Uniton Enterprise Private Limited, Hyderabad V. Income Tax Officer, Ward-17(3), Hyderabad

ITA 424/Hyd/2018

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 4292 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 2 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-05-2019
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: DB-A
• Next Hearing Date: 02-04-2019
• Assessment Year: 2013-2014
• Appeal Filed On: 28-02-2018
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: M H NAIK
• Assessee Lawyers: S RAMA RAO
• Keywords: Capital asset; Business expenditure; Earning of tax free income
• Section: 142(1); 14A; 37; 56

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH ES A , HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER I TA NO. A . Y. APPELLANT RESPONDENT 4 2 4 /HYD/1 8 201 3 - 1 4 UNITON EN TERPRISE PRIVATE LIMI T ED, HYDERABAD [ P A N: A A B CU4213D ] INCOME TAX OFFICER, WARD - 1 7(3) , HYDERABAD 4 25 / HYD/1 8 201 4 - 1 5 FOR ASSESSEE : SHRI S. RAMA RAO , AR FOR REVENUE : SHRI M.H. NAIK , DR DATE OF HEARI NG : 02 - 0 4 - 201 9 DATE OF PRONOU NCEM E NT : 10 - 0 5 - 2019 O R D E R PER S. RIFAUR RAHMAN, A.M. : TH E S E TWO APPEAL S ARE FILED BY T HE A SSESSEE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) - 5 , HYDERABAD FOR THE AYS. 2013 - 14 & 2014 - 15 . SINCE THE FACTS AND ISSU ES INVOL VE D IN THESE APPEALS ARE COMM ON AND IDENTICAL, BOTH OF THESE APPEALS ARE HEARD TOGETHER AND DISPOSED BY WAY OF THIS COMMON ORDER . 2. F OR THE SAKE OF CONVENIENCE , THE FACTS RELATING TO AY. 2013 - 14 ARE DISCUSSED HEREUNDER : 2 . 1 BR I EF FACT S OF THE CASE A RE , ASS ESSEE FILED ITS RETURN OF I NCOME FOR THE AY. 2013 - 14 ON 21 - 09 - 2013 , DECLARING INCOME OF RS. 44 ,0 2 0/ - . T HE CASE OF THE A SSESSEE WAS TAKEN UP FO R SCRUTINY AND ISSUED NOTICE U/S. ITA NO S. 424 & 42 5 /HYD/201 8 : - 2 - : 143(2) OF THE INCOME TAX ACT [ACT] AND SERVED ON THE ASSESSEE ON TIME. S UBSEQUENTLY , NOTICE U/S. 142(1) OF THE ACT WAS ALSO ISSUED. 3. DURING THE ASSESSMENT PROCEEDINGS, ASSESSING OFFICER NOTICED THAT ASSESSEE HAS ADMITTED GROSS RECEIPTS OF RS. 29,09,874/ - ON ACCOUNT OF PROVIDING ASSISTANCE FOR OVER SEAS UNIVERSITY FOR ADMISSION OF CANDIDATES AND AGAINST THESE R EC EIPTS, RELATED EXPEND I T URE S WERE CLAIMED ALONG WITH INTEREST EX PENDITURE OF RS. 9,10,440/ - AND DECLARED A PROFIT OF RS. 44,022/ - . I T WAS NOTICED BY THE ASSESSING OFFICER THAT AS PER THE BALANCE SHEET, ASSESSEE HAS RECEIVED UNSECURED LOANS OF RS. 1,15,72, 92 0/ - AND INCURRED FINANCIAL CHARGES FOR PAYMENT OF INTEREST TO THE ABOVE CREDITORS. T HE ASSESSEE MADE THE INVESTMENT IN EQUITY SHARES OF S RI GODAVARI K RAFT PAP ERS L IMI T E D . W HEN THE ASSESSEE WAS ASKED TO EXPLAIN WHY THE INTEREST EXPENDITURE SHOUL D NOT BE DI SALLOWED AS THE BO RROWED FUNDS WERE UTILISED FOR INVESTMENT IN NON - CURRENT INVESTMENT AND THERE IS NO NEXUS TO THE INCOME DECLARED AND PAYMENT OF INTE REST. IN R ESPONSE, ASSESSEE FILED THE FOLLOWING , WHICH IS REP RO D UCED BELOW: I. THE OBJECTIVES AS P ER MEMORAN DUM OF ARTICLES INCLUDE INVESTMENT IN COMPANIES. II. THE INVESTMENT WAS MADE AS A PART OF BUSINESS ACTIVITY. SUCH INVESTMENT IS REQUIRED TO BE KEPT FOR FEW YEARS BEFORE IT IS DE - IN VESTED. III. THE ASSESSES HAS TO WAIT TILL THE SHARES FETCH SUBSTANTIA L PROFITS. THEREFORE, THEY ARE NOT SHOWN AS CURRENT ASSET S AND ARE SHOWN AS NON - CURRENT ASSET S . IV. THE ENTR IES MADE IN THE BOOKS ARE NOT RELEVANT TO DETERMINE THE NATURE OF THE ASSET. V. IN THE CASE OF THE ASSESSES THE OBJECT IS INVESTMENT IN THE SHARES AS A PART OF IT S BUSINESS ACTIVITY. ITA NO S. 424 & 42 5 /HYD/201 8 : - 3 - : VI. IT CA N BE SEEN THAT, THE BUSINESS ACTIVITY OF THE ASSESSEE INCLUDES INVESTMENT IN ACCORDANCE WITH OBJECTS. THEREFORE, THE INTEREST IS ALLOWABLE AS A DEDUCTION U/ S. 36(I)(III). VII. THE PROVISIONS OF SEC. 37 HAVE NO APPLICATIO N AS THE IN TEREST IS ALLOWABLE U/ S . 36. VIII. THE PROVISO TO SEC. 36(I)(III) IS AP PLICABLE TO A CAPITAL ASSET ACQUIRED WHICH WAS PUT TO USE FOR THE PURPOSE OF BUSINESS AND IT SHALL NOT APPLY TO STOCK IN TRADE. IX. THE PROVISIONS OF SEC. 14 A ARE NOT APPLICABLE AS THE INTENT ION OF THE ASSESSEE IS NOT TO DERIVE INCOME UNDER THE HEAD DIVIDEND AND THE PROVISION CAN APPLY ONLY WHEN INCOME EXEMPT FROM TAX WAS DERIVED DURING THE YEAR. X. IN VIEW OF THE DECISION OF TH E HON'BLE AP HIGH COURT IN THE CASE OF COMMISSIONER OF I N COME TAX V S. PENINSULAR INVESTMENT LTD., 265 CTR 601, THE ASSESSEE IS ELIGIBLE FOR INTEREST U/ S . 36(L)(III). 3.1. ACCORDING TO THE ASSESSEE , SHARES WERE ACQUIRED AS A PART OF BUSINESS ACTIVITY BU T THE ASSESSEE HAS SHOWN THE ABOVE INVESTMENT AS NON - CUR R ENT AS THE ASSESSEE HAS TO WAIT TIL L THE SHARES FETCH SUBSTANTIAL PROFIT. T HEREFORE, THE INTEREST IS A LLOWABLE EXPENDITURE . THE ASSESSING OFFICER DID NOT ACCEPT THE CONTENTION OF ASSESSEE AND OPINED THAT THERE IS NO NEXUS BETWEEN THE INTEREST PAYMENT AN D THE INVES TMENT MADE WHICH IS NON - C UR RENT INVESTMENT. T HEREFORE, HE DISALLOWED THE INTEREST CLAIMED BY ASSESSEE IN THE P&L A/C BY RELYING ON THE DECISION OF KANKHAL INVESTMENTS & TRADING CO. (P) LTD., VS. ACIT [116 I TD 492] , ACIT VS. M/S. GOEL INVESTMENT S LTD., IN ITA NO. 817/LKW/2014, DT. 12 TH JUN E, 2015 AND THE DECISION OF THE HON'BLE AP HIGH COURT IN TH E CASE OF CIT VS. PENINSULAR INVESTMENT L T D., [265 CTR 601] . 3. 2. AGGRIEVED WITH THE ABOVE ORDER, ASSESSEE PREFERRED AN APPEAL B EFORE THE CIT(A ) . ITA NO S. 424 & 42 5 /HYD/201 8 : - 4 - : 4. B EFORE THE CIT(A) , THE ASSESSEE MADE SIMILAR SUBMISSIONS W HICH WERE MADE BEFORE THE ASSESSING OF FICER AND FURTHER SUBMITTED THAT EVEN IF THERE IS TO BE ANY DISALLOWANCE, ASSESSING OFFICER SHOULD HAVE DIS ALLOWED THE SAME U/S. 14A OF THE ACT AND NOT U/S. 36( 1 )(III) OF THE ACT. 4 .1. AFTER CO NSIDERING THE SUBMISSIONS OF ASSESSEE , LD.CIT(A) DISMISSED THE APPEAL OF ASSESSEE BY OBSERVING AS UNDER: IT IS IMPORTANT TO NOTE THAT THE ASSESSEE HAS MADE INVESTMENT IN SHARES. THE SHARES AS INVESTMENT CAN YIELD ONLY 2 TYPES OF INCOME I.E IN COME FR OM CAPITAL GAINS ON ACCOUNT OF TRANSFER OF SHARES, ON THE TRANSFER ONLY INDEXA TION AND EXPENSES IN RELATION TO THE SAME ARE ALLOWED BUT THE INTEREST EXPE N SES ARE NOT ALLOWED AS PER THE COMPUTATION OF INCOME. AS REGARDS THE DI V IDEND, THE SAME DOES NO T FALL UNDER INCOME FROM OTHER SOURCES AS THE DIVIDEND INCOME IS EXEMPT BECAUSE OF TH E WITHHOLDING TAX U/S. 115 - O . THEREFORE, THE INVESTMENT WOULD NOT YIELD ANY INCOME IN RELATION TO PROFIT AND GAINS AS PER BUSINESS AND PROFESSION AN D THEREFORE THE ASSESSE E CANN OT CLAIM THE SAID EXPENDITURE U/S. 36(1)(III) OF THE I.T. ACT AT ALL ON SUCH INV ESTMENTS AND FURTHER THE EXPENDITURE IS NOT ALLOWABLE U/S. 57 AS THE INCOME FROM DIVIDEND WILL NOT FALL U/S. 56 BECAUSE OF THE EXEMPTION. THEREFORE THE AO HAS RIGHTLY DIS A LLOWED THE EXPENDITURE U/S. 36( 1 )(III) AND THE ASSESSEE IS NOT ELIGIBLE FOR THE CLAIM UNDER ANY OTHER HEAD. IN VIEW OF THE SAME THE ADDITION IS UPHELD. HENCE GROUND NOS. 3 & 4 ARE DISMISSED. GROUND NO.5 BEING CONSEQUENTIAL IN NATURE NEEDS NO SPECIFIC ADJU DICATION. GROUND NOS. 1 & 6 BEING GENERAL IN NATURE, ALSO NEED NO SEPARATE ADJ U DICATIO N . 5 AGGRIEVED WITH THE ABOVE ORDER, ASSES SEE PREFERRED AN APPEAL BEFORE US, RAISING THE FO LLOWING G ROUNDS OF APP EA L: 1. THE ORDER OF THE LE A RNED COMMISSIONER OF INCO ME - TAX (APPEALS) IS ERRONEOUS BOTH ON FACTS AND IN LAW. 2. THE LEARNED COMMISSIONE R OF INCOME - TAX (APPEALS) ERRED IN CONFIRMING TH E ACTION OF THE ASSESSING OFFICER IN NOT TREATING THE ACTIVITY OF PURCHASE AND SALE OF SHARES AS B U SINESS . ITA NO S. 424 & 42 5 /HYD/201 8 : - 5 - : 3. THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) ERRED IN CONFIRMING THE DISALLOWANCE OF INTERE ST OF RS. 9,60,440/ - ON THE GROUND THAT SEC. 36(1)(III) OF THE I.T. ACT HAS NO APPLICATION. 4. ANY OTHER GROUNDS OR GROUNDS THAT MAY BE URGED AT T H E TIME OF HEARING . 6. G ROUND NOS. 1 & 4 ARE GENERAL IN NATURE, GROUND NOS. 2 & 3 ARE RELATING TO DISALLOWANCE OF INTERE ST U/S 36(1)(III) OF THE ACT. 7. BEFORE US, LD. A R SUBMITTED THAT THIS IS THE FIRST YEAR OF OPERATION. ASSESSEE MADE INVES TMENT IN SHARES, WHICH IS DECLARED IN BALANCE SHEET. HE SUBMITTED THAT A S PER MOA, THE MAIN OBJECT OF THE ASSESSEE IS TO DEAL IN THE SHARES LIKE, INVEST, SELL, TRANSFER ETC. THEREFORE, ASSESSEE IS DEALING IN THE BUSINESS OF BUYING AND SELLING SHARE S. HENCE, THE RELATED EXPENSES ARE BUSINESS EXPENDITURE. HE SUBMITTED THAT , B ESIDES, ASSESSEE ALSO CARRIES ON THE BUSINESS OF PROVIDING ASSISTANCE TO THE OVERSEAS U NIV ERSITIES FOR ADMISSION O F STUDENTS. HE OBJECTED TO THE ACTION OF AO THAT ASSESSEE HAS NOT CARRIED OUT ANY BUSINESS OF BUYING AND SE LLING OF SHARES AND IN DISALLOWING THE IN TEREST EXPENDITURE RELEVANT FOR THE INVESTMENT IN SHARES. HE CONTENDED THAT THIS ACTION OF THE AO IS AGAINST T HE MAIN OBJECTS OF THE COMPANY . THERE FORE, HE PRAYED THAT SINCE THE INTEREST E XPENDITURE IS RELATING TO T HE BUSINESS ACTIVITY OF THE ASSESSEE, THE SAME SHOULD BE ALLOWED U/S 36(1)(III) OF THE ACT. 8. ON THE OT HER HAND, LD. DR RELYING ON THE ORDERS OF TAX AUTHORITIES, SUBMITTED THAT ASSESSEE I S NOT INTO THE BUSINESS OF B UYING/SELLING OF SHARES. IT ONLY MADE INVESTMENT IN LONG TERM , ON WHICH , THE INCOME IS EXEMPT AND GAINS ARE TAXABLE UNDER CAPITAL GAINS. 9. CON SIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE NOTICED THAT ASSESSEE IS ESTABLISHED WITH THE OBJECT TO ITA NO S. 424 & 42 5 /HYD/201 8 : - 6 - : CARRY ON THE BUSINESS T O INVEST, ACQUIRE AND HOLD, SALE , BUY OR OTHERWISE DEAL IN SHARES. THE OBJECTS ALSO INCLUDE SIMILAR ACTIVITIES OF INVESTMENT. BUT, B EING IN THE FIRST YEAR OF OPE RATION, ASSESSEE HAD MADE HUGE INV ESTMENTS IN SHARES , BUT, CLASSI FI ED THE INVESTMENT AS NON - CUR RENT INVESTMENTS. IN ORDER TO DO THE BUSINE SS IN SHARE S, THE SHARES CAN ONLY BE TREATED AS STOCK - IN - TRADE. EVEN OTHERWISE, ASSESSEE CAN C LASSIFY THE INVESTMENT MADE IN BALANCE SHEET DEPENDING UP O N THE TYPE OF INVESTMENT I.E. HELD FOR STOCK, HELD FOR MATURI TY O R HELD FOR LONG TERM INVESTMENT. THESE CLASSIFICATIONS S HOULD BE PART OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF EARNING INCOME WILL DIFFER . ASSESS EE HAS NOT DISCLOSED ANYTHING IN ACCOUNTING POLICIES OF THE COMPANY. 9. 1 WE AGREE WITH THE ASSESS EE THAT THE OBJECT OF THE COMP ANY IS TO DEAL IN SHARES, IT CAN BE TREATED AS BUSINESS IN COME. DEALING IN SH A RES DIFFERS UPON THE ACTIVITIES CARRIED ON BY THE ASSESSEE. T HE SHARE S CAN BE BOUGHT AND SO LD, WHICH ALONE CAN BE CLA SSIFIED UNDER BUSINESS AS THEY ARE IN THE NATURE OF TRADING. THE OTHER ACTIVITIES LIKE INVESTMENT MADE ON TO HOLD THE STOCK FOR MATURING OR HELD FOR LON G TERM INVES TMENT WILL BE WITH THE INT ENTION TO MAKE RECURRING INCOME WHICH ULTIMATELY CLASSIFIED AS EXEMPT INCOME OR WHEN THESE INVEST ME NTS ARE TRANSFERRED , IT WILL EARN INCOME, WHICH CAN BE CLA SSIFIED UNDER THE HEAD INCOME FROM CAPITAL GAINS AND NOT UNDER THE HEAD B USINESS INCOME . 9.2 IN THE GIVEN CASE, ASSESSEE HAS DECLARED INCOME AND CAN CLAIM EXPENDITURE TO THE EXTENT OF THE IN COME EARNED I. E. RELATING T O THE BUSINESS PROVIDING ASSISTANCE TO OVER SEAS UNIV ER SITIES. BUT, WITH REGARD TO INVESTMENT IN SHARES, ASSESSEE HAS MADE LONG TERM INVESTMENT , THE INCOME CAN ONLY BE EXEMPT UNDER INCOME - T AX ACT. THE RELEVANT EXPENDITURE TO THAT EX TENT IS NOT ALLOWABLE EVEN THOUGH THE EXPENDITURE CAN BE CLASSIFIED AS BUSINESS EXPENDITURE CONSIDERING THE ITA NO S. 424 & 42 5 /HYD/201 8 : - 7 - : OBJECT CLAUSE. THEREFORE, ASSESSEE HAS TO CARRY ON THE BUSINESS ACTIVITIES SEPARATELY FOR EXEMPT AND TAXABLE. WE HAVE ALREADY EXPLAINED THAT THE A CTIVITIES CARRIED ON BY THE ASSESSEE CANNOT COME UNDER BUSINESS HEAD, STILL, ASSESSEE CAN CLASSIFY THE ACTIVITIES CARRIED ON BY IT AS INVESTMENT ACTIVITIES AND SERVICE ACTIVITIES. SINCE THE INTEREST CLAIMED BY THE ASSESSEE IS NOT RELATING TO SERVICE ACTIVI TIES, IT RELATES TO INVESTMENT ACTIVITIES. THE INVESTMENT ACTIVITIES HAVE NOT GENERATED ANY INCOME AND TH IS EXPEND ITURE RELATES TO ACTIVITIES, WHICH HAVE NOT GENERAT ED INCOME AND EVEN WHEN IT GENERATES INCOME WILL BE EXEMPT FROM TAX. THIS DIVISION OF BUSIN ESS OF T HE ASSESSEE , CAN BE CLASSIFIED AS ACTIVITIES WHICH ARE EXEMPT FROM TAX, WHICH ARE SIMILAR TO ACTIVITIES OF AGRICULTURE INCOME. WHILE DEALING WITH AGRICULTURAL ACTIVI TIES, THE AGRICULTURAL EXPENDITURE IS NOT ALLOWED AGAINST BUSI NESS INCOME. S IMILARL Y, IN THE GIVEN CASE ALSO, ASSESSEE IN ITS BALANCE SHEET CL EARLY INDICATES THAT IT HAS MADE LONG TERM INVESTMENT AND HAS NOT DEMONSTRATED IT HAS INVOLVED IN ANY TRADING ACTIVITIES IN SHARES, THEREFORE, WE DECLINE TO ENTERTAIN THE GRO UND RAISED BY THE ASSES SEE. HOWEVER, T HE EXPENDITURE CLAIMED BY THE ASSESSEE IS ALLOWED TO CARRY FORWARD AND CAN BE ADJUSTED OUT OF INCOME GENERATED IN TH E INVESTME NT ACTIVIT IES. 9.3 WE NOTICE THAT ASSESSEE HAS RAISED GROUND NO. 2 CLAIMING THE INVESTMENT ACTIVITIES AS BUSINESS . WE ARE IN AGREEMENT WITH THE ASSESSEE B UT CAN ONLY BE TREATED AS INCOME FROM ACTIVITIES WHICH ARE EXEMPT FROM TAX. ON THE OT HER H AND, GROUND NO. 3, WITH REGARD TO INTEREST EXPENDITURE, IT IS NOT AN EXPENDITURE FROM THE ACTIVITIES WHI CH IS TAXABLE UNDER I NCOME - TAX ACT. ASSESSEE HAS NOT DECLARED ANY EXEMPT INCOME BUT MADE INVESTMENT, WHICH CAN ONLY EARN EXEMPT INCOME. IN SUCH SITUATION, THE EXPENDITURE RELATING TO THAT PART OF ACTI VITIES CANNOT BE CLAIM ED. SECTION 14A I S APPLICABLE ONLY WHEN ASSESSEE DECLA RES EXEMPT INCOME. IN THE GIVEN CASE, THERE IS A CLEAR ITA NO S. 424 & 42 5 /HYD/201 8 : - 8 - : DISTINCTION IN THE ACTIVITIES ITS ELF. HENCE, GROUND RAISED BY THE ASSESSEE IS DI SMISSED. 10. IN THE RESULT, APPEAL OF THE ASSESSEE IS DISM ISSED. ORD ER P RONOUNCED IN THE OP EN C OURT ON 10 TH MAY , 201 9 . SD/ - SD/ - (P. MADHAVI D EVI) (S. R IFAUR RAHMAN ) JUDICIAL MEMBER AC COUNTAN T MEMBER H YDERA BAD, DAT ED 10 TH MAY , 20 1 9 T NMM /KV COPY TO : 1. UNITON ENTE RPRISE PRIVATE L I MI T ED, 101, SRI CHAITANYA RESIDENCY, SAGAR SOCIETY, ROAD NO. 2, BANJARA HILLS, H YDERABAD. 2 . THE INCOME TAX OFFICER , WARD - 1 7(3) , HYDERABAD. 3 . T HE CIT ( APPEALS) - 5 , HYDERABAD 4 . T HE PR. CIT - 5 , HYDERABAD 5 . D.R. ITAT, HYDERABAD. 6 . GUARD FILE.