M/s. Pavitra Commercials Ltd., New Delhi V. DCIT, New Delhi

ITA 5389/DEL/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 82168 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 1 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-12-2014
• Appeal Filed By: Assessee
• Bench Allotted: F
• Next Hearing Date: 15-10-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 22-10-2012
• Court: TRIBUNAL
• Department Lawyers: SHAMEER SHARMA
• Keywords: Capital asset; Principle of natural justice; Earning of tax free income; Question of law
• Section: 2(14); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : F NEW DELHI BEFORE SHRI H.S.SIDHU , JM AND SHRI J.SUDHAKAR REDDY, AM ITA NO. 5389 /DEL/201 2 AY : - 200 9 - 10 PAVITRA COMMERCIALS LTD. VS. DCIT, CC 20, 3 RD FLOOR 108, ANSAL BHAWAN ARA CENTRE, JHANDEWALAN EX. 16, K.G.MARG, NEW DELHI 110 001 NEW DELHI PAN: AA A C P 0299 F (APPELLANT) APPELLANT BY : SHRI AJAY VOHRA, SR.ADV. ALONG WITH MS. SHIKHA SHARMA, ADV. RESPONDENT BY : S H. SHAMEER SHARMA, SR. D.R. O R D E R PER J.SUDHAKAR REDDY, ACCOUNTANT MEMBER THIS IS AN APPEAL FILED BY THE ASSESSEE AND IS DIRECTED AGAINST THE ORDER DATED 22.8.2012 OF LD.CIT(A) - XXXI, NEW DELHI PERTAINING TO THE AY 2009 - 10. 2. THE ASSESSEE FILED A RETURN OF INCOME ON 17.9.2009 DECLARING NIL INCOME. IT SHOWED DIVIDEND INCOME OF RS.2,76,6 4,986/ - UNDER THE HEAD INCOME FROM OPERATIONS AND CLAIMED EXEMPTION U/S 10(34) OF THE ACT. 2.1. THE ASSESSEE HAS SUO MOTO DISALLOWED RS.7,84,976/ - U/S 14A OF THE ACT READ WITH RULE 8D IN ITS RETURN OF INCOME. THE AO COMPUTED DISALLOWANCE U NDER RULE 8 D IN THE FOLLOWING MANNER. INCOME AS DECLARED : NIL 1 . DISALLOWANCE U/S 14A OF THE ACT READ WITH RULE 8D OF IT RULES, 1962 AS DISCUSSED RS. 71,40,115/ - 2 . ADDITION OF RS.4,18,50,000/ - AS DISCUSSED ABOVE RS.4,18,50,000/ - 3 . ADDITION OF RS. 3,89,256/ - AS DISCUSSED ABOVE RS. 3,89,256/ - TOTAL TAXABLE INCOME RS. 4,93,79,371/ - . 2.2. AGGRIEVED THE ASSESSEE CARRIED THE ISSUE IN APPEAL. ITA 5389/DEL/2012 AY: 2009 - 10 PAVITRA COMMERCIALS LTD. 2 2.3. THE ASSESSEE ALSO DEBITED RS.4,18,50,000/ - UNDER THE HEAD LOSS DUE TO FORFEITURE O F WARRANTS AND CLAIMED THE SAME AS SHORT TERM CAPITAL LOSS. THE FACTS RELATING TO THIS CLAIM ARE AS FOLLOWS. 2.3.1. M/S MONNET ISPAT ENERGY LTD., WHICH WERE CONVERTIBLE INTO 10 LAKH EQUITY SHARES OF RS.10/ - EACH AT A PRICE OF RS.418.50. 10% OF THE SUBSCRIPTION PRICE, WAS PAID ALONG WITH THE APPLICATION I.E. RS.41.85 PER WARRANT WHICH COMES TO A TOTAL OF RS.4,18,50,000/ - . 2.3.2. THE MARKET PRICE OF THE EQUITY SHARES OF M/S MONNET ISPAT AND ENERGY LTD. D URING THE MONTH OF MARCH,2009 WAS RANGING BETWE EN RS.138.75 TO RS.154.35 PER SHARE. AS IT WAS FOUND THAT IT IS NOT VIABLE OR JUSTIFIABLE TO HAVE THE WARRANTS EXERCISED AT A PRICE OF RS.418.50 PER SHARE, THE ASSESSEE COMPANY CHOSE TO HAVE ITS APPLICATION MONEY FORFEITED. THE AO WAS OF THE VIEW THAT AM OUNT PAID ALONG WITH THE APPLICATION, CANNOT BE CALLED A CAPITAL ASSET AND CONSEQUENTLY, FORFEITURE CANNOT BE CALLED SHORT TERM CAPITAL LOSS. HE REJECTED THE CLAIM OF THE ASSESSEE. 3. AGGRIEVED THE ASSESSEE CARRIED THE MATTER BEFORE THE FIRST APPELLATE AU THORITY WHO GRANTED PART RELIEF. 3. 1. FURTHER A GGRIEVED THE ASSESSEE IS BEFORE US ON THE FOLLOWING GROUNDS. 1). THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX - (APPEALS) - XXXI, NEW DELHI IS BAD IN LAW, WRONG ON THE FACTS AND AGAINST THE PRINCIPLES OF NATURAL JUSTICE. 2). A) THE LD CIT - (A) HAS ERRED IN CONFIRMING THE DISALLOWANCE OF EXPENDITURE U / S 14A OF THE INC OME TAX ACT AT RS 54,48,957/ - (I.E. 62,33,963 - 7,84,976) BY APPLYING RULE 8 D BY CONCLUDING THAT THE EXPENDITURE IS INCURRED FOR EARNING TAX FREE INCOME. B) THE LD CIT (A) WHILE CONFIRMING THE DISALLOWANCE U / S 14A OF THE INCOME TAX ACT, 1961 AT RS 54,48 ,957/ - HAS FAILED TO APPRECIATE THAT THE APPELLANT COMPANY IN THE RETURN OF INCOME HAD ALREADY DISALLOWED A SUM OF RS 7,84,976/ - U / S 14A BY PROPORTIONATELY DIVIDING THE TOTAL EXPENSES CLAIMED IN THE RATIO OF TURNOVER OF EXEMPT INCOME TO TURNOVER OF TOTAL INCOME WHICH IS A SCIENTIFIC AND LOGICAL METHOD FOR COMPUTING DISALLOWANCE U/S 14A HOWEVER, THE LD. AO HAS MADE THE DISALLOWANCE U / S 14A BY APPLYING THE PROVISIONS OF RULE 80 WITHOUT RECORDING HIS SATISFACTION THAT WHY THE METHOD ADOPTED BY THE APPELLANT C OMPANY IS WRONG AND THEREFORE THE DISALLOWANCE MADE BY THE LD AO. AND CONFIRMED BY LD CIT (A) IS INCORRECT AS PER THE RATIO LAID DOWN BY ITA 5389/DEL/2012 AY: 2009 - 10 PAVITRA COMMERCIALS LTD. 3 THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. MAXOPP INVESTMENT LTD. C) THE LD. CIT(A) HAS WRONG LY CONFIRMED THE DISALLOWANCE OF ENTIRE EXPENSES OF RS.54,48,988/ - (TOTAL EXPENSES RS.62,33,964 - ALREADY DISALLOWED IN COMPUTATION RS.7,84,976 = RS.54,48,988/ - ) WITHOUT APPRECIATING THE FACT, THAT INTEREST PAID OF RS.41 ,57,8621 - IS DIRECTLY RELATED TO IN TEREST RECEIVED AND THE BALANCE EXPENSE OF RS.20, 76,1021 - (ACTUAL EXPENSES CLAIMED IN COMPUTATION RS.16,91,395/ - ONLY) HAS BEEN TOTALLY DISALLOWED AND CONFIRMED. D) THE LD. CIT (A) HAS ERRED IN CONFIRMING THE DISALLOWANCE OF TOTAL INTEREST PAID AT RS 41 ,57,862 / - (INSPITE OF THE FACT THAT AO. DISALLOWED ONLY RS.30,44,681/ - ) WITHOUT APPRECIATING THE FACT THAT THE APPELLANT COMPANY IS A REGISTERED NBFC AND IS ENGAGED IN THE BUSINESS OF MONEY LENDING AND DURING THE YEAR UNDER APPEAL TOTAL INTEREST PAID IS R S 41,57,862 / - AND INTEREST RECEIVED IS RS 43,50,139/ - AND THUS THERE IS NET INTEREST INCOME OF RS 1,92,277 / - AND INTEREST PAID AND INTEREST RECEIVED HAS DIRECT NEXUS AND THEREFORE NO DISALLOWANCE U / S 14A IS REQUIRED OUT OF INTEREST PAID. E) THE LD. CIT - (A) HAS ERRED IN CONFIRMING DISALLOWANCE OF SUM OF RS.4,18, 50,000/ - - TOWARDS THE SHORT TERM CAPITAL LOSS OF,RS.4,18,5 50,000/ - CLAIMED IN RESPECT OF FORFEITURE OF SHARE WARRANTS. THE LD. CIT - (A) HAS FAILED TO APPRECIATE THAT THE APPELLANT COMPANY IN ITS RETURN OF INCOME HAD CLAIMED SHORT TERM CAPITAL LOSS OF RS.4, 18,50,000 / - ON ACCOUNT OF FORFEITURE OF SHARE WARRANT IN ACCORDANCE WITH LAW. B) THE LD. CIT - (A) HAS ERRED IN CONCLUDING THAT SUBSCRIPTION TO THE CONVERTIBLE WARRANT BY THE APPELLANT COMPANY IN WARRANTS OF MONNET ISPAT & ENERGY LTD IS NOT A CAPITAL ASSET U / S 2(14) OF THE INCOME TAX ACT, 1961 WHEN IN FACT IT IS EXTINGUISHMENT OF RIGHTS THEREIN AND COVERED U / S 2(47)(II) OF THE INCOME TAX ACT, 1961. C). THE LD CIT(A) HAS CONCLUDED THAT FORFEITURE OF SHARE WARRANT IS NOT A GENUINE AND BONAFIDE TRANSACTION BUT IS A COLORABLE TRANSACTION ENTERED WITH A MOTIVE TO CREATE LOSS IN ONE COMPANY WITHOUT GETTING IT TAXED IN ANOTHER GROUP COMPANY. THE LD CIT(A) HAS G ROSSLY ERRED IN MAKING THE AFORESAID CONCLUSION AS THE FORFEITURE OF SHARE WARRANT IS A GENUINE AND BONAFIDE TRANSACTION. D) THE LD. CIT - (A) HAS ERRED IN CONCLUDING THAT THE SUBSCRIPTION TO THE CONVERTIBLE SHARE WARRANTS IS NOT A CAPITAL ASSET AS DEFINED IN SECTION 2(14) OF THE ACT, WHICH IS AGAINST THE PRINCIPLES LAID DOWN BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS CHAND RATAN BAGRI 329 ITR 356 WHEREIN IT HAS BEEN HELD THAT FORFEITURE OF CONVERTIBLE WARRANTS AMOUNTS TO TRANSFER WITHIN MEANING OF SECTION 2(47) OF THE ACT, AS THERE IS EXTINGUISHMENT OF RIGHTS AND LOSS ON THEIR FORFEITURE IS ALLOWABLE AS CAPITAL LOSS AND SIMILAR DECISION BY HON'BLE KARNATAKA HIGH COURT IN THE CASE OF CIT V BPL SANYO FINANCE LTD 323 ITR 63 AND HON'BLE PUNJAB AND HA RYANA HIGH COURT IN THE CASE OF CIT V GREWAL BROS 199 TAXMAN 201. THE LD. CIT(A) HAS GROSSLY ERRED IN CONCLUDING THAT THE AFORESAID CASE LAW DOES NOT RESEMBLE THE FACTS OF THE CASE OF THE APPELLANT COMPANY WHEREAS THE FACTS IN ALL THE CASES ARE ABSOLUTELY IDENTICAL. ITA 5389/DEL/2012 AY: 2009 - 10 PAVITRA COMMERCIALS LTD. 4 THE APPELLANT CRAVES LEAVE TO ADD, ALTER AMEND, MODIFY OR FOREGO ANY OF THE GROUNDS OF APPEAL BEFORE OR AT THE TIME OF HEARING. 4. WE HAVE HEARD SHRI AJAY VOHRA, SR.ADV. THE LD.COUNSEL FOR THE ASSESSEE AND SHRI SHAMMER SHARMA, LD.SR.D.R. ON BEHALF OF THE REVENUE. 5. ON A CAREFUL CONSIDERATION OF THE FACTS AND CIRCUMSTANCES OF THE CASE, ON PERUSAL OF ORDERS OF LOWER AUTHORITIES, MATERIAL PLACED ON RECORD, WE HOLD AS FOLLOWS. 6. GROUND NO.1 IS GENERAL IN NATURE. 6.1. GROUND NO.2 IS ON THE IS SUE OF DISALLOWANCE U /S 14A. THE LD.COUNSEL FOR THE ASSESSEE DREW THE ATTENTION OF THE BENCH TO PAGE 36 OF THE PAPER BOOK, WHICH IS A PROFIT AND LOSS A/C FOR THE YEAR ENDED 31 ST MARCH,2009 FOR THE PURPOSE OF DEMONSTRATING THE COMPOSITION OF INCOME WHICH I S AS FOLLOWS. INCOME FROM OPERATIONS RS.3,32,41,508.86 AGRICULTURAL INCOME RS. 10,130.00 ------------------------- RS.3,32,51,638.86 ================ SCHEDULE XII GIVES INCOME FROM OPERATIONS WHICH IS AS FOLLOWS: INTEREST (TDS RS.6 44141/ - ) RS.43,50,139.00 DIVIDEND RS. 2,76.64,985.84 RENT RECEIVED RS. 1,08,000.00 PROFIT ON SALE OF INVESTMENTS RS. 10,11,584.02 PROFIT IN SHARE TRANSACTION 0.00 PROFIT IN SPECULATION TRANSACTIONS RS. 6,400.00 BROKERAGE/COMMISSION RECEIVED RS. 1,00,400.00 ------------------------ RS.3,32,41,508.86 =============== 6.2. THEREAFTER HE DREW THE ATTENTION OF THE BENCH TO THE INTEREST INCURRED BY THE ASSESSEE WHICH IS AT PAGE 36 R.W. SCHEDULE XVI AND XVII OF THE ANNUAL ACCOUNTS. HE SUBMITTED THAT INTEREST EXPENDITURE HAS NEXUS WITH INTEREST EARNED. HE POINTED OUT THAT THE L D.CIT(A) AT PARA 6.3 AT PAGE 33 HAS COME TO A CONCLUSION THAT PRIMA FACIE, THE DETAILS OF EXPENDITURE DO NOT JUSTIFY THAT EXPENSES HAVE BEEN UTILISED FOR EARNING EXEMPT INCOME. HE ITA 5389/DEL/2012 AY: 2009 - 10 PAVITRA COMMERCIALS LTD. 5 REFERRED TO THE COMPUTATION MADE BY THE ASSESSEE , THE DETAILS OF WHICH ARE GIVEN IN A LETTER TO THE AO DT. 28.12.2011 WHICH IS AT PAGES 4 TO 10 OF THE PAPER BOOK SPECIFICALLY AT PAGES 8, 9 AND 10 AND SUBMITTED THAT THE SAME BE UPHELD. 6.3. THE LD.D.R. ON THE OTHER HAND SUBMITTED THAT IT IS FOR THE ASSESSEE TO PROVE THAT A PARTI CULAR ITEM OF EXPENDITURE WAS INCURRED FOR EARNING TAXABLE INCOME AND HENCE SHOULD NOT BE DISALLOWED U/S 14A. HE POINTED OUT THAT THE ASSESSEE HAS FAILED IN DOING SO. HE REFERRED TO THE ORDER OF THE LD.CIT(A) AND POINTED OUT THAT THERE IS A CLEAR FINDING THAT THE ASSESSEE FAILED TO MENTION EXPLICITLY AS TO WHICH INTEREST WAS PAID TO EARN INTEREST INCOME AND TO PROVE AS TO WHICH EXPENDITURE IS NOT INCURRED FOR THE PURPOSE OF EARNING INCOME. HE SUBMITS THAT THERE IS NO EVIDENCE LEAD BY THE ASSESSEE IN SUP PORT OF THE MANNER IN WHICH THE ASSESSEE HAS DETERMINED DISALLOWANCES U/S 14A . HE POINTED OUT THAT OUT OF TOTAL INCOME OF RS.3.32 CRORES, DIVIDEND INCOME CONSTITUTED RS.2.6 CRORES AND INTEREST INCOME RS.43.5 LAKHS. HENCE HE SUBMITTED THAT THE MAJOR PORTI ON OF THE EXPENDITURE WAS INCURRED FOR EARNING DIVIDEND INCOME. 6.4. ON A CAREFUL CONSIDERATION OF THE SUBMISSIONS WE FIND THAT THE COMPOSITION OF THE INCOME OF THE ASSESSEE DEMONSTRATES THAT IT EARNED RS.2.76 CRORES DIVIDEND INCOME, WHICH IS CLAIMED AS EXEMPT OUT OF TOTAL INCOME OF RS.3.32 CRORES. THE EXPENDITURE INCURRED IS RS.62,33,964/ - . THE ASSESSEE CLAIMS THAT THE EXPENDITURE ON INTEREST, IS INCURRED FOR THE PURPOSE OF EARNING INTEREST INCOME OF RS.43.5 LAKHS. NO EVIDENCE IS LEAD BY THE ASSESSEE TO PROVE THIS CLAIM. SIMILARLY ON THE ISSUE OF OTHER EXPENSES AMOUNTING TO RS.11,60,904.58, NO EVIDENCE IS LEAD TO DEMONSTRATE THAT A PARTICULAR EXPENSE CANNOT BE SAID TO HAVE BEEN INCURRED IN RELATION TO EARNING THE INCOME , WHICH IS NOT PART OF TOTAL INCOME. UNDER THESE CIRCUMSTANCES WE ARE UNABLE TO ACCEPT THE PLEA OF THE ASSESSEE . 6. 5 . THE LD.COUNSEL FOR THE ASSESSEE ARGUED THAT THE AO HAS NOT RECORDED SATISFACTION THAT THE COMPUTATION OF DISALLOWANCE U/S 14A BY THE ASSESSEE IS WRONG. WE FIND THAT THE SATISFACTION IS DISCERNIBLE FROM PARA 2 OF THE ITA 5389/DEL/2012 AY: 2009 - 10 PAVITRA COMMERCIALS LTD. 6 ASSESSMENT ORDER, WHERE THE AO HAS NOT AGREED WITH THE MANNER IN WHICH THE ASSESSEE APPLIED RULE 8D AND HAS COMPUTED THE DISALLOWANCE IN HIS OWN WAY. THIS WAS AFTER CONSIDERING THE DETAILED REPLY GIVEN BY THE ASSESSEE ON 28.12.2011. HENCE T HESE ARGUMENTS OF THE LD.COUNSEL IS DISMISSED AS DEVOID OF MERIT. 6.5. THE LD.CIT(A) HAS RESTRICTED THE NET DISALLOWANCE TO RS.6,23,39,962/ - U/S 14A. WE ARE OF THE VIEW THAT THE DISALLOWANCE HAS TO BE RECOMPUTED UNDER RULE 8D (2)(II). THUS FOR THIS LIMITED PURPOSE WE SET ASIDE THE MATTER TO THE FILE OF THE AO FOR COMPUTING THE DISALLOWANCE. 7. GROUND NO. 2(E) IS ON DISALLOWANCE OF CLAIM OF SHORT TERM CAPITAL LOSS. 7.1. THE LD.COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT RIGHT TO OBTAIN SHARES IS AN A SSET AND FORFEITURE OF THE SAME IS , EXTINGUISHING OF A RIGHT AND HENCE COVERED U/S 2(47 )(II) OF THE ACT. 7.2. THE LD.SR.D.R. RELIED ON THE ORDER OF THE LD.CIT(A). 7.3. AFTER HEARING RIVAL CONTENTIONS, WE HOLD AS FOLLOWS. HON BLE DELHI HIGH COURT IN THE CASE OF CIT VS. CHAND RATA N BAGRI REPORTED IN 329 ITR 356 HAS HELD AS FOLLOWS. MOR E IMPORTANTLY, THE SECOND ISSUE AS TO WHETHER THE FORFEITURE OF THE CONVERTIBLE WARRANT AMOUNTED TO A TRANSFER WITHIN THE MEANING OF S.2(47) OF THE SAID ACT HAS NOW BEEN MADE CLEAR BY THE SUPREME COURT IN THE CASE OF MRS.GRACE COLLIS (2001) 248 ITR 323 AS ALSO BY THE KARNATAKA HIGH COURT IN BPL SANYO FINANCE LTD. (2009) 312 ITR 63. WE AGREE WITH THE INTERPRETATION GIVEN BY THE KARNATAKA HIGH COURT IN BPL SANYO FINANCE LTD. (SUPRA) AND WE SEE NO REASON TO TAKE A DIFFERENT VIEW. THE RESTRICTIVE MEANING GIVE N TO THE WORD TRANSFER BY THE SUPREME COURT DECISION IN VANIA SILK MILLS P.LTD. (1991) 191 ITR 647 HAS BEEN OVER RULED BY THE LARGER BENCH OF THE SUPREME COURT IN THE CASE OF MRS.GRACE COLLIS (2001) 248 ITR 323. IN THE PRESENT CASE, WE FIND THAT THE FORFEITURE OF THE CONVERTIBLE WARRANT HAS RESULTED IN EXTINGUISHMENT OF THE RIGHT OF THE ASSESSEE TO OBTAIN A SHARE IN BLB LTD. IT IS NOT A CASE WHERE THE ASSET ITSELF HAS BEEN EXTINGUISHED OR DESTROYED. A SHARE IN A COMPANY IS NOTHING BUT A SHARE IN THE OWNERSHIP OF THE COMPANY. WHILE THE RIGHT OF THE ASSESSEE TO SHARE IN THE OWNERSHIP OF THE COMPANY BLB LTD. STANDS EXTINGUISHED ON ACCOUNT OF THE FORFEITURE, THE ITA 5389/DEL/2012 AY: 2009 - 10 PAVITRA COMMERCIALS LTD. 7 COMPANY, WITH ALL ITS ASSETS, CONTINUES TO EXIST. THE FORFEITURE ONLY RESULTS IN ONE LESS SHAREHOLDER. IT IS NOT AS IF THE ASSET IN WHICH A SHARE WAS BEING CLAIMED WAS ALSO EXTINGUISHED. THUS, THE SECOND POINT URGED BY THE LD.COUNSEL FOR THE REVENUE IS ALSO NOT TENABLE. IN VIEW OF THE FOREGOING REASONS NO SUBSTANTIAL QUESTION OF LAW ARISES FOR OUR CONSIDERATION. THE APPEAL IS DISMISSED. 7.4. RESPECTFULLY FOLLOWING THE JUDGEMENT OF THE JURISDICTIONAL HIGH COURT, WE ALLOW THE CLAIM OF THE ASSESSEE. GROUND NO.2(E) IS ALLOWED. 8. IN THE RESULT ASSESSEE S APPEAL IS ALLOWED IN PART. ORDER PRONOUNCED IN THE OPEN COURT ON 10 TH DECEMBER ,2014. SD/ - S D/ - ( H .S.SIDHU ) (J.SUDHAKAR REDDY) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: THE 10 TH DECEMBER , ,2014 *MANGA COPY OF THE ORDER FORWARD ED TO: 1. APPELLANT; 2.RESPONDENT; 3.CIT; 4.CIT(A); 5.DR; 6.GUARD FILE BY ORDER ASST. REGISTRAR