Kulgam Holding Pvt. Ltd., Ahmedabad V. The Dy.CIT, Range8(2), Mumbai

ITA 1920/MUM/2009

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 67933 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 7 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-11-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 03-12-2013
• Assessment Year: 2004-2005
• Appeal Filed On: 30-03-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P L KUREEL
• Assessee Lawyers: S N SOPARKAR
• Keywords: Capital asset; Retrospective amendment; Notional interest
• Section: 143(3); 14A

Judgement Text

ITA NO 1920/MUM/2009 . A.Y. 2004- 05 1 IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, AHMEDABAD (BEFORE SHRI G.C.GUPTA VICE PRESIDENT & SHRI ANIL C HATURVEDI, A.M.) I.T. A. NO. 1920/MUM/2009 (ASSESSMENT YEAR: 2004-05) KULGAM HOLDING PVT. LTD. NIRMA HOUSE, ASHRAM ROAD, AHMEDABAD (APPELLANT) VS. THE D.C.I.T, RANGE 8(2), MUMBAI (RESPONDENT) PAN: AAACK6575F APPELLANT BY : SHRI S.N. SOPARKAR RESPONDENT BY : SHRI P.L. KUREEL SR. D.R. ( )/ ORDER DATE OF HEARING : 08-10-201 3 DATE OF PRONOUNCEMENT : 22 -11-2013 PER SHRI ANIL CHATURVEDI,A.M. 1. THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE OR DER OF CIT(A)-VIII, MUMBAI DATED 02.02.2009 FOR A.Y. 2004-05. 2. THE FACTS AS CULLED OUT FROM THE ORDER OF LOWER AUT HORITIES ARE AS UNDER:- 3. ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF TR ADING OF SHARES AND SECURITIES AND FINANCIAL ACTIVITIES. ASSESSEE FILED ITS RETURN OF INCOME FOR A.Y. 2004-05 ON 01.11.2004 DECLARING TOTAL INCOME O F RS. 23,71,210/-. ITA NO 1920/MUM/2009 . A.Y. 2004- 05 2 THE CASE WAS SELECTED FOR SCRUTINY AND THEREAFTER T HE ASSESSMENT WAS FRAMED U/S 143(3) VIDE ORDER DATED 13.10.2006 AND T HE TOTAL INCOME WAS DETERMINED AT RS. 28,81,830/-. AGGRIEVED BY THE OR DER OF A.O., ASSESSEE CARRIED THE MATTER BEFORE CIT(A). CIT(A) VIDE ORDER DATED 02.02.2009 DISMISSED THE APPEAL OF THE ASSESSEE. AGGRIEVED BY THE AFORESAID ORDER OF CIT(A), THE ASSESSEE IS NOW IN APPEAL BEFORE US AND HAS RAISED THE FOLLOWING EFFECTIVE GROUNDS:- 1. IN LAW AND IN FACTS AND CIRCUMSTANCES OF THE APPELL ANTS CASE, THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) HAS ERRED IN C ONFIRMING DISALLOWANCE OF EXPENSES RS. 5,10,616/- SAID TO BE INCURRED FOR EAR NING DIVIDEND INCOME. APPELLANT HAS NOT INCURRED ANY EXPENDITURE FOR EARN ING DIVIDEND INCOME. 2. IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF THE AP PELLANTS CASE, THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) HAS GROSSLY ER RED IN CONFIRMING ADDITION OF RS. 26,50,257/- BEING NOTIONAL INTEREST ON INVES TMENT IN OFCPNS ISSUED BY NIRMA INDUSTRIES LTD. GROUND NO. 1 IS WITH RESPECT TO DISALLOWANCE OF UND ER SECTION 14A. 2. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, A.O. N OTICED THAT ASSESSEE HAS RECEIVED DIVIDEND OF RS. 81,46,351/- BUT HAD NO T DISALLOWED PROPORTIONATE EXPENSES FOR EARNING SUCH INCOME. IT WAS INTERALIA SUBMITTED BY ASSESSEE THAT NO EXPENSES HAVE BEEN IN CURRED TO EARN DIVIDEND INCOME. THE SUBMISSIONS OF THE ASSESSEE W AS NOT FOUND ACCEPTABLE TO THE A.O. HE ACCORDINGLY APPORTIONATED THE EXPENDITURE INCURRED FOR EARNING DIVIDEND INCOME IN THE RATIO O F DIVIDEND INCOME TO TOTAL INCOME AND THEREAFTER WORKED OUT THE DISALLOW ANCE AT RS. 5,10,616/- . AGGRIEVED BY THE ORDER OF A.O., ASSESSEE CARRIED THE MATTER BEFORE CIT(A). CIT(A) FOLLOWING THE DECISION OF SPECIAL BE NCH OF MUMBAI ITA NO 1920/MUM/2009 . A.Y. 2004- 05 3 TRIBUNAL IN THE CASE OF DAGA CAPITAL MANAGEMENT PVT . LTD. (2008) 26 (SOT) 603 (MUM) (SPECIAL BENCH) UPHELD THE DELETION MADE BY THE ASSESSING OFFICER BY HOLDING AS UNDER:- 2.4 I HAVE CONSIDERED THE SUBMISSIONS OF THE APPELL ANT, THE ORDER OF THE A.O AND ALSO THE LATEST DECISION OF SPECIAL BENCH OF MUMBAI TRIBUNAL IN THE CASE OF ITO VS. DAGA CAPITAL MANAGEMENT PVT. LTD. (2008) 26 SOT 603 (BOM) (SPECIAL BENCH), WHERE IT IS HELD THAT:- ALL DIRECT AND INDIRECT EXPENSES ARE DISALLOWABLE U NDER SECTION 14A, WHICH HAVE ANY RELATION WITH INCOME NOT CHARGEABLE TO TAX UNDE R ACT. 2.5 THIS CASE IS SQUARELY COVERED BY THIS DECISION . IT IS HELD IN THIS CASE THAT THE DISALLOWANCE WILL BE MADE AS PER RULE 8D OF I.T. RU LES AND IT WILL BE ACTIVE WITH RETROSPECTIVE EFFECT. ACCORDINGLY, THE A.O. IS DIRE CTED TO COMPUTE THE DISALLOWANCE U/S. 14A AS PER RULE 8D OF THE I.T. AC T. THIS GROUND OF APPEAL IS DISMISSED. 3. AGGRIEVED BY THE ORDER OF CIT(A), THE ASSESSEE IS N OW IN APPEAL BEFORE US. BEFORE US, THE LD. A.R. SUBMITTED THAT ASSESSEE HAS NOT INCURRED ANY EXPENSES FOR EARNING TAX FREE DIVIDEND INCOME AND F URTHER SUBMITTED THAT RULE 8D WAS INSERTED WITH EFFECT FROM 24.03.2008 AN D IT CANNOT BE APPLIED RETROSPECTIVELY. HE HOWEVER SUBMITTED THAT THE MATTER BE REMITTED TO A.O. TO WORK OUT THE DISALLOWANCE ON THE BASIS O F FACTS. THE LD. D.R. ON THE OTHER HAND SUPPORTED THE ORDER OF A.O. AND C IT(A). 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. IT IS AN UNDISPUTED FACT THAT ASSESSEE HAS EARNED T AX FREE DIVIDEND INCOME TO THE EXTENT OF RS. 81,46,351/- AND HAS ALSO SUBMI TTED THAT NO EXPENSES HAVE BEEN INCURRED FOR EARNING THE TAX FREE DIVIDEN D INCOME. IT IS ALSO A FACT THAT CIT(A) HAS RELIED ON THE DECISION OF DAGA CAPITAL MANAGEMENT ITA NO 1920/MUM/2009 . A.Y. 2004- 05 4 PVT. LTD. (SUPRA) TO WORK THAT THE DISALLOWANCE WHE REIN THE SPECIAL BENCH HAD HELD THAT THE PROVISIONS OF SUB-SECTION (2) AND (3) OF SECTION 14A TO BE PROCEDURAL IN NATURE AND HENCE RETROSPECTIVE. HO WEVER, IN THE CASE OF GODREJ & BOYCE COMPANY LTD. (2010) 328 ITR 81 (BOM) , THE HON. BOMBAY HIGH COURT HAS HELD AT RULE 8D WHICH HAS BEE N NOTIFIED ON MARCH 24, 2008 WOULD APPLY WITH EFFECT FROM ASSESSM ENT YEAR 2008-09. IT HAS FURTHER HELD THAT EVEN PRIOR TO ASSESSMENT Y EAR 08-09 WHEN RULE 8D WAS NOT APPLICABLE THE A.O. HAD TO ENFORCED THE PRO VISIONS OF SUBSECTION (1) OF SECTION 14A AND FOR THAT PURPOSE, THE A.O. I S DUTY BOUND TO DETERMINE THE EXPENDITURE WHICH HAS BEEN INCURRED I N RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE A.O. MUST ADOPT A REASONABLE BASIS OR METHOD CONSISTENT WITH ALL THE RELEVANT FACTS AND CIRCUMSTANCES AFTER FURNISHING A REASONAB LE OPPORTUNITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON RECORD. 5. IN VIEW OF THE AFORESAID FACTS AND FOLLOWING THE D ECISION OF HON. BOM HIGH COURT IN THE CASE OF GODREJ BOYCE COMPANY LTD. (SUPRA), WE REMIT THE ISSUE TO THE FILE OF A.O. TO DETERMINE THE DISA LLOWANCE U/S. 14A IN LIGHT OF THE AFORESAID DECISION OF HON. BOMBAY HIGH COURT. NEEDLESS TO STATE THAT THE A.O. SHALL GRANT ADEQUATE OPPORTUNIT Y OF HEARING TO THE ASSESSEE BEFORE DECIDING THE ISSUE. THUS THIS GROUND OF ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES . GROUND NO. 2 IS WITH RESPECT TO ADDITION ON ACCOUNT OF NOTIONAL INTEREST ON INVESTMENT OF OFCPNS ISSUED BY NIRMA INDUSTRIES LTD . ITA NO 1920/MUM/2009 . A.Y. 2004- 05 5 6. BEFORE US, THE LD. A.R. SUBMITTED THAT THE ASSESSEE HAD MADE INVESTMENTS IN OFCPNS OF NIRMA INDUSTRIES LIMITED ON 25.03.2002 AND THE INCOME FROM THE SAME AMOUNTING TO RS. 26,50,257/- BEING NA TIONAL INCOME WAS OFFERED TO TAX. HE FURTHER SUBMITTED THAT IN THE AS SESSEES OWN CASE FOR A.Y. 02-03 & 03-04, THE NOTIONAL INCOME OFFERED TO TAX BY THE ASSESSEE HAS BEEN DELETED BY HON. TRIBUNAL. HE PLACED ON RE CORD, THE COPY OF THE ORDER IN ITA NO. 1259/A/2006 ORDER DATED 21.06.2013 . HE ALSO POINTED TO THE RELEVANT PARA OF THE FINDING OF HON. TRIBUNA L. HE FURTHER SUBMITTED THAT SINCE THE FACTS OF THE CASE IN THE YEAR UNDER APPEAL ARE IDENTICAL TO THAT OF EARLIER YEARS, FOLLOWING THE DECISION OF TR IBUNAL IN EARLIER YEARS, THE SUO MOTU NATIONAL INCOME OFFERED ON ACCOUNT OF INTEREST OF OFCPNS BY THE ASSESSEE BE DELETED. THE LD. D.R. ON THE OTH ER HAND RELIED ON THE ORDER OF CIT(A). 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT ASSESSEE HAD RAISED AN ADDITIONAL GROU ND WITH RESPECT TO NOTIONAL INTEREST BEFORE CIT(A). CIT(A) NOTED THAT A.O. HAD TAKEN THE TOTAL INCOME AS PER THE RETURN OF INCOME AND NOT MA DE ANY ADDITION ON ACCOUNT OF NOTIONAL INTEREST. HE FURTHER HELD THAT THERE IS NO PROVISION IN LAW THAT INCOME IS ASSESSED AT LOWER FIGURE THAN TH E RETURNED INCOME AND THUS DISMISSED THE GROUND OF ASSESSEE. WE FIND THAT ON IDENTICAL FACTS, THE ADDITION HAS BEEN DELETED BY THE CO-ORDINATE BE NCH OF TRIBUNAL IN THE ASSESSEES OWN CASE IN ITA NO. 1259/A/2006 BY HOLDI NG AS UNDER:- 2.8.7 NOW, WE HAVE TO DECIDE AS TO WHETHER ANY INCOME IS ACCRUING TO THE ASSESSEE IN RESPECT OF THESE OFCPNS ISSUED BY NIRMA INDUSTRIES LTD. WE HAVE ALRE ADY DISCUSSED THAT AS PER THE ISSUE DETAILS OF THESE OFCPNS, THE ISSUE PRICE IS RS.25000 EACH, THE FACE VALUE IS RS.33750/- THE PERIOD IS 5 YEARS FROM THE DATE 0F ALLOTMENT I.E. 25.03.2002 AND THE ASSESSEE HAS PUT OPTION WHICH CAN BE EXERCISED BY THE ASSESSEE IN THE LAST QUARTER OF THE 5 YEAR AND THEN ASSESSEE HAS ALSO THE OPTION TO CONVERT SUCH OFCPNS AT THE END OF 5 TH YEAR FROM THE DATE OF ALLOTMENT INTO 2500 EQUITY S HARES OF RS. 10 EACH AT PAR. THESE ISSUE DETAILS OF OFCPN SUGGEST THAT NO INCOME IS GUARANTEED TO THE A SSESSEE EVEN AFTER 5 YEARS PERIOD FORM THE DATE OF ALLOTMENT IF THE ASSESSEE O PTS FOR CONVERSION AND THE ASSESSEE WILL GET THE ITA NO 1920/MUM/2009 . A.Y. 2004- 05 6 INCOME BEING DIFFERENCE BETWEEN THE FACE VALUE AND THE ISSUE PRICE ONLY IF SUCH OPTION OF CONVERSION I S NOT EXERCISED BY THE ASSESSEE WHICH HE CAN EXERCISE ONLY IN THE LAST QUARTER OF THE 5 TH YEAR. THERE WAS AN ARGUMENT FORWARDED BY THE LD. D.R. THAT BEFORE T HE LAST QUARTER OF THE 5 TH YEAR, THE ASSESSEE HAS AN OPTION TO SELL THESE OFCPNS BECAUSE THESE OFCPNS AR E TRANSFERABLE AND IN THAT SITUATION, THE ASSESSEE WILL GET AT LEAST ISSUE PRICE + PROPORTION ATE ACCRETION TILL THE DATE OF TRANSFER OVER AND AB OVE THE ISSUE PRICE, LAY BE CORRECT BUT IN OUR CONSIDER ED OPINION, EVEN IN THE LIGHT OF THESE FACTS IT CAN NOT BE SAID THAT ANY INCOME IS ACCRUING TO THE ASSESSEE ON DAY TO DAY OR YEAR TO YEAR BASIS. THE OFCPN MAY BE HELD BY THE ASSESSEE AS INVESTMENT OR TRADING TH EM. IF THE ASSESSEE IS HOLDING OFCPN AS A TRADING ITEM AND TILL THE SAME IS SOLD BY THE ASSESSEE, IT HAS TO BE CONSIDERED BY THE ASSESSEE AS CLOSING STO CK WHICH HAS TO BE VALUED AT THE COST OR AT THE COST O R MARKET PRICE WHICHEVER IS LOWER AND IN THAT SITUATION, EVEN IF THE MARKET PRICE IS MORE THAN CO ST PRICE I.E. ISSUE PRICE, THEN ALSO THIS INCOME IS NOT TO BE TAXED TILL THE SALE TAKES PLACE. ALTHOUGH, IF TH E MARKET PRICE GOES DOWN BELOW THE COST PRICE I.E. ISSUE PRICE THEN IN THAT SITUATION, THE ASSESSEE CAN CLAI M LOSS TO THAT EXTENT BY VALUING THE CLOSING STOCK OF OFGPN AT MARKET PRICE BUT IN CASE THE MARKET PRICE IS MORE THAN THE COST PRICE, NO INCOME IS ACCRUING TO THE ASSESSEE TILL THE SAME IS SOLD. 2.8.8 IN ANOTHER SITUATION, WHERE THE ASSESSEE IS HOLDIN G THESE OFCPNS AS INVESTMENT THEN ALSO, THE INCOME IF ANY IN RESPECT OF SUCH CAP ITAL ASSET IS TAXABLE ONLY AS CAPITAL GAIN AND THAT TOO AFTER THE CAPITAL ASSET IN QUESTI ON IS TRANSFERRED BY THE ASSESSEE. TILL THE ACTUAL TRANSFER TAKES PLACE, NEITHER ANY INCOME IS TAXABLE IN THE HANDS OF THE ASSESSEE EVEN IF THE MARKET VALUE OF THE ASSET HAS GONE UP NOR ANY LOSS IS ALLOWABLE TO THE ASSESSEE EVEN IF MARKET VALUE OF THE ASSET HAS GONE DOWN. IT IS NOT THE CASE OF THE A.O. THAT THE ASSESSEE HAS SOLD OR TRANSFERRED THES E OFCPNS IN THE PRESENT YEAR. IN THE ABSENCE OF THIS, IT CANNOT BE SAID THAT ANY INC OME HAS ACCRUED TO THE ASSESSEE EVEN IF IT IS ACCEPTED THAT THE MARKET VALUE OF THESE OFCPNS TILL THE LAST DATE OF THE PRESENT YEAR IS MORE THAN COST PRICE I.E. ISSUE PRI CE WHICH CAN BE ISSUE PRICE + PROPORTIONATE ACCRETION AND THE DIFFERENCE BETWEEN THE FACE VALUE AND ISSUE PRICE. WE HAVE ALREADY DISCUSSED THAT THE NATURE OF OFCPN IS NOT THAT OF FD AND IT IS ALS O NOT OF THE NATURE OF DDB BECAUSE OF CONVERTIBILITY OPTION AND UNCERTAINT Y ABOUT RECEIPT OF ANY EXTRA AMOUNT OVER AND ABOVE THE ISSUE PRICE. EVEN ON CONV ERSION, SHARES ARE TO BE ALLOTTED AT PAR AND NOT AT A PREMIUM I.E. FACE VALU E. CONSIDERING ALL THESE FACTS, WE HOLD THAT IN THE FACTS OF THE PRESENT CASE, IT CANN OT BE SAID THAT ANY INCOME HAS ACCRUED TO THE ASSESSEE ON ACCOUNT OF TH ESE OFCPNS OF NIRMA INDUSTRIES LTD. BECAUSE NO SALE HAS TAKEN PLACE AND THERE IS N O GUARANTEED INCOME TO THE ASSESSEE EVEN AFTER FIVE YEARS IN CASE THE ASSESSEE OPTS FOR CONVERSION INTO SHARES AT PAR. HENCE, THIS GROUND OF THE ASSESSEE IS ALLOWED. 8. BEFORE US, THE REVENUE COULD NOT CONTROVERT THE SUB MISSIONS OF LD. A.R. NOR COULD IT BRING ANY CONTRARY MATERIAL ON RECORD. FURTHER, SINCE THE FACTS OF THE CASE YEAR UNDER APPEAL ARE IDENTICAL TO THAT OF EARLIER YEARS, RESPECTFULLY FOLLOWING THE DECISION OF THE CO-ORDIN ATE BENCH OF TRIBUNAL IN THE ASSESSEES OWN CASE BY THE CONSOLIDATED ORDE R DATED 21.06.2013, WE DO NOT FIND ANY REASON TO TAKE A DIFFERENT VIEW THAN THAT TAKEN BY THE CO-ORDINATE BENCH. THUS THIS GROUND OF ASSESSEE IS ALLOWED. ITA NO 1920/MUM/2009 . A.Y. 2004- 05 7 9. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON 22 - 11 - 2013. SD/- SD/- (G.C.GUPTA) (ANIL CHATURVEDI) VICE PRESIDENT ACCOUNTANT MEMBER AHMEDABAD. TRUE COPY RAJESH COPY OF THE ORDER FORWARDED TO: - 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT (APPEALS) 4. THE CIT CONCERNED. 5. THE DR., ITAT, AHMEDABAD. 6. GUARD FILE. BY ORDER DEPUTY/ASSTT.REGISTRAR ITAT,AHMEDA BAD