RSP Capital Markets Pvt. Ltd., Kolkata V. DCIT, CIR-1, KOLKATA, Kolkata

ITA 53/KOL/2016

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 1230 (ITAT-KOLKATA)
• Duration Of Justice: 2 year(s) 2 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-03-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2006-2007
• Appeal Filed On: 12-01-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Avoidance of tax
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : KOLKATA [BEFORE HONBLE SHRI ABY. T. VARKEY, JM & SHRI M. BALAGANESH, AM ] I.T.A NO. 53/KOL/2016 ASSESSMENT YEAR : 2006-0 7 RSP CAPITAL MARKETS PVT. LTD. -VS- DCIT, CIRCLE-1, KOLKATA [PAN: AABCR 6142 G] (APPELLANT) ( RESPONDENT) FOR THE APPELLANT : SHRI M. SATNALIWAL A, AR FOR THE RESPONDENT : SHRI SAURABH KUMAR, ADDL . CIT, SR. DR DATE OF HEARING : 19.03.2018 DATE OF PRONOUNCEMENT : 23.03.2018 ORDER PER M.BALAGANESH, AM 1. THIS APPEAL BY THE ASSESSEE ARISES OUT OF THE OR DER OF THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS)-5, KOLKATA [IN SHORT THE LD CIT (A)] IN APPEAL NO.275/CIT(A)- 5/C-2/09-10/14-15 DATED 23.11.2015 AGAINST THE ORDE R PASSED BY THE DCIT, CIRCLE-1, KOLKATA [ IN SHORT THE LD AO] UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT) DATED 12.12.2008 FOR THE ASSESSM ENT YEAR 2006-07. 2. THE FIRST ISSUE TO BE DECIDED IN THIS APPEAL IS AS TO WHETHER THE LD CITA WAS JUSTIFIED IN UPHOLDING THE DISALLOWANCE OF RS 91,233/- U/S 14 A OF THE ACT IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 2.1. THE BRIEF FACTS OF THIS ISSUE IS THAT THE ASSE SSEE IS ENGAGED IN THE BUSINESS OF FINANCING AND INVESTMENT AND HAD FILED ITS RETURN F OR THE ASST YEAR 2006-07 ON 26.10.2006 DISCLOSING TOTAL INCOME OF RS 9,31,920/- . THE LD AO OBSERVED THAT THE 2 ITA NO.53/KOL/2016 RSP CAPITAL MARKETS PVT. LTD. A.YR.2006-07 2 ASSESSEE WAS REQUESTED TO FURNISH DIFFERENT DETAILS BY ISSUE OF LETTER DATED 12.9.2008 AND ALSO AS PER THE ORDER SHEET ENTIRES, WHICH WERE DUL Y COMPLIED WITH BY THE ASSESSEE. THE LD AO OBSERVED THAT THE ASSESSEE HAD EARNED DIVIDEN D INCOME OF RS 9,44,243/- AND LONG TERM CAPITAL GAIN OF RS 17,45,330- WHICH HAVE BEEN CLAIMED AS EXEMPT U/S 10(34) AND 10(38) OF THE ACT IN THE RETURN OF INCOM E. THE ASSESSEE STATED THAT NO EXPENDITURE WAS INCURRED FOR EARNING SUCH EXEMPT IN COME. THE LD AO FOUND THAT THE ASSESSEE HAD DEBITED INTEREST IN ITS PROFIT AND LOS S ACCOUNT A SUM OF RS 91,233/- AND ALSO OBSERVED THAT THE INVESTMENTS WERE MADE OUT OF BORR OWED FUNDS BY THE ASSESSEE. ACCORDINGLY HE DISALLOWED THE ENTIRE INTEREST PAID IN THE SUM OF RS 91,233/- AS DIRECT EXPENDITURE INCURRED FOR THE PURPOSE OF EARNING EXE MPT INCOME OUT OF INVESTMENTS IN THE FORM OF DIVIDEND AND LTCG BY APPLYING THE PROVI SIONS OF SECTION 14A OF THE ACT. BEFORE THE LD CITA , IT WAS POINTED OUT THAT THE LD AO HAD NOT BROUGHT ANY NEXUS ON RECORD BETWEEN THE BORROWED FUNDS AND THE INVESTMEN TS MADE BY THE ASSESSEE. IT WAS FURTHER PLEADED THAT THE ASSESSEE HAD DERIVED INTER EST INCOME OF RS 13,63,264/- AND HAD PAID INTEREST OF RS 91,233/- WHICH REQUIRES TO BE N ETTED OFF WITH INTEREST INCOME. ACCORDINGLY IT WAS PLEADED THAT THE BORROWED FUNDS WERE NOT UTILIZED FOR MAKING INVESTMENT IN SHARES AND MUTUAL FUNDS BY THE ASSESS EE. THE LD CITA OBSERVED FROM FACTS AND FIGURES OF THE ASSESSEES BALANCE SHEET T HAT OWN FUNDS AVAILABLE WITH THE ASSESSEE WAS ONLY RS 6.5 CRORES AND WHEREAS THE INV ESTMENT IN SHARES WERE ABOUT RS 9.52 CRORES. ACCORDINGLY, IT COULD BE SAFELY CONCL UDED THAT THE BORROWED FUNDS HAD ALSO BEEN UTILIZED FOR MAKING INVESTMENTS BY THE ASSESSE E. BASED ON THIS FINDING, THE LD CITA OBSERVED THAT THE DISALLOWANCE OF INTEREST UND ER RULE 8D(2)(II) OF THE RULES HAS BEEN RIGHTLY MADE BY THE LD AO AND UPHELD THE DISAL LOWANCE OF RS 91,233/-. 2.2. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US ON THE FOLLOWING GROUND:- 1. THAT THE LD. CIT(A)-5, KOLKATA WAS NOT JUSTIFIED IN CONFIRMING THE DISALLOWANCE OF RS. 91,233/- U/S 14A OF THE IT ACT, 1961. 3 ITA NO.53/KOL/2016 RSP CAPITAL MARKETS PVT. LTD. A.YR.2006-07 3 2.3. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE REL EVANT ASSESSMENT YEAR UNDER APPEAL IS 2006-07 AT WHICH POINT OF TIME , THE PROVISIONS OF RULE 8D WAS NOT IN FORCE AND THE SAME WAS MADE APPLICABLE ONLY FROM ASST YEAR 2008-0 9 AS DECIDED IN THE DECISION OF GODREJ & BOYCE MANUFACTURING. HOWEVER, IT IS NOT I N DISPUTE THAT THE ASSESSEE HAD DERIVED TAXABLE INCOME AS WELL AS TAX FREE INCOME A ND INCURRED EXPENDITURE FOR DERIVING BOTH THE INCOMES AND HENCE DISALLOWANCE IS DEFINITE LY WARRANTED IN TERMS OF SECTION 14A WHICH IS BROUGHT IN THE STATUTE BOOK WITH RETRO SPECTIVE EFFECT FROM 1.4.1962. THE DISALLOWANCE HAD TO BE MADE ONLY ON AN ESTIMATED BA SIS WITH REGARD TO THE EXPENDITURE INCURRED FOR THE PURPOSE OF EARNING TAX FREE INCOME . THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS M/S R.R.SEN & BROTHERS P LTD IN GA NO. 301 9 OF 2012 IN ITAT NO. 243 OF 2012 DATED 4.1.2013 HAD HELD AS UNDER:- THE ASSESSEE DID NOT SHOW ANY EXPENDITURE INCURRE D BY HIM FOR THE PURPOSE OF EARNING THE MONEY WHICH IS EXEMPTED UNDER INCOME TA X. THE TRIBUNAL HAS COMPUTED EXPENDITURE AT 1% OF SUCH DIVIDEND INCOME, WHICH, ACCORDING TO THEM, IS THE THUMB RULE APPLIED CONSISTENTLY. WE FIND NO REASON TO INTERFERE. THE APPEAL IS DISMISSED. RESPECTFULLY FOLLOWING THE JUDICIAL PRECEDENT, WE D IRECT THE LD AO TO DISALLOW 1% OF EXEMPT INCOME UNDER THIS ISSUE AND ACCORDINGLY, THE GROUND NO. 1 RAISED BY THE ASSESSEE IS PARTLY ALLOWED. 3. THE NEXT ISSUE TO BE DECIDED IN THIS APPEAL IS A S TO WHETHER THE LD CITA WAS JUSTIFIED IN UPHOLDING THE ADDITION MADE U/S 94(7) OF THE ACT IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 4 ITA NO.53/KOL/2016 RSP CAPITAL MARKETS PVT. LTD. A.YR.2006-07 4 3.1. THE BRIEF FACTS OF THIS ISSUE IS THAT THE ASSE SSEE HAD DERIVED DIVIDEND INCOME DURING THE YEAR UNDER CONSIDERATION AS UNDER:- DATE DIVIDEND RECEIVED FROM AMOUNT 15.9.2005 TATA TELESERVICES LTD ON 150000 SHARES @ 0.30 PER SHARE 45,000 16.9.2005 INDUS IND BANK LTD ON 25000 SHARES @ 1.80 PER SHARE 45,000 1.10.2005 NTPC LTD ON 13826 SHARES @ 1.20 PER SHARE 16,591 18.10.2005 SAIL ON 450000 SHARES @ 1.80 PER SHARE 8,10,00 0 3.3.2006 NTPC LTD ON 13826 SHARES @ 2 PER SHARE 2 7,652 ------------ 9,44,243 ------------ THE ASSESSEE FURNISHED THE DETAILS OF SHORT TERM CA PITAL GAINS FOR THE PERIOD 1.4.2005 TO 31.3.2006 IN RESPECT OF EACH SCRIP CONTAINING THE P URCHASE DETAILS WITH DATE OF PURCHASE, QUANTITY, RATE AND VALUE ; SALES DETAILS WITH DATE OF SALE, QUANTITY , RATE AND VALUE ; SHORT TERM CAPITAL GAINS / LOSSES DERIVED IN EACH SCRIP. FROM THE SAID WORKINGS, THE LD AO OBSERVED THAT THE ASSESSEE HAD REPORTED SHORT TERM CAPITAL LOSS IN RESPECT OF SALE OF SHARES OF SAIL AMONG OTHER SCRIPS. THE ASSESSEE H AD DERIVED DIVIDEND INCOME WHICH IS EXEMPT IN THE SUM OF RS 8,10,000/- FROM SAIL. T HE LD AO OBSERVED THAT THE ASSESSEE HAD ON ONE HAND EARNED DIVIDEND INCOME WHICH WAS EX EMPT IN THE SUM OF RS 8,10,000/- AND ON THE OTHER HAND, HAD SOLD THOSE SHARES OF SAI L AFTER THE DIVIDEND AT A LESSER PRICE RESULTING IN A HUGE LOSS. ACCORDINGLY, IN THE OPIN ION OF THE LD AO, THE SAME AMOUNTS TO DIVIDEND STRIPPING AND INVOKED THE PROVISIONS OF SE CTION 94(7) OF THE ACT. THE LD AO OBSERVED THAT THE SHORT TERM CAPITAL LOSS AMOUNTING TO RS 35,34,952/- CLAIMED IN THE 5 ITA NO.53/KOL/2016 RSP CAPITAL MARKETS PVT. LTD. A.YR.2006-07 5 RETURN IS TO BE REDUCED BY THE DIVIDEND INCOME OF R S 9,44,243/- U/S 94(7) OF THE ACT. THIS ACTION OF THE LD AO WAS UPHELD BY THE LD CITA. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US ON THE FOLLOWING GROUND:- 2. THAT THE LD. CIT(A)-5, KOLKATA WAS ERRED IN CONF IRMING DISALLOWANCE OF LOSS OF RS. 9,44,243/- U/S 94(7) OF I.T. ACT, 1961. 3.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIALS AVAILABLE ON RECORD. WE FIND THAT THE ASSESSEE HAD REPORTED SHORT TERM C APITAL LOSS ON THE FOLLOWING SCRIPS ON WHICH SECURITIES TRANSACTION TAX (STT) WAS PAID :- ELECTROSTEEL CASTINGS LTD - RS 30,330.55 ELECTROSTEEL CASTINGS LTD - RS 23,993.22 HINDUSTAN MOTORS LTD - RS 19,35,506.44 SAIL - RS 8,17,097.24 SAIL - RS 9,85,857.15 UCO BANK LTD - RS 2,24,267.85 SAIL - RS 7,52,669.90 UCO BANK LTD - RS 84,805.22 UCO BANK LTD - RS 34,732.66 UCO BANK LTD - RS 1,69,245.93 LANCO INDUSTRIES LTD - RS 2,37,964.72 LANCO INDUSTRIES LTD - RS 1,63,974.03 LANCO INDUSTRIES LTD - RS 1,11,216.23 LANCO INDUSTRIES LTD - RS 1,74,073.76 6 ITA NO.53/KOL/2016 RSP CAPITAL MARKETS PVT. LTD. A.YR.2006-07 6 OUT OF THE SHORT TERM CAPITAL LOSS CLAIMED IN RESPE CT OF AFORESAID SCRIPS, THE ASSESSEE HAD EARNED DIVIDEND INCOME OF RS 8,10,000/- ONLY FROM S AIL. HENCE THE PROVISIONS OF SECTION 94(7) OF THE ACT, IF AT ALL APPLICABLE, WOU LD BE CONFINED ONLY TO THE SCRIP OF SAIL AND NOT FOR OTHER SCRIPS. NOW THE RECORD DATE OF D ECLARATION OF DIVIDEND BY SAIL WAS 11.8.2005. FOR THE SAKE OF CONVENIENCE, THE PROVIS IONS OF SECTION 94(7) OF THE ACT ARE REPRODUCED BELOW:- SEC. 94 - AVOIDANCE OF TAX BY CERTAIN TRANSACTIONS IN SECURITIES. [(7) WHERE (A) ANY PERSON BUYS OR ACQUIRES ANY SECURITIES OR UNIT WITHIN A PERIOD OF THREE MONTHS PRIOR TO THE RECORD DATE; 99 [(B) SUCH PERSON SELLS OR TRANSFERS (I) SUCH SECURITIES WITHIN A PERIOD OF T HREE MONTHS AFTER SUCH DATE; OR (II) SUCH UNIT WITHIN A PERIOD OF NINE MO NTHS AFTER SUCH DATE;] (C) THE DIVIDEND OR INCOME ON SUCH SECURITIES OR UNIT RECEIVED OR RECEIVABLE BY SUCH PERSON IS EXEMPT, THEN, THE LOSS, IF ANY, ARISING TO HIM ON ACCOUNT O F SUCH PURCHASE AND SALE OF SECURITIES OR UNIT, TO THE EXTENT SUCH LOSS DOES NOT EXCEED TH E AMOUNT OF DIVIDEND OR INCOME RECEIVED OR RECEIVABLE ON SUCH SECURITIES OR UNIT, SHALL BE IGNORED FOR THE PURPOSES OF COMPUTING HIS INCOME CHARGEABLE TO TAX.] HENCE IT IS RELEVANT TO GET INTO THE PURCHASE AND S ALE OF SHARES OF SAIL BY THE ASSESSEE. FROM THE DETAILS AVAILABLE IN PAGE 11 OF THE PAPER BOOK, THE ASSESSEE HAD MADE PURCHASES AND SALE OF SHARES OF SAIL AS BELOW:- PURCHASE DETAILS SALE DETAILS 28.1.2005 150000 SHARES 20.12.2005 150000 SHARES 1.4.2005 110000 SHARES 21.12.2005 110000 SHARES 1.4.2005 90000 SHARES 22.12.2005 90000 SHARES WE FIND THAT THE ASSESSEE HAD NEITHER PURCHASED BEF ORE THREE MONTHS FROM THE RECORD DATE THE SHARES OF SAIL NOR SOLD THE SAME WITHIN TH REE MONTHS AFTER THE RECORD DATE. 7 ITA NO.53/KOL/2016 RSP CAPITAL MARKETS PVT. LTD. A.YR.2006-07 7 HENCE WE HOLD THAT THE TRANSACTIONS CARRIED OUT BY THE ASSESSEE WOULD BE OUTSIDE THE AMBIT OF PROVISIONS OF SECTION 94(7) OF THE ACT. H ENCE WE HOLD THAT THE SHORT TERM CAPITAL LOSS CLAIMED BY THE ASSESSEE NEED NOT BE RE DUCED BY THE SUM OF RS 9,44,243/- . ACCORDINGLY, THE GROUND NO. 2 RAISED BY THE ASSESSE E IS ALLOWED. 4. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PAR TLY ALLOWED. ORDER PRONOUNCED IN THE COURT ON 23.03.2018 SD/- SD/- [A.T. VARKEY] [ M.BALAGANESH ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 23.03.2018 SB, SR. PS COPY OF THE ORDER FORWARDED TO: 1. RSP CAPITAL MARKETS PVT. LTD., C/O, M. SATNALIWA LA & CO., 62, BENTINCK STREET, 1 ST FLOOR, KOLKATA-700069. 2. DCIT, CIRCLE-1, KOLKATA, AAYAKAR BHAWAN, P-7, CH OWRINGHEE SQUARE, KOLKATA- 700069. 3. C.I.T(A)- , KOLKATA 4. C.I.T.- K OLKATA. 5. CIT(DR), KOLKATA BENCHES, KOLKATA. TRUE COPY BY ORDER SENIOR PRIVAT E SECRETARY HEAD OF OFFICE/D.D.O., ITAT, KOLKATA BENCHE S