Exemption of tax on capital gains cannot be granted to an undertaking showing profit on ground of its revival charted out of BIFR

Delhi High Court: A Division Bench was seized of the question whether an undertaking which was being revived by BIFR could be granted a tax exemption from capital gains. The facts in issue were a textile machinery manufacturer became sick in 2001 and the BIFR charted out a rehabilitation scheme with a twin direction to the Income Tax Directorate (a) to consider the petitioners company’s request for exemption from payment of capital gains on the sale of assets and (b) to carry forward the losses incurred up to the year 2013 as against 2009. The Income Tax Directorate denied the benefit of exemption from capital gains based on certain figures projecting profit by the company in future years. The matter was remanded back by the High Court due to the fact that the income tax department should have passed a judgment keeping in mind the actual figures of profit of the undertaking rather than future projections. The matter was decided against the undertaking again upon reconsideration. The petitioner preferred a writ petition against the order of the Income Tax Directorate and challenged it on the ground of non-consideration of the sick health of the undertaking.

The broad contentions raised by the petitioners were –

(A) The Income tax directorate should have considered the fact that only because the assets exceeded the liabilities (net-worth was in profit) did not discount that the undertaking still had to make up the losses it had incurred.

(B) The BIFR scheme also envisioned the denial of capital gains exemption would make the undertaking sick again because the capital gains liability was a sum of Rs 331 Lakhs.

(C) The capital gains arose after selling land only for discharging the liabilities of other companies

(D) Section 32 of the Sick Industrial Companies Act 1985, stated that any direction issued by the authority would have an overriding effect over any provision or law barring a few exemptions. Therefore, BIFR’s rehabilitation scheme (which recommended exemption of tax on capital gains) should be seriously considered.

The Income Tax Directorate defended the order by contending –

(A) The undertaking of the petitioner was in profits not only in future projections but also in current actual figures – the undertaking had revived after the rehabilitation scheme in the year 2011 itself. (i.e. undertaking’s assets exceeded its liabilities)

(B) The department ought not to be forced to grant an exemption on payment for the fault of the petitioners

(C) The possibility of losses occurring after paying the tax on capital gains was a usual risk in business and could never be averted

The High Court partly allowed the writ petition by issuing a direction that since the petitioner’s liability had not been crystallized yet, no interest on capital gains tax shall be liable for the duration the matter remained pending in court. However, the Court held that the no exemption from payment of tax on capital gains would not be illegal because the possibility of losses arising in future is a normal course of any functioning business enterprise. [Laxmi Automatic Loom Works v. Deputy Commissioner of Income Tax, 2016 SCC OnLine Del 6207, decided on 5.12.2016]