SWALLOW ASSOCIATES, V. ACIT CIR 6(1),

CO 71/MUM/2013

• Counselvise Citation: [2013] 122 COUNSELVISE.COM (IT) 8977 (ITAT-MUMBAI)
• Duration Of Justice: 5 month(s) 29 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 18-09-2013
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: Not Allotted
• Assessment Year: 2006-2007
• Appeal Filed On: 20-03-2013
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Business income; Cost of acquisition; Speculation loss; Deemed dividend

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES B, MUMBAI BEFORE SHRI H L KARWA, PRESIDENT & SHRI N K BILLAIYA, ACCOUNTANT MEMBER ITA NO.1815/MUM/2012/ FOR ASST. YEAR: 2006-07 THE ACIT CIR 6(1) MUMBAI VS. BLUE NILES HOLDING LTD. NO.463, CEAT MAHAL, DR. ANNIE BESANT ROAD, WORLI, MUMBAI- 400 025 PAN AAACB1881B (APPELLANT) (RESPONDENT) C.O NO. 71/MUM/2013 (ARISING OUT OF ITA NO.1815/MUM/2012/ FOR A.Y: 2006 -07) M/S. SWALLOW ASSOCIATES LLP (SUCCESSOR TO BLUE NILES HOLDING LTD.), MUMBAI- 400 025 VS. THE ACIT CIR 6(1) MUMBAI (APPELLANT) (RESPONDENT) FOR THE REVENUE : SHRI SURENDRA KUMAR FOR THE ASSESSEE : SHRI YOGESH A THAR DATE OF HEARING : 18.09.2013 DATE OF PRONOUNCEMENT : 18.09.2013 O R D E R PER N.K.BILLAIYA (AM) : THIS APPEAL BY THE REVENUE AND THE CROSS-OBJECTION BY THE ASSESSEE ARE DIRECTED AGAINST THE VERY SAME ORDER OF THE CIT(A)- 14, MUMBAI, DATED 30.12.2011 PERTAINING TO A.Y. 2006-07. 2 ITA NO.1815/M/12 CO 71/M/13 AY:2006-07 2. THE REVENUE HAS RAISED THREE SUBSTANTIVE GROUNDS OF APPEAL. GROUND NO.1 WITH ITS SUB-GROUNDS RELATE TO TREATMENT OF TRADING IN SHARES BY THE ASSESSEE BEING NOT HIT BY EXPLANATION TO SECTION 73(1) OF THE ACT. AT THE VERY OUTSET, IT HAS BEEN POINTED OUT THAT THIS ISSUE IS WELL SETTLED IN FAVO UR OF THE ASSESSEE BY ORDER OF THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR A.Y. 2005-0 6. A PERUSAL OF THE ORDER OF THE CIT(A) ALSO SHOW THAT HE HAS FOLLOWED THE ORDER OF THE TRIBUNAL WHILE ALLOWING THE APPEAL. THE DR COULD NOT BRING ANY DISTINGUISHING DECISION IN FAVOUR OF THE REVENUE. A PERUSAL OF THE ORDER OF THE TRIBUNAL IN ITA NO.48 11/MUM/2008, WHICH HAS BEEN FOLLOWED BY THE CIT(A), SHOW THAT THE TRIBUNAL HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. RESPECTFULLY FOLLOWING THE DECISION OF T HE TRIBUNAL, FINDINGS OF THE CIT(A) ARE CONFIRMED. GROUND NO.1 WITH ITS SUB-GROUNDS IS DISMISSED. 3. GROUND NO.2 RELATES TO THE DELETION OF THE DISAL LOWANCE OF VALUATION LOSS OF RS.1,28,97,230/-. THIS ISSUE HAS BEEN DISCUSSED BY THE ASSESSING OFFICER UNDER THE HEAD SPECULATION LOSS. THE ASSESSING OFFICER OBS ERVED THAT THE ASSESSEE WAS HOLDING 3,35,000 SHARES OF KEC INFRASTRUCTURE VALUED AT RS.2,52,75,750/-. THE ASSESSING OFFICER FURTHER OBSERVED THAT DURING THE YEAR THE ASSESSEE HAS NEITHER PURCHASED NOR SOLD ANY OF THESE SHARES. HOWEVER, I T VALUED THE SAME AT RS1,23,78,520/-, WHICH RESULTED IN INCREASE OF SPEC ULATION LOSS BY RS.1,28,97,230/-. THE ASSESSING OFFICER FURTHER OBSERVED THAT THE SAI D COMPANY WAS DEMERGED AND THE ASSESSEE RECEIVED SHARES OF KEC INTERNATIONAL IN RAT IO OF 1:1. THE ASSESSEE SHOWED THE VALUE OF KEC INTERNATIONAL AT ZERO WHICH HAS RES ULTED INTO INCREASE IN SPECULATION LOSS BY RS.1,28,97,230/-. THE ASSESSING OFFICER TO OK THE VALUE OF SHARES OF KEC INTERNATIONAL AT RS.1,28,97,230/- AND THEREBY REDUC ED THE LOSS BY RS.1,28,97,230/-. THE ASSESSEE STRONGLY AGITATED THIS ISSUE BEFORE TH E CIT(A). THE CIT(A) HAS CONSIDERED THIS GRIEVANCE AT PARA 3 ON PAGE 9 OF HI S ORDER. IT WAS STRONGLY CONTENDED THAT THE VALUATION LOSS ACCOUNTED BY THE ASSESSEE IN ITS BOOKS IN RESPECT OF ITS TRADING STOCK OF KEC INFRASTRUCTURE LTD. COUL D NOT BE DISALLOWED BY THE ASSESSING OFFICER TREATING IT TO BE COST OF NEW 3,3 5,000 SHARES OF KEC INTERNATIONAL LTD. AFTER CONSIDERING THE FACTS AND THE SUBMISSIO NS THE CIT(A) WAS CONVINCED THAT 3 ITA NO.1815/M/12 CO 71/M/13 AY:2006-07 NO COST OF ACQUISITION WAS INCURRED FOR GETTING NEW 3,35,000 SHARES. THE CIT(A) FURTHER OBSERVED THAT THE ASSESSING OFFICER HAS NOT BROUGHT ON RECORD ANY LEGISLATIVE PROVISIONS NOR HE HAS CITED ANY JUDICIAL PRECEDENT ON THE BASIS OF WHICH THE DIMINUTION IN THE MARKET VALUE OF THE ORIGINAL 3,35 ,000 SHARES COULD BE ADOPTED AS THE COST OF ACQUISITION OF THE NEWLY ALLOTTED 3,35, 000 SHARES. THE CIT(A) REJECTED THE ASSESSING OFFICERS ACTION OF TREATING THE VALU ATION LOSS OF RS.1,28,97,230/- AS THE COST OF ACQUISITION OF THE NEWLY ACQUIRED 3,35,000 SHARES AND DIRECTED THE ASSESSING OFFICER TO TREAT THE LOSS AS BUSINESS LOSS. AGGRIE VED BY THIS THE REVENUE IS BEFORE US. THE DR SUPPORTED THE FINDINGS OF THE ASSESSING OFFI CER. THE COUNSEL FOR THE ASSESSEE REITERATED WHAT HAS BEEN SUBMITTED BEFORE THE LOWER AUTHORITIES. 4. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE LOWE R AUTHORITIES AND THE MATERIAL EVIDENCES BROUGHT ON RECORD. IT IS NOT IN DISPUTE THAT THE ORIGINAL 3,35,000 SHARES WERE HELD BY THE ASSESSEE AS STOCK IN TRADE. IT IS ALSO NOT IN DISPUTE THAT THE NEW 3,35,000 SHARES RECEIVED PURSUANT TO SCHEME OF ARRA NGEMENT FROM KEC INFRASTRUCTURE WERE ALSO HELD AS STOCK IN TRADE. F URTHER, IN TERMS OF SCHEME OF ARRANGEMENT, COST OF ORIGINAL 3,35,000 SHARES CONTI NUED TO REMAIN UNCHANGED AT RS.2,50,58,000/- AND THE NEW 3,35,000 SHARES WERE A CCOUNTED IN THE BOOKS AT NIL COST. THE ASSESSING OFFICER HAS TREATED THE FALL I N THE MARKET VALUE OF THE ORIGINAL 3,35,000 SHARES OF KEC INFRASTRUCTURE AS COST OF NEW 3,35,000 SHARES OF KEC INTERNATIONAL. IT IS AN ACCEPTED PRINCIPAL OF METH OD OF VALUATION TO VALUE THE INVENTORY AT LOWER OF COST OR MARKET VALUE. THE ORIGINAL 3,35,000 SHARES WERE VALUED AT COST ON 31.03.2005 AT RS.2,50,58,000/- S INCE THE MARKET VALUE AS ON THAT DATE WAS RS.6,25,44,500/- . HOWEVER, AS ON 31.03.2 006 THERE WAS A LOSS ON ACCOUNT OF INVENTORY VALUATION IN RESPECT OF ORIGINAL 3,35, 000 SHARES TO THE EXTENT OF RS.1,28,97,500/-. THIS LOSS WAS CLAIMED IN COMPUTA TION OF BUSINESS INCOME. WE FIND THAT THE ASSESSING OFFICER HAS NOT DISPUTED THE MET HOD OF DETERMINATION OF THIS LOSS. HOWEVER, THE ASSESSING OFFICER HAS ADOPTED THIS LOS S AS COST OF ACQUISITION OF NEW SHARES. THE ASSESSING OFFICER HAS GROSSLY ERRED BY DOING SO. THE ASSESSING OFFICER HAS NOT GIVEN ANY BASIS FOR ADOPTING THE LOSS IN VA LUATION OF SHARES AS COST OF 4 ITA NO.1815/M/12 CO 71/M/13 AY:2006-07 ACQUISITION OF NEW SHARES. ON THIS VERY NOTE THE O RDER OF THE ASSESSING OFFICER IS ERRONEOUS AND THE CIT(A) HAS RIGHTLY DIRECTED THE A SSESSING OFFICER TO TREAT RS.1,28,97,230/- AS BUSINESS LOSS. WE, THEREFORE, DO NOT FIND ANY REASON TO INTERFERE WITH THE FINDINGS OF THE CIT(A). GROUND NO.2 IS AC CORDINGLY DISMISSED. 5. GROUND NO.3 RELATES TO THE GRIEVANCE THAT THE CI T(A) ERRED IN DELETING THE ADDITION OF RS.17.50 LACS. THIS ISSUE HAS BEEN DIS CUSSED BY THE ASSESSING OFFICER UNDER THE HEADING DEEMED DIVIDEND U/S. 2(22)(E) OF THE ACT. DURING THE COURSE OF SCRUTINY ASSESSMENT PROCEEDINGS, THE ASSESSING OFFI CER RECEIVED INFORMATION FROM THE OFFICE OF ACIT CIRCLE 15(1), NEW DELHI, STATING THA T THE ASSESSEE HAS RECEIVED INTEREST FREE LOAN FROM RPG CELLULAR INVESTMENTS & HOLDINGS P LTD. AMOUNTING TO RS.17,50,000/-THE ASSESSING OFFICER WAS FURTHER INF ORMED THAT THE COMPANY HAS NOT CHARGED ANY INTEREST FROM THE ASSESSEE. THE ASSESS ING OFFICER WAS OF THE OPINION THAT THE AMOUNT RECEIVED BY THE ASSESSEE IS DEEMED DIVIDEND U/S. 2(22)(E) OF THE ACT AND ADDED THE SAME. THE ASSESSEE CARRIED THE M ATTER BEFORE THE CIT(A). THE CIT(A) HAS CONSIDERED THIS GRIEVANCE AT PARA 5 OF H IS ORDER. IT WAS EXPLAINED THAT RPG CELLULAR INVESTMENTS & HOLDINGS P LTD. WAS A NO N-BANKING FINANCIAL COMPANY (NBFC) AND, THEREFORE, GRANTING OF LOANS WAS ITS PR INCIPAL BUSINESS ACTIVITY. IT WAS ARGUED THAT ONLY BECAUSE INTEREST WAS NOT CHARGED T HE ASSESSING OFFICER HAS TREATED THE LOAN OF RS.17,50,000 AS DEEMED DIVIDEND. AFTER CONSIDERING THE FACTS AND THE SUBMISSIONS THE CIT(A) OBSERVED THAT RPG CELLULAR I NVESTMENTS & HOLDINGS P LTD. WAS A REGISTERED NBFC AND, THEREFORE, GRANTING OF L OANS WAS AN ORDINARY BUSINESS OF SUCH NBFCS. THE CIT(A) FURTHER OBSERVED THAT AS PE R BALANCE SHEET OF THE RPG CELLULAR INVESTMENTS & HOLDINGS P LTD., MORE THAN 4 3% OF ITS NET OWNED FUNDS WERE UTILIZED IN GRANTING OF LOANS AND, THEREFORE, IT IS EVIDENT THAT GRANTING OF LOAN WAS SUBSTANTIAL PART OF ITS BUSINESS. THE CIT(A) WAS C ONVINCED THAT CLAUSE (II) OF SECTION 2(22)(E) WAS APPLICABLE TO THE FACTS OF THE CASE AN D ACCORDINGLY DIRECTED THE ASSESSING OFFICER TO DELETE THE ADDITION. AGGRIEVE D BY THIS THE REVENUE IS BEFORE US. 5 ITA NO.1815/M/12 CO 71/M/13 AY:2006-07 6. THE DR STRONGLY RELIED UPON THE FINDINGS OF THE ASSESSING OFFICER. THE COUNSEL FOR THE ASSESSEE REITERATED WHAT HAS BEEN SUBMITTED BEFORE THE LOWER AUTHORITIES. IT IS NOT IN DISPUTE THAT RPG CELLULAR INVESTMENTS & H OLDINGS P LTD. IS AN NBFC. IT IS ALSO NOT DISPUTED THAT GRANTING OF LOANS WAS SUBSTA NTIAL PART OF ITS BUSINESS. MERELY BECAUSE IT HAS NOT CHARGED INTEREST CANNOT CHANGE T HE COLOUR OF THE TRANSACTION AND TAKE IT OUTSIDE THE PURVIEW OF CLAUSE (II) OF SECTI ON 2(22)(E). WE DRAW SUPPORT FROM THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COU RT IN THE CASE OF PARLE PLASTICS LTD. 332 ITR 63 A PLAIN READING OF CLAUSE (II) OF SECTION 2(22)(E) OF THE ACT SHOWS THAT ANY ADVANCE OR LOAN MADE BY A COMPANY TO A SHAREHOL DER OR A CONCERN IN WHICH THE SHAREHOLDER HAS A SUBSTANTIAL INTEREST WOULD NOT BE REGARDED AS A DIVIDEND IF THE ADVANCE OR LOAN WAS M ADE BY THE LENDING COMPANY, IF TWO CONDITIONS ARE SATISFIED NAMELY, (I ) THAT THE LOAN OR ADVANCE WAS MADE BY THE LENDING COMPANY IN THE ORDI NARY COURSE OF ITS BUSINESS AND (II) LENDING OF MONEY WAS A SUBSTANTIA L PART OF THE BUSINESS OF THE LENDING COMPANY. THE EXPRESSION USE D UNDER CLAUSE (II) OF SECTION 2(22)(E) IS 'SUBSTANTIAL PART OF THE BUS INESS'. THE EXPRESSION 'SUBSTANTIAL PART' DOES NOT CONNOTE AN IDEA OF BEIN G THE 'MAJOR PART' OR THE PART THAT CONSTITUTES MAJORITY OF THE WHOLE. IF THE LEGISLATURE INTENDED THAT A PARTICULAR MINIMUM PERCENTAGE OF TH E BUSINESS OF A LENDING COMPANY SHOULD COME FROM THE BUSINESS OF LE NDING, THE LEGISLATURE COULD HAVE SPECIFICALLY PROVIDED FOR TH AT PERCENTAGE WHILE DRAFTING CLAUSE (II) OF SECTION 2(22)(E) OF THE ACT . THE LEGISLATURE HAD DELIBERATELY USED THE WORD 'SUBSTANTIAL' INSTEAD OF USING THE WORD 'MAJOR' AND/OR SPECIFYING ANY PERCENTAGE OF THE BUS INESS OR PROFIT TO BE COMING FROM THE LENDING BUSINESS OF THE LENDING COMPANY FOR THE PURPOSE OF CLAUSE (II) OF SECTION 2(22)(E). ANY BUS INESS OF A COMPANY WHICH THE COMPANY DOES NOT REGARD AS SMALL, TRIVIAL , OR INCONSEQUENTIAL AS COMPARED TO THE WHOLE OF THE BUSINESS IS SUBSTAN TIAL BUSINESS. VARIOUS FACTORS AND CIRCUMSTANCES WOULD BE REQUIRED TO BE LOOKED INTO WHILE CONSIDERING WHETHER A PART OF THE BUSINESS OF A COMPANY IS ITS SUBSTANTIAL BUSINESS. SOMETIMES A PORTION WHICH CON TRIBUTES A SUBSTANTIAL PART OF THE TURNOVER, THOUGH IT CONTRIB UTES A RELATIVELY SMALL PORTION OF THE PROFIT, WOULD BE A SUBSTANTIAL PART OF THE BUSINESS. SIMILARLY, A PORTION WHICH IS RELATIVELY SMALL AS C OMPARED TO THE TOTAL TURNOVER, BUT GENERATES A LARGE PORTION, SAY MORE T HAN 50 PER CENT. OF THE TOTAL PROFIT OF THE COMPANY WOULD ALSO BE A SUB STANTIAL PART OF ITS BUSINESS. 6 ITA NO.1815/M/12 CO 71/M/13 AY:2006-07 RESPECTFULLY FOLLOWING THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE LIGHT OF THE FACTS OF THE CASE WE DO NOT FIND A NY REASON TO TO INTERFERE WITH THE FINDINGS OF THE CIT(A). GROUND NO.3 IS ACCORDI NGLY DISMISSED. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS D ISMISSED. CO NO.71/MUM/2013 7. AS WE HAVE DECIDED THE APPEAL IN FAVOUR OF THE A SSESSEE BY DISMISSING THE APPEAL OF THE REVENUE , THE CROSS-OBJECTIONS OF THE ASSESSEE BECOMES OTIOSE AND IS ACCORDINGLY DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 18 TH SEPTEMBER 2013. SD/- SD/- (H L KARWA) (N.K.BILLAIYA) PRESIDENT ACCOUNTANT MEMBER MUMBAI, DT : 18 TH SEPTEMBER, 2013 SA COPY FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE C.I.T, MUMBAI 4. THE CIT (A)-14, MUMBAI 5. THE DR, B- BENCH, ITAT, MUMBAI //TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI