ITO 6(1)(1), MUMBAI V. ABSOLUTE LEASING & FINANCE P.LTD, MUMBAI

ITA 4002/MUM/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 79531 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 1 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-07-2014
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 10-07-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 07-06-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S SENT H IL KUMARAN
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL A B ENCH, MUMBAI . , !' , #$ %&'( , #) *+ # ' BEFORE SHRI D.MANMOHAN, VICE PRESIDENT AND SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER ./ I.T.A. NO.4002/MUM/2012 ( , , , , / ASSESSMENT YEAR :2008-09 THE ITO 6(1)(1), AAYAKAR BHAVAN, MUMBAI-400 020 / VS. M/S. ABSOLUTE LEASING & FINANCE PVT. LTD., C/O SUNIL NAIR, B-141/142, PARK PLAZA CONDOMINIUM, NEW YARI ROAD, VERSOVA, ANDHERI(W), MUMBAI-400 061 +- #) ./ ./ ./ PAN/GIR NO. : AAACA 6803G ( -0 / APPELLANT ) .. ( 12-0 / RESPONDENT ) -0 3 # / APPELLANT BY: SHRI S. SENTHIL KUMARAN 12-0 4 3 # / RESPONDENT BY: SHRI SATISH MODY 4 5) / DATE OF HEARING :10.07.2014 6, 4 5) / DATE OF PRONOUNCEMENT :23.07.2014 *#7 / O R D E R PER N.K. BILLAIYA, AM: THIS APPEAL BY THE REVENUE IS PREFERRED AGAINST THE ORDER OF THE LD. CIT(A), MUMBAI DT.7.3.2012 PERTAINING TO A.Y. 200 8-09. 2. THE GRIEVANCES OF THE REVENUE READ AS UNDER: ITA NO. 4002/M/2012 2 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. CIT(A) ERRED IN RESTRICTING DISALLO WANCE OF RS. 2,24,086/- MADE U/S. 14A R.W.R. 8D TO RS. 1,49, 800/- WITHOUT FURNISHING ANY BASIS AND WITHOUT APPRECIATI NG THE FACT THAT DISALLOWANCE U/S. 14A HAS TO BE DETERMIN ED STRICTLY AS PER METHOD PRESCRIBED UNDER RULE 8D. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITI ON OF RS. 1,00,00,000/- MADE ON ACCOUNT OF UNSUBSTANTIATED PU RCHASE PRICE, UNSUBSTANTIATED SALE VALUE OF SHARES AS WELL AS THE VALUE OF INVESTMENTS IN SHARES AS ON 31.3.2008, BEI NG SHARE TRANSACTION NOT SUPPORTED BY ANY DOCUMENTARY EVIDEN CE WITHOUT APPRECIATING THE FACTS THAT NO DOCUMENTARY EVIDENCES ARE PRODUCED BY THE ASSESSEE DURING THE C OURSE OF SCRUTINY PROCEEDINGS IN SUPPORT OF THE SHARE TRANSA CTION. 3. THE ASSESSEE IS A PRIVATE LIMITED COMPANY TRADING IN SHARES. RETURN FOR THE YEAR WAS FILED ON 26.9.2008 DECLARI NG TOTAL INCOME AT RS. 1,16,683/-. THE RETURN WAS SELECTED FOR SCRUTINY ASSESSMENT, STATUTORY NOTICES WERE ACCORDINGLY ISSUED AND SERVED UPON THE ASSESSEE. 3.1. WHILE SCRUTINIZING THE RETURN, THE ASSESSING O FFICER NOTICED THAT THE ASSESSEE HAS SHOWN DIVIDEND INCOME OF RS. 1,49,800/ - WHICH WAS CLAIMED TO BE EXEMPT FROM TAX. DEMAT CHARGES FOUND TO BE DE BITED RS. 36,300/-. THE ASSESSEE WAS ASKED TO GIVE THE WORKING U/S. 14 A R.W. RULE 8D OF THE ACT. THE ASSESSEE REPLIED THAT NO EXPENDITURE HAD B EEN INCURRED TO EARN INCOME NOT INCLUDED IN THE TOTAL INCOME. HENCE, NO DISALLOWANCE IS CALLED FOR U/S. 14A OF THE ACT. 3.2. THE AO DID NOT ACCEPT THIS SUBMISSION OF THE A SSESSEE AND WENT ON TO COMPUTE THE DISALLOWANCE BY INVOKING RULE 8D. T HE DISALLOWANCE SO COMPUTED WAS AT RS. 2,24,086/-. ITA NO. 4002/M/2012 3 3.3. THE AO FURTHER NOTICED THAT THE ASSESSEE HAS T RADED IN QUOTED AND UNQUOTED EQUITY SHARES OF VARIOUS COMPANIES. THE A SSESSEE WAS ASKED TO SUBMIT THE BASIS OF VALUATION OF SHARES OF PRIVATE LIMITED COMPANIES WHILE PURCHASING AND SELLING. NO DETAILS WERE SUBM ITTED BY THE ASSESSEE. THE AO FURTHER ASKED THE ASSESSEE TO SUBMIT LIST OF SHARES PURCHASED AND SOLD WITH PAN, COPIES OF BALANCE SHEET. THE ASSESS EE FINALLY REPLIED AND EXPLAINED THE NATURE OF TRADING IN SECURITIES AND F URNISHED PAN OF QUOTED AND UNQUOTED COMPANYS SHARES PURCHASED AND SOLD DU RING THE YEAR. HOWEVER, BALANCE SHEET WERE NOT FURNISHED NOR THE C ALCULATION OF VALUE OF EACH SHARE WAS FURNISHED. THE AO FURTHER OBSERVED THAT EVEN THE BASIS FOR ARRIVING AT THE PURCHASE AND SALE VALUE HAS NOT BEEN FURNISHED IN RESPECT OF UNQUOTED SHARES. THE ASSESSEE IN ONE OF ITS REPLY STATED THAT PURCHASE AND SALE PRICE OF THE UNQUOTED SHARES ARE DECIDED BY THE MANAGEMENT OF THE COMPANY AFTER ADEQUATE DUE DILIGE NCE. THE ASSESSEE AFTER ANALYZING THE BUSINESS EXPEDIENCIES AND COMME RCIAL PRACTICES AND TRENDS OF THE FUNCTION ABILITY AND MODUS OPERANDI O F THE BUSINESS DECIDE THE RATE AT WHICH TO PURCHASE/SELL THE SHARES IN TH E ASSESSMENT YEAR UNDER CONSIDERATION. 3.3. IT WAS FURTHER EXPLAINED THAT DECISION TO SELL THE SHARES AT A PARTICULAR PRICE WAS DICTATED SOLELY FOR BUSINESS C ONSIDERATION. IT WAS STRONGLY CONTENDED THAT THERE CAN HARDLY BE ANY DIS PUTE TO THE PROPOSITION THAT THE BUSINESSMAN IS THE BEST JUDGE TO DETERMINE THE BUSINESS EXPEDIENCY. THE DETAILS OF THE SHARES PURCHASED AN D SOLD ARE EXHIBITED AT PAGES 5 TO 7 OF THE ASSESSMENT ORDER. THE AO OBSER VED THAT THE ASSESSEE HAS PURCHASED 8,34,561 NO. OF SHARES AND SOLD 13,04 ,761 NO. OF SHARES DURING THE YEAR. THE VALUE INVOLVED IN PURCHASES A ND SALES IS AT RS. 8.70 CRORES AND 9.49 CRORES RESPECTIVELY. THE AO FURTHE R OBSERVED THAT THE ASSESSEE COULD NOT PRODUCE THE COPIES OF BALANCE SH EET OF THE SAID ITA NO. 4002/M/2012 4 COMPANIES AT THE TIME OF SALE AS WELL AS AT THE TIM E OF PURCHASE OF THE SHARES THEREFORE IT WAS NOT POSSIBLE TO VERIFY WHET HER THE SHARES WERE PURCHASED AND SOLD ON THE BASIS OF SOME DEFINITE VA LUATION AND HENCE, THE PURCHASE VALUE AND SALE VALUE AS SHOWN BY THE ASSES SEE CANNOT BE RELIED UPON. IN THE ABSENCE OF THE BALANCE SHEET OF THE R ESPECTIVE COMPANIES FOR THE RELEVANT FINANCIAL YEAR, THE AO WENT ON THE PRO CEED BY MAKING AN ADDITION OF RS. ONE CRORE ON ACCOUNT OF UNSUBSTANTI ATED PURCHASE PRICE AND UNSUBSTANTIATED SALE VALUE OF SHARES. 4. THE ASSESSEE CARRIED THESE TWO ADDITIONS BEFORE THE LD. CIT(A). IN RESPECT OF THE DISALLOWANCE OF EXPENDITURE U/S. 14A R.W. RULE 8D, THE LD. CIT(A) OBSERVED THAT THE ASSESSEE HAS EARNED A DIVI DEND INCOME OF RS.1,49,800/- AND THE DISALLOWANCE OF RS. 2,24,086/ - IS HIGHER THAN THE EXEMPT INCOME. THE LD. CIT(A) FURTHER OBSERVED THA T THE ASSESSEE HAS CLAIMED TOTAL EXPENSES AT RS. 3,50,998/- OUT OF WHI CH IF THE EXPENDITURE OF RS. 2,24,086/- IS DISALLOWED, IT WOULD BE INJUSTICE TO THE ASSESSEE WHO IS HAVING A NORMAL TRADING BUSINESS TURNOVER OF ABOUT RS. 15 CRORES. THE LD. CIT(A) WENT ON TO RESTRICT THE DISALLOWANCE TO THE EXEMPT INCOME AT RS. 1,49,800/- AND GAVE RELIEF TO THE ASSESSEE AT R S. 74,286/-. 5. AGGRIEVED BY THIS, THE REVENUE IS BEFORE US. 6. THE LD. DEPARTMENTAL REPRESENTATIVE STRONGLY SUB MITTED THAT ONCE THE DISALLOWANCE IS TO BE COMPUTED U/S. 14A R.W. RU LE 8D, THERE IS NO PROVISION FOR RESTRICTING THE DISALLOWANCE TO THE E XEMPT INCOME. 7. PER CONTRA, THE LD. COUNSEL FOR THE ASSESSEE STA TED THAT THE AO HAS TAKEN THE SHARES HELD AS STOCK-IN-TRADE FOR COMPUTI NG THE AVERAGE INVESTMENTS DURING THE YEAR, THEREFORE, THE COMPUTA TION UNDER RULE ITA NO. 4002/M/2012 5 8D(III) IS IN ITSELF ERRONEOUS AND THERE IS NO ERRO R IN THE FINDINGS OF THE LD. CIT(A). 8. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE LOWE R AUTHORITIES. NO DETAILS OF SHARES HELD AS INVESTMENTS AND SHARES H ELD AS STOCK-IN-TRADE HAS BEEN FURNISHED BEFORE THE LOWER AUTHORITIES NOR ANY SUCH DETAILS FURNISHED BEFORE US. A PERUSAL OF THE STATEMENT OF PURCHASE AND SALE OF SHARES DURING THE YEAR UNDER CONSIDERATION WHICH IS EXHIBI TED AT PAGE 5 TO 7 OF THE ASSESSMENT ORDER SHOWS THAT THE ASSESSEE HAS BE EN PURCHASING AND SELLING SHARES OF PRIVATE LIMITED COMPANIES. IN O UR UNDERSTANDING OF THE COMPANIES LAW, A PERSON CAN ONLY INVEST IN SHARES O F A PRIVATE LIMITED CO. AND CANNOT TRADE IN THE SHARES OF A PRIVATE LIM ITED COMPANY. AS NO DETAILS HAVE BEEN BROUGHT ON RECORD IN RESPECT OF S HARES HELD AS STOCK-IN- TRADE, WE DO NOT FIND ANY ERROR IN THE COMPUTATION OF THE DISALLOWANCE MADE U/S. 14A R.W. RULE 8D BY THE AO. THE RELIEF G IVEN BY THE LD. CIT(A) IS UNCALLED FOR. WE, THEREFORE, SET ASIDE T HE ORDER OF THE LD. CIT(A) AND RESTORE THAT OF THE AO. THE DISALLOWANC E OF RS. 2,24,086/- IS CONFIRMED. 9. COMING TO THE SECOND GRIEVANCE OF THE REVENUE WH ICH RELATES TO THE DELETION OF THE ADDITION OF RS. ONE CRORE, WE F IND THAT NONE OF THE REVENUE AUTHORITIES BELOW HAVE CARED TO CONSIDER TH E RELEVANT APPLICABLE PROVISIONS OF THE COMPANIES ACT FOR A PRIVATE LIMIT ED COMPANY. THE ASSESSEE IS CLAIMING THE BUSINESS OF TRADING IN SHA RES OF PRIVATE LIMITED COMPANY. 9.1. SECTION 3(1)(III) OF COMPANIES ACT DEFINES A PRIVATE LIMITED CO. ONE WHICH: ITA NO. 4002/M/2012 6 (A) HAS A MINIMUM PAID-UP SHARES CAPITAL OF RS. 1 LAKH OR SUCH HIGHER CAPITAL AS MAY BE PRESCRIBED; AND (B) BY ITS ARTICLES ASSOCIATION: (1) RESTRICTS THE RIGHT OF TRANSFER OF ITS SHARE (2) LIMITS THE NUMBER OF ITS MEMBERS TO 50 WHICH WI LL NOT INCLUDE A. MEMBERS WHO ARE EMPLOYEES OF THE COMPANY; AND B. MEMBERS WHO ARE EX-EMPLOYEES OF THE COMPANY AND WERE MEMBERS WHILE IN SUCH EMPLOYMENT AND WHO HAVE CONTI NUED TO BE MEMBERS AFTER CEASING TO BE EMPLOYEES; 3. PROHIBITS ANY INVITATION TO THE PUBLIC TO SUBSCR IBE FOR ANY SHARES OR DEBENTURES OF THE COMPANY; AND 4. PROHIBITS ANY INVITATION OR ACCEPTANCE OF DEPOSI TS FROM PERSONS OTHER THAN ITS MEMBERS, DIRECTORS OR THEIR RELATIVE S. THIS MEANS THAT THE MAJOR OWNERSHIP RESTRICTIONS AR E: SHARE HOLDERS CANNOT SELL OR TRANSFER THEIR SHARES WITHOUT OFFERING THEM FIRST TO OTHER SHARE HOLDERS FOR PURCHASE. FU RTHER, SHARE HOLDERS CANNOT OFFER THE SHARES TO THE GENERAL PUBLIC OVER A STOCK EXCHANGE AND THE NO. OF SHARE HOLDERS CANNOT EXCEED A FIXED FIGU RE NAMELY 50. 10. THE ASSESSEES NATURE OF BUSINESS AS CLAIMED IS TRADING IN SHARES. WHATEVER LITTLE DETAILS WHICH ARE AVAILABLE FROM TH E ASSESSMENT ORDER SHOW THAT THE ASSESSEE IS PURCHASING AND SELLING SH ARES OF A PRIVATE LIMITED COMPANY AND CLAIMING IT TO BE ITS BUSINESS ACTIVITY. WE FAIL TO UNDERSTAND HOW CAN A PERSON TRADE IN SHARES OF A PR IVATE LIMITED COMPANY. THIS ASPECT HAS NOT EVEN CONSIDERED BY TH E AO DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS NOR THE LD. CI T(A) CARED TO APPLY HIS MIND ON THE NATURE OF ACTIVITY OF THE ASSESSEE BEFORE DELETING THE ITA NO. 4002/M/2012 7 ADDITION OF RS. ONE CRORE. NEEDLESS TO MENTION, TH E FINDINGS OF THE LD. CIT(A) ARE GROSSLY ERRONEOUS ON THE FACTS OF THE CA SE. 11. TO KNOW THE TRUE NATURE OF THE BUSINESS ACTIVIT Y OF THE ASSESSEE, WE RESTORE THIS ISSUE TO THE FILE OF THE AO. THE AO I S DIRECTED TO VERIFY THE NATURE OF THE BUSINESS ACTIVITY OF THE ASSESSEE, HO W THE ASSESSEE IS DOING BUSINESS IN THE SHARES OF PRIVATE LIMITED COMPANIES . THE AO IS FURTHER DIRECTED TO DEEPLY INVESTIGATE THE PURCHASE AND SAL E TRANSACTION OF THE SHARES OF PRIVATE LIMITED COMPANIES. THE ASSESSEE IS DIRECTED TO FILE THE ARTICLES OF ASSOCIATION OF ALL THE PRIVATE LIMITED COMPANIES IN WHOSE SHARES THE ASSESSEE HAS TRADED DURING THE YEAR UNDE R CONSIDERATION. NEEDLESS TO MENTION, THIS ACTIVITY OF THE ASSESSEE NEEDS THOROUGH INVESTIGATION BY THE AO. THE AO IS DIRECTED TO GIV E A REASONABLE AND SUFFICIENT OPPORTUNITY TO THE ASSESSEE WHILE DECIDI NG THIS ISSUE AFRESH. 12. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 23 RD JULY, 2014 . *#7 4 , ) # 8 9*: 23.7.2014 4 ; SD/- SD/- (D.MANMOHAN ) (N.K. BILLAIYA) !' /VICE PRESIDENT #) *+ / ACCOUNTANT MEMBER MUMBAI; 9* DATED : 23 RD JULY, 2014 . . ./ RJ , SR. PS ITA NO. 4002/M/2012 8 *#7 *#7 *#7 *#7 4 44 4 15% 15% 15% 15% <#%,5 <#%,5 <#%,5 <#%,5 / COPY OF THE ORDER FORWARDED TO : 1. -0 / THE APPELLANT 2. 12-0 / THE RESPONDENT. 3. = ( ) / THE CIT(A)- 4. = / CIT 5. %>; 15 , , / DR, ITAT, MUMBAI 6. ; ? / GUARD FILE. *#7 *#7 *#7 *#7 / BY ORDER, 2%5 15 //TRUE COPY// / . . . . (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI