DCIT 3(3), MUMBAI V. YASHEKA IMPEX P.LTD, MUMBAI

ITA 102/MUM/2011

• Counselvise Citation: 10219914 RSA 2011
• Duration Of Justice: 4 year(s) 3 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-04-2015
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: G
• Next Hearing Date: 12-02-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 06-01-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PAVAN KUMAR BEER LA
• Assessee Lawyers: J P BAIRAGRA
• Keywords: Capital asset; Business income; Cost of acquisition

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL G BENCH, MUMBAI BEFORE S/SHRI B.R.BASKARAN (AM) AND VIVEK VARMA, (JM) . . , , ./ I.T.A. NO. 102 / MUM/201 1 ( / ASSESSMENT YEAR : 200 7 - 08 ) DY.COMMISSIONER OF INCOME TAX - CIRCLE 3(3), ROOM NO.603, 6 TH FLOOR, AAYAKAR BHAVAN, M K ROAD, MUMBAI - 400020 / VS. M/S YASHEKA IMPEX PVT.LTD, 101, B WING, MITTAL COURT, NAR IMAN POINT, M UMBAI - 400021 ( / APPELLANT ) .. ( / RESPONDENT ) ./ ./PAN/GIR NO. : AAACY0293N /APPELLANT BY : SHRI PAVAN KUMAR BEERLA / RESPONDENT BY: SHRI J P BAIRAGRA / DATE OF HEARING : 12.2.2015 / DATE OF PRONOUNCEMENT : 21.4 .2015 / O R D E R PER B.R.BASKARAN, ACCOUNTANT MEMBER: THE APPEAL FILED BY THE REVENUE IS DIRECTED AGAI NST THE ORDER DATED 23.11.2009 PASSED BY LD CIT(A) - 7, MUMBAI AND IT RELATES TO THE ASSESSMENT YEAR 2007 - 08. FOLLOWING THREE ISSUES ARE CONTESTED IN THIS APPEAL: (A) ASSESSMENT OF SHORT TERM CAPITAL GAIN AS BUSINESS INCOME. I.T.A. NO. 102 /MUM/201 1 2 (B) DISALLOWANCE OF INTEREST PAID ON BORROWINGS MADE TO PURCHASE SHARES. (C) TREATMENT OF FOREIGN EXCHANGE GAIN AND INTEREST INCOME AS INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES. 2. WE HEARD THE PARTIES AND PERUSED THE RECORD. THE ASSESSEE COMPANY IS CARRYING ON BUSINESS AS IMPORTER, EXP ORTER, FINANCING AND INVESTMENTS ETC. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE DECLARED LONG TERM CAPITAL LOSS OF RS.7,51,698/ - AND SHORT TERM CAPITAL GAIN OF RS.1,26,84,254/ - . THE LONG TERM CAPITAL LOSS AROSE ON SALE OF SHARES OF SCI LTD AND TH E SHORT TERM CAPITAL GAIN AROSE ON SALE OF SHARES OF M/S ADANI EXPORTS LTD. THE AO TOOK THE VIEW THAT THE PURCHASE AND SALE OF SHARES OF M/S ADANI EXPORTS LTD WAS CARRIED ON BY THE ASSESSEE LIKE ITS BUSINESS ACTIVITY. FURTHER THE ASSESSEE HAD USED BORROW ED FUNDS FOR PURCHASING THE SHARES OF M/S ADANI EXPORTS LTD. ACCORDINGLY, THE AO ASSESSED THE SHORT TERM CAPITAL GAIN ARISING ON SALE OF SHARES OF M/S ADANI EXPORTS LTD AS BUSINESS INCOME OF THE ASSESSEE. THE LD CIT(A), HOWEVER, HELD THAT THE OVERALL CON DUCT OF THE ASSESSEE SHOW THAT IT HAS ACTED AS AN INVESTOR AND ACCORDINGLY DIRECTED THE AO TO ASSESS THE PROFIT ARISING ON SALE OF SHARES OF M/S ADANI EXPORTS LTD AS SHORT TERM CAPITAL GAIN. 3. THE ASSESSEE HAD CLAIMED THE INTEREST ON THE LOAN TAKEN F OR PURCHASING THE SHARES OF M/S ADANI EXPORTS LTD AS PART OF COST OF ACQUISITION OF SHARES. THE AO HAD ALLOWED THE INTEREST EXPENDITURE AGAINST THE PROFIT ARISING ON SALE OF SHARES, SINCE THE AO ASSESSED THE SAME AS BUSINESS PROFITS. THE LD CIT(A) HELD T HAT THE INTEREST EXPENDITURE SHOULD BE ALLOWED TO BE CAPITALISED AND CONSEQUENTLY THE SAME IS DEDUCTIBLE AGAINST THE SALE PRICE OF SHARES. 4. WE NOTICE FROM THE ASSESSMENT ORDER THAT THE ASSESSING OFFICER HAS ACCEPTED THE LONG TERM CAPITAL LOSS DECLAR ED BY THE ASSESSEE ON SALE OF SHARES OF SCI LTD. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS I.T.A. NO. 102 /MUM/201 1 3 PURCHASED 2,00,000 SHARES OF M/S ADANI EXPORTS LTD AND SOLD 1,50,000 SHARES AND HAS RETAINED 50,000 SHARES. THE PURCHASES WERE EFFECTED ON FIVE DAYS AN D THE SALE WAS EFFECTED ON A SINGLE DAY. THE AO TOOK THE VIEW THAT THE ASSESSEE HAS TAKEN THE RISK OF PRICE FLUCTUATION AND SUCH KIND OF RISK IS TAKEN ONLY IN THE CASE OF BUSINESS ACTIVITY. THE AO FURTHER NOTICED THAT THE ASSESSEE HAS USED BORROWED FUNDS FOR PURCHASING THE SHARES. HENCE, BY PLACING RELIANCE ON THE DECISION OF HONBLE SUPREME COURT RENDERED IN THE CASE OF CIT VS. SUTLEJ COTTON MILLS SUPPLY AGENCY LTD (100 ITR 706), THE AO HELD THAT THE SINGLE TRANSACTION CAN ALSO BE TREATED AS ADVENTURE I N THE NATURE OF TRADE. ACCORDINGLY, THE AO ASSESSED THE GAIN ARISING ON SALE OF SHARES OF M/S ADANI EXPORTS LTD AS BUSINESS INCOME OF THE ASSESSEE. 5. HOWEVER, WE ARE OF THE VIEW THAT THE ASSESSING OFFICER HAS FAILED TO ASCERTAIN THE INTENTION OF TH E ASSESSEE AT THE TIME OF PURCHASING OF THE SHARES OF M/S ADANI EXPORTS LTD, WHICH IS THE MOST IMPORTANT FACTOR TO BE CONSIDERED TO ASCERTAIN ABOUT THE NATURE OF TRANSACTION. FROM THE FACTS AVAILABLE, WE NOTICE THAT THE ASSESSEE HAD PURCHASED SHARES OF M /S SCI LTD IN THE EARLIER YEAR AND SOLD THE SAME DURING THE YEAR UNDER CONSIDERATION AND THE SAME HAS RESULTED IN LONG TERM CAPITAL LOSS. IT IS PERTINENT TO NOTE THAT THE ASSESSING OFFICER HAS ACCEPTED THE SAME, MEANING THEREBY, THE ASSESSING OFFICER HAS ACCEPTED THAT THE ASSESSEE IS ALSO ACTING AS INVESTOR. IN THE CASE OF SHARES OF M/S ADANI EXPORTS LTD, THE ASSESSEE HAD PURCHASED 2,00,000 SHARES AND HAS SOLD ONLY 1,50,000 SHARES. THE BALANCE QUANTITY OF 50,000 SHARES HAS BEEN RETAINED BY THE ASSESSEE A S ITS INVESTMENT. THE RISK OF FLUCTUATION IN PRICES OF SHARES IS QUIET COMMON IN SHARE PRICE MOVEMENTS AND HENCE THE SAME, IN OUR VIEW, CANNOT BE TAKEN AS A DECIDING FACTOR. THOUGH THE ASSESSEE HAS USED BORROWED FUNDS FOR PURCHASING THE SHARES, YET WE AR E OF THE VIEW THAT THE AO COULD NOT MAKE OUT A CASE, UNDER THESE SET OF FACTS, TO PROVE THAT THE INTENTION OF THE ASSESSEE AT THE TIME OF PURCHASING SHARES OF M/S ADANI I.T.A. NO. 102 /MUM/201 1 4 EXPORTS LTD WAS TO TRADE IN THAT SHARES. THE LD A.R ALSO SUBMITTED THAT THE CAPITAL GA IN DECLARED BY THE ASSESSEE IN THE IMMEDIATELY PRECEDING YEAR AND ALSO IN THE SUCCEEDING YEAR WAS ACCEPTED BY THE ASSESSING OFFICER. ACCORDINGLY, WE ARE OF THE VIEW THAT THE LD CIT(A) WAS JUSTIFIED IN HOLDING THAT THE PROFIT ARISING ON SALE OF SHARES OF M/ S ADANI EXPORTS LTD IS ASSESSABLE AS SHORT TERM CAPITAL GAIN. 6. THE NEXT ISSUE RELATES TO THE INTEREST EXPENDITURE. IN THE COMPUTATION OF SHORT TERM CAPITAL GAIN, THE ASSESSEE HAS ADDED THE INTEREST EXPENDITURE TO THE COST OF PURCHASE AND ACCORDINGLY C OMPUTED THE SHORT TERM CAPITAL GAIN. SINCE THE ASSESSING OFFICER HAS ASSESSED THE GAIN ARISING ON SALE OF SHARES AS BUSINESS INCOME, HE ALLOWED DEDUCTION OF INTEREST EXPENDITURE. HOWEVER, THE AO, IN THE ALTERNATIVE, HELD THAT THE INTEREST EXPENDITURE IS NOT ALLOWABLE AS DEDUCTION, IF THE GAIN IS ASSESSED AS SHORT TERM CAPITAL GAIN. THE LD CIT(A), HOWEVER, HELD THAT THE INTEREST EXPENDITURE WOULD GO TO INCREASE THE COST OF SHARES. 7. THE PROVISIONS OF SEC. 48 PROVIDE THE MODE OF COMPUTATION OF CAPITA L GAINS. FROM THE FULL VALUE OF CONSIDERATION RECEIVED AS A RESULT OF TRANSFER OF A CAPITAL ASSET, FOLLOWING TWO DEDUCTIONS ARE ALLOWED: - (A) EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY IN CONNECTION WITH SUCH TRANSFER. (B) COST OF ACQUISITION OF THE AS SET AND THE COST OF ANY IMPROVEMENT THERETO. THE QUESTION THAT ARISES IS, WHETHER THE INTEREST EXPENDITURE SHALL FORM PART OF COST OF ACQUISITION OF THE ASSET OR COST OF IMPROVEMENT THERETO. THE INTEREST EXPENDITURE COULD NOT FORM PART OF COST OF IMPR OVEMENT, SINCE THE SHARES DO NOT REQUIRE ANY IMPROVEMENT. THE ACCOUNTANCY PRINCIPLE STATES THAT ANY EXPENDITURE INCLUDING THE INTEREST EXPENDITURE COULD BE CAPITALISED ONLY UPTO THE DATE OF INSTALLATION OF THE ASSET. ACCORDINGLY, WE ARE OF THE VIEW THAT, IN THE CASE OF SHARES, THE INTEREST PAID UPTO THE DATE OF ACTUAL RECEIPT OF SHARES COULD BE CAPITALISED. SUCH KIND OF SITUATION I.T.A. NO. 102 /MUM/201 1 5 WOULD ARISE ONLY WHEN SHARES ARE APPLIED DURING THE COURSE OF PUBLIC ISSUE, WHICH IS NOT THE CASE UNDER CONSIDERATION. ACCORD INGLY, WE ARE OF THE VIEW THAT THE ASSESSEE IS NOT ENTITLED TO CLAIM INTEREST EXPENDITURE AGAINST THE SHORT TERM CAPITAL GAIN. THE SAME COULD BE CLAIMED ONLY AGAINST INCOME ARISING OUT OF INVESTMENTS. ACCORDINGLY, WE SET ASIDE THE ORDER OF LD CIT(A) ON T HIS ISSUE AND RESTORE THAT OF THE ASSESSING OFFICER. 8. THE LAST ISSUE RELATES TO THE HEAD UNDER WHICH THE FOREIGN EXCHANGE COMMISSION AND INTEREST INCOME IS ASSESSABLE. THOUGH THE ASSESSEE DECLARED THE ABOVE SAID RECEIPTS AS BUSINESS INCOME, THE AO ASSESSED THE SAME AS INCOME FALLING UNDER THE HEAD INCOME FROM OTHER SOURCES, ON THE REASONING THAT THE ASSESSEE HAS DISCONTINUED THE REGULAR BUSINESS OPERATIONS OF IMPORT & EXPORT; THAT THE ASSESSEE CANNOT BE CONSIDERED TO BE IN THE BUSINESS OF MONEY LEN DING, SINCE THE ASSESSEE IS NOT A NBFC AND THAT THE ASSESSEE DID NOT CHARGE INTEREST ON ALL THE ADVANCES. HOWEVER, THE LD CIT(A) ACCEPTED THE CONTENTIONS OF THE ASSESSEE THAT IT IS ENGAGED IN FINANCING BUSINESS SINCE LONG AND INTEREST EARNED BY IT HAS ALL ALONG BEEN ASSESSED AS ITS BUSINESS INCOME. 9. WE NOTICE THAT THE ASSESSEE HAS BEEN DECLARING INTEREST RECEIPTS AS ITS BUSINESS INCOME IN THE PAST YEARS AND THE SAME HAS BEEN ACCEPTED BY THE ASSESSING OFFICER. FURTHER, ACCORDING TO LD A.R, THE INTE NTION OF THE ASSESSEE IN ADVANCING LOANS TO OTHERS WAS TO EARN INTEREST INCOME AND THE SAME WAS CARRIED OUT AS REGULAR BUSINESS ACTIVITY. IN RESPECT OF FOREIGN EXCHANGE GAIN, THE LD A.R SUBMITTED THAT THE SAME RESULTED ON ACCOUNT OF PAYMENT MADE TO AN EXI STING CREDITOR. UNDER THESE SET OF FACTS, WE ARE OF THE VIEW THAT THE LD CIT(A) WAS JUSTIFIED IN HOLDING THAT THE INTEREST INCOME AND FOREIGN EXCHANGE GAIN IS ASSESSABLE AS BUSINESS INCOME OF THE ASSESSEE. ACCORDINGLY, WE UPHOLD HIS ORDER ON THIS ISSUE. I.T.A. NO. 102 /MUM/201 1 6 10. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS PARTLY ALLOWED. THE ABOVE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 21 ST APR ,2015 . 21 ST APR , 2015 SD SD ( / VIVEK VARMA) ( . . / B.R. BASKARAN ) / JUDICIAL MEMBER / ACCOUNTAN T MEMBER MUMBAI: 21 ST APR ,2015 . . . ./ SRL , SR. PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A) - CONCERNED 4. / CIT CONCERNED 5. , , / DR, ITAT, MUMBAI CONCERNED 6. / GUARD FILE. / BY ORDER, TRUE COPY (ASST T. REGISTRAR) , /ITAT, MUMBAI