Paswara Electronics (P) Ltd., New Delhi vs Assessee

M/s. Paswara Electronics (P) Ltd., vs. ITO, Ward 14 (2), 15, 2nd Floor, National Park, New Delhi. Lajpat Nagar - IV, New Delhi.

(PAN : AADCP5906G)

(APPELLANT) (RESPONDENT)

ASSESSEE BY : Shri Ved Jain, Advocate REVENUE BY : Shri Vikram Sahay, Senior DR Date of Hearing : 17.02.2015 Date of Pronouncement : .04.2015

ORDER

PER C.M. GARG, JUDICIAL MEMBER :

This appeal has been directed against the order of the Commissioner of

Income-tax (Appeals)-XVII, New Delhi dated 29.10.2010 in Appeal No.192/09-

10 for assessment year 2007-08.

2. The grounds no.1 and 5 of the assessee are general in nature which need

no adjudication. The remaining grounds for adjudication read as under :-

"2(i) On the facts and circumstances of the case, Ld. CIT(A) has erred both on facts and in law in confirming the action of the Assessing Officer in restricting the deduction under Section 80IC 2 ITA No.71/Del/2011

of the Act to Rs.83,71,889/- as against Rs.5,75,33,565/- claimed by the assessee and allowable under the provision of the Act.

(ii) On the facts and circumstances of the case, Ld. CIT(A) has erred both on facts and in law in confirming the action of the Assessing Officer by holding that profit on sale of undertaking is not income derived by an undertaking from any business and as such not eligible for deduction under section 80IC of the Act.

(iii) On the facts and circumstances of the case, Ld. CIT(A) has erred both on facts and in law in confirming the action of the Assessing Officer by holding that interest income from FDR of Rs.1,02,347/- is not income thereby not allowing deduction under section 80IC on account of interest of Rs.1,02,347/-.

(iv) n the facts and circumstances of the case, Ld. CIT(A) has erred both on facts and in law in confirming the action of the Assessing Officer in ignoring the provisions of the section 80IC which is quite distinct, despite the assessee bringing to his notice the judgement of Gauhati High Court in the case of Pancharatna Cement (P) Ltd vs Union of India (2009) 317 ITR 259.

3(i). On the facts and circumstances of the case, Ld. CIT(A) has erred both on facts and in law in confirming the action of the Assessing Officer in computing short-term capital gain at Rs.5,14,80,518/- against Rs.4,90,59,320/- computed as slump sale by the assessee.

(ii) That the above-said addition has been made rejecting the explanation of the assessee that the sale was a slump sale.

4. On the facts and circumstances of the case, Ld. CIT (A) has erred both on facts and in law in confirming the disallowance of an amount of Rs.6,47,197/- on account of expenses incurred by the assessee."

3. Briefly stated the facts giving rise to this appeal are that the case was

selected for scrutiny and a notice u/s 143(2) of the Income-tax Act, 1961 (for

short, the Act) was issued to the assessee. The AO noted that from the details 3 ITA No.71/Del/2011

filed in respect of other income, it was revealed that the same consisted of profit

on the sale of asset and bank interest. On specific query from the AO, the

assessee vide letter dated 27.11.2009 filed a revised computation of income

wherein short term capital gain of Rs.4,90,59,329.04 has been declared and

claim of deduction u/s 80IC of the Act has been revised to Rs.84,74,263.87.

Again on 07.12.2009, the ld. AR of the assessee company filed another revised

computation of total income wherein the said short term capital gain on sale of

assets was shown at Rs.4,90,59,320.54 and income from other sources was

shown at Rs.1,02,347/- and the claim of deduction u/s 80IC of the Act was

revised at Rs.83,71,889.87. The assessee also explained that assessee sold its

business as slump sale and adjusted the total consideration against the existing

assets. The AO rejected the explanation offered by the assessee and held that

the separate bills were raised for each and every assets which clearly proved

that it was not a slump sale and the AO calculated the short term capital gain at

Rs.5,14,80,518/-. The AO also made certain disallowances with regard to

interest from FDR and disallowances on account of expenses incurred by the

assessee and finalised, the assessment at Rs.5,22,30,062/-.

4. Being aggrieved by the above assessment order, the assessee preferred an

appeal before CIT (A) which was also dismissed on all the grounds. Now, the

empty handed assessee is before this Tribunal with the grounds as reproduced

herein above.

4 ITA No.71/Del/2011

GROUND NO.2(i), (ii) & (iv)

5. Apropos these grounds, the ld. Counsel of the assessee placing reliance

on the decision of Hon'ble Gauhati High Court in the case of Pancharatna

Cement P. Ltd. Vs. UOI - 317 ITR 259 (Gau.) submitted that the income from

profit on sale of assets and income from interest on fixed deposit are profits

derived from the business in which the industrial undertaking is engaged and,

therefore, such profits and gains need not essentially be derived from industrial

undertaking. The ld. Counsel also contended that they are eligible for deduction

u/s 80IC of the Act. Replying to the above, the ld. Departmental Representative

(DR) contended that when the assessee itself is showing the income from sale of

business as short term capital gain in the revised computation of income filed on

27.11.2009 and 07.12.2009 then the same cannot be held entitled for deduction

u/s 80IC of the Act. The ld. DR pointed out that assessee itself has revised its

claim of deduction u/s 80IC of the Act at Rs.83,71,889.87 then assessee cannot

claim the income from sale of business and earned on interest from fixed

deposits as eligible u/s 80IC of the Act.

5.1 The ld. DR also contended that separate bills were raised for each and

every asset which clearly proves that the sale of business by the assessee was

not a slump sale as defined in section 2(42C) of the Act, hence, the profit so

derived as short term capital gain is not eligible for deduction u/s 80IC of the

Act.

5 ITA No.71/Del/2011

6. On careful consideration of the above submissions, at the very outset, we

find it appropriate to consider the ratio of the decision of Hon'ble Gauhati High

Court in the case of Pancharatna Cement P. Ltd., supra, wherein it has been held

that the words "derived by an undertaking or an enterprise from any business"

in section 80IC having regard to the plenitude of expense would take in their

fold profits and gains made by any activity associable with the business it

undertakes and which forms the subject matter of assessment under the Act to

determine its tax liability thereunder. That was the case of reassessment u/s 147

of the Act on the ground that transport and insurance subsidies received from

Government are not profits and gains derived from industrial undertaking but

incidental. The facts of the present case are clearly distinguishable as in the

present case in hand, the assessee company derived short term capital gain from

sale of its business assets, therefore, we respectfully hold that the benefit of the

ratio of this decision of Hon'ble Gauhati High Court is not available for the

assessee. As we have already pointed out that the assessee, during the

assessment proceedings, revised its computation of income twice and finally,

claimed deduction u/s 80IC of the Act at Rs.83,71,889.87 excluding the short

term capital gain earned from sale of business assets. The ld. Counsel of the

assessee could not demonstrate us that the business of the assessee was sold as

slump sale and hence, we are inclined to accept conclusion of the

revenue authorities that separate bills were raised for every asset, 6 ITA No.71/Del/2011

therefore, the sale of business in piecemeal cannot be held as slump sale by the

assessee as defined in section 2(42C) of the Act.

6.1 Deriving to the action of the AO wherein the interest income from FDR

of Rs.1,02,347/- was also treated as income from other sources and deduction

u/s 80IC of the Act was also disallowed thereon, the ld. Counsel of the assessee

submitted that the sum received by the assessee company from interest on FDR

was accrued to the assessee as the assessee company deployed the funds

received from the sale proceeds into short term FDR's and the interest thereon

was also credited to the profit and loss account. The ld. Counsel further pointed

out that in both the instances, the income from sale of assets and income from

fixed deposits are profits derived from the business in which the industrial

undertaking is engaged and, therefore, such profits and gains need not

essentially, will derive from the industrial undertaking. Replying to the above,

the ld. DR submitted that the profit from sale of business assets and income

earned from FDR by deploying funds received from sale of business cannot be

held eligible for deduction u/s 80IC of the Act as such profits and gains are not

derived from business of industrial undertaking as required from eligibility u/s

80IC of the Act. The ld. DR further pointed out that the assessee company itself

has excluded these amounts in the revised computation of total income filed

before AO on 07.12.2009, therefore, the same cannot be claimed as deduction

u/s 80IC of the Act.

7 ITA No.71/Del/2011 6.2 On careful consideration of above submissions, we note that the CIT (A)

has decided the issue with following observations and conclusion :-

"2.2. I have carefully considered the submission of the Ld. AR and perused the assessment order passed by the AO. The Ld. AR tried to draw a distinction in the language used in section 80lA and section 80IC .I do not agree with the submissions of Ld. AR regarding the interpretation of section 80 IC. Section 80 IC is a special provision in respect of certain undertakings or enterprise in certain special category states. This section was inserted by the Finance Act, 2003 w.e.f. 01.04.2004 with an objective to promote industrialization of economically backward areas. The main purpose was to promote investment and employment in such areas. Sub-section (1) of section 80 IC provides for the deduction in respect of gross total income of an assessee from any business refer to in sub-section (2). Sub-section (2) provides that the section applies to any undertaking or enterprise which has begun or begins to manufacture or produce any article or thing, not being any article or thing specified in the 13th Schedule, or which manufactures or produces any article or thing not being any article or thing specified in the 13th Schedule and undertakes substantial expansion during the period beginning 23rd December, 2002 and other dates. Sub-section (4) provides the conditions required to be fulfilled by the undertaking.

It is an admitted fact that the appellant company has sold its entire manufacturing unit to another company. The profit earned on account of sale of unit cannot be said to be derived from manufacturing or production of an article or thing. The case laws relied upon by the Ld. AR are not of much help to the appellant as they were decided on different facts. Therefore, they are distinguishable on facts. The Ld. AR has placed reliance on the judgement of Hon'ble Gauhati High Court in the case of Pancharatna Cement (P) Ltd. vs. Union of India (2009) 317 ITR 259 (Gau). In that case, the appellant company had received transport subsidy and insurance subsidy and said amounts were duly accounted for and credit in the P&L account. The issue in that case was whether deduction u/s 80 IC was allowable on the transport subsidy and insurance subsidy which have been received in the course of the business and credited to the P&L account.

8 ITA No.71/Del/2011 In the case under consideration, the issue is totally different because the appellant company has sold its entire manufacturing unit. The valuation was done item wise. The income received from the sale of its unit cannot be said by any stretch of imagination to be received from manufacturing or produce of an article or thing. The Hon'ble Supreme Court in the case of CIT vs. Venkateshwara Hatcheries (P) Ltd. (SC) 237 ITR 174 has held that words take colour from context in which they are used. The jurisdictional High Court in the case of American Hotel and Lodging Association Educational Institute vs. CBDT (Del) 289 ITR 46 has held that the interpretation of the statute should be in conformity with object of provision. The Hon'ble Supreme Court in the case of Liberty India vs. CIT (2009) 317 ITR 218 has held that the connotation of the words 'derived from' is narrower as compared to words 'attributable to'. By using the expression 'derived from', Parliament intended to cover sources not beyond the first degree. The Hon'ble Apex Court in the case of Novopan India Ltd. vs. Commissioner of Central Excise 1994 (73) E. L.T. 769 has held that while interpreting provision granting exemption, strict construction of the statute should be adopted. In the instant case, the appellant is claiming deduction u/s 80 IC on the sale of its manufacturing unit. The profit from sale of a unit cannot be termed as derived from the business of manufacturing or production or an article or thing. Considering the facts and circumstances of the case in its totality and various judicial pronouncements on the issue, I hold that the AO was fully justified in rejecting the claim of the 'appellant company. I therefore, confirm the addition made by the AO. This ground of appeal is rejected."

6.3 In view of the above, firstly, we note that the assessee company itself has

submitted revised computation of its income before the AO twice, firstly on

27.11.2009 and secondly on 07.12.2009, wherein the short term capital gain on

sale of assets and income from FDR interest was reduced from the claim of

deduction u/s 80IC of the Act. At this juncture, we respectfully take guidance

from the decision of Hon'ble Supreme Court in the case of Liberty India Ltd.

(supra) wherein it was held that the connotation of the words "derived from" is 9 ITA No.71/Del/2011

narrower as compared to words "attributable to". Speaking for Hon'ble

Supreme Court, their Lordships further observed that by using the expression

"derived from", the Parliament intended to cover sources not beyond the first

degree business activities. From the facts emerged before us, it is vivid that the

assessee company sold its business assets and received sale consideration of

land and building of Rs.5,75,00,000/-. The assessee company also earned

interest from FDRs by deploying said amount of consideration with the bank in

short term fixed deposit account. Therefore, we are inclined to hold that such

profits and gains from sale of assets and interest cannot be held as income

derived from the activities of the industrial undertaking eligible for deduction

u/s 80IC of the Act and the word "derived from" covers the source of income

not beyond the first degree activities of the business. Hence, we reach to a

logical conclusion that the AO as well as CIT (A) was right in disallowing claim

of deduction u/s 80IC of the Act on the income from sale of business assets and

income from interest on short term fixed deposits with the banks. Accordingly,

grounds no.2(ii) & (iv) being de void of merits are dismissed.

GROUNDS NO.3(i) & (ii)

7. The ld. counsel of the assessee submitted that the CIT (A) has erred both

on facts and in law in confirming the action of the AO in computing short term

capital gain at Rs.5,14,80,518/- against Rs.4,90,59,320/- computed as slump

sale of the assessee. The ld. counsel vehemently contended that the above said 10 ITA No.71/Del/2011

addition has been made rejecting the explanation of the assessee that the sale

was a slump sale. Replying to the above, the ld. DR took us through definition

of slump sale as mentioned in section 2(42C) of the Act and submitted that

when assessee has raised separate bills for each and every asset then it cannot be

held that assessee transferred its business assets as a result of sale of a lump sum

consideration without values being assigned to the individual concern and

liabilities in such sale. The ld. DR also pointed out that in the letter dated

19.02.2009, the assessee explained that the assessee company sold its land and

building along with all furniture, fixtures and fittings for a lump sum

consideration without assigning value of individual assets, therefore, benefit of

section 50B of the Act is available to the assessee company but this explanation

could not be substantiated by the assessee. The ld. DR supporting the

assessment order submitted that the assessee company raised separate bills for

each and every asset stating therein value of sale separately assigned to every

asset, therefore, the sale of assets by the assessee company cannot be held as

slump sale.

8. On careful consideration of above submissions, we are included to accept

conclusion of the authorities below that sale of assets by the assessee company

was not a slump sale in the light of definition given by the statute to the slump

sale in section 2(42C) of the Act. Therefore, we uphold the same and grounds

no.3(i) and (ii) of the assessee being de void of merits are also dismissed. 11 ITA No.71/Del/2011

GROUND NO.4

9. Apropos ground no.4, the ld. counsel of the assessee reiterating its written

submissions submitted that as per decision of Hon'ble jurisdictional High Court

of Delhi in the case of CIT vs. Hughes Escort Communication Ltd. - 311 ITR

253, the expenses incurred in the previous year, prior to the date of

commencement of the business but after the setting up of its business, which

two dates need not be the same, would be deductible as revenue expenditure. The ld. counsel also placed reliance on the decision of Hon'ble High Court of

Delhi in the case of CIT vs. Whirlpool of India Ltd. and submitted that the

prerequisite for allowability of expenditure in the case of newly set up business

is not the commencement of commercial production but setting up of the

business and, therefore, an amount of Rs.6,47,197/- on account of expenses

incurred by the assessee during the relevant period should have been allowed as

revenue expenditure.

10. Replying to the above, the ld. DR pointed out that the assessee has

debited impugned sum towards indirect expenses pertaining to December 2006

to March 2007 which were not allowable as expenses as the company sold

almost entire all its assets and purchased new ones in the process of establishing

an entirely new establishment. Therefore, indirect expenses for the month of

December 2006 to March 2007 cannot be allowed as revenue expenditure

against the income earned.

12 ITA No.71/Del/2011

11. On careful consideration of above submissions, we note that the CIT (A)

declined to allow ground of assessee on this issue with following observations

and conclusions :-

"3.2. I have carefully considered the submissions of the Ld. AR and findings of the AO as given in the assessment order. The AO has given a categorical finding that the appellant company has sold its industrial land at Khasra No. 158 admeasuring 8.6179 hectares situated at Village Raipur, Bhagwanpur, Tehsil Roorki, District Haridwar together with the structure on the said plot of land for Rs.5,75,00,000/-. The perusal of MOU dated 16.11.2006 made between the appellant company and Mirc Electronics Ltd. reveals that the appellant was required to handover the plot with other structure as a vacant plot. Para 10 of the MOU reveals that the Mirc Electronics Ltd. was intending to setup a new industrial undertaking at the said plot of land. Therefore, it cannot be said that the appellant has sold its undertaking as a slump sale. Section 2(42C} of the I.T. Act, 1961 defines the slump sale/to mean the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in the such sales. It is noted that the appellant has sold plot of land and structure for Rs.5,75,00,000/- by a separate agreement which does not include plant & machinery and other assets.

In addition to the plot of land and structure, the appellant also sold the other assets such as' plant and machinery for Rs.23,65,000, Computer for Rs.80,000/- furniture & fixture for Rs.45,000/- and office equipment for Rs.10,000/-. Is further noted that separate bills' were raised for each and every asset, which clearly proves that it is not a slump sale. It is further noted that in the schedule of assets the appellant company has claimed loss on sale of plant and machinery at Rs.5,99,829/-, Electric installation at Rs.3,50,845/- furniture & fixture at Rs.60,25,246/-, Computers at Rs.1,50,980/-, Generator at Rs.4,07,000/-, Transforms at Rs.1,50,581/-, Mobile at Rs.6,072/- and Office equipment at Rs.23,202/-. During the hearing of appeal the Ld. AR has not submitted any argument and evidence to rebut the findings of the AO to the effect that it was not a slump sale. Considering the facts and circumstances of the case, I hold that the AO was justified in rejecting the alternate claim of the appellant regarding short term capital gain. Therefore, I do not find any infirmity in the order of the AO.

Regarding the claim of 13 ITA No.71/Del/2011

Rs.6,47,197/- to be revenue expenditure, the appellant has not been able to substantiate its claim that these expenses were revenue expenses. It has been admitted by the appellant that these expenses were incurred towards setting up of a new unit. Therefore, the same were rightly treated by the AO as capital expenditure. In view of the above discussion, the action of the AO is confirmed. This ground of appeal is rejected."

12. In view of above, since the assessee itself admitted before the CIT (A)

that the impugned expenditure was incurred towards setting up of a new unit

and therefore, the same were rightly treated by the AO as capital expenditure.

We further observe that the assessee could not substantiated its claim that the

assessee incurred said expenditure, which was incurred from December 2006 to

March 2007, was actually made as revenue expenditure against the income

earned during the year consideration. Thus, we are of the considered view that

when the assessee itself admitted that the expenditure in question was incurred

towards setting up of a new unit then the same cannot be allowed as expenditure

towards the business which was closed and assets were sold on 16.11.2006.

Then, the expenditure incurred subsequently from December 2006 to March

2007 cannot be treated as revenue expenditure that too when the assessee itself

admit that the impugned expenditure was incurred towards setting up of a new

unit and thus, we also uphold the action of the Revenue authorities, treating the

same as capital expenditure. Accordingly, we are unable to see any ambiguity, 14 ITA No.71/Del/2011

perversity or any other valid reason to interfere with the impugned order of the

CIT (A). Hence, ground no.4 of the assessee is also disallowed.

13. In the result, appeal of the assessee is dismissed.

Order pronounced in open court on this 17th day of April, 2015.

Sd/- sd/- (B.C. MEENA) (C.M. GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated the 17th day of April, 2015 TS

Copy forwarded to: 1.Appellant 2.Respondent 3.CIT 4.CIT(A), Meerut. 5.CIT(ITAT), New Delhi. AR, ITAT NEW DELHI.