Sandvik Mining And Construction Tools [ ... vs Assessee

Sandvik Mining and Construction Tools India Private Limited (merged with Sandvik Asia Private Limited), Mumbai-Pune Road, Dapodi, Pune - 411 012. PAN : AAHCS9249R .... Appellant

Vs.

Income Tax Officer, Ward 10(4), Pune. .... Respondent

Assessee by : Mr. Dhanesh Bafna Department by : Mr. Rajesh Damor Date of hearing : 16-12-2014 Date of pronouncement : 20-02-2015

ORDER

PER G. S. PANNU, AM

The captioned appeal by the assessee is directed against an order of

the Commissioner of Income Tax (Appeals)-V, Pune dated 16.04.2013 which,

in turn, has arisen from an order dated 22.12.2011 passed by the Assessing

Officer u/s 143(3) r.w.s. 147 of the Income-tax Act, 1961 (in short "the Act")

pertaining to the assessment year 2005-06.

2. In this appeal, assessee has raised the following Grounds of Appeal :-

"Ground 1:

The Ld. Commissioner of Income Tax (Appeals)- V, Pune {Ld. 'CIT(A)'} has erred in upholding the reopening of assessment under section 148 of the Income-tax Act, 1961 for the following reasons:

i. The Ld. CIT(A) erred in upholding the reassessment proceedings initiated by the Assessing Officer without appreciating the fact that the appellant had made a full and true disclosure of the material facts before the Assessing Officer at the time of original assessment under section 143(3).

2 ITA No.1425/PN/2013 ii. The Ld. CIT(A) erred in upholding the initiation of reassessment proceedings which was based on mere change of opinion; iii. The Ld. CIT(A) erred in upholding the initiation of reassessment proceedings in absence of additional facts or "Tangible Material".

Your Appellant prays that such reassessment proceedings be treated null and void.

Ground 2:

Without prejudice to ground 1, the Ld. CIT(A) has erred in confirming the AO's re-assessment order taxing the receipt of INR 21,138,400 as revenue receipt. Your Appellant prays that such addition be deleted. The Appellant craves leave to add, to amend, to alter, to substitute, and to withdraw the above grounds of appeal."

3. In brief, the relevant facts are that the appellant is a company

incorporated under the provisions of the Companies Act, 1956 and is, inter-

alia, engaged in the designing, manufacturing and distribution of cutting and

drilling products. For the assessment year 2005-06, it filed a return of income

declaring a loss of Rs.2,19,20,880/-. The return of income was subject to

scrutiny assessment u/s 143(3) of the Act dated 31.12.2006 whereby the

returned loss was reduced to Rs.2,17,09,200/-. Subsequently, the Assessing

Officer issued a notice u/s 148 of the Act dated 25.03.2011 re-opening the

assessment on the ground that certain income chargeable to tax has escaped

assessment. In the subsequent assessment finalized u/s 143(3) r.w.s. 147 of

the Act dated 22.12.2011, the Assessing Officer has assessed loss at

Rs.5,70,800/-. The addition of Rs.2,11,38,400/- made by the Assessing

Officer is the subject-matter of the dispute before us, as the said action of the

Assessing Officer has also been sustained by the CIT(A).

4. Brief facts with respect to the impugned dispute can be understood as

follows. In the preceding assessment year of 2004-05, assessee had acquired

the mining and construction business of Kennametal Widia India Limited

(KWIL) for a consideration of Rs.64.40 crores. The said acquisition was in

terms of a Business Purchase Agreement dated 20.02.2004 and it was a

slump sale whereby assessee paid a lump-sum of Rs.64.40 crores without 3 ITA No.1425/PN/2013

values being assigned to individual assets and liabilities. In the assessment

year 2004-05, the lump-sum consideration of Rs.64.40 crores was allocated

by assessee to various assets on the basis of the Valuation Report from

independent valuers and the excess of purchase consideration over and

above the net value of assets (i.e. after netting of liabilities) taken over from

KWIL was treated as goodwill. On these facts, there is no dispute.

Subsequently, it transpires that the assessee raised certain objections with

KWIL and sought reduction in the value of purchase consideration. As a

consequence, assessee and KWIL reached a settlement vide a settlement

agreement dated 09.03.2005 by virtue of which the total purchase

consideration payable by the assessee for acquisition of the mining and

construction business of KWIL was reduced by Rs.2,11,38,400/-. KWIL

refunded the aforesaid sum of Rs.2,11,38,400/- to the assessee as full and

final settlement of the dispute by virtue of the settlement agreement dated

09.03.2005.

5. The treatment of the aforesaid reduction in total purchase consideration

payable by the assessee for acquisition of the mining and construction of

business of KWIL is the subject-matter of dispute between the assessee and

the Revenue. Consequent to the receipt of the refund of Rs.2,11,38,400/- in

the previous year relevant to the assessment year under consideration,

assessee reduced it from the amount of Goodwill already recorded earlier. As

per the assessee, by virtue of the settlement agreement dated 09.03.2005 the

purchase consideration was reduced and, therefore its reduction from the

amount of Goodwill recorded in the account books earlier was justified. The

assessee had treated the refund of Rs.2,11,38,400/- as a capital receipt. 4 ITA No.1425/PN/2013

6. However, the Assessing Officer noted from the settlement agreement

dated 09.03.2005 that assessee company had raised the dispute on the

following items of the Business Purchase agreement :-

"Stock obsolescence (INR) 5,625,000 Doubtful A/c receivable (INR) 3,363,000 EMI (INR) 3,396,877 Export incentive (INR) 25,884,348 Export duty claim (INR) 14,631,201 Warranty reserve (INR) 29,185,888 Immovable property (not usable) (INR) 740,000"

7. The Assessing Officer was of the view that the compensation received

by the assessee i.e. Rs.2,11,38,400/- represented reduction in the purchase

consideration was a revenue receipt and that the action of the assessee in

reducing it from the amount of Goodwill recorded is not in order.

8. Before the Assessing Officer, the assessee submitted that the

settlement agreement was entered in pursuance to a clause existing in the

Business Purchase agreement and the terms of the settlement agreement

dated 09.03.2005 were a part and parcel of the Business Purchase

agreement. Therefore, any reduction in the purchase consideration was to be

understood as a capital receipt, i.e. a reduction in the capital outlay. The

Assessing Officer, however, has differed with the assessee by making the

following discussion :-

"The submission made by the assessee company has been carefully considered, the facts relating to the settlement agreement and business purchase. The contention that compensation received by the assessee company against the value of assets disputed vide the settlement agreement would not impact the profits of the Company is not acceptable. As mentioned in the reasons recorded for issue of notice, it is clear that compensation received totaling to Rs.2,11,38,400/- is of revenue nature. Therefore, reduction of the same from Goodwill is not in order. Therefore, the same disallowed and added to the income."

5 ITA No.1425/PN/2013 9. The CIT(A) has also affirmed the stand of the Assessing Officer on the

ground that the impugned amount was with respect to revenue assets and

therefore the impugned sum is a revenue receipt. Against the aforesaid

decision of the CIT(A), assessee is in further appeal before us.

10. At the time of hearing, the Ld. Representative for the assessee

vehemently pointed out that the settlement agreement was entered into on the

basis of clause 2.2.2 of the original Business Purchase agreement. The said

clause provided that the assessee could review and raise objections with the

seller on the purchase consideration within a specified period. In terms of the

said clause, assessee had pointed out to the seller i.e. KWIL, its objection with

regard to the various items and sought a reduction in the purchase

consideration. As a consequence, by settlement agreement dated

09.03.2005, both the parties agreed that the originally agreed purchase price

of Rs.64.40 crores was liable to be adjusted on account of the objection raised

by the assessee and as a consequence assessee received a refund of

Rs.2,11,38,400/- from KWIL. The Ld. Representative pointed out that the said

item was a capital receipt inasmuch the original amount of lump-sum

consideration of Rs.64.40 crores was indeed capitalized by the assessee in its

books of account. Therefore, any reduction in the value of acquisition of

business would not tantamount to be a revenue receipt.

11. On the other hand, the LD. CIT-DR has merely relied on the reasoning

contained in the orders of the authorities below, which we have already noted

earlier and is not being repeated for the sake brevity.

12. We have carefully considered the rival submissions. Undeniably, by

way of a Business Purchase agreement dated 20.02.2004, assessee acquired

the mining and construction business of KWIL for a lump-sum consideration of 6 ITA No.1425/PN/2013

Rs.64.40 crores without values being assigned to individual assets and

liabilities. It is also not in dispute that in the previous year relevant to the

preceding assessment year of 2004-05, assessee allocated the aforesaid

lump-sum consideration of Rs.64.40 crores to various assets on the basis of

the Valuation Report from the independent valuer. The excess of purchase

consideration over and above the net values of assets (i.e. after netting of

liabilities) taken over from KWIL was treated as Goodwill, and capitalized in

the Balance Sheet. There is no denying the fact that none of the assets

comprised in the slump sale acquisition from KWIL formed a part of the Profit

& Loss Account of the assessee. Subsequently, in the current assessment

year, assessee received a sum of Rs.2,11,38,400/- as a partial refund of the

business purchase consideration on account of certain objections raised by

the assessee. The aforesaid amount was accordingly reduced by the

assessee from the amount of Goodwill recorded in the books of account. The

Assessing Officer and the CIT(A) have differed with the assessee as

according to them the said refund was revenue in nature and therefore it was

to be assessed as a revenue receipt. We are unable to appreciate the

aforesaid stand of the income-tax authorities. It is quite clear that upon

acquisition of the mining and construction business of KWIL, the total

consideration paid was capitalized. Therefore, any reduction in the purchase

consideration by way of the impugned refund would retain the same character

as the original amount. Therefore, we find no justification on the part of the

Assessing Officer to treat the said sum as a revenue receipt. The plea setup

by the Revenue is that the aforesaid refund was on account of certain items,

namely, Stock obsolescence; Doubtful account receivable; EMI; Export

incentive; Warranty reserve; and, Immovable property (not usable), etc. which

are revenue assets. According to the Assessing Officer, such items are

revenue assets and therefore, any receipt therefrom is to be understood as a

revenue receipt. We are unable to appreciate the aforesaid reasoning of the 7 ITA No.1425/PN/2013

Revenue because the aforesaid items have not been entered the revenue

account of the assessee, namely, Profit & Loss Account inasmuch as they

have not been considered as an item of expense in the preceding assessment

year of 2004-05. Therefore, any refund or adjustment in purchase

consideration, even if in relation to the aforesaid assets, would not be an item

of the Profit & Loss Account of the assessee. Thus, action of the assessee in

treating the same as a capital receipt and reducing it from the amount

recorded as Goodwill earlier is in order. Thus, we set-aside the order of the

CIT(A) and direct the Assessing Officer to delete the addition of

Rs.2,11,38,400/-. Thus, on this aspect assessee succeeds.

13. The only other plea of the assessee is by way of challenge to the

proceedings initiated by the Assessing Officer by issuance of a notice u/s

147/148 of the Act. As per the assessee, the initiation of re-assessment

proceedings was invalid and thus the assessment itself is liable to be

quashed. Since assessee has already succeeded on the merits of the issue,

the aforesaid Ground of the assessee is rendered academic and is not

adjudicated for the present.

14. In the result, the appeal of the assessee is allowed, as above.

Order pronounced on 20 th February, 2015.

Sd/- Sd/- (R.S. PADVEKAR) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER

Pune, Dated: 20 th February, 2015.

Sujeet 8 ITA No.1425/PN/2013

Copy of the order is forwarded to: - 1) The Assessee; 2) The Department; 3) The CIT(A)-V, Pune; 4) The CIT-V, Pune; 5) The DR "A" Bench, I.T.A.T., Pune; 6) Guard File.

By Order //True Copy//

Assistant Registrar I.T.A.T., Pune