DCIT Vs Sicagen India Ltd. (ITAT Chennai)
Allowability of STCL on assignment of debts due from certain debtors even if assignee did not disclose recovered income
Conclusion: As regards to issue of allowability capital loss incurred by assessee on assigning of debts due from certain debtors, it was concluded that merely because assignee company did not disclose business income in their income tax returns for subsequent years in year of recovery of debts, that would not prejudice right of assessee company to claim capital loss in the year of extinguishment of their right in favour of assignee company. Hence, events that had happened after the date of assignment of debt, could not be used to judge the transaction, which had happened on the date of assignment.
Held: Assessee company entered into an agreement assigning the debts to M/s.G (P) Ltd. and accordingly, assigned the debts worth Rs. 57,01,55,180/- due from debtors to M/s.G (P) Ltd., for a sum of Rs.53 lakhs. By this process, assessee incurred capital loss of Rs. 56,48,52,180/-. Assignee company M/s.G (P) Ltd., was a related party with assessee company, in view of the fact that Mr.R was earlier director in assessee company and also a founder director in M/s.G (P) Ltd. It was found that the loss arising on account of debts advanced to MAC Clothing Ltd.,Sical Ships Ltd., and Profad Ltd. were not in dispute. The dispute was only with regard to the capital loss arising out of advance given to API and MCC Finance Ltd. Revenue argued that assignee company had paid Rs.53 lakhs to assessee-company allegedly for acquiring the debts on assignment basis. There was no reason for the assignee company to show the said payments under the head ‘’loans and advances” in the asset side of the balance sheet. Revenue argued that the correct way of reflecting the transaction would be reflecting the debts recoverable from API and MCC Finance Ltd., as sundry debtors in the balance sheet of assignee company. Revenue was trying to drive home the point that assessee-company on one hand had assigned debts worth Rs.57 crores for a paltry sum of Rs.53 lakhs in favour of assignee company and claimed capital loss thereon and correspondingly the assignee company also (being a related party) did not offer any business income in their income tax returns for subsequent years in the year of recovery of such debts. Accordingly, he argued that the entire transaction need to be construed as sham with a malafide intention to evade payment of taxes on both the ends. Mr.R became a Director of M/s.G (P) Ltd., only on 15.11.2012 i.e. after the date of assignment of debt in favour of assignee company. It was an undisputed fact that MCC Finance Ltd., was under liquidation till November 2011 and there was no directors during liquidation and that the company was only managed by official liquidator. CIT(A) had given a categorical finding in his order that MCC Finance Ltd., came out of liquidation by an order of Madras High Court dated 09.11.2012, Mr. R became a director in MCC Finance Ltd., only on 15.11.2012. He upon becoming a Director in MCC Finance Ltd., had signed the share certificates which were allotted to the assignee company M/s.G (P) Ltd. It was normal practice that the lender company would propose a Director to the board of borrowing company. The borrowing company in the instant case would be MCC Finance Ltd., pursuant to the assignment of debt. Hence, the event that had happened after the date of assignment of debt, could not be used to judge the transaction, which had happened on the date of assignment in assessment year 2011-12. To sum up, the transactions in respect of assignment of debt recoverable from API, was remitted back to the file of A.O. and transactions in respect of debt recovery from MCC Finance Ltd., was decided in favour of the assessee.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
The Revenue filed this appeal against the order of the Commissioner of Income Tax (Appeals)-VI, Chennai in ITA No.1744/13-14/A-VI, dated 30.07.2014 for the assessment year 2011-12.
2. The only effective issue to be decided in this appeal is as to whether the ld.CIT(A) was justified in allowing capital loss claimed by the assessee on the debts in the sum of .56,48,55,180/- in the facts and circumstances of the case.
3. The brief facts of the issue are that the assessee is engaged in the business of marketing of building materials, commercial vehicles, boat building, travels, speciality chemicals and manufacturing of drums and barrels. The assessee had filed its return of income of .31,80,06,380/-. The facts as recorded in the assessment order, the assessee company sold 6749 shares of SDB Cisco India ltd., which were obtained by the assessee from M/s.Sical Logistics Ltd., under demerger scheme approved by the Hon’ble Madras High Court vide its order dated 20.12.2007. Pursuant of the share purchase agreement dated 04.03.2010, the assessee sold 6749 shares on 09.08.2010 to M/s.Innovative salary services and payroll advisory Pvt Ltd., for a total consideration of .94,65,83202/-. On this sale of shares, the assessee derived a long term capital gains of .84,59,77,432/-, which was admittedly offered to tax in the return of income. The assessee also sold immovable property at Pattinamarudur and derived a long term capital gains of Rs.107,35,200/-. Hence, the total long term capital gains disclosed by the assessee in the return of income was .85,67,12,637/-. The assessee also had certain capital loss of .56,48,52,180/- on sale of debts due from certain debtors. This capital loss was sought to be set off by the assessee with the long term capital gains.
4. The assessee company entered into an agreement assigning the debts to M/s.Golden Star Asset Consultants (P) Ltd., Chennai and accordingly, assigned the debts worth .57,01,55,180/- due from debtors to M/s.Golden Star Asset Consultants (P) Ltd., for a sum of .53 lakhs. By this process, the assessee incurred capital loss of .56,48,52,180/-. In response to a query raised by the A.O with regard to allowability of the aforesaid capital loss, the assessee company submitted the documents like demerger scheme approved by the Hon’ble Madras High Court, balance sheet of M/s.Sical Logistics Ltd. as on 30.09.2006( being the date of demerger). Pursuant to the demerger, with effect from 01.10.2006, certain divisions of M/s.Sical Logistics Ltd., were transferred to the assessee company and accordingly, all the assets & liabilities of transferred undertaking were transferred to the assessee at the values appearing in the books of account of M/s.Sical Logistics Ltd., As a resut of this, the loans and advances to the tune of .24,728.67 lakhs got vested with the assessee. The aforesaid loans and advances admittedly included Inter corporate deposits (ICDs) and other loans and advances given to the following five parties to the tune of .57 crores.
