* IN THE HIGH COURT OF DELHI AT NEW DELHI
Decided on: 05.12.2016
+ W.P.(C) 5036/2016
LAXMI AUTOMATIC LOOM WORKS LTD. ......Petitioner
Through: Sh. S. Ganesh, Sr. Advocate with Ms. Suruchii
Aggarwal, Advocates.
Versus
DEPUTY COMMISSIONER OF INCOME TAX (RECOVERY)
AND ANR. .......Respondents
Through: Sh. D.R. Jain, Sr. Standing Counsel, for
Respondent No.1.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MS. JUSTICE DEEPA SHARMA
MR. JUSTICE S. RAVINDRA BHAT
%
1. The issue that arises in the present Writ Petition is whether the benefit
of exemption from Capital Gains Tax can be denied to an undertaking sought
to be revived by the Board for Industrial and Financial Reconstruction
(BIFR), by giving unwarranted importance and weightage to the fact that the
Petitioner's net worth has turned positive without considering that the
Company's carried-over losses as on 31.03.2015 amounts to `887.23 lakhs
and the fact that it has to create Capital Redemption Reserve of `850 lakhs
out of profits for redemption of 6% cumulative redeemable preference shares
due by year 2018-19, i.e. in the three years following 2014-15.
2. The petitioner, which is engaged in textile machinery manufacture,
became sick in 2001, and its case was referred to the BIFR as Case No.225
W.P.(C) 5036/2016 Page 1
of 2001. On 19.09.2003, the scheme for revival of the Petitioner was
sanctioned by BIFR. The BIFR appointed Indian Bank as monitoring agency
to monitor the progress of implementation of the sanctioned Scheme. In
terms of the viability projected in the sanctioned scheme of 2003, the net-
worth of the company was expected to turn positive by 2005-06 and its
accumulated losses were expected to be eliminated during 2006. These
projections remained unfulfilled, however, and there was a sharp decrease in
the company's net-worth due to which it could not generate the necessary
internal accruals. The Petitioner contends that this was inasmuch as it could
not take any positive steps for the sale of its assets, as contemplated in the
scheme of 2003; and it could also not reach an amicable settlement with the
Employees' Union in respect of BIFR's package and the terms of voluntary
retirement; it could also not dispose of its surplus assets and generate the
requisite amount of funds for effective revival. The BIFR, therefore,
reviewed and modified the rehabilitation scheme by an order passed on
18.02.2009. The petitioner then approached BIFR through an application,
requesting it to direct the income tax authorities to inter-alia, exempt the
company from capital gains tax on the sale of assets, which was to be made
by the Petitioner as part of the Modified Rehabilitation Scheme. On
09.11.2009, BIFR passed an order allowing that application. It directed the
Directorate of Income Tax (Recovery) to consider the Petitioner company's
request for exemption from payment of capital gains tax on the sale of assets.
In the BIFR's proceedings/order dated 09.11.2009 a new Para 10.7 was
included in Modified Scheme 2009, as quoted below:
"The Board on consideration of the material on record and also the
submissions made noted that although the Bench passed an order
W.P.(C) 5036/2016 Page 2
directing DIT (RECOVERY) to consider granting extension of the time
for set off the carry forward losses upto 31.03.2013 and also consider
exempting the Company from capital gains tax on sale of the assets,
the said Clause has not been included in MS09. The Bench therefore
directed that a new para as para 10.7 be inserted in MS09 to read as
under:
"Para 10.7 Directorate of Income Tax (RECOVERY)
(1) To consider to grant extension of time for set off the carry forward
losses upto 31-03-2013 as against 31-03-2009.
(2) To consider to exempt the company from Capital gains tax on sale
of assets"
3. This order was made after hearing the advocate appearing for the DIT
(Recovery). The petitioner highlights that the DIT (Recovery) had no
grievance against the said direction of the BIFR dated 09.11.2009 and,
therefore, did not prefer any appeal against the said direction, but allowed
the same to become final. The DIT (Recovery), therefore, clearly accepted
the position that if the facts and circumstances warranted, the Petitioner
company would be entitled to exemption from capital gains tax in respect of
assets transferred by it and such exemption should be granted to it. Further to
the direction of BIFR, the Joint Director of Income Tax (Recovery) passed
an order dated 29.11.2012 rejecting the request for exemption from capital
gains tax. This order was passed on the basis of certain projected figures
relating to the petitioner's expected profits in future years. The Petitioner
then filed a writ petition, being W.P.(C) 4367/2013 before this Court
challenging the legality and validity of the said order of the Joint Director
dated 29.11.2012. Since the return of income for the AY 2010-11 was due
by 15.10.2010, the Petitioner, pending the receipt of the order of the DIT
(Recovery) filed its return of income for the AY 2010-11 on 22.09.2010
W.P.(C) 5036/2016 Page 3
without subjecting the capital gains to tax based on the sanctioned scheme,
recommending the relief of capital gains tax as well as the sanctioned
scheme. The assessment order passed in the Petitioner's case for the A.Y.
2010-11 dated 08.02.2013 did not include the capital gain arising from
transfer of the assets. It was, therefore, not necessary for the Petitioner
Company to get the benefit of exemption from the capital gains tax. This was
brought to the notice of this Court on behalf of the DIT (Recovery) and
accordingly, the Petitioner's said Writ Petition No.4367/2013 was disposed
of as infructuous, as it was not necessary to consider the request for grant of
exemption on capital gains arising from the transfer of assets under the
scheme. The order of this Court, disposing of the writ petition is as follows:
"It is stated that the Assessing Officer accepted the Petitioner's
contention. The learned counsel for Petitioner states that in the
circumstances there is no surviving grievance and seeks liberty to
approach the Court in case the authority pass any adverse orders
subsequently. Liberty granted. The Petition is dismissed as
infructuous."
4. The order made by the income tax authorities after disposal of the writ
petition again denied relief to the petitioner, based on an appreciation of the
record and that the figures shown did not justify waiver of capital gains tax.
This order was again challenged, in W.P.(C) 1568/2015, which was disposed
of on 15 February 2016 in terms of the following order:
"Learned counsel for the Respondents has not been able to
substantiate the plea that if there is any difference between the
projections and the actuals to the detriment of the proposer, that
would have to be absorbed by the proposer. Learned counsel for the
Respondents drew the attention of the Court to the order passed by the
Appellate Authority for Industrial and Financial Reconstruction
W.P.(C) 5036/2016 Page 4
('AAIFR'). That order requires the Income Tax Department to accept
or reject the plea for grant of a concession or relief in terms of the
Scheme presented before the BIFR. The AAIFR observed that "the
Department should have only considered the proposed concession and
taken its own decision." That order does not by any means suggest
that when there are actual figures available at the time of the decision
to be taken by the Department, reliance can be placed on the
projections of the Petitioner which were submitted at the time of
submission of the scheme before the BIFR. In any event, it does not
support the plea of the Revenue that the difference between the actuals
and the projected figures should be absorbed by the Petitioner.
3. Consequently, while setting aside the order dated 29 thNovember
2012 W.P(C) No. 1568/2015 passed by the Directorate of Income Tax
('DIT') Recovery, the Court requires the DIT (Recovery) to once again
consider the proposed scheme and the question of entitlement of the
Petitioner to concession as sought for by the Petitioner. A fresh
decision based on the actual figures submitted by the Petitioner will
be taken. It is open to the Department to elicit all the necessary
information that is required by from the Petitioner in a time bound
manner and take a fresh decision not later than eight weeks from
today. If the Petitioner makes a request in that regard, a hearing will
also be afforded to the Petitioner before the decision is taken ."
5. The Income Tax authorities issued notice to the petitioner and after
considering the materials furnished to them as well as the submissions made
in this context, rejected the request vis-à-vis capital gains exemption,
through the impugned order of 19.04.2016. The said impugned order reads
as follows:
"7. In compliance with the direction of Hon'ble High Court, the
Directorate sent a letter dated 02-03-2016 giving opportunity to the
company to file documents/ submissions either in writing and/or in
person, The company filed its replies vide letters dated 26-02-2016,
04-03-2016, 07-03-2016 (letter dated 07-03-2016 was filed by the
W.P.(C) 5036/2016 Page 5
company's representative in person on 09-03-2016) and 10-03-2016
enclosing therewith, copies of the comparative statements of projected
and actual balance sheets, details of income, surplus cash, returns
filed etc. Company has also stated that its actual performance for the
period F.Y.. 2008-09 to F.Y. 2012-13 is much lower (actual sales/
other income/ cash accruals less than 50% of the projected figures)
than the projections shown in the sanctioned scheme.
8. Replies filed by the company as well as the information received
from field authorities earlier through letter dated 11-12-2015 and
other information available on record have been considered earlier,
All the actual financial results, wherever available, have been taken
into consideration.
9. It is noted that:
9.1 The actual figures of actual sales/ other income/ cash accruals are
less than 50% of the projected figures shown in the modified
rehabilitation scheme as sanctioned by the Hon'ble BIFR. However, it
is the company which is solely and wholly responsible for such a
situation, Income Tax Department has neither levied any tax nor took
any other action against the company during this period and
therefore, cannot be blamed for such a situation/poor performance of
the company: It is also noted that such poor implementation of the
scheme was also net brought to the notice of BIFR by the company. It
is therefore clear that company's stand seeking relief on the ground of
achievement of poor results by it by mars: than 50% of the projected
figures is not tenable legally as well astechnically. It is a settled
principal that one cannot be given benefit of one's own default.
9.2 It is further noted that the coin actual figures i.e. upto F.Y. 2014-
15, financials for which have, been audited adopted and income tax
returns filed, were not furnished by the company and were obtained
from the field authorities. A perusal of it these shows that the company
is running very well in all respects, operational as Well as financial.
As on 31.02.2015,company is having huge surplus cash/fund flow,
Company has also failed to show/wove that any tax has been
levied/leviable on it in respect of said capital gain. Still, however, tax
W.P.(C) 5036/2016 Page 6
on capital gain, if at all leviable, is much below the surplus cash
available with the company, payment of which is not going to affect it
adversely as even after payment of such tax, company will be left with
substantial surplus funds available with it.
9.3 Thus, the legal/actual/factual position shows that the company
cannot be said to be in need of any relief from the Income Tax
Department and it can very well survive without grant of any Income
Tax relief. In fact, the company has already attained an advanced
stage of its revival and there is no need to exempt the Capital Gain
Tax liability at all because it will be against public interest to grant
such exemption of tax liability.
Accordingly, relief relating to Capital Gain tax has not been granted
to the company."
6. The petitioner contends and its senior Counsel, Mr. S. Ganesh, argues
that the fact that the Petitioner Company's net-worth has become positive
only indicates that its total assets are in excess of its liabilities. The Deputy
Director, however, completely failed to appreciate that even though there
was a small excess of assets over liabilities, nevertheless, there was a huge
amount of accumulated losses of `1,773,79 lakhs as on 31.03.2010, which
had not been made good; and this fact by itself warranted and required the
grant of exemption from capital gains tax to the Petitioner. Mr. Ganesh
further argues that the impugned order does not consider the financial and
liquidity strain, which the Petitioner Company would be subjected to, if the
Petitioner was compelled to pay the amount of capital gains tax. It is
submitted that, having regard to the fact that this is the third round of
litigation, no purpose whatsoever would be served in merely setting aside the
impugned order and remanding the matter for fresh consideration and for the
passing of a de-novo order. It is submitted that, having regard to the
W.P.(C) 5036/2016 Page 7
indisputable facts and figures on record and the fact that this is the third
round of litigation, the interests of justice require that this Court to issue a
writ and order directing the Respondents to grant the benefit of capital gains
tax exemption to the Petitioner.
7. It is argued that the impugned order failed to consider that the
Petitioner Company's carried over losses as on 31.03.2015 remain at `887.23
lakhs and the net worth though has become positive as on 31.03.2010, the
Company has not wiped out its losses fully as on 31.03.2015. The Company
is required to create Capital Redemption Reserves of ` 850 Lakhs to redeem
its 6% Cumulative Redeemable Preferences Share of `100/- each in
February 2020. It is stated that no funds outflow was sanctioned in the
Modified sanctioned scheme in view of the capital gains tax waiver
contemplated. The capital gains tax liability of `331.68 lakhs would
substantially imperil the financial health of the petitioner and push it into an
uncontrollable spiral of indebtedness from which it would lapse into
sickness. It is argued that the BIFR scheme did not envision the denial of
capital gains tax waiver or exemption; that was integral to the modified
scheme. In fact, the assets sold (for which capital gains tax liabilities arose)
were for the satisfaction of the company's other liabilities and to place it in
the direction of financial recovery. The denial of the requested exemption is
neither in the interests of the company, nor for that matter, in the interests of
the revenue, because the alternative, i.e payment would result in bankrupting
the company, deprivation of employment and deprivation of future revenues
that would accrue as taxes.
8. It is argued on behalf of the revenue that the profitability of the
company has been steadily on the rise; it is submitted, in this context that the
W.P.(C) 5036/2016 Page 8
total income reported (before setting-off unabsorbed depreciation and losses)
was: `92,47,346 for 2013-14; `2,70,03,675 and ` 3,57,74,160 for 2015-16. It
is highlighted that the Audited Accounts for the F.Y. 2014-15 showed that
the Petitioner Company had surplus cash of `670.0 lakhs as on 31-03-2015.
As the payment of the tax liability on Capital Gains, if any, was to be made
in the Current Year i.e. F.Y. 2016-17 only and the financial position of the
Petitioner Company showed enough strength and capacity to absorb the
Capital Gain Tax liability, the relief on account thereof was not allowed. The
figures of Income, surplus cash and current assets as culled out from the
Audited Accounts for the F. Y. 2013-14 and 2014-15 obtained from the
Assessing Officer reinforced this conclusion. It is argued that on going
through the returns of income and Audited Accounts of the petitioner
company for the F.Y. 2011-12 onwards, it was found that the petitioner
company was earning huge profits and was out of sickness. As such, there
was no need to grant any tax
exemption to the petitioner company. Therefore, the respondent department,
in compliance of this court's order dated 15.02.2016, passed the fresh
impugned order dated 19.04.2016 holding that as the petitioner company was
earning huge profits, it should be able to pay the tax liability arising on
capital gain income and that, therefore, it was not entitled to any tax
exemptions reliefs.
9. Section 32 of the Sick Industrial Companies (Special Provisions) Act,
1985 [hereafter "the Act" which provides for the rehabilitation of sick
companies under orders of the BIFR], clearly states that any direction issued
by that authority would have an overriding effect notwithstanding any other
provision or any law with a few exceptions. In the present case, para 17(i) (c)
W.P.(C) 5036/2016 Page 9
of the BIFR's order requested the Director of Income (Recovery) to consider
grating extension of time for set-off of carry forward losses up to 31.03.2013
as against 31.03.2009. In addition, the said Director of Income Tax
(Recovery) was "requested to consider to exempt the company from capital
gains tax on sale of assets." The previous history of this case would show
that the income tax authorities by two separate orders made on 05.09.2012
and 29.11.2012 rejected the request for waiver of capital gains tax. The
previous orders, especially the order made after the first remand (dated
29.11.2012) noticed carry forward or brought forward business loss to the
tune of `19.58 crores relating to AY 1998-99 to 2011-12. The projected
profit of the assessment year in the rehabilitation period, i.e. AY 2009-10 to
2013-14 amounted to `29.34 crores. The respondent revenue permitted stay
of brought forward business losses against the projected profit for 8 years
and allowed set-off of balance forward business losses of `5.48 crores, i.e.
`19.58 crores (-) Rs.14.09 crores of AY 2009-10 and 2011-12 within the
normal period of three years. The order of the Joint Director of Income Tax,
however, denied the relief in respect of capital gains tax on the ground that it
could be set-off of against unabsorbed depreciation so that the respondent's
fear of unviability in the event of outgoing of tax could be addressed.
10. This Court's order of 15.02.2016 directed the Director of Income Tax
to consider the proposed claim and the question of petitioner's entitlement to
concession on the basis of the actual submission figures submitted by it. The
income tax authorities were at liberty to elicit all necessary fresh figures and
documents in this regard. The impugned order is premised on the opinion
that the actual sales and other cash accruals were less than 50% of the
projected figures, within the figures projected in the rehabilitation scheme.
W.P.(C) 5036/2016 Page 10
The order also notes that this was on account of the assessee petitioner's own
functioning and for which revenue could not be blamed or faulted. The order
also noted that actual figures up to FY 2014-15, financials of which were
audited and adopted were not furnished by the company but were obtained
by the field authorities. The order notes further that these figures show that
the company has huge surplus funds and flow. The petitioner urged in this
regard that even though facially the funds flow appears to be convertible and
profits are on the rise, yet, having regard to the preference share liability, if
the capital gains tax is insisted, not only the profitability would be wiped-out
but the company might become sick. The petitioner also has placed on record
the annual report for 2014-15 in support of its argument that it has large
component of liability, i.e. claims for refund of security deposit and further
liability of `8.5 crores towards the 6% cumulative redeemable preference
shares. Section 32 of the Act confers primacy upon the orders of BIFR. In
the present case, the BIFR directed income authorities to consider granting
relief on two aspects carry forward business losses and their absorption
having regard to projected profits in terms of the modified rehabilitation
scheme. That relief has concededly been granted; it is a substantial one to the
extent of `14.09 crores. The question, therefore, is whether the income
authority's refusal to grant relief on the basis of the actual figures of
profitability in the circumstances of the case is warranted.
11. This Court notices that though the modified scheme was issued in
2009, the consideration and grant of relief took place on 29.12.2012 by the
income tax authorities when they actually took note of the projections. It is a
matter of record that the company achieved net worth and had in fact moved
out of the rehabilitation phase in 2011. That was the rationale for this
W.P.(C) 5036/2016 Page 11
Court's decision on 15.02.2016 that those actual figures should be taken note
of. It is here that the company's functioning became material. The income
tax authorities now feel that whilst the decision of carry forward was
justified, the figures now based upon the functioning after rehabilitation
reveal a different story, i.e. that the company has funds and that there was
less than half the projected profits for a certain period having regard to the
modified scheme. Now, as far as the later aspect is concerned, the income
tax authority's view cannot be faulted. It is based upon objective assessment
of materials on record. As to the other aspect, i.e. that the company is in
possession of funds and as of late, shown profitability, the Court has in the
previous part of its judgment noted that profitability has indeed been on the
increase. In these circumstances, the question is whether rejection of request
for exemption from payment of central government taxes (of `3.31 crores),
is justified or an arbitrary one. There is no denial of the fact that the
company has shown profitability. Its liability to redeem the preference shares
is in the future. In the circumstances, the possibility of its incurring losses in
the event of payment of capital gains tax cannot be ruled out. That such
losses might arise could also be within the normal course of any normal
business enterprise's functioning. In the circumstances, the view of the
respondents that exemption from payment of capital gains tax is not
warranted cannot be held illegal.
12. The Court is aware, at the same time that in the assessments
completed till date, the petitioner's liability had not in one sense been
crystallized. The remand to the income tax authorities on three occasions led
to fresh orders based upon fresh assessment of the facts and circumstances
on each occasion. Having regard to these peculiar facts, a direction is issued
W.P.(C) 5036/2016 Page 12
to the respondents not to charge interest or penalty on the capital gains tax
amounts in the circumstances of the case for the duration that the matter
remained pending in these proceedings and all prior proceedings.
13. The writ petition is allowed in terms of the directions in the preceding
paragraph even while upholding the liability to pay capital gains tax. No
costs.
S. RAVINDRA BHAT
(JUDGE)
DEEPA SHARMA
(JUDGE)
DECEMBER 5, 2016
W.P.(C) 5036/2016 Page 13
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