ELATION INVESTMENTS P. LTD ( NOW MERGED WITH RIDGE BUSINESS CENTRE P. LTD), MUMBAI V. ACIT 8(1), MUMBAI

ITA 729/MUM/2011

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 8053 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 8 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-10-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: H
• Next Hearing Date: 20-08-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 25-01-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: VIEK A PERAMPURNA
• Assessee Lawyers: RAJESH ATHVALE
• Keywords: Capital asset; Business income; Earning of tax free income; Capital receipt
• Section: 2(14); 14A

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL H , BENCH MUMBAI , BEFORE : SHRI R.C.SHARMA , A M & SHRI SANJAY GARG, J M ITA NO. 729 / MUM/20 1 1 ( ASSESSMENT YEAR : 200 7 - 08 ) ELATION INVESTMENT PVT. LTD. (NOW MERGED WITH RIDGE BUSINESS CENTRE PRIVATE LIMITED) , MAHINDRA TOWERS, DR. G.M.BHOSALE MARG, P.K.KURNE CHOWK, WORLI, MUMBAI VS. ACIT, CIRLE 8(1), MUMBAI - 20 PAN/GIR NO. : A A ACE 1065 C ( APPELLANT ) .. ( RESPONDENT ) /ASSESSEE BY : SHRI RAJESH ATHVALE /REVENUE BY : SHRI VIEK A. PERAMPURNA DATE OF HE ARING : 1 8 TH SEPT , 201 4 DATE OF PRONOUNCEMENT : 10 TH OCT , 201 4 O R D E R PER R.C.SHARMA ( A .M.) : TH IS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF CIT(A ) , DATED 8 - 1 1 - 201 0 FOR THE ASSESSMENT YEAR 200 7 - 08 , IN THE MATTER OF ORDER PASSED U/S. 143 ( 3 ) OF TH E I.T. ACT , ON THE FOLLOWING GROUNDS : - BEING AGGRIEVED BY THE ORDER PASSED BY THE COMMISSIONER OF INCOME - TAX(APPEALS) - 16, MUMBAI , [CIT(A) FOR SHORT] YOUR APPELLANT SUBMITS THE FOLLOWING GROUNDS OF APPEA L FOR YOUR HONOURS SYMPATHETIC CONSIDERATION : - 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) ERRED IN DIRECTING ASSESSING OFFICER TO RECOMPUTED DISALLOWANCE U/S. 14A. HE OUGHT TO HAVE ALLOWED THE ENTIRE EXPENDITURE OF RS. 22,12, 09 3/ - DISALLOWED BY THE ASSESSING OFFICER U/S. 14A. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) FURTHER ERRED IN CONFIRMING TREATMENT OF REDEMPTION OF DEBENTURES (OFCD) OF RS. 80,01,043/ - AS INCOME FROM OTHER SOURCES AS AGAINST LONG TERM CAPITAL GAINS . ITA NO. 729 /1 1 2 2 . WE HAVE HEARD THE RIVAL CONTENTIONS AND FOUND FROM RECORD THAT THE AO HAS DISALLOWED RS. 22,12,093/ - UNDER SECTION 14A. THE AO OBSERVED THAT ASSESSEE HAS EARNED DIVIDEND INCOME OF RS. 5.84 CRORES WHICH IS EXEMPT FROM TAX U/S. 10( 34), WHEREAS IN THE COMPUTATION OF INCOME, ASSESSEE HAS DISALLOWED AN AMOUNT OF RS. 2.30 CRORES BEING INTEREST EXPENDITURE AS PER SECTION 14A . THE AO FURTHER OBSERVED THAT IN THE CALCULATION OF THE INTEREST EXPENDITURE, THE ASSESSEE HAS NOT CALCULATED 0.5% OF THE AVERAGE VALUE OF INVESTMENT, THE INCOME FROM WHICH DOES NOT FORM PART OF TOTAL INCOME. ACCORDINGLY THE DISALLOWANCE U/S. 14A OF THE ACT R.W.RULE 8D IS WORKED OUT AS UNDER : - CALCULATION FOR DISALLOWANCE OF EXPENSE BASED ON RULE 8D THE AMOUNT OF EXP ENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. 4.65 (A) AMOUNT OF EXPENDITURE BY WAY OF INTEREST EXCLUDING BILL DISCOUNTING & BANK CHARGES 236.73 (B) AVERAGE VALUE OF INVESTMENT A. NET INVESTMENT AT THE END OF THE YEAR 8201.39 B. NET INVESTMENT AT THE BEGINNING OF THE YEAR 4922.24 AVERAGE INVESTMENT = (A+B) / 2 6561.82 (C) TOTAL ASSETS (FIXED ASSETS + INVESTMENT + CURRENT ASSETS) A. TOTAL ASSETS AT THE END OF THE YEAR 8409.35 B. TOTAL ASSETS AT TH E BEGINNING OF THE YEAR 6018.37 AVERAGE INVESTMENT = (A+B) / 2 7213.86 A X B / C = 215.33 0.5% OF THE AVERAGE VALUE OF INVESTMENT, THE INCOME FROM WHICH DOES NOT FORM PART OF TOTAL INCOME 32.81 TOTAL DISALLOWANCE IS AGGREGATE OF (I) + (II) + (III) = 252.79 4.3 THE ASSESSEE IN THE COMPUTATION OF TOTAL INCOME HAS DISALLOWED AN AMOUNT OF RS. 2,30,66,907/ - ON INTEREST DISALLOWED U/S. 14A OF THE ACT. IN VIEW OF THE ABOVE, AN AMOUNT OF RS. 22,12,093/ - (RS.2,52,79,000 RS.2,30,66,907) I S TREATED AS EXPENDITURE INCURRED FOR EARNING THE DIVIDEND INCOME AND THE SAME IS DISALLOWED U/S.14A OF THE ACT. ITA NO. 729 /1 1 3 3 . BY THE IMPUGNED ORDER, THE CIT(A) OBSERVED THAT IN VIEW OF DECISION OF HONBLE BOMBAY HIGH COURT IN CASE OF GODREJ BOYCE MFG. LTD., 328 I TR 81 , RULE 8D HAS NO APPLICATION TO THE FACTS OF THE CASE. HE FURTHER OBSERVED THAT ASSESSEE HAD NOT MADE ANY APPORTIONMENT ON ITS OWN, THEREFORE, MATTER WAS RESTORED TO THE AO, AGAINST WHICH ASSESSEE IS IN FURTHER APPEAL BEFORE US. 4 . IT WAS CONTENDED B Y LEARNED AR THAT THE AO HAS MADE DISALLOWANCE OF RS. 252.79 LAKHS AS AGAINST TOTAL EXPENDITURE OF RS. 241.38 LAKHS. IN OTHER WORDS, THE DISALLOWANCE MADE BY AO WAS MUCH MORE THAN THE EXPENDITURE INCURRED BY ASSESSEE IN ITS PROFIT AND LOSS ACCOUNT. AS PER LE ARNED AR, THE AO WAS NOT JUSTIFIED IN BLINDLY APPLYING RULE 8D FOR COMPUTING THE DISALLOWANCE IN THE ASSESSMENT YEAR 2007 - 08, INSOFAR AS RULE 8D IS APPLICABLE FROM ASSESSMENT YEAR 2008 - 09 AS PER VERDICT OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF G ODREJ BOYCE MFG. LTD.(SUPRA) . 5. ON THE OTHER HAND, LEARNED DR RELIED ON THE ORDER OF LOWER AUTHORITIES. 6 . WE HAVE CONSIDERED RIVAL CONTENTIONS AND FOUND FROM THE RECORD THAT DURING THE YEAR TOTAL INTEREST EXPENDITURE INCURRED BY THE ASSESSEE WAS TO THE TUNE OF RS. 236.73 LAKHS OUT OF IT INTEREST ATTRIBUTABLE TO EXEMPT INCOME AMOUNTING TO RS. 230 LAKHS WERE DISALLOWED BY THE ASSESSEE HIMSELF U/S. 14A . OTHER EXPENDITURE INCURRED AMOUNTED TO RS. 4.65 LAKHS. WE FOUND THAT IN ADDITION TO EXEMPT INCOME THERE WAS ALSO OTHER TAXABLE INCOME DURING THE YEAR IN THE FORM OF PROFIT ON SALE OF SHARES OF RS. 8. 6 4 LAKHS, PROFIT ON REDEMPTION OF DEBENTURES OF RS. 8 0 .02 LAKHS. HOWEVER, THE ITA NO. 729 /1 1 4 AO COMPUTED DISALLOWANCE OF OTHER EXPENDITURE AT RS. 22.12 LAKHS AS AGAINST TOTAL EXPENDIT URE OF RS.4.65 LAKHS INCURRED BY ASSESSEE. THE AO HAS NOWHERE POINTED OUT MISTAKE IN THE DISALLOWANCE PROPOSED BY THE ASSESSEE AMOUNTING TO RS. 230 LAKHS. HOWEVER, HE HAS APPLIED RULE 14A . THE YEAR UNDER CONSIDERATION IS ASSESSMENT YEAR 2007 - 08, WHEREAS RUL E 14A WAS MADE APPLICABLE FROM ASSESSMENT YEAR 2008 - 09 AS HELD BY HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ BOYCE MFG. LTD., 328 ITR 81 . HOWEVER, THE HON BLE HIGH COURT HAS FURTHER STATED THAT EVEN IN EARLIER YEARS REASONABLE DISALLOWANCE IS REQUIRED TO BE MADE. THUS, THERE IS NO REASON TO COMPUTE DISALLOWANCE AS PER RULE 8D DURING THE RELEVANT ASSESSMENT YEAR 2008 - 09 UNDER CONSIDERATION. KEEPING IN VIEW THE OTHER TAXABLE INCOME EARNED BY ASSESSEE, WE DIRECT THE AO TO DISALLOW 50% OF TOTAL EX PENDITURE OF RS. 4.65 LAKHS AS INCURRED DURING THE YEAR UNDER CONSIDERATION , I N ADDITION TO DISALLOWANCE OF INTEREST EXPENDITURE OF RS. 230 LAKHS, ATTRIBUTABLE TO EARNING OF EXEMPT INCOME OUT OF TOTAL INTEREST EXPENDITURE OF RS. 236.73 LAKHS. WE DIRECT ACCORD INGLY. 7 . THE ASSESSEE HAS ALSO SHOWN THE LONG TERM CAPITAL GAINS ON REDEMPTION OF DEBENTURES, HOWEVER, THE AO TREATED THE SAME AS INCOME FROM OTHER SOURCES. AS PER THE AO TO ATTRACT THE CAPITAL GAIN THERE HAS TO BE A CAPITAL ASSET WITHIN THE MEANING OF S ECTION 2(14) AND THERE HAS TO BE A TRANSFER WITHIN THE MEANING OF SECTION 2(47) OF THE ACT. HOWEVER, IN THE INSTANT CASE, AS PER THE AO, THE ASSESSEE HAS NOT REDEEMED THE DEBENTURE TO THIRD PARTY BUT THE DEBENTURE ARE REDEEMED AND RECEIVED A SUM OF RS. 4.80 CRORES AS AGAINST VALUE OF RS. 3.99 CRORES. AS PER AO, IT WAS ASSESSEES OWN MONEY INVESTED AS DEBENTURES, WHICH CAME BACK ITA NO. 729 /1 1 5 WITH A SURPLUS WHICH REPRESENTED THE ACCUMULATED INTEREST. ACCORDINGLY, HE TREATED THE SURPLUS SO RECEIVED AS INCOME FROM OTHER SOURC ES. BY THE IMPUGNED ORDER, THE CIT(A) CONFIRMED THE ACTION OF THE AO. 8 . IT WAS ARGUED BY THE LEARNED AR THAT INTEREST ON DEBENTURE WERE CONTINUOUSLY SHOWN AS INCOME OF THE ASSESSEE. THUS, IT WAS THE INVESTMENT ON WHICH ASSESSEE WAS EARNING INTEREST AND O N REDEMPTION OF SUCH INVESTMENT, AMOUNT SO RECEIVED WAS IN THE NATURE OF CAPITAL GAIN ON CAPITAL RECEIPT. RELIANCE WAS PLACED ON THE DECISION OF M.P. HIGH CURT IN THE CASE OF MADHYA PRADESH FINANCIAL CORPORATION VS. CIT, MP, REPORTED IN 1980 - (IT2) - GJX - 0 629 - MP , WHEREIN IT WAS HELD THAT EXCESS AMOUNT RECEIVED ON REDEMPTION BONDS WAS IN THE NATURE OF CAPITAL RECEIPT, THEREFORE, LIABLE TO BE TAXED AS CAPITAL GAINS. ACTION OF THE AO FOR TREATING THE SAME AS BUSINESS INCOME OF ASSESSEE WAS HELD TO BE NOT JUSTIFIE D. 9 . RELIANCE WAS ALSO PLACED ON THE DECISION OF THE COORDINATE BENCH IN THE CASE OF MRS. PERVIZ WANG CHUK BASI VS. JCIT, REPORTED IN 200 6 - ( 102 ) - ITD - 0123 - TBOM , WHEREIN IT WAS OBSERVED THAT THE WORD, RELINQUISHMENT WOULD MEAN THAT ASSET IS EXISTING AND ASSESSEE ON HIS OWN RELINQUISHES ITS RIGHT IN FAVOUR OF TRANSFEREE. THE RELINQUISHMENT TAKES PLACE WHEN OWNER WITHDRAWS HIMSELF FROM THE PROPERTY AND PARTS HIS RIGHT THEREON. BY REFERRING TO THE DECISION OF HON BLE SUPREME COURT IN THE CASE OF KARTIKEYA V. SARABHAI VS. CIT, (1997) 228 ITR 163 , IT WAS OBSERVED THAT DEFINITION OF TRANSFER U/S. 2(47) IN RELATION TO CAPITAL ASSET IS INCLUSIVE DEFINITION, IT PROVIDES THAT RELINQUISHMENT OR EXTINGUISHMENT OF ANY RIGHT THEREIN AMOUNTS A TRANSFER OF CAPITAL ASSET. A CCORDINGLY, IT WAS HELD THAT AFTER THE DATE OF REDEMPTION, THERE WAS AN EXTINGUISHMENT OF RIGHT BY ITA NO. 729 /1 1 6 OPERATION OF CONTRACT AND ALSO A RELINQUISHMENT OF RIGHT IN THE ASSET IN LIEU OF WHICH, THE ASSESSEE RECEIVED CASH. THUS, IN EITHER OF THE SITUATION, THE CA SE IS COVERED WITHIN THE DEFINITION OF SECTION 2(47) OF THE ACT. IT WAS HELD THAT REDEMPTION OF DEBENTURES COULD RAISE THE CAPITAL GAIN/LOSS. 10 . RELIANCE WAS ALSO PLACED ON THE FOLLOWING OBSERVATION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. MRS. GRACE COLLIS & ORS. , REPORTED IN 2001 - (115) - TAXMAN - 0326 - SC : - WE HAVE GIVEN CAREFUL THROUGH TO THE DEFINITION OF TRANSFER IN S.2(47) AND TO THE DECISION OF THIS COURT IN VANIAS CASE (SUPRA). IN OUR VIEW, THE DECISION CLEARLY CONTEMPLATES THE EXTIN GUISHMENT OF RIGHTS IN A CAPITAL ASSET DISTINCT AND INDEPENDENT OF SUCH EXTINGUISHMENT CONSEQUENT UPON THE TRANSFER THEREOF. WE DO NOT APPROVE, RESPECTFULLY, OF THE LIMITATION OF THE EXPRESSION EXTINGUISHMENT OF ANY RIGHTS THEREIN TO SUCH EXTINGUISHMENT O N ACCOUNT OF TRANSFERS OR TO THE VIEW THAT THE EXPRESSION EXTINGUISHMENT OF ANY RIGHTS THEREIN CANNOT BE EXTENDED TO MEAN THE EXTINGUISHMENT OF RIGHTS INDEPENDENT OF OR OTHERWISE THAN ON ACCOUNT OF TRANSFER. TO SO READ THE EXPRESSION IS TO RENDER IT INEF FECTIVE AND ITS USE MEANINGLESS. AS WE READ IT, THEREFORE, THE EXPRESSION DOES INCLUDE THE EXTINGUISHMENT OF RIGHTS IN A CAPITAL ASSET INDEPENDENT OF AND OTHERWISE THAN ON ACCOUNT OF TRANSFER. FROM THE RECORD WE FOUND THAT THE AO HAS NOT TREATED THE AMOU NT RECEIVED ON REDEMPTION AS CAPITAL RECEIPT ON THE PLEA THAT THERE WAS NO TRANSFER WITHIN THE MEANING OF SECTION 2(47) . APPLYING THE PROPOSITION OF LAW AS DISCUSSED ABOVE, WE HOLD THAT REDEMPTION OF DEBENTURE AMOUNT TO TRANSFER WITHIN THE MEANING OF SECTI ON 2(47 ), THEREFORE, THE LOWER AUTHORITIES WERE NOT JUSTIFIED IN NOT TREATING REDEMPTION ON DEBENTURE AS CAPITAL GAIN. ACCORDINGLY, THE AO IS DIRECTED TO TAX THE GAIN UNDER THE HEAD CAPITAL GAINS IN PLACE OF INCOME FROM OTHER SOURCES. WE DIRECT ACCORDING LY. 11 . IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED IN PART. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 10/10 / 201 4 . ITA NO. 729 /1 1 7 10/10 / 2014 SD/ - SD/ - ( ) ( SANJAY GARG ) ( ) ( R.C.SHARMA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; DATED 10/10 /2014 /PKM , PS COPY OF THE ORDER FORWARDED TO : / BY ORDER, ( ASSTT. REGISTRAR) / ITAT, MUMBAI 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / THE CIT(A) , MUMBAI. 4. / CIT 5. / DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COP Y//