Lustre Merchants Pvt. Ltd., Delhi V. DCIT, New Delhi

ITA 6396/DEL/2015

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 6697 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 10 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-10-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 03-12-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ASHIMA NEB
• Keywords: Capital asset; Business income; Business expenditure; Opportunity of being heard; Retrospective amendment; Question of law; Wrong claim; Commercial expediency; Sham transactions; Capital expenditure; Set aside; Liquidation; Capital Gains
• Section: 143(3); 64; 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : B : NEW DELHI BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND MS SUCHITRA KAMBLE, JUDICIAL MEMBER ITA NO.6396/DEL/2015 ASSESSMENT YEAR: 2008-09 LUSTRE MERCHANTS PVT. LTD., C/O KAPIL GOEL, ADVOCATE, A-1/25, SECTOR-15, ROHINI, DELHI. PAN: AAACL2457D VS DCIT, CIRCLE 4(1), NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI KAPIL GOEL, ADVOCATE, REVENUE BY : MS ASHIMA NEB, SR. DR DATE OF HEARING : 29.08.2019 DATE OF PRONOUNCEMENT : 30.10.2019 ORDER PER R.K. PANDA, AM: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER DATED 21 ST SEPTEMBER, 2015 OF THE CIT(A)-5, NEW DELHI, RELATIN G TO ASSESSMENT YEAR 2008-09. 2. THIS IS THE SECOND ROUND OF LITIGATION BEFORE TH E TRIBUNAL. 3. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESS EE IS A COMPANY ENGAGED IN THE BUSINESS OF DEALING IN SHARES AND SECURITIES. IT F ILED ITS RETURN OF INCOME ON 19 TH SEPTEMBER, 2008, DECLARING A LOSS OF RS.64,34,736/- . THE ASSESSING OFFICER, DURING THE COURSE OF ASSESSMENT PROCEEDINGS, OBSERV ED THAT THE ASSESSEE COMPANY ITA NO.6396/DEL/2015 2 APPLIED FOR 750000 CONVERTIBLE WARRANTS @ RS.64/- P ER WARRANT OF A LISTED COMPANY ON 16 TH JANUARY, 2006 AND REMITTED THE APPLICATION MONEY A MOUNTING TO RS.48 LAKHS. ON 23 RD SEPTEMBER, 2006, THE ASSESSEE COMPANY OPTED FOR CO NVERSION OF 1 LAKH SHARE WARRANTS INTO EQUITY SHARES BY MAKING A PAYMENT OF RS.57,60,000/- BEING 90% OF THE VALUE OF SHARE WARRANTS AND ADJUST ING AN AMOUNT OF RS.6,40,000/- OUT OF RS.48 LAKHS PAID AT THE TIME OF MAKING APPLI CATION FOR 750000 SHARE WARRANTS. THE BALANCE AMOUNT OF RS.41,60,000/- WAS OUTSTANDING AS ON 31.03.2006 REPRESENTING APPLICATION MONEY OF 10% VALUE OF BALA NCE 650000 CONVERTIBLE WARRANTS. AS PER THE TERMS AND CONDITIONS OF THE P REFERENTIAL ISSUE OF OPTIONAL CONVERTIBLE WARRANTS, THE ASSESSEE WAS REQUIRED TO MAKE PAYMENT FOR BALANCE AMOUNT ON OR BEFORE 15 TH JULY, 2007 AS PER SEBI GUIDELINES. SINCE THE ASSES SEE COMPANY FAILED TO REMIT THE BALANCE OUTSTANDING AMO UNT OF ALLOTMENT MONEY FOR WHICH THE SAID LISTED COMPANY FORFEITED THE APPLICA TION MONEY AMOUNTING TO RS.41,60,000/-, THE ASSESSEE CLAIMED THE SAME AS A BUSINESS LOSS. THE ASSESSING OFFICER, IN THE ORDER PASSED U/S 143(3) ON 25 TH JANUARY, 2010, DISALLOWED THE SAID LOSS DEBITED TO THE PROFIT & LOSS ACCOUNT AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. WHILE DOING SO, THE ASSESSING OFFICER RE LIED ON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. MRS. GRACE COLLIS (2001) 248 ITR 323 , THE DECISION OF THE HON'BLE KARNATAKA HIGH COURT IN THE CASE OF DCIT VS. BPL SANYO FINANCE LTD., 312 ITR 63 , THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. CHAND RATAN BAGRI, 230 CTR 258 AND THE DECISION OF THE ITA NO.6396/DEL/2015 3 HON'BLE SUPREME COURT IN THE CASE OF VANIA SILK MILLS PVT. LTD. VS. CIT, 98 CTR 153. 4. THE ASSESSEE PREFERRED AN APPEAL, BUT, WITHOUT A NY SUCCESS. SUBSEQUENTLY, THE TRIBUNAL, VIDE ITA NO.3836/DEL/2011, ORDER DATED 13 TH FEBRUARY, 2012 , RESTORED THE ISSUE TO THE FILE OF THE ASSESSING OFF ICER FOR FRESH ADJUDICATION OF THE ISSUE BY OBSERVING AS UNDER:- 5. WE HAVE HEARD RIVAL CONTENTIONS AND GONE THROUG H THE ENTIRE MATERIAL AVAILABLE ON RECORD. AS THE FACTS EMERGE, THE LOWER AUTHORITIES HAVE NOT ADVERTED TO THE CRUCIAL FACTS I.E. ASSESSEE'S INVES TMENT IN SURYA ROSHNI LTD., A GROUP COMPANY, BY WAY OF SUBSCRIPTION TO CONVERTIBL E DEBENTURES BEING HELD AS STOCK IN TRADE NOT ONLY IN THIS YEAR BUT EARLIER YEAR ALSO. THESE FACTS HAVE A MATERIAL BEARING ON TAKING A PROPER DECISION AS TO WHETHER ASSESSEE'S INVESTMENT WAS A BUSINESS ASSET. BESIDES, THE AO HA S HEAVILY RELIED ON THE ISSUE OF LOCK IN PERIOD AS A DETERMINATE FACTOR TO HOLD THE IMPUGNED INVESTMENT AS ACCRUAL OF A RIGHT WHILE DENYING THE ASSESSEE'S CLAIM. IN OUR CONSIDERED VIEW THE CONTENTIONS RAISED BY THE ASSES SEE HAVE NOT BEEN DULY CONSIDERED BY AO. THE OBSERVATIONS ABOUT THE ASSESS EE'S CONVERTIBLE DEBENTURES/ WARRANTS BECAUSE OF THE LOCK IN PERIOD BECOMING CAPITAL ASSET HAS ALSO NOT BEEN SUBSTANTIATED IN A JUSTIFIED MANNER. IN THE ENTIRETY OF FACTS AND CIRCUMSTANCES, WE ARE INCLINED TO SET ASIDE THE ISS UE BACK TO THE FILE OF AO TO CONSIDER THE SAME AFRESH AFTER GIVING THE ASSESSEE AN OPPORTUNITY OF BEING HEARD AND KEEPING IN MIND THE BOMBAY HIGH COURT JUD GMENT (SUPRA). 5. IN THE SET ASIDE PROCEEDINGS, THE ASSESSING OFF ICER NOTED THAT THE FACTS OF THE CASE ARE DISTINGUISHABLE FROM THE CASE OF CIT VS. T AINWALA TRADING & INVESTMENT COMPANY LTD. DECIDED BY THE HON'BLE BOMBAY HIGH COU RT. HE OBSERVED THAT IN THE CASE OF TAINWALA TRADING & INVESTMENT CO. LTD., AS AGAINST THE AGREED PRICE OF RS72.70 AT THE TIME OF DEBENTURES WERE QUOTED, THE SHARE PRICE HAD GONE DOWN SUBSTANTIALLY TO RS.14 PER SHARE AND, THEREFORE, TH E DECISION TO FOREGO THE AMOUNT INVESTED IN THE CONVERTIBLE DEBENTURES WAS HELD TO BE A COMMERCIAL DECISION TO ITA NO.6396/DEL/2015 4 AVOID HIGHER LOSS AND, THEREFORE, THE HON'BLE HIGH COURT HELD IT TO BE AN ALLOWABLE BUSINESS LOSS. HOWEVER, IN THE INSTANT CASE, THE C ONVERTIBLE DEBENTURES WERE AGREED TO BE PURCHASED AT A PRICE OF RS.64 PER SHARE. THE ASSESSEE ALSO EXERCISED THE OPTION FOR CONVERSION OF 1 LAKH CONVERTIBLE DEBENTU RES ON 22 ND MARCH, 2006 WHEN THE PRICE OF EACH SHARE WAS RS.65.85. HE NOTED THAT AT THE TIME THE DECISION WAS TAKEN TO FOREGO THE AMOUNT INVESTED, THE SHARE PRIC E WAS MORE THAN RS.60/-. SINCE THE INVESTMENT WAS MADE WITH A VIEW TO EARN PROFIT IT WOULD HAVE BEEN COMMERCIALLY EXPEDIENT TO UTILIZE THE OPTION TO REN OUNCE THE SHARE RATHER THAN ACQUIRING THE SAID SHARES WHICH WOULD HAVE RESULTED IN LOSS OF RS.5 LAKHS APPROXIMATELY RATHER THAN RS.41.60 LAKH WHICH THE A SSESSEE INCURRED IN THE CURRENT YEAR. THE ASSESSING OFFICER FURTHER NOTED THAT THE DECISION TO INVEST IN THE SHARES OF M/S SURYA ROSHNI LTD., WAS NOT A NORMAL BUSINESS TRANSACTION. THE ASSESSEE WAS THE PROMOTER COMPANY OF M/S SURYA ROSHNI LTD. A ND THE IMPUGNED TRANSACTIONS SHOWED THAT THEY WERE SET UP TO AVOID TAX LIABILITY. HE, THEREFORE, WAS OF THE VIEW THAT THE CORPORATE VEIL OF THE COMPANY CAN BE LIFTED TO EXAMINE THE REAL CHARACTER OF TRANSACTION. SINCE ACCORDING TO THE AS SESSING OFFICER THE TRANSACTION WAS A COLOURABLE DEVICE, HE HELD THAT THE SAME COUL D NOT BE ALLOWED AS A BUSINESS LOSS TOO, BUT, HAS TO BE TREATED AS A CAPITAL LOSS. HE ACCORDINGLY REJECTED THE CLAIM OF THE ASSESSEE OF THE SAID LOSS OF RS.41,60,000/- ON ACCOUNT OF FORFEITURE OF CONVERTIBLE DEBENTURES AS BUSINESS LOSS. ITA NO.6396/DEL/2015 5 6. BEFORE THE CIT(A), THE ASSESSEE SUBMITTED THAT I T WAS CONSISTENTLY ENGAGED IN THE BUSINESS OF DEALING IN SHARES AND SECURITIES UNDER STOCK-IN-TRADE PORTFOLIO. THE ASSESSING OFFICER FAILED TO DISTINGUISH THE FAC TS IN ASSESSEES CASE VIS-A- VIS THE FACTS IN THE CASE OF TAINWALA TRADING & INVESTM ENT COMPANY LTD. IT WAS ARGUED THAT THE ASSESSING OFFICER TRAVELLED BEYOND THE SCOPE OF THE DIRECTIONS ISSUED BY THE TRIBUNAL BY GOING INTO THE CONCEPT OF COMMERCIAL EXPEDIENCY UNDER THE MISCONCEIVED NOTION THAT THE ASSESSEE COULD HAV E AT BEST INCURRED A LOSS OF RS.5 LAKHS IF IT HAD EXERCISED THE OPTION OF ACQUIRING T HE SHARES. RELYING ON VARIOUS DECISIONS, IT WAS SUBMITTED THAT THE ACTION OF THE ASSESSING OFFICER WAS ILLEGAL AND NOT IN ACCORDANCE WITH LAW AND, THEREFORE, THE DISA LLOWANCE MADE BY THE ASSESSING OFFICER SHOULD BE DELETED. 7. HOWEVER, THE LD. CIT(A) WAS NOT SATISFIED WITH T HE ARGUMENTS ADVANCED BY THE ASSESSEE. RELYING ON VARIOUS DECISIONS, SHE HEL D THAT THE TREATMENT BY AN ASSESSEE IN ITS BOOKS OF ACCOUNT IS NOT DETERMINATI VE OF THE REAL NATURE OF ANY COMMERCIAL TRANSACTION. ACCORDING TO HER, THE EXIS TENCE OF AN ENTRY IN THE BOOKS OF ACCOUNT OF THE ASSESSEE CANNOT BE THE DECISIVE OR C ONCLUSIVE FACTOR IN DETERMINING WHETHER THE DEDUCTION CLAIMED IS A REVENUE EXPENDI TURE OR NOT. SHE NOTED THAT THE ASSESSEE COMPANY IN THE INSTANT CASE HAS CLARIFIED BEFORE THE ASSESSING OFFICER, VIDE LETTER DATED 01.11.2010 THAT ALL THE SHARES HA D BEEN PURCHASED OUT OF ITS OWN FUNDS AND NOT FROM ANY BORROWED FUNDS. THE ONLY TR ADING TRANSACTION CARRIED OUT BY THE ASSESSEE DURING THE YEAR WAS THE INTENDED PU RCHASE OF 24 LAKH SHARES IN IPO ITA NO.6396/DEL/2015 6 RELIANCE POWER LTD., WHICH WAS FINANCED PRIMARILY F ROM A LOAN TAKEN FROM INDIA BULLS FINANCE COMPANY PVT. LTD., TO THE TUNE OF RS. 25.68 CRORES. SHE NOTED THAT WHILE THE TRADING IN THE SHARES OF RELIANCE POWER L TD. WAS FUNDED BY WAY OF BORROWED FUNDS ON WHICH INTEREST OF RS.20,05,151/- WAS ALSO CLAIMED, AND WHICH WAS ALLOWED IN THE ASSESSMENT PROCEEDINGS AS BUSINE SS EXPENDITURE, HOWEVER, THE INVESTMENT IN THE SHARES OF SURYA ROSHNI LTD., WAS OUT OF OWN FUNDS. THIS, ACCORDING TO HER, LENDS CREDENCE TO THE FACT THAT T HE ASSESSEE INTENDED TO HOLD THE SHARES AS A CAPITAL ASSET/INVESTMENT. RELYING ON V ARIOUS DECISIONS, SHE HELD THAT A RIGHT TO INVEST IN PREFERENCE SHARE IS A CAPITAL AS SET. SO FAR AS THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF TAINWALA TRADING & INVESTMENT COMPANY LTD. (SUPRA) IS CONCERNED, SHE HELD THAT TH E SAME CANNOT BE APPLIED TO THE FACTS OF THE PRESENT CASE SINCE, ACCORDING TO HER, FACTS OF THAT CASE WAS DISTINGUISHABLE FROM THE FACTS OF THE PRESENT CASE. FURTHER, THERE HAS BEEN A DEVIATION OF ACCOUNTING STANDARD-13 SINCE THE SHARE S HAVE BEEN FORFEITED IN ADVANCE OF THE LOCK IN PERIOD AND THE ASSESSEE HAD UTILIZED ITS OWN FUNDS TO MAKE INVESTMENT IN THE EQUITY IN THE COMPANY AND THE DEC ISION TO FORFEIT THE SHARES HAS NOT BEEN INTENDED FOR COMMERCIAL CONSIDERATION. SH E ACCORDINGLY UPHELD THE ACTION OF THE ASSESSING OFFICER IN DISALLOWING THE CLAIM OF EXPENDITURE OF RS.41,61,000/- ON ACCOUNT OF FORFEITURE OF SHARES A S A BUSINESS EXPENDITURE. 8. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE ASSE SSEE IS IN APPEAL BY RAISING THE FOLLOWING GROUNDS:- ITA NO.6396/DEL/2015 7 CLASSIFICATION OF LOSS ARISING FROM FORFEITURE OF ADVANCE PAID ON CONVERTIBLE WARRANTS (BUSINESS OR CAPITAL FIELD) 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, LEARNED CIT-A ERRED IN AFFIRMING THE ORDER OF ASSESSING OFF ICER (AO) TREATING THE SUBJECT LOSS AMOUNTING TO RS 41,60,000 AS CAPITAL LOSS IN NATURE. 2. THAT ON THE FACTS AND IN THE CIRCUMSTANCESOF THE CA SE AND IN LAW, LEARNED CIT-A ERRED IN AFFIRMING THE ORDER OF ASSESSING OFF ICER (AO) TREATING THE SUBJECT LOSS AMOUNTING TO RS 41,60,000 AS CAPITAL LOSS IN NATURE IN GROSS NON APPRECIATION OF: A. AS-13 OF ICAI DO NOT APPLY TO STOCK IN TRADE AS CLARIFIED IN OUR DETAILED REPLY AVAILABLE ON RECORDS; B. MISINTERPRETED THE FACTS ABOUT FLUCTUATION IN PRIC E OF SHARES OF SURYA ROSHNI LTD/SRL LEADING TO PERVERSE FINDINGS; C. PRICE OF SHARES OF SRL ON CUT OFF DATE WAS LOWER T HAN ORIGINAL SUBSCRIPTION PRICE JUSTIFYING APPELLANTS PRUDENT A CTION FOR BEARING OF SUBJECT LOSS; D. LOSS CLAIMED WAS AS PER SEBI GUIDELINES (POINT NO. 12.1.2.3(C)) POINTED IN OUR REPLY AVAILABLE ON RECO RDS (LETTER DT. 16/7/2007); E. ASSESSEE IS TRADER BEING REGISTERED NBFC AND HAVIN G SOLE TRADE PORTFOLIO; F. APPLICABLE ORDER OF BOMBAY HIGH COURT IN TAINWALLA CASE DIRECTED BY ITAT TO BE CONSIDERED EXPRESSLY IS WRON GLY DISTINGUISHED; G. IN WORST CASE, DIFFERENCE OF RS 4.50 WITH REFERENC E TO 650000 WARRANTS SHOULD BE CONSIDERED TO BE ALLOWED AS BUSI NESS LOSS H. NO CITED CASE BY CIT-A IS WITH REFERENCE TO NBFC 3. THAT THE APPELLANT CRAVES LEAVE TO ADD, TO, AMEND, MODIFY, RESCIND, SUPPLEMENT OR ALTER ANY OF THE GROUNDS STATED HEREI N ABOVE, EITHER BEFORE OR AT THE TIME OF HEARING OF THIS APPEAL. 9. THE LD. COUNSEL FOR THE ASSESSEE STRONGLY CHALLE NGED THE ORDER OF THE CIT(A) IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER I N DISALLOWING THE CLAIM OF ITA NO.6396/DEL/2015 8 BUSINESS LOSS. REFERRING TO CBDT CIRCULAR NO.6/201 6 DATED 29 TH FEBRUARY, 2016, HE DREW THE ATTENTION OF THE BENCH TO PARA 3 A) OF THE CIRCULAR WHERE IT HAS BEEN CLARIFIED BY THE CBDT THAT WHERE THE ASSESSEE ITSE LF, IRRESPECTIVE OF THE PERIOD OF HOLDING THE LISTED SHARES AND SECURITIES, OPTS TO T REAT THEM AS STOCK-IN-TRADE, THE INCOME ARISING FROM TRANSFER OF SUCH SHARES/SECURIT IES WOULD BE TREATED AS ITS BUSINESS INCOME. HE SUBMITTED THAT THE ASSESSING O FFICER NOWHERE HAS DOUBTED THE ENTRIES IN THE BOOKS OF ACCOUNT OR CALLED INTO QUESTION REGARDING THE ENTRIES IN THE BOOKS OF ACCOUNT. REFERRING TO A SERIES OF DEC ISIONS, HE SUBMITTED THAT BONA FIDE OF THE DECISION TAKEN BY THE ASSESSEE CANNOT B E QUESTIONED BY THE REVENUE AUTHORITIES AND THE ASSESSING OFFICER CANNOT SIT ON THE ARM CHAIR OF THE ASSESSEE TO DECIDE HOW THE ASSESSEE SHOULD DO ITS BUSINESS. RE FERRING TO THE DECISION OF THE HYDERABAD BENCH OF THE TRIBUNAL IN THE CASE OF TANV I FINANCIAL SERVICES PRIVATE LIMITED VS. ITO, VIDE ITA NO.893/HYD/2017, ORDER DA TED 13 TH APRIL, 2018, HE DREW THE ATTENTION OF THE BENCH TO PARA 10 OF THE O RDER WHICH READS AS UNDER:- 10. WE FIND THAT THERE IS NO DISPUTE ABOUT THE LOS S THAT WAS INCURRED BY THE ASSESSEE, ON NOT SUBSCRIBING TO THE FULL VALUE OF T HE SHARES. THE DISTINGUISHING FACTOR FROM THE CASE OF BPL SANYO FI NANCE LTD (CITED SUPRA) AND THE ASSESSEE BEFORE US IS THAT BPL SANYO FINANC E LTD WAS AN INVESTOR WHILE THE ASSESSEE BEFORE US IS A TRADER IN SHARES AND NOT AN INVESTOR AND WAS ALSO JUSTIFIED IN NOT MAKING THE PAYMENT OF THE BALANCE OF THE SHARE APPLICATION MONEY. IF THE ASSESSEE HAS SUBSCRIBED T O THE PREFERENTIAL WARRANTS AS AN INVESTOR, THEN THE SHARE APPLICATION MONEY ASSUMES THE CHARACTER OF CAPITAL EXPENDITURE AND THE LOSS INCUR RED BY THE ASSESSEE ON FORFEITURE OF THE INITIAL PAYMENT ALREADY MADE BY T HE ASSESSEE IS CAPITAL IN NATURE. BUT IF THE ASSESSEE IS TRADING IN SHARES AN D IN THE COURSE OF SUCH BUSINESS, IF IT HAS INCURRED LOSS, IT WOULD BE REVE NUE EXPENDITURE. THE ASSESSEE HAS FILED THE COPIES OF THE BALANCE SHEETS ALONG WITH THE RELEVANT SCHEDULES TO PROVE THAT THE ASSESSEE HAS BEEN TRADI NG IN SHARES AND HAS BEEN TREATING THE SHARES AS CURRENT ASSETS ALL ALONG. EV EN BEFORE THE AO, THE ITA NO.6396/DEL/2015 9 ASSESSEE HAD STATED TO BE A TRADER IN SHARES AND TH EREFORE, THE TREATMENT OF THE LOSS ON FORFEITURE OF SHARES IS CORRECTLY ACCEP TED BY THE AO AS REVENUE LOSS. THUS, THE AO HAS ACCEPTED ONE OF THE POSSIBLE VIEWS AND THERE IS NO ERRONEOUS APPLICATION OF LAW, MAKING THE ASSESSMENT ORDER ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE. WE FIND THA T THE CIT HAS NOT CONSIDERED THIS ISSUE. WE ACCORDINGLY SET ASIDE THE ORDER OF CIT U/S 263 AND RESTORE THE ORDER OF THE AO DATED 30.03.2015. 10. REFERRING TO THE DECISION OF THE HON'BLE GUJARA T HIGH COURT IN THE CASE OF SAKAR LAL BALABAI VS. ITO, 100 ITR 97, HE SUBMITTED THAT THE HON'BLE HIGH COURT HAS DISTINGUISHED BETWEEN THE TAX AVOIDANCE AND TAX EVASION. HE SUBMITTED THAT HIS CASE MAY BE A LEGITIMATE TAX AVOIDANCE, BUT CAN NOT BE CALLED AS A TAX EVASION. 11. REFERRING TO THE DECISION OF THE COORDINATE BEN CH OF THE TRIBUNAL IN THE CASE OF COSMOS INDUSTRIES LTD. VS. DCIT, VIDE ITA NO.373 0/DEL/2015, ORDER DATED 31 ST DECEMBER, 2018, HE SUBMITTED THAT THE TRIBUNAL IN T HE SAID DECISION HAS HELD THAT THE LOSS INCURRED ON SALE OF SHARES OF SUBSIDIARY C OMPANIES IS A BUSINESS LOSS AND NOT A CAPITAL LOSS AS HELD BY THE CIT(A). ACCORDIN GLY, THE APPEAL FILED BY THE ASSESSEE WAS ALLOWED. 12. REFERRING TO THE DECISION OF THE HON'BLE SUPREM E COURT IN THE CASE OF HERO CYCLES PVT. LTD. VS. CIT, REPORTED IN 379 ITR 347 (SC) , HE DREW THE ATTENTION OF THE BENCH TO PARA 13 OF THE ORDER WHICH READS AS UN DER:- IN THE PROCESS, THE COURT ALSO AGREED THAT THE VIE W TAKEN BY THE DELHI HIGH COURT IN 'CIT V. DALMIA CEMENT (B.) LTD.' [2002] 25 4 ITR 377 (DELHI) WHEREIN THE HIGH COURT HAD HELD THAT ONCE IT IS EST ABLISHED THAT THERE IS NEXUS BETWEEN THE EXPENDITURE AND THE PURPOSE OF BUSINESS (WHICH NEED NOT NECESSARILY BE THE BUSINESS OF THE ASSESSEE ITSELF) , THE REVENUE CANNOT JUSTIFIABLY CLAIM TO PUT ITSELF IN THE ARM-CHAIR OF THE BUSINESSMAN OR IN THE POSITION OF THE BOARD OF DIRECTORS AND ASSUME THE R OLE TO DECIDE HOW MUCH IS ITA NO.6396/DEL/2015 10 REASONABLE EXPENDITURE HAVING REGARD TO THE CIRCUMS TANCES OF THE CASE. IT FURTHER HELD THAT NO BUSINESSMAN CAN BE COMPELLED T O MAXIMIZE HIS PROFIT AND THAT THE INCOME TAX AUTHORITIES MUST PUT THEMSELVES IN THE SHOES OF THE ASSESSEE AND SEE HOW A PRUDENT BUSINESSMAN WOULD AC T. THE AUTHORITIES MUST NOT LOOK AT THE MATTER FROM THEIR OWN VIEW POINT BU T THAT OF A PRUDENT BUSINESSMAN. 13. HE ACCORDINGLY SUBMITTED THAT THE ORDER OF THE CIT(A) BEING NOT IN ACCORDANCE WITH THE LAW SHOULD BE SET ASIDE AND THE LOSS CLAIMED BY THE ASSESSEE SHOULD BE ALLOWED AS NORMAL BUSINESS LOSS. 14. THE LD. DR, ON THE OTHER HAND, HEAVILY RELIED O N THE ORDER OF THE CIT(A). SHE SUBMITTED THAT THE ASSESSING OFFICER HAS FOLLOW ED THE DIRECTION OF THE TRIBUNAL AND HAS DISTINGUISHED THE DECISION IN THE CASE OF T AINWALA TRADING & INVESTMENT COMPANY LTD. (SUPRA). SO FAR AS THE CBDT CIRCULAR NO.6/2016 RELIED ON BY THE LD. COUNSEL FOR THE ASSESSEE, SHE SUBMITTED THAT THE SA ID CIRCULAR IS PROSPECTIVE. SHE ACCORDINGLY SUBMITTED THAT SINCE THE LD.CIT(A) HAS PASSED A VERY SPEAKING ORDER ON THIS ISSUE, THEREFORE, THE SAME SHOULD BE UPHELD AN D THE GROUNDS RAISED BY THE ASSESSEE SHOULD BE DISMISSED. 15. THE LD. COUNSEL FOR THE ASSESSEE, IN HIS REJOIN DER, SUBMITTED THAT THE SAID CIRCULAR BEING CLARIFICATORY IN NATURE IS RETROSPEC TIVE AND CANNOT BE SAID TO BE PROSPECTIVE. 16. WE HAVE CONSIDERED THE RIVAL ARGUMENTS ADVANCED BY BOTH THE SIDES, PERUSED THE ORDERS OF THE AUTHORITIES BELOW AND THE PAPER B OOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO GONE THROUGH THE VARIOUS DE CISIONS CITED BEFORE US. THE ITA NO.6396/DEL/2015 11 ONLY DISPUTE IN THE INSTANT APPEAL IS REGARDING THE TREATMENT OF THE LOSS ON ACCOUNT OF FORFEITURE OF SHARE APPLICATION MONEY AMOUNTING TO RS.41,61,000/- AS BUSINESS LOSS OR CAPITAL LOSS. WHILE THE LOSS IS NOT IN DIS PUTE, ACCORDING TO THE ASSESSEE IT IS A BUSINESS LOSS WHEREAS ACCORDING TO THE REVENUE IT I S A CAPITAL LOSS. THUS, THE GENUINENESS OF THE SAID LOSS IS NOT DOUBTED AND THE ONLY QUESTION IS WHETHER IT IS A CAPITAL LOSS OR BUSINESS LOSS. AS MENTIONED BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER ITSELF, THE ASSESSEE IS A NON-BANK ING FINANCE COMPANY ENGAGED IN THE BUSINESS OF DEALING IN SHARES AND SECURITIES. IT HAD APPLIED FOR 750000 CONVERTIBLE WARRANTS @ 64 PER WARRANT OF A LISTED C OMPANY ON 16 TH JANUARY, 2006 AND REMITTED THE APPLICATION MONEY OF RS.48 LAKHS. WE FIND, ON 23 RD MARCH, 2006, THE ASSESSEE COMPANY OPTED FOR CONVERSION OF 1 LAKH SHARE WARRANTS INTO EQUITY SHARES BY MAKING A PAYMENT OF RS.57,60,000/- BEING 90% VALUE OF SHARE WARRANTS AND ADJUSTING AN AMOUNT OF RS.6,40,000/- OUT OF THE AMOUNT OF RS.48 LAKHS PAID EARLIER AT THE TIME OF MAKING THE APPLICATION FOR 7 50000 SHARE WARRANTS. THE ASSESSEE DID NOT REMIT THE BALANCE AMOUNT OF RS.41, 60,000/- BEFORE THE DUE DATE OF 15 TH JULY, 2007 FOR WHICH THE SAID LISTED COMPANY FORFE ITED THE APPLICATION MONEY OF RS.41,60,000/-. ACCORDING TO THE ASSESSING OFFI CER, IF THE ASSESSEE WOULD HAVE REMITTED THE AMOUNT IT WOULD HAVE INCURRED A LOSS O F RS.5 LAKH ONLY AND BY NOT MAKING THE PAYMENT IT INCURRED A LOSS OF RS.41,60,0 00/- AND, THEREFORE, IT IS NOT A COMMERCIAL DECISION BUT IS A COLOURABLE DEVICE TO A VOID ITS TAX. FURTHER, SUCH A TRANSACTION WOULD ATTRACT THE PROVISION OF SECTION 2(47) OF THE ACT AND THE EXTINGUISHMENT OF ANY RIGHT THEREIN IS A CAPITAL LO SS AND CANNOT BE HELD AS A ITA NO.6396/DEL/2015 12 BUSINESS LOSS. WE DO NOT FIND ANY MERIT IN THE ACTI ON OF THE REVENUE AUTHORITIES ESPECIALLY IN VIEW OF THE DIRECTION OF THE TRIBUNAL IN THE ORIGINAL PROCEEDINGS WHILE SETTING ASIDE THE ISSUE TO THE FILE OF THE ASSESSIN G OFFICER. THERE IS NO FINDING BY THE ASSESSING OFFICER TO THE DIRECTION BY THE TRIBU NAL THAT THE LOWER AUTHORITIES HAVE NOT ADVERTED TO THE CRUCIAL FACT I.E., ASSESSE ES INVESTMENT IN SURYA ROSHNI LTD., A GROUP COMPANY BY WAY OF SUBSCRIPTION TO THE CONVERTIBLE DEBENTURES BEING HELD AS STOCK-IN-TRADE NOT ONLY IN THIS YEAR, BUT, IN EARLIER YEAR ALSO. ONCE THE SHARES ARE HELD AS STOCK-IN-TRADE AS ARGUED BEFORE THE TRIBUNAL ON THE EARLIER OCCASION FOR WHICH THE TRIBUNAL HAD RESTORED THE IS SUE TO THE FILE OF THE ASSESSING OFFICER FOR VERIFICATION OF THIS CRUCIAL FACT AND S INCE THERE IS NO MATERIAL TO CONTROVERT THE ABOVE SUBMISSION OF THE ASSESSEE BEF ORE THE TRIBUNAL THAT SUCH SHARES WERE HELD AS STOCK-IN-TRADE, THEREFORE, WE A RE OF THE CONSIDERED OPINION THAT THE LOWER AUTHORITIES IN THE SET ASIDE PROCEEDINGS HAVE NOT FOLLOWED THE DIRECTION OF THE TRIBUNAL. 17. WE FIND THE CBDT, VIDE CIRCULAR NO.6/2016 DATED 29 TH FEBRUARY, 2016 HAD CATEGORICALLY HELD THAT WHERE THE ASSESSEE ITSELF, IRRESPECTIVE OF THE PERIOD OF HOLDING THE LISTED SHARES AND SECURITIES, OPTS TO T REAT THEM AS STOCK-IN-TRADE, THE INCOME ARISING FROM TRANSFER OF SUCH SHARES/SECURIT IES WOULD BE TREATED AS ITS BUSINESS INCOME. FOR THE SAKE OF READY REFERENCE, WE REPRODUCE THE CBDT CIRCULAR NO.6/2016 DATED 29 TH FEBRUARY, 2016 BELOW:- SUB: ISSUE OF TAXABILITY OF SURPLUS ON SALE OF SHA RES AND SECURITIES - CAPITAL GAINS OR BUSINESS INCOME - INSTRUCTIONS IN ORDER TO REDUCE LITIGATION - REG.- ITA NO.6396/DEL/2015 13 SUB-SECTION (14) OF SECTION 2 OF THE INCOME-TAX ACT , 1961 ('ACT') DEFINES THE TERM 'CAPITAL ASSET' TO INCLUDE PROPERTY OF ANY KIN D HELD BY AN ASSESSEE, WHETHER OR NOT CONNECTED WITH HIS BUSINESS OR PROFE SSION, BUT DOES NOT INCLUDE ANY STOCK-IN-TRADE OR PERSONAL ASSETS SUBJECT TO CE RTAIN EXCEPTIONS. AS REGARDS SHARES AND OTHER SECURITIES, THE SAME CAN BE HELD E ITHER AS CAPITAL ASSETS OR STOCK-IN-TRADE/ TRADING ASSETS OR BOTH. DETERMINATI ON OF THE CHARACTER OF A PARTICULAR INVESTMENT IN SHARES OR OTHER SECURITIES , WHETHER THE SAME IS IN THE NATURE OF A CAPITAL ASSET OR STOCK-IN-TRADE, IS ESS ENTIALLY A FACT-SPECIFIC DETERMINATION AND HAS LED TO A LOT OT UNCERTAINTY A ND LITIGATION IN THE PAST. 2. OVER THE YEARS, THE COURTS HAVE LAID DOWN DIFFER ENT PARAMETERS TO DISTINGUISH THE SHARES HELD AS INVESTMENTS FROM THE SHARES HELD AS STOCK-IN-TRADE. THE CENTRAL BOARD OF DIRECT TAXES ('CBDT) HAS ALSO, THR OUGH INSTRUCTION NO. 1827, DATED AUGUST 31, 1989 AND CIRCULAR NO.4 OF 20 07 DATED JUNE 15, 2007, SUMMARIZED THE SAID PRINCIPLES FOR GUIDANCE OF THE FIELD FORMATIONS . 3. DISPUTES, HOWEVER, CONTINUE TO EXIST ON THE APPL ICATION OF THESE PRINCIPLES TO THE FACTS OF AN INDIVIDUAL CASE SINCE THE TAXPAYERS FIND IT DIFFICULT TO PROVE THE INTENTION IN ACQUIRING SUCH SHARES/SECURITIES. IN T HIS BACKGROUND, WHILE RECOGNIZING THAT NO UNIVERSAL PRINCIPAL IN ABSOLUTE TERMS CA.N BE LAID DOWN TO DECIDE THE CHARACTER OF INCOME FROM SALE OF SHARES ANDSECURITIES (LE. WHETHER THE SAME IS IN THE NATURE OF CAPITAL GAIN OR BUSINE SS INCOME), CBDT REALIZING THAT MAJOR PART OF SHARES/SECURITIES TRANSACTIONS T AKES PLACE IN RESPECT OF THE LISTED ONES AND WITH A VIEW TO REDUCE LITIGATION AN D UNCERTAINTY IN THE MATTER, IN PARTIAL MODIFICATION TO THE AFORESAID CIRCULARS, FURTHER INSTRUCTS THAT THE ASSESSING OFFICERS IN HOLDING WHETHER THE SURPLUS G ENERATED FROM SALE OF LISTED SHARES OR OTHER SECURITIES WOULD BE TREATED AS CAPI TAL GAIN OR BUSINESS INCOME, SHALL TAKE INTO ACCOUNT THE FOLLOWING. A) WHERE THE ASSESSEE ITSELF, IRRESPECTIVE OF THE P ERIOD OF HOLDING THE LISTED SHARES AND SECURITIES, OPTS TO TREAT THEM AS STOCK- IN-TRADE, THE INCOME ARISING FROM TRANSFER OF SUCH SHARES/SECURITIES WOULD BE TR EATED AS ITS BUSINESS INCOME, B) IN RESPECT OF LISTED SHARES AND SECURITIES HELD FOR A PERIOD OF MORE THAN 12 MONTHS IMMEDIATELY PRECEDING THE DATE OF ITS TRANSF ER, IF THE ASSESSEE DESIRES TO TREAT THE INCOME ARISING FROM THE TRANSFER THEREOF AS CAPITAL GAIN, THE SAME SHALL NOT BE PUT TO DISPUTE BY THE ASSESSING OFFICE R. HOWEVER, THIS STAND, ONCE TAKEN BY THE ASSESSEE IN A PARTICULAR ASSESSMENT YE AR, SHALL REMAIN APPLICABLE IN SUBSEQUENT ASSESSMENT YEARS ALSO AND THE TAXPAYE RS SHALL NOT BE ALLOWED TO ADOPT A DIFFERENT/CONTRARY STAND IN THIS REGARD IN SUBSEQUENT YEARS; C) IN ALL OTHER CASES, THE NATURE OF TRANSACTION (I .E. WHETHER THE SAME IS IN THE NATURE OF CAPITAL GAIN OR BUSINESS INCOME) SHALL CO NTINUE TO BE DECIDED KEEPING IN VIEW THE AFORESAID CIRCULARS ISSUED BY THE CBDT. ITA NO.6396/DEL/2015 14 4. IT IS, HOWEVER, CLARIFIED THAT THE ABOVE SHALL NOT APPLY IN RESPECT OF SUCH TRAN SACTIONS IN SHARES/SECURITIES WHERE THE G ENUINENESS OF THE TRANSACTION ITSELF IS QUESTIONABLE, SUCH AS BOGUS CLAIMS OF LON G TERM CAPITAL GAIN / SHORT TERM CAPITAL LOSS OR ANY OTHER SHAM TRANSACTIONS. 5. IT IS REITERATED THAT THE ABOVE PRINCIPLES HAVE BEEN FORMULATED WITH T HE SALE OBJECTIVE OF REDUCING LITIGATION AND MAINTAINING CO NSISTENCY IN APPROACH ON THE ISSUE OF TREATMENT OF INCOME DERIVED FROM TRANS FER OF SHARES AND SECURITIES. ALL THE RELEVANT PROVISIONS OF THE ACT SHALL CONTIN UE TO APPLY ON THE TRANSACTIONS INVOLVING TRANSFER OF SHARES AND SECUR ITIES. 18. IN OUR OPINION, THE ABOVE CIRCULAR BEING CLARIF ICATORY IN NATURE IS RETROSPECTIVE AND CANNOT BE HELD AS PROSPECTIVE AS ARGUED BY THE LD. DR. WE FURTHER FIND THE COORDINATE BENCH OF THE TRIBUNAL I N THE CASE OF COSMOS INDUSTRIES LTD. (SUPRA) WHILE DECIDING SOMEWHAT IDENTICAL ISSU E HAS HELD THAT THE LOSS INCURRED ON SALE OF SHARES OF A SUBSIDIARY COMPANY IS A BUSI NESS LOSS. THE RELEVANT OBSERVATION OF THE TRIBUNAL FROM PARA 12 ONWARDS RE ADS AS UNDER:- 12. WE HAVE CONSIDERED THE RIVAL ARGUMENTS AND PE RUSED THE ORDERS OF THE ASSESSING OFFICER AND CIT(A). WE HAVE ALSO CONSIDE RED THE VARIOUS DECISIONS CITED BEFORE US. WE FIND THE ASSESSING OFFICER DIS ALLOWED THE AMOUNT OF RS.71,69,290/- CLAIMED BY THE ASSESSEE ON ACCOUNT O F LOSS ON SALE OF INVESTMENTS BY HOLDING THAT SUCH LOSS IS A LONG-TER M CAPITAL LOSS AND, THEREFORE, IS NOT ELIGIBLE FOR SETTING OFF AGAINST THE BUSINES S INCOME DECLARED BY THE ASSESSEE. TREATING THE SAID LOSS AS LONG-TERM CAPI TAL LOSS, THE ASSESSING OFFICER HAS ALLOWED THE CARRY FORWARD OF THE SAME A S PER THE PROVISIONS OF THE INCOME-TAX ACT. WE FIND THE LD.CIT(A) UPHELD THE A CTION OF THE ASSESSING OFFICER, THE REASONS OF WHICH HAVE ALREADY BEEN REP RODUCED IN THE PRECEDING PARAGRAPHS. IT IS THE SUBMISSION OF THE LD. COUNSE L FOR THE ASSESSEE THAT LOSS ON SALE OF SHARES HELD AS INVESTMENT IN SUBSIDIARY COM PANIES IS A REVENUE LOSS. IT IS ALSO HIS ARGUMENT THAT WHEN HOLDING COMPANY INVE STS AMOUNTS FOR BUSINESS OF ITS SUBSIDIARY, IT MUST BE HELD FOR BUSINESS EXP EDIENCY. WE FIND MERIT IN THE ARGUMENTS ADVANCED BY THE LD. COUNSEL FOR THE ASSES SEE. WE FIND THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF BRIGHT E NTERPRISES PVT. LTD. (SUPRA), WHILE DECIDING THE ISSUE OF COMMERCIAL EXP EDIENCY HAS OBSERVED AS UNDER:- 14. THE APPELLANT'S CASE MEETS EACH OF THE TESTS ST IPULATED BY THE DIVISION BENCH. IN FACT, IT MEETS A HIGHER TEST. WH EN A HOLDING COMPANY INVESTS AMOUNTS FOR THE PURPOSE OF THE BUSI NESS OF ITS ITA NO.6396/DEL/2015 15 SUBSIDIARY, IT MUST OF NECESSITY BE HELD TO BE AN E XPENSE ON ACCOUNT OF COMMERCIAL EXPEDIENCY. A FINANCIAL BENEFIT OF AN Y NATURE DERIVED BY THE SUBSIDIARY ON ACCOUNT OF THE AMOUNTS ADVANCED TO IT BY THE HOLDING COMPANY WOULD NOT MERELY INDIRECTLY BUT DIRECTLY BENEFIT ITS HOLDING COMPANY. IN THE CASE BEFORE US, THE SUBSIDIARY HAD TO BE FUNDED TO A LARGE EXTENT FOR OTHERWISE IT WOULD NOT HAVE SURVIVED. IF IT HAD NOT SURVIVED AND HAD GONE INTO LIQUIDATION, THE APPELLANT WOULD HAVE SUFFERED DIRECTLY ON ACCOUNT O F AN EROSION OF ITS ENTIRE INVESTMENT IN THE SUBSIDIARY. IN THIS CA SE, THE FINANCIAL ASSISTANCE WAS NOT ONLY PRUDENT BUT OF UTMOST NECES SITY FOR WITHOUT IT THE SUBSIDIARY WOULD HAVE SUFFERED GRAVE FINANCI AL PREJUDICE. 15. THE TRIBUNAL, THEREFORE, ERRED IN COMING TO THE CONCLUSION THAT THE CIT (APPEALS) HAD NOT CONSIDERED THE JUDGMENT O F THE SUPREME COURT IN THE CORRECT PERSPECTIVE. WITH RESPECT, WE FIND THAT THE TRIBUNAL HAS NOT EVEN ANALYZED THE JUDGMENT OF THE SUPREME COURT IN S.A. BUILDERS LTD. VS. COMMISSIONER OF INCOME-TAX ( APPEALS) AND ANOTHER (SUPRA). 16. AS WE NOTED EARLIER, THE FUNDS/RESERVES OF THE APPELLANT WERE SUFFICIENT TO COVER THE INTEREST FREE ADVANCES MADE BY IT OF RS.10.29 CRORES TO ITS SISTER COMPANY. WE ARE ENTIRELY IN AG REEMENT WITH THE JUDGMENT OF THE BOMBAY HIGH COURT IN COMMISSIONER OF INCOME TAX VS. RELIANCE UTILITIES & POWER LTD ., (2009) 313 ITR 340, PARA- 10, THAT IF THERE ARE INTEREST FREE FUNDS AVAILABLE A PRESUMPTION WOULD ARISE THAT INVESTMENT WOULD BE OUT OF THE INT EREST FREE FUNDS GENERATED OR AVAILABLE WITH THE COMPANY IF THE INTE REST FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENT. 17. THE ASSESSING OFFICER'S VIEW THAT THE ADVANCE W AS NOT FOR BUSINESS PURPOSES AS THE APPELLANT HAD NO BUSINESS DEALINGS WITH THE SISTER COMPANY IS ERRONEOUS. COMMERCIAL EXPEDIE NCY IN ADVANCING LOANS DOES NOT ARISE ONLY ON ACCOUNT OF T HERE BEING TRANSACTIONS DIRECTLY BETWEEN THE HOLDING COMPANY A ND THE SUBSIDIARY COMPANY OR BETWEEN THE GROUP COMPANIES I NTER SE. THE TWO COMPANIES MAY EVEN BE IN A DIFFERENT LINE OF BU SINESS. IT WOULD MAKE NO DIFFERENCE. IT WOULD STILL BE COMMERCIALLY EXPEDIENT FOR ONE GROUP COMPANY TO ADVANCE AMOUNTS TO ANOTHER GRO UP COMPANY, IF, FOR INSTANCE, AS A RESULT THEREOF THE FORMER BE NEFITS. IN THE PRESENT CASE, AS WE HAVE ALREADY DEMONSTRATED, THERE WOULD BE A DIRECT BENEFIT ON ACCOUNT OF THE ADVANCE MADE BY THE APPEL LANT TO ITS SISTER COMPANY IF THE SAME IMPROVES THE FINANCIAL HEALTH O F THE SISTER COMPANY AND MAKES IT A VIABLE ENTERPRISE. WE HASTEN TO ADD THAT IT IS NOT NECESSARY THAT THE ADVANCE RESULTS IN A POSI TIVE TANGIBLE BENEFIT. SO LONG AS THE AMOUNT IS ADVANCED WITH THA T VIEW IN MIND ITA NO.6396/DEL/2015 16 OR WITH ANY OTHER COMMERCIALLY EXPEDIENT VIEW IN MI ND THAT IS SUFFICIENT. 13. WE FIND THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF CIT VS. COLGATE PALMOLIVE (SUPRA) HAS DECIDED AN IDENTICAL ISSUE WH ERE THE LOSS INCURRED ON SALE OF SHARES OF THE SUBSIDIARY COMPANY WAS DISALL OWED AS BUSINESS LOSS. THE CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE AND ON APP EAL BY THE REVENUE, THE TRIBUNAL UPHELD THE ACTION OF THE ASSESSING OFFICER AND DISMISSED THE APPEAL FILED BY THE REVENUE BY OBSERVING AS UNDER:- 7. WE FIND THAT CAMELOT WAS SET UP TO MANUFACTURE T OOTHBRUSHES EXCLUSIVELY FOR THE ASSESSEE COMPANY AND THAT IT HA D NO OTHER CUSTOMER THAN THE ASSESSEE. IT WAS SAID TO HAVE BEE N SET UP AS A SMALL SCALE INDUSTRIAL UNDERTAKING WITH A VIEW TO C ERTAIN PREFERENTIAL TREATMENT IN THE EXCISE LAWS, BUT WHATEVER IT MANUF ACTURED WAS BOUGHT BY THE ASSESSEE COMPANY ALONE. CAMELOT DID I NCUR THE LOSSES BUT THE ASSESSEE COMPANY EXTENDED FINANCIAL HELP TO CAMELOT FROM TIME TO TIME. THIS FINANCIAL HELP WAS CLEARLY IN AS SESSEE'S OWN BUSINESS INTERESTS BECAUSE, IF THE ASSESSEE COMPANY WAS NOT TO DO SO, CAMELOT COULD NOT HAVE CONTINUED TO EXIST, AND ALL THESE LOSSES INCURRED BY CAMELOT WERE ESSENTIALLY RELATABLE TO D OING BUSINESS WITH ASSESSEE ALONE, I.E. CAMELOT'S ONLY CUSTOMER. THE LOANS AND ADVANCES SO GIVEN BY THE ASSESSEE WERE THEREFORE WH OLLY INCIDENTAL TO ITS BUSINESS AND COULD NOT BE TREATED IN ISOLATI ON OF ITS LEGITIMATE BUSINESS INTERESTS. WHEN THE GRANT OF LOAN ITSELF I S JUSTIFIED ON THE GROUND OF COMMERCIAL EXPEDIENCY, IT IS ONLY COR OLLARY THERETO THAT EVEN WRITE OFF OF SUCH A LOAN IS INCIDENTAL TO BUSINESS. IT IS, THEREFORE, NOT REALLY CORRECT TO SAY THAT WRITE OFF OF THE LOANS GRANTED BY THE ASSESSEE TO CAMELOT WOULD HAVE BEEN AN INADM ISSIBLE BUSINESS DEDUCTION AND THE ENTIRE TRANSACTION WAS D EVISED TO AVOID LEGITIMATE TAX LIABILITY. WE SEE SUBSTANCE IN THE P LEA OF THE COMPANY THAT ANYONE BUYING A COMPANY WOULD LIKE TO BUY A COMPANY WITH MINIMUM LIABILITIES, IT WAS CONSIDERED APPROPRIATE TO FIRST PAY OFF THE DUES BY THE COMPANY, EVEN BY RAIS ING THE FUNDS THROUGH FRESH ISSUE, AND THEN SELL THE COMPANY. THI S EXPLANATION IS IN CONSONANCE WITH THE GROUND BUSINESS REALITIES AN D WE FIND NO INFIRMITY IN THE SAME. THE ADVANCES GIVEN BY THE AS SESSEE WERE FINALLY CONVERTED INTO EQUITY, AS THE ASSESSEE COMP ANY SUBSCRIBED TO THE CAMELOT SHARES TO ENABLE CAMELOT TO PAY OFF ITS DUES TO THE ASSESSEE COMPANY. ON THESE FACTS, IN OUR HUMBLE UND ERSTANDING, THE ASSESSEE HAD INVESTED IN THE CAMELOT, AND EXTENDED FINANCIAL HELP TO CAMELOT, PURELY FOR COMMERCIAL EXPEDIENCY. THE H EAD UNDER WHICH INVESTMENTS IN SUBSIDIARIES IS SHOWN IS GOVER NED BY THE DISCLOSURE REQUIREMENTS UNDER SCHEDULE VI TO THE COMPANIES ACT , AND, THEREFORE, THE FACT THAT AN ASSET IS SHOWN AS 'INVESTMENT' PER SE DOES NOT, AND CANNOT, NEGATE THE FACT THAT THE SUCH INVESTMENTS ARE ITA NO.6396/DEL/2015 17 MADE ON THE GROUNDS OF COMMERCIAL EXPEDIENCY. SIMIL ARLY, THE HEAD UNDER WHICH DIVIDEND INCOME IS ASSESSED TO TAX DOES NOT ALSO AFFECT DETERMINATION OF QUESTION WHETHER THE SHARES ARE PURCHASED ON ACCOUNT OF COMMERCIAL EXPEDIENCY OR NOT. IT IS O NLY ELEMENTARY THAT DIVIDEND INCOME, WHETHER THE SHARES ARE HELD A S INVESTMENTS OR AS ANY OTHER ASSET, IS ALWAYS TAXABLE UNDER THE HEA D 'INCOME FROM OTHER SOURCES'. THEREFORE, NOTHING REALLY TURNS ON ASSESSING OFFICER'S EMPHASIS ON THE FACT THAT THE CAMELOT SHA RES WERE SHOWN AS INVESTMENTS IN THE BALANCE SHEET AND THAT DIVIDE ND INCOME FROM THESE SHARES IS TAXABLE AS INCOME FROM OTHER SOURCE S. WE HAVE ALSO NOTED THAT AS LONG AS SHARES ARE ACQUIRED ON THE GR OUNDS OF BUSINESS EXPEDIENCY, ANY LOSS ON SALE THEREOF IS ALSO REQUIR ED TO BE TREATED AS AN ADMISSIBLE BUSINESS DEDUCTION. HON'BLE SUPREME C OURT'S JUDGMENT IN THE CASE OF PATNAIK & CO (SUPRA) DEALS WITH A SITUATION IN WHICH THE ASSESSEE HAD SUBSCRIBED TO CERTAIN GOV ERNMENT SECURITY BUT INCURRED A LOSS ON SALE OF THAT SECURI TY. THE STAND OF THE ASSESSEE WAS THAT THE ASSESSEE HAD MADE THE SAID IN VESTMENT WITH A VIEW TO PROMOTE ITS BUSINESS INTERESTS AND AS SUBSC RIPTION TO THE GOVERNMENT LOAN WAS CONDUCIVE TO ITS BUSINESS, THE LOSS AROSE IN THE COURSE OF THE BUSINESS, AND THAT, THEREFORE, TH E ASSESSEE WAS ENTITLED TO A DEDUCTION OF THE LOSS CLAIMED BY IT. A COORDINATE BENCH OF THIS TRIBUNAL UPHELD THE CLAIM MADE BY THE ASSES SEE. THE TRIBUNAL FOUND THAT HAVING REGARD TO THE SEQUENCE O F EVENTS AND THE CLOSE PROXIMITY OF THE INVESTMENT WITH THE RECEIPT OF THE GOVERNMENT ORDERS, THE CONCLUSION WAS INESCAPABLE T HAT THE INVESTMENT WAS MADE IN ORDER TO FURTHER THE SALES O F THE ASSESSEE AND BOOST ITS BUSINESS. IN THE CIRCUMSTANCES, THE T RIBUNAL HELD THAT THE INVESTMENT WAS MADE BY WAY OF COMMERCIAL EXPEDI ENCY FOR THE PURPOSE OF CARRYING ON THE ASSESSEE'S BUSINESS AND THAT, THEREFORE, THE LOSS SUFFERED BY THE ASSESSEE ON THE SALE OF TH E INVESTMENT MUST BE REGARDED AS A REVENUE LOSS. UPHOLDING THE STAND OF THE TRIBUNAL, HON'BLE SUPREME COURT HELD THAT THE TRIBUNAL WAS RI GHT IN ITS VIEW. IT IS THUS CLEAR THAT AS LONG AS INVESTMENT IS JUST IFIED ON THE GROUNDS OF COMMERCIAL EXPEDIENCY, THE LOSS ON SALE OF SUCH INVESTMENT IS TO BE CONSIDERED A BUSINESS LOSS. THE NATURE OF BUSINE SS EXPEDIENCY COULD VARY FROM CASE TO CASE BUT WHAT IS IMPORTANT IS THAT THERE MUST BE AN UNDERLYING MOTIVE TO SERVE BUSINESS INTE RESTS OF THE ASSESSEE IN MAKING SUCH INVESTMENT. LET US NOW TURN TO THE FACTS OF THE CASE BEFORE US. THE COMPANY IN WHICH SHARES ARE SUBSCRIBED IS ENGAGED ONLY IN THE BUSINESS OF MANUFACTURING THE T OOTHBRUSHES FOR THE ASSESSEE COMPANY. ANY INVESTMENT IN SUCH A COMP ANY IS JUSTIFIED FOR PURE COMMERCIAL CONSIDERATIONS, AND, THEREFORE, LOSS ON SALE OF SUCH SHARES IS ADMISSIBLE AS BUSINESS LOSSE S. IN THE CASE OF DCIT VS GUJARAT SMALL INDUSTRIES CORPORATION (84 TT J 22), A COORDINATE BENCH OF THIS TRIBUNAL WAS DEALING WITH A SITUATION IN WHICH ' FROM THE FACTS ON RECORD, IT IS OBVIOUS THA T THE GIRNAR ITA NO.6396/DEL/2015 18 SCOOTER LTD. WAS FLOATED FOR THE SAME PURPOSE AS A SUBSIDIARY AND LATER ON SOLD OFF WHEN THE LOSS STARTED MOUNTING' A ND ON THESE FACTS THE COORDINATE BENCH HELD THAT LOSS ON SALE OF SHAR ES IN SUBSIDIARY WAS BUSINESS LOSS IN NATURE. WE ARE IN CONSIDERED A GREEMENT WITH THE LINE OF REASONING THUS ADOPTED BY THE COORDINAT E BENCH. IN VIEW OF THESE DISCUSSIONS, AS ALSO BEARING IN MIND ENTIR ETY OF THE CASE, WE UPHOLD THE STAND OF THE CIT(A) AND DECLINE TO INTER FERE IN THE MATTER. ................................................... ................................................... ....... ................................................... ................................................... ....... 24. HAVING HEARD THE RIVAL CONTENTIONS, WE FIND THA T THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION O F ITAT DELHI (SB) IN THE CASE OF ITO V. EKTA PROMOTERS (P)LTD ., (2008) 113 ITD 719 (DELHI)(SB), WHEREIN, IT HAS BEEN HELD THAT SECTION 223D WILL HAVE APPLICATION ONLY W.E.F. A.Y. 2004-05 AND CANNO T BE APPLIED TO A.Y. 2003-04. THE ASSESSMENT YEAR UNDER CONSIDERATI ON IN THIS CASE IS 2003-04. WE ALSO FIND THAT HON'BLE JURISDICTIONA L HIGH COURT IN THE CASE CIT V. M/S. BAJAJ HINDUSTAN LTD IN INCOME TAX APPEAL NO.198 OF 2009 , HELD THAT THE PROVISIONS OF SECTION 234D INSERTED W.E.F. 1.6.2003 HAVE NO RETROSPECTIVE EFFECT. RESPE CTFULLY FOLLOWING THE DECISION IN THE CASE OF EKTA PROMOTERS (SUPRA), AND ALSO IN THE CASE OF BAJAJ HINDUSTAN LTD (SUPRA), WE UPHOLD THE ACTION OF THE CIT(A) AND DECLINE TO INTERFERE. 14. WE FIND THE DECISION OF THE TRIBUNAL WAS UPH ELD BY THE HON'BLE BOMBAY HIGH COURT REPORTED IN 370 ITR 728. THE RELEVANT O BSERVATIONS OF THE HON'BLE HIGH COURT AT PARA 9 OF THE ORDER READS AS UNDER:- 9. UPON A PERUSAL OF THIS MATERIAL, WE ARE UNABLE TO AGREE WITH MR. PINTO THAT QUESTION 5.1 REPRODUCED ABOVE I S A SUBSTANTIAL QUESTION OF LAW. GIVEN THE PECULIAR FACTS AND CIRCU MSTANCES AND THE NATURE OF THE INVESTMENT SO ALSO BEING FOR COMMERCI AL EXPEDIENCY, THE VIEW TAKEN BY THE COMMISSIONER AND THE TRIBUNAL CONCURRENTLY CANNOT BE TERMED AS PERVERSE. THAT VIEW BEING IMMIN ENTLY POSSIBLE IN THE GIVEN FACTS AND CIRCUMSTANCES. IT DOES NOT R AISE ANY SUBSTANTIAL QUESTION OF LAW. 15. WE FIND THE SLP FILED BY THE REVENUE HAS BEE N DISMISSED BY THE HON'BLE SUPREME COURT. THE VARIOUS OTHER DECISIONS RELIED ON BY THE LD. COUNSEL FOR THE ASSESSEE ALSO SUPPORT HIS CASE. UNDER THESE CI RCUMSTANCES, WE ARE OF THE CONSIDERED OPINION THAT THE CIT(A) WAS NOT JUSTIFIE D IN HOLDING THAT THE LOSS ITA NO.6396/DEL/2015 19 INCURRED ON SALE OF SHARES OF SUBSIDIARY COMPANIES IS A CAPITAL LOSS AND NOT A BUSINESS LOSS. THE GROUNDS RAISED BY THE ASSESSEE ARE ACCORDINGLY ALLOWED. 19. RESPECTFULLY FOLLOWING THE DECISIONS CITED SUPR A, WE HOLD THE LOSS AMOUNTING TO RS.41,60,000/- IS A BUSINESS LOSS. THE VARIOUS DECISIONS RELIED ON BY LD. CIT(A) ARE DISTINGUISHABLE AND NOT APPLICABLE T O THE FACTS OF THE PRESENT CASE. IN THIS VIEW OF THE MATTER, THE ORDER OF THE CIT(A) IS SET ASIDE AND THE GROUNDS OF THE ASSESSEE ARE ALLOWED. 20. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. THE DECISION WAS PRONOUNCED IN THE OPEN COURT ON 3 0.10.2019. SD/- SD/- (SUCHITRA KAMBLE) (R.K. PANDA) JUDICIAL MEMBER ACCO UNTANT MEMBER DATED: 30 TH OCTOBER, 2019 DK COPY FORWARDED TO : 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASSTT. REGISTRAR, ITAT, NEW DELHI