ACIT, New Delhi V. M/s H.B. Stockholding Ltd., New Delhi

ITA 2888/DEL/2011

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 7857 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-06-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 15-05-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 02-06-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ANUSHA KHURANA
• Assessee Lawyers: SANTOSH KUMAR AGARWAL
• Keywords: Capital asset; Business income; Depreciation; Business expenditure; Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH C NEW DELHI) BEFORE SHRI R.P. TOLANI, JUDICIAL MEMBER AND SHRI T.S. KAPOOR, ACCOUNTANT MEMBER I.T.A. NO.2888 /DEL/2011 ASSESSMENT YEAR : 2007-08 ACIT, H.B. STOCKHOLDING LTD., CIRCLE-12 (1), H-72, CONNAUGHT CIRCUS, NEW DELHI. V. NEW DELHI. (APPELLANT) (RESPONDENT) PAN /GIR/NO. PAN /GIR/NO. PAN /GIR/NO. PAN /GIR/NO.AAACH AAACH AAACH AAACH- -- -0637 0637 0637 0637- -- -F FF F APPELLANT BY : SMT. ANUSHA KHURANA, SR. DR. RESPONDENT BY : SHRI SANTOSH KUMAR AGARWAL, ADV. ORDER PER TS KAPOOR, AM: THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE OR DER OF LD CIT(A) XV, NEW DELHI DATED 15.3.2011. THE GROUNDS RAISED BY THE REVENUE ARE AS UNDER:- 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT(A) HAD ERRED IN GIVING RELIEF OF ` .1,48,36,153/- OUT OF ADDITION OF ` .1,55,30,791/- ON ACCOUNT OF ADMINISTRATIVE & OTHER EXPENSES, DEPRECIATION AND INTEREST AND FINANCIAL CHARGES MADE BY THE ASSESSING OFFICER. 2. THE APPELLANT CRAVES TO LEAVE, TO ADD, ALTER OR A MEND ANY GROUND OF APPEAL RAISED ABOVE AT THE TIME OF THE HEARING. ITA NO2888/DEL/2011 2 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMP ANY IS ENGAGED IN DEALING/INVESTMENT IN SECURITIES. THE CASE O F THE ASSESSEE WAS PICKED UP FOR SCRUTINY AND ASSESSMENT WAS COMPLETED B Y MAKING THE FOLLOWING THREE ADDITIONS:- I) INTEREST & FINANCIAL CHARGES. ` . 15,55,736/- II) ADMINISTRATIVE & OTHER EXPENSES. ` .1,38,92,750/- III) DEPRECIATION. ` . 82,305/- DURING ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTED T HAT ASSESSEE IS HAVING INCOME AS PROFIT OR LOSS ON SALE OF SECUR ITIES WHICH WAS SHOWN BY THE ASSESSEE UNDER THE HEAD CAPITAL GAINS BO TH SHORT TERM AND LONG TERM. HE, THEREFORE, HELD THAT ASSESSEE I S AN INVESTMENT COMPANY AND INCOME ARISING IS CHARGEABLE TO TAX UNDER THE HEAD INCOME FROM CAPITAL GAINS AND THEREFORE HE FORMED AN OPINION THAT EXPENSES CLAIMED IN P&L ACCOUNT ARE NOT DEDUCTIBLE FR OM THE INCOME OF ASSESSEE. THE ASSESSING OFFICER FURTHER NOTED THAT ASSESSEE WAS ALSO EARNING SIGNIFICANT AMOUNT FROM DIVIDEND INCOME THEREFORE HE HELD THAT INTEREST AND OTHER EXPENSES CHARGED AND CLAI MED BY THE ASSESSEE AGAINST THE INCOME EARNED BY IT ARE NOT ALLOWAB LE TO IT EITHER AGAINST THE DIVIDEND INCOME IN VIEW OF SPECIFIC PROV ISIONS OF SECTION 14A OR AGAINST INCOME UNDER THE HEAD CAPITAL GAINS. 3. THE ASSESSING OFFICER FURTHER NOTED THAT ASSESSEE HAD MA DE INTEREST FREE LOANS TO VARIOUS PERSONS WHEREAS IT HAD PAI D INTEREST ON BORROWED FUNDS. THE ASSESSING OFFICER OBSERVED THAT THESE ADVANCES ARE NOT MADE TO EARN ANY INCOME AND THEREFORE CANNO T BE SAID TO BE MADE FOR BUSINESS PURPOSES AND THEREFORE HE HELD THAT IN TEREST PAID ON ITA NO2888/DEL/2011 3 BORROWED MONEY USED FOR GIVING INTEREST FREE ADVANCES CANNOT BE ALLOWED. 4. IN REPLY TO THE ALLEGATIONS OF ASSESSING OFFICER, THE ASSESSEE HAD CONTENDED THAT INTEREST BEARING FUNDS WERE NOT UTILIZ ED FOR GIVING ADVANCES TO GROUP COMPANIES AND ASSESSEE FURTHER SUBMITT ED THAT IT ITSELF HAS OFFERED BUSINESS INCOME OF ` .17,04,020/- AND THEREFORE IT CANNOT BE SAID THAT THE ASSESSEE HAS EARNED ONLY AS AN IN VESTMENT COMPANY AND THE DIVIDEND IS ONLY A CONSEQUENCE OF THE MAIN BUSINESS ACTIVITY OF THE ASSESSEE. HOWEVER, THE ASSESSING OFFICER DI D NOT AGREE WITH THE CONTENTIONS MADE BY THE ASSESSEE AND MADE THE A BOVE ADDITIONS. AGGRIEVED, THE ASSESSEE FILED APPEAL BEFORE LD CIT(A) AND MADE THE FOLLOWING SUBMISSIONS:- 1) THAT THE ASSESSEE COMPANY FILED RETURN OF INCOME DE CLARING INCOME AT ` .17,04,020/- AND IN THE COMPUTATION OF INCOME OUT O F TOTAL ADMINISTRATIVE AND OTHER EXPENSES OF ` .1,55,30,791/-, ` .20,88,588/- AND ` .20,330/- WERE ALREADY ADDED BACK IN THE COMPUTATION OF INCOME AND THEREFORE THE DISALLOWANCE OF THE SAME TO THAT EXTENT AMOUNTS TO DOUBLE ADDITION. 2). THE DISALLOWANCE HAS BEEN MADE ON WRONG UNDERSTAND ING OF THE FACTS OF THE CASE. THE REASON GIVEN BY LD AO FOR MAKING THE DISALLOWANCE OF EXPENSES IS THAT OTHER THAN TAX FREE IN COME OR INCOME UNDER THE HEAD CAPITAL GAIN, THE APPELLANT D OES NOT HAVE ANY OTHER INCOME WHICH IS TOTALLY INCORRECT. 3). THE FACT IS THAT COMPANY IS HAVING DUAL PORTFOLIO OF SECURITIES I.E. ONE OF TRADING/REVENUE ASSET AND ANOTHER OF CAPI TAL ASSET AND ITA NO2888/DEL/2011 4 THIS POSITION HAS BEEN CONTINUING FOR THE LAST 10 YEAR S AND HAS BEEN CONTINUOUSLY ACCEPTED BY THE DEPARTMENT. 4) THAT DURING ASSESSMENT YEAR 2005-06 & 2006-07 THE AP PELLANT HAD PROFIT ON SALE OF SHARES BOTH UNDER THE HEAD BUSINE SS AS WELL AS CAPITAL GAINS AND SO IN THOSE YEARS THE DEPARTMENT H AD DULY ACCEPTED THE BUSINESS INCOME OF THE APPELLANT. 5. THAT THE LOANS GRANTED BY THE APPELLANT ARE VERY OLD AND IN FACT HAS REDUCED DURING THE YEAR AND MOREOVER THE DI SALLOWANCE OF INTEREST MADE IN RELATION TO THESE ADVANCES WAS DELE TED BY ITAT AS WELL AS BY HON'BLE DELHI HIGH COURT IN THE ASSE SSMENT YEAR 1997-98. 5. THE LD CIT(A) AFTER CONSIDERING THE SUBMISSIONS MAD E BY THE ASSESSEE DELETED THE ADDITION MADE BY THE ASSESSING OFFICER . HOWEVER, HE UPHELD AN ADDITION OF ` .6,94,638/- BEING 5% OF ADMINISTRATIVE & OTHER EXPENSES OF ` .1,38,92,750/-. THE DISALLOWANCE OF 5% WAS KEPT KEEPING IN VIEW THE PROVISIONS OF SECTION 14A OF THE A CT. THE RELEVANT PORTION OF LD CIT(A)S ORDER IS REPRODUCED BELOW:- IT IS SEEN THAT THE ASSESSING OFFICER HAS MADE THE DISALLO WANCE OF EXPENSES BECAUSE ACCORDING TO HIM THE APPELLANT WA S HAVING ONLY THE DIVIDEND INCOME OR THE INCOME UNDER THE HE AD CAPITAL GAIN. HOWEVER, FROM THE FACTS OF THE CASE, IT IS SEEN T HAT OBSERVATION MADE BY THE ASSESSING OFFICER ARE ACTUALLY N OT CORRECT. THE APPELLANT IS SHOWING INCOME BOTH UNDER T HE HEAD CAPITAL GAIN AS WELL AS BUSINESS. IT IS THAT AS IN THE PAST SHARES/SECURITIES IN THE NATURE OF CAPITAL ASSETS ARE SHOWN BY THE APPELLANT UNDER THE HEAD LONG TERM INVESTMENT AND GA IN/LOSS ITA NO2888/DEL/2011 5 THEREON IS SHOWN UNDER THE HEAD CAPITAL GAIN. THE SHA RE/SECURITY IN THE NATURE OF TRADING/REVENUE ARE CLASSIFIED UNDER THE HEAD CURRENT INVESTMENT AND THE PROFIT/LOSS THEREON IS SHOW N UNDER THE HEAD INCOME FROM BUSINESS AND PROFESSION. THE FACT T HAT COMPANY IS HAVING DUAL PORTFOLIO OF SECURITY I.E. ONE OF TRADING ASSET AND ANOTHER IS OF CAPITAL ASSET IS NOT A NEW FACT BUT IS AN ACCEPTED POSITION IN THE PAST. IN THE IMMEDIATELY PRE CEDING TWO YEARS I.E. ASSESSMENT YEAR 2005-06 & 2006-07 THE APPELLA NT HAD RETURNED INCOME BOTH UNDER THE HEAD CAPITAL GAIN AS WELL AS BUSINESS INCOME. THE ASSESSING OFFICER HAD TREATED THE SHOR T TERM CAPITAL GAIN AS BUSINESS INCOME IN APPEAL, THE CIT (A) BY ORDER DATED 25.5.2009 FOR ASSESSMENT YEAR 2005-06 AND O RDER DATED 15.2.2010 FOR ASSESSMENT YEAR 2006-07 AFTER DETAI LED DISCUSSION AND AFTER CONSIDERING PAST HISTORY OF THE CASE UPHELD THE CLAIM OF APPELLANT FOR MAINTAINING DUAL PORTFOL IO AND HAVING INCOME BOTH UNDER THE HEAD CAPITAL GAIN AS WELL AS BU SINESS INCOME. DURING THE YEAR UNDER CONSIDERATION NO CHAN GE IN THE FACTS AND CIRCUMSTANCES HAS BEEN BROUGHT ON RECORD BY THE ASSESSING OFFICER AS COMPARED TO EARLIER YEARS. IN VIEW O F THE ABOVE, THEREFORE, THE ISSUE STANDS COVERED IN FAVOUR OF THE APPELLANT ----------IN VIEW OF THE FINDINGS ABOVE, THAT THE APPELLANT IS ALSO HAVING BUSINESS INCOME AND INTEREST INC OME APART FROM CAPITAL GAINS AND EXEMPT INCOME, THE DISA LLOWANCE MADE BY THE ASSESSING OFFICER OF ENTIRE ADMINISTRATIVE AND OTHER EXPENSES OF ` .1,38,92,750/- AND DEPRECIATION DOES NOT HOLD GOOD. ------HOWEVER, THE PERUSAL OF RECORD SHOWS THAT THE AP PELLANT IS EARNING TAX FREE INCOME SINCE EXPENSES HAVE TO BE INCU RRED FOR EARNING EXEMPT INCOME, THEREFORE, THE PROVISIONS OF SE CTION 14A WILL BE APPLICABLE IN THE CASE OF APPELLANT -------- ---THE PRINCIPLE UNDERLYING U/S 14A(1) IS THAT NO DEDUCTION CAN BE CLA IMED IN ITA NO2888/DEL/2011 6 RESPECT OF EXPENDITURE INCURRED IN RELATION TO INCOM E WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. A COMPANY CANNOT EARN DIVIDEND WITHOUT ITS EXISTENCE AND MANAGE MENT. INVESTMENT DECISIONS ARE GENERALLY COMMUNICATED REQUIR ING DAILY ANALYSIS, MARKET TRENDS AND RESEARCH AND ANALYSIS. THE DE CISIONS RELATE TO ACQUISITION, HOLDING PERIOD AND REDEMPTION OF INVESTMENT AT THE PROPER TIME. THESE DECISIONS ARE GENE RALLY TAKEN IN THE MEETING OF BOARD OF DIRECTORS FOR WHICH ADMINISTRATIVE EXPENSES ARE INCURRED -------DETAILS OF EXPENDITURE SHOW THAT THE APPELLANT HAS CLAIMED ADMINISTRATIVE AND OTHER EXPENSES OF ` .1,38,92,750/-. KEEPING IN VIEW THE FACTS AND CIRCUMSTANCES OF THE CASE AND THE JUDICIAL PRECEDENTS D ISCUSSED ABOVE, IT WILL BE IN THE FITNESS OF THINGS IF 5% OF TH E ABOVE EXPENDITURE AMOUNTING TO ` .6,94,638/- IS DISALLOWED RELATING TO EARNING OF EXEMPT INCOME AS PER THE PROVISIONS OF SECTI ON 14A OF THE ACT. HENCE, THE ADDITION TO THE EXTENT OF ` .6,94,638/- IS CONFIRMED. 6. AGGRIEVED THE REVENUE HAS FILED APPEAL BEFORE THI S TRIBUNAL. 7. LD DR ARGUED THAT LD CIT(A) HAD DELETED THE ADDI TION OF EXPENSES WITHOUT CONSIDERING THE FACT THAT ASSESSEE WAS HAV ING INCOME FROM CAPITAL GAINS BOTH SHORT TERM AND LONG TE RM AND INVESTMENTS BOTH LONG TERM AND SHORT TERM CONSTITUTED A MAJOR PORTION OF ASSETS OF THE COMPANY. THE WHOLE OF THE EXPENSES INC URRED BY THE ASSESSEE CANNOT BE SAID TO BE FOR EARNING SHORT TERM CAP ITAL GAIN OR BUSINESS INCOME. SHE FURTHER ARGUED THAT SOME PORTION O F ADMINISTRATIVE AND OTHER EXPENSES MUST BE ATTRIBUTED TO EARNING OF INCOME FROM LONG TERM INVESTMENT AND KEEPING IN VIEW THE VALUE OF LONG TERM INVESTMENT HELD BY THE ASSESSEE AS COMPARED TO TOTAL ITA NO2888/DEL/2011 7 INVESTMENT, 5% DISALLOWANCE MADE BY THE LD CIT(A) IS NOT JUSTIFIED. ON THE POINT OF DELETION OF INTEREST SHE ARGUED THAT KE EPING IN VIEW THE FACT THAT THE ASSESSEE HAD GIVEN INTEREST FREE ADVANCES, THE ADDITION MADE BY THE ASSESSING OFFICER WAS CORRECT AND LD CIT(A ) WAS NOT JUSTIFIED IN DELETING THE ADDITION. 8. THE LD AR, ON THE OTHER HAND, ARGUED THAT ASSESSEES CASE IN RESPECT OF DELETION OF INTEREST IS COVERED BY ITS OWN C ASE AS DECIDED BY HON'BLE DELHI HIGH COURT FOR THE YEAR 1997-98 REPOR TED AT 325 ITR 316. AS REGARDS THE DELETION OF OTHER ADDITIONS, THE LD AR ARGUED THAT DISALLOWANCES BY THE ASSESSING OFFICER WERE MADE ONLY ON THE GROUND THAT THE ASSESSEE HAD NO BUSINESS INCOME AND HAD INCOME ON LY UNDER THE HEAD CAPITAL GAINS OR DIVIDEND INCOME WHICH WAS NOT TRUE AS WAS EXPLAINED BY THE LD CIT(A)S ORDER AT PAGE 7 OF THE ORDER. 9. WE HAVE HEARD THE RIVAL SUBMISSIONS OF BOTH THE PAR TIES AND HAVE GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. ON THE POINT OF DELETION OF INTEREST, WE ARE OF THE OPINION THAT LD CIT(A) HAD RIGHTLY DELETED THE ADDITION OF ` .15,55,736/- ON ACCOUNT OF INTEREST PAID. THIS POINT STANDS COVERED BY HON'BLE DELHI HIGH COURT JUDG MENT IN ASSESSEES OWN CASE REPORTED AT 325 ITR 316 WHEREIN IT WA S HELD THAT INTEREST FREE LOANS AND ADVANCES TO SISTER CONCERN GIVEN BY THE ASSESSEE BEFORE TAKING BORROWINGS CANNOT COME IN THE WAY OF ALLOWING INTEREST PAID ON BORROWINGS TAKEN BY THE COMPANY. IN THE PRESENT CASE, THERE WAS FRESH BORROWINGS OF ` . 6,00,00,000/- WHICH IS APPARENT FROM PAGE 20 OF PAPER BOOK WHEREAS LOANS AND ADVANCES ARE C ONTINUING FROM THE PREVIOUS YEAR WHICH FACT IS ALSO VERIFIABLE FROM PAGE 20 OF THE PAPER BOOK. THE FACTS OF THE PRESENT CASE ARE SAME AS T HOSE DECIDED BY HON'BLE DELHI HIGH COURT. RESPECTFULLY FOLLOWING THE JUDGMENT OF HON'BLE DELHI HIGH COURT, WE ALSO HOLD THE VIEW THAT INTEREST WAS ITA NO2888/DEL/2011 8 ALLOWABLE BUSINESS EXPENDITURE AND THEREFORE WE DO NOT FIND ANY REASON TO INTERFERE IN THE ORDER OF LD CIT(A) TO THA T EXTENT. 10. AS REGARDS THE DELETION OF ADMINISTRATIVE & OTHER EXPENSES, DISALLOWED BY THE ASSESSING OFFICER, WE HAVE OBSERVED THA T ASSESSEE IS EARNING INCOME FROM BUSINESS, FROM SHORT TERM CAPITAL GAIN, LONG TERM CAPITAL GAIN AND FROM INTEREST INCOME. FROM THE ANAL YSIS OF INVESTMENT FIGURES OF ASSESSEE FILED AT PAGES 26-30 OF PAPER BOOK IT BECOMES CLEAR THAT OUT OF TOTAL INVESTMENT OF ` 98.07 CRORES, ` .52.85 CRORES HAS BEEN SHOWN AS LONG TERM INVESTMENT. LONG TERM INVESTMENTS OF THE ASSESSEE CONSTITUTE A SIGNIFICANT PORTION OF TOTAL INVEST MENTS, THE INCOME FROM WHICH IS EXEMPT EITHER AS DIVIDEND OR LON G TERM CAPITAL GAIN. THE IMPORTANCE OF EFFORT, MAN POWER REQUIREM ENT AND EXPERTISE INVOLVED IN BOTH THE AREAS OF INVESTMENT CANNOT BE DE NIED. THE PORTFOLIO OF ASSESSEE CONSISTS MERE OF LONG TERM, INVESTME NTS THAN SHORT TERM INVESTMENTS AND THEREFORE 5% DISALLOWANCE OF EXPENDITURE UPHELD BY LD CIT(A) DOES NOT SEEM TO BE JUSTIFIED. IN VIEW OF THIS, WE REMIT THE CASE TO THE FILE OF THE ASSESSING OFFICER TO CONSIDER THIS ASPECT AND RECORD HIS CLEAR FINDING AS TO THE EXPENSES W HICH COULD BE RELATED TO EARNING OF EXEMPT INCOME I.E. LONG TERM CAPITAL GAIN AND DIVIDEND INCOME AND RECOMPUTE THE DISALLOWANCE ON SOU ND COMMERCIAL BASIS. NEEDLESS TO SAY, THAT THE ASSESSING OFFICE R WILL GIVE A REASONABLE OPPORTUNITY TO ASSESSEE OF BEING HEARD. 10. IN VIEW OF THE APPEAL, THE APPEAL OF THE REVENU E IS PARTLY ALLOWED. 11. ORDER PRONOUNCED IN THE OPEN COURT ON THE 15TH DAY OF JUNE, 2012. SD/- SD/- (R.P. TOLANI) (T.S. KAP OOR) JUDICIAL MEMBER ACCOUNTANT MEMBER ITA NO2888/DEL/2011 9 DT. 15.6.2012. HMS COPY FORWARDED TO:- 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT (A)-, NEW DELHI. 5. THE DR, ITAT, LOKNAYAK BHAWAN, KHAN MARKET, NEW DEL HI. TRUE COPY. BY ORDER (ITAT, NEW DELHI). DATE OF HEARING 23.5.2012 DATE OF DICTATION 11.6.2012 DATE OF TYPING 12.6.2012 DATE OF ORDER SIGNED BY 15.6.2012 BOTH THE MEMBERS & 25.6.2012 PRONOUNCEMENT. DATE OF ORDER UPLOADED ON NET & SENT TO THE BENCH CONCERNED. 25.6.2012