Shri Bharatkumar P.Mandalia, Ahmedabad V. The ACIT, Cent.Circle-2(4), Ahmedabad

ITA 472/AHD/2007

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 63125 (ITAT-AHMEDABAD)
• Duration Of Justice: 5 year(s) 9 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 04-09-2012
• Assessment Year: 2004-2005
• Appeal Filed On: 02-02-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: KARTAR SINGH
• Keywords: Business income; Earning of tax free income; Retrospective amendment
• Section: 14A; 6

Judgement Text

ITA NO.472/ AHD/20- 07 . ASSESSMENT Y EAR 2004- 05 . 1 IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, AHMEDABAD (BEFORE SHRI G.C.GUPTA VICE PRESIDENT & SHRI ANIL C HATURVEDI, A.M.) I.T. A. NO. 472/AHD/2007 (ASSESSMENT YEA R: 2004-05) SHRI BHARATKUMAR P.MANDALIA, C/O.ZAVERI & CO., SWAGAT BUILDING, C.G. ROAD, AHMEDABAD. (APPELLANT) VS. ASSISTANT COMMISSIONER OF INCOME TAX, CENTRALCIRCL;E 2(4), AAYAKAR BHAVAN, ASHRAM ROAD, AHMEDABAD. (RESPONDENT) PAN: ACCPM 8736D APPELLANT BY : SHRI M.K. PATEL WITH SHRI J.C. SHAREDALAL. RESPONDENT BY : SHRI KARTARSINGH CIT (DR) ( )/ ORDER DATE OF HEARING : 4- 09-2 012 DATE OF PRONOUNCEMENT : 30-11-2012 PER: SHRI ANIL CHATURVEDI, A.M. THIS APPEAL IS APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF LD. CIT (A)-III, AHMEDABAD DATED 18-12-2006 FOR THE ASS ESSMENT YEAR 2004- 05. ITA NO.472/ AHD/20- 07 . ASSESSMENT Y EAR 2004- 05 . 2 2. THE ASSESSEE IS AN INDIVIDUAL ENGAGED IN THE BUS INESS OF TRADING OF SHARES AND HAS INCOME FROM SHARES, DIVIDEND, RENT A ND CAPITAL GAINS. ASSESSEE IS ALSO A PARTNER IN THE FIRM M/S. ZAVERI & CO. EXPORTS. THE ASSESSEE FILED HIS RETURN OF INCOME ON 31-10-2004 S HOWING TOTAL LOSS OF RS.57,31,265/-.THE CASE WAS SELECTED FOR SCRUTINY. 3. ON THE BASIS OF DETAILS SUBMITTED, THE A.O. NOTI CED THAT ASSESSEE HAD PURCHASED/ALLOTTED UNITS OF RS.8,07,56,958/- AND AL SO SOLD UNITS OF RS.7,22,97,926/- AND EARNED DIVIDEND OF RS.1,13,95, 811/- ON UNITS OF MUTUAL FUNDS WHICH WAS CLAIMED AS EXEMPT INCOME U/S . 10(33). THE ASSESSEE ALSO CLAIMED LOSS OF RS.1,24,45,114/- ON T HE SALE OF UNITS. THE A.O. NOTICED THAT THE ASSESSEE HAD BORROWED FUNDS F ROM KOTAK MAHINDRA INVESTMENTS LTD. FOR THE PURPOSE OF INVESTING IN UN ITS OF MUTUAL FUNDS AND ON THE MONEY BORROWED HAD PAID INTEREST OF RS. 4,76 ,824/- WHICH WAS CLAIMED AS INTEREST EXPENSES. THE A.O. WAS OF THE V IEW THAT ASSESSEE WAS NOT ENTITLED TO DEDUCTION OF INTEREST IN VIEW OF TH E PROVISIONS OF SEC. 14A AND THEREFORE THE ASSESSEE WAS ISSUED SHOW CAUSE NO TICE TO SUBMIT HIS EXPLANATION. THE ASSESSEE INTERALIA SUBMITTED THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF TRADING OF SHARES, SECUR ITIES AND UNITS OF MUTUAL FUNDS, THE INCOME OF WHICH IS CONSIDERED AS INCOME FROM BUSINESS. THE ASSESSEE HAD BORROWED MONEY FOR THE PURPOSE OF BUSI NESS AND THEREFORE NO DISALLOWANCE CAN BE MADE U/S.14A.THE A.O. DID NO T AGREE WITH THE CONTENTIONS OF THE ASSESSEE AND ACCORDINGLY HE DISA LLOWED RS.4,76,824/- BEING THE INTEREST EXPENSES U/S. 14A AND ADDED TO T HE INCOME. AGGRIEVED BY THE ACTION OF THE A.O. THE ASSESSEE CARRIED THE MATTER BEFORE CIT (A). ITA NO.472/ AHD/20- 07 . ASSESSMENT Y EAR 2004- 05 . 3 4. BEFORE CIT (A), THE ASSESSEE SUBMITTED THAT IT I S ASSESSEES BUSINESS TO PURCHASE / SALE UNITS AND SHARES AND THE INCOME FROM WHICH IS CONSIDERED AS BUSINESS INCOME. THE DIVIDEND WHICH H AS BEEN EARNED ON THE UNITS IS INCIDENTAL TO THE BUSINESS. ASSESSEE H AD PAID INTEREST ON LOAN RAISED FROM KOTAK MAHINDRA FINANCE FOR MAKING INVES TMENTS IN THE UNITS OF MUTUAL FUNDS. THE INTEREST PAID FOR INVESTING IN UN ITS WAS OF RS.4,76,824/-. AND IT WAS FOR THE PURCHASE OF UNITS OF MUTUAL FUND S WHICH IS AN INTEGRAL PART OF THE BUSINESS. THE ASSESSEE FURTHER SUBMITTE D THAT THE A.O. HAS TAKEN CONTRADICTORY STAND. ON ONE HAND THE A.O. HAS DISALLOWED THE INTEREST AND ON THE OTHER HAND HE HAS TREATED THE T RANSACTIONS OF PURCHASE/SALE OF UNITS AS THAT BEING BUSINESS OF AS SESSEE. IT WAS THUS CONTENDED THAT THE INTEREST PAYMENT WAS ON ACCOUNT OF BUSINESS AND THEREFORE NO DISALLOWANCE U/S.14A WAS CALLED FOR. 5. CIT (A) VIDE HIS ORDER DATED 18-12-2006 DISMISSE D THE APPEAL OF THE ASSESSEE BY HOLDING AS UNDER:- 9. IT IS SEEN THAT THE PROVISIONS OF SECTION14A (I NSERTED BY THE FINANCE ACT, 2001, WITH RETROSPECTIVE EFFECT FROM 1 -4-1962) ARE UNAMBIGUOUS. THEY RELATE TO EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME. THE APPELLAN T HAD RAISED LOANS FROM M/S. KOTAK MAHINDRA FOR PURCHASE OF MUTUAL FUN D UNITS, AS A CONSEQUENCE OF WHICH, DIVIDENDS EARNED THEREFROM DI D NOT FORM PART OF THE TOTAL INCOME. THE INTEREST EXPENDITURE IS, I N THE FACTS OF THE CASE, DIRECTLY ATTRIBUTABLE TO EARNING OF THIS EXEM PTED INCOME AND IS THEREFORE COVERED BY THE PROVISIONS OF SECTION 14A. THE PROVISO TO SECTION 14A INSERTED WITH RETROSPECTIVE EFFECT FROM 11-5-2001 DOES NOT PROVIDE ANY MITIGATING CIRCUMSTANCES OF THE APP ELLANT. THE DECISIONS CITED WERE ALSO NOT APPLICABLE IN THE FAC TS OF THE APPELLANTS CASE AND IN VIEW OF THE SPECIFIC NATURE OF THE PROV ISIONS OF SECTION ITA NO.472/ AHD/20- 07 . ASSESSMENT Y EAR 2004- 05 . 4 14A. THE ARGUMENT OF THE APPELLANT THAT THE EARNIN G OF DIVIDEND WAS ONLY INCIDENTAL SINCE THE MAIN MOTIVE WAS TO EARN P ROFIT, IS ALSO NOT VALID IN THE FACTS OF THE CASE. THE CHRONOLOGICAL S EQUENCE OF EVENT, CLEARLY POINTS OUT THAT THE APPELLANT PURCHASED THE MUTUAL FUND UNITS ONLY TO EARN DIVIDEND AND REDEEMED THEM IMMEDIATELY THEREAFTER. ANY OTHER MOTIVE, INCLUDING THAT OF EARNING PROFIT, HAS NOT BEEN EXPLAINED BY THE APPELLANT WITH REFERENCE TO THE NA V OF THE MUTUAL FUNDS BEFORE/AFTER THE DECLARATION OF DIVIDENDS AND /OR THE REASON FOR EFFECTING REDEMPTION IN ALL SUCH CASES IMMEDIATELY AFTER THE DIVIDEND. IN THESE FACTS AND CIRCUMSTANCES, THE DISALLOWANCE MADE BY THE A.O U/S. 14A WAS JUSTIFIED AND IS CONFIRMED. 6. AGGRIEVED BY THE ORDER OF CIT (A), ASSESSEE IS N OW IN APPEAL BEFORE US. 7. BEFORE US THE LD. A.R. SUBMITTED THAT THE ASSESS EE IS IN THE BUSINESS OF PURCHASE OF SHARES, UNITS ETC AND THE INCOME OF WHICH IS TREATED AS BUSINESS INCOME. THE PURCHASE OF SHARES AND UNITS W AS A NORMAL BUSINESS ACTIVITY OF THE ASSESSEE AND THE DIVIDEND THAT WAS EARNED WAS INCIDENTAL TO THE BUSINESS OF THE ASSESSEE. THE INTEREST THAT IS INCURRED FOR THE PURCHASE OF SHARES AND UNITS OF MUTUAL FUNDS WERE IN THE NOR MAL COURSE OF BUSINESS AND ARE THEREFORE ALLOWABLE AS DEDUCTION U/S. 36(1) (III). IT WAS FURTHER SUBMITTED THAT THE A.O. HAS CONSIDERED THE LOSS ON SALE OF UNITS OF MUTUAL FUND/SHARE TRANSACTIONS CARRIED ON OUT OF BORROWED FUNDS AS A BUSINESS LOSS. HE FURTHER RELIED ON THE FOLLOWING DECISIONS (1) CIT VS. LAXMI AGENTS P. LTD. 125 ITR 227 (GUJ. ) (2) CIT VS.COTTON FABRICS LTD.(1981) 131 ITR 99(GU J.) (3) YATISH TRADING CO. P. LTD. VS. ACIT (2011) 129 ITD 237 8. ON THE OTHER HAND THE LD. D.R. SUBMITTED THAT TH E KIND OF TRANSACTIONS ENTERED INTO BY THE ASSESSEE REVEALS THAT THE PURCH ASE AND REDEMPTION OF UNITS DONE BY THE ASSESSEE HAVE TAKEN PLACE IN A PR E-ORDAINED MANNER. ITA NO.472/ AHD/20- 07 . ASSESSMENT Y EAR 2004- 05 . 5 THE EXPENSES INCURRED BY THE ASSESSEE ARE NOTHING B UT IS COST TO EARN DIVIDEND INCOME BECAUSE WHILE STRUCTURING THE DEAL THE ASSESSEE WAS AWARE OF THE RECEIPT OF DIVIDENDS AND INCURRING OF INTEREST EXPENSES. THE LOAN TAKEN FROM KOTAK MAHINDRA INVESTMENT LTD. WAS UTILIZED FOR PURCHASING DIVIDEND INCOME WHICH IS EXEMPT U/S. 10(33) AND THE REFORE THE INTEREST EXPENSES IS REQUIRED TO BE DISALLOWED U/S. 14A. HE THUS RELIED ON THE ORDER OF A.O. HE URGED THAT CIT (A) HAS ERRED IN DELETING THE ADDITION MADE BY A.O. HE THEREFORE URGED THAT THE ORDER OF A.O. BE U PHELD. 9. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. IT IS AN UNDISPUTED FACT THAT THE ASSESSEE APART FROM OTHER BUSINESS IS ALSO ENGAGED IN THE BUSINESS OF PURCHASE AND SAL E OF SHARES AND UNITS OF MUTUAL FUNDS. THE EARNINGS FROM THE SALE AND PURCH ASE OF SHARES IS CONSIDERED AS INCOME FROM BUSINESS. IT IS SEEN THAT THE A.O. HAS COMPUTED THE LOSS ON THE MUTUAL FUND/SHARE TRANSACTIONS CARR IED OUT OF BORROWED FUNDS AND TREATED AS LOSS FROM BUSINESS. IN VIEW OF THE AFORESAID FACTS THE ACTIVITY OF THE ASSESSEE AS BUSINESS AND THE LOSS A RISING OUT OF TRANSACTIONS OF REDEMPTION OF UNITS AS BUSINESS LOSS IS NOT UNDE R DISPUTE. DURING THE YEAR THE ASSESSEE HAD BORROWED MONEY FROM KOTAK MAH INDRA INVESTMENTS LTD. AND USED IT FOR PURCHASE OF UNITS. THE ASSESSE E HAS ALSO EARNED DIVIDENDS WHICH ARE EXEMPT US/ 10(33). 10. IN THE CASE OF ADDL. CIT VS. LAXMI AGENTS PVT. LTD. (1980) 125 ITR 227 (GUJ.) THE HONBLE GUJARAT HIGH COURT HAS HELD THAT IF ONCE IT IS ESTABLISHED THAT CAPITAL WAS BORROWED FOR THE PURPO SE OF BUSINESS, IT IS IMMATERIAL HOW THAT BORROWED CAPITAL WAS APPLIED BE CAUSE ALL THAT CL. (III) OF ITA NO.472/ AHD/20- 07 . ASSESSMENT Y EAR 2004- 05 . 6 SEC.36(1) REQUIRES IS THAT BORROWINGS ON WHICH INTE REST IS PAID SHOULD BE FOR THE PURPOSE OF BUSINESS. 11. IN THE CASE OF CIT VS. COTTON FABRICS LTD. (198 1) 131 ITR 99 (GUJ.), THE HONBLE GUJARAT HIGH COURT THAT IT HAS BEEN HEL D THAT IF THE BORROWING IS FOR THE PURPOSE OF THE BUSINESS THEN INTEREST NEED NOT BE APPORTIONED BETWEEN THE BUSINESS REQUIREMENTS AND THE MONEYS BO RROWED FOR THE PURPOSE OF INVESTMENT IN SHARES. U/S. 36, INTEREST PAID BY AN ASSESSEE FOR THE PURPOSE OF CARRYING ON ITS BUSINESS IS DEDUCTED IN ITS ENTIRETY WHILE COMPUTING PROFITS AND GAINS OF BUSINESS AND THEREFO RE IT IS NOT POSSIBLE TO ALLOCATE A PORTION OF THAT INTEREST AS AGAINST INCO ME FROM DIVIDENDS BY STATING THAT INTEREST HAD TO BE PAID FOR THE PURPOS E OF INVESTING IN SHARES. 12. IN THE CASE OF YATISH TRADING CO. PVT. LTD. VS. ACIT (2011) 129 ITD 237 IT HAS BEEN HELD THAT WHEN THE REAL PURPOSE AND INTENT TO USE THE BORROWED FUNDS WAS FOR TRADING ACTIVITY AND IF INCI DENTALLY RESULTED SOME DIVIDEND INCOME ON THE SHARES PURCHASED FOR TRADING THEN THE SAME WOULD NOT CHANGE THE PURPOSE, NATURE OR CHARACTER OF THE EXPENDITURE. THUS, WHEN INTEREST IS INCURRED FOR TRADING ACTIVITY THEN THE SAME CANNOT BE SAID TO HAVE BEEN INCURRED FOR EARNING THE DIVIDEND INCO ME. IN THE CASE OF DEALER IN SHARES AND SECURITIES THE PRIMARY OBJECT AND INTENTION FOR ACQUISITION OF THE SHARES IS TO EARN PROFIT ON TRAD ING OF SHARES. THE INCOME ON SALE AND PURCHASE OF THE SHARES OF A DEALER IS C HARGEABLE TO TAX. THEREFORE, IF THE SAID ACTIVITY OF PURCHASE AND SAL E ALSO INCIDENTALLY YIELDS SOME DIVIDEND INCOME ON THE SHARES HELD BY HIM AS S TOCK IN TRADE SUCH DIVIDEND INCOME IS NOT INTENDED AT THE TIME OF PURC HASE OF SUCH SHARES AND ITA NO.472/ AHD/20- 07 . ASSESSMENT Y EAR 2004- 05 . 7 ACCORDINGLY THERE IS NO LIVE CONNECTION BETWEEN THE EXPENDITURE INCURRED AND DIVIDEND INCOME. 13. CONSIDERING THE FACTUAL POSITIONING IN THE PRES ENT CASE IN LIGHT OF THE DECISIONS OF HIGH COURT AND TRIBUNAL, WE ARE OF THE VIEW THAT NO DISALLOWANCE OF INTEREST IS CALLED FOR IN THE PRESE NT CASE. WE THEREFORE DIRECT THE DELETION OF THE DISALLOWANCE MADE BY THE A.O. THUS THE GROUND OF THE ASSESSEE IS ALLOWED. 13. IN THE RESULT APPEAL OF THE ASSESSEE IS ALLOWED . ORDER PRONOUNCED IN OPEN COURT ON 30 - 11- 2012. SD/- SD/- (G.C.GUPTA) (ANIL CHATURVEDI) VICE PRESIDENT ACCOUNTANT MEMBER AHMEDABAD. S.A.PATKI. COPY OF THE ORDER FORWARDED TO: - 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT (APPEALS) III, AHMEDABAD. 4. THE CIT CONCERNED. 5. THE DR., ITAT, AHMEDABAD. 6. GUARD FILE. BY ORDER DEPUTY/ASSTT.REGISTRAR ITAT,AHMEDABAD ITA NO.472/ AHD/20- 07 . ASSESSMENT Y EAR 2004- 05 . 8 1.DATE OF DICTATION - 9 -2012 2.DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE TH E DICTATING 7 / 11/ 2012 MEMBER.OTHER MEMBER. 3.DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P.S./P.S - -2012. 4.DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT - -2012 5.DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR .P.S./P.S - -2012 6.DATE ON WHICH THE FILE GOES TO THE BENCH CLERK - -2012. 7.DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8.THE DATE ON WHICH THE FILE GOES TO THE ASSTT. REG ISTRAR FOR SIGNATURE ON THE ORDER 9.DATE OF DESPATCH OF THE ORDER