Unreported Decisions – September 2019

By Ajay R. Singh

1. SECTION 43 READ WITH SECTION 32 – LIQUIDATED DAMAGES RECEIVED FOR DELAY IN DELIVERY BY THE VENDOR, WHETHER LIABLE TO BE REDUCED FROM COST OF ASSETS – SUCH LIQUIDATED DAMAGES ARE NOT TO BE REDUCED FROM THE COST OF ASSETS

The assessee for purchase of buses placed order worth ₹ 654,62,81,543/- with the condition that for delay in delivery, the supplier would be liable for penalty/ liquidated damages and on that account the assessee received a sum of ₹ 120,11,78,279/- from M/s. Ashok Leyland Ltd. According to the assessee, this amount has to be reduced from the purchase of the business to calculate the depreciation. On this premise. AO held that the value of the bus was only ₹ 534,51,03,270/- and the assessee is entitled for depreciation on this amount only and, therefore, disallowed the balance of depreciation to the tune of ₹ 18,01,76,741/- and added it to the income of the assessee. The. CIT(A) considered the case of the assessee in the light of the decision of the Hon’ble Gujarat High Court in the light of the decision of the Hon’ble Gujarat High Court in the case of Digvijay Cement Co. Ltd. vs. CIT (1982) 138 ITR 45 (Guj) wherein it was held by the Hon’ble High Court that having regard to the nature of the business of the assessee in the light of the terms of contract in respect of the provision for compensation for a delay in delivery, the sum received through compensation was not made with the intention of reducing the cost of machinery but to compensate the loss of profits which the assessee would suffer on account of delay in delivery of the machinery. Admittedly, the assessee in the case in hand is the transport corporation earning income by plying the buses. In case of delay in delivery the assessee would suffer loss on profits and that is the reason there was a stipulation in the agreement for purchase of buses to the effect that delay in delivery shall result in levy of penalty/liquidated damages . On this account, assessee received a sum of ₹ 120,11,78,279/- and having regard to the business of the assessee, this compensation received is not to reduce the cost of the buses but to compensate the loss of income/profits the assessee would have earned had the buses been supplied in time. Therefore, the decision of the Gujarat High Court in the case of Digvijay Cement Co. Ltd. (supra) is applicable to the facts of this case on all fours and the ld. CIT(A) had rightly deleted the addition by following the binding precedent. In the result, appeal of the revenue is dismissed

DCIT vs. Delhi Transport Corporation (ITA No. 6658/D/15) (Dated 16/07/2019)

Delhi Transport Corporation

2. S. 56(2)(viib) – THAT AS PER CLAUSE (b) AND CLAUSE (j) OF RULE 11UA FOR COMPUTING FAIR MARKET VALUE OF THE SHARES THE VALUE OF THE ASSETS AND LIABILITIES AS STATED IN THE AUDITED BALANCE SHEET IMMEDIATELY PRIOR TO THE RECEIPT OF CONSIDERATION SHOULD BE ADOPTED.

A perusal of the Rule 11U(b) as reproduced by CIT(A) at para 5.6 of his order makes it clear that the balance sheet means the balance sheet as drawn up on the balance sheet date which has been audited by the auditor of the company and where the balance sheet on the valuation date has not been drawn up the balance sheet drawn up as on a date immediately preceding the valuation date which has been approved and adopted in the AGM of the shareholders of the company.

We find in the instant case, on the date of receipt of the consideration the balance sheet of the assessee company was not drawn up as the same was drawn up only on 31st July, 2014 which is evident from the audited balance sheet filed. Clause (b) and clause (j) of Rule 11UA makes it clear that for computing fair market value of the shares the value of the assets and liabilities as stated in the audited balance sheet immediately prior to the receipt of consideration should be adopted. If, on the date of receipt of the consideration, the balance sheet was not drawn up, then, the balance sheet drawn up as on a date immediately preceding the valuation date should be adopted i.e., the balance sheet of the immediately preceding year should be adopted. We find, in the instant case, on the valuation date i.e., on 31.03.2004, the balance sheet was not drawn up by the auditor as audited financials were drawn up only on 31st July, 2014 and, therefore, the valuation of assets and liabilities in the balance sheet of the immediately preceding year i.e., 31.03.2013 should have been adopted. Since the valuation done by the assessee was not in accordance with the Rule framed for valuation of unquoted shares i.e., the assessee has not taken the value of assets before introduction of share capital received through fresh allotment and since the Assessing Officer has correctly determined the valuation of the unquoted equity shares which has been upheld by the CIT(A), therefore, the same is upheld and the grounds raised by the assessee are dismissed.

Sadhvi Securities P. Ltd vs. ACIT (ITA No.1047/Del/2019) (Dated : 16.07.2019)

Sadhvi Securities P. Ltd