Credit Himatsingka Pvt. Ltd., Bangalore V. ITO, Bangalore

ITA 752/BANG/2016

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 4786 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 1 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 03-07-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 07-04-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DR P V PRADEEP KUMAR
• Keywords: Business income; Business expenditure; Opportunity of being heard; Principle of natural justice; Revenue expenditure
• Section: 14A; 115JB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI ARUN KUMAR GARODIA, ACCOUNTANT MEMBER ITA NO. 7 52 / BANG/201 6 ASSESSMENT YEAR : 20 1 0 - 11 M/S. CREDIT HIMATSINGKA PVT. LTD., NO. 10/24, KUMARA KRUPA ROAD, HIGH GROUNDS, BANGALORE 560 001. PAN: AAACC5883G VS. THE INCOME TAX OFFICER, WARD 11 (1), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI BALRAM R. RAO, ADVOCATE RESPONDENT BY : DR. P.V. PRADEEP KUMAR, ADDL. CIT (DR) DATE OF HEARING : 0 8 . 0 5 .2018 DATE OF PRONOUNCEMENT : 31 . 0 5 .201 8 O R D E R PER SHRI A.K. GARODIA, ACCOUNTANT MEMBER THIS APPEAL IS FILED BY THEASSESSEE WHICH IS DIRECT ED AGAINST THE ORDER OF LD. CIT(A)-2, BANGALORE DATED 12.01.2016 FOR ASSESS MENT YEAR 2010-11. 2. THE GROUNDS RAISED BY THE ASSESSEE ARE AS UNDER. 1. THE APPELLANT SUBMITS THAT THE ORDER PASSED BY T HE LEARNED RESPONDENT IS BAD IN LAW, IN SO FAR AS REJECTING TH E CONTENTION OF THE APPELLANT AND MAKING THE ADDITIONS TO THE RETURNED INCOME AND THE SAME IS NOT IN ACCORDANCE WITH THE PROVISIONS OF TH E INCOME TAX ACT. 1961 2. HONORABLE COMMISSIONER OF INCOME-TAX (APPEALS) H AS NOT GIVEN FAIR OPPORTUNITY OF BEING HEARD TO THE APPELLANT BE FORE ISSUING THE DIRECTIONS. THIS IS CLEARLY IN VIOLATION OF THE PRO VISIONS OF THE ACT AND IS AGAINST THE PRINCIPLES OF NATURAL JUSTICE. 3. THE LEARNED AO HAS ERRED IN MAKING DISALLOWANCE U/S 14A EVEN WHERE THE INVESTMENT IN SHARES AND SECURITIES IS MA DE OUT OF OWN FUNDS OF THE COMPANY WHICH ARE NON-INTEREST BEARING . 4. THE LEARNED AO HAS ERRED IN APPLYING RULE 8D WIT HOUT RECORDING DISSATISFACTION ABOUT THE CORRECTNESS OF THE CLAIM OF THE APPELLANT IN ITA NO.752/BANG/2016 PAGE 2 OF 5 RESPECT OF EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. HAVING REGARD TO BOOKS AND ACC OUNTS OF THE APPELLANT. 5. THE LEARNED AO HAS ERRED IN DISALLOWING 50% OF A DMINISTRATION EXPENDITURE BY NOT COMPUTING DISALLOWANCE AS PER RU LE 8D. 6. THE LEARNED AO HAS ERRED IN IMPORTING THE PROVIS IONS OF SECTION 14A INTO SECTION 115JB AND ADDING BACK DISALLOWANCE AS PER RULE 8D TO BOOK PROFIT COMPUTED AS PER SECTION 115JB. 7. THE LEARNED AO HAS ERRED IN TREATING THE REVENUE EXPENDITURE AS CAPITAL IN NATURE AND DISALLOWING LOSS ON SUCH APPL ICATION MONEY PAID TOWARDS CONVERTIBLE PREFERENTIAL WARRANTS. THE APPELLANT SUBMITS THAT EACH OF THE ABOVE GROUND S IS INDEPENDENT AND WITHOUT PREJUDICE TO ONE ANOTHER. FURTHER, THE APPELLANT CRAVES LEAVE TO ADD, ALTER, VARY, OMIT, SUBSTITUTE OR AMEND THE ABOVE GROUNDS OF APPEAL, AT ANY TIME B EFORE OR AT, THE TIME OF HEARING, OF THE APPEAL. 3. IT WAS SUBMITTED BY LD. AR OF ASSESSEE THAT IN P ARA 4 OF THE ASSESSMENT ORDER, IT IS NOTED BY THE AO THAT THE ASSESSEE HAS DEBITED INTEREST EXPENSES OF RS. 2,02,51,633/- FOR THE PRESENT YEAR AND HE SUBMI TTED THAT THE AO HAS JUMPED TO THIS CONCLUSION THAT THIS INTEREST EXPEND ITURE IS OF INDIRECT NATURE WHEREAS IT IS THE CASE OF THE ASSESSEE THAT THIS IN TEREST EXPENDITURE IS DIRECTLY RELATABLE TO EARNING OF TAXABLE INCOME. HE FURTHER SUBMITTED THAT CIT (A) HAS NOT CONSIDERED THIS ASPECT OF THE MATTER AND THEREF ORE, THE DISALLOWANCE MADE BY THE AO U/S. 14A AND RULE 8D OUT OF INTEREST EXPE NDITURE OF RS. 34,61,178/- IS NOT PROPER AND IT SHOULD BE DELETED. REGARDING THE SECOND ISSUE I.E. IN RESPECT OF TREATING THE REVENUE EXPENSES AS CAPITAL EXPENSES, HE REITERATED THE SAME SUBMISSIONS AS MADE BEFORE CIT (A). T LD. DR O F REVENUE SUPPORTED THE ORDER OF CIT(A) REGARDING BOTH THE ISSUES. 4. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. REGAR DING THE ISSUE IN RESPECT OF DISALLOWANCE U/S. 14A, WE FIND FORCE IN THE SUBMISS ION OF LD. AR OF ASSESSEE BECAUSE WE FIND THAT AS PER PARA 4 OF THE ASSESSMEN T ORDER, THE AO SAYS THAT THE ASSESSEE HAS DEBITED INTEREST EXPENSES OF RS. 2 ,02,51,633/- FOR THE YEAR AND CONSIDERING THE INDIRECT NATURE OF THE INTEREST DEBITED, THE ENTIRE AMOUNT IS CONSIDERED FOR DISALLOWANCE ATTRACTED UNDER RULE 8D OF IT ACT. NOTHING IS COMING OUT FROM THIS PARA OF ASSESSMENT ORDER AS TO WHAT IS THE BASIS OF AOS ITA NO.752/BANG/2016 PAGE 3 OF 5 ASSERTION THAT NATURE OF INTEREST EXPENDITURE IS IN DIRECT NATURE PARTICULARLY WHEN THE ASSESSEE IS SUBMITTING BEFORE US STRONGLY THAT THE INTEREST EXPENDITURE CAN BE DIRECTLY LINKED TO EARNING OF BUSINESS INCOME WH ICH IS TAXABLE AND THEREFORE, UNDER THESE FACTS, WE FEEL IT PROPER TO RESTORE THI S MATTER BACK TO THE FILE OF CIT(A) FOR FRESH DECISION WITH THE DIRECTION THAT I F THE ASSESSEE PRODUCES ANY EVIDENCE REGARDING THIS ASSERTION THAT PART OR TOTA L OF THIS INTEREST EXPENDITURE IS DIRECTLY RELATABLE TO EARNING OF BUSINESS INCOME ES TABLISHING DIRECT NEXUS BETWEEN ANY PART OF INTEREST EXPENDITURE WITH EARNI NG OF TAXABLE BUSINESS INCOME THEN SUCH PART OF INTEREST EXPENDITURE SHOUL D BE EXCLUDED FOR THE PURPOSE OF COMPUTING DISALLOWANCE OF INTEREST EXPEN DITURE UNDER RULE 8D AS DONE BY THE AO IN THE RATIO PROVIDED IN RULE 8D. T HE CIT(A) SHOULD PASS NECESSARY ORDER AS PER LAW AFTER PROVIDING ADEQUATE OPPORTUNITY OF BEING HEARD TO BOTH SIDES. ACCORDINGLY GROUND NOS. 1 TO 6 OF A SSESSEES APPEAL ARE ALLOWED FOR STATISTICAL PURPOSES. 5. REGARDING GROUND NO. 7 OF ASSESSEES APPEAL, WE FIND THAT THIS ISSUE WAS DECIDED BY CIT(A) AS PER PARA NOS. 4.1 AND 4.2 OF H IS ORDER. THESE PARAS ARE REPRODUCED HEREINBELOW FOR READY REFERENCE. 4. DISALLOWANCE OF EXPENDITURE ON SHARE WARRANTS: 4.1 THE AO FURTHER NOTED THAT THE APPELLANT HAD INV ESTED IN PREFERENTIAL WARRANTS FOR ACQUIRING SHARES IN ITS S ISTER COMPANY FOR WHICH IT HAD INCURRED AN EXPENDITURE OF RS.23,79,00 0/-; THAT, DUE TO POOR APPRECIATION IN THE VALUE OF SHARES OF ITS SIS TER COMPANY, THE APPELLANT REFRAINED FROM GOING FOR CONVERSION OF TH E PREFERENTIAL WARRANTS; AND THAT THE APPELLANT HAD FOREGONE THE A MOUNT INCURRED BY WAY OF EXPENDITURE. IN RESPONSE TO THE AO'S QUERY, THE APPELLANT EXPLAINED THAT, IN RESPONSE TO THE OFFER BY M/S HIM ATSINGKA SEIDE LTD. OF 58,00,000 WARRANTS OF RS.130/- EACH CONVERTIBLE TO EQUITY SHARES, THE APPELLANT HAD APPLIED FOR 2,79,000 SUCH WARRANT S BY PAYING RS.13/- PER WARRANT AS APPLICATION MONEY; THAT, SUB SEQUENTLY, THE SHARE VALUE OF THE SAID COMPANY WENT DOWN DUE TO MA RKET FLUCTUATIONS TO RS.26/- INCREASING SLIGHTLY TO RS.38/- AS OF NOV EMBER 2012; THAT, IN ORDER NOT TO MAKE ANY ADDITIONAL LOSS, IT REFRAINED FROM CONVERTING 1,83,000 WARRANTS AT RS.13/- PER WARRANT; AND THAT, THEREFORE, THE LOSS OF RS.23,79,000/- BEING LOSS ON CONVERSION OF PREFE RENTIAL WARRANTS WAS NOT A LOSS ON CAPITAL ACCOUNT, BUT A REVENUE LO SS. ACCORDING TO THE ASSESSING OFFICER THE LOSS RESULTING FROM THE ACT O F FOREGOING THE EXPENDITURE OF RS.23,79,000/- IS CAPITAL IN NATURE AND THE INTENTION BEHIND INCURRING SUCH EXPENDITURE WAS TO ACQUIRE SH ARES, WHICH ARE ITA NO.752/BANG/2016 PAGE 4 OF 5 CAPITAL IN NATURE. HE, THEREFORE, DISALLOWED THE LO SS OF RS.23,79,000/- AS BEING CAPITAL IN NATURE AND BROUGHT IT TO TAX. 4.2I HAVE CAREFULLY CONSIDERED THE APPELLANT'S CONT ENTIONS AND PERUSED THE ASSESSMENT ORDER. THE ASSESSING OFFICER HAS POI NTED OUT IN DETAIL THAT THE TRANSACTION WAS ONE OF THE INVESTMENTS AND THE LOSS WITH REGARD TO THE SAME IS ON CAPITAL ACCOUNT, NOT ON RE VENUE ACCOUNT. THE SAID LOSS BEING CAPITAL IN NATURE, CANNOT BE ALLOWE D AS A BUSINESS EXPENDITURE OR SET OFF AGAINST THE INCOME FROM THE YEAR IN QUESTION. THE ACTION OF THE ASSESSING OFFICER IS UPHELD. 6. FROM THE ABOVE PARAS REPRODUCED FROM THE ORDER O F CIT(A), IT IS SEEN THAT THIS IS THE ARGUMENT OF ASSESSEE BEFORE THE AUTHORITIES BELOW THAT THE SHARES WERE AVAILABLE TO THE ASSESSEE @ RS. 130 PER SHARE OUT O F WHICH THE ASSESSEE HAS ALREADY PAID RS. 13/- PER SHARE AND THE ASSESSEE WA S REQUIRED TO PAY REMAINING RS. 117/- PER SHARE BUT THE PRICE OF SHAR E FELL DOWN TO RS. 26/- INCREASING SLIGHTLY TO RS. 38 PER SHARE IN NOVEMBER 2012 AND BECAUSE OF THIS REASON, THE ASSESSEE DID NOT WANT TO CONVERT THE RE MAINING 1,83,000/- SHARE WARRANTS INTO SHARE RS. 130 EACH BY PAYING RS. 117/ - MORE PER SHARE WHEN THE SHARES ARE BEING TRADED AT RS. 38/- MAXIMUM IN THE RELEVANT PERIOD. EVEN IF THAT IS SO, THE LOSS CANNOT BE CONSIDERED AS REVENU E LOSS BECAUSE THIS IS NOT THE CASE OF THE ASSESSEE THAT THE ASSESSEE IS DEALI NG IN SHARES. IT IS NOTED BY THE AO ON PAGE NO. 4 OF THE ASSESSMENT ORDER THAT T HE COMPANY BEING PART OF THE PROMOTER GROUP, HAD APPLIED FOR 2,79,000 PREFER ENTIAL WARRANTS, BY PAYING RS. 13/- PER WARRANT AS APPLICATION MONEY DURING TH E FINANCIAL YEAR 2007-08. THE P&L ACCOUNT OF ASSESSEE COMPANY IS AVAILABLE ON AGE NO. 1 OF THE PAPER BOOK AND IN THE SAME, IT IS SEEN THAT CLOSING STOCK OF SECURITIES WAS SHOWN AT RS. 184/- AS ON 31.03.2009 AND RS. NIL AS ON 31.03. 2010 AND FROM THAT, IT IS CLEAR THAT ASSESSEE IS NOT SHOWING THE SHARE WARRAN TS AS CLOSING STOCK AT THE END OF THE PRECEDING YEAR I.E. ON 31.03.2009 WHICH MEANS THAT THESE SHARE WARRANTS WERE ACQUIRED NOT AS TRADING GOODS BUT AS INVESTMENT AND THEREFORE, IF ANY LOSS HAS ARISEN ON ACCOUNT OF INVESTMENT WHICH IS NEITHER ACQUIRED AFTER PAYING BALANCE RS. 117/- PER SHARE NOR SOLD, SUCH L OSS CANNOT BE ALLOWED AS REVENUE LOSS OR CAPITAL LOSS. HENCE, THIS GROUND I S REJECTED. ITA NO.752/BANG/2016 PAGE 5 OF 5 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THE DATE MENT IONED ON THE CAPTION PAGE. SD/- SD/- (N.V. VASUDEVAN) (ARUN KUMAR GARODIA) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED, THE 31 ST MAY, 2018. /MS/ COPY TO: 1. APPELLANT 4. CIT(A) 2. RESPONDENT 5. DR, ITAT, BANGALORE 3. CIT 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY, INCOME TAX APPELLATE TRIBUNAL, BANGALORE.