ITO, New Delhi V. M/s Triumph Engineering Pvt. Ltd., New Delhi

ITA 3567/DEL/2011

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 6391 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 7 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-03-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: H
• Next Hearing Date: 09-02-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 15-07-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K JAIN
• Assessee Lawyers: I M SINGH
• Keywords: Business income; Depreciation; Proportionate interest
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH H NEW DELHI BEFORE : SHRI H.S. SIDHU , JUDICIAL MEMBER & SHRI L.P. SAHU, ACCOUNTANT MEMBER ITA NO. 3567/DEL./2011 ASSTT. YEAR : 2008 - 09 INCOME - TAX OFFICER, VS. TRIUMPH E NGINEERING PVT. LTD. WARD 16(4), NEW DELHI. 32, HANUMAN ROAD, NEW DELHI. [PAN: AAACT 0420 C] (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI S.K. JAIN, SR. DR RESPONDENT BY : SHRI I.M. SINGH, ADVOCATE DATE OF HEAR ING : 09.02.2016 DATE OF PRONOUNCEMENT : 09 .03.2016 ORDER PER L.P. SAHU, ACCOUNTANT MEMBER: THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF LD. CIT(A) - XIV, NEW DELHI DATED 12.05.2011 FOR THE ASSESSMENT YEAR 2008 - 09 ON THE FOLLOWING GROUNDS : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED BY NOT UPHOLDING THE ACTION OF THE AO THE PROFIT OF RS.77,15,415/ - EARNED FROM SALE OF SHARES AS BUSINESS INCOME AS AGAINST THE TREATMENT OF THE SAME BY THE ASSESSEE AS CAPITAL GAINS. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED BY GRANTING RELIEF OF RS.1,31,293/ - IN RESPECT OF DISALLOWANCE MADE BY THE AO U/S. 14A READ WITH RULE 8D BY NOT DECIDING THE CASE ENTIRELY ON MERITS AND BY IG NORING THE CONTENTIONS OF THE AO DISCUSSED IN DETAIL IN THE ASSESSMENT ORDER. ITA NO. 3567 /DEL./2011 2 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE FILED RETURN OF INCOME ON 23.09.2008 DECLARING INCOME OF RS.63,07,541/ - . THE DETAILS OF SOURCE OF INCOME ARE AS FOLLOWS : BA LANCE AS PER P & L A/C 8,354,503 1) DEPRECIATION AS PER BOOKS 23,840 2) SECURITY TRANSACTION TAX 44,613 - 68,453 8,422,956 LESS: I) DIVIDEND INCOME 975,644 II) DEPRECIATION AS PER I.TAX RULES 14,490 III) CAPITAL GAIN 7,715,415 8,705,549 _____________ BUSINESS INCOME / (LOSS) (282,593 INCOME FROM CAPITAL GAIN 434,159 LONG TERM GAIN 7,181,256 7,715,415 LESS: LONG TERM GAIN EXEMPT FROM INCOME TAX 534,159 7,181,256 LESS: BROUGHT FORWARD SHORT TERM LOSS 591,122 TAXABLE SHORT TERM GAIN FOR THE YEAR 6,590,134 TAXABLE INCOME (SHORT TERM GAIN) 6,307,541 THE CASE WAS SELECTED FOR SCRUTINY AND THE ASSESSMENT WAS COMPLETED. THE ASSESSING OFFICER NOTICED FROM THE DETAILS OF SHARE TRANSACTIONS GIVEN BY THE ASSESSEE THAT THE ASSESSEE HAS SHOWN PURCHASE AND SALE OF SHARES AND THE PROFIT EARNED THEREON WAS CLAIMED AS CAPITAL GAIN. THE ASSESSING OFFICER ALSO NOTICED THAT DURING THE YEAR , THE ASS ESSEE COMPANY WAS CARRYING ON THE SAME BUSINESS AS IN EARLIER YEARS. THE ASSESSEE HAS SHOWN ITS MAIN SOURCE OF INCOME ON ACCOUNT OF DIVIDEND, INTEREST RECEIVED AND PROFIT ON SALE OF INVESTMENTS. ITA NO. 3567 /DEL./2011 3 THE AO OBSERVED THAT THE SALE OF SHARES WAS MADE IN HUGE QUAN TITY. THEREFORE, THE INCOME SHOULD BE TREATED AS BUSINESS INCOME INSTEAD OF CAPITAL GAIN AND ASSESSED ACCORDINGLY. THE ASSESSING OFFICER ALSO ADDED RS.1,60,746/ - U/S. 14A. THE ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. CIT(A), WHO ALLOWED THE APPEAL OF TH E ASSESSEE WITH RESPECT TO TREATMENT OF PROFITS ON PURCHASE AND SALE OF SHARES, AS CAPITAL GAIN AND PARTLY ALLOWED THE DISALLOWANCE MADE U/S. 14A OF THE ACT. AGAINST THE ORDER OF THE LD. CIT(A), THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. 3. WITH RESP ECT TO GROUND NO. 1 & 2 OF APPEAL PREFERRED BY THE REVENUE, THE LD. DR HAS BASICALLY PLACED RELIANCE ON THE ASSESSMENT ORDER. HE REFERRED TO CONTENTS OF PAGE NO. 1, 2 & 3 PARA NO. 3 & 5 OF THE ASSESSMENT ORDER WITH THE SUBMISSIONS THAT FREQUENCY AND VOLUME S OF THE TRANSACTION SUGGESTED THAT IT WAS NOT A CASE OF INVESTMENT, BUT BUSINESS. HE SUBMITTED THAT WHERE A COMPANY PURCHASE AND SELLS SHARES, IT MUST BE SHOWN THAT THEY WERE HELD AS STOCK IN TRADE AND THAT EXISTENCE OF THE POWER TO PURCHASE AND SALE SHARES IN THE MEMORANDUM OF ASSOCIATION IS NOT DECISIVE OF THE NATURE OF TRANSACTION. HE SUBMITTED THAT THE SUBSTANTIAL NATURE OF TRANSACTIONS, THE MANNER OF MAINTAINING THE BOOKS OF ACCOUNT, THE MAGNITUDE OF PURCHASE AND SALES AND THE RATIOS BETWEEN THE PURCHASE AND SALE AND THE HOLDING PERIOD WOULD ITA NO. 3567 /DEL./2011 4 FURNISH A GOOD GUIDE TO DETERMINE THE NATURE OF TRANS ACTION. HE CONTENDED THAT ORDINARILY, THE PURCHASES AND SALES OF SHARES WITH THE MOTIVE OF EARNING A PROFIT WOULD RESULT IN TRANSACTION BEING IN THE NATURE OF TRADE/ADVENTURE IN THE NATURE OF TRADE, BUT WHERE THE OBJECTS OF INVESTMENTS IN SHARES OF A COMPA NY IS TO DERIVE INCOME BY WAY OF DIVIDEND ETC., THEN THE PROFITS ACCRUING BY CHANGE IN SUCH INVESTMENTS BY SALE OF SHARES WILL YIELD CAPITAL GAIN AND NOT REVENUE RECEIPTS. HE FURTHER SUBMITTED THAT THERE WERE LOT OF FREQUENCY AND VOLUMES OF TRANSACTIONS. THEREFORE, THE INCOME SHOULD BE TREATED AS BUSINESS INCOME AND NOT CAPITAL GAIN AS CLAIMED BY THE ASSESSEE. 4. THE LD. AR ON THE OTHER HAND, PLACED RELIANCE ON THE FIRST APPELLATE ORDER ON THE ISSUE. HE SUBMITTED THAT THE COMPANY HAVE CATEGORIZED THE IN VESTMENT AS STOCK IN TRADE IN HIS BALANCE SHEET. HE PLACED RELIANCE ON THE JUDGMENT OF HON BLE MUMBAI TRIBUNAL B BENCH IN THE CASE OF ACIT VS. N A ISHAD H V. VACHHARAJANI DATED 25.02.2011. HE FURTHER SUBMITTED THAT INTENTION OF THE ASSESSEE BEHIND THE TRANS ACTION IS SIGNIFICANT AND FREQUENCY OF TRANSACTION ALONE WOULD NOT DECIDE THE ISSUE IPSO FACTO. HE EXPLAINED THAT THE ASSESSEE CAN HOLD SHARES EITHER AS INVESTMENT OR AS STOCK IN TRADE AS QUALIFIED BY CBDT CIRCULAR NO. 4/2007 DATED 15.06.2007. HE POINTED O UT THAT ENTRIES IN THE BOOKS OF ACCOUNT PROVE THAT THE SHARES IN QUESTION WERE HELD AS INVESTMENT. ITA NO. 3567 /DEL./2011 5 AS REGARDS THE ISSUE OF DISALLOWANCE U/S 14A, THE INTEREST EARNED IS MORE THAN INTEREST PAID AND THE NET RESULT IS THAT THE INCOME OF RS.8,174/ - IS TAXED AS INTEREST INCOME IN THE TOTAL INCOME DECLARED BY THE ASSESSEE COMPANY. THUS, THERE WAS NO JUSTIFICATION, WHATSOEVER, IN MAKING DISALLOWANCE OF THE INTEREST U/R 8D OF THE IT RULES. HE FURTHER SUBMITTED THAT THE LD. CIT(A) HAS MADE A GOOD ORDER, WHICH DOES NO T REQUIRE ANY INTERFERENCE. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND HAVE GONE THROUGH THE ENTIRE MATERIAL AVAILABLE ON RECORD AND WE FIND THAT THERE IS NO JUSTIFICATION TO INTERFERE WITH THE IMPUGNED ORDER. THE LD. CIT(A) HAS DECIDED THE FIRST ISSUE RE GARDING PURCHASE AND SALE OF SHARES IN PARA 6 TO 7.6 AT PAGES 4 & 5 OF THE IMPUGNED ORDER. FOR THE SAKE OF CONVENIENCE, THE SAME IS REPRODUCED AS UNDER : 6. I HAVE GONE THROUGH THE ASSESSMENT ORDER AND THE DETAILED WRITTEN FILED BY THE AR. 7.1 THE MAIN OBSERVATION OF THE AO IS THAT THE ASSESSEE HAS BEEN DOING BUSINESS IN SHARES AND HENCE THE GAIN IS TO BE TAXED AS BUSINESS INCOME. 7.2 THE MAIN CONTENTION OF THE AR IS THAT THE SHARES MEANT FOR TRADING ARE SHOWN AS STOCK IN TRADE AND THE SHARES MEANT FOR INVESTMENT ARE SHOWN UNDER THE HEAD INVESTMENT. IN SUCH A CASE THE GAIN ON THE SALE OF SHARES SHOWN AS INVESTMENT SHOULD BE TAXED UNDER THE HEAD CAPITAL GAINS. FOR THIS PROPOSITION, HE RELIED ON THE FOLLOWING CASE LAW : ACIT VS. NAISHADH V. CACHHARAJANI ( ITAT MUMBAI DATED 25.02.2011), ITA NO. 6429/MUM/2009. ITA NO. 3567 /DEL./2011 6 7.3 THE ASSESSEE HAS SHOWN FOLLOWING DETAILS OF CAPITAL GAINS : LONG TERM GAIN 534,159 SHORT TERM GAIN 7,181,256 7,715,415 LESS: LONG TERM GAIN EXEMPT FROM INCOME TAX 534,159 7,18,256 7.4 THE ASSESSEE HAS SOLD THE SHARES AS DETAILED BELOW : NAME OF THE SHARE NO. OF SHARES DATE OF SALE DATE OF PURCHASE REMARKS HDFC EQUITY FUND 61,650 , 761 12.10.07 18.09.06 SHOWN AS INVESTMENT AS ON 3 1.03. 07 ITC AGRO TECH LTD 260 18.05.07 SHOWN AS INVESTMENT AS ON 3 1.03.07 BORSIL GLASS LTD 7,000 12.12.07 JULY - 07 PURCHASED AND SOLD DURING THE YEAR. BORSI L GLASS LTD 13,000 13.12.07 PURCHASED AND SOLD DURING THE YEAR UNITECH LTD 3,000 20.07.07 7,500 SHARES WERE SHOWN AS INVESTMENT AS ON 31.03.07. BONUS SHARES OF 3,500 WERE SOLD. UNITECH LTD 1,000 23.07.07 UNITECH LTD 7,000 ._ 26.10.07 7.5 AS SEEN FROM THE ABOVE TRANSACTIONS, IT IS VERY CLEAR THAT THE HOLDING PERIOD OF SHARES IS VERY LONG AND ALSO VERY FEW TRANSACTIONS. THE SHARES WERE SHOWN AS INVESTMENT/S IN THE BOOKS OF ACCOUNT. DOMINANT INTENTION WAS TO MAKE INVESTMENT AND SELL WHEN THERE IS APPRECIATION. DELIVERY OF SHARES WAS TAKEN. THERE WAS NO DAILY PURCHASE AND SALE OF SHARES IN RESPECT OF THE SHARES IN QUESTION. THE FACTS BROUGHT ON RECORD WERE NOT CONTROVERTED BY THE A O. 7.6 AFTER CAREFUL CONSIDERATION OF THE FACTS OF THE CASE AND THE LEGAL POSITION CITED BY THE AR, THE GAIN IS TO BE TAX ED UNDER THE HEAD CAPITAL GAINS. THE ACTION OF THE AO IS NOT APPROVED. ACCORDINGLY GROUND NO. 2 IS ALLOWED. ITA NO. 3567 /DEL./2011 7 6. IN VIEW OF THE ABOVE DISCUSSION, MADE IN THE IMPUGNED ORDER, WE ARE OF THE CONSIDERED OPINION THAT THE LD. CIT(A) HAS RIGHTLY TREATED THE PROF IT EARNED ON PURCHASE AND SALE OF SHARES AS CAPITAL GAIN. ON PERUSAL OF THE ABOVE CHART, IT REVEALS THAT THE ASSESSEE HAS PURCHASED SHARES ONLY ON TWO OCCASIONS ON 18.09.2006 (HDFC EQUITY FUND ) AND JULY, 2007(BORCIL GLASS LTD.) AND HE HAS SOLD THE SHARES ONLY ON SEVEN OCCASIONS. THERE IS WIDE GAP BETWEEN THE PURCHASE AND SALE OF SHARES. HENCE, THE LD. CIT(A) WAS QUITE JUSTIFIED IN ACCEPTING THE CONTENTION OF THE ASSESSEE. ACCORDINGLY, THE APPEAL OF THE REVENUE ON THIS ISSUE HAS NO MERIT AND IS LIABLE TO BE DISMISSED. 7. AS REGARDS THE DISALLOWANCE OF EXPENDITURE U/S. 14A, THE LD. CIT(A) HAS MADE REASONED ORDER WHICH NEEDS NO INTERFERENCE. THE CIT(A) HAS DECIDED THE ISSUE AT PAGE 5 & 6 PARA 8 TO 12 OF THE IMPUGNED ORDER. FOR THE SAKE OF CONVENIENCE, THE SAME IS REPRODUCED AS UNDER : 8. GROUND NO.3 READS AS UNDER: 'A) THAT ASSESSING OFFICER HAS ERRED IN MAKING ADDITION U/S. 14 - A OF THE I .T. ACT, B) THAT THE ADDITION AS MADE IS HIGHLY EXCESSIVE AND ARBITRARY.' 9. VIDE THIS GROUND THE APPELLANT CHALLENGED THE ACTION OF THE AO IN MAKING DISALLOWANCE OF EXPENDITURE OF RS. 1,60,746 BY INVOKING RULE 8 D R.W.S. 14 A. THE REASONS GIVEN BY THE AO ARE AS UNDER: 'ASSESSEE HAS AN INVESTMENT AMOUNTING TO RS.53,71,380/ - AT TH E END OF THE YEAR IS EQUITY SHARES FROM WHICH IT EARNED DIVIDEND INCOME OF RS.975,644/ - WHICH IT CLAIMED AS EXEMPT. THE ASSESSEE WAS ASKED TO ITA NO. 3567 /DEL./2011 8 EXPLAIN AS TO WHY THE EXPENSES RELATING TO THE DIVIDEND INCOME ON THIS INVESTMENT SHOULD NOT BE MADE TO THE TOTAL INCOME IN THE LIGHT OF PROVISIONS OF SECTION 14 - A READ WITH RULE 8D OF IT RULES. IT HAS BEEN CONTENDED THAT CLAUSE 2(II) OF RULE 8D DEALS WITH THE SITUATION WHEREIN AMOUNT OF EXPENDITURE DIRECTLY RELATING TO 'INCOME WHICH DOES NOT FORM PART OF INCOME' CAN NOT BE ASCERTAINED......THE ASSESSEE HAS EARNED AN INTEREST OF RS.8174/ - DURING THE PREVIOUS YEAR AND THAT IT HAD ADVANCED LOANS ON WHICH IT HAS EARNED INTEREST TO THE TUNE OF RS.657,863/ - WHEREAS THE ASSESSEE COMPANY HAS PAID LESS INTEREST ON LOANS THAT I T HAS RAISED. THE CONTENTION OF THE ASSESSEE HAS BEEN CONSIDERED BUT NOT FOUND ACCEPTABLE IN THE ABSENCE OF ANY DETAILS TO SUBSTANTIATE THE FACT THAT BORROWED FUNDS IN WHICH INTEREST HAS BEEN PAID HAVE BEEN UTILIZED FOR ADVANCING THE LOAN ON INTEREST INCOM E EARNED. THE INTEREST PAID ON BORROWED FUNDS IN JULY, 2007 HAVE BEEN UTILIZED FOR EARNING TAX FREE INCOME WHEREAS INTEREST EARNED ON THE FUND LENT IS IN THE MONTH OF DEC, 2007. THEREFORE, IT ESTABLISHES THAT THERE IS NO NEXUS FOR INTEREST EARNED AND INTER EST PAID FOR INTEREST BEARING ADVANCES. THEREFORE, AS PER THE WORKING OF RULE 8 - D, THE PROPORTIONATE EXPENSES INCURRED FOR EARNING THE DIVIDEND INCOME ARE WORKED OUT BELOW AT RS.160,746/ - WHICH IS DISALLOWED AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. I ) AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME. NIL II) A = AMOUNT OF EXPENDITURE BY WAY OF INTEREST 649,6 8 9/ - B = AVERAGE VALUE OF INVESTMENT INCOME. 58,90,628/ - C = AVER AGE OF TOTAL ASSETS. 291,48,916/ - A X B/C = 131,293/ - III) .05% OF AVERAGE VALUE OF INVESTMENT = 29,453/ - AGGREGATE OF ABOVE = 160 , 146 / - 10. THE AR FILED DETAILED WRITTEN SUBMISSIONS IN THIS REGARD WHICH ARE AS UNDER: THE LEARNED ASSESSING OFFICER HAS MADE AN ADDITION OF RS. 1,60.746 / - U/S. 14 - A OF THE I.T. ACT BASED ON THE CALCULATIONS AS PER RULE 8D OF THE INCOME TAX RULES. IN THIS CONNECTION, THE APPELLANT HAS OBJECTION TO THE DISALLOWANCE OF RS. 1,31,293/ - BEING THE PROPORTIONATE INTEREST DISALLOWED BY THE ASSESSING OFFICER. ENCLOSED PLEASE FIND COPY OF SUBMISSION MADE BEFORE THE ASSESSING OFFICER WHEREIN IT IS CLEARLY STATED THAT THE LIABILITY OF THE INTEREST ON THE APPELLATE FIRM DURING THE YEAR UNDER ASSESSMENT WAS NIL, ITA NO. 3567 /DEL./2011 9 (PAGE - 19) IN FACT, THE INTEREST EARNED IS MORE THAN INTEREST PAID AND THE NET RESULT IS THAT INCOME OF RS. 8,174 / - IS TAXED AS INTEREST INCOME IN THE TOTAL INCOME DECLARED BY THE APPELLANT COMPANY. THUS, THERE WAS NO JUSTIFICATI ON WHATSOEVER IN MAKING DISALLOWING OF THE INTEREST IN RULE 8D OF THE INCOME TAX RULES . ' 11. I HAVE GONE THROUGH THE ASSESSMENT ORDER AND THE DETAILED WRITTEN SUBMISSIONS FILED BY THE AR. 12. THE MAIN CONTENTION OF THE AR IS THAT THE INTEREST RECEIPT IS HIGHER THAN THE INTEREST EXPENDITURE AND THERE IS NET GAIN OF RS. 8,174 (6,57,863 - 6,49,689). HENCE NO DISALLOWANCE SHOULD BE MADE IN RESPECT OF INTEREST EXPENDITURE. I AM IN TOTAL AGREEMENT WITH THE CONTENTION OF THE AR. THE DISALLOWANCE IS RESTRICTED TO RS. 29,453 AGAINST WHICH THERE IS NO OBJECTION. 8 . IN VIEW OF THE DISCUSSION, MADE IN THE IMPUGNED ORDER, WE ARE OF THE CONSIDERED OPINION THAT THE LD. CIT(A) HAS PASSED THE REASONED ORDER WHICH REQUIRES NO INTERFERENCE. THE LD. DR HAS NOT BEEN ABLE TO REBUT THE FINDINGS OF THE LD. CIT(A). THEREFORE, THE IMPUGNED ORDER DOES NOT CALL FOR ANY INTERFERENCE ON THIS ISSUE ALSO. AS A RESULT, THE APPEAL OF THE REVENUE IS L IABLE TO BE DISMISSED. 9 . IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 09.03.2016 . SD/ - SD/ - ( H.S. SIDHU ) (L.P. SAHU) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 09.03.2016 *AK S/ -