ITO 2(1)(3), MUMBAI V. ECD ELECTRONICS (P) LTD, MUMBAI

ITA 912/MUM/2010

• Counselvise Citation: 91219914 RSA 2010
• Duration Of Justice: 1 year(s) 2 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-04-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 30-03-2011
• Assessment Year: 2002-2003
• Appeal Filed On: 05-02-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: HEMANT LAL
• Keywords: Business income; Business expenditure
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH E, MUMBAI BEFORE SHRI P.M. JAGTAP AND SMT. ASHA VIJAYARAGHAV AN, JM I.T.A.NO. 912/MUM/2010 ASSESSMENT YEAR: 2002-03 THE ASST. COMMISSIONER OF INCOME- TAX-2(1), ROOM NBO. 575, 5 TH FLOOR, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI. 400 020. VS. M/S. ECD ELECTRONICS (P) LTD., 11-13, BOTAWALA BLDG., LST FLOOR, HORNIMAN CIRCLE, FORT, MUMBAI 400 023 PAN: AAACE 1894 P (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI HEMANT LAL RESPONDENT BY : NONE O R D E R PER P.M. JAGTAP, AM: THIS APPEAL IS PREFERRED BY THE REVENUE AGAINST TH E ORDER OF THE LEARNED COMMISSIONER OF INCOME-TAX(APPEALS)-4, MUMBAI, DATE D 23.11.2009 FOR THE ASSESSMENT YEAR 2002-03. 2. THE ASSESSEE IN THE PRESENT CASE IS AN INVESTMEN T COMPANY, WHICH IS ENGAGED, INTER ALIA, IN DEALING IN SHARES. THE RETU RN OF INCOME FOR THE YEAR UNDER CONSIDERATION WAS FILED BY IT ON 7.12.2002 DECLARIN G LOSS OF RS.6,62,67,424/-. IN THE SAID RETURN, INCOME RECEIVED FROM DEALING IN SH ARES WAS DECLARED BY THE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSI ON, WHEREAS THE DIVIDEND INCOME OF RS.16,82,850/- RECEIVED ON SHARES WAS CLA IMED AS EXEMPT UNDER SECTION 10(33). INTEREST OF RS. 3,11,37,200/- PAID DURING T HE YEAR WAS CLAIMED BY THE ASSESSEE AS BUSINESS EXPENDITURE. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE WAS CALLED UPON BY THE ASSESSING OFFIC ER TO EXPLAIN AS TO WHY THE INCOME FROM DEALING IN SHARES SHOULD NOT BE TREATED AS CAPITAL GAINS/LOSS. THE ASSESSEE WAS ALSO REQUIRED BY THE ASSESSING OFFICER TO EXPLAIN AS TO WHY INTEREST PAID ON THE LOAN UTILIZED FOR MAKING INVESTMENT IN SHARES SHOULD NOT BE DISALLOWED U/S.14A AS DIVIDEND INCOME EARNED ON THE SHARES WAS EXEMPT UNDER SECTION ITA NO.912/M/2010 M/S. ECD ELECTRONICS PVT. LTD. 2 10(33). IN REPLY, THE FOLLOWING SUBMISSIONS WERE MA DE ON BEHALF OF THE ASSESSEE BEFORE THE ASSESSING OFFICER IN WRITING: 6.1 AS CLARIFIED TO YOU VIDE OUR LETTER DATED 16 TH AUGUST, 2004, THE BUSINESS ACTIVITIES OF OUR CLIENT CONSIST OF DEALIN G IN INVESTMENTS AND SHARES AND SECURITIES. SINCE BEGINNING THE INCOME FROM THIS ACTIVITY IS BEING OFFERED TO TAX UNDER THE HEAD BUSINESS AND P ROFESSION. THE VERY FACT THAT THE ASSESSEE COMPANY HAS HUGE BORROWINGS FOR THIS ACTIVITY GOES ON ESTABLISHING THE NATURE OF TRANSACTION IN INVEST MENTS SHARES & SECURITIES AS BUSINESS TRANSACTIONS. 6.2 FURTHER MORE IN THE BOOKS OF ACCOUNTS AS WELL A S AUDITED STATEMENTS OF ACCOUNTS, THE COMPANYS INVESTMENT IN SHARES & S ECURITIES IS CLASSIFIED AS STOCK IN TRADE. THE ACCOUNTING TREATMENT HENCE S UBSTANTIATES THE TREATMENT OF INCOME EARNED FROM TRANSACTIONS IN SHA RES & SECURITIES AS BUSINESS INCOME. 6.3 IN FACT, IN YOUR ORDER UNDER THE INTEREST TAX A CT, IN THE CASE OF ASSESSEE COMPANY WHILE UPHOLDING THE COMPANYS LIAB ILITY IN RESPECT OF INTEREST TAX, YOU HAVE OBSERVED AS FOLLOWS: 6.4 THE ASSESSEE COMPANY IS AN INVESTMENT COMPANY, WHICH CARRIES ON AS ITS PRINCIPLE BUSINESS THE ACQUISITION OF SHARES, STOCK, BONDS DEBENTURES & SECURITIES 6.5 WE FURTHER RELY ON THE DECISION OF COMMISSIONER OF INCOME-TAX, APPEALS, IN THE CASE OF ASSESSEE COMPANY FOR THE A. Y. 1998-99 IN SUPPORT OF TREAT THE COMPANYS ACTIVITY IN RESPECT OF DEALI NG IN INVESTMENT SHARES AND SECURITIES AS BUSINESS ACTIVITY. 6.6 IN VIEW OF THE ABOVE, WE HAVE TO SUBMIT THAT YO UR PROPOSAL TO TREAT THE LOSS ARISING TO THE ASSESSEE COMPANY ON TRANSAC TIONS OF DEALING IN SHARES AS CAPITAL LOSS IS NOT WARRANTED. 6.7 SINCE THE BORROWINGS OF THE COMPANY ARE USED FO R COMPANYS BUSINESS ACTIVITIES, THE CLAIM IN RESPECT OF INTEREST EXPEND ITURE IS ALLOWABLE U/S.36(1)(III). THE COMPANYS INVESTMENT IN SHARES & SECURITIES IS AROUND RS. 12.41 CRORES. AS AT 31.3.2002 THE COMPANYS PAI D SHARE CAPITAL IS RS.4.75 CRORES AND BORROWINGS ARE RS. 22.52 CRORES. THE INVESTMENT IN SHARES AND SECURITIES IS OUT OF BOTH FROM PAID UP S HARE CAPITAL AS WELL AS FROM BORROWINGS. PART OF THE INTEREST PAID ON BORR OWINGS IS HENCE ATTRIBUTABLE TO INVESTMENT IN SHARES AND SECURITIES . HOWEVER, SINCE THE DEALINGS IN SHARES & SECURITIES, IN VIEW OF THE SUB MISSIONS MADE ABOVE, CONSTITUTES BUSINESS ACTIVITIES IN THE HANDS OF THE COMPANY, THE QUESTION OF DISALLOWANCE OF SUCH INTEREST EXPENDITURE DOES N OT ARISE AS THE INTEREST CLAIM GETS GOVERNED BY SEC.36(1)(III). THE ASSESSEE COMPANY SATISFIES THE CONDITIONS OF SEC.36(1)(III). 3. THE ABOVE SUBMISSIONS MADE ON BEHALF OF THE ASSE SSEE BEFORE HIM WERE NOT FOUND ACCEPTABLE BY THE ASSESSING OFFICER FOR T HE FOLLOWING REASONS: ITA NO.912/M/2010 M/S. ECD ELECTRONICS PVT. LTD. 3 THE SHARE STOCK INVENTORY REFLECTS NAMES OF SIX SH ARES, WHICH ARE GROUP CONCERNS OF THE ASSESSEE COMPANY. OUT OF THESE, SHA RES OF ONE COMPANY ARE SOLD DURING THE YEAR UNDER CONSIDERATION, RESUL TING IN A LOSS. 9. ASSESSEES COMPANY DEALS ONLY IN SHARES OF FEW G ROUP COMPANIES. DURING THE YEAR, ONLY ONE GROUP COMPANY SHARE SCRIP T IS TRANSACTED. THE DEBTOR OF RS.9.5 CR. IS A GROUP COMPANY FROM WHOM A MOUNTS ARE DUE ON SALE OF SUCH SHARES. THESE FACTS ESTABLISH THAT, T HE ASSESSEE COMPANY IS NOT IN BUSINESS OF TRADING OF SHARES. THE TRANSAC TION CAN ONLY BE TERMED AS INVESTMENTS AND THE GAIN OR LOSS SHOULD BE TAXED UNDER THE HEAD CAPITAL GAINS. 10. SECTION 14A OF THE I.T.ACT PROVIDES THAT, FOR T HE PURPOSE OF COMPUTING TOTAL INCOME NO DEDUCTION SHALL BE ALLOWED IN RESPE CT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHIC H DOES NOT FORM PART OF TOTAL INCOME. AS ELABORATED IN PARA 4 ABOVE, THE BORROWED FUNDS ARE UTILIZED FOR PURCHASE OF SHARES. ASSESSEE HAS RECE IVED A DIVIDEND OF RS. 16,82,850/-, WHICH IS CLAIMED EXEMPT U/S.10(33) OF IT ACT. DEDUCTION IN RESPECT OF INTEREST PAYMENT OF RS. 3,11,37,200/0- I S INCIDENTAL TO AND FOR THE PURPOSE OF EARNING DIVIDEND INCOME, WHICH DOES NOT FORM PART OF THE TOTAL INCOME. 4. FOR THE REASONS GIVEN ABOVE, THE ASSESSING OFFIC ER TREATED THE LOSS SUFFERED BY THE ASSESSEE IN DEALING IN SHARES AS CA PITAL LOSS AND DISALLOWED THE INTEREST EXPENDITURE CLAIMED BY THE ASSESSEE IN THE ASSESSMENT COMPLETED UNDER SECTION 143(3) VIDE ORDER DATED 14.2.2005. AGAINST THE ORDER PASSED BY THE ASSESSING OFFICER UNDER SECTION 143(3), AN APPEAL W AS FILED BY THE ASSESSEE BEFORE THE LEARNED CIT(A) AND AFTER CONSIDERING THE SUBMIS SIONS MADE ON BEHALF OF THE ASSESSEE AS WELL AS THE MATERIAL AVAILABLE ON RECOR D, THE LEARNED CIT(A) HELD, FOLLOWING THE ORDERS OF THE TRIBUNAL IN THE ASSESSE ES OWN CASE FOR THE EARLIER YEARS, I.E. ASSESSMENT YEARS 1995-96, 1997-98 AND 1 998-99, THAT THE ASSESSEE WAS IN THE BUSINESS OF SHARE DEALING AND THE ASSES SING OFFICER WAS NOT JUSTIFIED IN TREATING THE BUSINESS INCOME EARNED BY THE ASSESSEE ON THE SAID ACTIVITY A CAPITAL GAINS/LOSS. HE ALSO HELD THAT THE DEALING IN SHARES BEING THE BUSINESS ACTIVITY OF THE ASSESSEE, INTEREST EXPENDITURE INCURRED IN RELA TION TO THE SAID BUSINESS WAS ALLOWABLE U/S.36(1)(III). HE, HOWEVER, DIRECTED THE A.O. TO DISALLOW THE EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO THE EARNING OF DIVIDEND INCOME U/S.14A BY ITA NO.912/M/2010 M/S. ECD ELECTRONICS PVT. LTD. 4 APPLYING RULE 8D. AGGRIEVED BY THE ORDER OF THE LE ARNED CIT(A), THE REVENUE HAS PREFERRED THIS APPEAL BEFORE THE TRIBUNAL. 5. THE GROUNDS RAISED BY THE REVENUE IN THIS APPEAL READ AS UNDER: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN ALLOWING RELIEF TO THE ASSESSEE TO THE EXTENT IMPUGNED IN THE GROUNDS ENUMERATED BELOW: 1. THE ORDER OF THE CIT(A) IS OPPOSED TO LAW AND FACTS OF THE CASE 2. (A) THE LEARNED CIT(A) ERRED IN TREATING THE INCOME ARISING ON PURCHASE AND SALE OF SHARES UNDER THE HEAD INCOME FROM BUSINESS WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE TRA NSACTED IN SHARES OF ONE GROUP COMPANY ONLY, FROM WHOM THE CONSIDERATION OF RS. 9.5 CRORES ON SALE OF SHARES WAS YET TO BE RECEIVED. 2.(B) THE LEARNED CIT(A) ERRED IN NOT APPRECIATING THAT THE ITATS DECISION IN THE CASE OF THE ASSESSEE FOR A.YS. 1995 -96, 1997-98 AND 1998- 99 HAVE NOT BEEN ACCEPTED BY THE DEPARTMENT AND APP EAL U/S.260A HAS BEEN FILED VIDE ITXL NO. 2785/2008, 2753/2008 & 265 4/2008. 3. THE LEARNED CIT(A) ERRED IN ALLOWING THE INTER EST EXPENSES OF RS. 3,11,37,200/- AS BUSINESS EXPENSES WITHOUT APPRECIA TING THE FACT THAT THE INCOME FORM SHARE TRANSACTION WAS DECLARED BY THE A SSESSEE ON ACCOUNT OF INCOME FROM CAPITAL GAINS AND NOT AS BUSINESS IN COME. 4. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, THE DECISION OF THE CIT(A) MAY BE SET ASIDE AND THA T OF THE AO RESTORED. 6. AT THE TIME OF HEARING BEFORE US NONE HAS APPEAR ED ON BEHALF OF THE ASSESSEE. EVEN THE NOTICE SENT TO THE ASSESSEE AT T HE ADDRESS AVAILABLE ON RECORD BY REGISTERED A/D HAS COME BACK UNDELIVERED FROM TH E POSTAL AUTHORITIES WITH THE REMARK NOT KNOWN. THIS APPEAL OF THE REVENUE IS, THEREFORE, BEING DISPOSED OF EX PARTE QUA THE RESPONDENT ASSESSEE AFTER HEARING THE ARGUMENTS OF THE LEARNED DEPARTMENTAL REPRESENTATIVE AND PERUSING THE RELEVA NT MATERIAL ON RECORD. 7. GROUND NO. 1 RAISED BY THE REVENUE IS GENERAL S EEKING NO SPECIFIC DECISION FROM US. 8. AS REGARDS GROUND NO. 2, IT IS OBSERVED THAT THE ISSUE RAISED THEREIN IS SQUARELY COVERED BY THE ORDERS OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE EARLIER YEAS I.E. ASSESSMENT YEARS 1995-96, 1997-98 AND 1998-99., WHEREIN IT WAS HELD BY THE TRIBUNAL THAT THE ASSESSEE WAS IN THE B USINESS OF DEALING IN SHARES AND ITA NO.912/M/2010 M/S. ECD ELECTRONICS PVT. LTD. 5 THE PROFIT/LOSS EARNED FROM THE SAID ACTIVITY WAS C HARGEABLE TO TAX IN ITS HANDS UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PR OFESSION. AS THE ISSUE INVOLVED IN THE YEAR UNDER CONSIDERATION AS WELL AS ALL TH E MATERIAL FACTS RELEVANT THERETO ARE SIMILAR TO THE EARLIER YEARS, WE FIND NO INFIRM ITY IN THE IMPUGNED ORDER OF THE LEARNED CIT(A) DECIDING THIS ISSUE IN FAVOUR OF THE ASSESSEE FOLLOWING THE ORDERS OF THE TRIBUNAL FOR THE EARLIER YEARS. THE SAME IS, TH EREFORE, UPHELD ON THIS ISSUE DISMISSING GROUND NO.2 OF THE REVENUES APPEAL. 9. AS REGARDS GROUND NO.3, IT IS OBSERVED THAT THE ISSUE INVOLVED THEREIN RELATING TO ASSESSEES CLAIM FOR DEDUCTION ON ACCOU NT OF INTEREST EXPENSES IS ALSO COVERED BY THE ORDERS OF THE TRIBUNAL FOR THE EARLI ER YEARS IN FAVOUR OF THE ASSESSEE. IN THIS REGARD, THE LIMITED CONTENTION RA ISED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE IS THAT INTEREST EXPEND ITURE TO THE EXTENT THE SAME WAS INCURRED IN RELATION TO EARNING OF DIVIDEND INC OME IS LIABLE TO BE DISALLOWED U/S.14A. HE HAS SUBMITTED THAT A DIRECTION, THEREFO RE, MAY BE GIVEN TO THE A.O. TO QUANTIFY THE DISALLOWANCE WHICH IS LIABLE TO BE MAD E OUT OF INTEREST EXPENDITURE U/S.14A. IN THIS REGARD IT IS OBSERVED THAT THE LE ARNED CIT(A) HAS ALREADY GIVEN A DIRECTION TO THE ASSESSING OFFICER VIDE HIS IMPUGNE D ORDER TO MAKE DISALLOWANCE U/S.14A BY APPLYING RULE 8D OF THE INCOME-TAX RULES , 1962. AS HELD BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE MFG. CO. LTD. V. DCIT (328 ITR 81), RULE 8D IS APPLICABLE ONLY FROM THE ASSESSMENT YEAR 2008-09. AS FURTHER HELD BY THE HONBLE BOMBAY HIGH COURT IN TH E SAID CASE, THE QUANTUM OF DISALLOWANCE WHICH IS LIABLE TO BE MADE FOR THE EAR LIER YEARS U/S.14A HAS TO BE WORKED OUT BY THE A.O. BY ADOPTING SOME REASONABLE METHOD. WE, THEREFORE, MODIFY THE DIRECTION GIVEN BY THE LEARNED CIT(A) ON THIS ISSUE AND DIRECT THE A.O. TO QUANTIFY THE DISALLOWANCE TO BE MADE U/S.14A BY ADOPTING SOME REASONABLE METHOD AFTER ALLOWING THE ASSESSEE AN OPPORTUNITY O F HEARING HEARD. ITA NO.912/M/2010 M/S. ECD ELECTRONICS PVT. LTD. 6 10. IN THE RESULT THE REVENUE/S APPEAL IS TREATED A S PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 29 TH DAY OF APRIL, 2011. SD. SD. (ASHA VIJAYARAGHAVAN) (P.M. JAGTAP) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED THE 29 TH APRIL, 2011. KN COPY TO: 1. THE ASSESSEE 2. THE REVENUE 3. THE CIT-2, MUMBAI. 4. THE CIT(A)-4, MUMBAI 5. THE DR E BENCH, MUMBAI BY ORDER /TRUE COPY/ ASST. REGISTRAR, ITAT, MUMBAI