ITA Nos. 2600, 2623, 2606/Ahd/2012, CO No. 19/Ahd/2013 (in ITA No. 2606/Ahd/2012), (Assessment Year: 2002-2003;2003-2004). Case: 1. Asstt. Commissioner of Income Tax, 2. Sarabhai Machinery Pvt. Ltd. Vs 1. Sarabhai Machinery Pvt. Ltd., 2. ITO. ITAT (Income Tax Appellate Tribunal)

Case NumberITA Nos. 2600, 2623, 2606/Ahd/2012, CO No. 19/Ahd/2013 (in ITA No. 2606/Ahd/2012), (Assessment Year: 2002-2003;2003-2004)
CounselFor Revenue: Sonia Kumar, Sr. D.R. and For Assessee: Vijay Kumar, AR
JudgesG.C. Gupta, Vice President and N.S. Saini, Member (A)
IssueIncome Tax Act, 1961 - Sections 14A, 271(1)(c), 28, 36(1)(va), 41
Judgement DateSeptember 19, 2014
CourtITAT (Income Tax Appellate Tribunal)

Order:

N.S. Saini, Member (A), (ITAT Ahmedabad 'D' Bench)

  1. The appeals in ITA No. 2600/Ahd/2012 and 2623/Ahd/2012 are the cross-appeals filed by the Revenue and assessee against the order of CIT(A)-III, Baroda dated 06.08.2012 for AY 2002-03. The appeal in ITA No. 2606/Ahd/2012 and CO No. 19/Ahd/2013 are filed by the Revenue and assessee respectively against the order of CIT(A)-III, Baroda dated 06.08.2012 for AY 2003-04.

  2. The ground No. 1 of the Revenue's appeal in both the Assessment Years i.e. AYs 2002-03 and 2003-04, is directed against the order of CIT(A)-III, Baroda in deleting the addition of Rs. 6,84,182/- in AY 2002-03 and Rs. 8,07,334/- in AY 2003-04 on account of reversal of the provision made by the assessee for revaluation of liability.

  3. The ground No. 1 of the appeal of the assessee in Assessment Year 2002-03 is directed against the order of the CIT(A)-III, Baroda in sustaining the disallowance made by the Assessing Officer of Rs. 21,39,553/- on account of revaluation of liability.

  4. The facts of the case are that a tripartite agreement was made between Sarabbai Machinery Ltd. (SML), Ambalal Sarabhai Enterprise Ltd. (ASE Ltd.) and the purchasers of the shares of SML on 18.04.1994. At that particular point i.e. in 1994, SML was indebted to ASE Ltd. for an aggregate amount of Rs. 7,40,96,250/- (consisting of unpaid purchase consideration, advances received by SML from ASE Ltd. and interest provided on these amounts). In the said agreement, clause 3 expressly provided that the interest on the unpaid purchase consideration shall cease to accrue with effect from 01.10.1993. The clause 4 of the agreement provided for the payments in installments in the following manner:

    4.1 The aforesaid sum of Rs. 7,40,96,250 shall be paid by SML to ASE in the following manner:

    4.2..........

    4.3 Whereas the last installment of Rs. 3,26,86,250 is payable on 1st April, 2014, SML shall be at liberty, in its sole discretion, to discharge that liability at any earlier point of time by the payment of that amount which would be the then present value of the said amount of Rs. 3,26,86,250 on the basis of the discounting factor of 18% p.a.

  5. It was submitted by the AR of the assessee that the aforesaid agreement provides for provision of separate securities for the dues of Rs. 4,14,10,000 and Rs. 3,26,86,250. For Rs. 4,14,10,000/-, SML will give a Demand Promissory Note alongwith the purchaser Shri Siddharth Chimanbhai Patel as a joint signatory to the promissory note. Further, the assessee-company stated that SML is to create in favour of the ASE, an Equitable Mortgage by deposit of the Title Deeds of all its immovable properties at Ranoli and by hypothecating all its movable machinery and equipments at Ranoli as a security. It further stated that, the balance amount of Rs. 3,26,86,250 will be secured by Deep Discount Bonds/Debentures of such present value as would, on maturity on 1st April, 2014, give an aggregate amount of Rs. 3,26,86,250. Therefore, he submitted that, following position emerged with regard to SML's claim for interest on the unpaid purchase consideration:-

  6. It was further submitted that the Tripartite Agreement had the effect of ceasing the accrual of interest on the unpaid purchase consideration with effect from 01.10.1993. Thus, so far as the liability for interest upto 30.9.1993 is concerned, there was no cessation or remission of the liability whatsoever. The cessation of liability can take place only when SML actually exercises the option of discharging the liability for Rs. 3,26,86,250 earlier than on 1.4.2014 and it is only in that event that the amount by which the liability had ceased upon such earlier payment, can be known.

  7. Considering that SML had the option to discharge the aggregate interest liability of Rs. 3,26,86,250 (which was payable on 1.4.2014) at any earlier point of time by the payment of only that amount which was equal to the discounted value thereof (based on the discounting factor of 18% p.a.) at the time of payment, solely with a view to secure that the books of account reflected this position, the Board of Directors of the Company passed a resolution at their meeting held on 2.9.1996 for writing back Rs. 82,47,082 [Rs. 99,08,539 minus Rs. 16,61,457 (present value of Rs. 3,26,86,250 as on 31/03/1996 at a discounting factor of 18%)]. This amount of Rs. 82,47,082 written back to the credit of the Profit and Loss Account does not at all represent any cessation, remission or waiver of the liability to ASE-especially such as is envisaged by Section 41 of the Income-tax Act, 1961, and there can be no question for including the credit as the Company's income for taxation purposes for the year ended 31.3.1996 corresponding to A.Y. 1996-97. The assessee-company submitted that the ASE has accounted for the entire amount of interest upto 30.9.1993 in its books of account and offered it for taxation. Further, for the reason that the Tripartite Agreement does not envisage any remission of that liability, ASE Ltd. has not passed any entry for withdrawing the credit for income in the form of that interest. However, this amount of Rs. 82,47,082/- written back to the credit of the Profit and Loss Account for A.Y. 1996-97 has been added by the department and considered it as company's income for that A.Y. 1996-97.

  8. As per the agreement, during the year ended 31.3.1997, SML had subscribed an amount of Rs. 15,08,000 for 290 Deep Discount Bonds of ICICI Limited (@ Rs. 5,200 per bond.) which were to mature on 15.7.2021 and which, on maturity, were to fetch SML Rs. 5,20,00,000 (@ Rs. 2,00,000 per bond). Considering that no interest as such was to accrue on these bonds and the maturity value was payable only...

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