Assignment of liabilities and assets by an assessee cannot be treated as a void agreement in eye of law merely because some statutory liability has been taken over by assignee
CASE LAW DETAILS
Decided by: ITAT, MUMBAI BENCHES `A’, In The case of: MIRC Electronics Ltd. v. DCIT, Appeal No.: ITA NO. 3193/M/08, Decided on: AUGUST 22, 2008
We have considered the submissions made both sides, material on record and orders of authorities below. It is noted that the assessee, during the year under consideration, has assigned Sales Tax liability worth Rs. 53.31 crores to the assignee along with receivables worth Rs. 33.52 crores. It is also noted that the assessee has also paid Rs. 17.64 crores to the assignee as part of consideration for taking over the said liability. All these facts emerge from the assignment agreement dated 29.01.04. Thereafter, the assignee has paid the said Sales Tax liability at net present value of Rs. 26.63 crores which has given rise to the dispute between the assessee and the Department. The Revenue has treated the said assignment agreement as a sham transaction and has held that the benefit arising out of pre-payment of Sales Tax liability at it’s net present value is chargeable to tax u/s 41(1) of the Act in the hands of the assessee. For such view, the Revenue has mainly relied on the fact that all the parties are related and the assignment of statutory liability is not valid in law. The assessee, on the other hand, has disclosed the income of Rs. 2.15 crores out of the said transaction and claimed deduction thereon u/s. 80IA of the Act which has also been denied.
19.1. The first aspect is that whether such statutory liability can be assigned. As per the commercial practices and the laws relating to contracts and governing commercial transactions, restructuring/ transfers of business by way of sale or de-merger or amalgamation of two entities is a common feature in the business world and every entity may have got some outstanding liabilities, whether trading or statutory and may also have contingent liabilities which may adversely affect the new owner of such business, and ownership transfer agreement is generally, approved by the share holders/judicial forums, if required. In such agreements, certain safe-guards are made to protect the interests of both the parties and to take remedial measures against the defaulting party. Hence, the assignment of liabilities and assets by assessee company cannot be treated as avoid ‘agreement’ in the eye of law merely because some statutory liability has been taken over by the assignee. It is pertinent to note that none of the Revenue Authorities has brought on record any provisions of any law prohibiting such assignment, hence, the various contentions, such as entries made in the records of Government regarding the discharge of such liability by the assessee etc., made by the Revenue before us, are rejected.
19.2. The next question is regarding the impact of relationship between the parties. The assessee has placed reliance on various provisions of law as well as on accounting standard to show that the transactions is at arm’s length, but in our view, the said provisions operate in different fields, hence, the same cannot be put into operation for treating the transaction at arm’s length because of the fact that the promoters of all the companies are directly or in directly connected and have got some share holdings in all companies and, moreover, the business activities are also carried out in cohesive manner, hence, these contentions of the assessee are not tenable, hence, rejected. Having stated so, we, however, find that the assignee has taken over this liability and assets as a part of its factoring business activity, which fact has been has been accepted by both the Revenue Authorities in the case of assignee, hence, fact of existence of commercial considerations gets established. It is also noted that the Sales Tax liability and receivables have been transferred at book value which shows that the assignee has also taken into consideration the fact that the quantum of ultimate liability to be paid, which at the net present value is factually less than such book value, hence, the objects of factoring business also get fulfilled because in such type of business activity, the liabilities are generally over stated by the person who takes over the liabilities and the assets are generally under valued so that such person can get the maximum benefit, if the transfer is viewed from the perspective of the assignor i.e. assessee, it has got rid of sticky advances and has saved the immediate outflow of funds to the extent of Rs. 9 crores. Hence, inspite of the fact that the parties are related but the transactions is commercially reasonable and, therefore, such relationship per se cannot be said to have resulted any adverse impact on the interests of the assessee and for this reason, we hold that the genuineness of the agreement cannot be doubted.
19.3. Now, coming to the third aspect regarding application of provisions of Section 41(1) of the Act. It is seen earlier that the assessee has gained 2.15 crores on transfer of Sales Tax liability by transferring receivables and paying cash in consideration thereof. It is also seen that the Sales Tax collected by the assessee is a trading receipt and the assessee, except for A.Y. 1996-97, has not claimed any deduction u/s. 43B of the Act. However, in our view, even though the trading receipt has not been shown as income and if it would have been shown as income in the first instance, the same would have been allowed as expenditure as per the provisions of Section 43-B of the Act read with Circular issued by the CBDT, hence, in fact, the assessee has got the benefit of provisions of law and, therefore, we do not find any merit in the contention of the assessee that there should be a specific claim by the assessee and specific allowance of the same in the assessment order because the provisions of Section 41(1) of the Act have to be interpreted in a manner where actual effect of treatment of particular receipts/ expenditure by the assessee has to be seen and, accordingly, we hold that the provisions of Section 41(1) of the Act are attracted in this case. This is further supported by the fact that the assessee, itself has treated it as income and has offered as such, although the assessee has not mentioned any specific section, but the same appears to have been offered u/s, 41(1) of the Act itself. We are further of the view that decision of the Hon’ble Supreme Court on the case of Madeva Upendra Sinai vs. Union of India & Others (supra) relied on by the assessee is in the context of other provisions of law which are different from the provisions of Section 41(1) of the Act, hence, this decision does not help the cause of assessee.
19.4. Now, coming to the aspect of genuineness of the agreement, we have already dealt with some of the aspects earlier, however, it is most interesting to note in the case of Adonis Electronics P. Ltd., (the assignee), being one of the parties to the same transaction, the Id. CIT(A) has held that the assignment agreement is genuine so far as it relates to accrued of income in the hands of assignee out of such transaction. We wonder how this is possible because if it is a genuine agreement in the hands of one of the parties to the same agreement, then, how it can become a sham agreement in the hands of the other party, particularly when the assignee has also offered income resulting from the transaction and the A.O. has made a protective assessment at a higher figure which has been converted to substantive addition by Id. CIT(A) on the basis of same agreement. The assessee has given plethora of judgments on the aspect of sham transaction and has also contended that it is the assessee’s right to plan it’s business affairs in a manner whereby it legitimately saves tax simultaneously and, in that situation, a genuine business transaction cannot be held as sham. However, in view of the fact that the agreement has been accepted as genuine in the hands of one of the parties and economic consequences have also occurred because the assignee has made the payment to the Government, the transaction is necessarily be treated as genuine one, and for this reason, we do not wish to deliberate much on the various contentions raised by the assessee in this regard. Accordingly, we accept ground No. 5 & 7 of the assessee and ground No. 6, being of the nature of arguments, have already been dealt with hereinbefore, hence, there is no specific decision is given thereon.