DCIT, CHENNAI V. Best & Crompton Engg. Projects Limited, CHENNAI

ITA 729/CHNY/2015

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 8772 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 3 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-07-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 25-07-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 08-04-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DURAI PANDIAN
• Assessee Lawyers: S SUBRAMANIAN
• Keywords: Capital asset; Depreciation; Wholly owned subsidiary; Valuation report
• Section: 260A; 6

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI , !' . ' # $ , % $& BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER ./ I.T.A. NOS.726, 727, 728, 729 & 730/MDS/2015 % ' '(' / ASSESSMENT YEAR : 2006-07, 2007-08, 2008-09, 2009-10 & 2010-2011 THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 1(2) CHENNAI 600 034 VS. M/S. BEST & CROMPTON ENGG. PROJECTS LTD, PARSN COMPLEX, A WING, 9 TH FLOOR, 602, ANNA SALAI, CHENNAI 600 034. [PAN AABCB5248H ] ( / APPELLANT) ( /RESPONDENT) )* + , / APPELLANT BY : SHRI. DURAI PANDIAN, JCIT. -.)* + , /RESPONDENT BY : SHRI. S. SUBRAMANIAN, C.A. # ' + / / DATE OF HEARING : 25-07-2016 01( + / / DATE OF PRONOUNCEMENT : 27-07-2016 / O R D E R PER BENCH : THESE FIVE APPEALS FILED BY THE REVENUE ARE DIRE CTED AGAINST DIFFERENT ORDERS OF COMMISSIONER OF INCOME-TAX (A PPEALS)-1, CHENNAI ITA NOS. 726 TO 730/MDS/2015 :- 2 -: DATED 26.12.2014 AND 29.12.2014 FOR THE ABOVE ASSE SSMENT YEARS PASSED U/S.143(3) AND 250 OF THE INCOME TAX ACT, 19 61. SINCE THE ISSUE IN THESE APPEALS ARE COMMON IN NATURE, THESE APPEAL S ARE CLUBBED, HEARD TOGETHER, AND DISPOSED OF BY THIS CO MMON ORDER FOR THE SAKE OF CONVENIENCE. WE TAKE UP ITA NO.726/MDS/2015 OF ASSESSMENT YEAR 2006-2007 FOR ADJUDICATION. 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APP EAL:- 2.1 THE LEARNED CIT(A) HAS FAILED TO APPRECIATE T HE APPLICABILITY OF EXPLANATION 6 TO SECTION 43(1) OF THE LT. ACT WHEREBY THE COST IN THE HANDS OF THE TRANSFEREE COM PANY SHALL BE THE SAME AS IN THE HANDS OF THE TRANSFEROR COMPANY. 2.2. THE LEARNED CIT(A) OUGHT TO HAVE APPRECIATED T HE FACT THAT THE DECISION OF THE HON'BLE ITAT RELIED ON BY HIM HAS NOT BEEN ACCEPTED BY THE DEPARTMENT FOR THE A.YS.20 02-03 TO 2005-06 AND APPEAL U/S.260A IS PENDING BEFORE TH E JURISDICTIONAL HIGH COURT. 2.3. THE LEARNED CIT(A) HAS NOT GIVEN A SPECIFIC FI NDING AS TO THE VALUATION OF THE ASSETS ACQUIRED BY THE ASSE SSEE AS THE TRANSFER IS BETWEEN THE HOLDING COMPANY AND THE SUBSIDIARY COMPANY.. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE C OMPANY IS ENGAGED IN ELECTRICAL CONTRACT AND FILED RETURN OF INCOME ELECTRONICALLY ON 25.11.2006 WITH TOTAL INCOME OF <24,25,299/- AND THE RETURN OF INCOME WAS PROCESSED U/S.143(1) OF THE ACT. SUBSE QUENTLY, THE CASE WAS SELECTED FOR SCRUTINY AND NOTICE U/S. 143(2) OF THE ACT WAS ISSUED. IN COMPLIANCE TO NOTICE, THE LD. AUTHORISED REPRESE NTATIVE OF ASSESSEE ITA NOS. 726 TO 730/MDS/2015 :- 3 -: APPEARED FROM TIME TO TIME AND FILED DETAILS. THE ASSESSEE-COMPANY, NAMELY M/S BEST & CROMPTON ENGINEERING PROJECTS LTD ., IS A WHOLLY OWNED SUBSIDIARY OF M/S BEST & CROMPTON ENGINEERING LTD, WHICH IS DOING THE BUSINESS OF ELECTRICAL & PROJECTS CONTRAC TING, LIKE, ERECTION OF HIGH VOLTAGE SUBSTATIONS, TRANSMISSION LINES, RAILW AY ELECTRIFICATION BOTH IN INDIA AND OUTSIDE INDIA; AND THESE ACTIVITI ES HAVE BEEN CARRIED ON BY BEST & CROMPTON ENGINEERING LTD FROM THE YEAR 1975. ON 30.6.2001, RELEVANT TO ASSESSMENT YEAR 2002- 03, BE ST & CROMPTON ENGINEERING LTD TRANSFERRED THE ELECTRICAL & PROJEC TS CONTRACTING DIVISION ALONGWITH ITS FIXED ASSETS, CURRENT ASSETS AND CURRENT LIABILITIES TO ITS WHOLLY OWNED SUBSIDIARY COMPANY, BEST & CROM PTON ENGINEERING PROJECTS LTD. THIS TRANSFER TOOK PLACE VIDE AGREEME NT DATED 13.11.2000 FOLLOWED BY OTHER SUPPLEMENTAL AGREEMENT S EXECUTED ON VARIOUS OTHER DATES. THIS TRANSFER TOOK PLACE ON TH E BASIS OF BUSINESS- VALUATION-REPORT OBTAINED FROM M/S ERNST & YOUNG PV T. LTD, A REPUTED CHARTERED ACCOUNTANTS COMPANY, ACCORDING TO WHICH, THE BUSINESS OF THE ELECTRICAL & PROJECTS CONTRACTING DIVISION OF B EST & CROMPTON ENGINEERING LTD AS ON 30.6.2001 WAS VALUED AT <34. 85 CRORES WITH REFERENCE TO THE SUPPLEMENTAL AGREEMENT DATED 31.10 .2001. HOWEVER, THIS VALUE WAS ORIGINALLY FIXED AT <45.78 CRORES ON THE BASIS OF ORIGINAL AGREEMENT. THUS, THE BUSINESS VALUE OF <34.85 CRORE S WAS FIXED AS THE ITA NOS. 726 TO 730/MDS/2015 :- 4 -: PURCHASE CONSIDERATION FOR THE TRANSFER OF THE ELEC TRICAL PROJECTS AND CONTRACTING DIVISION, THE BREAK-UP OF WHICH IS GIVE N AS UNDER: A TOWARDS WRITTEN DOWN VALUE OF FIXED ASSETS 4,80,69,143 B TOWARDS VALUE OF NET CURRENT ASSET - VALUE OF CURRENT LIABILITIES 37,40,07,014 LESS: VALUE OF CURRENT LIABILITIES 30,01,19,101 7,38,87,913 C TOWARDS VALUE OF TECHNICAL PROPRIETARY INFORMATION 10,00,00,000 D TOWARDS VALUE OF COMMERCIAL /PRE- QUALIFICATION ON RIGHTS. 12,65,42,944 TOTAL 34,85,00,000 THE ASSESSEE HAS CLAIMED DEPRECIATION @25% ON BOTH PRE- QUALIFICATION RIGHTS AND TECHNICAL KNOW HOW ON WRIT TEN DOWN VALUE BROUGHT FORWARDED FROM ASSESSMENT YEAR 2002-2003. THE LD. ASSESSING OFFICER MADE A ELABORATE FINDINGS IN RESP ECT OF CLAIM OF DEPRECIATION ON THE PRE-QUALIFICATION RIGHTS AND T ECHNICAL KNOWHOW AND REFERRED TO THE DECISION OF THE CIT (A)-VIII IN ITA NOS. 358, 082 TO 084/07-08, DATED 27.05.2008 FOR ASSESSMENT YEARS 20 02-03 TO 2005- 06 WHICH WAS DECIDED IN FAVOUR OF THE ASSESSEE. SIN CE THE DEPARTMENT HAS FILED AN APPEAL BEFORE ITAT, THE LD. ASSESSING OFFICER HAS MADE DISALLOWANCE OF DEPRECIATION AND ADDED TO THE RETU RNED INCOME AND ITA NOS. 726 TO 730/MDS/2015 :- 5 -: PASSED ORDER U/S.143(3) OF THE ACT, DATED 15.12.200 8. AGGRIEVED BY THE ORDER, THE ASSESSEE FILED AN APPEAL BEFORE COMM ISSIONER OF INCOME TAX (APPEALS). 4. IN THE APPELLATE PROCEEDINGS, THE LD. AUTHORISED REPRESENTATIVE OF ASSESSEE ARGUED THE GROUNDS AND E XPLAINED THE FACTS AND ALSO RELIED ON THE JUDICIAL DECISIONS ON THE CLAIM OF DEPRECIATION. THE LD. COMMISSIONER OF INCOME TAX ( APPEALS) CONSIDERED THE FINDINGS OF THE LD. ASSESSING OFFICE R AND SUBMISSIONS OF THE ASSESSEE AND THE PROVISIONS OF LAW U/S.32(1)(I I) OF THE ACT AND EXPLANATION 6 TO SEC. 43(1) OF THE ACT IN RESPECT O F TRANSFER OF CAPITAL ASSET BETWEEN HOLDING COMPANY AND THE WHOLLY OWNED SUBSIDIARY COMPANY AND RELIED ON THE ORDER OF CO-ORDINATE BENC H IN ASSESSEES OWN CASE IN ITA NO.1675 TO 1678/MDS/2008, ASSESSMEN T YEAR 2002-03 TO 2005-06, DATED 20.04.2011 AND ALLOWED THE APPEAL OF THE ASSESSEE. AGGRIEVED BY THE COMMISSIONER OF INCOME TAX (APPEAL S) ORDER, THE REVENUE HAS ASSAILED AN APPEAL BEFORE TRIBUNAL. 5. BEFORE US, LD. DEPARTMENTAL REPRESENTATIVE ARGUED THAT THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED AND NOT APPRECIATED THE APPLICABILITY OF EXPLANATION 6 TO SEC 43(1) IN RES PECT OF COST IN THE HANDS OF TRANSFEROR AND TRANSFEREE OF THE COMPANY BEING THE SAME AND THERE IS NO SPECIFIC FINDINGS ON THE VALUATION OF ASSET. FURTHER, THE ITA NOS. 726 TO 730/MDS/2015 :- 6 -: REVENUE HAVING NOT SATISFIED WITH THE ITAT ORDER R ELIED BY THE LD. COMMISSIONER OF INCOME TAX (APPEALS) FOR THE ASSESS MENT YEARS 2002-03 TO 2005-06 IN ASSESSEE S OWN CASE HAS FILE D AN APPEAL BEFORE JURISDICTIONAL HIGH COURT AND IS PENDING AND PRAYE D FOR ALLOWING THE APPEAL. 6. CONTRA, LD. AUTHORISED REPRESENTATIVE RELIED ON T HE ORDERS OF COMMISSIONER OF INCOME TAX (APPEALS) AND CO-ORDI NATE BENCH DECISION AND VEHEMENTLY OPPOSED TO THE GROUNDS. 7. WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERIA L ON RECORD AND JUDICIAL DECISIONS CITED. THE CRUX OF T HE ISSUE BEING THE CLAIM OF DEPRECIATION ON PRE-QUALIFICATION RIGHTS AND TECHNICAL KNOW DEALT BY THE LD. ASSESSING OFFICER IN ASSESSMENT O RDER WAS ALREADY A SUBJECT MATTER OF DISPUTE IN EARLIER YEARS. SIMIL AR ISSUE WAS CONSIDERED BY THE TRIBUNAL IN ASSESSEES CASE OWN FOR ASSESSMENT YEARS 2002-03 TO 2005-06, WHEREIN THE TRIBUNAL HAS HELD AT PARA NO.6 & 7 AS UNDER:- 6. WITH REFERENCE TO THE ABOVE ADMITTED FACTS, IT IS NOT TRUE THAT THERE IS NO BASIS FOR VALUATION OF THE INTANGI BLE ASSETS WHICH ARE PREQUALIFICATION RIGHTS AND TECHNICAL PRO PRIETORY INFORMATION. THERE ARE NUMEROUS METHODS FOR VALUATI ON OF BUSINESS AND THE ONE SUCH METHOD WHICH HAS BEEN ADO PTED BY M/S ERNST & YOUNG PVT. LTD. AND IT IS EVIDENT IN TH E REPORT ITSELF, WHICH HAS DEALT THE ISSUES EXTENSIVELY TO A RRIVE AT THE BUSINESS VALUATION. WE CANNOT ATTACH MUCH IMPORTANC E TO THE ROUTINE DISCLAIMER APPENDED TO THE REPORT IN QUESTI ON BECAUSE ITA NOS. 726 TO 730/MDS/2015 :- 7 -: NORMALLY EVERY VALUATION REPORT, BEING AN ESTIMATIO N, CONTAINS SUCH A DISCLAIMER TO AVOID FUTURE LITIGATION. A BUS INESS VALUATION IS DEFINITELY DIFFERENT FROM AN AUDIT REP ORT. THE HIVING OFF OF THE PROJECTS DIVISION WAS DONE WITH A N INTENTION TO CARRY ON THE BUSINESS OF PROJECTS DIVISION IN A BETTER AND EFFICIENT MANNER. SEEMINGLY BECAUSE THE MANUFACTURI NG UNITS OF BEST & CROMPTON ENGINEERING LTD WAS NOT PROFITAB LE AND THERE WERE MAJOR PROBLEMS WHICH COULD AFFECT THE OP ERATIONS OF THE PROJECTS DIVISION, IN OUR CONSIDERED OPINION , EXPLANATION 2 AND 2A APPENDED TO SECTION 43(6) OF T HE ACT IS NOT APPLICABLE IN THE GIVEN CASE AS THE PRE-QUALIFI CATION RIGHTS AND TECHNICAL PROPRIETORY INFORMATION WERE NOT FORM ING PART OF THE BLOCK OF ASSETS OF THE HOLDING COMPANY NAMEL Y BEST & CROMPTON ENGINEERING LTD. NO NEED TO MENTION THAT H IVING OFF OF THE PROJECTS DIVISION IS A DEMERGER AND IT DOES NOT AMOUNT TO DEMERGER IN THE GIVEN CASE. THE ASSESSEECOMPANY COULD CARRY ON BUSINESS ONLY ON ACQUISITION OF PREQUALIFI CATION RIGHTS, SO, IT CAN BE SAFELY EPILOGUED THAT IT IS N OT SIMPLY A BOOK ENTRY, MORE PARTICULARLY, BECAUSE THE CUSTOMER S OF THE COMPANY ARE INDIAN RAILWAYS, PSUS, LIKE POWER GRID CORPORATION, NTPC LTD., AND INTERNATIONAL COMPANIES , TO WHOM THE BUSINESS PURCHASE AGREEMENT WAS SUBMITTED TO PROVE THE PRE-QUALIFICATION RIGHTS AND THIS WAS THE BASIS FOR AWARDING OF TENDERS TO THE ASSESSEE WHEN IT HAD NO QUALIFICATION TO BID ON ITS OWN FOR TENDERS. THE EN TIRE CONSIDERATION OF ` 34.85 CRORES FOR HIVING OFF THE PROJECTS DIVISION BY THE HOLDING COMPANY WAS DISCHARGED BY A LLOTMENT OF SHARES FOR ` 20 CRORES AND THE BALANCE OF ` 14.8 5 CRORES WAS UNSECURED LOANS WHICH WAS PAID BY THE ASSESSEE AND THE BALANCE AS ON 31.3.2002 WAS ONLY `1,03,11,000/- AS IS EVIDENT FROM THE AUDITED ACCOUNTS DATED 30.6.2001 AND LOAN FUNDS SCHEDULE 2 OF THE AUDITED ACCOUNTS AS ON 31.3.2002. THE MODE OF DISCHARGE FOR PURCHASE CONSIDERATION AND THE DET AILS OF AMOUNT DISCHARGED WERE SUBMITTED BY THE ASSESSEE VI DE LETTER DATED 21.3.2005 AS UNDER: < < A EQUITY SHARES ALLOTTED TO HOLDING COMPANY BEST & CROMPTON ENGINEERING LTD. 20,00,00,000 B UNSECURED LOAN FROM THE HOLDING COMPANY BEST & CROMPTON ENGINEERING LTD 14,85,00,000 14,85,00,000 LESS: REPAYEMNT OF LOAN FROM PROCEEDS FROM PREFERENCE SHARE ISSUE 9,31,00,000 ITA NOS. 726 TO 730/MDS/2015 :- 8 -: TOTAL 34,85,00,000 5,44,00,000 7. THEREFORE, THE CUMULATIVE EFFECT FROM THESE FACT S IS THAT THE TRANSFER OF PRE-QUALIFICATION RIGHTS AND TECHNICAL PROPRIETORY INFORMATION BY THE HOLDING COMPANY WAS ON ACCOUNT O F GENUINE COMMERCIAL CONSIDERATIONS DONE, AT ARMS LEN GTH, BASED ON THE BUSINESS VALUATION REPORT, GIVEN BY A REPUTED FIRM OF CHARTERED ACCOUNTANTS AND WITHOUT WHICH THE ASSESSEE WOULD NOT HAVE BEEN IN A POSITION TO CARRY ON THE B USINESS AND ALSO TO SECURE FURTHER BUSINESS. IN OUR OPINION, TH IS TRANSACTION CANNOT TANTAMOUNT TO ONLY A PAPER TRANS ACTION OR SHAM TRANSACTION AS THERE IS NO SUCH EVIDENCE ON RE CORD. CONSEQUENTLY, WE DO NOT FIND ANY ERROR IN THE APPEL LATE ORDER AND WE CONFIRM THE FINDINGS OF THE LD. CIT (A). FURTHER, THE CONTENTION OF THE DEPARTMENT BEFORE TH E TRIBUNAL THAT THE REVENUE HAS NOT ACCEPTED THE JUDGMENT OF TRIBUN AL AND AN APPEAL U/SEC. 260A OF THE ACT HAS ALREADY BEEN FILED BEFOR E JURISDICTIONAL HIGH COURT AND THE SAME IS PENDING. THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT MERE FILING OF APPEAL BEFORE HONBLE HIGH COURT CANNOT BE A REASON TO TAKE A DIFFERENT VIEW. THE ORDER OF TR IBUNAL IS BINDING ON ALL THE AUTHORITIES IN THE STATE OF TAMIL NADU AND UNION TERRITORY OF PONDICHERRY. THEREFORE, THE COMMISSIONER OF INCOME TAX (APPEALS) HAS RIGHTLY ALLOWED THE CLAIM OF THE ASSESSEE BY FO LLOWING THE TRIBUNAL ORDER IN OWN ASSESSEE CASE FOR EARLIER ASSESSMENT Y EARS. WE, RESPECTFULLY FOLLOWING THE CO-ORDINATE BENCH DECISI ON, UPHELD THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS) AND D ISMISS THE GROUNDS OF THE REVENUE. ITA NOS. 726 TO 730/MDS/2015 :- 9 -: 8. SIMILARLY, THE APPEALS OF THE REVENUE IN ITA NOS.7 27 TO 730/MDS/2015 FOR ASSESSMENT YEARS 2007-08, 2008-09, 2009-10 & 2010-2011 ARE DISMISSED. 9. IN THE RESULT, THE APPEALS OF THE REVENUE IN ITA N OS.726 TO 730/MDS/2015 FOR ASSESSMENT YEARS 2006-07 TO 2010-2 011 ARE DISMISSED. ORDER PRONOUNCED ON WEDNESDAY, THE 27TH DAY OF JULY, 2016, AT CHENNAI. SD/- SD/- ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER ( . ' # $ ) (G. PAVAN KUMAR) / JUDICIAL MEMBER / CHENNAI 3 / DATED: 27.07.2016 KV 4 + -%/56 76(/ / COPY TO: 1 . )* / APPELLANT 3. # 8/ () / CIT(A) 5. 6';< -%/% / DR 2. -.)* / RESPONDENT 4. # 8/ / CIT 6. <' = / GF