON SALE OF ASSETS AMOUNTING TO RS.3,27,00,000/- WAS ADDED BACK TO THE INCOME AND LONG TERM CAPITAL GAINS AMOUNTING TO RS.17,92,25,580/- HAS BEEN SHOWN UNDER THE HEAD CAPITAL GAINS. COPY OF COMPUTATION OF INCOME WAS SUBMITTED VIDE REPLY DATED 12/10/2018 AND IS PLACED ON RECORD. SO IT IS INCORRECT TO SAY THAT THIS TRANSACTION DID NOT GET ROUTED THROUGH THE BALANCE SHEET AND P & L ACCOUNT. THOUGH THE FIGURE MENTIONED IN THE PROFIT AND LOSS ACCOUNT IS THE NET FIGURE OF PROFIT ARISING OUT OF THIS TRANSACTION BUT IT HAS THE EFFECT OF WHOLE PURCHASE & SALE VALUE BEING CONSIDERED WHILE CREATING THE RESERVE. AO HAS FURTHER HELD THAT THE WORKING OF THE 'RESERVE & SURPLUS' DONE BY THE ASSESSEE IS NOT IN ACCORDANCE WITH THE AMALGAMATION SCHEME DULY SANCTIONED BY THE HON'BLE HIGH COURT. AS PER AMALGAMATION SCHEME, THE VALUE OF FIXED ASSETS AS ON 01.04.2014 IN THE BOOKS OF M/S KANPUR CONSTRUCTIONS PVT. LTD., WOULD BE THE VALUE OF FIXED ASSETS AS SHOWN IN LAST BALANCE SHEET OF TRANSFER OR COMPANY I.E. M/S KANPUR BUILDERS PVT. LTD. AS ; PER THE LAST BALANCE SHEET OF M/S KANPUR BUILDERS PVT. LTD., I.E. AS ON 31.03.2014, THE VALUE OF FIXED ASSETS WAS AT RS.14,25,389/-. HOWEVER, SURPRISINGLY, THE ASSESSEE (M/S KANPUR ITA NO.578/LKW/2018 PAGE 75 OF 98 CONSTRUCTIONS PVT. LTD.,) HAS SHOWN THE VALUE OF FIXED ASSETS AS ON 01.04.2014 AS NIL. THUS, THIS ACT ON THE PART OF THE ASSESSEE IS TOTALLY AGAINST THE AMALGAMATION SCHEME. I HAVE PERUSED THE ORDER OF HON'BLE ALLAHABAD HIGH COURT AND IT IS SEEN FROM THE PERUSAL OF ORDER OF HON'BLE HIGH COURT SANCTIONING AMALGAMATION SCHEME, THAT THE RESERVE IS CREATED AS PER THE DIRECTIONS OF THE COURT ON THE PURCHASE METHOD, DULY APPROVED BY THE HON'BLE ALLAHABAD HIGH COURT VIDE THEIR ORDER DT. 16 TH DEC., 2015. SECTION - 4 OF THIS ORDER DEALS WITH CAPITAL STRUCTURE AND ACCOUNTING TREATMENT AND MERGER OF AUTHORIZED SHARE CAPITAL OF KBPL WITH AUTHORIZED SHARE CAPITAL OF KCPL AND TREATMENT OF SHARES AND PARA 6.3 THEREOF DEALS WITH THE ACCOUNTING TREATMENT OF ALL ASSETS AND LIABILITIES AS APPEARING IN THE BOOKS OF TRANSFEROR COMPANY. RELEVANT PART OF PARA 6.3 IS REPRODUCED BELOW:- 6.3.1 UPON THE COMING INTO EFFECT OF THIS SCHEME, ALL ASSETS & LIABILITIES AS APPEARING IN THE BOOKS OF TRANSFEROR COMPANY ON THE APPOINTED DATE, SHALL BE RECORDED IN THE BOOKS OF KCPL AS ASSETS AND LIABILITIES AT THEIR RESPECTIVE VALUES (SUBJECT TO CLAUSE 6.3.6) IN ACCORDANCE WITH 'THE PURCHASE METHOD' AS PRESCRIBED UNDER ACCOUNTING STANDARD-14 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. 6.3.2 KCPL SHALL CREDIT THE AGGREGATE FACE VALUE OF THE EQUITY SHARES ISSUED TO THE EQUITY SHARE HOLDERS OF THE TRANSFEROR COMPANY PURSUANT TO THIS SCHEME TO THE 'SHARE CAPITAL ACCOUNT' IN ITS BOOKS OF ACCOUNTS. 6.3.3 PURSUANT TO THE AMALGAMATION, THE DIFFERENCE, IF ANY, ARISING BETWEEN: I. THE VALUE OF ASSETS TAKEN OVER; AND II. THE AGGREGATE OF THE ISSUED AND PAID UP SHARE CAPITAL PURSUANT TO THE EQUITY SHARES ALLOTTED AND THE LIABILITIES TAKEN OVER PURSUANT TO THIS SCHEME WOULD BE CREDITED TO THE SECURITIES PREMIUM ACCOUNT (IN CASE VALUE OF ASSETS IS GREATER THAN THE FACE VALUE OF SHARES ISSUED) OR ITA NO.578/LKW/2018 PAGE 76 OF 98 DEFICIT, IF ANY, WILL BE DEBITED TO GOODWILL ON AMALGAMATION ACCOUNT OF KCPL. 6.3.4 IN CASE OF ANY DIFFERENCES IN ACCOUNTING POLICIES BETWEEN KBPL AND KCPL, THE IMPACT OF THE SAME TILL THE APPOINTED DATE WILL BE QUANTIFIED AND ADJUSTED IN THE ACCUMULATED PROFIT & LOSS ACCOUNT IN THE BALANCE SHEET OF KCPL, TO ENSURE THAT THE FINANCIAL STATEMENTS OF KCPL REFLECT THE FINANCIAL POSITION ON THE BASIS OF CONSISTENT ACCOUNTING POLICIES''. ASSESSEE MADE COMPLIANCE OF THE SAID SCHEME AS APPROVED BY THE HON'BLE HIGH COURT BY GIVING A NOTE-16 DISCLOSURE REGARDING AS-14-ACCOUNTING FOR AMALGAMATION IN THE BALANCE SHEET FOR THE YEAR ENDED ON 31/03/2015, WHICH IS REPRODUCED BELOW; A) 'THE ASSETS, LIABILITIES, RIGHTS AND OBLIGATIONS OF TRANSFEREE COMPANY HAVE BEEN TRANSFERRED TO AND VESTED WITH THE COMPANY WITH EFFECT FROM 1 ST APRIL, 2014 AND HAVE BEEN RECORDED AT THEIR RESPECTIVE FAIR VALUE UNDER THE PURCHASE METHOD OF ACCOUNTING FOR AMALGAMATION IN ACCORDANCE WITH ACCOUNTING STANDARD 14-ACCOUNTING FOR AMALGAMATION. B) 4,10,000 EQUITY SHARES OF RS.10/- EACH HAVE BEEN ISSUED TO THE ELIGIBLE EQUITY SHAREHOLDERS OF THE TRANSFEREE COMPANY WHOSE NAMES ARE REGISTERED IN THE REGISTER OF MEMBERS ON 22 ND DEC 2015, WITHOUT PAYMENT BEING RECEIVED IN CASH. C) 20,000, 1% REDEEMABLE NON-CUMULATIVE PREFERENCE SHARES OF RS.100/- EACH, FULLY PAID UP HAVE BEEN ISSUED TO PREFERENCE SHAREHOLDERS OF THE TRANSFEREE COMPANY WHOSE NAME APPEARS IN THE REGISTER ON 22 ND DEC, 2015 WITHOUT PAYMENT BEING RECEIVED IN CASH. D) 10,000 EQUITY SHARES OF RS.10/- EACH HELD BY THE TRANSFEREE COMPANY HAVE BEEN CANCELLED AGAINST THE VALUE OF INVESTMENTS HELD BY THE TRANSFEREE COMPANY AND DIFFERENCE HAVE BEEN CHARGED TO PROFIT AND LOSS ACCOUNT. E) THE DIFFERENCE BETWEEN THE ASSETS AND LIABILITIES ACQUIRED FROM THE TRANSFEREE COMPANY, AMOUNTING TO ITA NO.578/LKW/2018 PAGE 77 OF 98 RS.63,66,86,610/- HAS BEEN CREDITED TO THE 'SECURITIES PREMIUM ACCOUNT' AS PER THE SCHEME OF AMALGAMATION APPROVED BY HON'BLE HIGH COURT. F) THE INTER COMPANY BALANCES AND TRANSACTIONS GET CANCELLED.' ACCOUNTING STANDARD-14:- FOR YOUR HONOUR KIND PERUSAL, WE ARE REPRODUCING BELOW THE RELEVANT PART OF ACCOUNTING STANDARD-14 RELATED TO ACCOUNTING FOR AMALGAMATIONS ON 'THE PURCHASE METHOD'. '36. IN PREPARING THE TRANSFEREE COMPANY'S FINANCIAL STATEMENTS, THE ASSETS AND LIABILITIES OF THE TRANSFEROR COMPANY SHOULD BE INCORPORATED AT THEIR EXISTING CARRYING AMOUNTS OR, ALTERNATIVELY, THE CONSIDERATION SHOULD BE ALLOCATED TO INDIVIDUAL IDENTIFIABLE ASSETS AND LIABILITIES ON THE BASIS OF THEIR FAIR VALUES AT THE DATE OF AMALGAMATION. THE RESERVES (WHETHER CAPITAL OR REVENUE OR ARISING ON REVALUATION) OF THE TRANSFEROR COMPANY, OTHER THAN THE STATUTORY RESERVES, SHOULD NOT BE INCLUDED IN THE FINANCIAL STATEMENTS OF THE TRANSFEREE COMPANY EXCEPT AS STATED IN PARAGRAPH 39. 37. ANY EXCESS OF THE AMOUNT OF THE CONSIDERATION OVER THE VALUE OF THE NET ASSETS OF THE TRANSFEROR COMPANY ACQUIRED BY THE TRANSFEREE COMPANY SHOULD BE RECOGNIZED IN THE TRANSFEREE COMPANY'S FINANCIAL STATEMENTS AS GOODWILL ARISING ON AMALGAMATION. IF THE AMOUNT OF THE CONSIDERATION IS LOWER THAN THE VALUE OF THE NET ASSETS ACQUIRED, THE DIFFERENCE SHOULD BE TREATED AS CAPITAL RESERVE. IN THE LIGHT OF ABOVE FACTS, AO FAILED TO APPRECIATE THAT CLAUSE-(B) OF EXPLANATION 1 OF SECTION 115JB OF THE ACT IS TO BE CONSIDERED ONLY FOR THE SAID AMOUNT THAT IS DEBITED TO PROFIT & LOSS ACCOUNT. IN THE PRESENT CASE ONLY PROFIT AMOUNT WAS DEBITED TO PROFIT & LOSS ACCOUNT AND THEREFORE WHOLE SALE CONSIDERATION CANNOT BE ADDED BACK OR CONSIDERED FOR THE PURPOSES OF DETERMINATION OF BOOK PROFITS. AT BEST ONLY RS.3,27,00,000/- CAN BE ADDED BACK TO ITA NO.578/LKW/2018 PAGE 78 OF 98 ADJUST THE BOOK| PROFITS U/S 115JB OF I.T ACT. AO RATHER HELD IN THE ASSESSMENT ORDER THAT THE AMOUNT CREDITED IN THE BALANCE SHEET OF M/S KANPUR CONSTRUCTIONS PVT. LTD., UNDER THE HEAD 'RESERVE & SURPLUS' IS THE PROFIT ON SALE OF PROPERTY IN QUESTION BUT WHILE COMPUTING BOOK PROFIT IN ACCORDANCE WITH THE PROVISIONS OF SECTION 115JB, AO ADDED THE WHOLE AMOUNT OF 'RESERVE AND SURPLUS' CREDITED IN THE' BALANCE SHEET, HOLDING IT AS LIABLE TO BE INCLUDED IN THE NET PROFIT OF THE ASSESSEE COMPANY AS PROVIDED UNDER EXPLANATION-1 TO SECTION 115JB OF THE INCOME TAX ACT., 1961. IF THE APPELLANT HAD DEBITED THIS WHOLE AMOUNT IN THE P & L ACCOUNT THEN STAND OF THE AO WOULD HAVE BEEN LEGALLY CORRECT. LAW MAKERS OBSERVED THAT THERE ARE MANY COMPANIES WHICH ARE DISCLOSING MASSIVE PROFIT IN THE ACCOUNTS AS LAID IN THE ANNUAL GENERAL MEETING (AGM) BEFORE THE SHAREHOLDER BUT AT THE SAME TIME THESE COMPANIES ALSO SHOWING FAR LESS PROFIT FOR THE INCOME TAX PURPOSE. VARIANCE BETWEEN PROFITS AS PER THE COMPANIES ACT AND AS PER INCOME TAX ACT WAS DUE TO MANY DISSIMILAR ALLOWANCE OF DISALLOWANCE IN THE BOTH ACTS E.G. DIFFERENCE IN METHOD AND RATE OF DEPRECIATION PROVIDED IN BOTH ACTS. TO PUT AN END ON THIS TREND AND BRING THESE KINDS OF COMPANIES UNDER THE TAX NET, LAW MAKER FRAMED, CONCEPT OF MAT, ACCORDING TO THIS CONCEPT CORPORATE ENTITY HAS TO PAY MINIMUM TAX. THE CONCEPT OF MAT IS GOVERN BY THE PROVISIONS CONTAINS IN SECTION 115JB OF INCOME TAX ACT, 1961. WHERE IN CASE OF A COMPANY, THE INCOME TAX PAYABLE ON THE TOTAL INCOME AS COMPUTED UNDER THE INCOME TAX ACT IN RESPECT OF ANY PREVIOUS YEAR IS LESS THAN 18.5% OF ITS BOOK PROFIT, THEN SUCH BOOK PROFIT SHALL BE DEEMED TO BE THE TOTAL INCOME OF THE ASSESSEE AND THE TAX PAYABLE ON SUCH TOTAL INCOME SHALL BE THE AMOUNT OF INCOME TAX AT THE RATE OF 18.5%. IN THE SIMPLE WORDS EVERY COMPANY HAS TO COMPUTE ITS INCOME TAX LIABILITY AS PER TWO SETS OF PROVISIONS. THE SET OF PROVISIONS WHICH RESULTS IN HIGHER INCOME TAX LIABILITY BECOME THE INCOME TAX PAYABLE. FOLLOWINGS ARE THE TWO SET OF PROVISIONS: ITA NO.578/LKW/2018 PAGE 79 OF 98 1) INCOME TAX COMPUTED AS PER NORMAL PROVISIONS OF INCOME-TAX ACT. 2) INCOME TAX COMPUTED AS PER PROVISION OF SECTION 115JB OF INCOME TAX ACT. BOOK PROFIT IS DEFINED IN THE EXPLANATION 1 TO SECTION 115JB AS BOOK PROFIT MEANS THE NET PROFIT AS SHOWN IN THE PROFIT & LOSS ACCOUNT FOR THE RELEVANT PREVIOUS YEAR AND AS INCREASED AND DECREASED BY SOME PRESCRIBED ITEMS. IN SIMPLE WORDS TO COMPUTE BOOK PROFIT, WE HAVE TO TAKE PROFIT & LOSS ACCOUNT AND MAKE SOME PRESCRIBED ADDITIONS AND DELETIONS TO IT. SO THE PURPOSE OF S. 115 JB IS TO REACH A CORRECT FIGURE OF PROFIT FOR TAXATION PURPOSES. SO IN LIGHT OF THIS BASIC PRINCIPLE IN THE INSTANT CASE THE WHOLE SALE PRICE CANNOT BE A PROFIT LIABLE FOR ADJUSTMENT. ONLY THE PROFIT OF RS.3,27,00,000/- ARISING OUT OF THIS TRANSACTION CAN AT BEST BE ADDED BACK U/S 115JB, IF DEBITED TO P & L ACCOUNT. EVEN OTHERWISE, AS PER SETTLED LEGAL AND ACCOUNTING PRINCIPLES, A CAPITAL RESERVE OR SURPLUS ARISING UPON MERGER OF TWO CORPORATE ENTITLES, CANNOT BE TREATED AS PROFIT LIABLE TO BE TAXED U/S. 115JB OF THE I.T. ACT, 1961. SECTION 115JB OF THE ACT CREATES A FICTION BY INTRODUCING A DEEMING PROVISION. IT IS WELL SETTLED POSITION IN LAW THAT SUCH A DEEMING PROVISION CREATING A FICTION MUST BE CONSTRUED STRICTLY AND ITS SCOPE CANNOT BE EXTENDED ON ANY OTHER GROUND. IN THE PRESENT CASE, THEREFORE, ITS SCOPE CANNOT BE EXTENDED TO COVER THE AMOUNT IN SECURITIES PREMIUM ACCOUNT THAT AROSE UPON THE MERGER BY VIRTUE OF THE ORDER OF HON'BLE HIGH COURT APPROVING THE MERGER SCHEME. IT SEEMS THAT THE AO FAILED TO APPRECIATE THE CORRECT ACCOUNTING ENTRIES. ON 01/04/2014 THERE WERE NO FIXED ASSETS IN THE BALANCE SHEET OF KANPUR CONSTRUCTIONS PVT. LTD. AND THE VALUE OF ASSETS (TOTAL AMOUNTING TO RS.64,73,00,000/- AS PER VALUATION REPORT AS ON 01/04/2014 OF APPROVED VALUER) ACQUIRED UPON AMALGAMATION HAS BEEN SHOWN IN THE COLUMN OF 'ADDITIONS DURING THE YEAR' IN THE SCHEDULE OF FIXED ASSETS FORMING PART OF BALANCE SHEET. FIXED ASSETS SCHEDULE IS REPRODUCED ABOVE. IN AMALGAMATION, CREATION OF GENERAL RESERVE IN BALANCE SHEET OF THE AMALGAMATED COMPANY, OF AN AMOUNT EQUAL TO EXCESS ARISING ITA NO.578/LKW/2018 PAGE 80 OF 98 DUE TO REVALUATION OF ASSETS OF AMALGAMATING COMPANY, CANNOT BE SAID TO BE OUT OF APPROPRIATION OF PROFITS AND THEREFORE, CANNOT BE CONSIDERED WHILE COMPUTING BOOK PROFITS U/S. 115JB. FURTHER 'RESERVE' AS CONTEMPLATED BY CLAUSE-(B) OF EXPLANATION 1 OF SECTION 115JB OF THE ACT IS REQUIRED TO BE CARRIED THROUGH THE PROFIT & LOSS ACCOUNT. IT IS A FACT THAT ISSUE OF BOOK PROFIT U/S 115JB WAS THE SUBJECT MATTER OF ASSESSMENT PROCEEDINGS AS AN OFFICE NOTE BUT WAS NOT AN ISSUE DURING THE APPELLATE PROCEEDINGS AND THE ASSESSING OFFICER HAS FOR FIRST TIME RACKED UP THIS ISSUE DURING PROCEEDINGS U/S 251/143(3) OF THE ACT. APPELLANT HAS RAISED A LEGAL ISSUE IN THIS REGARD FOR ADJUDICATION: A. WHETHER THE ASSESSING OFFICER HAS JURISDICTION TO MAKE FRESH-ADDITION/DISALLOWANCE IN THE PROCEEDINGS U/S 251/143(3) OF THE ACT? ON THE ISSUE OF JURISDICTION, IT IS QUITE CLEAR THAT PROCEEDINGS U/S 251/143(3) ARE ESSENTIALLY TO GIVE EFFECT TO THE FINDINGS AND DIRECTIONS OF FIRST APPELLATE AUTHORITY AND PROVIDES LIMITED WINDOW TO THE ASSESSING OFFICER. FURTHER, IT IS OBVIOUS THAT SCOPE OF PROCEEDINGS IS WELL DEFINED AND THE ASSESSING OFFICER IS PURELY REQUIRED TO FOLLOW THE DIRECTIONS OF THE FIRST APPELLATE AUTHORITY AND IS NOT ALLOWED TO DEVIATE FROM SUBJECT MATTER OF THE REMAND. IN THE PRESENT CASE, AS ALREADY DISCUSSED ABOVE, THE FIRST APPELLATE AUTHORITY MERELY DIRECTED THE ASSESSING OFFICER TO VERIFY THE CLAIM OF DEPRECIATION AND NO DIRECTIONS WHATSOEVER WERE ISSUED IN RESPECT OF COMPUTATION OF BOOK PROFIT U/S 115JB OF THE ACT. IN FACT, THERE WAS NO WHISPER OF THIS ISSUE IN THE ASSESSMENT ORDER AND SAME WAS NOT EVEN THE SUBJECT MATTER OF THE FIRST APPEAL. IT IS NOT EVEN THE ASSESSING OFFICER'S CASE THAT IN THE RETURN OF INCOME, THE APPELLANT HAS ADMITTED ANY TAX LIABILITY U/S 115JB OF THE ACT. IN THESE CIRCUMSTANCES, THE ASSESSING OFFICER HAS EXCEEDED ITS JURISDICTION AND HAS TRAVELLED BEYOND THE SUBJECT MATTER TO MAKE FRESH ADDITION IN PROCEEDING U/S 251/143(3) OF THE ACT. THE DECISION OF HON'BLE GUJARAT HIGH COURT IN THE CASE OF DCIT V. SURAT ELECTRICITY CO. LTD [2011] 337 ITR 271 (GUJARAT) AS REFERRED TO BY THE APPELLANT IS FULLY APPLICABLE IN THE PRESENT ITA NO.578/LKW/2018 PAGE 81 OF 98 CASE AS IN THAT CASE ALSO THE ASSESSING OFFICER INVOKED PROVISIONS OF SECTION 115J IN THE REMAND PROCEEDINGS WHICH WAS SUBSEQUENTLY HELD TO BE WITHOUT JURISDICTION AND SET-ASIDE BY HON'BLE ITAT AND THE ORDER OF ITAT WAS UPHELD BY HON'BLE GUJARAT HIGH COURT. IN THE LIGHT OF FOREGOING DISCUSSION, I HAVE NO HESITATION IN HOLDING THAT ASSESSING OFFICER WAS NOT EMPOWERED TO MAKE ADJUSTMENT IN BOOK PROFIT U/S. 115JB AND SAME FALLS OUTSIDE THE PURVIEW OF PROCEEDINGS U/S 251/143(3) OF THE ACT. ON THE MERITS OF THE ADDITION, IT IS SEEN THAT ONLY ADJUSTMENT STIPULATED U/S 115JB COULD BE MADE WHILE COMPUTING BOOK PROFIT AND THE IMPUGNED ADJUSTMENT FALLS OUTSIDE THE MANDATE OF PROVISIONS OF SECTION 115JB OF THE ACT. IN THE PRESENT CASE, NEITHER OF THE TWO CONDITIONS IS SATISFIED AND AS SUCH I FIND NO JUSTIFICATION IN THE ACTION OF THE ASSESSING OFFICER IN MAKING THE IMPUGNED ADJUSTMENT IN BOOK PROFIT. THE DECISION OF ITAT, MUMBAI BENCH IN THE CASE OF ITO V. UNITED ESTATES P. LTD. (SUPRA) IS BASED ON IDENTICAL FACTS AND CLEARLY SUPPORTS THIS VIEW. THE RELEVANT FINDING IS AS UNDER: 'THE HON'BLE SUPREME COURT CLEARLY OBSERVED IN THE CASE OF NATIONAL HYDROELECTRIC POWER CORPN. LTD. (SUPRA) THAT FOR MAKING AN ADDITION UNDER CLAUSE (B) OF EXPLANATION 1 TO SEC. 115JB TWO CONDITIONS MUST BE SATISFIED, JOINTLY (1)(A). THERE MUST BE A DEBIT OF THE AMOUNT TO THE PROFIT & LOSS ACCOUNT, (CLAUSE (B) OF EXPLANATION 1 TO SEC. 115JB) THE AMOUNT SO DEBITED MUST BE CARRIED TO THE RESERVE. FURTHER, THE RESERVE CONTEMPLATED BY CLAUSE (B) OF EXPLANATION 1 TO SEC. 115JB IS REQUIRED TO BE CARRIED THROUGH THE PROFIT & LOSS ACCOUNT. THE HON'BLE COURT ALSO OBSERVED THAT THERE CAN BE TWO TYPES OF RESERVES, NAMELY, THOSE THAT ARE ROUTED THROUGH THE PROFIT & LOSS ACCOUNT AND THOSE WHICH ARE NOT ROUTED THROUGH THE PROFIT & LOSS ACCOUNT, E.G. CAPITAL RESERVE SUCH AS SHARE PREMIUM ACCOUNT. TESTING THE FACTS ON THIS TOUCHSTONE, IT IS CLEAR THAT ASSESSEE HAS DEBITED A SUM OF RS.47,39,19,646/-, WHICH IS THE PRESENT MARKET VALUE OF THE WORK-IN-PROGRESS ITA NO.578/LKW/2018 PAGE 82 OF 98 WHICH HAS BEEN TAKEN OVER AND, THEREFORE, IT CANNOT BE SAID THAT IT CONSISTS OF SOME PORTION OF RESERVE ALSO. THEREFORE, THERE IS NO DEBIT FOR CREATION OF RESERVE AND HENCE RESERVE OF RS.39,79,89,282/- HAS NOT BEEN CARRIED THROUGH THE PROFIT & LOSS ACCOUNT. THE DEBIT OF WORK-IN- PROGRESS CANNOT BE CALLED A RESERVE. IT IS ALSO TO BE NOTED THAT THE HON'BLE SUPREME COURT OBSERVED THAT AAD WHICH WAS BEFORE THEM WAS NOT APPROPRIATION OUT OF PROFITS. SIMILARLY, CREATION OF GENERAL RESERVE OUT OF REVALUATION RESERVE CANNOT BE SAID TO BE OUT OF APPROPRIATION OF PROFITS. THEREFORE, IN OUR OPINION, THE AMOUNT WHICH WAS NEVER ROUTED THROUGH THE PROFIT & LOSS ACCOUNT AND NEVER DEBITED TO THE PROFIT & LOSS ACCOUNT COULD NOT BE CONSIDERED FOR THE PURPOSE OF DETERMINATION OF BOOK PROFITS UNDER CLAUSE (B) OF EXPLANATION 1 TO SEC. 115JB. ACCORDINGLY, WE CONFIRM THE ORDER OF THE ID. CIT(A). '11. IN THE RESULT, REVENUE'S APPEAL IS DISMISSED.' IT IS FURTHER NOTED THAT AUDITED BALANCE SHEET OF THE APPELLANT HAS BEEN PREPARED IN ACCORDANCE WITH PROVISIONS OF COMPANIES ACT AND AS SUCH THE ASSESSING OFFICER CANNOT DISREGARD AUDITED BALANCE SHEET AND COMPUTE TAX LIABILITY ON ILLEGAL AND ARBITRARY BASIS. THE LEGAL POSITION TO THIS EFFECT IS WELL SETTLED AS PER THE DECISION OF APEX COURT IN THE CASE OF APOLLO TYRES LTD, V. CIT [2002] 255/77? 273 (SC), IN VIEW OF FINDING RECORDED IN AFORESAID PARAS AND RESPECTFULLY FOLLOWING THE DECISIONS OF HON'BLE APEX COURT AND ITAT, I HEREBY DELETE THE ADJUSTMENT OF RS.63,66,86,610/- TO BOOK PROFIT U/S 115JB OF IT ACT. 72. THE LD. D.R. HAS CONTENDED THAT THE CIT(A) HAS ERRED IN LAW AS WELL AS IN THE FACTS AND CIRCUMSTANCES OF THE CASE, IN HOLDING THAT THE ISSUE OF BOOK PROFIT UNDER SECTION 115JB WAS THE SUBJECT-MATTER OF THE ASSESSMENT PROCEEDINGS AND IT DID NOT ARISE ITA NO.578/LKW/2018 PAGE 83 OF 98 DURING THE PROCEEDINGS UNDER SECTION 251/143(3) OF THE ACT, WITHOUT APPRECIATING THE FACT THAT AS AND WHEN TAX LIABILITY ON BOOK PROFIT IS MORE THAN THE TAX LIABILITY COMPUTED IN ACCORDANCE WITH NORMAL PROVISIONS OF THE ACT, TAX WOULD BE CHARGED ON BOOK PROFIT IN ACCORDANCE WITH THE PROVISIONS OF SECTION 115JB OF THE ACT; AND THAT THE ISSUE OF BOOK PROFIT UNDER SECTION 115JB WAS THE SUBJECT MATTER OF ASSESSMENT PROCEEDINGS AND NOT DURING PROCEEDINGS UNDER SECTION 251/143(3) OF THE ACT, WITHOUT APPRECIATING THE FACT THAT COMPUTATION OF BOOK PROFIT WAS DONE DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS AND SINCE THE TAX LIABILITY COMPUTED IN ACCORDANCE WITH THE NORMAL PROVISION OF THE ACT WAS MORE, TAX WAS CHARGED ON THE NORMAL INCOME, HOWEVER, WHILE PASSING ORDER U/S 251/143(3), TAX WAS CHARGED ON BOOK PROFIT, AS THE TAX ON BOOK PROFIT WAS MORE. 73. THE LD. COUNSEL FOR THE ASSESSEE HAS PLACED RELIANCE ON THE ORDER OF THE LD. CIT(A). 74. HEARD. WE FIND FROM THE ASSESSMENT ORDER THAT THE AO HAS RELIED ON THE OFFICE NOTE FOR COMPUTATION OF THE BOOK PROFIT OF THE ASSESSEE UNDER SECTION 115JB OF THE ACT. IT IS A FACT THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAD CREDITED A SUM OF RS.63,66,86,610/- IN THE BALANCE SHEET UNDER THE HEAD 'RESERVE & SURPLUS'. HOWEVER, SINCE THE ASSESSEE, WHILE COMPUTING THE BOOK PROFIT, HAD NOT INCREASED THE NET PROFIT BY RS.63,66,86,610/-, AS PROVIDED UNDER EXPLANATION-1 TO SECTION 115JB OF THE ACT, THE ASSESSING OFFICER, VIDE NOTICE UNDER SECTION 142(1) OF THE ACT, DATED 22.12.2017 REQUIRED THE ASSESSEE TO PREPARE COMPUTATION OF INCOME IN ACCORDANCE WITH THE ITA NO.578/LKW/2018 PAGE 84 OF 98 PROVISIONS OF SECTION 115JB OF THE ACT AND TO ALSO SHOW CAUSE AS TO WHY THE SUM OF RS.63,66,86,610/-, DIRECTLY CREDITED IN THE BALANCE SHEET, MAY NOT BE INCLUDED IN THE NET PROFIT, WHILE COMPUTING BOOK PROFIT IN VIEW OF THE PROVISIONS OF SECTION 115JB OF THE ACT. THE REPLY SUBMITTED BY THE ASSESSEE WAS NOT FOUND TO BE TENABLE BY THE ASSESSING OFFICER. 75. THE LD. CIT(A), ON PERUSAL OF THE FINAL ACCOUNTS SUBMITTED BY THE ASSESSEE DURING THE APPELLATE PROCEEDINGS, NOTED THAT THE ASSESSEE HAD SUBMITTED THE COMPUTATION OF INCOME IN ACCORDANCE WITH THE PROVISIONS OF SECTION 115JB AS PART OF ITS COMPUTATION OF INCOME, WHEREIN, THE ASSESSEE HAD SHOWN THE NET PROFIT ARISING OUT OF THIS SALE AS ITS INCOME IN THE PROFIT AND LOSS ACCOUNT. THE ASSESSEE SOLD THE PROPERTY TO ARA INDIA LLP, FOR A TOTAL SUM OF RS.68,00,00,000/-. SINCE THE PURCHASE VALUE OF THE ASSETS, AS PER ORDER OF THE HON'BLE ALLAHABAD HIGH COURT, SANCTIONING THE AMALGAMATION SCHEME, WAS RS.64,73,00,0.00/-, THEREFORE, THE DIFFERENCE OF RS.3,27,00,000/- (EXCESS OF SALE PROCEEDS OVER THE COST) BEING THE PROFIT ON SALE OF THE ASSETS WAS ADMITTEDLY CREDITED INTO THE PROFIT & LOSS ACCOUNT, AS UNDER: S.NO. PARTICULARS PURCHASE VALUE SALE VALUE PROFIT 1. LAND 63,76,03,211 66,82,21,200 3,06,17,989 2. BUILDING 96,96,789 1,17,78,800 20,82,011 TOTAL 64,73,00,000 68,00,00,000 3,27,00,000 76. HOWEVER, WHILE COMPUTING THE LONG TERM CAPITAL GAINS ON THE SALE OF ASSETS, SURPLUS ON THE SALE OF ASSETS, AMOUNTING TO ITA NO.578/LKW/2018 PAGE 85 OF 98 RS.3,27,00,000/-, WAS ADDED BACK TO THE INCOME AND LONG TERM CAPITAL GAINS, AMOUNTING TO RS.17,92,25,580/- HAD BEEN SHOWN UNDER THE HEAD CAPITAL GAINS. A COPY OF THE COMPUTATION OF INCOME, AS SUBMITTED BY THE ASSESSEE BEFORE THE LD. CIT(A), VIDE REPLY DATED 12/10/2018 IS ON RECORD. THEREFORE, IT WAS INCORRECT TO SAY THAT THIS TRANSACTION DID NOT GET ROUTED THROUGH THE BALANCE SHEET AND PROFIT AND LOSS ACCOUNT. THOUGH THE FIGURE MENTIONED IN THE THE PROFIT AND LOSS ACCOUNT IS THE NET FIGURE OF PROFIT, ARISING OUT OF THIS TRANSACTION, IT HAS THE EFFECT OF THE WHOLE PURCHASE & SALE VALUE BEING CONSIDERED WHILE CREATING THE RESERVE. 77. THE ASSESSING OFFICER ALSO HELD THAT THE WORKING OF THE 'RESERVE & SURPLUS' OF THE ASSESSEE WAS NOT IN ACCORDANCE WITH THE AMALGAMATION SCHEME DULY SANCTIONED BY THE HON'BLE HIGH COURT; THAT AS PER THE AMALGAMATION SCHEME, THE VALUE OF THE FIXED ASSETS AS ON 01.04.2014 IN THE BOOKS OF KCPL, WOULD BE THE VALUE OF THE FIXED ASSETS AS SHOWN IN THE LAST BALANCE SHEET OF THE TRANSFEROR COMPANY, I.E., KBPL; THAT AS PER THE LAST BALANCE SHEET OF KBPL, I.E., AS ON 31.03.2014, THE VALUE OF FIXED ASSETS WAS AT RS.14,25,389/-; THAT HOWEVER, SURPRISINGLY, THE ASSESSEE, KCPL, HAS SHOWN THE VALUE OF THE FIXED ASSETS AS ON 01.04.2014 AS NIL; AND THAT THUS, THIS ACT ON THE PART OF THE ASSESSEE WAS TOTALLY AGAINST THE AMALGAMATION SCHEME . 78. AS PER THE ORDER OF THE HON'BLE JURISDICTIONAL HIGH COURT (SUPRA), SANCTIONING THE AMALGAMATION SCHEME, THE RESERVE WAS CREATED AS PER THE DIRECTIONS OF THE HON'BLE COURT ON THE PURCHASE METHOD, DULY APPROVED BY THE HON'BLE ALLAHABAD HIGH COURT, VIDE THEIR ORDER DATED 16 TH DEC., 2015. PARA 4 OF THIS ITA NO.578/LKW/2018 PAGE 86 OF 98 ORDER DEALS WITH CAPITAL STRUCTURE AND ACCOUNTING TREATMENT AND MERGER OF THE AUTHORIZED SHARE CAPITAL OF KBPL WITH THE AUTHORIZED SHARE CAPITAL OF KCPL AND THE TREATMENT OF SHARES AND PARA 6.3 THEREOF DEALS WITH THE ACCOUNTING TREATMENT OF ALL THE ASSETS AND LIABILITIES, AS APPEARING IN THE BOOKS OF THE TRANSFEROR COMPANY . THE LD. CIT(A) HAS REPRODUCED THE RELEVANT PART OF PARA 6.3 IN HIS ORDER. 79. THE ASSESSEE, UNDISPUTEDLY, HAD MADE COMPLIANCE OF THE SAID SCHEME, AS APPROVED BY THE HON'BLE HIGH COURT BY GIVING A NOTE-16 DISCLOSURE REGARDING AS-14-ACCOUNTING FOR THE AMALGAMATION, IN THE BALANCE SHEET FOR THE YEAR ENDED ON 31/03/2015, WHICH HAS ALSO BEEN REPRODUCED BY THE LD. CIT(A) IN HIS ORDER. ACCOUNTING STANDARD-14, RELATING TO ACCOUNTING FOR AMALGAMATIONS ON 'THE PURCHASE METHOD', AS HAS BEEN REPRODUCED BY THE LD. CIT(A), IS AS UNDER: '36. IN PREPARING THE TRANSFEREE COMPANY'S FINANCIAL STATEMENTS, THE ASSETS AND LIABILITIES OF THE TRANSFEROR COMPANY SHOULD BE INCORPORATED AT THEIR EXISTING CARRYING AMOUNTS OR, ALTERNATIVELY, THE CONSIDERATION SHOULD BE ALLOCATED TO INDIVIDUAL IDENTIFIABLE ASSETS AND LIABILITIES ON THE BASIS OF THEIR FAIR VALUES AT THE DATE OF AMALGAMATION. THE RESERVES (WHETHER CAPITAL OR REVENUE OR ARISING ON REVALUATION) OF THE TRANSFEROR COMPANY, OTHER THAN THE STATUTORY RESERVES, SHOULD NOT BE INCLUDED IN THE FINANCIAL STATEMENTS OF THE TRANSFEREE COMPANY EXCEPT AS STATED IN PARAGRAPH 39. 37. ANY EXCESS OF THE AMOUNT OF THE CONSIDERATION OVER THE VALUE OF THE NET ASSETS OF THE TRANSFEROR COMPANY ACQUIRED BY THE TRANSFEREE COMPANY SHOULD BE RECOGNIZED IN THE TRANSFEREE COMPANY'S FINANCIAL STATEMENTS AS GOODWILL ARISING ON AMALGAMATION. IF THE AMOUNT OF THE CONSIDERATION IS LOWER THAN ITA NO.578/LKW/2018 PAGE 87 OF 98 THE VALUE OF THE NET ASSETS ACQUIRED, THE DIFFERENCE SHOULD BE TREATED AS CAPITAL RESERVE. IN THE LIGHT OF THE ABOVE FACTS, WE ARE ALSO OF THE VIEW THAT THE ASSESSING OFFICER FAILED TO APPRECIATE THAT CLAUSE (B) OF EXPLANATION 1 TO SECTION 115JB OF THE ACT IS TO BE CONSIDERED ONLY FOR THE AMOUNT THAT HAS BEEN DEBITED TO THE PROFIT & LOSS ACCOUNT. HOWEVER, IN THE PRESENT CASE, ONLY PROFIT AMOUNT WAS DEBITED TO THE PROFIT & LOSS ACCOUNT AND, THEREFORE, THE WHOLE OF THE SALE CONSIDERATION CANNOT BE ADDED BACK, OR CONSIDERED FOR THE PURPOSES OF DETERMINATION OF THE BOOK PROFITS. AT THE BEST, ONLY RS.3,27,00,000/- CAN BE ADDED BACK TO ADJUST THE BOOK PROFITS UNDER SECTION 115JB OF ACT . THE ASSESSING OFFICER, RATHER, HELD THAT THE AMOUNT CREDITED IN THE BALANCE SHEET OF KCPL UNDER THE HEAD 'RESERVE & SURPLUS' IS THE PROFIT ON SALE OF THE PROPERTY IN QUESTION, BUT WHILE COMPUTING THE BOOK PROFIT, IN ACCORDANCE WITH THE PROVISIONS OF SECTION 115JB, THE ASSESSING OFFICER ADDED THE WHOLE AMOUNT OF 'RESERVE AND SURPLUS' CREDITED IN THE BALANCE SHEET, HOLDING IT AS LIABLE TO BE INCLUDED IN THE NET PROFIT OF THE ASSESSEE COMPANY, AS PROVIDED UNDER EXPLANATION-1 TO SECTION 115JB OF THE ACT. IT WAS ONLY IF THE ASSESSEE HAD DEBITED THIS WHOLE AMOUNT IN THE PROFIT AND LOSS ACCOUNT, THAT THE STAND TAKEN BY THE ASSESSING OFFICER WOULD HAVE BEEN LEGALLY CORRECT. 80. BOOK PROFIT IS DEFINED IN THE EXPLANATION 1 TO SECTION 115JB, WHICH MEANS THE NET PROFIT, AS SHOWN IN THE PROFIT & LOSS ACCOUNT FOR THE RELEVANT PREVIOUS YEAR, AND AS INCREASED AND DECREASED BY SOME PRESCRIBED ITEMS. IN SIMPLE WORDS, TO COMPUTE THE BOOK PROFIT, ONE HAS TO TAKE PROFIT & LOSS ACCOUNT AND MAKE ITA NO.578/LKW/2018 PAGE 88 OF 98 SOME PRESCRIBED ADDITIONS AND DELETIONS TO IT. SO, THE PURPOSE OF SECTION 115JB IS TO REACH ON A CORRECT FIGURE OF PROFIT FOR TAXATION PURPOSES. SO, IN THE LIGHT OF THIS BASIC PRINCIPLE IN THE INSTANT CASE, THE WHOLESALE PRICE CANNOT BE A PROFIT LIABLE FOR ADJUSTMENT. ONLY, THE PROFIT OF RS.3,27,00,000/-, ARISING OUT OF THIS TRANSACTION, CAN, AT BEST, BE ADDED BACK UNDER SECTION 115JB, IF DEBITED TO THE PROFIT AND LOSS ACCOUNT. EVEN OTHERWISE, AS PER THE SETTLED LEGAL AND ACCOUNTING PRINCIPLES, A CAPITAL RESERVE OR SURPLUS ARISING UPON MERGER OF TWO CORPORATE ENTITIES, CANNOT BE TREATED AS PROFIT LIABLE TO BE TAXED UNDER SECTION 115JB OF THE ACT. SECTION 115JB OF THE ACT CREATES A FICTION BY INTRODUCING A DEEMING PROVISION. IT IS WELL SETTLED POSITION OF LAW THAT SUCH A DEEMING PROVISION CREATING A FICTION MUST BE CONSTRUED STRICTLY AND ITS SCOPE CANNOT BE EXTENDED ON ANY OTHER GROUND. IN THE PRESENT CASE, THEREFORE, ITS SCOPE CANNOT BE EXTENDED TO COVER THE AMOUNT IN SECURITIES PREMIUM ACCOUNT THAT AROSE UPON THE MERGER BY VIRTUE OF THE ORDER OF THE HON'BLE HIGH COURT, APPROVING THE MERGER SCHEME. IT SEEMS THAT THE ASSESSING OFFICER FAILED TO APPRECIATE THE CORRECT ACCOUNTING ENTRIES. ON 01/04/2014, THERE WERE NO FIXED ASSETS IN THE BALANCE SHEET OF KCPL AND THE VALUE OF ASSETS, TOTALING TO RS.64,73,00,000/-, AS PER VALUATION REPORT AS ON 01/04/2014 OF THE APPROVED VALUER, ACQUIRED UPON AMALGAMATION, HAS BEEN SHOWN IN THE COLUMN OF 'ADDITIONS DURING THE YEAR' IN THE SCHEDULE OF FIXED ASSETS, FORMING PART OF THE BALANCE SHEET. 81. IN THE AMALGAMATION, THE CREATION OF THE GENERAL RESERVE IN THE BALANCE SHEET OF THE AMALGAMATED COMPANY, OF AN AMOUNT EQUAL TO EXCESS ARISING DUE TO REVALUATION OF THE ASSETS OF THE ITA NO.578/LKW/2018 PAGE 89 OF 98 AMALGAMATING COMPANY, CANNOT BE SAID TO BE OUT OF APPROPRIATION OF PROFITS, AND THEREFORE, CANNOT BE CONSIDERED WHILE COMPUTING THE BOOK PROFITS UNDER SECTION 115JB. FURTHER, THE 'RESERVE' AS CONTEMPLATED IN CLAUSE (B) TO EXPLANATION 1 TO SECTION 115JB OF THE ACT IS REQUIRED TO BE CARRIED THROUGH THE PROFIT & LOSS ACCOUNT. IT IS A FACT THAT THE ISSUE RELATING TO BOOK PROFIT UNDER SECTION 115JB WAS THE SUBJECT MATTER OF THE ASSESSMENT PROCEEDINGS, ON THE BASIS OF AN OFFICE NOTE, BUT WAS NOT AN ISSUE DURING THE APPELLATE PROCEEDINGS AND THE ASSESSING OFFICER, FOR THE FIRST TIME RAKED UP THIS ISSUE DURING THE PROCEEDINGS UNDER SECTION 251/143(3) OF THE ACT. 82. ON THE MERITS OF THE ADDITION, IT IS SEEN THAT THE ONLY ADJUSTMENT STIPULATED UNDER SECTION 115JB COULD BE MADE WHILE COMPUTING THE BOOK PROFIT AND THE IMPUGNED ADJUSTMENT FALLS OUTSIDE THE MANDATE OF THE PROVISIONS OF SECTION 115JB OF THE ACT. IN THE PRESENT CASE, NEITHER OF THE TWO CONDITIONS IS SATISFIED AND AS SUCH, WE FIND NO JUSTIFICATION IN THE ACTION OF THE ASSESSING OFFICER IN MAKING THE IMPUGNED ADJUSTMENT IN THE BOOK PROFIT AND THE DECISION OF THE ITAT, MUMBAI BENCH IN THE CASE OF ITO V. UNITED ESTATES P. LTD. (SUPRA), AS HELD BY THE LD. CIT(A), IS BASED ON IDENTICAL FACTS AND CLEARLY SUPPORTS THIS VIEW. 83. THE ASSESSING OFFICER HAS MADE THE ADDITION BY OBSERVING THAT THE CAPITAL RESERVE CREATED OUT OF AMALGAMATION AND APPEARING IN THE BALANCE SHEET IS REQUIRED TO BE ADDED BACK TO THE BOOK PROFITS UNDER SECTION 115JB OF THE ACT. IN THIS CONNECTION, WE ARE OF THE VIEW THAT THE ACTION OF THE ASSESSING OFFICER IS WHOLLY WITHOUT JURISDICTION AND FALLS OUTSIDE THE SCOPE AND PURVIEW OF THE PROCEEDINGS UNDER SECTION 250/143(3) OF THE ITA NO.578/LKW/2018 PAGE 90 OF 98 ACT. IT MAY BE APPRECIATED THAT THE PROCEEDINGS UNDER SECTION 250/143(3) ARE MERELY TO GIVE EFFECT TO THE ORDER OF CIT(A) AND NO FRESH ISSUE OR ADDITION COULD BE CONSIDERED IN THE SAID PROCEEDINGS. THE ASSESSING OFFICER, WITHOUT GIVING ANY OPPORTUNITY TO THE ASSESSEE, HAS MADE ENHANCEMENT IN BOOK PROFIT UNDER SECTION 115JB IN AN ILLEGAL AND ARBITRARY MANNER, WHICH IS NOT SUSTAINABLE UNDER THE PROVISIONS OF THE ACT. IT IS TO BE FURTHER NOTED THAT NEITHER THE ASSESSEE HAS COMPUTED ANY TAX LIABILITY ON THE BASIS OF PROVISIONS OF SECTION 115JB IN ITS RETURN OF INCOME NOR THE ASSESSING OFFICER HAS MADE ANY WORKING OF MAT, WHILE PASSING THE ASSESSMENT ORDER UNDER SECTION 143(3) OF THE ACT, DATED 30/12/2017. 84. IT MAY BE APPRECIATED THAT SCOPE OF PROCEEDINGS UNDER SECTION 250/143(3) IS LIMITED TO THE DIRECTIONS CONTAINED IN THE APPELLATE ORDER AND IT IS NOT OPEN TO THE ASSESSING OFFICER TO MAKE ANY FRESH ADDITION/DISALLOWANCE, WHICH IS NOT THE SUBJECT MATTER OF THE ORIGINAL ASSESSMENT AND THE APPELLATE PROCEEDINGS. IT IS A MATTER OF FACT THAT THE ISSUE OF ADDITION TO THE BOOK PROFIT UNDER SECTION 115JB WAS NEITHER PART OF THE ORIGINAL ASSESSMENT ORDER NOR THE APPELLATE ORDER AND AS SUCH, THE ASSESSING OFFICER HAS EXCEEDED ITS JURISDICTION BY MAKING SUCH ADDITION IN THE PROCEEDINGS UNDER SECTION 250/143(3) OF THE ACT. THE JUDGMENT OF THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF DCIT V. SURAT ELECTRICITY CO LTD., 337 ITR 271, IS DIRECTLY ON THIS ISSUE, WHEREIN ON IDENTICAL FACTS, THE HON'BLE COURT HELD THAT THE ASSESSING OFFICER IS NOT EMPOWERED TO TRAVEL BEYOND THE DIRECTIONS OF THE FIRST APPELLATE AUTHORITY. ITA NO.578/LKW/2018 PAGE 91 OF 98 85. THE GUJARAT HIGH COURT, IN THE CASE OF SAHELI SYNTHETICS (P.) LTD. V. CIT, 302 ITR 126, HELD THAT THE SET ASIDE OF ASSESSMENT MADE BY THE APPELLATE AUTHORITY WAS ALWAYS IN ACCORDANCE WITH THE DIRECTIONS GIVEN BY THE APPELLATE AUTHORITY FOR MAKING A FRESH ASSESSMENT. BUT, THE MOST MATERIAL PART OF THE PROVISION OF SECTION 251 WAS THE OPENING PORTION WHICH STIPULATES IN AN APPEAL AGAINST AN ORDER OF ASSESSMENT. IN OTHER WORDS, THE ENTIRE GAMUT OF POWERS, WHICH ARE AVAILABLE TO THE APPELLATE AUTHORITY, IS GOVERNED WITHIN THE FOUR CORNERS OF THE SUBJECT MATTER OF THE APPEAL. THE SUBJECT MATTER OF THE APPEAL IS THE ASSESSMENT OF INCOME WHICH FORMS PART OF THE ORDER OF ASSESSMENT IN THE LIGHT OF THE RETURN OF INCOME FILED BY AN ASSESSEE. EXAMINING THE FACTS OF THE PRESENT CASE, IN THE LIGHT OF THE AFORESAID DECISION, IT WAS APPARENT THAT THE ASSESSING OFFICER WAS REQUIRED TO MAKE A FRESH ASSESSMENT IN ACCORDANCE WITH THE DIRECTIONS GIVEN BY THE LD. CIT(A) AND COULD NOT HAVE TRAVELLED BEYOND THE SAME. 86. REFERENCE MAY ALSO BE MADE TO THE DECISION OF THE MUMBAI ITAT IN THE CASE OF AVENTIS PHARMA LTD. V. DCIT, 57 SOT 102, WHEREIN, IT WAS HELD THAT THE ASSESSING OFFICER CANNOT EXCEED HIS JURISDICTION AND SCOPE OF ENQUIRY, BY MAKING ADDITION ON THE GROUND, WHICH IS NOT SUBJECT MATTER OF REMAND PROCEEDINGS. 87. IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE, WHEN THE LIMITED ASPECT/DISPUTE OF ALLOCATION OF INDIRECT COST TO THE EXPORT OF TRADING GOODS WAS REMANDED TO THE RECORD OF THE ASSESSING OFFICER, THEN IN THE GIVING EFFECT PROCEEDINGS, IN PURSUANT TO THE DIRECTIONS OF THE LD. CIT(A), THE JURISDICTION AND ITA NO.578/LKW/2018 PAGE 92 OF 98 POWER OF THE ASSESSING OFFICER WAS CONFINED ONLY TO THE ISSUE AND ASPECT, WHICH HAD BEEN REMANDED FOR REWORKING AND, REDETERMINATION. HENCE, IN THE PROCEEDINGS PURSUANT TO THE DIRECTIONS OF THE LD. CIT(A), THE ASSESSING OFFICER COULD NOT HAVE GONE BEYOND THE ISSUE AND ASPECT, WHICH WAS DIRECTED TO BE RECONSIDERED AND DECIDED. THUS, REDUCING OF NINETY PER CENT OF THE RECEIPTS, ARISING FROM SALES TAX REFUND, PROCESSING CHARGES AND SALE OF SCRAP, THE ASSESSING OFFICER TRAVELLED BEYOND HIS JURISDICTION AND SCOPE OF ENQUIRY LIMITED TO THE DIRECTION OF THE LD. CIT(A). IN THE LIGHT OF THE LEGAL POSITION CLARIFIED ABOVE, THE ASSESSING OFFICER WAS NOT JUSTIFIED IN MAKING FRESH ADDITION TO THE BOOK PROFIT UNDER SECTION 115JB, AS THE SAME IS ILLEGAL AND WHOLLY WITHOUT JURISDICTION AND THE CASE OF THE ASSESSEE IS FULLY AND SQUARELY COVERED BY THE DECISION OF THE HON'BLE GUJARAT HIGH COURT (SUPRA). 88. FURTHER, EVEN ON MERITS, THE ASSESSING OFFICER WAS NOT JUSTIFIED IN ADDING BACK THE CAPITAL RESERVE TO THE BOOK PROFIT, WITHOUT APPRECIATING THE NATURE AND SCOPE OF PROVISIONS OF SECTION 115JB OF THE ACT. IT IS RELEVANT TO CLARIFY THE NATURE OF CAPITAL RESERVE, SO AS TO UNDERSTAND THE ISSUE IN CORRECT PERSPECTIVE. THE CAPITAL RESERVE APPEARING IN THE BALANCE SHEET OF THE ASSESSEE IS ARISING OUT OF AMALGAMATION OF KBPL WITH THE ASSESSEE IN ACCORDANCE WITH THE AMALGAMATION SCHEME DULY APPROVED BY THE HON'BLE ALLAHABAD HIGH COURT. AS PER THE SETTLED ACCOUNTING STANDARDS AND PROVISIONS OF THE COMPANIES ACT, WHEN THE ASSET OF AMALGAMATING COMPANY IS TAKEN OVER BY THE AMALGAMATED COMPANY, THE RESULTANT DIFFERENCE BETWEEN THE BOOK VALUE AND THE VALUE AT WHICH THE ASSET IS TAKEN OVER, IS ITA NO.578/LKW/2018 PAGE 93 OF 98 TREATED AS CAPITAL RESERVE WHICH IS DIRECTLY POSTED IN THE BALANCE SHEET. THE CAPITAL RESERVE OF RS.63,66,86,610/- APPEARING IN THE BALANCE SHEET OF THE ASSESSEE IS ON ACCOUNT OF AMALGAMATION AND ACQUISITION OF ASSETS OF KBPL, UNDER THE SCHEME APPROVED BY THE HON'BLE ALLAHABAD HIGH COURT. 89. IT MAY BE APPRECIATED THAT THE CAPITAL RESERVE SO CREATED IS NOT PASSED THROUGH THE PROFIT AND LOSS ACCOUNT AND, AS SUCH, THE SAME HAS NO IMPACT ON THE BOOK PROFIT COMPUTED UNDER SECTION 115JB. SUCH RESERVE IS NOT IN THE NATURE OF INCOME AND HAS NO RELEVANCE TO THE ISSUE OF BOOK PROFIT OR COVERED BY THE STIPULATED ADJUSTMENTS UNDER SECTION 115JB OF THE ACT. EVEN, THE ASSESSING OFFICER HAS ACCEPTED THE FACT THAT THE CAPITAL RESERVE WAS NOT ROUTED THROUGH PROFIT AND LOSS ACCOUNT AS PER THE FINDING RECORDED AT PAGE 8 OF THE IMPUGNED ORDER. HOWEVER, THE ASSESSING OFFICER HAVING FAILED TO UNDERSTAND THE BASIC CHARACTER OF THE CAPITAL RESERVE AND ACCOUNTING ADJUSTMENT PURSUANT TO THE AMALGAMATION SCHEME, CONSIDERED ENHANCEMENT OF BOOK PROFIT UNDER SECTION 115JB, ON A MECHANICAL BASIS. 90. FURTHER, THE DECISION OF THE MUMBAI ITAT IN THE CASE OF BOMBAY DIAMONDS (SUPRA), AS RELIED UPON BY THE ASSESSING OFFICER, IS NOT RELEVANT TO THE FACTS OF THE CASE, AS IN THAT CASE, THE ACCOUNTS OF THE ASSESSEE WERE NOT PREPARED IN ACCORDANCE WITH THE PROVISIONS OF THE COMPANIES ACT, AND THE PROFIT ON SALE OF THE PROPERTY RIGHTS WAS DIRECTLY TAKEN TO THE BALANCE SHEET. HOWEVER, IN THE PRESENT CASE, THE CAPITAL RESERVE HAS BEEN CREATED IN ACCORDANCE WITH THE AMALGAMATION SCHEME APPROVED BY THE HON'BLE HIGH COURT AND THE ACCOUNTING TREATMENT IS AS PER THE GUIDELINES LAID DOWN BY AS-14. IT IS THE SETTLED LEGAL POSITION THAT ITA NO.578/LKW/2018 PAGE 94 OF 98 WHILE COMPUTING THE BOOK PROFIT UNDER SECTION 115JB, ONLY THOSE ITEMS OF RESERVE WOULD BE ADDED BACK WHICH HAS RESULTED IN REDUCTION OF THE BOOK PROFIT OR BASED ON STIPULATED ADJUSTMENTS. 91. IN THE PRESENT CASE, AS NOTICED ABOVE, THE CAPITAL RESERVE HAD NOT RESULTED IN REDUCTION OF THE BOOK PROFIT AND, AS SUCH, THERE WAS NO CASE OF ADJUSTMENT UNDER SECTION 115JB OF THE ACT. IN THIS REGARD, REFERENCE MADE TO THE DECISION OF THE ITAT, MUMBAI BENCH IN THE CASE OF ITO V. UNITED ESTATES PVT. LTD., 20 TAXMANN.COM 588, IS APT. 92. IN NATIONAL HYDROELECTRIC POWER CORPN. LTD. V. CIT, 320 ITR 374, THE HON'BLE APEX COURT HELD THAT SINCE THE AMOUNT OF AAD WAS REDUCED FROM SALES, THERE WAS NO DEBIT IN THE PROFIT AND LOSS ACCOUNT. THE AMOUNT DID NOT ENTER THE STREAM OF INCOME FOR THE PURPOSE OF DETERMINATION OF NET PROFIT AT ALL AND, HENCE, CLAUSE (B) OF EXPLANATION I TO SECTION 115JB WAS NOT APPLICABLE. FURTHER, 'RESERVE', AS CONTEMPLATED BY CLAUSE (B) OF THE EXPLANATION I TO SECTION 115JB WAS REQUIRED TO BE CARRIED THROUGH THE PROFIT AND LOSS ACCOUNT. THERE ARE BROADLY TWO TYPES OF RESERVES, I.E., THOSE WHICH ARE ROUTED THROUGH THE PROFIT AND LOSS ACCOUNT AND THOSE WHICH ARE NOT CARRIED VIA THE PROFIT AND LOSS ACCOUNT. FOR EXAMPLE, A CAPITAL RESERVE, SUCH AS SHARE PREMIUM ACCOUNT, THE AAD WAS NOT A RESERVE. IT WAS NOT AN APPROPRIATION OF PROFITS AND IT WAS NOT MEANT FOR AN UNCERTAIN PURPOSE. THE AAD WAS AN AMOUNT THAT WAS UNDER OBLIGATION, RIGHT FROM THE INCEPTION, TO GET ADJUSTED IN THE FUTURE AND, HENCE, COULD NOT BE DESIGNATED AS A RESERVE. IT WAS NOTHING, BUT AN ADJUSTMENT BY REDUCING THE NORMAL DEPRECIATION INCLUDIBLE IN THE FUTURE YEARS IN SUCH A MANNER THAT AT THE END OF USEFUL LIFE OF THE ITA NO.578/LKW/2018 PAGE 95 OF 98 PLANT, WHICH WAS NORMALLY THIRTY YEARS, THE SAME WOULD BE REDUCED TO NIL, THEREFORE, THE ASSESSEE COULD NOT USE THE AAD FOR ANY OTHER PURPOSE, WHICH IS POSSIBLE IN THE CASE OF A RESERVE, EXCEPT TO ADJUST THE SAME AGAINST FUTURE DEPRECIATION, SO AS TO REDUCE THE TARIFF IN THE FUTURE YEARS. AT THE END OF THE LIFE OF THE PLANT, THE AAD WOULD BE REDUCED TO NIL. IN FACT, SCHEDULE XII-A TO THE BALANCE SHEET FOR THE FINANCIAL YEAR 2004-05 ONWARDS INDICATED RECOUPING. THE AAD DENOTES 'INCOME RECEIVED IN ADVANCE'. IT WAS A TIMING DIFFERENCE AND REPRESENTED ADJUSTMENT IN FUTURE WHICH WAS IN-BUILT IN THE MECHANISM NOTIFIED ON 26-05- 1997. THIS ADJUSTMENT MIGHT TAKE PLACE OVER A LONG PERIOD OF TIME. HENCE, THE AAD WAS NOT A RESERVE. 93. THUS, THE AAD WAS A TIMING DIFFERENCE, IT WAS NOT A RESERVE AND IT WAS NOT CARRIED THROUGH THE PROFIT AND LOSS ACCOUNT. IT WAS INCOME RECEIVED IN ADVANCE, SUBJECT TO THE ADJUSTMENT IN FUTURE AND, THEREFORE, CLAUSE (B) TO EXPLANATION I OF SECTION 115JB WAS NOT APPLICABLE. ACCORDINGLY, THE IMPUGNED RULING WAS TO BE SET ASIDE AND THE APPEAL FILED BY THE ASSESSEE STOOD ALLOWED. 94. IN ITO V. GALAXY SAWS PVT. LTD., 13 TAXMANN.COM 179, IT WAS HELD THAT WE ALSO NOTE FROM THE PROVISIONS OF EXPLANATION 1 TO SECTION 115JB(2) THAT THE AMOUNT CARRIED TO ANY RESERVE, BY WHATEVER NAME CALLED, HAS TO BE ADDED TO THE NET PROFIT IF THE AMOUNT HAD BEEN DEBITED TO THE PROFIT AND LOSS ACCOUNT. IN THIS CASE, THE REVALUATION RESERVE HAD BEEN DIRECTLY TAKEN TO THE BALANCE SHEET AND NOT DEBITED TO THE PROFIT AND LOSS ACCOUNT AND THEREFORE, THE AMOUNT COULD NOT BE ADDED UNDER CLAUSE (B) OF EXPLANATION 1 TO SECTION 115JB(2) . ITA NO.578/LKW/2018 PAGE 96 OF 98 95. THE ISSUE, AS RIGHTLY CANVASSED, IS, EVEN OTHERWISE, COVERED BY THE DECISION OF THE HON'BLE SUPREME COURT IN APOLLO TYRES LTD. V. CIT, 255 ITR 273, AS PER WHICH, NO ADJUSTMENT COULD BE MADE IN RESPECT OF DECLARED BOOK PROFIT, IF THE SAME IS BASED ON AUDITED BALANCE SHEET AND PROFIT AND LOSS ACCOUNT PREPARED IN ACCORDANCE WITH THE PROVISIONS OF THE COMPANIES ACT. 96. THE PROPERTY IN QUESTION WAS SOLD BY THE ASSESSEE COMPANY TO ARA INDIA LLP FOR A TOTAL SUM OF RS.68,00,00,000/-. SINCE THE PURCHASE VALUE OF THE ASSET, AS PER THE AMALGAMATION ORDER OF THE HON'BLE ALLAHABAD HIGH COURT, WAS RS.64,73,00,000/-, THE DIFFERENCE OF RS.3,27,00,000/-, (EXCESS OF SALE PROCEEDS OVER THE COST), BEING THE PROFIT ON SALE OF ASSETS, WAS CREDITED THE PROFIT & LOSS ACCOUNT. 97. WHILE COMPUTING THE LONG TERM CAPITAL GAINS ON SALE OF THE ASSET, SURPLUS ON SALE OF ASSET, AMOUNTING TO RS.3,27,00,000/- WAS ADDED BACK TO THE INCOME AND LONG TERM CAPITAL GAINS, AMOUNTING TO RS.17,92,25,580/-, HAS BEEN SHOWN UNDER THE HEAD CAPITAL GAINS. 98. IT IS A FACT THAT THE ASSETS WERE TRANSFERRED BY THE AMALGAMATING COMPANY TO THE ASSESSEE COMPANY UNDER THE PURCHASE VALUE METHOD AND THERE WAS NO REVALUATION OF THE ASSETS IN THE BOOKS OF THE ASSESSEE COMPANY. THE ASSESSEE HAS DULY ACCOUNTED FOR THE ASSETS VALUE IN ITS BOOKS OF ACCOUNT AS PER THE SCHEME OF AMALGAMATION AND THE DIFFERENCE IN VALUE BETWEEN THE WDV OF ASSETS AND THEIR MARKET VALUE, AS ON THE EFFECTIVE DATE OF AMALGAMATION, WAS CREDITED IN THE SHARE PREMIUM ACCOUNT. ITA NO.578/LKW/2018 PAGE 97 OF 98 99. IN THIS VIEW OF THE MATTER, THE PROVISIONS OF CLAUSE (B) OF EXPLANATION 1 TO SECTION 115JB OF THE ACT ARE NOT APPLICABLE IN THE ASSESSEE'S CASE, BECAUSE THE AMOUNT CREDITED UNDER THE HEAD CAPITAL RESERVE/SHARE PREMIUM WAS NEVER ROUTED THROUGH PROFIT & LOSS ACCOUNT AND THE ASSETS WERE TRANSFERRED FROM THE AMALGAMATING COMPANY UNDER THE 'PURCHASE METHOD' AS DEFINED UNDER THE ACCOUNTING STANDARD-14, AS PER THE AMALGAMATION SCHEME. 100. IN VIEW OF OUR AFORESAID DISCUSSION, THE IMPUGNED ADJUSTMENT IN BOOK PROFIT UNDER SECTION 115JB IS NOT SUSTAINABLE UNDER THE LAW AND THE SAME IS ACCORDINGLY DELETED. 101. WE, ACCORDINGLY, FIND NO ERROR IN THE ORDER OF THE LD. CIT(A),WHO HAS RIGHTLY DELETED THE ADDITION, ON THIS ISSUE. ACCORDINGLY, GROUND NOS. 7 & 8 ARE REJECTED. CONSEQUENTLY, ITA NO.71/LKW/2018 IS ALSO DISMISSED. 102. IN THE RESULT, BOTH THE APPEALS OF THE REVENUE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 19/12/2019. SD/ - SD/ - [ T. S. KAPOOR ] [ A. D. JAIN ] ACCOUNTANT MEMBER VICE PRESIDENT DATED:19/12/2019 JJ:1311-2911 ITA NO.578/LKW/2018 PAGE 98 OF 98 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR BY ORDER ASSISTANT REGISTRAR