The Deputy Commissioner of Income Tax, Corporate Circle 6(1), Chennai V. Sak Industries Private Limited , Chennai

ITA 2138/CHNY/2017

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 5141 (ITAT-CHENNAI)
• Duration Of Justice: 4 year(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-09-2021
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Assessment Year: 2011-2012
• Appeal Filed On: 01-09-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: G JOHNSON
• Assessee Lawyers: SANJEEV ADITYA M
• Keywords: Capital asset; Business income; Earning of tax free income; Rule 8D; Capital Gains
• Section: 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH: CHENNAI , , % BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER AND SHRI G. MANJUNATHA, ACCOUNTANT MEMBER ./ ITA NO.2138/CHNY/2017 /ASSESSMENT YEAR: 2011-12 THE DY. COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE-6(1), CHENNAI. VS. M/S. SAK INDUSTRIES PVT. LTD., 27-F, RANJITH ROAD, KOTTURPURAM, CHENNAI 600 085. [PAN: AAGCS 3326Q] ( /APPELLANT) ( '() /RESPONDENT) ) / APPELLANT BY : MR. G. JOHNSON, ADDL. CIT '() /RESPONDENT BY : MR. SANJEEV ADITYA M, CA /DATE OF HEARING : 06.09.2021 / DATE OF PRONOUNCEMENT : 24.09.2021 / O R D E R PER V. DURGA RAO, JUDICIAL MEMBER : THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINS T THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-15 , CHENNAI IN I.T.A NO.750/2013-14/A.Y.2011-12/CIT(A)-15 DATED 20 .06.2017 RELEVANT TO THE ASSESSMENT YEAR 2011-12. 2. THE FIRST GROUND OF APPEAL IS GENERAL IN NATURE HENCE, NO ADJUDICATION IS REQUIRED. I.T.A NO.2138/CHNY/2017 :- 2 -: 3. GROUNDS OF APPEAL NOS.2 TO 2.6 DEALS WITH WHETHE R THE INCOME ARISING OUT OF SHARES IS BUSINESS INCOME OR INCOME FROM CAPITAL GAINS? 4. IN THE ASSESSMENT ORDER, THE A.O HAS ASKED THE A SSESSEE WHEY THE SALE OF SHARES SHOULD NOT BE TREATED AS BUSINES S INCOME. THE ASSESSEE HAS SUBMITTED THAT THE DATE OF PURCHASE OF SHARES ON 18.12.2009 AND SALE OF SHARES ON 23.03.2011. THE AB OVE TRANSACTIONS DECLARED IN THE BALANCE SHEET AS AN INVESTMENT AND SUBMITTED THAT THE SAME MAY BE TREATED AS CAPITAL GAINS. THE A.O AFTE R CONSIDERING THE EXPLANATION OF THE ASSESSEE, HE HAS OBSERVED THAT I N THE EARLIER YEARS ALSO THE SALE AND PURCHASE OF THE SHARES BY THE ASS ESSEE HAS TREATED AS BUSINESS INCOME WHICH HAS BEEN DISPUTED BY THE A SSESSEE BEFORE THE LD. CI(A) AND THIS YEAR UNDER CONSIDERATION ALS O IT IS TREATED AS BUSINESS INCOME. 5. ON APPEAL BEFORE LD. CIT(A), THE ASSESSEE HAS RE ITERATED THE SUBMISSIONS WHICH HE HAS MADE BEFORE THE A.O. THE LD. CIT(A) AFTER CONSIDERING THE EXPLANATION OF THE ASSESSEE HE DIRE CTED THE A.O TO DELETE THE ADDITION BY TREATING THE ENTIRE SHARES T RANSACTION MADE BY THE ASSESSEE IS AN INVESTMENT. 6. ON BEING AGGRIEVED, THE ASSESSEE CARRIED THE MAT TER BEFORE THE TRIBUNAL. I.T.A NO.2138/CHNY/2017 :- 3 -: 7. THE LD. COUNSEL FOR THE ASSESSEE HAS SUBMITTED T HAT THE YEAR UNDER CONSIDERATION, HE HAS MADE ONLY ONE TRANSACTI ON THE HOLDING PERIOD OF MORE THAN 12 MONTHS AND THEREFORE, THE A. O IS NOT JUSTIFIED IN TREATING THE TRANSACTIONS AS A BUSINESS TRANSACTION AND THE INCOME ARISING OUT OF THE TRANSACTION IS A BUSINESS INCOME AND HE STRONGLY SUPPORTED THE ORDER PASSED BY THE LD. CIT(A). 8. ON THE OTHER HAND, THE LD. DEPARTMENTAL REPRESEN TATIVE STRONGLY SUPPORTED THE ORDERS PASSED BY THE A.O. 9. WE HAVE HEARD BOTH THE SIDES, PERUSED THE MATERI ALS AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHORITI ES BELOW. IN THIS CASE THE ASSESSEE HAS PURCHASED SHARES OF INDUSLND BANK ON 18.12.2009 AND SOLD THE SAME ON 23.03.2011. THE HO LDING PERIOD OF THE SHARES IS MORE THAN 12 MONTHS AND ONLY SINGLE A CTIVITY CARRIED BY THE ASSESSEE. IN THE BALANCE SHEET ALSO IT HAS SHO WN AS AN INVESTMENT. IN VIEW OF THE ABOVE FACTS, WE ARE OF THE OPINION THAT THE ACTIVITY CARRIED BY THE ASSESSEE CANNOT BE TREATED AS A BUSINESS ACTIVITY. THE LD. CIT(A) BY FOLLOWING THE CIRCULAR NOS.4 & 6 DELETED THE ADDITION MADE BY THE A.O, WHICH READS AS UNDER: 3.2 I HAVE GONE THROUGH THE FACTS OF THE CASE AND HAVE ALSO CONSIDERED THE RIVAL SUBMISSIONS. IN VIEW OF THAT, THE CASE IS DISCUSSED AS UNDER. I.T.A NO.2138/CHNY/2017 :- 4 -: 3.3 ON PERUSAL OF THE ASSESSMENT ORDER, IT IS NOTIC ED THAT THE APPELLANT HAS SOLD EQUITY SHARES AND HAS MADE A LON G TERM CAPITAL GAIN TO THE TUNE OF RS. 1,23, 34, 606/-. THE APPELLANT H AS TREATED THE SAME AS CAPITAL GAINS IN COMPUTING THE TOTAL INCOME AND HAS CLAIMED THE SAME AS EXEMPT UNDER SECTION 10(38) OF THE INCOME T AX ACT, 1961. THE APPELLANT HAS ENTERED INTO A SINGLE SOLITARY TR ANSACTION FOR PURCHASING AND SELLING THE EQUITY SHARES WITH THE I NTENTION OF REINVESTING THE SURPLUS FUNDS. ACCORDING TO THE AO, OUT OF TOTAL GAIN ON SALE OF SHARES OF RS. 1,23,34,606/-, THE PROFIT ON SALE OF SHARES OF INDUSLND BANK TO THE TUNE OF RS. 1,09,79,4907- IS T O BE TREATED AS BUSINESS INCOME AS THE APPELLANT HAS BEEN DEALING I N PURCHASE AND SALE OF SHARES FOR THE LAST SO MANY YEARS. 3.4. IN THE WRITTEN SUBMISSION, IT HAS BEEN CONTE NDED BY THE APPELLANT THAT THERE HAS BEEN ONLY ONE TRANSACTION OF SALE OF SHARES AND THAT TOO OF A SINGLE INVESTMENT INDICATES THAT THE ASSES SEE IS NOT A DEALER IN SHARES. FURTHER, THE APPELLANT CLAIMS T HAT SUCH INVESTMENTS WERE TREATED AS INVESTMENTS ONLY IN THE BALANCE SHEET AND NOT AS STOCK-IN-TRADE. ALSO, THE APPELLANT HAS ALSO MADE A REFERENCE TO THE CIRCULAR NO. 4/2007 WHICH CLEARLY MAKES A DISTINCTION BETWEEN 'CAPITAL ASSET' AND A 'TRADING ASSET' AND STATES THAT WHERE THE APPELLANT HAS ENTERED INTO A SINGLE TRANSACTION OF PURCHASE AND SALE OF SHARES, THE SAME SHALL NOT TAN TAMOUNT TO BUSINESS ACTIVITY AND SHALL BE INVESTMENT ACTIVITY AND SUCH INCOME TO BE CHARGED AS CAPITAL GAINS ONLY. FURTHER, THE APPE LLANT HAS PLACED' RELIANCE ON CBDT CIRCULAR NO. 06/2016 DATED 29.02.2 016 WHICH STATES THAT IN RESPECT OF LISTED SHARES AND SECURIT IES HELD FOR A PERIOD OF MORE THAN 12 MONTHS IMMEDIATELY PRECEEDING THE D ATE OF TRANSFER, IF THE ASSESSEE DECIDES TO TREAT THE INCOME FROM TR ANSFER THEREOF AS CAPITAL GAIN, THE SAME SHALL NOT BE PUT TO DISPUTE BY THE ASSESSING OFFICER. HENCE, THE APPELLANT CLAIMS THAT THE SALE OF SHARES OF INDUSLND BANK IS SQUARELY COVERED BY THE ABOVE MENT IONED CIRCULAR AND THE APPELLANT'S ACTION FALLS IN LINE WITH THE I NTENT OF THE LEGISLATION. 3.5. I HAVE CONSIDERED THE ABOVE SUBMISSIONS OF THE APPELLANT. AS LAID DOWN IN THE CBDT CIRCULAR NO. 4/2007, THE SUBS TANTIAL NATURE OF TRANSACTIONS AND THE MANNER OF MAINTAINING BOOKS OF ACCOUNTS PLAYS AN IMPORTANT ROLE IN DETERMINING THE NATURE OF TRAN SACTION. ALSO, AS DEPICTED BY THE CIRCULAR NO. 06/2016, IN THE PRESEN T CASE, THE APPELLANT HAS TREATED THE SHARES AS INVESTMENT AND NOT AS STOCK-IN- TRADE AND THERE ARE NO FINE GROUNDS TO SAY THAT THE APPELLANT IS A DEALER IN SHARES AND NOT AN INVESTOR ESPECIALLY WHEN THE S ALE OF SHARES WAS A SINGLE SOLITARY TRANSACTION. FROM THE PERUSAL OF TH E FACTS AND CIRCUMSTANCES OF THE CASE, THE CONTENTIONS OF THE A PPELLANT ARE FOUND IN ORDER. THEREFORE, KEEPING IN VIEW THE ABOVE FACTS A ND CIRCUMSTANCES OF THE CASE, THE AO IS DIRECTED TO DELETE THE ADDITION OF RS. 1,09,79,490/-. I.T.A NO.2138/CHNY/2017 :- 5 -: 10. BY CONSIDERING THE ABOVE ORDER PASSED BY THE LD . CIT(A), WE FIND NO INFIRMITY IN THE ORDER PASSED BY THE LD. CIT(A). THUS, GROUNDS OF APPEAL NO.2 TO 2.6 RAISED BY THE REVENUE ARE DISMIS SED. 11. THE NEXT GROUNDS OF APPEAL NO.2.7 TO 3 RELATES TO DISALLOWANCE U/S. 14A OF THE ACT. IN THE ASSESSMENT ORDER, THE A.O HAS NOTED THAT THE ASSESSEE-COMPANY HAD INVESTED TO THE EXTENT OF RS. 1,21,32,09,086/- AND RECEIVED A TAX EXEMPT DIVIDEND INCOME OF RS. 1,01,89,949/-. THE ASSESSEE HAS DISALLOWED AN AMOUN T OF RS. 33,09,000/- AS EXPENSES ATTRIBUTABLE TO THE EARNING OF THE EXEMPT DIVIDEND INCOME. THE A.O DID NOT ACCEPT THE DISALL OWANCE MADE BY THE ASSESSEE AND HE HAS INVOKED S. 14A OF THE ACT A ND R/W. RULE 8D(2)(III) OF THE INCOME TAX RULES, 1963 (HEREINAFT ER AS THE RULES) AND DISALLOWED AN AMOUNT OF RS. 70,71,281/-. ON APP EAL, THE LD. CIT(A) PARTLY ALLOWED THE GROUNDS RAISED BY THE ASS ESSEE BY DIRECTING THE A.O PARTLY ALLOW THE APPEAL. THE RELEVANT PORT ION OF THE ORDER IS EXTRACTED AS UNDER: 1.3. I HAVE CONSIDERED THE ABOVE SUBMISSIONS AND ON PERUSAL OF THE ABOVE FACTS AND CIRCUMSTANCES OF THE CASE, THE CONTENTION OF THE APPELLANT ARE FOUND IN ORDER. IT IS OBSERVED TH AT THE AO HAS ALSO CONSIDERED INVESTMENTS, THE RETURN OF WHICH AR E TAXABLE, FOR THE PURPOSE OF COMPUTATION OF DISALLOWANCE UNDER RU LE 8D(III) OF THE IT RULES. FOR INSTANCE, THE APPELLANT HAS INVES TMENTS IN FOREIGN SUBSIDIARIES, AND THE EARNING FROM THE SAME IS LIABLE TO TAX. THE APPELLANT HAS SIMILAR OTHER INVESTMENTS, WHEREI N THE INCOME/RETURNS ARE TAXABLE. THEREFORE, ON PROPER VE RIFICATION, THE AO IS DIRECTED TO RE-COMPUTE THE DISALLOWANCE UNDER RULE 8D(2)(III) OF IT RULES READ WITH SECTION 14A OF THE ACT AFTER I.T.A NO.2138/CHNY/2017 :- 6 -: EXCLUDING INVESTMENTS FROM WHICH NO EXEMPT INCOME I S EARNED. THIS GROUND IS THEREFORE PARTLY ALLOWED. 12. WE HAVE CONSIDERED THE ORDERS PASSED BY THE LD. CIT(A) AS WELL AS A.O AND HEARD BOTH THE SIDES, WE FIND THAT THE L D. CIT(A) ONLY DIRECTED THE A.O TO VERIFY ENTIRE INVESTMENTS AND E XCLUDE INVESTMENTS WHICH HAS NO EXEMPT INCOME YIELDED AND DIRECT THE A .O TO RE-COMPUTE DISALLOWANCE OF RULE 8D(2)(III) OF THE RULES R/W S. 14A OF THE ACT. HENCE, WE FIND NO INFIRMITY IN THE ORDER PASSED BY THE LD. CIT(A). ACCORDINGLY, THESE GROUNDS OF APPEAL NOS.2.7 TO 3 R AISED BY THE REVENUE ARE DISMISSED. 13. GROUNDS OF APPEAL NO.3.1 TO 3.4 RELATES TO DISA LLOWANCE OF BOARD MEETING EXPENDITURE. THE A.O HAS DISALLOWED AN AMOU NT OF RS. 3,38,216/- ON THE GROUND THAT THE ASSESSEE HAS COND UCTED A BOARD MEETING AT CHENNAI ON VARIOUS DATES AND HAS INCURRE D THE ABOVE EXPENDITURE TOWARDS TRAVELLING, BOARDING, LODGING, CREDIT CARD EXPENDITURE. THE CASE OF THE A.O IS THAT THE ASSESS EES REGISTERED OFFICE IS SITUATED IN DELHI, THERE IS NO PURPOSE OF HOLDING THE BOARD MEETING IN CHENNAI THEREFORE, THERE IS NO NECESSITY IN CONDUCTING THE BOARD MEETING IN CHENNAI AND HE IS OF THE OPINION T HAT THE EXPENDITURE IS PERSONAL IN NATURE AND DISALLOWED THE SAME. BEFORE THE LD. CIT(A), IT IS SUBMITTED THAT THE COMPANY HAS ITS SUBSIDIARY AN D ASSOCIATED OFFICE I.T.A NO.2138/CHNY/2017 :- 7 -: IS IN CHENNAI AND SOME OF THE DIRECTORS ARE BASED I N CHENNAI THEREFORE, THE BOARD MEETING WAS CONDUCTED IN CHENN AI. THE LD. CIT(A) BY CONSIDERING THE ABOVE, HE DIRECTED THE A. O TO DELETE THE ADDITION. 14. WE FIND THAT WHEN THE ASSESSEE IS HAVING SUBSID IARY AND ASSOCIATED OFFICES IN CHENNAI AND SOME OF THE DIREC TORS ARE STAYING AT CHENNAI, IT IS A BUSINESS CONVENIENCE OF THE ASSESS EE TO CONDUCT THE BOARD MEETING. THE A.O CANNOT DECIDE WHERE THE ASS ESSEE HAS TO CONDUCT THE BOARD MEETING. IN VIEW OF THE ABOVE, W E ARE OF THE OPINION THAT THE LD. CIT(A) RIGHTLY DELETED THE ADDITION MA DE BY THE A.O AND WE FIND NO INFIRMITY IN THE ORDER PASSED BY THE LD. CI T(A). THUS, GROUNDS NO.3.1 TO 3.4 RAISED BY THE REVENUE ARE DISMISSED. 15. GROUNDS NO.3.5 & 3.6 RELATES TO DISALLOWANCE OF CAR HIRE CHARGES AT RS. 22,80,000/-. DURING THE YEAR UNDER CONSIDERA TION, THE ASSESSEE HAS PAID HIRE CHARGES TO M/S. SONNET TRADE AND INVE STMENTS PVT. LTD. AND MRS. ANURADHA RAGHU TO THE TUNE OF RS. 22, 80,0 00/- (RS. 18,00,000/- AND RS. 4,80,000/- RESPECTIVELY). THE CASE OF THE A.O IS THAT THE ASSESSEE HAS TAKEN A HONDA CIVIC CAR ON RE NT WHICH IS REGISTERED IN CHENNAI AND THE ASSESSEE IS HAVING NO BUSINESS CONNECTION IN CHENNAI THEREFORE, THE ABOVE EXPENDIT URE INCURRED BY THE I.T.A NO.2138/CHNY/2017 :- 8 -: ASSESSEE IS NOT A BUSINESS PURPOSE IT IS ONLY PERSO NAL PURPOSE. IT IS SUBMITTED BEFORE THE A.O THAT THE ASSESSEE WAS COND UCTED MEETING AT CHENNAI AND THE CARS WERE HIRED FOR THE PURPOSE OF BUSINESS TO FACILITATE THE DIRECTORS AND THEREFORE, THE CAR HIR E CHARGES ARE INCURRED BY THE ASSESSEE FOR THE PURPOSE OF BUSINESS ONLY. BY CONSIDERING THE FACTS OF THE CASE, THE LD. CIT(A) DIRECTED THE A.O TO DELETE THE ENTIRE ADDITION OF RS. 22,80,000/-. 16. WE FIND THAT WHEN THE ASSESSEE IS HAVING A SUBS IDIARY COMPANIES IN CHENNAI AND SOME OF THE DIRECTORS ARE RESIDING A T CHENNAI AND THE ASSESSEE HAS HIRED A CAR FOR HIS DIRECTORS FOR THE PURPOSE OF BUSINESS, IT CANNOT BE SAID THAT IT IS A PERSONAL IN NATURE T HEREFORE, THE LD. CIT(A) RIGHTLY DELETED THE ADDITION MADE BY THE A.O. BY C ONSIDERING THE ABOVE ORDER PASSED BY THE LD. CIT(A), WE FIND NO INFIRMIT Y IN THE ORDER PASSED BY THE LD. CIT(A). THUS, GROUNDS NO.3.5 & 3.6 RAI SED BY THE REVENUE ARE DISMISSED. 17. HENCE, ALL THE GROUNDS OF APPEAL RAISED BY THE REVENUE ARE DISMISSED. I.T.A NO.2138/CHNY/2017 :- 9 -: 18. IN THE RESULT, THE APPEAL IN ITA NO.2138/CHNY/2 017 FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED ON 24 TH SEPTEMBER, 2021 IN CHENNAI. SD/ - SD/ - ( ) (G. MANJUNATHA) /ACCOUNTANT MEMBER ( ) (V. DURGA RAO) /JUDICIAL MEMBER /CHENNAI, /DATED: 24 TH SEPTEMBER, 2021 . EDN/- /COPY TO: 1. /APPELLANT 2. /RESPONDENT 3. ( )/CIT(A) 4. /CIT 5. /DR 6. /GF