Ananya Finance For Inclusive Growth Pvt.Ltd., Ahmedabad V. Dy.Commissioner of Income Tax,Circle-1(1)(2), Ahmedabad

ITA 959/AHD/2016

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 3530 (ITAT-AHMEDABAD)
• Duration Of Justice: 6 year(s) 4 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-08-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: A
• Assessment Year: 2011-2012
• Appeal Filed On: 14-04-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: VIRTUE OF BTA IS NOT
• Keywords: Depreciation; Business expenditure; Charitable institution; Principle of natural justice; Tax effect; Earning of tax free income; Cost of acquisition; Wholly owned subsidiary; Avoidance of tax; Valuation report; Tax effect; Rule 8D
• Section: 12; 271(1)(c); 11; 14A; 10B; 73; 22

Judgement Text

आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरणआयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण, अहमदाबाद 瀈यायपीठ अहमदाबाद 瀈यायपीठअहमदाबाद 瀈यायपीठ अहमदाबाद 瀈यायपीठ ‘A’ अहमदाबाद। अहमदाबाद।अहमदाबाद। अहमदाबाद। IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, AHMEDABAD ] ] BEFORE SMT.ANNAPURNA GUPTA, ACCOUNTANT MEMBER AND SHRI MAHAVIR PRASAD, JUDICIAL MEMBER ITA No.959/Ahd/2016 Assessment Year : 2011-12 Ananya Finance for Inclusive Growth P Ltd. 401, Shaan, Op: M.J. Library Ashram Road Ahmedabad 380 009. PAN : AAHCA 8023 D The DCIT, Cir.1(1)(1) Ambawadi Ahmedabad 380015. (Applicant) (Responent) Assessee by : Shri Tushar Hemani, Sr.Advocate & Shri Parimalsinh B. Parmar, AR Revenue by : Shri Vijay Kumar Jaiswal, CIT-DR स ु नवाई क तार ख/D a t e o f H e a r i n g : 0 7 / 0 6 / 2 0 2 2 घोषणा क तार ख /D a t e o f P r o n o u n c e m e n t : 2 5 / 0 8 / 2 0 2 2 आदेश/ O R D E R PER ANNAPURNA GUPTA, ACCOUNTANT MEMBER Present appeal has been filed by the Assessee against the order passed by the ld.Commissioner of Income-Tax (Appeals)-1, Ahmedabad [hereinafter referred to as “CIT(A)”] dated 29.2.2016 under section 250(6) of the Income Tax Act, 1961 ("the Act" for short) pertaining to the Asst.Year 2011-12. 2. Grounds of appeal raised by the assessee are as under: ITA No.959/Ahd/2016 2 “1.1 The order passed u/s.250 on 29.02.2016 for A.Y.2011-12 by CIT(A)-1, Abad upholding the disallowance of claim of depreciation of Rs.7.58 cr. and Rs.24,45,419/- U/S.14A of the Act made by AO is wholly illegal, unlawful and against the principles of natural justice. 1.2 The Ld. CIT(A) has grievously erred in law and or on facts in not considering fully and properly the submissions made and evidence produced by the appellant with regard to the impugned disallowances/additions. 2.1 The Ld.CIT(A) has grievously erred in law and on facts in confirming the following additions/disallowances: (i) Depreciation on intangible assets Rs. 7,58,00,000/- ii) Disallowance U/S.14A Rs. 24,45,419/- 2.2 That in the facts and circumstances of the case as well as in law, the Ld.CIT(A) ought not to have upheld the above said disallowances/additions. 3.1 The Ld.CIT(A) has erred in upholding that valuation of intangibles was made higher so as to get the benefit of higher depreciation by the appellant. The observations made and conclusion reached by CIT(A) for upholding the disallowance of depreciation of Rs.7.58 cr. on intangible assets are not admitted by the appellant to the extent the same are contrary to the facts on record. 4.1 The Ld.CIT(A) has erred in upholding that the provisions of section 14A were attracted on account of exempt dividend income of Rs.24,45,419/- earned by the appellant and further upholding the disallowance as computed under Rule-8D. 3. As is evident from the grounds, there are two issues raised by the assessee in the present appeal viz. (i) relating to denial of depreciation on goodwill and, (ii) relating to disallowance of expenses allegedly incurred for the purpose of earning exempt income, as per section 14A of the Act. The primary and substantial issue in the present appeal relates to denial of depreciation of Rs.7.58 crores on ITA No.959/Ahd/2016 3 goodwill/intangible assets and this issue is being taken up first for adjudication. 4. Brief background of the case, leading to the impugned disallowance of depreciation, is that during the impugned year the assessee had claimed deprecation of Rs.7.58 crores on addition of Rs.30.32 crores under the head intangible assets. During assessment proceedings it transpired that the intangible assets pertained to know-how, acquired by the assessee under a Business Transfer Agreement (BTA) entered into with a trust viz. Friends of Women’s World Banking (FWWB for short), for transfer of its Micro Finance Division (MFD for short) to the assessee. As per the BTA the entire consideration paid for transfer was Rs.45 crores out of which Rs.14.68 crores related to the net value of the business and remaining Rs.30.32 crores was paid for intangible assets acquired. During assessment proceedings the Assessing Officer (AO) asked the assessee to justify and substantiate the acquisition of any intangible assets as such by way of the BTA, to justify and substantiate its valuation and accordingly also the claim of depreciation on it. Due replies were filed by the assessee, after considering which the AO denied the claim of depreciation, finding no intangible assets as such to have been acquired by the assessee, and even if acquired, it was found over-valued with no basis for valuation being given by the assessee. The AO held the entire arrangement of acquisition of business of Micro Finance Division of FWWB by the assessee, which was noted to be with a related party of the assessee, as being with the only purpose of the assessee claiming depreciation and FWWB not paying any taxes on the capital gain; thus, claiming depreciation and avoiding any payment of taxes ITA No.959/Ahd/2016 4 in the process. The order of the AO was upheld by the ld.CIT(A) against which the assessee has come up in appeal before us. 5. We have heard both the parties. 6. Before proceeding to adjudicate the issue, it is pertinent to outline certain relevant facts relating to the issue which are not disputed before us. 7. As is revealed from the order of the authorities below and also from the documents filed before us in a paper book ,there are three entities which are closely involved in the impugned transaction of acquiring business of Micro Finance Lending by the assessee which has resulted in acquisition of intangible asset on which depreciation of Rs.7.58 Crs has been claimed by the assessee . The entities are – Friends For Women’s World Bank ( FWWB) Indian Foundation For Inclusive Growth (IFIG) The assessee company, Ananya Finance for Inclusive Growth Pvt. Ltd 8. The involvement of the three entities is on account of: • the Business Transfer Agreement resulting in acquisition of intangible assets by the assessee, being between the assessee and Friends For Women’s World Bank ( FWWB) for acquiring its business relating to lending and investment to Micro Finance Institutions for on lending small value micro loans to women of the weaker sections of society. • Assessee in turn being a wholly owned subsidiary of IFIG ,a trust, which held 99.97 % shares in the assessee company ITA No.959/Ahd/2016 5 and IFIG in turn being formed from corpus funds received from FWWB. 9. FWWB is a charitable institution registered under the Societies Registration Act, 1860 and also registered under Bombay Trust Act, 1950. It was also registered as a charitable Trust u/s 12A of the Act, claiming exemption under section 11 and 12 of the Income Tax Act, 1961. The Micro Finance Division (MFD) of FWWB was started three decades back. Indian Foundation For Inclusive Growth (IFIG) is a trust registered under the Documents and Registration Act,1908 ,and was formed on 13-03-2009, out of corpus funds from FWWB.It had invested Rs. 45 crores in shares of the assessee company out of corpus donation of identical amount received from FWWB. 10. The assessee company, i.e Ananya Finance for Inclusive Growth Pvt. Ltd ,was incorporated on 22.4.2009 .The entire expenses incurred by the assessee-company in Asst.Year 2010-11,i.e the year of incorporation and the preceding A.Y, were paid by IFIG since the assessee had no assets or funds of its own. 11. The audited financial statements of FWWB for the year ending 31-03-2011 filed before us at P.B 337-356 reveals that both the assessee and IFIG are related parties of FWWB as under: Names of the Related Party and nature of their relationships with FWWB Name of the Party Nature of relationship with FWWB Ananya Finance for Inclusive Growth Private A private limited liability company in which the promoter ITA No.959/Ahd/2016 6 Limited (Ananya) Director, Mrs. Vijayalakshmi Das is a trustee of FWWB Trust Indian Foundation for Inclusive. Growth (1FIG) . A Trust in which the first trustees, Ms. Sudha Kothari and Ms. Anjali Bansal, are ths trustees of FWWB Trust Mrs. Vijayalakshmi Das Trustee Ms. Anjali Bansal Chairperson and Trustee On 26.4.2010, the assessee entered into BTA with FWWB acquiring the entire business operation of Micro Finance Division conducted by FWWB along with liabilities and assets at an agreed consideration of Rs.45 crores. Valuation of the Business so transferred was done and a report was prepared dated 30.4.2010, which valued the net business of FWWB at Rs.14.68 crores and the intangibles, consisting of intellectual property rights, brand, logo, trade-marks etc at Rs.30.32 crores. The assessee has claimed depreciation of Rs.7.58 crores during the year on these intangible assets acquired which has been denied by the Revenue. 12. Arguments of the ld.counsel for the assessee before us, briefly stated was that – (i) fact that micro finance lending division of FWWB were transferred to the assessee by virtue of BTA is not disputed by the Revenue; (ii) valuation of goodwill submitted by the assessee has not been disputed, and dislodged by the Revenue authorities by bring on record opinion of any other experts, (iii) if the Revenue was not satisfied with the valuation adopted by the assessee, then intangible assets could ITA No.959/Ahd/2016 7 have been valued at a different amount in accordance with law, but in any case their value could not have been taken at NIL; (iv) valuation report adopted by the assessee was justified. The assessee having placed on record detailed working of the valuation report, and genuineness of the report having not been disputed, the justification for arriving at the valuation stands proved. Brief submissions in this regard were placed in writing before us 13. The ld.DR, on the other hand, emphasized that - (i) the assessee was unable to clearly point out what intangible assets were acquired by it; (ii) the basis of arriving at the valuation was not brought out by the assessee. The assessee had given no basis for the estimation of future projection of finance taken by the valuer for arriving at the value of intangible assets/goodwill. (iii) That the entire transaction was only an arrangement for claiming benefit of depreciation. 14. The ld.counsel for the assessee countered by stating that basis of estimation had been provided to both the AO as well as CIT(A) but both had chosen to ignore the same. Voluminous paper Book was filed before us by both the parties and several documents referred to therefrom during the course of arguments made before us. ITA No.959/Ahd/2016 8 15. We have heard both the parties; have carefully gone through the orders of the authorities below, the documents filed before us and also applied our mind to the facts which were stated before us. After considering all the above, we hold that we completely agree with the Revenue that the assesses claim of depreciation on intangible assets, which accrued to it on purchase of business of MFD from FWWB, was not justified. We agree with the Revenue that the assessee was unable to establish any intangible assets worth its while being transferred to the assessee on acquisition of business from FWWB and we also agree that the assessee was unable to justify its valuation at 30.32 crs.We find merit in the contention of the Revenue that the transaction of sale of business of MFD by FWWB to the assessee, which resulted in intangible assets accruing to the assessee, was merely an arrangement to facilitate claim of depreciation on the intangible assets against the revenues generated in the MFD business, thus enabling reduction in profits of the said business for reduced tax implications thereon. 16. Taking up the first aspect, whether any intangible assets were actually transferred to the assessee by virtue of this BTA, the ld.counsel for the assessee demonstrated the same by drawing our attention to various clauses of BTA defining the terms such as business, intellectual property rights, lenders, receivables and contended that since business transfer agreement was for transfer of business of micro finance lending, the interpretation of the above terms clearly revealed that even intangible assets were transferred to the assessee in the process. Our attention was drawn to the interpretation of term “business” given at para 1.1.1 of the BTA as under: ITA No.959/Ahd/2016 9 “1.1.1 Business: Means the lending and investment activities of the Vendor, including the goodwill, brand, operational procedures, etc. relating to the same. The lending and investment business of the Vendor relates to lending to MFI partners throughout India for on-lending small value micro loans and moneys to women of the weaker sections of society, organised in self help groups. The Business, inter alia, consists of (a) Employees, (b) Fixed Assets, (c) Other Current Assets, (d) Intellectual Property Rights, (e) Liabilities (f) Premises (g) Receivables, (h) and Software.” He also brought to our attention other terms viz. “intellectual property rights”, “lender” and “receivables” defined at para-1.1.7, 1.1.8 and 1.1.11 of the agreement as under: “1.1.7 Intellectual Property Rights: Means the – a) specific logo of FWWB, with its inscriptions, duly copyrighted and registered as a trade mark or the process of securing a copy right is under progress. b) the MFI lending and investment methods: consisting of a). basic system and procedures relating to the funding to selected MFIs as partners, enabling them to get rooted in their operations in funding the self help groups of poor women, b). funding the said MFIs (with seed capital loans, grants and providing them capacity building support) so that they could: i. assist the women from the weaker sections of society in forming cohesive self help groups and ii. offer on-lending funds to the group members, ii) train the members of group in providing collective responsibility for repayment of collateral free loans provided to them. All the activities thus carried out by FWWB are collectively known as "MFI lending and investment methods", c) mechanisms developed for accounting and effecting control over management of funds recovered from the MFIs and all other associated methods, mechanisms and procedures adopted and developed for Indian conditions, whether registered or not under appropriate laws but could be proved to be the rights of the Vendor and used by it in carrying on the activities in larger and expanded scale of operations.” 1.1.8 Lenders: Means the persons. (Banks /Financial institutions), who have extended the loans to the Vendor. The complete details of the Lenders along with the details of the loans outstanding as of March 31, 2010 are annexed as Schedule 4 to this agreement. .... ..... ..... ITA No.959/Ahd/2016 10 1.1.11 Receivables: Means the loan principal sum along with interest receivable on different due dates to the Vendor in relation to the Business. The complete details are set but in Schedule 5 to this Agreement. This Schedule contains the details of the Receivables in relation to the borrowers of the Vendor as on March 31,2010.” 17. Thereafter our attention was drawn to section 3 of the clause dealing with transfer of business pointing out therefrom that it was the business of FWWB which was purchased by the assessee, and in view of the definition of term “business” as above, even intangible assets were transferred to the assessee. 18. The ld.DR, per contra, contended that nothing could be derived from the above clauses of BTA, as pointed out by the ld.counsel for the assessee. Referring to the assessment order at page no.7, he pointed out that intellectual property rights (IPR) meaning specific logo of FWWB could not have been possibly transferred to the assessee since its copy right was still under progress on the date of business transfer. As for Micro Finance Institution lending and investment method mentioned in the intellectual property rights, it was a generic term having no substance; mechanism developed for effective control over the management of funds mentioned in clause of the intellectual property rights was also a generic term. He therefore contended that no specific intellectual property as stated was transferred to the assessee as claimed by it, and the assessee had not demonstrated and substantiated that it acquired any specialized knowhow from the FWWB. He further countered the contention of the assessee that brand, software for MIS etc. were transferred to the assessee by stating that there could be no question of any brand being transferred to the assessee since the assessee functioned in the name of Ananya Finance P.Ltd. only and no benefit of brand of FWWB was therefore given to the assessee. As ITA No.959/Ahd/2016 11 for software, MIS and accounting system, the ld.DR contended that they could be reliably measured and therefore there was no need for projection. 19. As regards the issue of valuation, the ld.counsel for the assessee drew our attention to valuation report dated 3.5.2011 placed before us at PB Page No.15-23 and our attention was drawn to page no.17 pointing out basis of the valuation of entire business done as under: 20. He further drawn our attention to valuation report placed at page no.21 in PB before us as under: ITA No.959/Ahd/2016 12 21. He then drew our attention to the documents supporting the valuation of the intangible assets stating that it had been absolutely justified by a comprehensive chart showing future surplus of micro finance business of FWWB placed at Page no.55-56 of the Paper book; chart showing profit of SKS Microfinance Ltd to appreciate growth of MFI ‘s of India at Page No.57 of the PB; CRISIL’s report with respect to brief portfolio of largest MFIs of India at page no.58- 69; Offer letter from SIDBI, WWB, ISIS and Trodos & Deon at Page ITA No.959/Ahd/2016 13 No.78-95 of the PB; and financial statement of few MFIs like Ashmita Microfin Ltd., Share Microfin Ltd. at page no.96-110 of the PB. 22. Referring to the above, he contended that the estimated financial position of the assessee-company for the purpose of arriving at the valuation of goodwill was duly supported by the above documents. 23. The ld.DR on the other hand, pointed out that these contentions of the assessee need to be outrightly rejected since actual performance showed totally contradictory position with the assessee showing losses year to year and no explanation being given for the completely changed circumstances between the projections and actual. He also drew our attention to the finding of the AO at page no.5 of the order that while projecting interest income from MFI and processing fee, increase by 8.2 times was shown increasing from Rs.46 crores to Rs.370 crores and expenses increased by only 5.6 times only, that PBT increased from Rs.3 to Rs.35 i.e. 45 times and annual appreciation on return in equity investment was shown at 9.024 in Asst.Year 2010-11 and 410.02 in Asst.Year 2011-12 which was 45 times. He contended that these data itself reflected that valuation was highly inflated. He further pointed out that the actual profitability largely differed from the projections for which no explanation was given by the assessee, which proved that the valuation was highly inflated. He drew our attention to the projected and actual profits for the period considered for the purposes of valuation as under: Projected Profit & Loss Account Amount in crores 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 ITA No.959/Ahd/2016 14 Income from operations 46 56 71 100 151 237 379 Net operating Profit 3 5 20 43 64 88 135 Actual Profit & Loss Account Amount in crores 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 Income from operations .036 54.8 24.06 8.45 3.75 4.81 9.83 Net operating Profit 0 2.58 (-) 25.33 (-) 21.54 (-) 17.98 (-) 9.39 1.29 24. Considering the contentions of both the parties as above, we find, that it is clear that the assessee was unable to justify what intangibles had been paid for and also its valuation at Rs.30.32 crores. The assesses contention that the intangibles comprised of knowhow(software for MIS, accounting system, internal control system),trade mark ,franchise, logo, brand etc. has been justifiable countered by the Revenue pointing out that the brand still remaining with FWWB there could not have been any intangible transferred to the assessee on this account. As for Software for MIS and accounting system these are measurable items and need not be valued by projections. The logo, it was pointed out was still under progress. As for the MFI lending and investment method and mechanism developed for accounting and effective control over management of funds, firstly these are very generic terms and even otherwise these are basically management systems developed over time, to which alone the future flow of profits cannot be attributed so as to constitute as an intangible asset. The assesses claim of established business of a long period of time with its dedicated customers and practices as constituting intangibles we find also is ITA No.959/Ahd/2016 15 not acceptable since the Accounting Standard for accounting of intangibles, i.e AS -26, issued by the Institute of Chartered Accountants of India, rules out the same being identified as an intangible in the absence of a legal right to protect the customer base or any other ways to control the relationship and loyalty with the customers. The Standard recognizes right of control over an intangible as an essential criteria for recognizing it as an asset. This issue is dealt at para 17 of the Standard as under: “17. An enterprise may have a portfolio of customers or a market share and expect that, due to its efforts in building customer relationships and loyalty, the customers will continue to trade with the enterprise. However, in the absence of legal rights to protect, or other ways to control, the relationships with customers or the loyalty of the customers to the enterprise, the enterprise usually has insufficient control over the economic benefits from customer relationships and loyalty to consider that such items (portfolio of customers, market shares, customer relationships, customer loyalty) meet the definition of intangible assets.” Thus almost all the intangibles claimed by the assessee to have been transferred to it by virtue of the BTA are found to be irrelevant for the purpose. 25. Further even if out of all the intangibles claimed to be transferred, we consider lending and investment mechanism and established customer base as intangibles, the assesses valuation applied to all the stated intangibles cannot apply with respect to these two alone. Even otherwise we find that there is no palpable justification given for its valuation at double the value of the net business itself ,being Rs.30.32 Crs as against business valuation of Rs.14.68 crs. For the measurement of intangibles the Standard states that it should be measured based on the probability that future economic benefits will flow to the entity therefrom ,which ITA No.959/Ahd/2016 16 should be assessed using reasonable and supportable assumptions representing the best estimate of the set of economic conditions that will exist over the useful life of the asset. Para 20-21 of the Standard sets out the above as under: 20. An intangible asset should be recognised if, and only if: (a) it is probable that the future economic benefits that are attributable to the asset will flow to the enterprise; and (b) the cost of the asset can be measured reliably. 21. An enterprise should assess the probability of future economic benefits using reasonable and supportable assumptions that represent best estimate of the set of economic conditions that will exist over the useful life of the asset. 26. In the present case the Ld.Counsel has pointed out that the basis was justified by filing reports of similar entities showing growth in the business of Micro Finance lending and also report of CRISIL giving brief portfolio of 50 largest MFI’s of India and such other material. But what cannot be lost sight of is the fact that though the future projections showed an extremely rosy picture for the MFI lending business ,the actual picture was in stark contrast to the same ,showing losses from year to year. If the basis of future projections was justified, as claimed by the assessee, there surely must have been some extraordinary reason for a complete reversal of picture in actual, which the assessee must be aware of. But no such reason has been given by the assessee to explain the starkly different picture of financials in projections taken for valuation purposes and the actual results. In the absence of any such explanation, the assumptions by the valuer cannot be said to represent the true set of economic conditions existing over the useful life of the asset and the valuation therefore ,we hold has been rightly ITA No.959/Ahd/2016 17 rejected as unjustified. The AO was well within his rights to doubt the correctness of the valuation and reject the same without any reference to a valuer. Having held so that the assessee was unable to demonstrate what intangible assets were transferred as also to justify its valuation at a high value of Rs. 30.32 Crs,we agree with the Revenue that the entire transaction was nothing but a colorable device to claim depreciation for set off against profits of MF D business . 27. A close look at the entire transaction glaringly reveals that there was no real/actual transfer of business by FWWB to an independent separate entity, i.e the assessee, as claimed. The business was very much owned, though indirectly, by FWWB only. And as a consequence no intangible asset could have been created in the own business of FWWB nor was any created. The following facts when considered in totality lead to the above inescapable findings. 28. The assessee admittedly is a new entity formed only in the preceding financial year i.e FY 2009-10, on 22-04-2009. It had no assets, no premises of its own nor enough money to carry out its day to day business expenses. Its entire expenses in the preceding year were paid for by another trust IFIG. All these facts find mention at para 2 of the assessment order and have not been controverted before us. So the question arises as to how it managed to buy a business worth Rs.45 Crs. The answer lies in the facts again mentioned in the assessment order para 2, that Rs.45 Crs were provided by IFIG as investment in share capital of the assessee ,IFIG in turn having received this identical amount of Rs.45 Crs from FWWB as corpus donation. ITA No.959/Ahd/2016 18 29. As is evident from the facts stated above, the assessee is not simply an wholly owned subsidiary of IFIG ,on the contrary it is in reality a subsidiary of FWWB only, the funds for investment in entire share capital of the assessee having been routed by FWWB through IFIG as corpus donation to it. Another very pertinent fact adding to and supporting our finding is that the promoter director of the assessee company, Mrs.Vijaylaxmi Das ,was a trustee of FWWB, which fact was disclosed in the Audited Balance Sheet of FWWB and also the assessee company. The share capital in the assessee company being routed by FWWB through IFIG in the assessee and even the founder director of the assessee company being a trustee of FWWB, both monetarily and management wise the assessee was under control of FWWB. It is a foregone conclusion therefore that the assessee company was in reality the wholly owned subsidiary or a division of FWWB only . And the only purpose of this arrangement was to create intangibles, which did not actually exist, in a purportedly separate entity and claim benefit of depreciation. 30. The apparent is not the real in the present case. It is not as simple and straight a case of sale of business by one entity to another and the entire flow of events reveal a larger and different picture. FWWB rotated Rs.45 Crs by giving corpus donation to IFIG, which in turn flowed to the assessee as share capital investment, from where it went back to FWWB as consideration for business purchase and in the process FWWB siphoned off the MFD division and created intangibles worth Rs.30.32 Crs for claiming benefit of depreciation against profits of MFD division. The entire transaction is ,we agree with the Revenue, nothing but a colorable device for tax evasion . ITA No.959/Ahd/2016 19 31. The doctrine of lifting the corporate veil in tax matters has always been judicially recognized right from the decision of the Hon’ble apex court in Mcdowell and Company Ltd. Vs Commercial Tax Officer reported in 154 ITR 148 (SC) wherein it was categorically held that colorable devices cannot be part of tax planning and avoidance of tax payment by resorting to dubious methods should not be encouraged. The Hon’ble apex court in the case of CIT vs Shree Meenakshi Mills Ltd. 63 ITR 609(SC) and in the case of Juggilal Kamlapat vs CIT 73 ITR 702 (SC) approved looking behind the apparent transaction to the arrangement or scheme involved therein for the purposes of taxation. The Hon’ble Delhi High Court in a recent decision in the case of Commissioner of Income Tax vs Shiv Raj Gupta 372 ITR 337 (Del) held the separate payment of purchase price for shares of a company and non compete fees for not indulging in similar activity as the said company, to the assessee, as a mere colorable device in the facts and circumstances that by virtue of sale of shares, entire control and management had transferred and the non compete fees was accordingly held to be not a separate fees paid but part of consideration of sale of shares only. The assessee had claimed the non compete fees to be not taxable but the Hon’ble court, finding the component of the same to be many times the price of shares and noting that entire control and management had been transferred by virtue of sale of shares , held that charging separately for sale of shares and non compete fees was only a colorable device so as to avoid payment of taxes on the non compete fees which were otherwise not taxable in nature. The Hon’ble court held the transaction to be abusive tax avoidance and held that the real nature of the transaction needed to be unearthed. ITA No.959/Ahd/2016 20 The Hon’ble court dealt with the expressions tax avoidance, evasion and mitigation at para 39- 54 of its order as under: “39. Expressions “tax avoidance, tax evasion and tax mitigation” are often spoken about, but differently understood. Rule of law mandates and requires a measure of certainty in understanding the said terms. Juristic explications on the subject are indicative of equivocating and divergent stand points. The distinction between the expressions; tax avoidance, tax evasion and tax mitigation has been a subject matter of several erudite articles with different perspectives like Morality on Tax Avoidance by Zoë Prebble and John Prebble; Interpretation of Tax Statutes: tax avoidance and the intention of the Parliament by Judith Freedman; Tax Avoidance, Tax Evasion and Tax Mitigation by Philip Baker; and, Corporate Social Responsibility and Tax Avoidance: A comment and reflection by John Hasseldine and Gregory Morris. We acknowledge benefit of exposition and analysis in these articles as we elaborate on the said distinction. Discussion even after Vodafone’s case (supra) is reflective that penetrating and perfect clarity of the said terms is not easy to discern and determine. To us the determination and ratio in Vodafone’s case is clear. 40. The aforesaid decision in Vodafone’s case (supra) does not prescribe criterion simply predicated on preordained, circular or self cancelling transactions with a step or steps having no commercial or business purpose other than obtaining tax advantage. The decision does not exert the doctrine of economic substance. The ratio steers clear from using the said tests or principles. The said propositions and premise as specific tests stands disapproved and rejected. 41. The precise test enunciated and prescribed as a tenet, negates and disqualifies colourable device, deceit and sham as a legitimate and acceptable tax event. These terms have some- what ethical and casuistical connotations and are the elective test for differentiating tax planning from abusive tax avoidance. 42. To appreciate the concept of abusive tax avoidance, it would be appropriate to first delineate with precision the expressions “tax mitigation” and “tax evasion” as their boundaries and confines would enable us to draw lines amongst the four concepts; tax mitigation, tax evasion, acceptable tax avoidance and abusive tax avoidance. Each of the said expressions involves an element of tax planning. It would be hard to conceive of a ITA No.959/Ahd/2016 21 situation where the assessed does not indulge to some sort of tax planning, be it tax mitigation, acceptable tax avoidance, abusive tax avoidance or tax evasion. “Tax planning”, being common to all situations, cannot be the distinguishing feature, but nature and character of the planning and its nexus with the transaction is decisive. 43. Tax mitigation in simple words would refer to a taxpayer taking advantage or benefit of a beneficent provision under the tax code and complying with the requisites to his lower the tax liability. In the words of Lord Nolan in CIR versus Willoughby [1997] 4 All ER 65, it is:- “The hallmark of tax mitigation, on the other hand, is that the taxpayer takes advantage of a fiscally attractive option afforded to him by the tax legislation and genuinely suffers the economic consequences that Parliament intended to be suffered by those taking advantage of the option” The aforesaid quote uses the expression “economic consequences that Parliament intended” which as per some, causes confusion and is self contradictory. However, the said criticism overlooks that if the intention of the Parliament is clear and unambiguous; taking advantage or benefit as envisaged by the provision is a case of tax mitigation. Even in case of debate, when the intention of the Parliament is favourable and adjudication decides the question in favour of the assessee, it would be a case of tax mitigation. Courts are trusted and given the power to determine as to what was the intent of the Parliament while enacting a particular provision. When the court decision interpreting the legislative intent is in favour of the assessee, there is no avoidance of tax because the conduct is consistent with the taxing provision. If there is no tax avoidance, the question of abusive tax avoidance does not arise, for the latter refers to a particular category of transactions that are unacceptable being pejorative, i.e. sham, colourable device or deceitful and is distinct from tax mitigation. Albeit, where the Parliament’s intention is to the contrary and the finding negates the assessed’s submission, it would be a case of tax avoidance, whether acceptable or abusive is a different and another matter. Thus, the term “tax mitigation” is simple, intelligible and unequivocal. It is a positive term and refers to the assessed taking benefit or advantage of a provision which the tax code intends and wants to confer. Deductions under Chapter VIA, exemptions under Sections 10A, 10AA, 10B etc. of the Act are all provisions relating to tax mitigation. If an assessee takes benefit or advantage by complying with the stipulated ITA No.959/Ahd/2016 22 conditions therein to reduce his tax liability, it would be a case of tax mitigation. 44. Tax evasion is illegal and consists of wilful violation or circumvention of applicable tax laws to minimise tax liability. The assessed breaches the relevant law and it involves contumacious behaviour or actual knowledge of wrong doing. This can happen when an assessee deliberately fails to report an item in the income tax return, or knowingly claims a deduction which he is aware he is not entitled to, or consciously omits to supply information even when there is duty to furnish the said details. It can also apply to situations when the assessee fails to clarify a matter, which has been misunderstood by the income tax authorities, and keeps quiet. In these cases, there is element of wilfulness, dishonesty or contemptuous conduct or even absence of honest belief. If the taxpayer cannot show that he had an honest belief that he was not liable to tax or liable to a lower tax, then prima facie such conduct would fall within the ambit/scope of tax evasion. 45. Tax avoidance by elimination would mean the residual and surplus, after we exclude cases of tax mitigation and tax evasion. Tax mitigation and tax evasion are two end points. It is easier and more beneficial to follow this discernment to define tax avoidance, for the confines and bounds of tax mitigation and tax evasion are easier to decipher and define legally and also identify with some exactness in practice. (Refer Tax Avoidance, Tax Evasion & Tax Mitigation by Philip Baker.) 46. It is equally important to distinguish and differentiate acceptable tax avoidance and abusive tax avoidance. The Supreme Court in CIT versus Raman (A.) & Co. [1968] 67 ITR 11, at p.17 had observed:- “Avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited. A taxpayer may resort to a device to divert the income before it accrues or arises to him. Effectiveness of the device depends not upon considerations of morality, but on the operation of the Income-tax Act. Legislative injunction in taxing statutes may not, except on peril of penalty, be violated, but it may lawfully be circumvented.” 47. In clear and categorical terms the aforesaid ratio was resonated and approved by the Supreme Court in the Vodafone’s case (supra). Thus, the test of ‘devoid of business purpose’ or ‘lack of economic substance’ is not accepted and applied in India ITA No.959/Ahd/2016 23 as it is too broad and unsatisfactory. The said test, if ardently applied, would contradict and would be irreconcilable with taxpayers’ right to arrange once affairs within the confines of law, which is not prohibited or barred. 48. Naturally, the dividing line between acceptable and abusive tax avoidance cannot be deduced or inferred from lowering or elimination of the tax liability. Latter is the consequence and the tax effect. It is the post facto consequence under the tax code of the event selected by the assessed. The test applied should not curtail the freedom of choice to adopt a particular transaction or combination of transactions to reduce or eliminate the tax liability. 49. At the same time, the dividing line as per the ratio in Vodafone’s case (supra) is ethically principled and moralistic as tax avoidance is disapproved when the assessee adopts a colourable device, dubiousness and otherwise indulges in a sham arrangement or transaction. This would mean that pre-ordained, circular or self- cancelling transaction with a step or steps having no commercial purpose or lack of economic or business purpose could in a given case be, though not necessarily, a relevant fact, yet they are not the touchstone, yardstick or the final test. These could be circumstances or facts to infer and discern whether the taxable event selected was a colourable device, sham or deceit and not the tax event intended by the parties. Right to choice to select the most beneficial legal way and manner to execute a transaction is unquestionable and perennial. A fact is not the test; rather the corrupt and mendacious conduct, i.e. colourable device, sham or deceit, is the specified bright line, dividing acceptable tax avoidance from abusive tax avoidance. 50. The assessed is well within his right to choose any one event between two or more events and select an event to minimize or reduce his tax liability. The Act, i.e. the Income Tax Act, 1961, imposes and saddles tax liability on the chosen tax event. The Act per se, unless a provision so stipulates, does not restrict or curtail the right of choice. Tax is determined and gets crystallized on the tax event adopted by the assessee. For example, in Vodafone’s case (supra), the assessed had several options and therefore, right to choose a particular tax event. As long as the choice is within the framework of law, the Assessing Officer cannot disturb the tax effect or liability, which is the consequence of the event. The choice of the assessee is not abrogated or invalidated. For example, a company has several legal options, and therefore, right to choose how to dispose of a capital asset, as in Vodafone’s case (supra). Similarly, an assessee can opt for and has multiple options for raising debt to finance business expansion ITA No.959/Ahd/2016 24 plans. The assessed may have several legally permissible alternatives to effect and divide the assets on partition. Such examples are numerous. The choice might result in mitigation of tax liability, but the tax effect would not classify or help us differentiate between tax avoidance and abusive tax avoidance. Any attempt to minimize or eliminate tax liability would not make the choice of the tax payer abusive tax avoidance. The foundation of the said principle is that the tax code by its nature differentiates between different types of actions, transactions, arrangements and activities and then identifies and stipulates the consequences. The tax code, i.e. the Income Tax Act, 1961 is rule based and complex. The Act is not entirely principle based. The provisions are read and applied. Principle of purposive interpretation both in favour of Revenue or assessed can be applied but within four corners of law. In fact, in some cases, the assessed may find themselves taxed at a higher liability for failure to choose a more tax friendly event. But the right of choice is hedged with one significant condition. The event selected, as noticed above and subsequently, should be real and not a colourable device, sham and deceit. 51. Tax reduction is not an evil if you do not do it evilly [Murphy Logging Co. vs. US, 378 F.2d 222 (1967)]. The assessee acts evilly when there is camouflage or dubiousity to mask and masquerade the real intent of the transaction which the parties intended and the document(s)/transaction(s), is at variance with the actual intent. The assessed in such cases does not choose the real event as one from the multiple choices, but adopts a sham or colourable event. The assessed then acts fraudulently, deceitfully or in a corrupt manner. He does not choose an event which is useful, viable and tenable, but employs deception and visors to pretense a state of affair which is different from the actual or real state of affairs. The event propounded is contrary to his intention. When the event selected is artificial it can be treated as colourable, deceitful or sham. The artificial event is one which purports to be one thing but in fact is another. Thus, abusive tax avoidance is a matter of evil intention and a result of dishonest behaviour of the assessed. 52. In such cases, question of ignorance as to tax or administrative incompetence would arise for consideration, for abusive tax avoidance scheme requires a mind set and propensity to act evilly. It requires a degree of knowledge and absence of honest belief. 53. The aforesaid doctrine of abusive tax avoidance is a Judge made law or a judicial doctrine. The Parliament can legislate and ITA No.959/Ahd/2016 25 has enacted provisions to negate and nullify specific anti-tax avoidance rules/provisions. Section 2(22)(e), i.e. the principle of deemed dividend, Section 94 relating to dividend stripping, clubbing of income of minors, are few such provisions where the legislature has enacted specific anti-tax avoidance rules. It is the obligation and duty of the court/tribunal to apply the said provisions in terms of the legislative mandate. When a specific anti-tax avoidance section/rule is invoked, the court and the tribunal must look at and interpret the relevant provision to decipher whether the chosen tax event falls within the said provision and accordingly the tax consequences will apply. 54. A caveat, the aforesaid discussion does not examine and elucidate scope and ambit of Section 271(1)(c) of the Act.” And thereafter held that it is the duty of the courts to look at the true nature of transactions where there are a series of transactions operating as such, at para 55-56 of the order as under: 55. In the context of Vodafone’s tests, we would paraphrase the words of Lord Nicholls in MacNiven (Inspector of Taxes) versus Wesmoreland Investments Ltd. (2002) 225 ITR 612; the decision in Ramsay’s case (supra) had not enunciated a new legal principle but reiterated the courts’ duty to determine the legal nature of the transaction and then relate the finding to the fiscal legislation. Thus, when there is one or a series or combination of transactions intended to operate as such, the courts are entitled to look the real scheme as such or as a whole, even when a particular stage is only an expectation without any contractual force. This does not mean that the transaction or any step in the transaction is treated as sham or given a legal effect different from the legal effect intended by the parties. Nor does it imply going behind the transaction or the series of transactions for some supposed underlying substance. It means looking at the document(s) or the act(s) in the context to which it properly belongs. Ramsay’s approach promises ascertaining the legal nature of the transaction(s) and is a principle of interpretation applicable to taxing statutes. 56. In view of the aforesaid discussion and our findings on the true and real nature of the transaction camouflaged as ‘non- compete fee’, we have no hesitation and reservation that the respondent-assessee had indulged in abusive tax avoidance. The real and true nature of the transaction or event was the sale of shares and transfer of control and management of CDBL in favour ITA No.959/Ahd/2016 26 of the SWC Group. The consideration of Rs.6.60 crores was not a fee paid towards non- compete (see paragraphs 22 and 60). It would not be exempt. 32. Having so found that the assessee is but a division of FWWB only, there can be no question of the assessee paying any amount for acquiring intangibles. It tantamounts to creating intangibles in the business of an assessee which cannot be done for the simple reason that, their cost of acquisition to the entity is impossible to determine. The real intention of the transaction was only creation of huge intangibles for claiming depreciation of the same to be set off against income from MFD business. 33. In view of our findings as above that the BTA is a mere cover- up/colorable device and there is no transfer of business by FWWB to an independent entity, the question of claim of depreciation on the resulting intangibles created on acquisition of business by the assessee, stands answered against the assessee. There are no intangibles created, as held above by us, and accordingly the assessee we hold is not entitled to claim depreciation of Rs.7.58 Crs. 34. In view of the above, we uphold the order of the Ld.CIT(A) denying the claim of depreciation on intangibles amounting to Rs.7.58 Crs. 35. Grounds raised by the assessee in this regard are accordingly dismissed. 36. Next issue relates of expenses incurred purportedly for earning exempt income as per provision of section 14A of the Act. ITA No.959/Ahd/2016 27 37. Our attention was drawn to the fact that the AO had made a disallowance of Rs.80,15,807/- by applying Rule 8D of IT Rules and components of expenditure disallowed were according as under: i) Interest component Rs.78,40,807/- ii) Administrative Exp Rs. 1,75,000/- The ld.CIT(A), it was pointed out to us, restricted the disallowance to the extent of exempt income earned by the assessee amounting to Rs.24,45,19/-. The ld.counsel for the assessee pointed out that this disallowance pertained to exempt income earned from investment made by the assessee amounting in odd to Rs.7 crores. The ld.counsel for the assessee contended that it had sufficient interest free funds at its disposal for making impugned investment in the form of share capital and reserves & surplus totaling in all to Rs.49,05,94,938/- as reflected in the audited accounts of the assessee as under: i) Share capital Rs.31,01,00,000/- ii) Reserves & Surplus Rs.16,04,94,938/- 38. The ld.counsel for the assessee has pointed out that, clearly the assessee had owned interest free funds seven times than the amount of investment made. He contended that it is settled law that where the assessee had sufficient interest free funds, the disallowance under section 14A was unwarranted. Reliance was placed on the following case laws: > CIT vs. Reliance Industries Ltd. - 410 ITR 466 (SC) > CIT vs. Torrent Power Ltd. - 363 ITR 474 (Guj.) > CIT vs. Suzlon Energy Ltd. - 354 ITR 630 (Guj) > CIT vs. Gujarat Power Corporation Ltd. - 352 ITR 583 (Guj) > CIT vs. Reliance Utilities & Power Ltd. - 313 ITR 340 (Bom) > Munjal Sales Corporation vs. CIT - 298 ITR 298 (SC) ITA No.959/Ahd/2016 28 The ld.counsel for the assessee, accordingly contended that no disallowance is called for in the circumstances. 39. The ld.DR was unable to controvert either factual contentions of the assessee that it had sufficient interest free funds for making investment in relation to which the expenses had been disallowed under section 14A of the Act, nor he able to distinguish the judicial decisions relied upon by the ld.counsel for the assessee in support of his contentions that where sufficient owned interest free fund is available presumption was that same was deployed for making the impugned investment. 40. In view of the above, considering the proposition of law, as pointed out by the ld.counsel for the assessee before us, and considering the factual position that the assessee had owned sufficient interest free funds for making investment, we hold that no disallowance under section 14A of the Act was called for, and accordingly, direct deletion of the disallowance sustained by the ld.counsel for the assessee to the extent of Rs.24,45,490/-. This ground of appeal raised in this assessee is allowed. 41. In the result, the appeal of the assessee is partly allowed. Order pronounced in the Court on 25 th August, 2022 at Ahmedabad. Sd/- Sd/- (MAHAVIR PRASAD) JUDICIAL MEMBER (ANNAPURNA GUPTA) ACCOUNTANT MEMBER Ahmedabad, dated 25/08/2022 vk*