ASSISTANT COMMISSIONER OF INCOME TAX vs. TVS MOTORS COMPANY LTD.

Transcription

1 ASSISTANT COMMISSIONER OF INCOME TAX vs. TVS MOTORS COMPANY LTD. ITAT, CHENNAI 'D' BENCH T.R. Sood, A.M. & Vijay Pal Rao, J.M. ITA No. 491/Mad/2008; Asst. yr th April, 2009 (2011) 137 TTJ (Chennai) 220 : (2011) 128 ITD 47 : (2010) 36 DTR 89 Section 2(1B), 2(22)(a), 2(22)(c), 4, 32, 35(1)(iv), 35(2)(ia), 43(1), 43B, 115-O Asst. Year Decision in favour of Assessee, Assessee with remand Counsel appeared : R. Vijayaraghavan, for the Assessee : Smt. P.N. Kamala Devi, for the Revenue T.R. SOOD, A.M. : ORDER In this appeal the Revenue has raised the following grounds : "1. The learned CIT(A) erred in directing the AO to allow a sum of Rs. 2,92,09,502 towards R&D work-inprogress and another sum of Rs. 2,19,33,859 in respect of another item of R&D work-inprogress. 1.1 It is submitted that the order of the CIT(A) relied upon in the assessee's own case for the earlier assessment year in IT Appeal No. 32 of /Tr 6/A VIII, dt. 29th Jan., 2007 has not become final and the Department has preferred appeal before Tribunal. 1.2 Having regard to the Supreme Court decision in the case of Goetze (India) Ltd. vs. CIT (2006) 204 CTR (SC) 182 : (2006) 284 ITR 323 (SC), the CIT(A) erred in allowing the claim of the assessee for the first time before the CIT(A). 2.1 The learned CIT(A) erred in directing the AO to allow the expenditure incurred on dyes and moulds as revenue expenditure. 2.2 It is submitted that the order of the CIT(A) relied upon in the assessee's own case for the earlier assessment year in IT Appeal No. 32 of /Tr 6/A VIII, dt. 29th Jan., 2007 has not become final and the Department has preferred appeal before Tribunal. 3.1 The learned CIT(A) erred in deleting the disallowance of entry tax. /about.html Page 1 of 15 /contact.html

2 3.2 The learned CIT(A) failed to note that the assessee has claimed automatic set off of entry tax against sales-tax payment but the sales-tax had not been credited to the P&L a/c and hence the assessee's claim is not admissible. 3.3 It is submitted that the order of the CIT(A) relied upon in the assessee's own case for the earlier assessment year in IT Appeal No. 32 of /Tr 6/A VIII dt. 29th Jan., 2007 has not become final and the Department has preferred appeal before Tribunal. 4. The learned CIT(A) erred in holding that the assessee's claim of amalgamation of M/s Lakshmi Auto Components Ltd. with the assessee company is to be upheld and accordingly erred in allowing the following reliefs : (a) Deletion of addition made towards capital reserves on a sum of Rs crores. (b) Depreciation on the net block of assets transferred from M/s Lakshmi Auto Components Ltd. to the assessee's company. (c) The block of assets pertaining to the rubber and plastic divisions of M/s Lakshmi Auto Components Ltd. prior to slump sale and amalgamation period should not be reduced in the block of assets of the assessee company. (d) Credit for dividend tax paid by M/s Lakshmi Auto Components Ltd. in the hands of the assessee company. 4.1 The learned CIT(A) failed to note that the scheme of arrangement between the M/s Lakshmi Auto Components Ltd. and the assessee company cannot be considered as amalgamation of the former with latter." 2. With regard to ground No. 1 above, after hearing both the parties we find that the claim of a sum of Rs. 2,19,33,859 made under R&D capital asset was disallowed because the same was disallowed in the earlier year and in this year the claim was made only through a letter and not through the return of income. The assessee's claim was disallowed on the basis of decision of the Hon'ble Supreme Court in the case of Goetze (India) Ltd. (2006) 204 CTR (SC) 182 : (2006) 284 ITR 323 (SC). It was further observed that R&D assets shown by the assessee were Rs. 18,96,16,061 whereas as per accounts, the same was Rs. 16,04,06,559 and, therefore, the difference of Rs. 2,92,09,506 was added to the income of the assessee. On appeal before the CIT (A), it was mainly submitted that s. 35(2)(ia) of the Act used the expression "incurred". Relying on the decision of Hon'ble Madras High Court in the case of CIT vs. Rane Brake Linings Ltd. (2002) 176 CTR (Mad) 396 : (2002) 255 ITR 395 (Mad), it was further submitted that there was no requirement that assets must be brought in existence for incurring such expenditure and hence the same should have been allowed. The CIT(A) after considering the submission went through the case law and was of the opinion that restriction for putting the claim by way of letter was applicable only before the AO and not before the appellate authority. Ultimately, he allowed the appeal of the assessee following the earlier year's orders as well as the decision of the Hon'ble Madras High Court in the case of Rane Brake Linings Ltd. (supra). Before us, the learned Departmental Representative submitted that as far the claim for a sum of Rs. 2,92,09,504 is concerned, it was decided by the Tribunal in ITA No. 893/Mad/2007 in favour of the assessee. Since the claim was already allowed by the Tribunal in the earlier years, the same cannot be maintained in this year. As far as the claim of Rs. 2,19,33,859 is concerned, since the same has been made only by way of a letter the same could not have been allowed in view of the decision of the Hon'ble /about.html Page 2 of 15 /contact.html

3 Supreme Court in the case of Goetze (India) Ltd. (supra). The learned counsel for the assessee, on the other hand, submitted that the issue is squarely covered in favour of the assessee by the decision of the Tribunal in the earlier year vide consolidated order in ITA Nos. 792 and 893/Mad/2007, dt. 22nd May, He further submitted that the claim for R&D had already been made in the return of income and through a letter, only the correct amount was informed to the AO. It was pointed out that the assessee had claimed the following amount in the original return : Later on, by a letter the assessee claimed additional amount on account of capital work-in-progress allowable under s. 35(2)(ia) and increased this amount by a sum of Rs. 2,19,33,859. He argued that the letter for determining the correct amount for deduction cannot be called a fresh claim. He argued that the Hon'ble Supreme Court has itself clarified that this decision in the case of Goetze (India) Ltd. (supra), that restriction is applicable only before the AO and not before the appellate authority. In the case of CIT vs. Ramnath Goenka (Decd.) & Ors. (2001) 252 ITR 653 (Mad), the Hon'ble Madras High Court has held that the Tribunal was dutybound to grant relief to which the assessee is entitled even though there was no plea in this regard. 5. We have considered the rival submissions carefully in the light of the material on record. We find that in the case of Goetze (India) Ltd. (supra), the Hon'ble Supreme Court has clarified in that judgment in the last four lines which reads as under : "Further, we make it clear that the issue in this case is limited to the power of the AO and does not impinge on the power of the Tribunal under s. 254 of the IT Act, 1961." This ultimately makes it clear that restriction is not applicable to the appellate authority. Further, when the assessee has already made a claim in respect of a particular deduction and when it was noted during assessment proceedings, it is clear that the particular claim was not properly quantified, the assessee would have the right to correct the right figure and it cannot be said that it is a fresh case. The Hon'ble Madras High Court in the case of CIT vs. Ramnath Goenka (Decd.) & Ors. (supra) has observed as under : " The Tribunal has primary jurisdiction to prevent miscarriage of justice or to correct palpable errors committed by it. The Tribunal is duty-bound to grant relief to which the assessee is entitled even though there was no plea in this regard." We further find that the issue regarding claim of R&D explained (sic expenditure) was considered by the Tribunal in the asst. yr in ITA No. 893/Mad/2007 and it was held vide para 22 of the order as under : " 22. We have considered the rival submissions. The s. 35(1)(iv) reads as under : 35(1)(iv) in respect of any expenditure of a capital nature on scientific research related to the business carried on by the assessee, such deduction as may be admissible under the provisions of sub-s. (2)." While interpreting this provision the Hon'ble Madras High Court in the case of CIT vs. Rane Brake Linings Ltd. (supra) has observed as under : " As per s. 35(1)(iv) of the IT Act, 1961, in respect of any expenditure of a capital nature on scientific research related to the business carried on by the assessee such deduction as may be admissible under the provisions of sub-s. (2) shall be allowed. Sec. 35(2)(ia) provides that in a case where such capital expenditure is incurred after 31st March, 1967, the whole of such capital expenditure incurred in any previous year shall be deducted for that previous year. The section refers only to capital expenditure and does not further require that the asset brought into existence by incurring such expenditure should have been complete in all respects. The deduction is for the expenditure to the extent incurred. /about.html Page 3 of 15 /contact.html

4 Expenditure incurred on ongoing construction of a building designed for housing the research wing is clearly capital expenditure and is deductible under this provision. Thus, the above decision clearly shows that it is not necessary that the assets must come into existence which means capital expenditure incurred would be allowed as such. Respectfully following the above decisions, we decide this issue against the Revenue." In view of the above decision we basically decide this issue in favour of the assessee and against the Revenue. However, if a particular claim stands allowed in the earlier year then no further deduction can be allowed in this year. Therefore, to this extent, we remit the matter back to the file of the AO to verify with reference to the order of the Tribunal whether any particular claim had already been allowed in the earlier year and if so the same cannot be allowed in this year. 6. As regards the next ground, after hearing both the parties we find that identical claim regarding expenditure incurred on dyes and moulds as revenue expenditure came up for consideration before this Tribunal in asst yr in ITA No. 893/Mad/2007 and the same was decided vide paras 26 and 27 of the order which are as under : "26. We have considered the rival submissions. It is a well known fact that dyes and moulds cannot be classified as plant and machinery because they themselves cannot be employed independently in manufacturing in an industrial undertaking. Such dyes and moulds are normally attachment to the machineries to suit the individual requirement of particular product. The Hon'ble Karnataka High Court in the case of CIT vs. Mysore Spun Concrete Pipe (P) Ltd. (1991) 97 CTR (Kar) 117 : (1992) 194 ITR 159 (Kar) has observed at p. 160 as under : 'Held that it was a matter of common knowledge that moulds do not last long. The assessee required moulds which, by constant use, needed replacement. The replacement of moulds was not in the nature or replacement of a capital machinery but in the nature of replacing a part of a machinery especially in the context of the entire set up being treated as one unit. The replacement of moulds was in the nature of maintenance of the machinery installed in the factory. It could be termed loosely as rebuilding of the machinery as a whole used in the productive process of the assessee. Therefore, the expenditure incurred on replacement of damaged moulds and replacement of runners and end rings was revenue in nature.' Similarly, the Delhi High Court has held that replacement of dyes and moulds would constitute revenue expenditure. 27. We further find that in the case of CIT & Ors. vs. Janakiram Mills Ltd. & Ors. (2005) 196 CTR (Mad) 551 : (2005) 275 ITR 403 (Mad), the Hon'ble Madras High Court was concerned with the issue of replacement of certain machines and only that decision has been reversed by the Hon'ble Supreme Court by holding that replacement of machinery cannot be called repair and maintenance. We are of the view that these two decisions have nothing to do with the issue and for claiming expenditure incurred on replacement of dyes and moulds. Therefore, following the decision of the Hon'ble Karnataka High Court in the case of CIT vs. Mysore Spun Concrete Pipe (P) Ltd. (supra), we hold that the replacement of dyes and moulds would amount to incurring of revenue expenditure. In these circumstances, we find nothing wrong with the order of the CIT(A) and confirm the same." Following the above decision, we decide this issue against the Revenue. Insofar as the next ground is concerned, after hearing the rival submissions we find that during assessment proceedings, the AO has noticed that a sum of Rs. 9,27,661 was claimed /about.html Page 4 of 15 /contact.html

5 towards entry tax paid to various State Governments. This entry tax was paid for entry of vehicles to various States which were despatched for sale. As per Sales-tax Rules of Tamilnadu, the entry tax paid was allowed to be set off against the sales-tax payable by the assessee and, therefore, the assessee was asked as to why this amount should not be disallowed as an amount of sales-tax has been collected but not credited to the P&L a/c. It was argued that the claim was made under s. 43B of the Act on payment basis since under s. 43B of the Act if any tax or duty, etc., is paid the same is allowable irrespective of the previous year in which the liability to pay such amount has been incurred by the assessee. According to the method of accounting regularly employed by the assessee, it was contended that since the sales-tax assessments were pending, the set off was not shown. The AO did not find force in these contentions and observed that completion of sales-tax assessment could not be the condition for claiming the set off since the sales-tax collected was not credited, the same was held to be not allowable. On appeal, the CIT(A) allowed the claim of the assessee following the earlier order. Before us, the learned Departmental Representative submitted that the AO has given categorical finding that the assessee has not credited the sales-tax collected to P&L a/c though the assessee had stated that entry tax should be set off against the sales-tax. Therefore, it is clear that the method followed by the assessee for accounting the entry tax and sales-tax liability towards salestax collected from its customers does not reflect the correct picture. She further stated that for example the entry tax was Rs. 10 and the sales-tax collected was Rs. 12 then Rs. 2 should be disallowed under s. 43B of the Act. Since the assessee could not produce any evidence for crediting in the P&L a/c the collection of sales-tax from the customers the payment of entry tax could not be allowed. The learned counsel for the assessee, on the other hand, submitted that the issue is covered in favour of the assessee by the decision of the Tribunal for the asst. yr in ITA No. 893/Mad/2004. He further argued that the entry tax was payable upon entry of the vehicle in the States of Tamilnadu and Orissa. Entry tax paid is set off against the sales-tax liability arising on the sale of vehicle which suffered entry tax. The entry tax paid and unadjusted against the sales-tax liability is claimed as allowable expenditure since the same has already been paid. Whenever salestax is collected later on, is offered as income and the sum of Rs. 9,27,661 received during the financial year has already been offered for tax in the asst. yr In any case, the statutory payment is allowable at the time of payment irrespective of the method of accounting admitted by the assessee. We have considered the rival submissions carefully in the light of the material on record. We find that relevant portion of s. 43B reads as under : "43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of (a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or (b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, or (c) any sum referred to in cl. (ii) of sub-s. (1) of s. 36, or (d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or a State financial corporation or a State industrial investment corporation, in accordance with the terms and conditions of the agreement governing such loan or borrowing or /about.html Page 5 of 15 /contact.html

6 (e) any sum payable by the assessee as interest on any loan or advances from a scheduled bank in accordance with the terms and conditions of the agreement governing such loan or advances, or (f) any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee, shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in s. 28 of that previous year in which such sum is actually paid by him :" A plain reading of this provision clearly shows that deduction on account of various Government dues has to be allowed on the basis of payment irrespective of the previous year in which such liability is incurred as per the method of accounting followed by the assessee. We further find that whenever sales-tax is received the same would be credited and if there is excess liability the same has to be paid to the concerned State Government and if there is excessive credit then the same is required to be taxed. Since it was claimed that entry tax has already been offered for tax in the asst. yr , the AO may verify the same. But for this year, the payment on account of entry tax, according to us, is an allowable expenditure and, therefore, we confirm the order of the CIT(A) on this issue. 11. With regard to the next ground, after hearing the rival submissions we find that during the year the assessee has gone for a scheme of arrangement/amalgamation in respect of Lakshmi Auto Components Ltd. (LAC for short) which was a subsidiary to the assessee company. The assessee company was holding per cent share capital of this subsidiary company, A composite scheme was proposed through which rubber and plastic divisions of the LAC were transferred to Sundaram Auto Components Ltd. (SAC for short) as a going concern w.e.f. 1st April, The remaining business of LAC was amalgamated with the assessee company w.e.f. 2nd April, 2003 and its composite scheme got the sanction of Hon'ble Madras High Court vide order dt. 23rd March, Certain claim was also made on the basis of this amalgamation for which reliance was also placed on the decision of the Hon'ble Supreme Court in the case of Marshall Sons & Co. (India) Ltd. vs. ITO (1997) 138 CTR (SC) 1 : (1997) 223 ITR 809 (SC) as well as Board's Circular No. 5P, dt. 9th Oct., The AO denied the claim of the assessee by observing as under : "The decision relied upon by the assessee in the above case is applicable only in the scheme of amalgamation of companies. In the instant case as can be seen from the composite scheme of arrangement filed by LAC Ltd. M/s Sundaram Auto Components Ltd. and TVS(M) Ltd. before the Hon'ble High Court para 12 approval of the so-called amalgamation, it is very clear that it is only a scheme of arrangement under ss. 391 to 394 under Companies Act, 1956 and not a true amalgamation in the real sense of the word. The amalgamation contemplates a complete take over of one company by the other company with all its assets and liabilities. Whereas in the instant case, Sundaram Auto Components Ltd. which is a subsidiary of LAC has transferred its business of rubber and plastics to M/s Sundaram Auto Components on a slump sale basis, the remaining assets of LAC have been merged with TVS(M). From the above it is clear that there is no amalgamation in the real sense of the term as per provisions of s. 2(1B)(i) and the decision of Marshall & Sons (supra) and also the Board's circular relied upon by the assessee are not applicable to the facts of the case. In the case of Marshall & Sons (supra), basically, the issue was to consider what is effective date on which the amalgamation had taken place subsequent to the approval by the Court of Companies. /about.html Page 6 of 15 /contact.html

7 Hence, the decision relied upon by the assessee does not apply on all fours to the facts of the present case." In the light of the above, the AO disallowed the claim in respect of (i) capital reserve for a sum of Rs 6.43 crores; and (ii) depreciation on the net block of assets transferred from LAC to the assessee company; (iii) credit for dividend tax paid by LAC in the hands of the assessee; and (iv) it seems that the AO had allowed depreciation on the assets of rubber and plastics division belonging to LAC which were hived off to SAC and the CIT(A) has directed him to reduce such assets from the block of assets and, therefore, the Revenue has raised ground No. 4(c) which is as under : "(c) The block of assets pertaining to the rubber and plastic divisions of M/s Lakshmi Auto Components Ltd., prior to slump sale and amalgamation period should not be reduced in the block of assets of the assessee company." Before the CIT(A), it was mainly contended that the AO has wrongly rejected the amalgamation of remaining business of LAC with the assessee company. It was pointed out that para 4 of the scheme clearly mentions regarding amalgamation of remaining business of LAC mainly consisting of engine components business and investment with the assessee company. It was contended that once the scheme was sanctioned by the High Court the same was of binding nature on all authorities. Reliance was again placed on the CBDT Circular No. 5 as well as the decision of the Hon'ble Supreme Court in the case of Marshall Sons & Co. (India) Ltd. (supra) as well as Sadanand S. Varde & Ors. vs. State of Maharashtra & Ors. (2001) 247 ITR 609 (Bom). The CIT(A), after considering the submissions as well as the definition of amalgamation in s. 2(1B) has held that remaining business of LAC consisting of engine component and investment stood amalgamated with the assessee company. In the light of these findings, he held that (i) capital reserve received from LAC could not be taxed as deemed dividend; (ii) depreciation was allowable on the block of assets which were taken over from LAC; (iii) credit for dividend tax paid by LAC was to be allowed; and (iv) assets pertaining to rubber and plastic divisions etc. which have been hived off vide arrangement scheme to assessee were to be excluded from the block of assets. Both parties made arguments in detail and filed written submissions. The principal submissions of the learned Departmental Representative are as under : The learned Departmental Representative supported the order of AO where he has held that scheme of arrangement sanctioned by the High Court under ss. 391 to 394 of the Companies Act, 1956 cannot be called amalgamation in the real sense and as per the definition of amalgamation given in the IT Act under s. 2(1B). Accordingly, therefore, circular of the Board as well as the decision of the Hon'ble Supreme Court in the case of Marshall Sons & Co. (India) Ltd. (supra) were not applicable. She then referred to the order of the High Court and submitted that the Hon'ble High Court has sanctioned only the scheme of arrangement and there was no mention regarding amalgamation of the two companies. She pointed out that LAC has transferred part of its assets on slump sale basis on 1st April, 2003 to another group company SAC and on 2nd April, 2003 transferred the remaining assets to assessee company. She argued that it was very pertinent to note that all the three companies involved in the scheme of arrangement belonged to the same group and, therefore, the Hon'ble High Court was only concerned with the interest of the shareholders of all the three companies and the Court has sanctioned the scheme for that limited purpose only. She submitted that the case cited by the learned counsel for the assessee of CIT vs. Rattan Lal (2006) 204 CTR (All) 589 : (2006) 284 ITR 162 (All) is /about.html Page 7 of 15 /contact.html

8 quite distinguishable because IT Department normally does not question the validity of the scheme of arrangement made among different companies. The implication of various schemes before the IT authorities was never part of the dispute or discussion before the High Court and the same was never adjudicated also. Similarly, the decision in the case of Sadanand S. Varde & Ors. (supra) is also of not much assistance to the assessee wherein it was only held that once amalgamation scheme gets Court's approval, Chapter XX-C of the IT Act will not apply. It has also been pointed out that the scheme of arrangement was not a simple scheme. It was a slump sale of part of the assets of LAC to SAC on 1st April, 2003 which resulted in the acquisition of entire shareholdings of the SAC making the SAC wholly-owned subsidiary. After completing the slump sale and making the SAC wholly-owned subsidiary of LAC on 1st April, 2003, the next stage of composite scheme was executed on 2nd April, 2003 by which LAC's remaining assets were taken over by the assessee company. It is important to note that LAC's remaining business included investment in SAC which again includes the share acquired by the LAC on transfer of part of its business in the so-called slump sale. Further, the three companies to the composite scheme who were having the same address of registered office, common directors and arrangement and, therefore, the approval of majority of the shareholders of the scheme was mere formality. The control and management remained the same before and after the arrangement. No specific purpose for this composite arrangement has been spelt out on enquiry and, therefore, only purpose or main purpose was to avoid tax. Reliance was placed on the decision of the Hon'ble Gujarat High Court in the case of Wood Polymer Ltd., In re (1977) 109 ITR 177 (Guj), wherein it was held that judicial machinery could not be used to evade tax. 14. On the other hand, the principal submissions of the learned counsel for the assessee are as under : LAC was a subsidiary of the assessee company and the assessee company was holding per cent of share capital of the LAC. The assessee company along with LAC and SAC formulated a scheme of arrangement whereby : (a) rubber and plastic business of LAC was to be transferred to SAC as going concern w.e.f. 1st April, 2003; and (b) the remaining business of LAC after the transfer of rubber and plastic divisions of the assessee (sic LAC) was to be amalgamated with the assessee company w.e.f. 2nd April, This scheme has been sanctioned by the High Court. Para 6 of the order of High Court confirms the scheme of arrangement in respect of transfer of assets of rubber and plastic divisions from the LAC to SAC w.e.f. 1st April, 2003 and the amalgamation of remaining assets of LAC with the assessee company w.e.f. 2nd April, Para III of the scheme deals with the transfer of rubber and plastic business of LAC to SAC and para IV of the scheme deals with the amalgamation of the remaining business of LAC with the assessee company. In view of this scheme all assets and liabilities of the LAC along with employees after the slump sale of rubber and plastic divisions of the assessee (sic LAC) got merged and amalgamated with the assessee company and shareholders of the LAC other than the assessee company were allotted shares as per cl. 4.2 of para 4 of the scheme. All the /about.html Page 8 of 15 /contact.html

9 shares held by the assessee company in LAC were cancelled in view of the amalgamation. It was argued that there is no specific provision in the Companies Act dealing with amalgamation and all kinds of arrangements, compromise etc., are placed in Chapter V of the Companies Act, 1956, under ss. 389 to 396A. Simply because there is no mention of amalgamation in the Companies Act it cannot be held that the scheme of arrangement which aims to amalgamate was not amalgamation. In this regard he referred to the definition of amalgamation under IT Act in s. 2 (1B) of the Act. It was argued that once all assets and liabilities of LAC prior to amalgamation vested with the assessee company this would mean amalgamation. It was argued that the AO has never made any case for tax avoidance and at this stage of the proceedings a new case cannot be made. In any case the arrangement has to be accepted because it was within the (four) corners of law as per the decision of the Hon'ble Supreme Court in the case of Union of India & Anr. vs. Azadi Bachao Andolan & Anr. (2003) 184 CTR (SC) 450 : (2003) 263 ITR 706 (SC). It was argued that the decision of the Hon'ble Gujarat High Court in the case of Wood Polymer Ltd., In re (supra) cited by the learned Departmental Representative though deals with tax evasion, practically in that case the arrangement scheme itself was never sanctioned by the High Court. In the light of the above scheme of amalgamation the difference between the value of assets and liabilities cannot be treated as transfer under s. 47(vi) of the Act since this was transfer of a business as a going concern and the same cannot be considered as income from other sources. It was further argued that the shares issued by the assessee company could not be considered as distribution of retained profits and as deemed dividend under s. 2(22)(a) of the Act in view of the Board's Circular No. 5P (supra). Since all the remaining assets of LAC after hiving off of the rubber and plastic divisions have been taken over by the assessee company in the scheme of amalgamation w.e.f. 2nd April, 2003 and profit of that business from 2nd April, 2003 to 31st March, 2004 has been assessed in the hands of the assessee company the depreciation claimed on such assets should be allowed accordingly. Such transfer is even recognized by s. 43, Expln. 7. Since the business of LAC was merged with the assessee company w.e.f. 2nd April, 2003 even though the Court order was delivered later on LAC ceased to exist from 2nd April, All the transactions of LAC w.e.f. 2nd April, 2003 till the order of the Court was pronounced were for and on behalf of the assessee company. Consequently, the entire profit of LAC was assessed in the hands of the assessee company even though the Court order was received later. After 2nd April, 2003, but prior to receipt of order confirming amalgamation LAC has distributed dividend of per cent. Dividend was received by the assessee company on which LAC had paid dividend distribution tax under s. 115-O of the Act. This amount in the case of the assessee cannot be construed dividend because after merger, amalgamation took place on 2nd April, 2003 and LAC effectively became part of the assessee company and the assessee company cannot distribute dividend to itself. In this regard he relied on the decision of the Hon'ble Bombay High Court in the /about.html Page 9 of 15 /contact.html

10 case of Mafatlal Gagalbhai & Co. (P) Ltd. vs. CIT (1991) 95 CTR (Bom) 1 : (1992) 193 ITR 188 (Bom). Therefore, the amount paid by the LAC to the assessee is not dividend under s. 115-O and dividend tax paid on this amount should either be refunded or adjusted against other demands in the case of the assessee. 15. We have considered the rival submissions carefully in the light of the material on record as well as the decisions cited by the parties. We do not find any force in the argument of the learned Departmental Representative that since the scheme was sanctioned under ss. 391 to 394 of the Companies Act which deal with arrangement and, therefore, strictly cannot be called amalgamation. We have carefully perused the Companies Act and find that there is no other provision dealing with the issue regarding amalgamation. Only chapter deals with arbitration, compromises, arrangement and reconstruction. In fact, a careful perusal of this chapter would show that recommendations of the Dephtary Sastri Committee, based on the report of the Vivian Bose Commission of Enquiry, regarding amalgamation etc., have been made and incorporated by way of amendments to ss. 391 to 394, 394A and 395 by the Companies (Amendment) Act, 1965 (reference may be made to the Guide to the Companies Act by A. Ramaiya, 15th Edition, p. 2903). This makes it clear that amalgamation is dealt with by these sections only. 16. In addition to above provisions of Companies Act, 'amalgamation' has been defined in the IT Act under s. 2(1B) which is as under : "2(1B) 'amalgamation', in relation to companies, means the merger of one or more companies with another company or the merger of two or more companies to form one company (the company or companies which so merge being referred to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that (i) all the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation; (ii) all the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation; (iii) shareholders holding not less than three-fourths in value of the shares in the amalgamating company or companies (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated company or its subsidiary) becomeshareholders of the amalgamated company by virtue of the amalgamation, otherwise than as a result of the acquisition of the property of one company by another company pursuant to the purchase of such property by the other company or as a result of the distribution of such property to the other company after the winding up of the first-mentioned company;" From the plain reading of the above provision it becomes clear that when all the assets and liabilities are taken over by the transferee company then such process will be known as amalgamation. There is no finding in the assessment order that some of the assets or liabilities were not taken over by the assessee company and even the learned Departmental Representative did not point out any assets or liabilities which were not taken over by the assessee company. /about.html Page 10 of 15 /contact.html

11 17. In the case of Marshall Sons & Co. (India) Ltd. (supra) wherein the assessee company's (subsidiary company) assets and liabilities were taken over by the holding company and a notice was issued to the subsidiary company to file the return of income, then the issue arose whether amalgamation will take effect from the date mentioned in the scheme or from the date of the order of amalgamation. It was held by the Hon'ble Supreme Court in that case that : "Held accordingly, reversing the decision of the High Court, that since the Company Courts had not only sanctioned the scheme of amalgamation as presented to them, but had also not specified any other date as the date of transfer/amalgamation, it followed that the date of amalgamation/date of transfer was the date specified in the scheme as the transfer date. In such a situation, it would not be reasonable to say that the scheme of amalgamation took effect on and from the date of the order sanctioning the scheme. The business carried on by the subsidiary company should be deemed to have been carried on for and on behalf of the appellant-company. This was the necessary and the logical consequence of the Court sanctioning the scheme of amalgamation as presented to it. The order of the Court sanctioning the scheme, the filing of the certified copies of the orders of the Court before the Registrar of Companies, the allotment of shares, etc., might have all taken place subsequent to the date of amalgamation/transfer, yet the date of amalgamation in the circumstances of this case would be 1st Jan., Therefore, the notices issued by the ITO were not warranted in law." From the above the other inference which can be derived is that after amalgamation the subsidiary company is held to be non-existent and holding company which was amalgamated company was made responsible for the payment of income-tax in respect of business acquired from the subsidiary company. 18. The Hon'ble Allahabad High Court in the case of Sadanand S. Varde & Ors. (supra) has observed at p. 633 as under : "We are of the view that the amalgamation, which has become final and binding, cannot be permitted to be challenged by the petitioners, without locus standi, in a collateral proceeding in the present writ petition. An amalgamation order can only be challenged under the Companies Act by an appeal under s. 391(7) by any one of the parties, but no such appeal was ever filed." 19. It was seriously argued by the learned Departmental Representative that it was not a simple case of amalgamation but there could be other motives namely tax avoidance. Reliance was placed on the decision of Hon'ble Gujarat High Court in the case of Wood Polymer Ltd., In re vs. Bengal Hotels (P) Ltd., In re (supra). We are unable to agree with these submissions also. As pointed out by the learned counsel for the assessee, there is no such finding that amalgamation was proposed for tax avoidance in the assessment order. Further, as pointed out by the learned counsel for the assessee when proper legal steps have been taken they cannot be ignored in view of the observations of the Hon'ble Supreme Court in the case of Union of India & Anr. vs. Azadi Bachao Andolan & Anr. (supra). The relevant headnote at p. 710 of the Report is reproduced below : "If the Court finds that notwithstanding a series of legal steps taken by an assessee, the intended legal result has not been achieved, the Court might be justified in overlooking the intermediate steps, but it is not permissible for the Court to treat the intervening legal step as non est based upon some hypothetical assessment of the real motive of the assessee. An act which is otherwise valid in law cannot be treated as non est merely on the basis of some /about.html Page 11 of 15 /contact.html

12 underlying motive supposedly resulting in some economic detriment or prejudice to the national interests." 20. We have also gone through the decision in the case of Wood Polymer Ltd., In re (supra). No doubt, in that case the Hon'ble Gujarat High Court has refused to sanction the scheme of amalgamation on the ground that it cannot be a party to an arrangement for avoiding payment of capital gain tax. Therefore, it is important to note that where the Court suspected that there was a situation in which through such schemes tax is being avoided, the scheme itself was not sanctioned. Whereas in the case before us, the scheme has been sanctioned and, therefore, it cannot be argued that there is any such motive to avoid tax. In fact, the assessment order does not contain any such allegation and before us also only general allegations were made without pinpointing how through amalgamation the assessee has sought to avoid tax. 21. In view of the above legal position, now let us consider the factual matrix of the case. Clause (6) of the preamble to the composite scheme reads as under : "This composite scheme of arrangement (hereinafter referred to as scheme provides for : 6.1 Transfer of rubber and plastics businesses as defined hereinafter of LAC to SAC in terms of Part III of the scheme on a slump sale basis and 6.2 Amalgamation of the remaining business (as defined hereinafter of LAC in terms of Part IV of the scheme with TVS-M." The remaining business of LAC has been defined in cl. 6 of the Part 1 definitions. "6. Remaining business of LAC Remaining business means all the business and division of LAC, as existing after the transfer of rubber and plastics businesses to SAC including but not limited to, (i) Engine components business. (ii) Investment in the equity shares of SAC including the equity shares allotted in consideration of the transfer of rubber and plastics businesses to SAC pursuant to this scheme. (iii) Other investments in listed and unlisted entities." Part III of composite scheme reads as under : "Transfer of rubber and plastic businesses of LAC under the scheme to SAC : On and from the appointed date (1), namely, 1st April, 2003, the entire rubber and plastic businesses of LAC shall stand transferred and vested to/in SAC, in the manner described hereunder, as a going concern together with its assets both movable and immovable, and liabilities, rights, duties and obligations, etc. of every description of slump value of Rs crores upon the coming into effect of the scheme." We further find that ultimately the shares were issued to the outside shareholders by the assessee company in terms of the scheme sanctioned by the Hon'ble High Court. The allotment of shares was done on the basis of valuation report submitted by Deloitte Haskin & Sells. We also find that the Hon'ble High Court in the operative portion of the order, observed as under : "and this Court having further observed that the report filed by the official liquidator does not show any malfeasance or misfeasance in the affairs of the transferor company, viz. M/s Lakshmi Auto Components Ltd., and this Court doth hereby sanction the composite scheme of arrangement as set out in the schedule hereunder w.e.f. 1st April, 2003 and in respect of Lakshmi Auto Components Ltd. and Sundaram Auto Components Ltd. and in respect of Lakshmi Auto Components Ltd. and TVS Motor Company from 2nd April, 2003 and this Court doth hereby declare the same to be binding on the shareholders of the said companies and on the said companies this Court /about.html Page 12 of 15 /contact.html

13 doth further order as under : 3 That the transferor company, viz. Lakshmi Auto Components Ltd. be and is hereby dissolved without winding up." Therefore, it is clear that all the assets and liabilities have been transferred by LAC which remained after hiving off of rubber and plastic company (sic division) to the assessee company and the shares held by the assessee company in LAC have been cancelled and shares have been issued for the remaining shares held by the outsiders leading to complete take over of the assets and liabilities of the LAC sanctioned by the Hon'ble High Court and thus it would amount to amalgamation. Now, let us deal with the four issues raised by the Department, emerging out of this amalgamation. As far as the issue regarding taxing the capital reserve is concerned, we find that capital reserve arises because of acquisition of all the assets and liabilities of LAC. Only share capital and share premium remained which were dealt as under : Rupees in crores The issue was dealt with by the CIT(A) as under : "I have carefully considered this issue and find that vide Circular No. 5P (Para 56), dt. 9th Oct., 1967, the Board has clarified that 'that Board are therefore of the view that the provisions of cl. (a) or (c) of s. 2(22) are not attracted in a case where a company merges with another company in a scheme of amalgamation'. In view of the above, I direct the AO to delete the above addition on account of capital reserve of Rs crores. 10. Further, in ground No. 10, appellant has contested the denial of depreciation on the assets transferred on amalgamation from LAC to TVSM which was done by the AO on the ground that amalgamation is not real and hence not worthy of being given effect to. Since, I have held that amalgamation is approved by the High Court as well as fulfils the conditions of the amalgamation as per the IT Act, the AO is directed to grant depreciation on the net block of assets transferred on amalgamation from LAC to TVSM." Since we have confirmed the fact of amalgamation the question of reserve arises only because of transfer of capital and the same cannot be brought into taxation as deemed dividend or otherwise in view of the Board's circular. Therefore, we confirm the findings of the CIT(A) on this issue. As stated earlier we have confirmed the action of the CIT(A) regarding amalgamation. Therefore, depreciation has to be allowed accordingly, particularly in view of the fact that when profits earned by deploying such assets have been taxed in the hands of the assessee company. However, the depreciation has to be allowed not on the purchase value of the assets but on the WDV in terms of Expln. 7 to s. 43(1) of the Act. As far as ground No. 4(c) above is concerned, the CIT(A) has dealt with this issue as under : "11. Ground No. 11 pertains to the denial of depreciation again in the sense that while reducing the block of assets pertaining to LAC from the block of assets of the appellant, the AO has reduced the entire block of assets of LAC including the rubber and plastic divisions which were not taken over by the TVSM, as only the engine components division assets were taken over by the TVSM. Hence, it has been contended by the appellant that the rubber and plastics division s assets, earlier belonging to LAC, should not reduced from the block of assets and depreciation should not be reduced to that effect unnecessarily. There is merit in the contention of the appellant that the rubber and plastic division s assets, earlier belonging to LAC, were never part of TVSM. Hence, those assets should not be excluded in any case from the assets of TVSM /about.html Page 13 of 15 /contact.html

14 while granting depreciation. I have considered this and I direct the AO to verify the contention of the appellant and if it is found to be correct, the block of assets pertaining to the rubber and plastic divisions of LAC prior to slump sale and amalgamation period should not be reduced from the block of assets of TVSM while granting depreciation on the assets of engine components on which I have already given my finding." As discussed earlier, we have confirmed the order of the CIT(A) in respect of amalgamation. As per the scheme, assets of rubber and plastic divisions of erstwhile LAC company were transferred to the assessee company (sic SAC) and, therefore, the same have to be reduced from the block of assets in the assessee's case and thus we confirm the findings of the CIT(A) on this issue. The last issue raised by the Revenue in this ground is regarding direction of the CIT(A) to allow proportionate dividend distribution tax paid by LAC. This issue has been dealt with by the CIT(A) as under : "I have considered the above submissions of the appellant as well as the contention of the AO. It appears that on certain points, the AO has recognized the amalgamation, while on certain other points, he has refused to recognize it. As pointed out by the appellant, he has given credit for the advance tax paid by the amalgamating entity, i.e., LAC and the TDS paid by it in the hands of TVSM but he refused to give credit for dividend tax paid by LAC in the hands of the TVSM on the ground that LAC was different entity at the time of distribution of dividend. I agree that in the case of amalgamation, the credit for the levy of Central excise, sales-tax, advance tax, TDS paid by the transferor company is treated as tax paid by the transferee company. Hon'ble Chennai Tribunal has already decided that tax on distribution of profit by domestic companies is nothing but an income-tax in the case of Dy. CIT vs. Dhanalakshmi Paper Mills Ltd. (2007) 108 TTJ (Chennai) 84 : (2007) 105 ITD 123 (Chennai). The appellant is assisted by the decision of the Hon'ble Supreme Court in Marshall Sons & Co. (India) Ltd. vs. ITO (1997) 138 CTR (SC) 1 : (1997) 223 ITR 809 (SC) and judgment of the Madras High Court in the case of Castrol India Ltd. vs. State of Tamilnadu 114 STC 468. Since LAC ceased to exist from 2nd April, 2003 as per the order of the High Court, I am inclined to accept the claim of the appellant in this regard and direct the AO to give the credit for dividend tax paid by LAC to TVSM." As mentioned earlier, the amalgamation scheme was sanctioned w.e.f. 2nd April, 2003 and any distribution after that would amount to giving dividend by the assessee company to itself because action was taken by LAC on behalf of the assessee company. In fact, the Hon'ble Bombay High Court was concerned with the same question in the case of Mafatlal Gagalbhai & Co. (P) Ltd. (supra), wherein it was held as under : "Held that, in the present case, the High Court passed the sanction order for the amalgamation w.e.f. 1st, April Dividend had been declared by the jute company on 2nd Sept., It had at this stage become the income of the assessee for the relevant accounting year. But, as a result of the order of the High Court, the jute company became a part of the assessee company from the commencement of the previous year which meant that provision for the distribution of dividend in the hands of the jute company became a provision for dividend in the hands of the assessee company as on 1st April, This also meant that the assessee ceased to be a shareholder of the jute company as on that day, as it is inconceivable that a company holds its own shares. Thus, the legal position was that /about.html Page 14 of 15 /contact.html

15 neither could the jute company declare nor could the assessee company receive dividend from the jute company after 1st April, If, factually, any such thing happened as it did happen in this case, the legal effect of the order of sanction for amalgamation was that all that became impermissible and illegal. Hence, the amount of Rs. 2,14,250 could not be taxed in the hands of the assessee as income by way of dividend received from the jute company." In view of the above decision, the assessee company could not have paid dividend to itself and whatever dividend has been paid cannot be treated as income of the assessee. Accordingly, the proportionate tax paid as dividend distribution tax has to be allowed as credit. In the circumstances we find nothing wrong with the order of the CIT(A) and confirm the same. 29. In the result, the appeal filed by the Revenue is dismissed. /about.html Page 15 of 15 /contact.html