M/s Taikisha Engineering India Ltd., New Delhi V. ACIT, New Delhi

CO 223/DEL/2010

• Counselvise Citation: [2010] 122 COUNSELVISE.COM (IT) 5301 (ITAT-DELHI)
• Duration Of Justice: 3 month(s) 10 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 19-11-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: H
• Assessment Year: 2006-2007
• Appeal Filed On: 09-08-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: CO NO; K R MANJANI ITA NO DEL
• Assessee Lawyers: AMRENDRA KUMAR
• Keywords: Business income; Earning of tax free income; Retrospective amendment; Speculation loss
• Section: 142(1); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: H NEW DELHI BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI A.K. GARODIA, ACCOUNTANT MEMBER I.T.A NO. 2905/DEL/10 ASSTT. YEAR 2006-07 ACIT, CENTRAL CIRCLE-16 (1), NEW DELHI. VS. M/S. TAIKISHA ENGINEERING INDIA LTD. 14, PALAM MARG, VASANT VIHAR, NEW DELHI. (APPELLANT) (RESPONDENT) AND C.O NO. 223/DEL/10 ASSTT. YEAR 2006-07 M/S. TAIKISHA ENGINEERING INDIA LTD. 14, PALAM MARG, VASANT VIHAR, NEW DELHI. VS. ACIT, CENTRAL CIRCLE 16 (1), NEW DELHI. (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI AMRENDRA KUMAR, SR. DR. RESPONDENT BY: SHRI K.R. MANJANI, ADVOCATE ITA NO. 2905/DEL/2010 & CO NO. 223/DEL/ 2010 ASS TT. YEAR 2006-07 2 ORDER PER RAJPAL YADAV, JM: THE REVENUE IS IN APPEAL BEFORE US AGAINST THE ORD ER OF LD. CIT (A) DATED 31 ST MARCH 2010 PASSED FOR ASSTT. YEAR 2006-07. ON RECE IPT OF NOTICE IN THE REVENUES APPEAL ASSESSEE HAS FILED C ROSS OBJECTION BEARING NO. 223/D/2010. 2. GROUND NO. 1 & 2 TAKEN BY THE REVENUE ARE INTERC ONNECTED WITH SOLITARY GRIEVANCE RAISED BY THE ASSESSEE IN THE CR OSS OBJECTION. THE COMMON GRIEVANCE OF APPELLANTS AS WELL AS RESPONDEN TS RELATES TO QUANTIFICATION OF AMOUNT REQUIRED TO BE DISALLOWED FOR THE PURPOSE OF SECTION 14A OF THE INCOME TAX ACT. 3. THE BRIEF FACTS OF THE CASE ARE THAT ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF DRAWING DESIGN, PROCUREM ENT OF EQUIPMENT, AND ERECTION & COMMISSIONING OF METAL FINISH PLANTS (PAINT SHOPS) FOR AUTOMOBILE INDUSTRIES ON TURNKEY BASIS. IT HAS FILE D ITS RETURN OF INCOME ON 16.11.2006 DECLARING A TOTAL INCOME OF ` 25,58,66,421/-. THE CASE WAS SELECTED FOR SCRUTINY ASSESSMENT AND NOTICES U /S 143(2) AND 142(1) WERE ISSUED AND SERVED UPON THE ASSESSEE. ON SCRUTI NY OF THE ACCOUNTS LD. AO FOUND THAT ASSESSEE HAS SHOWN DIVIDEND INCOM E OF ` 1,59,01,548/-, WHICH IT CLAIMED EXEMPT FROM TAX. TH E ASSESSEE HAS ITA NO. 2905/DEL/2010 & CO NO. 223/DEL/ 2010 ASS TT. YEAR 2006-07 3 OFFERED A SUM OF ` 5,50,214/- FOR TAXATION ON THE GROUND THAT THIS MU CH EXPENDITURE RELATES TO EARNING OF EXEMPT INCOME. TH E AO HAD COMPUTED THE EXPENSES RELATABLE FOR EARNING EXEMPT INCOME U/ S 14A OF THE ACT ON THE BASIS OF RULE 8D OF THE INCOME TAX RULES 1962. THE AO RELIED UPON THE SPECIAL BENCH DECISION OF THE TRIBUNAL IN THE C ASE OF DAGA CAPITAL MANAGEMENT PRIVATE LTD. REPORTED IN 26 SOT 603. HE WORKED OUT A SUM OF F ` 35,40,454/- FOR DISALLOWANCE. 4. ON APPEAL LD. CIT(A) HAS HELD THAT DISALLOWANCE OF EXPENSES CANNOT BE MADE ON THE STRENGTH OF RULE 8D. LD. CIT( A) RELIED UPON THE DECISION OF HONBLE P & H HIGH COURT IN THE CASE OF CIT VS. M/S. HERO CYCLES LTD. RENDERED IN ITA NO. 331 OF 2009. LD. C IT (A) HAS WORKED OUT THE DISALLOWANCE AT ` 8,43,882/-. 5. THE REVENUE IN ITS APPEAL IS IMPUGNING THE ACTIO N OF LD. CIT(A) WHEREBY THE LD. FIRST APPELLATE AUTHORITY HAS DELET ED THE DISALLOWANCE OF ` 26,96,572/- ( ` 35,40,454 ` 8,43,882). THE ASSESSEE IN ITS CROSS OBJECTION HAS PLEADED THAT LD. CIT (A) HAS ERRED IN ESTIMATING THE EXPENSES AT ` 8,43,882/- AS AGAINST ` 5,50,214/- OFFERED BY THE ASSESSEE. ACCORDING TO THE ASSESSEE ` 5,50,214/- IS SUFFICIENT TO EARN THE DIVIDEND INCOME. 6. WITH THE ASSISTANCE OF LD. REPRESENTATIVE WE HAV E GONE THROUGH THE RECORD CAREFULLY. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF M/S ITA NO. 2905/DEL/2010 & CO NO. 223/DEL/ 2010 ASS TT. YEAR 2006-07 4 GODREJ AND BOYCEE MANUFACTURING REPORTED IN 328 ITR 81 HAS HELD THAT RULE 8D IS NOT APPLICABLE WITH RETROSPECTIVE EFFECT . IT WILL BE APPLICABLE W.E.F ASSTT. YEAR 2008-09 BECAUSE THIS RULE WAS N OTIFIED W.E.F. 24 TH MARCH, 2008. IN VIEW OF THIS DECISION THE AO IS REQ UIRED TO WORK OUT THE EXPENSES RELATABLE FOR EARNING EXEMPT INCOME AFRESH BY TAKING INTO CONSIDERATION THE SURROUNDING CIRCUMSTANCES. THE DI SALLOWANCE CANNOT BE MADE ON THE BASIS OF THE PROCEDURE PROVIDED IN R ULE 8D IN THIS ASSTT. YEAR. LD. CIT(A) HAS ESTIMATED THE EXPENSES AT ` 8,43,882/- BUT HAS NOT ASSIGNED ANY REASON. THE RELEVANT FIRST APPELLATE A UTHORITY ONLY TOOK INTO CONSIDERATION THE ALLEGED INDIRECT EXPENSES ME NTIONED BY THE AO IN THE ASSTT. ORDER. THEREFORE, KEEPING IN VIEW ALL TH ESE ASPECTS WE SET ASIDE THIS FILE TO THE FILE OF AO FOR READJUDICATI ON. THE ASSESSEE WILL BE AT LIBERTY TO SUBMIT ANY DETAIL EXPLANATION IN ITS DEF ENCE. IT IS NEEDLESS TO SAY THAT ANY OBSERVATION MADE BY US WOULD NOT INJUR E OR IMPAIR THE CASE OF AO OR WOULD CAUSE ANY PREJUDICE TO THE DEFENCE / EXPLANATION OF THE ASSESSEE. LD. AO SHALL WORK OUT THE EXPENSES IN ACC ORDANCE WITH LAW. IN THIS WAY GROUND NO. 1 AND 2 OF THE REVENUES AP PEAL AND THE SOLITARY GRIEVANCE RAISED BY THE ASSESSEE IN ITS CROSS OBJEC TION ALLOWED FOR STATISTICAL PURPOSE. ITA NO. 2905/DEL/2010 & CO NO. 223/DEL/ 2010 ASS TT. YEAR 2006-07 5 7. IN GROUND NO. 3 THE REVENUE HAS PLEADED THAT LD. CIT (A) HAS ERRED IN TREATING THE INCOME EARNED FROM THE TRADIN G OF SHARES AS BUSINESS INCOME. 8. THE BRIEF FACTS OF THE CASE ARE THAT ASSESSEE HA S DISCLOSED SHORT TERM CAPITAL GAIN OF ` 2,12,60,408/-. THE AO HAS CONFRONTED THE ASSESSEE AS TO WHY THE SHORT TERM CAPITAL GAIN DISC LOSED BY THE ASSESSEE SHOULD NOT BE TREATED AS A SPECULATION TRA NSACTION. IN RESPONSE TO THE SHOW CAUSE NOTICE OF THE AO ASSESSE E MADE THE FOLLOWING SUBMISSIONS:- THE ASSESSEE HAS ONLY INVESTED SURPLUS FUND TO EAR N THE DIVIDEND THEREFORE SALE OF SHARES SHOULD NOT BE TREATED BUSINESS INCOM E OF THE ASSESSEE. IN COURSE OF BUSINESS THE ASSESSEE COMPANY HAS ACCUMUL ATED A SURPLUS FUND AMOUNTING TO RS. 30,72,96,047.66. THIS AMOUNT IS RE FLECTED UNDER THE HEAD RESERVE AND SURPLUS IN THE BALANCE SHEET. IN ORDE R TO EARN INCOME FROM THESE SURPLUS FUNDS THE COMPANY MADE INVESTMENT IN MUTUAL FUNDS AND SHARES. COMPANY DURING THE YEAR INVESTED RS. 172500000/- IN MUTUAL FUND AND RS. 25000000/- IN SHARES. INVESTMENT IN MUTUAL FUNDS IS 56% AND INVESTMENT IN SHARES 8% OF THE TOTAL SURPLUS FUNDS. DETAIL OF PAY MENT FOR INVESTMENT IS FILED. COMPANY MADE VERY NOMINAL CONTRIBUTION OF THE SURPL US FUNDS TOWARDS INVESTMENT IN SHARES. THIS CANNOT BE CONSIDERED AS BUSINESS OF THE COMPANY OR TO BE CONSIDERED SPECULATION BUSINESS. IT IS MAI NLY THE INVESTMENTS OF THE SURPLUS FUNDS OF THE COMPANY. SECTION-73 WHICH IS PART OF CHAPTER VI DEALS WITH S ET OFF LOSSES COMPUTED IN RESPECT OF SPECULATION BUSINESS. THE EXPLANATION TO SECTION 73 IS APPLICABLE ONLY FOR THE PURPOSE OF LOSES BECAUSE NOWHERE IN SE CTION OR EXPLANATION IT IS STATED THAT THE PROFITS OF THOSE COMPANIES FROM THE PURCHASE AND SALE OF SHARES SHALL BE TREATED AS SPECULATION INCOME. THE PURPOSE OF INTRODUCTION OF EXPLANATION WAS TO COVER LOSSES. EXPLANATION TO SEC TION 73 SHOULD BE READ AS TO HARMONIES WITH THE CLEAR-UP AMBIGUITY IN THE MAI N SECTION AND SHOULD NOT BE SO CONSTRUED AS TO WIDEN THE AMBIT OF THE SECTIO N. ACCORDINGLY, SECTION CANNOT BE INVOKED WHERE THERE IS PROFIT FROM BUYING AND SELLING OF SHARES. ACCORDING TO THE CBDT CIRCULAR NO. 204, DATED 24/07 /1976 THE OBJECT OF THE PROVISIONS WAS TO CURB DEVICE BEING RESORTED TO BY SOME BUSINESS TO MANIPULATE AND REDUCE THE TAXABLE INCOME BY BOOKING SPECULATIVE LOSSES. ITA NO. 2905/DEL/2010 & CO NO. 223/DEL/ 2010 ASS TT. YEAR 2006-07 6 THE EXPLANATION IS ONLY FOR THE PURPOSE OF SECTION- 73 AND WHEN THE SECTION DOES NOT APPLY THE EXPLANATION CAN NOT BE INVOKED, HELD IN THE DECISION OF ITAT HYDERABAD IN THE CASE OF GODAVARI CAPITAL LTD. V. DYU. CIT (204) 19 ITD 274. IT IS ALSO HELD IN THE CASE ADI (INV.) V. KUM. A.B. SHANTI (1997) 225 ITR 258 (SC) (SIC), ALLIED MOTORS (P) LTD. V. CIT (1997 ) 224 ITR 677 (SC) AND CIT V. PODAR CEMENT (P) LTD. (1997) 226 ITR 625 (SC) TH AT THE INTERPRETATION OF THE STATUTORY PROVISION MUST CONFORM TO THE OBJECT FOR WHICH IT WAS INTRODUCED. 9. LD. AO HAS GONE THROUGH THE CONTENTIONS OF ASSES SEE BUT DID NOT ACCEPT THEM. HE RELIED UPON THE INSTRUCTIONS OF CBD T GIVEN IN CIRCULAR NO. 1827 DATED 31 ST AUGUST, 1989 AND 13.12.2005. HE HAS NOT ELABORATELY DISCUSSED THE AVAILABILITY OF FUNDS, NA TURE OF TRANSACTIONS, WHETHER BOARD OF DIRECTORS HAVE RESOLVED TO MAKE IN VESTMENT? HE HAS ALSO NOT CONSIDERED THE OBJECT PROVIDED IN MEMORAND UM OF ASSOCIATION FOR MAKING INVESTMENT IN THE SHARES OF OTHER COMPAN Y. HE SIMPLY REJECTED THE CONTENTION OF ASSESSEE AND HELD THAT I NVESTMENT IN THE SHARE IS TO BE TREATED AS BUSINESS ACTIVITY. 10. AGGRIEVED WITH THE ACTION OF AO, ASSESSEE CARRI ED THE MATTER IN APPEAL BEFORE THE LD. CIT (A). IT CONTENDED THAT IN ORDER TO ADJUDICATE WHETHER AN ASSESSEE HAS MADE INVESTMENT IN THE SHAR ES OR IT PURCHASES THE SHARE FOR THE BUSINESS PURPOSE? ONE HAS TO LOOK INTO CERTAIN FACTORS I.E. WHAT WAS THE INTENTION OF ASSESSEE? WHETHER T HE INTENTION WAS TO EARN DIVIDEND INCOME OR NOT? AVAILABILITY OF FUNDS, WHETHER ASSESSEE HAD UTILIZED SURPLUS FUNDS OR BORROWED FUNDS FOR TH E PURPOSE OF INVESTMENT? WHAT TREATMENT HAS BEEN GIVEN IN THE BO OKS? WHETHER ITA NO. 2905/DEL/2010 & CO NO. 223/DEL/ 2010 ASS TT. YEAR 2006-07 7 SHARES HAVE BEEN SHOWN AS STOCK IN TRADE OR LONG TE RM INVESTMENT? ALL THESE THINGS ARE RELEVANT FOR DECIDING THE NATURE O F ANY SHARE TRANSACTION. IT WAS ALSO CONTENDED BY THE ASSESSEE THAT IN ASSTT. YEAR 2005-06 AO HIMSELF TREATED SUCH TRANSACTIONS AS AN INVESTMENT. THE ASSESSEE ALSO POINTED OUT BEFORE THE LD. CIT(A) TH AT FREQUENCY OF TRANSACTIONS IN SHARES ARE NOMINAL . LD. CIT(A) HAS ACCEPTED THE CONTENTION OF THE ASSESSEE AND HELD TRANSACTION IN THE SHARES AS AN INVESTMENT. 11. WITH THE ASSISTANCE OF LD. REPRESENTATIVE WE HA VE GONE THROUGH THE RECORD CAREFULLY. WE CONFRONTED THE LD. COUNSEL FOR THE ASSESSEE TO SHOW THE BOARD RESOLUTION EXHIBITING THE FACT THAT ASSESSEE CAN MAKE INVESTMENT IN SHARES. LD. COUNSEL FOR THE ASSESSEE WAS UNABLE TO SHOW THAT RESOLUTION. WHEN WE CONFRONTED THE LD. COUNSE L FOR THE ASSESSEE THAT ONE OF THE ISSUE WE ARE SETTING ASIDE TO THE A O WHY NOT THIS ISSUE BE REMITTED BACK TO THE FILE OF AO FOR READJUDCITIO N. HE CONCEDED WITH OUR PROPOSAL. IN OUR OPINION THE ISSUE REQUIRED TO BE S ET ASIDE TO THE FILE OF AO OTHERWISE ALSO EVEN IN THE ABSENCE OF CONSENT OF LD. COUNSEL FOR THE ASSESSEE, BECAUSE NEITHER LD. CIT(A) NOR LD. AO HAS CONSIDERED THE DETAILS OF SHARE TRANSACTION SUBMITTED BY ASSESSEE IN THE LIGHT OF CERTAIN TESTS LAID DOWN BY HONBLE GUJARAT HIGH COURT IN T HE CASE OF RAVI SHANKAR A KOTHARI 237 ITR 338 AS WELL AS LAID DOWN IN VARIOUS ITA NO. 2905/DEL/2010 & CO NO. 223/DEL/ 2010 ASS TT. YEAR 2006-07 8 AUTHORITATIVE PRONOUNCEMENT OF THE HONBLE SUPREME COURT AS WELL AS OF HONBLE HIGH COURT. A REFERENCE CAN BE MADE TO THE CASE OF SUTLEJ COTTON REPORTED IN 100 ITR 706, 34 SOT 42,122 TTJ8 7, 16 DTR 97, ETC. LD. AO HAS SIMPLY MADE REFERENCE TO THE GUIDELINES OF CBDT AND THEN WITHOUT DISCUSSING WHETHER ASSESSEE HAS SURPLUS FUN DS ? WHAT IS THE FREQUENCY OF TRANSACTION ? WHAT TREATMENT ASSESSEE HAS GIVEN IN THE BOOKS OF ACCOUNTS ETC. REJECTED ITS CONTENTION. HON BLE GUJRAT HIGH COURT IN THE CASE OF RAVI SHANKAR A KOTHARI HAS PROPOUND ED CERTAIN BASIC TESTS APART FROM OTHERS FOR JUDGING SUCH TYPE OF TR ANSACTION. THESE TESTS READ AS UNDER :- (A) THE FIRST TEST IS WHETHER THE INITIAL ACQUISITI ON OF THE SUBJECT MATTER OF TRANSACTION WAS WITH THE INTENTIO N OF DEALING IN THE ITEM, OR WITH A VIEW TO FINDING AN INVESTMENT. IF THE TRANSACTION, SINCE THE INCEPTION , APPEARS TO BE IMPRESSED WITH THE CHARACTER OF A COMMERCIAL TRANSACTION ENTERED INTO WITH A VIEW TO EARN PROFIT, IT WOULD FURNISH A VALUABLE GUIDELINES. (B) THE SECOND TEST IS WHY AND HOW AND FOR WHAT PUR POSE THE SALE WAS EFFECTED SUBSEQUENTLY; (C) THE THIRD TEST IS AS TO HOW THE ASSESSEE DEAL W ITH THE SUBJECT MATTER OF TRANSACTION DURING THE TIME THE A SSET WAS WITH THE ASSESSEE WHETHER IT HAS BEEN TREATED A S STOCK-IN-TRADE, OR BEEN SHOWN IN THE BOOKS OF ACCOU NT AND BALANCE SHEET AS AN INVESTMENT. THIS INQUIRY, T HOUGH RELEVANT, IS NOT CONCLUSIVE; (D) THE FOURTH TEST IS HOW THE ASSESSEE HIMSELF HAS RETURNED THE INCOME FROM SUCH ACTIVITIES AND HOW THE DEPART MENT HAS DEALT WITH THE SAME IN THE COURSE OF PRECEDING AND SUCCEEDING ASSESSMENTS. THE FACTOR, THOUGH NOT CONCLUSIVE, CAN AFFORD GOOD AND COGENT EVIDENCE TO JUDGE THE NATURE OF TRANSACTION AND WOULD BE A RELE VANT ITA NO. 2905/DEL/2010 & CO NO. 223/DEL/ 2010 ASS TT. YEAR 2006-07 9 CIRCUMSTANCE TO BE CONSIDERED IN THE ABSENCE OF ANY SATISFACTORY EXPLANATION. (E) THE FIFTH TEST, NORMALLY APPLIED IN CASES OF FI RMS AND COMPANIES, IS WHETHER THE DEED OF PARTNERSHIP OR TH E MEMORANDUM OF ASSOCIATION, AS THE CASE MAY BE, AUTHORIZE SUCH AN ACTIVITY. (F) THE MOST IMPORTANT TEST IS AS TO THE VOLUME, FR EQUENCY, CONTINUITY AND REGULARITY OF TRANSACTIONS OF PURCHA SE AND SALE OF THE GOODS CONCERNED. IN A CASE WHERE THERE IS REPETITION AND CONTINUITY, COUPLED WITH THE MAGNITU DE OF THE TRANSACTION, BEARING REASONABLE PROPORTION TO T HE STRENGTH OF HOLDING, AN INFERENCE CAN READILY BE DR AWN THAT THE ACTIVITY IS IN THE NATURE OF BUSINESS. 12. IN VIEW OF THE ABOVE DISCUSSION WE ARE OF THE VIEW THAT LD. AUTHORITIES HAVE NOT EXAMINED THE ISSUE ANALYTICAL LY. THEREFORE WE SET ASIDE THIS ISSUE ALSO TO THE FILE OF AO FOR READJUD ICATION. ASSESSEE WILL BE AT LIBERTY TO PRODUCE ANY DETAILS IN SUPPORT OF ITS CONTENTION. IT IS NEEDLESS TO SAY THAT ANY OBSERVATION MADE BY US WOULD NOT IM PAIR OR INJURE THE CASE OF AO OR WOULD CAUSE ANY PREJUDICE TO THE DEFE NCE / EXPLANATION OF THE ASSESSEE. LD. AO SHALL READJUDICATE BOTH THESE ISSUES AFTER GIVING DUE OPPORTUNITY OF HEARING TO THE ASSESSEE. ORDER PRONOUNCED IN THE OPEN COURT ON 19.11.2010. SD/- [A.K. GARODIA] [RAJPAL YADAV] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 19.11.2010 VEENA ITA NO. 2905/DEL/2010 & CO NO. 223/DEL/ 2010 ASS TT. YEAR 2006-07 10 COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY BY ORDER, DEPUTY REGISTRAR, ITAT