Direct tax laws update - V. K. Subramani - Article published in Business Advisor, dated October 10, 2014 http://www.magzter.com/IN/Shrinikethan/Business-Advisor/Business/

1. Volume IX Part 1 October 10, 2014 19 Business Advisor
Direct tax laws update
V. K. Subramani
1. Payments for use of customer database and transfer
of certain skilled and trained employees are revenue
expenditure:
In CIT v. IBM Global Services India P Ltd (2014) 107 DTR
(Kar) 372, the assessee claimed Rs 530 lakh towards
payment for using the customer database as revenue
expenditure. The Assessing Officer held that the customer
database provided enduring advantage or benefit to the
assessee since by using the same, the assessee can
successfully run its business over a considerable period of time and hence
is a capital expenditure. The CIT (Appeals) upheld the order of the Assessing
Officer. The tribunal held that the payment towards use of customer
database as revenue expenditure. The apex court, in CIT v. Madras Auto
Service (P) Ltd (1998) 238 ITR 468 (SC), has observed as under: ―In order to
decide whether this expenditure is revenue expenditure or capital
expenditure, one has to look at the expenditure from a commercial point of
view. What advantage did the assessee get by constructing a building which
belonged to somebody else and spending money for such construction?
The assessee got a long lease of a newly constructed building suitable to its
own business at a very concessional rent. The expenditure, therefore, was
made in order to secure a long lease of new and more suitable business
premises at a lower rent. In other words, the assessee made substantial
savings in monthly rent for a period of 39 years by spending these amounts.
This saving in expenditure was a saving in revenue expenditure in the form
of rent. Whatever substitutes for revenue expenditure should normally be
considered as revenue expenditure. Moreover, the assessee in the present
case did not get any capital asset by spending the said amounts. The
assessee, therefore, could not have claimed any depreciation. Looking to the
nature of the advantage which the assessee obtained in a commercial sense,
the expenditure appears to be revenue expenditure‖.
Also, in Empire Jute Co Ltd v. CIT (1980) 124 ITR 1 (SC) the apex court
observed as under: ―When dealing with cases of this kind where the
question is whether expenditure incurred by an assessee is capital or
revenue expenditure, it is necessary to bear in mind what Dixon J. said in
Hallstrom‟s Property Ltd v. Federal Commr. Of Taxation 72 CLR 634: ‗What is
an outgoing of capital and what is an outgoing on account of revenue

2. Volume IX Part 1 October 10, 2014 20 Business Advisor
depends on what the expenditure is calculated to effect from a practical and
business point of view rather than upon juristic classification of the legal
rights, if any, secured, employed or exhausted in the process‘. The question
must be viewed in the larger context of business necessity or expediency. If
the outgoing expenditure is so related to the carrying on or the conduct of
the business that it may be regarded as an integral part of the profit earning
process and not for acquisition of an asset or a right of permanent
character, the possession of which is a condition of the carrying on of the
business, the expenditure may be regarded as revenue expenditure‖.
Also, the assessee incurred Rs 938.58 lakh paid to parent company towards
transfer of certain skilled and trained employees. This claim as revenue
expenditure was also upheld by the court.
2. Admission by vendor of the actual sale consideration will impact
addition under section 69B in the hands of vendee:
In CIT v. P.M.Aboobacker (2014) 107 DTR (Ker) 383, the assessee acquired a
property for a consideration of Rs 24 lakh mentioned in the sale deed. The
vendor in a statement under section 132(4) admitted the actual sale
consideration for the property as Rs 78.20 lakh. It was also admitted that
the property was acquired originally for Rs 66.20 lakh earlier. Based on the
statement of the vendor, the Assessing Officer wanted to tax the difference
between the recorded consideration and actual consideration (as per the
statement of the vendor) as income of the assessee-vendee under section
69B of the Act.
The assessee asked for cross examining the vendor to prove the point of
actual cost of acquisition being the amount recorded in the conveyance deed
viz. Rs 24 lakh. However, the vendor stood by the statement recorded under
section 132(4) and claimed that the sale consideration was Rs 78.20 lakh
and not Rs 24 lakh. The tribunal held that in the absence of any evidence
linking the payments stated to be paid by the assessee merely based on the
statement of the vendor it cannot be stated that the assessee has incurred
on-money payment. It held that it is the duty of the revenue to prove beyond
doubt that additional consideration has exchanged as, in the absence of any
material and evidence, such a decision cannot be taken on mere
assumption or probabilities.
The court held that the evidence held by the Revenue, viz. statement
recorded under section 132(4), is probable evidence. If the assessee wanted
to disprove the evidence he could have proved by giving some evidence to
show the market value of the asset in the locality. No such evidence was
adduced by the assessee. The court held that the revenue has to prove the

3. Volume IX Part 1 October 10, 2014 21 Business Advisor
existence of under-valuation made by the assessee and that the assessee
has paid more than what is recorded in the conveyance deed. When it is
proved, the onus would shift to the assessee to prove otherwise. The
assessee did not provide any evidence to disprove the contention of the
revenue. Accordingly, the uncontroverted evidence of the vendor justified
the addition in the hands of the vendee for the excess money paid for
acquisition of property. The court reversed the order of both the CIT
(Appeals) and tribunal and confirmed the order of the Assessing Officer.
3. Transfer of one division in consideration for the issue of preference
share is not a slump sale:
In CIT v. Bharat Bijlee Ltd (2014) 107 DTR (Bom) 249, the assessee-company
exchanged its lift division in return for the preference shares and bonds
issued by the transferee-company. The valuation of assets was made by
means of a valuation report. The Assessing Officer treated the sale of
division as slump sale and applied section 50B. The transfer of lift
operations was under the scheme of arrangement sanctioned by the
Bombay High Court and was by invoking section 391 read with section 394
of the Companies Act, 1956. The tribunal referred to apex court decision in
the case of CIT v. Motor & General Stores (P) Ltd (1967) 66 ITR 692 (SC), and
posed the question as to whether such a transaction was subject matter of
―exchange deed‖, and could be termed as a sale and alternatively whether
the consideration of sale is not the market value of the shares as on the date
of transaction, viz. Rs 95 per share but the face value of the shares.
The revenue argued the case based the decision in the case of SREI
Infrastructure Finance Ltd v. ITSC (2012) 70 DTR (Del) 153. The court
distinguished the applicability of Delhi High Court judgment by holding that in
that case the consideration was partly in money and partly by means of
shares of a third company issued in favour of the transferor. Whereas in this
case, the court observed the transfer was exclusively on shares or bonds. The
transfer hence could not be termed as slump sale. It agreed with the
assessee‘s contention that the applicability of section 50B has to be
considered in the facts and circumstances of each case. Only if the transfer
is by way of sale, it could be termed as slump sale and section 50B would be
attracted.
Accordingly, it did not apply the Delhi High Court decision to decide this
case. As the consideration was by way of preference shares of the transferee
and no money was involved, it was held that it is not a slump sale for
applying section 50B.
(V. K. Subramani is Chartered Accountant, Erode)