DCIT - 3(2), MUMBAI V. M/s. KOTAK MAHINDRA FINANCE LTD., MUMBAI

ITA 799/MUM/2007

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 2928 (ITAT-MUMBAI)
• Duration Of Justice: 9 year(s) 5 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-06-2016
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 25-03-2015
• Assessment Year: 2003-2004
• Appeal Filed On: 24-01-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ANJU GARI DIA
• Assessee Lawyers: F V IRANI
• Keywords: Business expenditure; Earning of tax free income; Question of law; Revenue expenditure
• Section: 14A; 37

Judgement Text

ITA NO.799/M/2007 KOTAK MAHINDRA CAPITAL COMPANY LTD IN THE INCOME TAX APPELLATE TRIBUNAL, BEN CH A, MUMBAI BEFORE SHRI SANJAY ARAORA, ACCOUNTANT MEMBER AND SHRI PAWAN SINGH, JUDICIAL MEMBER ITA NO.799/MUM/2007 ASSESSMENT YEAR: 2003-04 DEUPTY COMMISSIONER OF INCOME TAX ,-3(2), ROOM NO.68,6 TH FLOOR, AAYAKAR BHAVAN, MK ROAD, MUMBAI VS. KOTAK MAHENDRA CAPITAL CO. LTD BAKTHWAR,1 ST FLOOR, 229, NARIMAN POINT, MUMBAI-21 PAN AAACK5577D (APPELLANT) (RESPONDENT) REVENUE BY MS. ANJU GARI DIA DR ASSESSEE BY SH. F V IRANI AR DATE OF HEARING 17.05.2016 DATE OF ANNOUNCEMENT 24 .06.2016 ORDER PER PAWAN SINGH ,JM 1. THIS APPEAL FILED BY REVENUE AGAINST THE ORDER OF C OMMISSIONER OF INCOME TAX APPEALS III, MUMBAI, DATED 9 NOVEMBER 2007 FOR ASSESSMENT Y EAR 2003-04. THE REVENUE HAS RAISED FOLLOWING GROUNDS OF APPEAL: I. CIT(A) ERRED IN REDUCING THE DISALLOWANCE UNDER SE CTION 14A OF THE ACT, FROM RS. 7,54,000/- TO RS. 1,34,000/- II. CIT (A) ERRED IN DELETING THE DISALLOWANCE OF RS. 2 2,75,000/-BEING THE ENTRANCE FEE PAID BY ASSESSEE COMPANY TO VARIOUS CLUBS TREAT ING THE SAME AS REVENUE EXPENDITURE. III. CIT(A) ERRED IN DELETING THE ADDITION ON ACCOUNT OF INTEREST INCOME FROM GOVERNMENT SECURITY RELATING TO BROKEN PERIOD AMOUN TING TO RS. 47,391/- IV. CIT(A) ERRED IN REJECTING THE AO ACTION IN RECLASSI FYING THE BROUGHT FORWARD CAPITAL OF RS. 5,18,27,121/-PERTAINING TO A Y 2001- 02, AS LONG TERM CAPITAL LOSS AND IN DIRECTING THE AO TO TAKE THE LONG TERM CAPIT AL LOSS AT RS.4,52,27,456/- AND THE BALANCE OF RS. 65,99,665/- AS SHORT TERM CAPITA L LOSS . V. CIT(A) ERRED IN DIRECTING THE AO TO ALLOW SET OF FO R LOSS OF RS. 6,59,966/- PERTAINING TO AY 2001-02,RECLASSIFIED BY AO AS LONG TERM CAPITAL LOSS, AGAINST THE SHORT TERM CAPITAL GAIN OF RS. 2,21,91,308/- 2. BRIEF FACTS OF THE CASE ARE THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF INVESTMENT BANKING, FILED RETURN OF INCOME FOR RELEVANT ASSESS MENT YEAR ON 20 NOV 2003. THE RETURN OF INCOME WAS SELECTED FOR SCRUTINY. WHILE MAKING ASSESSMENT THE AO MADE VARIOUS ITA NO.799/M/2007 KOTAK MAHINDRA CAPITAL COMPANY LTD ADDITION / DISALLOWANCE INCLUDING THE DISALLOWANCE UNDER SECTION 14 A, OF RS.7,54,500/- BEING 10% OF THE EXEMPT INCOME, DISALLOWANCE OF CLU B ENTRANCE FEE OF RS.22,75,000/-, ADDITION ON ACCOUNT OF INTEREST INCOME FROM THE GOV ERNMENT SECURITIES RELATING TO THE BROKEN PERIOD AMOUNTING TO RS. 47,391/- , RECLASSIF IED THE BROUGHT FORWARD CAPITAL GAIN OF RS. 51,827,121/- PERTAINING TO AY 2001-02, AND FURT HER DISALLOWED TO SET OFF A LOSS OF RS. 65,99,665/- PERTAINING TO AY 2001-02. AGGRIEVED BY THE ORDER OF AO ASSESSEE FILED APPEAL BEFORE COMMISSIONER OF INCOME TAX APPEALS. LEARNED CIT(A) PARTLY ALLOWED THE GROUND RAISED UNDER SECTION 14A, ALLOWED THE GROUND RELATING TO THE CLUB ENTRY FEE, THE GROUND RELATING WITH INTEREST INCOME FROM GOVERNMEN T SECURITIES, AND DIRECTED THE AO TO TAKE THE LONG TERM CAPITAL LOSS AT RS.4,52,27,456/- AND THE BALANCE OF RS. 65,99,665/- AS SHORT TERM CAPITAL LOSS. AND FURTHER DIRECTED THE A O TO ALLOW SET OF FOR LOSS OF RS. 6,59,966/-PERTAINING TO AY 2001-02,RECLASSIFIED BY AO AS LONG TERM CAPITAL LOSS, AGAINST THE SHORT TERM CAPITAL GAIN OF RS. 2,21,91,308/-. A GGRIEVED BY THE ORDER OF COMMISSIONER OF APPEALS THE REVENUE HAS FILED THE PRESENT APPEAL BEFORE THIS TRIBUNAL. 3. WE HAVE HEARD LEARNED DR FOR REVENUE AND AR FOR ASS ESSEE AND PERUSED THE MATERIAL AVAILABLE ON RECORD. FIRST GROUND FOR OUR CONSIDER ATION IS DISALLOWANCE UNDER SECTION 14 A OF THE ACT. AT THE OUTSET LD AR OF ASSESSEE ARGUE D HE DOES NOT WANT TO OPPOSE AND ARGUE THIS GROUND. LD DR FOR REVENUE SUBMITS AS THI S GROUND OF APPEAL IS NOT OPPSEDBY ASSESSEE, SO THIS GROUND MAY BE ALLOWED IN HIS FAVO UR. CONSIDERING THE RIVAL CONTENTION OF THE PARTIES THIS GROUND OF APPEAL IS ALLOWED IN FAV OUR OF REVENUE. 4. GROUND N. 2, FOR OUR CONSIDERATION IS RELATED WITH THE ENTRANCE FEES PAID TO VARIOUS CLUBS. LD DR FOR REVENUE RELIED ON THE ORDER OF AUTHORITY BELOW. LD AR OF THE ASSESSEE ARGUED THAT THIS ISSUE IS COVERED IN FAVOUR OF ASSESSEE BY THE JUDGMENT OF HONBLE SUPREME COURT IN CASE OF CIT VS UNITED GLASS MANUFACTURING CO. LTD IN CIVIL APPEAL NO. 6449 OF 2012 AND JUDGMENT OF HONBLE DELHI HIGH COURT IN C ASE OF SAMTEL COLOURS LTD AND NESTL INDIA LTD. WE HAVE SEEN THE ORDER OF HONBLE APEX COURT IN UNITED GLASS MFG. CO. (SUPRA) WHEREIN IT WAS HELD AS UNDER: IN THIS CIVIL APPEAL, FOLLOWING TWO QUESTIONS ARISE FOR DETERMINATION: (I) . . (II) WHETHER CLUB MEMBERSHIP FEE FOR EMPLOYEES IN CURRED BY THE ASSESSEE IS A BUSINESS EXPENSES AND LIABLE TO BE DEDUCTED UNDER SECTION 37 (1) OF THE INCOME TAX ACT 1961? AS FAR AS QUESTION NO. 2 IS CONCERNED, WE FIND TH AT A SERIES OF JUDGMENTS HAVE BEEN PASSED BY HIGH COURTS HOLDING THAT CLUB MEMBERSHIP FEES FOR EMPLOYEES INCURRED BY THE ITA NO.799/M/2007 KOTAK MAHINDRA CAPITAL COMPANY LTD ASSESSEE IS BUSINESS EXPENSES UNDER SECTION 37 OF T HE INCOME TAX ACT, 1961. WE FIND THAT NONE OF THE DECISIONS HAVE BEEN CHALLENGED IN THIS COURT. EVEN OTHERWISE, WE ARE OF THE VIEW THAT IT IS A PURE BUSINESS EXPENSES. IN THE CIRCUMSTANCES, THIS CIVIL APPEAL FILED BY TH E DEPARTMENT STANDS DISMISSED. WITH NO ORDER AS TO COSTS. 5. THUS, RESPECTFULLY FOLLOWING THE ORDER OF HONBLE A PEX COURT, WE ALLOWED THIS GROUND IN FAVOUR OF ASSESSEE. IN THE RESULT, THE GROUND RAISE D BY REVENUE IS DISMISSED. 6. GROUND NO. 3 RAISED IN THE PRESENT APPEAL IS RELATE D WITH DELETION OF INTEREST ON GOVERNMENT SECURITIES. DR FOR REVENUE ARGUED THAT COMMISSIONER OF APPEALS WRONGLY DELETED THE ADDITION MADE BY AO AND PRAYED THAT ORDER OF AO BE RESTORED AND THAT ORDER OF CIT(A) BE REVERSED. AR FOR ASSESSEE IS ARGUED THAT THIS GROUND OF APPEA L IS COVERED IN HIS FAVOUR BY THE DECISION OF BOMBAY HIGH COURT IN CIT VS BANK OF RAJASTHAN 32 6 ITR 525(BOM) AND IN DIT(IT) VERSUS CREDIT SUISEE FIRST BOSTON(CYPRUS) LTD 351 I TR 323 , AND FURTHER BY THE DECISION OF KERALA HIGH COURT IN CIT VERSUS FEDERAL BANK LTD 30 1 ITR 188(KER). WE HAVE GONE THROUGH THE VARIOUS DECISIONS RELIED BY LD AR OF THE ASSESS EE AND CONSIDERED THE RATIO LAID DOWN THEREIN. IN CIT VERSUS BANK OF RAJASTHAN THE JURISD ICTIONAL HIGH COURT WHILE CONSIDERING THE IDENTICAL GROUND HELD AS UNDER INSOFAR AS THE 3 RD QUESTION IS CONCERNED, IT IS BROUGHT TO OUR NOTICE THAT IN THE ASSESSMENT YEARS 1991 92 AND 199293, THIS ISSUE WAS CONSIDE RED BY THE JODHPUR BENCH OF THE TRIBUNAL. INTEREST ON GOVERNMENT SECURITIES CAN BE SAID TO ACCRUE ONLY WHEN IT BECOMES DUE AND, THEREFORE, THERE CANNOT BE IS CHARGED TO SUCH INCOME AND UNTIL SUCH TIME THAT IT BECAME DUE. COUNSEL APPEARING ON BEHALF OF THE REVENUE HAD STATED BEFORE THE COURT THAT HE HAS WRITTEN INSTRUCTIONS TO THE FACT THAT AN APPEAL AGA INST THE ORDER OF THE JODHPUR BENCH OF THE TRIBUNAL WAS DISMISSED BY THE HIGH COURT OF RAJASTH AN ON JANUARY 23, 2008. IN THAT VIEW OF THE MATTER AND PARTICULARLY, SINCE THE FINDING OF T HE TRIBUNAL HAS NOT BEEN SHOWN TO SUFFER FROM ANY PERVERSITY, NO SUBSTANTIAL QUESTION OF LAW ARISE. FURTHER KERALA HIGH COURT IN CIT VERSUS FEDERAL BAN K(SUPRA), WHILE DECIDING THE IDENTICAL GROUNDS HELD AS UNDER: WE ARE UNABLE TO ACCEPT THE CONTENTION OF THE DEPA RTMENT BASED ON THE DECISION ABOVE REFERRED, THAT WAS THE ASSESSEE SHOWS THE AMOUNT IN THE PROFIT AND LOSS ACCOUNT, AS INCOME, IT IS ASSESSABLE UNDER THE ACT. INCOME ACCRUED OBVIOUS LY MEANS SOME INCOME THAT HAS BECOME TO RECEIVE ABLE BY THE ASSESSEE. IN THIS CASE, THE DEPARTMENT HAS NO CASE THAT THE SECURITIES HELD BY ASSESSEE WERE MATURED DURING THE RELEVANT Y EAR OR THE ASSESSEE WAS ENTITLED TO RECEIVE THE INTEREST ON SUCH SECURITIES. SINCE THE SECURITIES HAD NOT MATURED FOR PAYMENT, THE ASSESSEE WAS OBVIOUSLY NOT ENTITLED TO INTEREST, AN D THE INTEREST WAS DULY NOT DUE TO THEM IN THE PREVIOUS YEAR. THE ASSESSEE HAD SHOWN AND THE P ROFIT AND LOSS ACCOUNT, ONLY TO SHOW WHAT ITA NO.799/M/2007 KOTAK MAHINDRA CAPITAL COMPANY LTD IT IS ENTITLED IN DUE COURSE, WHICH IS STATEMENT MA Y HELP BETTER EXPLANATION OF THE FINANCIAL POSITION OF THE ASSESSEE. MERELY BECAUSE THE ASSESS EE HAS DECLARED IT IS AMOUNT RECEIVABLE IN THE COURSE OF TIME, IT DOES NOT MEAN THAT INTEREST ON INCOME HAD IN FACT ACCRUED TO THE ASSESSEE. AS HELD BY SUPREME COURT IN STATE BANK OF TRAVANCORES CASE, (1986) 158 ITR 102 ABOVE REFERRED, ONLY REAL INCOME IS ASSESSABLE UNDE R THE ACT. THOUGH INTEREST DUE IS ASSESSABLE UNDER THE MERCANTILE SYSTEM, SINCE THE I NTEREST ON THE SECURITIES INVOLVED IN THIS CASE, WAS NEITHER RECEIVED NOR RECEIVABLE DURING TH E PREVIOUS YEAR, SUCH INTEREST CANNOT BE ASSESSED AND THE TRIBUNAL RIGHTLY HOLD SO UPHOLDING THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS). THUS KEEPING IN VIEW THE ABOVE LEGAL POSITION AS HE LD BY JURISDICTIONAL HIGH COURT AND BY KERALA HIGH COURT, WE DO NOT FIND ANY ILLEGALITY OR PERVERSITY IN THE ORDER PASSED BY LD CIT APPEALS FOR DELETION OF INTEREST ON GOVERNMENT SECURITIES, THUS, THIS GROUND OF APPEAL RAISED BY REVENUE IS DISMISSED. 7. GROUND NO. 4 AND 5 RAISED IN THE PRESENT APPEAL ARE RELATED WITH THE DELETION OF RECLASSIFYING BROUGHT FORWARD CAPITAL LOSS AND SETT ING OFF AS LTGL WITH STCG. WHILE FRAMING ASSESSMENT AO OBSERVED THAT THERE IS NO CLA RITY IN THE ASSESSMENT ORDER FOR AY 2001 02, AS TO THE NATURE OF CAPITAL LOSS CARRIE D FORWARD I.E, WHETHER IT IS A LONG TERM CAPITAL LOSS OR A SHORT TERM CAPITAL LOSS. THEREFOR E, THE AO REWORKED THE CAPITAL LOSS BY SETTING OFF SHORT TERM CAPITAL LOSS AGAINST SHOR T TERM CAPITAL GAIN AND LONG TERM CAPITAL LOSS AGAINST LONG TERM CAPITAL GAIN AND WOR KED OUT CAPITAL LOSS AT RS.5,18,27,121/- AS LONG TERM CAPITAL LOSS. THE AO DISALLOWED THE ASSESSEES CLAIM FOR THE SET OFF OF LONG TERM CAPITAL LOSS FOR AY 2001-0 2, AS DETERMINED BY HIM, ON THE GROUND THAT SAME COULD NOT BE ADJUSTED AGAINST SHOR T TERM CAPITAL GAIN. THE LEARNED CIT(A) WHILE CONSIDERING THIS CLAIM CONCLUDED THAT THE ISSUE RELATING TO THE SET OFF OF LOSS FROM ONE SOURCE AGAINST INCOME FROM ANOTHER SOURCE UNDER THIS SAME HEAD OF INCOME IS GOVERNED BY SECTION 70 OF I. T. ACT. IN THE SAID SE CTION, THERE IS NO SEPARATE PROVISION FOR SET OFF OF LONG TERM OR SHORT TERM CAPITAL LOSS. AL THOUGH, THROUGH FINANCE ACT 2002, PROVISIONS HAVE BEEN INSERTED IN SECTION 72. THE FA CT THAT SHORT TERM CAPITAL LOSS CAN BE SET OFF ONLY AGAINST SHORT TERM CAPITAL GAIN AND LO NG TERM CAPITAL LOSS CAN BE SET OFF ONLY AGAINST LONG TERM CAPITAL GAIN, BUT SAID PROVI SION ARE APPLICABLE ONLY FOR AYS 2003 -04 ONWARDS. THE ISSUE UNDER CONSIDERATION REL ATES TO THE WORKING OUT OF CAPITAL LOSS FOR AY 2001-02, TILL AYS 2002-03, THE ASSESSEE HAD LIBERTY TO SET OFF THE LOSS FROM ANY SOURCE OF INCOME FALLING UNDER ANY HEAD OF INCOME A GAINST THE INCOME UNDER ANY OTHER ITA NO.799/M/2007 KOTAK MAHINDRA CAPITAL COMPANY LTD SOURCE OF INCOME IN THE SAME HEAD OF INCOME. AND ON THE BASIS OF DECISION OF ITAT SPECIAL BENCH MUMBAI IN MONTGOMERY EMERGING MARKET FUND ALLOWED THE ASSESSEE TO SET OFF THE LONG TERM CAPITAL LOSS AGAINST SHORT TE RM CAPITAL GAIN AND DIRECTED THE AO. ACCORDINGLY. SIMILARLY AO NOT ALLOWED THE SET OFF O F CAPITAL LOSS AGAINST THE CAPITAL GAIN OF RS.2,21,90,308/- ON TWO GROUNDS. FIRSTLY THE CAPITAL LOSS CARRIED FORWARD BY THE ASSESSEE FOR AY 200102 AT RS.65,99,665/ AS SHO RT TERM CAPITAL LOSS WAS ACTUALLY A LONG TERM CAPITAL LOSS. SECONDLY, THE LOSS OF RS. 2,21,90,308/- BEING A SHORT TERM CAPITAL GAIN CANNOT BE SET OFF AGAINST THE LONG TER M CAPITAL LOSS. LD CIT(A) FURTHER CONCLUDED THAT THE ASSESSEE HAD AN AVERAGE OF SHORT TERM CAPITAL LOSS OF RS. 4 291526/- PERTAINING TO AYS 2001-02. AS PER SECTION 74(1) (A) OF I. T. ACT, THE BROUGHT FORWARD STCL PERTAINING TO ANY OTHER YEAR CAN BE SET OFF AG AINST LTGC OR STGC. THEREFORE, THE ASSESSEE IS ENTITLED TO SET OFF THE STCL OF RS. 65, 99,665/- AGAINST THE STCG OF RS .2,21,91,308/- AND FURTHER CONCLUDED THAT THE SET O FF OF FORWARD LONG TERM CAPITAL LOSS OF RS. 4 2,91,526/-CAN BE SET OFF ONLY AGAINST LONG TERM CAPITAL GAIN. IT CANNOT BE SET OFF AGAINST SHORT TERM CAPITAL GAIN. UP TO AY 2002 -03, THE ASSESSEE HAD ADOPTION TO SET OF LONG TERM CAPITAL LOSS AGAINST SHORT TERM CAPITA L GAIN. HOWEVER, FROM AY 2003- 04, BROUGHT FORWARD LONG TERM CAPITAL LOSS CAN BE S ET OFF ONLY AGAINST LONG TERM CAPITAL GAIN. THUS THE CLAIM OF ASSESSEE SEEKING SE T OFF OF ABSORBED LONG TERM CAPITAL LOSS AGAINST SHORT TERM CAPITAL GAIN CANNOT BE ACCE PTED. AS THE ASSESSEE IS HELD NOT ENTITLE TO SET OF LONG TERM CAPITAL LOSS OF RS. 42, 91,526/- AGAINST SHORT TERM CAPITAL GAIN OF RS 2,21,91,308/- THUS THE SHORT TERM CAPITA L GAIN FOR AYS 2003-04 IS WORKED OUT AT RS. 1,55,91,643/-. DR FOR REVENUE ARGUED THA T COMMISSIONER OF APPEAL WRONGLY GIVEN THE SET OFF OF DIFFERENT SOURCE OF INCOME. ON THE CONTRARY AR FOR ASSESSEE ARGUED THAT GROUND NO. 4 AND 5 ARE INTERCONNECTED AND ARE COVERED IN FAVOUR OF ASSESSEE BY THE DECISIONS OF SPECIAL BENCH OF ITAT, MUMBAI, IN ITA NO 521/M/2007 IN ASSESSEES OWN CASE AND FURTHER BY THE DECISION OF JCIT VS MONTGOM ERY EMERGING MARKETS FUND IN ITA NO.829/M/1999. 8. WE HAVE CONSIDERED THE RIVAL CONTENTION OF BOTH THE PARTIES AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. WE HAVE CONSIDERED THE RATIO OF DECISIONS IN ITA NO 521/M/2007 IN ASSESSEES OWN CASE AND FURTHER BY THE DECISION OF JCIT VS MONTGOMERY EMERGING ITA NO.799/M/2007 KOTAK MAHINDRA CAPITAL COMPANY LTD MARKETS FUND IN ITA NO.829/M/1999. WE FIND THAT COM MISSIONER OF APPEALS ALSO RELIED UPON THE DECISION OF THE SPECIAL BENCH OF THIS TERM INAL IN MONTGOMERY EMERGING MARKETING FUNDS (SUPRA). COMMISSIONER OF APPEALS FU RTHER CONSIDERED THE STATUTORY CHANGES IN THE LAW REGARDING ALLOWABILITY OF SET OF F IN RESPECT OF LONG TERM CAPITAL LOSS AND LONG TERM CAPITAL GAIN AND SHORT-TERM CAPITAL L OSS AGAINST SHORT TERM CAPITAL GAIN WHILE GRANTING PARTIAL RELIEF TO THE ASSESSEE. AS B OTH THE GROUNDS ARE COVERED IN FAVOUR OF ASSESSEE AND AGAINST THE REVENUE BY THE DECISIONS O F SPECIAL BENCH OF MUMBAI TRIBUNAL, THUS, WE DO NOT FIND ANY ILLEGALITY OR INFIRMITY IN THE ORDER PASSED BY COMMISSIONER OF APPEALS. WE ORDER ACCORDINGLY. 9. IN THE RESULT, APPEAL FILED BY THE REVENUE IS PARTL Y ALLOWED. ANNOUNCED ON 24 TH JUNE 2016. SD/- SD/- (SANJAY ARORA) (PAWAN SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI; DATED 24/06/2016 S.K.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 COPY/