ITAT Deletes TP Addition as Nokia Shutdown Led to Distress Sale of Finished Goods

DCIT Vs BYD India Pvt. Ltd. (ITAT Chennai)

ITAT upholds deletion of transfer pricing adjustment relating to ‘distress sale’, holding that the TPO failed to account for the shutdown of Nokia India

Summary: Income Tax Appellate Tribunal, Chennai Bench, upheld the relief granted by the Commissioner (Appeals) on transfer pricing adjustment, disallowance of expenses, and taxability of sale of fixed assets. On transfer pricing, the Tribunal accepted that the assessee’s sale of finished goods to its associated enterprise was a distress sale arising from the shutdown of its predominant customer, Nokia India, during FY 2014–15. It observed that sales to Nokia had sharply declined while sales to the associated enterprise increased substantially, establishing that finished goods originally manufactured for Nokia were sold under extraordinary business circumstances. The Tribunal held that the Transfer Pricing Officer failed to consider the impact of reduced revenue, unabsorbed costs, and abnormal business conditions while benchmarking margins, making the adjustment unsustainable. It also noted that tax authorities cannot question commercial prudence by deciding how a business should have acted. On disallowance of expenses, the Tribunal found that the Assessing Officer had neither disputed the genuineness of the expenditure nor produced material to show that the expenses were incurred for a future business. It noted that the assessee continued trading operations, maintained accounts on a going concern basis, and that the new electric vehicle business commenced only in a later assessment year. Accordingly, ad hoc disallowance under Section 37 was held unjustified. On slump sale, the Tribunal observed that plant and machinery were sold individually with separate values assigned, the block of assets continued to exist, and no undertaking was transferred as a whole. Since the essential condition of transfer of an undertaking for lump sum consideration was absent, the transaction could not be treated as slump sale. The Revenue’s appeal was dismissed.

Facts:

• The assessee is a company and wholly owned subsidiary of Lead Wealth International Ltd., British Virgin Island. During the year under consideration, the assessee was engaged in the business of manufacturing, assembly and sub-assembly of components for mobile phones exclusively for Nokia India and its affiliates and trading of solar panels. The assessee filed its return of income for A.Y. 2015–16 on 25.03.2015 declaring a loss of Rs.34,18,12,411/-, which was subsequently revised to Rs.37,25,43,570/-. The case was selected for scrutiny and statutory notices were issued. Since the assessee had international transactions, the Assessing Officer made a reference to the Transfer Pricing Officer (TPO) for determination of the arm’s length price. The TPO proposed a transfer pricing adjustment of Rs.10,70,45,309/-, which was incorporated in the final assessment order.
• The Assessing Officer further disallowed expenses incurred by the assessee amounting to Rs.43,26,63,304/- treating them as preliminary expenses under Section 35D of the Act. The Assessing Officer also treated the sale of fixed assets adjusted against the block of assets as slump sale and brought the same to tax as short-term capital gains. Aggrieved, the assessee preferred an appeal before the CIT(A), who granted relief in respect of all the additions and disallowances. The Revenue, being aggrieved, preferred an appeal before the Tribunal.
• During the year under consideration, the assessee sold finished goods amounting to Rs.23,95,68,252/- to its associated enterprise, BYD Precision Manufacturing Co. Ltd., China. The assessee submitted that since its major customer Nokia India shut down its operations in Chennai and it had no other customer or buyer, the finished goods had to be sold to its AE as a distress sale at a lower value. It was further submitted that the goods were ultimately sold by the AE to Nokia Group at a lower rate and part of the goods were used by the AE for its own manufacturing.
• In its transfer pricing study, the assessee adopted TNMM as the most appropriate method and applied gross profit margin (sales less cost of production) as the profit level indicator, stating that the relevant year was an extraordinary year due to shutdown of its only customer Nokia India. The assessee selected four comparables and arrived at a mean weighted average margin of 26.08% and compared the same with its own margin of 37.69% to conclude that the international transaction was at arm’s length.
• The TPO rejected the transfer pricing study and recomputed the profit level indicator of the assessee on the basis of OP/OC and computed the same at (-)26.75%. The TPO did not accept the contention of distress sale and held that Nokia India had announced the shutdown in September 2013 itself and that the assessee continued to manufacture goods despite being aware that it may not be able to sell the entire goods. The TPO further held that the claim of distress sale was not supported by records and conducted an independent search identifying comparables with margins ranging from 5.89% to 6.38%, and accordingly made a transfer pricing adjustment of Rs.10,70,45,309/-.
• On appeal, the CIT(A) deleted the TP adjustment by observing that the sales to the AE had significantly increased during the relevant year (from earlier years to Rs.23.95 crores), indicating distress sale, and that the year was an extraordinary year due to shutdown of Nokia India, which was the predominant customer of the assessee. It was further observed that the goods purchased by the AE were subsequently sold to Nokia Group at lower prices and part of the goods were used or scrapped.
• With regard to disallowance of expenses, the assessee had debited an amount of Rs.59,84,84,673/- towards various expenses in the profit and loss account relating to its business activities. The Assessing Officer held that these expenses were incurred towards a new business of manufacturing electric vehicles which had not commenced during the year and therefore disallowed a portion of the expenses amounting to Rs.43,26,63,304/- treating them as preliminary expenses.
• The CIT(A), after examining the financial statements and computation, observed that part of the disallowance resulted in double disallowance as certain expenses had already been disallowed by the assessee. It was further observed that during the year the assessee had two lines of business, namely manufacturing of mobile components and trading in solar panels. Though the manufacturing activity was suspended due to closure of Nokia India, the assessee continued its trading business and incurred routine administrative expenses including employee costs.
• In respect of sale of fixed assets, the assessee sold plant and machinery amounting to Rs.45,37,96,425/- and adjusted the sale consideration against the block of assets. The Assessing Officer held that the assets sold pertained to the manufacturing unit and treated the transaction as slump sale, bringing the gains to tax as short-term capital gains.
• The CIT(A), however, deleted the addition after examining the fixed asset register and observing that the assets were sold individually with specific values assigned and not as a transfer of an undertaking. It was also observed that the assessee retained substantial assets and the block of assets continued to exist, and therefore the transaction could not be treated as slump sale.

Issues:

• The order of the CIT(A) is contrary to law, facts and circumstances of the case.
• Whether the Ld. CIT(A) had erred in deleting the TP Adjustment of Rs. 10,70,45,239/- made by the TPO?
• Whether the Ld. CIT(A) had erred in holding that ‘distress’ sale was made by the appellant (the assessee company) to its AE even though the facts and circumstances of the case shows that the sales were effected in the normal course of business transactions?
• Whether the Ld. CIT(A) had erred in holding that F.Y 2014-15 was an extraordinary year to the assessee company, BYD India without considering the facts that the assessee was fully aware as early as in September, 2013 about impending shutdown of the business of its predominant customer M/s Nokia and the likely fall in its sales during the F.Y 2014-15?
• Whether the Ld. CIT(A) has erred in granting relief to the assessee by deleting the disallowance of preliminary expenses that are capital in nature?
• Whether the Ld. CIT(A) has erred in granting relief to the assessee by deleting the disallowance made on account of sale of core assets which was treated as slump sale and charged to Short Term Capital gains tax?
• For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer restored.

Observations:

1. TP Adjustment

• The Hon’ble Tribunal observed that the assessee, with regard to the international transaction of sale of finished goods, had used GPM i.e. Sales less cost of production as its PLI on the ground that the year under consideration was an extraordinary year due to shutdown of its major customer Nokia India and that the assessee had to carry out distress sale of goods to its AE in China.
• The Hon’ble Tribunal observed from the financial statements that the SEZ unit at Orgadam manufacturing components for Nokia India was shut down during FY 2014–15 and that revenue from sales to Nokia had drastically reduced, while sales to AE had increased substantially. It was thus not in dispute that the assessee sold finished goods manufactured for Nokia India to its AE.
• The Hon’ble Tribunal further observed that the contention of the Revenue that the assessee should not have continued manufacturing cannot be accepted, as it is a well-settled position that the AO cannot sit in the “armchair of a businessman” to question the prudence, wisdom or effectiveness of commercial decisions, which are taken based on various business considerations.
• The Hon’ble Tribunal observed that the assessee had furnished detailed breakup of sales to AE and details of subsequent sale/internal utilisation of goods. It was further observed that such transactions could not be regarded as having been carried out in the normal course of business in view of the extraordinary circumstances arising from shutdown of Nokia India.
• The Hon’ble Tribunal observed that the TPO failed to consider these extraordinary circumstances and ignored the impact of reduced revenue and unabsorbed costs on margins, and proceeded to recompute the PLI without factoring such material events. It was held that benchmarking carried out without considering such factors having significant impact on margins is not sustainable and not in accordance with the Rules.
• The Hon’ble Tribunal held that there was no reason to interfere with the order of the CIT(A) in deleting the TP adjustment and accordingly dismissed the grounds raised by the Revenue.

2. Disallowance of Expenses

• The Hon’ble Tribunal observed that the Assessing Officer disallowed expenses on the ground that they were incurred for future business, though he had neither questioned the genuineness of the expenses nor doubted their business purpose.
• It was observed that the assessee continued its manufacturing activity till July 2014 and was also engaged in trading of solar panels, and that the financial statements reflected reduction in expenses and increase in trading income. It was further observed that there was no income from the business of manufacturing electric vehicles and that the accounts were prepared on a going concern basis.
• The Hon’ble Tribunal observed that the Assessing Officer had not recorded any finding with regard to the basis for concluding that the expenses were incurred for future business and had not brought any material on record to substantiate such conclusion. It was further observed that the new business of manufacturing electric vehicles commenced only from AY 2018–19.
• The Hon’ble Tribunal held that where expenses satisfy the conditions under Section 37, the AO cannot make an ad hoc disallowance based on unsubstantiated assumptions or conjecture.
• The Hon’ble Tribunal upheld the order of the CIT(A) in deleting the disallowance of expenses and dismissed the grounds raised by the Revenue.

3. Slump Sale

• The Hon’ble Tribunal observed that the Assessing Officer treated the sale of plant and machinery as slump sale on the ground that the assets pertained to a manufacturing unit.
• The Hon’ble Tribunal observed that the definition of slump sale requires transfer of an undertaking as a whole for a lump sum consideration without assigning values to individual assets. It was observed that in the present case, values were assigned to individual assets and profit/loss was computed asset-wise.
• It was further observed that the block of assets continued to exist and that the manufacturing unit was not transferred as a whole, and therefore the transaction represented sale of individual assets and not transfer of an undertaking.
• The Hon’ble Tribunal held that the transaction cannot be treated as slump sale and upheld the deletion of addition by the CIT(A).

FULL TEXT OF THE ORDER OF ITAT CHENNAI

This appeal by the Revenue is against the order of the Commissioner of Income Tax (Appeals)-16, Chennai (in short “CIT(A)”) passed u/s. 250 of the Income Tax Act, 1961 (in short “the Act”) dated 20.04.2023 for Assessment Year (AY) 2015-16. The grounds of appeal raised by the Revenue are as under:

“1. The order of the CIT(A) is contrary to law, facts and circumstances of the case.

2. Whether the Ld. CIT(A) had erred in deleting the TP Adjustment of Rs. 10,70,45,239/-made by the TPO?

3. Whether the Ld.CIT(A) had erred in holding that ‘distress’ sale was made by the appellant (the assessee company) to its AE even though the facts and circumstances of the case shows that the sales were effected in the normal course of business transactions?

4. Whether the Ld.CIT(A) had erred in holding that F.Y 2014-15 was an extraordinary year to the assessee company, BYD India without considering the facts that the assessee was fully aware as early as in September, 2013 about impending shutdown of the business of its predominant customer M/s Nokia and the likely fall in its sales during the F.Y 2014-15?

5. Whether the Ld.CIT(A) has erred in granting relief to the assessee by deleting the disallowance of preliminary expenses that are capital in nature?

6. Whether the Ld.CIT(A) has erred in granting relief to the assessee by deleting the disallowance made on account of sale of core assets which was treated as slump sale and charged to Short Term Capital gains tax?

7. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer restored.”

2. The assessee is a company and wholly owned subsidiary of Lead Wealth International Ltd. British Virgin Island. During the year under consideration, the assessee was engaged in the business of manufacturing, assembly and sub assembly of components for mobile exclusively for Nokia India and its affiliates and trading of solar panels. The assessee filed a return of income for AY 2015-16 on 25.03.2015 declaring a loss of Rs.34,18,12,411/- which was subsequently revised to Rs.37,25,43,570/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. Since the assessee had international transactions, the A.O made a reference to the Transfer Pricing Officer (TPO) to determine the Arms Length Price (ALP) of the international transactions. The TPO arrived at the TP adjustment of Rs. 10,70,45,309/-. The A.O passed a final assessment order incorporating the TP adjustment. The A.O also disallowed the expenses incurred by the assessee to the tune of Rs. 43,26,63,304/- treating the same as preliminary expenses u/s. 35D of the Act. The A.O also treated the sale of fixed assets adjusted by the assessee against the WDV of block of assets as short term capital gains (STCG) treating the transaction as slump sale. Aggrieved, the assessee filed further appeal before the CIT(A). The CIT(A) gave relief to the assessee with respect to all the above additions / disallowances made and the revenue is in appeal before the Tribunal against the order of the CIT(A).

Deletion of TP adjustment – Ground No.2 to 4

3. During the year under consideration, the assessee has sold finished goods to the tune of Rs.23,95,68,252/- to its AE BYD Precision manufacturing Co. Ltd. China. The assessee submitted that since its major customer Nokia India shut down its operations in Chennai and since the assessee had no other customer or buyer the finished goods had to be sold to AE as distress sale at lesser value. The assessee further submitted that the goods were ultimately sold by the AE to Nokia Group at a lesser rate and part of the goods was used by the AE for its own manufacturing. The assessee in the TP study for the purpose of ALP sale of Finished Goods adopted TNMM method as MAM and applied Gross Profit Margin i.e. Sales less Cost of production as the Profit Level Indicator (PLI) stating that the year under consideration is an extraordinary year due to shut down of operations of its only customer Nokia India. The assessee chose 4 comparables whose mean weighted average margin for 3 years was arrived at Rs.26.08%. The assessee compared the same with its own PLI of 37.69% to conclude that the international transaction of sale of finished goods is at arm’s length. The TPO rejected the TP study of the assessee and recomputed the PLI of the assessee at (-)26.75%. The TPO did not accept the submissions of the assessee with regard to distress sale and held that the Nokia India has announced the shut down in September, 2013 itself and the assessee-company still went on to manufacture the goods for Nokia models knowing fully well that it may not be able to sell the entire goods directly to Nokia India. The TPO further held that the claim of the assessee without any basis or records and conducted independent search to arrive at seven comparables whose margin ranged from 5.89 to 6.38%. Accordingly the TPO proceeded to make TP adjustment to the tune of Rs.10,70,45,309/-. On further appeal, the CIT(A) deleted the adjustment made by the TPO stating that:

“5. The submissions of the appellant were considered vis-a-vis the findings of the Transfer Pricing Officer:

5.1 The Transfer Pricing Officer in her order had stated that it is evident that the assessee company has regular transactions with its associated enterprises BYD Precision Manufacture Company Limited, China as sales has been booked with this AE even for FY:2013-14,

5.2 However, as it can be observed from the below table that the appellant’s sale to its associated enterprise BYD Precision manufacture Company Limited, China had significantly increased in the captioned FY:2014-15 as compared to the previous years:

5.3 From the above financial data, it can be observed that the sale BYD China has significantly increased during FY:2014-15 (7 times approx) which clearly indicates that ‘distress’ sale was made by the appellant to its AE. Therefore, the TPO’s statement that it is evident that the assessee company has regular transactions with its AE as sales has been booked with this AE even for FY:2013-14 is without any basis.

5.4 Further, the appellant has also submitted that the components/finished goods purchased by BYD China from BYD India were subsequently sold to Nokia Group at a price lower than their purchase price. Further, majority of the components which cannot be sold to Nokia Group were either used as raw materials for further processing or scrapped without further use, thereby resulting in further losses to BYD China. The details of sale price of components purchased from BYD India which were subsequently sold to Nokia Group has been filed.

5.5 Taking into account all the above facts stated above, it can be considered that FY:2014-15 was an extraordinary year to BYD India in terms of shutdown of Nokia which was the predominant customer of BYD India. Therefore, the international transaction in relation to distress sale to BYD China of INR 23,95,68,252 is at arm’s length and the TP adjustment of INR 10,70,45,309 made by the TPO is deleted.”

4. The Ld. Departmental Representative (DR) submitted that the assessee claimed before the TPO that the goods sold by it to its AE post shut down of operations are resold by the AE to Nokia group. The Ld. DR further submitted the assessee has not submitted any details in this regard before the TPO. The ld. DR also submitted that the CIT(A) while deleting the TP adjustment has stated that some details were furnished by the assessee during appellate proceedings but the CIT(A) neither discussed the details nor called for any remand report from the A.O. The Ld. DR argued that the claim of the assessee that there is no agreement between assessee and Nokia for supply of products is without any basis and that any prudent licensed manufacturer could foresee such eventuality as in the present case and would agree for a compensation in case of such unforeseen circumstances. The ld. DR further argued that the Nokia shutdown during FY 2014-15 was already envisaged in earlier year and the assessee still went on to manufacture the goods for Nokia knowing fully well that it may not be able to sell the entire goods is not acceptable. Accordingly, the Ld. DR submitted that the claim of the assessee that the distress sale to its AE of the products manufactured for Nokia India at a lesser rate is unsubstantiated and the CIT(A) is not correct in deleting the said adjustment.

5. The Ld. Authorized Representative (AR) of the assessee submitted that the assessee has no other customers for the goods manufactured for Nokia India and therefore had to make a distressed sale to BYD, China. The Ld. AR drew our attention to the year on year comparison of the sales made to BYD, China to submit that the significant increase in the sales to BYD, China is due to the fact that the assessee made a distressed sale and the said transaction is not regular business transaction of the assessee. The Ld. AR drew our attention to the details submitted with regard to the sale made to BYD, China and the subsequent sale made by BYD, China to Nokia Group (Page 97 to 105 of paper book) to substantiate that the entire goods sold by the assessee have been subsequently sold by the AE to Nokia group. Accordingly, the Ld. AR argued that the CIT(A) has rightly considered the impugned transactions as extraordinary item and as rightly deleted the TP adjustment.

6. We have heard the parties, and perused the material available on record. The assessee with regard to the international transaction of sale of finished goods has used GPM i.e. Sales less cost of production as its PLI for the reason that the year under consideration is an extraordinary year due to close off down of its major supplier Nokia India and that the assessee had to carry out a distress sale of the goods already manufactured to it AE in China. The TPO rejected the said contentions stating that there is no reason for the assessee to continue its manufacturing, when it is well aware of the proposed closure of Nokia India. The TPO also held that the assessee did not produce any agreement with Nokia India and has also not submitted the evidence of subsequent sale by the AE to Nokia group. The CIT(A) deleted the adjustment after considering the submissions made by the assessee in this regard. We notice from perusal of the financial statement of the assessee that a SEZ unit of the assessee at Orgadam which was manufacturing components of mobile phones for Nokia India was shut down during the FY 2014-15 and that the revenue from sales of finished goods to Nokia has come down to Rs. 12.16 crores from Rs. 379.25 crores as compared to earlier year. We further notice that the sale of finished goods for the year under consideration to AE has increased substantially to Rs.23.95 crores as against Rs.3.25 crores. Accordingly there cannot be dispute that the assessee has sold the finished goods manufactured for Nokia India to its AE in China. The contention of the revenue is that the assessee having known the proposed shut down should not have continued its production of components. It is a well settled position that AO cannot sit in the “armchair of a businessman” to question the prudence, wisdom, or effectiveness of an assessee’s commercial decisions. The commercial wisdom of the assessee cannot be examined using the lens of tax liability, since the prudence of the business decision is taken based on many commercial factors. The revenue’s scope is to ensure tax compliance and to examine the genuineness of the claim of the assessee considering the overall facts and circumstances. Accordingly in our considered view, the proposing TP adjustment based on a commercial decision of the decision of the assessee to continue its manufacturing till the close down of Nokia India is not tenable. The next contention of the revenue is that the assessee has not furnished the details of sale to AE and the subsequent sale by AE to Nokia Group. In this regard we notice that the assessee has submitted the detailed breakup of the sales to its AE and the details of subsequent sale / internal utilisation of goods sold to AE. Further the sale for the year under consideration made by the assessee to its AE cannot be held to be done in the normal course of business, when we consider the fact that the Nokia India for whom the assessee was manufacturing components exclusively shut down its operations mid year. Therefore, for the purpose of ALP determination the TPO ought to considered the extraordinary circumstances under which the impugned transactions were carried out by the assessee while bench marking. In the present case, the TPO has completely ignored the well recorded and adequately substantiated extraordinary circumstances while rejecting the bench marking exercise of the assessee in the TP study. The TPO has simply proceeded re-computing the PLI as OP/OC whereas the OC for the year under consideration includes expenses that are not fully absorbed due to the reduction in the revenue as a result of shut down of operations of Nokia India. Therefore we are of the view that the bench marking exercise carried out by the TPO without considering the events which have significant impact to the margins of the assessee cannot be sustained as they are not in accordance with the Rules laid down in this regard. Accordingly we see no reason to interfere with the decision of CIT(A) in deleting the TP adjustment made by the TPO. The grounds raised by the revenue in this regard are dismissed.

Disallowance of expenses – Ground No.5

7. During the year under consideration, the assessee debited an amount of Rs. 59,84,84,673/- of its profit and loss account towards various expenses. These expenses according to the assessee were incurred in relation to the business carried on by the assessee i.e., the business of manufacture of mobile components and business of trading in solar panels. The A.O held that these expenses are incurred towards the new business of manufacturing electric vehicles which the assessee is proposing to start post shutdown of its manufacturing activities. The AO held that the claim of expenses when the new business has not taken off during the year under consideration cannot be allowed since the same are not related to earning the income of the year. Accordingly, the A.O disallowed a part of the expenses to the tune of Rs. 43,26,63,304/- as preliminary expenses that are capital in nature. Aggrieved, the assessee filed further appeal before the CIT(A). The CIT(A) after considering the submissions of the assessee deleted the disallowance by holding that:

“7.1 The facts of the case have been carefully considered. The disallowance amounting to INR 43,26,63,304 has been split in to two parts. Double Disallowance amounting to INR 11,08,98,175 and the balance amounting to INR 32,17,65,129.

7.2 Double Disallowance :-

In this context the Financial Statements and the Tax Computation of the appellant was examined, and it is noted that the following expenses debited to the Profit and Loss Account has been voluntarily disallowed by the appellant in the Tax Computation.

7.3 With respect to depreciation amounting to INR 11,02,97,173 (2/3rd of the total expenditure), it is noticed that the Appellant had disallowed the entire depreciation amounting to INR 16,54,45,760 while determining the taxable income. Accordingly, disallowance of 2/3rd of the total depreciation again has resulted in double disallowance.

7.4 Further, INR 6,01,002 (2/3rd of INR 9,01,504) of disallowance pertaining to Provision for Doubtful Debts and Advance and disallowance on account of non-deduction of taxes was added back by the appellant in the tax computation.

7.5 As it was found that the appellant itself has disallowed the above expenditure in its computation statement, Assessing Officer is directed to delete the said addition.

7.6 Expenses treated as capital in nature:

7.7 In this context the Financial Statement, Memorandum of Association has been examined and it is noted that during the year under consideration, the appellant had two lines of business viz.,

1. assembly of components for mobile Manufacture, assembly and sub telephones and

2. Trading of solar panels.

7.8 The appellant had temporarily suspended operations in relation to manufacturing of mobile components on account of closure of one of its largest customers Nokia’s business. However, it has continued its trading of solar panels and continued to carry on its business operations for sustenance. An examination of the Financial Statements of the Company shows that it had continued carrying on the activity of trading in solar panels during the subject AY. The trading business was operational during the subject AY which is evidenced by the revenue amounting to INR 573,518,470 from trading of solar panels.

7.9 The financials of the company exhibit that the company had retained its work force and continued to pay salary to its Employees along with associated costs. The business of trading in solar panels also carries with it certain routine administrative expenses such as audit fee, consultancy charges, postage and other charges which are incidental to any business.

7.10 In this context, though, it is out of place, I would like to quote Taleb from his book “Black Swan”. It is reproduced as under to understand uncertainties, be it financial or otherwise. “It is easy to see that life is the cumulative effect of a handful of significant shocks. It is not so hard to identify the role of black swans, from your armchair (or bar stool). Go through the following exercise, look into your own existence, count the significant events, the technological changes, and the inventions that have taken place in our environment, since you were born and compare them to what was expected before their advent. How many of them come on a schedule? Look into your personal life, to your choice of profession, say or meeting your mate, your exile from your country of origin, the betrayals you faced, your sudden enrichment or impoverishment. How often did these things occur according to plan?”

7.11 The Assessing Officer’s premise talks of all things as certain, which may not be the case. This is an year in which the company had to shut down one of its business due to unforeseen circumstances and was under the uncertainty as to its further course of action. In such a juncture, it would be unfair to assume that the appellant has immediately contemplated a future plan and incurre expenditure towards the said new business.

7.12 The Company had ventured into the business of manufacturing of electronic automobile components only during the AY:2018-19. Accordingly, there is no possibility of incurring any expenses in AY:2015-16 in relation to new business which was decided to be undertaken only in AY:2018-19.

7.13 Taking into account all the above facts as well as judicial precedents pertaining to this case, it is clear that disallowance by the Assessing Officer is not tenable in law and hence, these grounds of appeal are allowed in favour of the appellant.”

8. The Ld. DR submitted that the CIT(A) has erred in stating that there is a double disallowance with respect to claim of depreciation for the reason that the assessee has disallowed the depreciation claimed in the books of accounts., The Ld. DR further submitted that the CIT(A) while stating so has failed to consider that the assessee has claimed depreciation as per the income tax act and therefore there is no double disallowance. The Ld. DR further submitted that the sale of solar panel during the year under consideration was more than 50% of the total revenue of the assessee and therefore the deletion of the disallowance on the ground that the assessee has retained the workforce who is engaged in the manufacturing activity is not correct. The ld. DR also submitted that the assessee is engaged in trading in solar panel and therefore there is no requirement for the assessee to retain the employee workforces who are engaged in the manufacturing activity. The ld. DR argued that the assessee could not substantiate the payment of salary and other expenses post shutdown of Nokia-India operations and therefore the CIT(A) is not correct in deleting the disallowance without verification of any documentary evidence in support of the impugned expenses. The ld. DR further argued that in the subsequent AYs i.e., 2016-17 & 2017-18 the only revenue of the assessee is other income and thus trading in solar panels is not being carried out by the assessee in a regular manner. Accordingly, the Ld. DR argued that claim of expenditure without any corresponding income and without any evidences should not have been allowed by the CIT(A).

9. The Ld. AR submitted that during the year under consideration the assessee was engaged in manufacturing of components for mobile handsets till July 2014 and simultaneously was also carrying on the business of trading in solar panels. The Ld. AR further submitted that the assessee had ventured into the business of manufacturing of electronic automobile components only during AY 2018-19 and accordingly treating the expenses incurred during the year under consideration as in relation to the business venture is not correct. The Ld. AR also submitted that as of 31^st March, 2015, the assessee had not foreseen venturing into automobile business and therefore there is no possibility of incurring any expenditure towards the new undertaking. The Ld. AR also drew our attention to the amendment made to the memorandum of articles which was amended only during the FY 2017-18 to include the new business to submit that during the year under consideration the assessee did not incur any expenditure towards its new business activity. The ld. AR argued that the assessee being a corporate entity has to keep the business running as a going concern and has to continue to incur the regular administrative expenses. The Ld. AR further argued that the employees engaged in the manufacturing of mobile components could not be retrench immediately on shutdown of Nokia-India operations and keeping in mind the welfare of the employees, the assessee continue to keep them on roles and paid salary. The Ld. AR also argued that the impugned payments therefore meet all the conditions laid out for claim of any expenditure u/s. 37 and therefore the CIT(A) has rightly allowed the expenditure.

10. We have heard the parties, and perused the material available on record. The AO during the course of assessment noticed that the assessee has incurred substantial expenses that are not commensurate with the revenue. The AO held that since the assessee has stopped the manufacturing unit due to shut sown of Nokia India, the expenses cannot relate to the said activity and that the expenses should be for the future ventures of the assessee. Accordingly the AO disallowed a portion of the expenses holding it is in the nature of preliminary expenses that is capital in nature. It is relevant to note that the AO while doing so has not questioned the genuineness of the expenses and has also not doubted the business purpose. According to the AO the “business” for which it is incurred is yet to commence and hence cannot be allowed for the year under consideration. We in this regard notice that the assessee was carrying on its manufacturing activity till July 2014 and was also doing trading in solar panel. From the perusal of the financial statements of the assessee we notice that the there has been a reduction in the expenses incurred by the assessee during the year under consideration, though not in the same proportion as the revenue. We further notice that the income from trading in solar panel has increased during the year under consideration and there is no income from the activity of manufacturing electric vehicles. We also notice from Notes to Accounts (Note 2(a)) that the assessee is exploring the alternate use for the factories and the financial statements are prepared as going concern. It is noticed that the AO while making the disallowance, has held that the part of expenses are incurred for the future business. However the AO has not brought has not recorded any finding with regard to the basis on which such conclusion is arrived at. It is further noticed that the AO did not call upon the assessee to furnish any details pertaining to the future business but has simply concluded that the expenses are incurred now for the said purposes. Therefore we are of the view that there is no concrete basis for the AO to record the finding that the expenses are incurred for the future expansion more so when the new business of manufacturing electric vehicles is commence only from AY 2018-19. Therefore we see merit in the submission of the assessee that when the expenses meet the criteria for claiming deduction u/s.37, the AO cannot make an adhoc disallowance based on an unsubstantiated contention that it is incurred towards new business yet to be commenced. Having held so, we notice that the CIT(A) has recorded a finding with regard to double disallowance of depreciation and provision for doubtful debts. On perusal of records we notice that the CIT(A) has rightly held that there is a double disallowance with regard to provision for doubtful debts since the assessee in the computation of income has already disallowed the same. However, we are unable to agree with the same finding with regard to depreciation since the assessee in the computation has disallowed the book depreciation but has claimed deduction towards depreciation under the Act. Accordingly, there is merit in the argument of the ld DR that double disallowance with regard to depreciation is not the correct ground for deleting the disallowance. We have already held that the expenses claimed by the assessee to keep the business running as a going concern cannot be disallowed on adhoc basis. Accordingly we see no infirmity in the decision of CIT(A) in deleting the disallowance of expenses and the grounds raised in this regard by the revenue are dismissed.

Addition towards short term capital gains – Ground No.6

11. During the year under consideration, the assessee has sold assets in the nature of plant and machinery amounting to Rs. 45,37,96,425/- and the said consideration was reduced from the block of plant and machinery. The A.O held that the sale of plant and machinery is in the nature of slump sale since the plant and machinery which was sold was specifically catering to manufacture of mobile components which is a separate undertaking. Accordingly, the A.O treated a sum of Rs. 24,65,26,951/- as short term capital gains (STCG) towards slump sale. The CIT(A) deleted the addition stating that:

“8.3 The submissions of the appellant were considered vis-a-vis the findings of the AO. In this context the Fixed Asset Register, workings in relation to the sale of assets and the Financial Statements were examined.

8.4 Undertaking shall include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole but does not include Individual assets or liabilities or any combination thereof not constituting a business activity. According to the definition of undertaking it can be understood that the assets transferred shall constitute a unit or a business as a whole and not assets or combination of assets. The appellant has transferred some of the plant and machinery during the year and retained the remaining assets which cannot be treated as an undertaking.

8.5 Based on the examination of the Fixed Asset Register it is seen that the appellant has transferred assets on an itemized basis and sale consideration is assigned to each line item and not on a lumpsum basis. The Plant and Machinery were transferred individually and on various dates with sale consideration assigned to each line item of the asset transferred. Hence, the same cannot be treated as a transfer of undertaking leading to slump sale.

8.6 Further, the case law relied on by the AO relates to exclusion of defunct or superfluous assets while transfer of undertaking. Further, the inference drawn by the AO in relation to the case that it is not necessary to transfer all assets to consider the transfer as a slump sale in not in line with the crux of the judgement.

8.7 Moreover, in the present case the Appellant has sold only sold part of the assets and has retained majority of the assets as it can be evidenced by the closing WDV amounting to INR 856,124,657 which are functional Plant and Machinery and not defunct and hence the said case is distinguishable from the facts and circumstances of the case of the appellant. Accordingly, it is clear from the facts of the case that, the Appellant has sold few machineries as itemized sale and not an undertaking as held by the Assessing Officer. Hence, for the reasons provided above, the same cannot be considered as slump sale.

8.8 Thus taking the facts as well as law, this addition also cannot be sustained and the Assessing Officer is directed to delete the addition of Rs.24,65,26,951/-The appellant succeeds on grounds 4.1 to 4.6.”

12. The Ld. DR submitted that the assets retained by the assessee in the block of plant and machinery are general assets and the assessee has sold the core assets pertaining to the mobile manufacturing unit. The Ld. DR further submitted that since the assessee had sold the assets immediately after the suspension of production of mobile components goes to prove that the specific plant and machinery used for manufacturing activity are sold by the assessee. Accordingly, the ld. DR submitted that the A.O has correctly treated the impugned transaction as a slump sale since the assessee has disposed off the assets pertaining to the specific undertaking i.e, the manufacturing unit.

13. The Ld. Authorized Representative (AR) of the assessee submitted that the contention that the assessee has sold the entire assets in the plant and machinery block is not correct since the assessee has sold only a part and the block continues to exist as on 31.03.2015. The Ld. AR further submitted that the assessee has adjusted the sale consideration against the block since the WDV of the block was more than the sale consideration as per the provisions of section 32 of the Act. The Ld. AR also submitted that in a slump sale the assets are not identified individually for the purpose of sale and the sale takes place for a lump sum consideration whereas in assessee’s case individual assets were identified and sold on different dates along with separate invoices which goes to prove that the impugned transaction is not a slump sale. The Ld. AR argued that the individual sale of the plant and machinery does not fall within the definition of slump sale as per Section 2(42C) of the Act since the impugned transaction does not satisfy the conditions for a transaction to be treated as slump sale such as an undertaking has to be transferred for lump sum consideration where the values should not be assigned to individual assets and liabilities. The Ld. AR drew our attention to the extraction from the fixed assets register (page 147 to 157 of paper book) to submit that the assets are sold for individual consideration and are sold item wise.

14. We heard the parties and perused the material on record. During the year under consideration, the assessee adjusted the consideration received towards sale of plant and machinery against the block of assets for the purpose of claiming depreciation. The AO held that the assets sold belong to the manufacturing unit shut down by the assessee and therefore the transaction is a “slump sale”. Accordingly the AO treated the gain from the said sale as short term capital gain to be brought to tax. The CIT(A) deleted the addition stating that the impugned transaction is not resulting in transfer of an undertaking and therefore cannot be a slump sale. In this regard it is relevant to look at the definition of slump sale u/s.2(42A) of the Act which reads as under –

“slump sale” means the transfer of one or more undertaking, by any means, for a lump sum consideration without values being assigned to the individual assets and liabilities in such transfer.

Explanation 1.—For the purposes of this clause, “undertaking” shall have the meaning assigned to it in Explanation 1 to clause (19AA).

Explanation 2.—For the removal of doubts, it is hereby declared that the determination of the value of an asset or liability for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities.

Explanation 3.—For the purposes of this clause, “transfer” shall have the meaning assigned to it in clause (47);

15. The definition of “Undertaking” as per Explanation 1 to section 2(19AA) shall include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity. A combined perusal of the above definitions makes it clear that for a transaction to be considered as a slump sale there should a transfer of undertaking for a lump sum consideration without values being assigned to the individual assets and liabilities in such transfer. In the present case, from the perusal of the workings of profit/loss of sale of fixed assets (pages 147 to 157 of paper book) we notice that the sale value is identified for each of the assets and the profit/loss on the sale is also identified asset wise. Further from the perusal of the fixed assets schedule, we notice that the balance in Plant & Machinery continue exist. The AO has treated the transaction as slump sale on the ground that the assets pertaining to the manufacturing unit which is closed down are sold and therefore it is a transfer of an undertaking. We in this regard notice that in the present case, the manufacturing unit of the assessee has not been sold a whole from the perusal of fixed assets schedule we notice deletion in plant and machinery, tools and furniture block. Further there is nothing recorded by the AO that the assets transferred entirely belong to the manufacturing unit which the part of the undertaking. As mentioned in the earlier part of this order, the notes accounts clearly mentions that the assessee is exploring the possibilities of utilizing the factory unit earlier used for manufacturing mobile components and therefore the financial statements are prepared as going concern. From these facts, we see merit in the argument that the impugned transaction is sale of certain individual assets of the manufacturing units and not as part of transfer any undertaking for lump sum consideration. Accordingly, we hold that there is no infirmity in the order of the CIT(A) in deleting the addition made towards slump sale. The grounds raised in this regard are dismissed.

16. Ground No.1 and 7 are general in nature not warranting separate adjudication.

17. In the result, the appeal of the Revenue is dismissed. Order pronounced on 16^th day of April, 2026 at Chennai.