ISL CONSULTING LIMITED,AHMEDABAD vs. THE DCIT, CIRCLE-2(1)(1) ( PREVIOUSLY DCIT, CEN. CIRC. 1(3), CHENNAI), AHMEDABAD

Aggrieved by which, the assessee is come up in appeal before us raising grounds as reproduced above.

Taking up Ground No.1 which relates to the issue of disallowance of loss incurred by the assessee of Rs.30,65,000/- treating it as capital loss. The facts relating to the issue are that the assessee had claimed business expenditure of Rs.30,65,000/- under the head ‘investment written off “in its P&L account on account of the following investments written off: i. Kothari Securities Ltd. 22,50,000/- ii. Innovation Agro Products Ltd. 8,15,000/- Total 30,65,000/-

These investments were noted by the AO to have been treated by the assessee as long term investments in its balance sheet right from F.Y. 2008-09 to the immediately preceding financial year i.e. F.Y. 2010-11 pertaining to A.Y. 2011-12. The AO noted from Item No.5 of the report of Auditors to the members of ISL Consulting Limited (the assessee company) from the annual report for F.Ys. 2008-09 to 2010-11, that the auditors had also mentioned these very shares to be investments of the assessee company. He noted the auditors to have stated that the impugned shares of Kothari Securities Ltd. and Innovation Agro Products Ltd. which the company has classified as long term, they (auditors) were unable to comment on the realizable value of the investment made Consulting Limited vs. DCIT] A.Y. 2012-13 - 4 – in the said companies in the absence of the balance sheet of the investee company.

From the aforesaid facts, the AO derived the investments to be capital in nature and not stock-in-trade of the assessee and, therefore, held the loss incurred by the assessee to be a capital loss and accordingly disallowed the assessee’s claim as a revenue loss/business expenditure. Ld. CIT(A) confirmed the disallowance made by the AO noting that the assessee was unable to dislodge the finding of fact that the impugned investments were long term investments in the nature of capital assets and did not constitute stock-in-trade.

The facts relating to the issue are reproduced at 4.1 of the CIT(A)’s order and his findings are contained at para 6.4 of this order as under:

Ld. DR, however, heavily relied on the orders of the authorities below and pointed out that the undisputed fact is that the impugned investments were all along treated by the assessee itself as long term investments and without any circumstances being brought to right to reflect any change in character of the investments as stock-in-trade, the authorities below had rightly rejected the claim of the assessee to treat these investments as stock-in-trade and the loss incurred on account of the writing off these investments as business loss of the assessee. Ld. DR further pointed out that the case laws relied upon by the Ld. Counsel for Consulting Limited vs. DCIT] A.Y. 2012-13 - 6 – the assessee was not applicable to the facts of the present case being distinguishable on facts. He pointed out that in the facts of the said case, though the loss of long term investments made by the assessee was allowed as being in the nature of business loss incurred by the assessee but it was done in the background of the fact noted by the Tribunal that the investments made were for the purpose of giving working capital to the company and the real character of the transaction was, thus, akin to loans and not equity investment. He drew our attention to the findings of the ITAT in this regard in Para no.11.1 of this order:

Having heard the contentions of both the parties and after going through the orders of the authorities below, we hold that the assessee has been unable to make out a case before us for claiming the loss on investments as its business loss. The fact that the investments were long term investments of the assessee reflected as such in its balance sheet right from F.Y. 2008-09 onwards and noted by its Auditors to be so is not disputed. Therefore, the Consulting Limited vs. DCIT] A.Y. 2012-13 - 7 – authorities below, we hold, had rightly noted that the nature of investments admittedly as per the assessee itself was long term investments. Though, the assessee has been repeatedly contending the character of the investments to be by way of stock-in-trade but no fact has been brought before any of the authorities below or even before us to substantiate this claim of the assessee. Therefore, that the only fact on record being that the investments were classified as long term investments by the assessee itself in its balance sheet and were held in this character by the assessee right from F.Y. 2008-09 onwards, we do not find any infirmity in the orders of the authorities below treating the impugned investments as capital investment of the assessee, rejecting assessee’s contention that they were in the nature of stock-in- trade. The authorities below, therefore, we hold, have rightly treated the loss incurred by the assessee on these investments as being in the nature of capital loss. Also we agree with the Ld. DR that the decision relied upon by the Ld. Counsel for the assessee in support of its contention that loss on long term investment is to be treated as business loss, in the case of Seshasayee Paper and Boards Ltd. (supra), is distinguishable on facts and, therefore, not applicable to the present case. As rightly pointed out by the Ld. DR, the loss on investments in the said case was treated as business loss noting the fact that the investment made in equity was more by way of working capital loans and advances to the said entity since it was noted to have been made to ensure uninterrupted supply of raw material to the assessee. In the facts of the present case, there is no case made out by the Ld. Counsel Consulting Limited vs. DCIT] A.Y. 2012-13 - 8 – for the assessee that the investments were by way of loans and advances for the purpose of business of the assessee. Therefore, the decision rendered in the case of Seshasayee Paper and Boards Ltd. (supra) is not applicable to the present case and the reliance, therefore, placed by the Ld. Counsel for the assesse on the same is of no assistance to the assessee.

In the light of the above, we hold that the disallowance of expenditure of Rs.30,65,000/- claimed under the head ‘investment written off by the assessee has been rightly made and confirmed by the authorities below. The Ground Nos.1 & 3 raised by the assessee are, therefore, dismissed.

Ground No.2 relates to the issue of disallowance of expenses pertaining to the earning of exempt income in terms of provisions of Section 14A of the Act.

The facts relating to the issue as reproduced at para nos. 4.2 & 4.3 of the order of the Ld. CIT(A) is that the assessee had earned exempt income of dividend from shares of M/s. Gujarat Alkalies and Chemicals Ltd. (‘GAACL’) amounting to Rs.3,41,617/-. The assessee was also noted to have claimed interest expenses of Rs.53,33,295/-. The assessee had made suo motto disallowance of expenditure amounting to Rs.41,280/- u/s.14A of the Act. When confronted with the aspect of disallowance of expenses u/s.14A of the Act, the assessee contended that the entire investment in shares of GAACL has been Consulting Limited vs. DCIT] A.Y. 2012-13 - 9 – made from interest free loans. The AO, however, found the claim of the assessee as incorrect and, therefore, he proceeded to determine the amount of expenditure in relation to such dividend income, which did form part of the total income, u/s.14A of the Act as per method prescribed under Rule 8D of the Income Tax Rules, 1962. The disallowance, accordingly was worked out at Rs.27,63,380/-. The Ld. CIT(A), however, restricted the disallowance to the extent of exempt income claimed by the assessee amounting to Rs.3,41,617/-.

The Ld. Counsel for the assessee contended that the impugned investments in GAACL which had earned exempt income were part of the stock-in-trade and, therefore, did not warrant any disallowance of expenses u/s.14A of the Act.

Ld. DR, however, pointed out that this plea of the assessee had been dealt with by the Ld. CIT(A), considering the decision of the Hon’ble Apex Court in the case of Maxopp Investment Limited [2018] 91 Taxmann.com 154, wherein it was categorically held that even investment held as stock-in-trade were to be considered for the purposes of disallowance of expenses u/s.14A of the Act. He drew our attention to para 6.6 & 6.7 of the order of the Ld. CIT(A) as under:

In those cases, where shares are held as stock-in-trade, the main purpose is to trade in those shares and earn profits therefrom. However, we are not concerned with those profits which would naturally be treated as "income" under the head "profits and gains from business and profession". What happens is that, in the process, when the shares are held as "stock-in-trade", certain dividend is also earned, though Incidentally, which is also an income. However, by virtue of Section 10(34) of the Act, this dividend income is not to be included in the total income and is exempt from tax. This triggers the applicability of Section 14-A of the Act which is based on the theory of apportionment of expenditure between taxable and non-taxable income as held in Walfort Share and Stock Brokers (P) Ltd. case (2010) 8 SCC 137, (2010) 326 ITR 1. Therefore, to that extent, depending upon the facts of each case, the expenditure incurred in acquiring those shares will have to be apportioned.

We note from the facts in State Bank of Patiala case (2017) 391 ITR 218 (P&H) that the AO, while passing the assessment order, had already restricted the disallowance to the amount which was claimed as exempt income by applying the formula contained in Rule 8-D of the Rules and holding that Section 14- Consulting Limited vs. DCIT] A.Y. 2012-13 - 11 – A of the Act would be applicable. In spite of this exercise of apportionment of expenditure carried out by the AO, CIT(A) disallowed the entire deduction of expenditure. That view of the CIT(A) was clearly untenable and rightly set aside by ITAT. Therefore, on facts, the Punjab and Haryana High Court has arrived at a correct conclusion by affirming the view of ITAT, though we are not subscribing to the theory of dominant intention applied by the High Court." 6.7 From a perusal of the aforesaid Supreme Court decision, it is clear that disallowance u/s14A is required to be made even when dividend Income is earned from shares held as stock-in-trade. However, the disallowance cannot exceed the exempt income claimed and is to be restricted to direct expenses only. The A.O. has examined the source of funds submitted by the appellant for the purchase of the Impugned shares and established that interest expenses of Rs. 17,99,870/- paid to Enrich Consulting Pvt. Ltd., are directly related to the purchase of shares which yielded exempt Income. The appellant has stated in the written submissions that shares were purchased in July 2011 and the appellant has also repaid loan to Enrich Consulting P. Ltd. in July 2011. Thus, the appellant states that the interest paid to Enrich Consulting P. Ltd. relates to purchase of other shares which have not yielded any exempt income. However, the appellant has itself listed Enrich Consulting Pvt. Ltd. as one of the sources for the purchase of impugned shares. The appellant has maintained constant receipt and payment transactions with all the 4 parties who have been listed as sources, viz Hitesh C Kothari, Jagruti Abhay Thakur, Natvarlal K Thakkar HUF and Enrich Consulting Pvt. Ltd. From the ledger account of Enrich Consulting Pvt. Ltd., it is seen that amounts totalling Rs. 90,50,000/- have been received in the month of July 2011 alone. The appellant's contention that interest bearing funds from Enrich Consulting Pvt. Ltd. have not been used for the purchase of the impugned shares is not borne out from the facts on record. Thus, interest expenses paid to Enrich Consulting pvt. Ltd. have a direct relationship with the purchase of shares. Further, Rs. 41,280/- are direct expenses debited to the P&L A/c, as per the working of the appellant himself. Thus, disallowance u/s 14A works out to Rs. 18,41,150/- (17,99,870 + 41,280), but the same is to be restricted to Rs.3,41,617/-, which is the amount of exempt income claimed. Thus, disallowance u/s 14A is upheld to the extent of Rs. 3,41,617/-, against the disallowance of Rs. 27,63,318/- worked out by the A.O. The appellant gets a relief of Rs. 24,21,701/-. Thus grounds no. 3.1 and 3.2 are partly allowed.”

Having heard the contention of both the parties, we find that the solitary argument of the Ld. Counsel for the assessee against Consulting Limited vs. DCIT] A.Y. 2012-13 - 12 – the disallowance made u/s.14A of the Act that the same is not invokable on investments made as stock-in-trade has been found to be bereft of any merit considering the ruling of the Hon’ble Apex Court in case of Maxopp Investment Limited (supra), wherein this very argument was rejected by the apex court. Ld.Counsel was unable to distinguish the said decision before us. In the light of the same, we find no infirmity in the order of the Ld. CIT(A) confirming the disallowance of expenses u/s.14A of the Act to the extent of Rs.3,41,617/-.

Ground No.2 of the assessees appeal is dismissed.

In the result, appeal filed by the assessee is dismissed.