Commissioner Of Income-Tax - 2, Chennai v. M/S.isc Investments And Finance Pvt. Ltd

IN THE HIGH COURT OF JUDICATURE AT MADRAS CORAM: THE HONOURABLE MR.JUSTICE S.MANIKUMARand THE HONOURABLE MR.JUSTICE D.KRISHNA KUMAR T.C.A.No.516 of 2016 Commissioner of Income-Tax - 2,Chennai. ... Appellantversus M/s.ISC Investments and Finance Pvt. Ltd.,No.5, Mezzanine Floor, Thapar House,37, Monteith Road, Chennai 600 008. ... Respondent Prayer: Tax Case Appeals filed under Section 260A of the IncomeTax Act, 1961, against the orders made in I.T.A.No.1987/Mds/2014, dated 28.10.2015, against the Order of DCIT.Co.CircleII(3), Chennai 34, order dated 24.12.2010 for the AssessmentYear 2008-09 against the Order of the Commissioner of Income Tax(Appeals)-II, Chennai, dated 30.01.2014 made in I.T.A.No.432/2013-14. For Appellant :Mr.T.R.Senthil KumarSenior Standing Counsel for Income-Tax COMMON ORDER (Order of the Court was made by S.MANIKUMAR, J.) Tax Case Appeal is directed against the order made inI.T.A.No.1987/Mds/2014, dated 28.10.2015, for the assessmentyear 2008-09. 2.Facts leading to the appeal are that the assesseecompany, engaged in the business of providing automated tellermachine (ATMs) infrastructural facilities under outsourcing,filed its return of income on 25.09.2008, declaring loss ofRs.9,45,617/-. The Assessing Officer has noticed that theassessee has received interest income of Rs.2,56,64,169/- andthis interest income has been adjusted against business loss ofRs.2,86,09,185/-, apart from showing Rs.7,00,000/-, as income https://hcservices.ecourts.gov.in/hcservices/ during the assessment year 2008-09. The Assessing Officer was ofthe view that the assessee has transferred its business in thefinancial year 2004-05 to eFunds International Pvt. Ltd.,through business transfer agreement, and by virtue of thisagreement, the assessee sold its business in the year 2005, andthat the assessee was barred from entering into same line ofbusiness for three years. According to the assessing officer,in the absence of any business activity during the assessmentyear 2008-09, the expenses claimed by the assessee were notprima-facie incidental to business and therefore, the interestexpenses cannot be allowed to set off against business losses.Thus, the assessment officer, vide order, dated 24.12.2010,assessed the income of the assessee, under Section 143(3) of theIncome-Tax Act, 1961, at Rs.2,56,64,169/-. 3.Being aggrieved by the same, the assessee has preferredan appeal in I.T.A.No.432/2013-14, before the Commissioner ofIncome Tax (Appeals)-II, Chennai, contending inter alia thatassessee has not sold its entire undertaking as lock-stock-barrel, as observed by the Assessing Officer. The assessee alsocontended that it had transferred only its business of“outsourcing of ATMs business” to M/s.eFunds International Pvt.Ltd. Before the Commissioner of Income Tax (Appeals), it wasalso contended that business currently carried on by theassessee was on Sun-Oasis platform and this business had beensold on slump sale basis, while retaining Tandem-Base 24platform related business with the assessee. Thus, it wascontended before the Commissioner of Income Tax (Appeals), thatassessee has not sold its entire undertaking, so as to say, thatit is a slump sale. 4.According to the assessee, even as per the agreement,it was not restricted to carry on various businesses. Contentionhas also been made that the assessee in fact carried on job workof outsourcing of ATMs business during the financial years 2005-06 and 2006-07, for eFunds International Pvt. Ltd., and earnedsubstantial revenue of Rs.12.81 crores, as business income,though business transfer agreement was entered into, in thefinancial year 2004-05 with M/s.eFunds International Pvt. Ltd. 4.According to the assessee, even as per the agreement,it was not restricted to carry on various businesses. Contentionhas also been made that the assessee in fact carried on job workof outsourcing of ATMs business during the financial years 2005-06 and 2006-07, for eFunds International Pvt. Ltd., and earnedsubstantial revenue of Rs.12.81 crores, as business income,though business transfer agreement was entered into, in thefinancial year 2004-05 with M/s.eFunds International Pvt. Ltd. 5.Before the Commissioner of Income-Tax (Appeals), acontention has also been made by the assessee that during thefinancial year 2007-08 relevant to the assessment year 2008-09,the assessee carried on job work for its sister concern andearned income of Rs.7,00,000/- and therefore, it contended thatthe conclusion of the assessing officer that the assessee hasnot carried on any business at all, during the assessment year2008-09, is incorrect and for the abovesaid reasons, prayed toset aside the assessment order, dated 24.12.2010. https://hcservices.ecourts.gov.in/hcservices/ 6.Adverting to the abovesaid submissions and detailsfiled by the assessee, the Commissioner of Income-Tax(Appeals)-II, Chennai, vide order, dated 30.01.2014, allowed theappeal of the assessee. Perusal of the abovesaid order showsthat none represented the department. Being aggrieved by theaforesaid order, the Assistant Commissioner of Income-Tax,CompanyCircle-II(3),Chennai,hasfiled,I.T.A.No.1987/Mds/2014, before the Income Tax AppellateTribunal, 'C' Bench, Chennai. 7.Before the Tribunal, the very same rival contentionshave been made by both parties. Adverting to the above, theTribunal has referred to the following clauses from theagreement dated 31.03.2005. “iii) For the avoidance of doubt, it is herebyagreed that nothing contained in this Agreement shallprevent or restrict ISC, Capven or their associates,affiliates or owners from carrying on any or all ofthe following activities: (A) sale, lease or sale on hire-purchase of ATMs,ATM-related hardware and operating software; securityproducts; (B) the sale, lease or sale on hire-purchase of PO? terminals, related hardware and operatingsoftware; provision of ATM maintenance, healthmonitoring and content management except that theseservices may not be solicited for ATMs contracted withISC prior to Closing, or for those ATMs added on tothose existing contracts post-Closing or from acustomer of ISC as of Closing, without consent ofPurchaser; (C) maintenance services for POS terminals andrelated hardware and software;(D) sale and support of 'plastic cards (but notincluding their production and issuance underoutsourcing arrangements as performed in theBusiness); development, sale and/ or licensing of HMAData / HMA Starware's proprietary software; (E) the business currently carried on by HMAStarware of licensing and support of Oasis ISTswitches, card related solutions and other suchbusiness; and (F) any other business whether or not related tothe foregoing, which was not part of 1SC TransferredBusiness or agreed to be extensions of the Business asof Closing.(iv) During the Restricted Period, Purchasershall offer to ISC or its Affiliates the rights of (C) maintenance services for POS terminals andrelated hardware and software;(D) sale and support of 'plastic cards (but notincluding their production and issuance underoutsourcing arrangements as performed in theBusiness); development, sale and/ or licensing of HMAData / HMA Starware's proprietary software; (E) the business currently carried on by HMAStarware of licensing and support of Oasis ISTswitches, card related solutions and other suchbusiness; and (F) any other business whether or not related tothe foregoing, which was not part of 1SC TransferredBusiness or agreed to be extensions of the Business asof Closing.(iv) During the Restricted Period, Purchasershall offer to ISC or its Affiliates the rights of first refusal for Second Line Maintenance (SLM) forATMs implemented or under contract for futureimplementation on an outsourcing basis under ISCcontracts with customers as of the Go sing Date, andfor ATMs supplied by ISC or its Affiliates in thefuture to Purchaser or any other Affiliate of thePurchaser in India in the event of such entity seekingto engage a third party service provider for suchservice. 'Purchaser shall also offer to ISC or itsAffiliates the rights of first refusal for the supplyof Triton Automated Teller Machines and CashDispensers and other self service devices where theseare qualified for consideration provided that ISC orits Affiliate is an authorized distribution channelfor those devices at the time of the transaction. (v) Reciprocally, 1SC and its Affiliates shall,during the Restricted Period, provide the Purchaserwith a right of first refusal for third partyprocessing and networking solutions that may berequired by them in relation to the deployment ofATMs, Cash Dispensers, Self-Service Terminals, pasterminals or other electronic transaction devices, andfor the production and supply of plastic cards asmay .be required by ISC or its Affiliates. (vi) The Parties agree that these rights of firstrefusal for both Parties as mentioned in thisAgreement are intended to enhance opportunities formutual benefit by enabling them to work together andare subject to each party meeting the requirements offunctionality, adherence to Service Level Agreements,preferential pricing reflecting competitive marketconditions, and customer requirements which may applyin each instance.” 8.After considering the rival submissions, orders passedby the authorities, at Paragraphs 6 and 7, the Tribunal, held asfollows: “6. Heard both sides. Perused orders of lowerauthorities. The Assessing Officer while completingthe assessment did not allow business loss againstinterest income stating that assessee did not carry onany business during this assessment year underconsideration and the assessee sold its business inthe year 2004-05 to M/s. eFunds International Pvt.Ltd. The Assessing Officer also ignored income ofRs.7,00,000/- shown by the assessee for the job workdone by the assessee for M/s. Cash Link Global Systems(P)Ltd.,duringtheassessmentyearunderconsideration. The Assessing Officer was of the 8.After considering the rival submissions, orders passedby the authorities, at Paragraphs 6 and 7, the Tribunal, held asfollows: “6. Heard both sides. Perused orders of lowerauthorities. The Assessing Officer while completingthe assessment did not allow business loss againstinterest income stating that assessee did not carry onany business during this assessment year underconsideration and the assessee sold its business inthe year 2004-05 to M/s. eFunds International Pvt.Ltd. The Assessing Officer also ignored income ofRs.7,00,000/- shown by the assessee for the job workdone by the assessee for M/s. Cash Link Global Systems(P)Ltd.,duringtheassessmentyearunderconsideration. The Assessing Officer was of the opinion that the entire businesses were sold in theyear 2005 by the assessee and further barred fromentering into same line of business for three years.On appeal, the Commissioner of Income Tax (Appeals)allowed the claim of the assessee holding that eventhough entered into business transfer agreement, theassessee conducted job work in the subsequent twofinancial years i.e. 2005-06 and 2006-07 to the verysame M/s. eFunds International P.Ltd. by retainingportion of fixed assets and employees. Therefore,Commissioner of Income Tax (Appeals) elaboratelyconsidered the submissions of the assessee and thecontentions of the Assessing Officer and concludedthat the assessee carried on the business during theassessment year under consideration and therefore losshas to be allowed observing as under:- “I have considered the assessee's submissions aswell as the assessment order carefully. The AssessingOfficer's observations that consequent to the transferof its "outsourcing of ATMs business" to M/s. EfundsInternational P Ltd in F.Y.2005, the assessee has notcarried out any business, is factually not correct. Nodoubt the assessee is prohibited for entering into thesame line of business for a period of 3 years. But theassessee is free to take up any other business. Infact, the assessee company has got the sub-contractwork from M/s.Efunds International P Ltd itself in thefollowing two years i.e. In F.Y. 2005-06 and 2006-07.This clearly shows that the assessee was carrying onthe business activities even after the transfer of its"outsourcing of ATMs business" to M/s.eFundsInternational P Ltd, in the form of sub-contracts fromM/s. eFunds International P Ltd. Further as could beseen from the assessee's P&L accounts and the balancesheets of the F.Ys. 2005-06, 2006-07 and 2007-08,theassessee has not transferred the entire incomeearning apparatus as such. While transferring the"outsourcing of ATMs business" to M/s. eFundsInternational P Ltd, only the business activity alongwith contracts, customers, business debtors, someemployees, some fixed assets were transferred. Inother words, the assessee still left 'with severalemployees and some of the business infrastructure,which are enough to carry on business, though on alesser scale. The incomes generated from 'outsourcingof ATMs business' in FY 2004-05, its sub-contracts(job work) income in FYs 2005-06 & 2006-07, otherbusiness incomes, interest income etc, the employeecost, administration costs, depreciation etc, of the electrical equipment, furniture etc). These employeesand the infrastructure are capable of running thebusiness either in the same line or any otherbusiness. In fact, these employees and theinfrastructure were utilized by the assessee to runthe sub-contract business of "outsourcing of ATMsbusiness" awarded by M/s. eFunds International P Ltd,in next following 2 years i.e. FYs 2005-06 & 2006-07.This clearly shows that the assessee was carrying onthe business in the FY s 2005-06 & 2006-07, by way ofjob-work to M/s. eFunds International P Ltd, that tooin the same line of business of "outsourcing of ATMsbusiness". The incomes generated by the said job-worksduring these financial years are Rs.5,84,55,191/- andRs.6,97,22,8501-, respectively, which is about 1/4thto 1/5th of the regular business prevailing inF.Y.2004-05. Thus the assessee company was carrying onthe business during the financial years and alsooffered the same under the head 'income frombusiness'. These are the undisputed facts. As mentioned above, after the transfer of“outsourcing of ATMs business” to M/s. eFundsInternational P Ltd, the assessee retained portion ofemployees and infrastructure. These facts are clearlyavailable from above details of P&L accounts of theassessee. The employee cost in F.Y.2004-05 (i.e.before the transfer of "outsourcing of ATMs business"to M/s. eFunds International P Ltd) was Rs.140.74lakhs. In the following year (i.e. after the transferof "outsourcing of ATMs business") employee cost wasRs.59.22 lakhs, which is about 42% of the previousyear's employee cost. In other words, the assesseeretained more than 40% of the employees/manpower evenafter the transfer of the business. With theseemployees/ manpower, the assessee company carried outthe job-work to the transferee company M/s. eFundsInternational P Ltd in the following two financialyears. Though the employee/ manpower cost of theF.Y.2006-07 was reduced to Rs.2l.31lakhs, it againincreased to Rs.38.63 lakhs in F.Y.2007-08. Thesefacts clearly show that the assessee's employee /manpower and infrastructure remained intact during theF.Ys. 2005-06, 2006-07 and 2007-08. Even the perusals of the depreciation schedulesof these financial years clearly shows that theassessee, even after the transfer of "outsourcing ofATMs business" to M/ s. eFunds International P Ltd,retailed certain infrastructure like computers,electrical equipment, premises, furniture etc with which it was carrying on the job- work business to M /s. eFunds International P Ltd, during the financialyears 2005-06 and 2006-07, in the field of"outsourcing of ATMs business". These infrastructuralfacilities are remaining intact in the financial year2007-08 as well. These facts are clearly availablefrom the depreciation schedules of the balance sheetsenclosed along with the returns of income. Even the perusals of the depreciation schedulesof these financial years clearly shows that theassessee, even after the transfer of "outsourcing ofATMs business" to M/ s. eFunds International P Ltd,retailed certain infrastructure like computers,electrical equipment, premises, furniture etc with which it was carrying on the job- work business to M /s. eFunds International P Ltd, during the financialyears 2005-06 and 2006-07, in the field of"outsourcing of ATMs business". These infrastructuralfacilities are remaining intact in the financial year2007-08 as well. These facts are clearly availablefrom the depreciation schedules of the balance sheetsenclosed along with the returns of income. From the above details it is clear that theassessee's employee/manpower and the infrastructuralfacilities are remaining intact in the financial year2007-08 and the assessee has been exploring toundertake new activities. In fact, during thefinancial year 2007-08, the assessee, by utilizing thesaid employee/manpower and the infrastructuralfacilities, also carried out a new contract work forM/s Cash Link Global Systems (P) Ltd and earned abusiness income of Rs.7,00,000/- and the same was alsoincluded in the P&L account and offered to tax in thepresentA.Y.2008-09.TheAssessingOfficeracknowledged the said contact receipts by allowing thecredit for TDS, but surprisingly ignored the saidincome while computing the income under the head'income from business'. Further, as held by severalcourts, earning of income is not the criteria to provethat the business is in existence. What is required tobe seen is the existence of income earning apparatus(like employees/manpower, plant and machinery etc) andthe efforts made by the assessee into carry out thebusiness. In the present case, all these criteria areclearly existing in favour of the assessee. In view of the above reasons and since theassessee's employee/manpower and the infrastructuralfacilities are remaining intact in the financial year2007-0.8 and also carried out a new contract work forM/s Cash Link Global Systems (P) Ltd and earned abusiness income of Rs.7,00,000/- during the year, theAssessing Officer is not justified in coming to theconclusion that the assessee did not carry out anybusiness activities during the year. On the otherhand, the above facts clearly proves that theassessee's business activities are in existence andalso earned a business income of Rs.7,00,000/- duringfinancial year relevant to the A.Y.2008-09, Hence theassessee has the right to claim all the expenses underthe head 'income from business' and the resultinglosses, if any, are also eligible for set. off againstthe income from other heads as per the law. TheAssessing Officer is directed to allow the assessee's claim of losses under the head 'income from business'and their set off against the income of other heads.”7. On going through the order of the Commissionerof Income Tax (Appeals), it is very clear that theassessee has not transferred the entire undertakingsbut only portion of it was transferred by way ofbusiness transfer agreement and the assessee hascarried on the business of job work of outsourcing ofATMs business in the financial years 2005-06 and 2006-07 and earned income of Rs.12.81 crores with the verysame M/s. eFunds International P.Ltd. to whom part ofthe business was already sold. It was also the findingof the Commissioner of Income Tax (Appeals) that theassessee has retained portion of employees andinfrastructure i.e. Fixed assets like computers,electrical equipments, furniture etc. These employeesand infrastructures are capable of running thebusiness either in the same line or in any otherbusiness. It is the finding of the Commissioner ofIncome Tax (Appeals) that during the financial year2007-08 relevant to the assessment year underconsideration, the assessee utilizing the saidemployees, manpower and infrastructural facilitiescarried out a new contract work for M/s. Cash LinkGlobal Systems (P)Ltd. and earned business income ofRs.7,00,000/-, therefore he concluded that assessee infact carried on the business even after the businesstransfer agreement in the year 2005. On going throughthe above order of the Commissioner of Income Tax(Appeals), we do not find any infirmity in thefindings holding that assessee engaged in the businessduring the assessment year 2008-09 and therefore lossis to be allowed. Thus, we sustain the order of theCommissioner of Income Tax (Appeals) and reject thegrounds raised by the Revenue.” Thus, the Tribunal has dismissed the appeal. 9.Assailing the correctness of the order of the Tribunal,dated 28.10.2015, revenue has filed the instant Tax Case Appeal,on the following substantial questions of law, (i) Whether the Appellate Tribunal was correct inlaw in holding that the assessee was entitled to claimexpenses in the absence of any income from businessduring the assessment year? (ii) Whether the Appellate Tribunal was right inholding that the assessee was carrying on the businesseven after the Business Transfer Agreement, whichbarred the assessee from entering into the same line ofbusiness for three years on signing such agreement? (iii) Whether the Hon'ble ITAT was right inholding that the assessee was carrying on sub-contracting business with its sister concern, in theabsence of alternative business of sub-contracting inits Memorandum of Association? (ii) Whether the Appellate Tribunal was right inholding that the assessee was carrying on the businesseven after the Business Transfer Agreement, whichbarred the assessee from entering into the same line ofbusiness for three years on signing such agreement? (iii) Whether the Hon'ble ITAT was right inholding that the assessee was carrying on sub-contracting business with its sister concern, in theabsence of alternative business of sub-contracting inits Memorandum of Association? 10.Though, supporting the abovesaid substantial questionsof law, Mr.T.R.Senthil Kumar, learned standing counselappearing for the Income-Tax Department, submitted that theTribunal has failed to consider that the assessee had sold thebusiness entirely in the year 2005, and therefore, barred fromentering into the same line of business for 3 years, and furthercontended that alternative business of sub-contracting in theMemorandum of Agreement, is not at all relevant and therefore,set off expenses, made by the Commissioner of Income-Tax(Appeals), vide order in I.T.A.No.432/2013-14, dated 30.01.2014and confirmed by the Tribunal, in I.T.A.No.1987/Mds/2014, dated28.10.2015, is erroneous in law, and opposed to the facts andcircumstances of the case, going through the material on record,we find that the Commissioner of Income-Tax (Appeals)-II, hascategorically held that even after transfer of "outsourcing ofATMs business" to M/s. Efunds International P Ltd in 2005, theassessee has retained a portion of the employees' andinfrastructure (fixed assets like computers, electricalequipment, furniture etc). Similarly, after perusal of thedepreciation schedules of the financial years 2005-06, 2006-07and 2007-08, the appellate authority has also found that evenafter transfer of "outsourcing of ATMs business" to M/s.eFundsInternational P Ltd, the assessee was carrying on job-workbusiness to M/s.eFunds International Pvt. Ltd, during thefinancial years 2005-06 and 2006-07. It is also the finding ofthe appellate authority, infrastructural facilities have beenretained in the financial year 2007-08, as well. 11. The appellate authority has also found that byutilizing the said employees and infrastructural facilities, theassessee has also carried out a new contract work for M/s.CashLink Global Systems (P) Ltd, and earned a business income ofRs.7,00,000/-, which was also included in the Profit and LossAccount and offered to tax in the assessment year 2008-09. Theappellate authority has also noticed that the assessing officerhas acknowledged the said contract receipts, by allowing creditfor TDS, but surprisingly, ignored the said income, whilecomputing the income under the head 'income from business'. 12.In I.T.A.No.1987/Mds/2014, appeal filed by the Revenue,the Tribunal has extensively considered all the particulars,such as, income from operations, other revenues, dividends,interest received and profit (loss) – sale of assets and the https://hcservices.ecourts.gov.in/hcservices/ expenses incurred on employee cost, operation expenses,administrative expenses, depreciation, preliminary expenses anddeferred revenue expenses, for the financial years 2004-05,2005-06, 2006-07 and 2007-08 and thus, arrived at the net profit(loss). 12.In I.T.A.No.1987/Mds/2014, appeal filed by the Revenue,the Tribunal has extensively considered all the particulars,such as, income from operations, other revenues, dividends,interest received and profit (loss) – sale of assets and the https://hcservices.ecourts.gov.in/hcservices/ expenses incurred on employee cost, operation expenses,administrative expenses, depreciation, preliminary expenses anddeferred revenue expenses, for the financial years 2004-05,2005-06, 2006-07 and 2007-08 and thus, arrived at the net profit(loss). 13.The Tribunal, after going through the entire materialson record, has also categorically concurred with the views ofthe Commissioner of Income-Tax (Appeals)-II that the assesseewas engaged in business, during the assessment year 2008-09 andthus, dismissed the appeal filed by the revenue. As we havealready adverted to the details of the orders of the Tribunal,in the earlier paragraphs of this judgment, there is nothing toadd, excepting to state, what is sought to be raised before us,is nothing but adjudication of facts. Analysing the reasonsgiven by both the Commissioner of Income Tax (Appeals), theappellate authority and the Tribunal, there is properappreciation of evidence. We do not find any perversity in thefinding recorded by the authorities, warranting interference. 14.A substantial question of law does not arise on thefindings of fact, unless it is substantiated that there isperversity. In Bhagat Construction Co. (P) Ltd., v. CITreported in (2001) 250 ITR 291 (Del.), the Delhi High Court heldthat a question of fact, becomes a question of law, if thefinding is either without any evidence or material or, if thefinding is contrary to the evidence, or is perverse or there isno direct nexus between the conclusion of fact and the primaryfact upon which that conclusion is based. But it is not possibleto turn a mere question of fact into a question of law by askingwhether as a matter of law the authority came to the correctconclusion on a matter of fact. 15.In M.Janardhana Rao v. Joint CIT reported in (2005) 273ITR 50 (SC), the Hon'ble Supreme Court held that in the exerciseof the powers under Section 260A, the findings of fact of theTribunal cannot be disturbed. In the said judgment, the ApexCourt further held that the tests for determining whether asubstantial questions of law, is involved in an appeal are, (a) whether directly or indirectly it affectssubstantial rights of the parties, or(b) the question is of general public importance,or (c) whether it is an open question in the sensethat the issue is not settled by a pronouncement ofthe Supreme Court or Privy Council or by the FederalCourt, or https://hcservices.ecourts.gov.in/hcservices/ (d) the issue is not free from difficulty, or(e) it calls for a discussion for alternativeview. 16.In the light of the above discussions, the substantialquestions of law, raised by the Revenue, are answered againstthem. In the result, the Tax Case Appeals are dismissed. Sd/- Assistant Registrar(CCC) //True Copy// Sub Assistant RegistrarskmTo1.The Income Tax Appellate Tribunal, “C” Bench, Chennai.2.The Deputy Commissioner of Income Tax, Circle II, 131, Chennai 34.3.The Commissioner of Income Tax(Appeals)-II, Chennai.+1cc to Mr.T.R.Senthil Kumar, Advocate, S.R.No.44968 T.C.A.No.516 of 2016NM(CO)CA(14/09/2016) https://hcservices.ecourts.gov.in/hcservices/