DPIL Limited vs CIT

The subject matter of challenge is a judgment and order dated September 7, 2007, passed by the Income Tax Appellate Tribunal, D-Bench, Kolkata, pertaining to assessment year 2003-04, in appeal being ITA No. 1420/Kol/2007, by which the Tribunal partly allowed the appeal preferred by the assessee.

It may be mentioned that in respect of the self same assessment year challenging the order of the CIT(A), the revenue has also preferred an appeal, which was registered as ITA No.15 of 2008 which we disposed of today by a separate judgment.

The questions formulated at the time of admission of the appeal are as follows:

(i) Whether the Tribunal was justified in law in upholding the disallowance of Rs. 48,21,901/- out of the interest expenditure incurred by the appellant for the purposes of its business and allowable under section 36(1)(iii) of the Income Tax Act, 1961, and its purported findings in that behalf are arbitrary, unreasonable and perverse?

(ii) Whether on a true and proper interpretation of the agreements dated October 8, 2002 and December 19, 2002 and the provisions of sections 2(42C) and 50B of the Income Tax Act, 1961, the Tribunal was justified in law in upholding the direction of the Commissioner of Income Tax(Appeals) to compute the capital gains in respect of each tea estate sold by the appellant as a whole and not with reference to the individual assets comprised in the said tea estate?

(iii) Whether, on a true and proper interpretation of the provisions of section 2(11), 43(6)(c) and 50 of the Income Tax Act, 1961, the short term capital gains upon sale of the plant and machinery of the two tea estates was to be determined by reducing the sale consideration from the written down value of the block of plant and machinery of all the tea estates and not only the written down value of the plant and machinery of the tea estates sold?

The facts and circumstances pertaining to the questions nos.2 and 3 are as follows.

The assessee engaged in the business of growing and manufacturing tea purchased two tea gardens during the financial year 1999-2000 which were sold during the financial year 2002-03 corresponding to the assessment year 2003-04.

From the agreements for sale, dated October 8, 2002 and December 19, 2002, it would appear that values of the individual assets in both the cases were assigned.

The assessee had, in its computation of income, shown short term capital gain of Rs. 2,05,12,694/-. The assessing officer did not, however, accept the contention of the assessee and came to the following conclusion:

"The assessee during the year under consideration has sold the entire assets of Katalguri Tea Estate and Tippuk Tea Estate. In respect of sale proceeds for plant & machinery for both the tea gardens the assessee received Rs. 8,23,75,000/- out of which it claimed the WDV at Rs. 7,18,62,306/- and the balance amount for Rs. 1,05,12,694/- has been shown as short term capital gain. It has been stated by the A/R that the assessee had eight tea gardens in all out of which two gardens have been sold. It is further seen from the Tax Audit Report that the opening WDV for all the eight tea gardens were Rs. 2,77,34,222/-. Adding with this, the cost of new plant & machinery added for this year amounting to Rs. 4,39,68,100/- and Rs. 1,59,984/-. Out of this new addition plant & machinery amounting to Rs. 4,39,68,100/- was added in the Tippuk Tea Garden and the balance amount Rs. 1,59,984/- was added in other tea gardens which has not been sold. The assessee was requested to furnish the WDV of plant & machinery in respect of this two tea gardens separately since the entire plant & machinery have been sold out. But the assessee failed to furnish the same and it claimed that from the sale proceed they have deducted the entire WDV in respect of the plant & machinery comprised in eight tea gardens. The contention of the assessee is not accepted and in absence of any details the opening WDV for the two tea gardens at pro rata basis is taken at Rs. 69,33,555/-. Adding with this, the cost of new plant & machinery for Rs. 4,39,68,100/- the WDV in respect of plant & machinery for these two tea gardens comes to Rs. 5,09,01,655/-. Hence, the difference Rs. (8,23,75,000-5,09,01,655) or Rs. 3,14,73,345/- is treated as business income of the assessee and is added back."

In an appeal preferred by the assessee, the CIT(A) expressed the following views:

"The entire transaction of sale of the two tea estates each as a going concern is exigible to capital gains and no part thereof can be excluded as being non-depreciable asset or not being a capital asset. It would be necessary to emphasise that what had been sold by the appellant is a profit generating commercial industrial unit and not land or plant and machinery or Furniture & Fixtures etc. as claimed by the appellant in its assessment proceedings. Such a claim is contrary to the two agreements to sale executed by the appellant. Thus the appellant’s contention of disclosing only short term capital gains on Plant & Machinery is totally erroneous and is rejected."

In a further appeal by the assessee, the Tribunal upheld the views of the CIT(A) by stating as follows:

"On hearing most contested argument and counter reply from both the sides, perusing the orders of the authorities below, we find no reason to interfere in the order of the CIT(A) particularly because it is a speaking one on the issue with logical reasoning which dismissing the ground of the assessee. Accordingly, the assessee does not succeed on this ground."

We have heard the learned Advocates appearing for the parties. The CIT(A) has opined that the capital gains have to be computed under section 2(42C) read with section 50B whereas the contention of the assessee is that the capital gains have to be computed on the basis of section 2(11) read with section 50. The agreements for sale go to show that value has been assigned to individual assets. It was, therefore, contended by Mr. Khaitan, learned Senior Advocate, that section 2(42C) has or can have no manner of application to this case. He submitted that the assessment has to be made under section 50 read with section 2(11) wherein the block of assets has been defined. The assessing officer erred, according to him, in insisting upon the written down value of the plant and machinery in respect of the two gardens sold. The assessee admittedly owned at the relevant time eight tea gardens out of which two were sold. It would appear from the assessment for the year 2002-03 that the assessee has shown its block of assets at a sum of Rs. 2,77,34,222/-. He added that the concept of written down value of the plant and machinery of each garden is simply not there because the assessment is the assessment of the income of the assessee. The assessee may have any number of gardens, any number of factories, any number businesses. The combined income from all the individual units shall be assessed as the income of the assessee. The CIT(A), according to him, realising the mistake on the part of the assessing officer, sought to take a different line by alleging that the capital gains have to be computed on the basis of slump sale. This was not a case of slump sale. Therefore, there was no reason why assessment should be made on that basis. The Tribunal did not go into the matter at all.

Mr. Nizamuddin is unable to show as to why and how can the sale be treated as a slump sale. He is unable to dispute that in the assessment year 2002-03, the plant and machinery of all the gardens had a written down value of Rs. 2,77,34,222/-. For the year under consideration, a separate standard could not have been insisted upon. That would not also be in accordance with the concept of block of assets. Once the fact that the block of assets computed at a sum of Rs. 2,77,3,222/- for the assessment year 2002-03 is admitted, there remains no further controversy as regards the fact that during the year under consideration there was an addition of a sum of Rs. 4.41 crores approximately. The opening balance and the addition during the year aggregate to a sum of Rs. 7,18,62,306/-. The sale took place at a sum of Rs. 8,23,75,000/-. The difference between the two would be a sum of Rs. 1,05,12,694/- as computed by the assessee.

We find that the computation made by the assessee is a correct computation. In that view of the matter, the question no.2 is answered in the negative and the question no.3 is answered in the affirmation, both in favour of the assessee.

In so far as question no.1 is concerned, it is not in dispute that the assessee had advanced interest free loans or advances to its sister concerns whereas the assessee had borrowed money in respect whereof the assessee was liable to pay interest. Mr. Khaitan submitted that the loans or advances made to the sister concerns were from out of the own funds of the assessee and the money was borrowed for the purpose of business. We are unable to accept this submission. The question essentially is a question of fact. Both the CIT(A) and the Tribunal have come to a concurrent finding that the amount of interest spent by the assessee could not allowed to be deducted in the facts and circumstances of the case. We cannot interfere with the aforesaid finding of fact. No question of law is involved nor was urged before us. In that view of the matter, question no.1 is answered in the affirmative with the addition that the findings are justified. The question is thus decided in favour of the revenue.

The appeal is thus partly allowed. Parties shall bear their own costs.