M/s. Zaveri & Co. Jewellers Pvt.Ltd., Ahmedabad V. The ACIT, Cent.Circle-2(4), Ahmedabad

ITA 476/AHD/2007

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 63118 (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: 2001-2002
• 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; Proportionate interest; Retrospective amendment
• Section: 14A; 6

Judgement Text

ITA NO.476/AHD/2007 . ASSESSMENT Y EAR 2001- 02 . 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. 476 /AHD/2007 (ASSESSMENT YEAR: 2001-02) M/S.ZAVERI & CO., JEWELLERS PVT.LTD., SWAGAT BUILDING, C.G ROAD, AHMEDABAD. (APPELLANT) VS. ASSISTANT COMMISSIONER OF INCOME TAX CENTRAL CIRCLE 2(4), AAYAKAR BHAVAN, ASHRAMROAD, AHMEDABAD. (RESPONDENT) PAN: AAACZ 0486A APPELLANT BY : SHRI M.K. PATEL WITH SHRI J. C.SHARE DALAL 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 FILED BY THE ASSESSEE AGAINST THE OR DER OF LD. CIT (A)- III, AHMEDABAD DATED 19-12-2006 FOR THE ASSESSMENT YEAR 2001-02. 2. ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF TRADING AND MANUFACTURING OF GOLD AND SILVER ORNAMENTS AND ALSO IN THE BUSINESS OF TRADING OF SHARES. ITA NO.476/AHD/2007 . ASSESSMENT Y EAR 2001- 02 . 2 3. PURSUANT TO THE WARRANT ISSUED U/S.132 IN THE NA ME OF THE ASSESSEE COMPANY, SEARCH WAS CONDUCTED AT THE OFFICE PREMISE S OF THE ASSESSEE ON 18-12-2003.ASSESSEE WAS DIRECTED TO FILE RETURN U/S .153A. THE ASSESSEE FILED HIS RETURN OF INCOME ON 4-8-2004 SHOWING TOTA L LOSS OF RS. 24,23,760. THE CASE WAS SELECTED FOR SCRUTINY. 4. ON THE BASIS OF DETAILS SUBMITTED, INTERALIA, AP ART FROM OTHER OBSERVATIONS, THE A.O. NOTICED THAT ASSESSEE HAD P URCHASED/ALLOTTED UNITS OF RS.6,23,34,259/- AND ALSO SOLD UNITS OF RS.5,29, 82,766/- AND EARNED DIVIDEND OF RS.78,34,259/- ON UNITS OF MUTUAL FUNDS WHICH WAS CLAIMED AS EXEMPT INCOME U/S. 10(33). THE ASSESSEE ALSO CLAIME D LOSS OF RS.93,51,493/- ON THE SALE OF UNITS. THE A.O. NOTIC ED THAT THE ASSESSEE HAD BORROWED FUNDS FROM KOTAK MAHINDRA INVESTMENTS LTD. FOR THE PURPOSE OF INVESTING IN UNITS OF MUTUAL FUNDS AND ON THE MONEY BORROWED HAD PAID INTEREST OF RS. 1,31,245/- WHICH WAS CLAIMED AS INT EREST EXPENSES. THE A.O. WAS OF THE VIEW THAT THOUGH THE ASSESSEE WAS H AVING SUFFICIENT FUNDS ON HAND IT HAD TAKEN OVERDRAFT FROM THE BANK AND AL SO TAKEN LOAN FROM THE DIRECTORS/SHAREHOLDERS AND MADE INVESTMENT IN THE U NITS WITH A MOTIVE TO EARN DIVIDEND INCOME. THE PROPORTIONATE INTEREST OF RS.34,354/- THAT WAS WORKED OUT BY THE ASSESSEE ON THE OVERDRAFT UTILIZE D BY THE ASSESSEE FOR MAKING INVESTMENTS WAS CONSIDERED BY A.O. TO BE FOR EARNING EXEMPT DIVIDEND. HE ACCORDINGLY DISALLOWED RS.34,354/- U/S . 14A AND ADDED TO THE TOTAL INCOME. 5. AGGRIEVED BY THE ACTION OF THE A.O. THE ASSESSEE CARRIED THE MATTER BEFORE CIT (A). ITA NO.476/AHD/2007 . ASSESSMENT Y EAR 2001- 02 . 3 6. BEFORE CIT (A), THE ASSESSEE SUBMITTED THAT IT I S ASSESSEES BUSINESS TO PURCHASE / SALE UNITS AND SHARES AND THE INCOME FROM IT IS CONSIDERED AS BUSINESS INCOME. THE DIVIDEND WHICH HAS BEEN EARNED ON THE UNITS IS INCIDENTAL TO THE BUSINESS. ASSESSEE HAD PAID INTER EST ON LOAN RAISED FROM KOTAK MAHINDRA FINANCE FOR MAKING INVESTMENTS IN TH E UNITS OF MUTUAL FUNDS. THE INTEREST PAID FOR INVESTING IN UNITS WAS OF RS.34,354/- AND IT WAS AN INTEGRAL PART OF THE BUSINESS. IT WAS THUS CONTE NDED THAT THE INTEREST IS ON ACCOUNT OF BUSINESS AND THEREFORE NO DISALLOWANC E U/S. 14A IS CALLED FOR. CIT (A) VIDE HIS ORDER DATED 19-12-2006 DISMISSED T HE APPEAL OF THE ASSESSEE BY HOLDING AS UNDER:- 21 IN RESPECT OF THE NEXT GROUND OF APPEAL, IT IS SEEN THAT THE PROVISIONS OF SECTION14A (INSERTED BY THE FINANCE A CT, 2001, WITH RETROSPECTIVE EFFECT FROM 1-4-1962) ARE UNAMBIGUOUS . THEY RELATE TO EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCL UDIBLE IN TOTAL INCOME. THE APPELLANT HAD AVAILED OVERDRAFT FROM BA NKS FOR PURCHASE OF MUTUAL FUND UNITS, AS A CONSEQUENCE OF WHICH, DI VIDENDS EARNED THEREFROM, DID NOT FORM PART OF THE TOTAL INCOME. T HE INTEREST EXPENDITURE IS, IN THE FACTS OF THE CASE, DIRECTLY ATTRIBUTABLE TO EARNING OF THIS EXEMPTED INCOME AND IS THEREFORE COVERED BY THE PROVISIONS OF SECTION 14A. THE PROVISO TO SECTION 14A INSERTED W ITH RETROSPECTIVE EFFECT FROM 11-5-2001 DOES NOT PROVIDE ANY MITIGATI NG CIRCUMSTANCES OF THE APPELLANT. THE DECISIONS CITED WERE ALSO NOT APPLICABLE IN THE FACTS OF THE APPELLANTS CASE AND IN VIEW OF THE SP ECIFIC NATURE OF THE PROVISIONS OF SECTION14A. THE ARGUMENT OF THE APPE LLANT THAT THE EARNING OF DIVIDEND WAS ONLY INCIDENTAL SINCE THE M AIN MOTIVE WAS TO EARN PROFIT, IS ALSO NOT VALID IN THE FACTS OF THE CASE. THE CHRONOLOGICAL SEQUENCE OF EVENT, CLEARLY POINTS OUT THAT THE APPE LLANT PURCHASED THE MUTUAL FUND UNITS ONLY TO EARN DIVIDEND AND REDEEME D THEM IMMEDIATELY THEREAFTER. ANY OTHER MOTIVE, INCLUDING THAT OF EARNING PROFIT, HAS NOT BEEN EXPLAINED BY THE APPELLANT WIT H REFERENCE TO THE NAV OF THE MUTUAL FUNDS BEFORE/AFTER THE DECLARATIO N OF DIVIDENDS AND/OR THE REASON FOR EFFECTING REDEMPTION IN ALL S UCH CASES IMMEDIATELY AFTER THE DIVIDEND. IN THESE FACTS AND CIRCUMSTANCES, THE ITA NO.476/AHD/2007 . ASSESSMENT Y EAR 2001- 02 . 4 DISALLOWANCE OF RS.34,354/- MADE BY THE A.O. U/S. 1 4A FOR THE INTEREST ON OVERDRAFT TAKEN FOR INVESTING IN MUTUAL FUND UNITS WAS JUSTIFIED AND IS CONFIRMED. 5. AGGRIEVED BY THE ORDER OF CIT (A), ASSESSEE IS N OW IN APPEAL BEFORE US. 6. BEFORE US THE LD. A.R. SUBMITTED THAT THE ASSESS EE IS IN THE BUSINESS OF PURCHASE OF SHARES, UNITS ETC. THE INCOME OF THE ASSESSEE 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 ARE IN THE NORM AL 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 7. 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. 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 ITA NO.476/AHD/2007 . ASSESSMENT Y EAR 2001- 02 . 5 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. 8. 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. WHILE FRAMING THE ASSESSMENT FOR A.Y. 2001-02 A.O. HAD CONSIDERED THE LOSS INCURRED ON PURCHASE AND SALE O F UNITS AS NOT TO BE A BUSINESS LOSS OR SHORT TERM CAPITAL LOSS. HOWEVER, CIT (A) VIDE ORDER DATED 19-12- 2006 ALLOWED THE APPEAL OF THE ASSESSEE AND HELD IT TO BE BUSINESS LOSS. WE UNDERSTAND THAT AGAINST THE AFORESAID ORDE R OF CIT (A), THE REVENUE IS NOT IN APPEAL AND THEREFORE THE ISSUE TH AT THE LOSS INCURRED ON PURCHASE/SALE OF UNITS IS BUSINESS LOSS HAS ATTAINE D FINALITY AND IN VIEW OF THE AFORESAID FACTS THE ACTIVITY OF THE ASSESSEE OF PURCHASE/SALE OF UNITS/SHARES AS BUSINESS AND THE LOSS ARISING OUT O F TRANSACTIONS OF REDEMPTION OF UNITS AS BUSINESS LOSS IS NOT UNDER D ISPUTE. THE DISPUTE IS WITH RESPECT TO INTEREST EXPENSES INCURRED FOR PURC HASE OF FUNDS. DURING THE YEAR THE ASSESSEE HAD BORROWED MONEY FROM KOTAK MAHINDRA INVESTMENTS LTD. AND USED IT FOR PURCHASE OF UNITS. THE ASSESSEE HAS ALSO EARNED DIVIDENDS WHICH ARE EXEMPT U/S.. 10(33). 9. IN THE CASE OF ADDL. CIT VS. LAXMI AGENTS PVT. L TD. (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.476/AHD/2007 . ASSESSMENT Y EAR 2001- 02 . 6 SEC.36(1) REQUIRES IS THAT BORROWINGS ON WHICH INTE REST IS PAID SHOULD BE FOR THE PURPOSE OF BUSINESS. 10. IN THE CASE OF CIT VS. COTTON FABRICS LTD. (198 1) 131 ITR 99 (GUJ.), THE HONBLE GUJARAT HIGH COURT HAS HELD THAT IF THE BORROWING IS FOR THE PURPOSE OF THE BUSINESS THEN INTEREST NEED NOT BE A PPORTIONED BETWEEN THE BUSINESS REQUIREMENTS AND THE MONEYS BORROWED FOR T HE 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 ENTI RETY WHILE COMPUTING PROFITS AND GAINS OF BUSINESS AND THEREFORE IT IS NOT POSSI BLE TO ALLOCATE A PORTION OF THAT INTEREST AS AGAINST INCOME FROM DIVIDENDS BY S TATING THAT INTEREST HAD TO BE PAID FOR THE PURPOSE OF INVESTING IN SHARES. 11. IN THE CASE OF YATISH TRADING CO. PVT. LTD. VS. ACIT (2011) 129 ITD 237 THE CO-ORDINATE BENCH HAS HELD THAT WHEN THE REAL PURPOSE AND INTENT TO USE THE BORROWED FUNDS WAS FOR TRADING ACTIVITY AND IF INCIDENTALLY RESULTED SOME DIVIDEND INCOME ON THE SHARES PURCHAS ED FOR TRADING THEN THE SAME WOULD NOT CHANGE THE PURPOSE, NATURE OR CH ARACTER OF THE EXPENDITURE. THUS, WHEN INTEREST IS INCURRED FOR TR ADING ACTIVITY THEN THE SAME CANNOT BE SAID TO HAVE BEEN INCURRED FOR EARNI NG THE DIVIDEND INCOME. IN THE CASE OF DEALER IN SHARES AND SECURIT IES THE PRIMARY OBJECT AND INTENTION FOR ACQUISITION OF THE SHARES IS TO E ARN PROFIT ON TRADING OF SHARES. THE INCOME ON SALE AND PURCHASE OF THE SHARES OF A DEALER IS CHARGEABLE TO TAX. THEREFORE, IF THE SAID ACTIVITY OF PURCHASE AND SALE ALSO INCIDENTALLY YIELDS SOME DIVIDEND INCOME ON THE SHA RES HELD BY HIM AS STOCK IN TRADE SUCH DIVIDEND INCOME IS NOT INTENDED AT THE TIME OF PURCHASE ITA NO.476/AHD/2007 . ASSESSMENT Y EAR 2001- 02 . 7 OF SUCH SHARES AND ACCORDINGLY THERE IS NO LIVE CON NECTION BETWEEN THE EXPENDITURE INCURRED AND DIVIDEND INCOME. 12. CONSIDERING THE FACTUAL POSITIONING IN THE PRES ENT CASE, IN THE 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. MORE SO WHEN THE ASSESSEE IS CONSIDERED TO BE IN THE BUSINESS OF PUR CHASE AND SALE OF SHARES & UNITS. WE THEREFORE DIRECT THE DELETION OF THE DISALLOWANCE MADE BY THE A.O. THUS THE GROUND OF THE ASSESSEE IS ALL OWED. 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) 4. THE CIT CONCERNED. 5. THE DR., ITAT, AHMEDABAD. 6. GUARD FILE. BY ORDER DEPUTY/ASSTT.REGISTRAR ITAT,AHMEDABAD ITA NO.476/AHD/2007 . ASSESSMENT Y EAR 2001- 02 . 8 1.DATE OF DICTATION - -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