Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, DELHI BENCH “A”: NEW DELHI
Before: SHRI KULDIP SINGH & SHRI PRASHANT MAHARISHI
O R D E R PER PRASHANT MAHARISHI, A. M. 1. These are the two appeals filed by the learned Assessing Officer against the order of the learned COMMISSIONER OF INCOME TAX (APPEALS) – 1, New Delhi dated 25/2/2011 for assessment year 2005 – 06 and 15/11/2010 for assessment year 2007 – 2008. 2. The revenue has raised the following grounds of appeal in for the Assessment Year 2005-06 “1. The order of the ld CIT(A) is not correct in law and facts.
2. Whether on the facts and in the circumstances of the case, the CIT (A) has erred in deleting disallowance of Rs. 8,403/- made u/s 14A.
3. Whether on the facts and in the circumstances of the case, the ld CIT(A) has erred in deleting addition of Rs. 1,24,35,157/- on account of loss on sale of securities.
4. Whether on the facts and in the circumstances of the case, the ld CIT(A) has erred in deleting addition of Rs. 2,24,140/- made u/s 35D in respect of preliminary expenses written off during the year.
5. Whether on the facts and in the circumstances of the case, the ld CIT (A) has erred in deleting addition of Rs. 11,425/- made on account of prior period expenses.”
3. Briefly, the fact shows that Assessee Company is a promoter company of Sahara India life insurance Co Ltd having the main object to promote life insurance Company for conduct of the life insurance business. The assessee during the year received from dividend income of INR 1640946/– and interest income of INR 57064296/–. It filed its return of income on 31/10/2005 declaring income of Rs. 44104390/–. The assessment u/s 143 (3) of The Income Tax Act was passed on 28/12/2007 by the learned assessing officer determining the total income of the assessee at INR 5 6783515/– by making following additions. a. Disallowance u/s 14 A of the income tax act of INR 8 403/– b. disallowance of loss on sale of securities debited to the profit and loss account of INR 1 2435157/– c. disallowance of expenses claimed under section 35D of INR 2 24140/– d. disallowance of prior period expenses of Rs. 11425/– 4. Assessee aggrieved with the order of the learned assessing officer preferred an appeal before the learned CIT – A. He deleted the disallowance of INR 8403/– u/s 14 A of the income tax act. He also directed the learned assessing officer treated the loss on sale of securities as business loss in the hands of appellant and compute the income accordingly. He further directed the learned assessing officer to delete the disallowance u/s 35D of the income tax act of Rs. 224140/–. He also deleted the disallowance of Rs. 11425/– under the head prior period expenses. In short, he allowed the appeal of the assessee and therefore the revenue is aggrieved with the order of the learned CIT – A and is in appeal before us. 5. Ground number 1 of the appeal is general in nature and therefore it is dismissed. 6. Ground number 2 is against the disallowance u/s 14 A of the income tax act of INR 8 403/– deleted by the learned CIT appeal. The learned assessing officer noted that assessee has earned dividend income of INR 1 640946/– and operational expenses against such income have claimed deduction. However no deduction is to be allowed under section 14 A of the income tax act in respect of the expenditure incurred by the assessee in relation to the income which does not form part of the total income. As per order sheet entry dated 4/10/2007 the assessee was asked to show cause as to why the proportional disallowance of expenses against this dividend income should not be made. The assessee submitted that these expenses incurred by the assessee are minimum expenses, which are required by a corporate entity to retain its status as a corporate entity and should not be disallowed. After considering the explanation of the assessee, he proportionately disallowed the expenses of INR 8 403/– out of total operational expenses incurred by the assessee of INR 3 00608/–. On appeal before the learned CIT – A , he held that the above disallowance has been made on ad hoc basis since no expenditure has been directly pointed out by the learned assessing officer to be attributable to earning of dividend income during the year. He further held that there should be proximate link between the expenditure to be disallowed with the exempted income. Since the entire disallowance is on ad hoc basis, without pinpointing any particular expenditure, which can be attributable to the earning of dividend income by the assessing officer, he deleted the above disallowance.
The learned departmental representative vehemently submitted that as the assessee has earned huge dividend income and therefore the disallowance u/s 14 A of the income tax act is required to be made which has been made by the learned assessing officer on proportionate basis.
The learned authorised representative vehemently submitted that the assessee has earned dividend income however; no expenditure has been incurred by the assessee for earning of exempt income. He submitted that in absence of any satisfaction of the learned assessing officer that assessee has incurred any expenditure for the purpose of earning of exempt income the disallowance cannot be made.
We have carefully considered the rival contention and perused the orders of the lower authorities. In the present case the learned assessing officer has failed to record his satisfaction under section 14 A of the income tax act that assessee has incurred any expenditure for the purpose of earning of the exempt income. It is mandatory for learned assessing officer to first record his satisfaction with reference to the books of accounts of the assessee that explanation of the assessee, that a. it has not incurred any expenditure for the purpose of earning of the exempt income of the income or b. quantified disallowance by assessee under the provisions of section 14 A of the income tax act is incorrect. In the present case, we do not find any such satisfaction recorded by the learned assessing officer in his assessment order. Further, the assessee has shown us in the paper book that such dividend income received does not have any efforts on the side of the assessee; therefore, no such expenses are incurred for earning it. Hence, on this score we do not find any infirmity in the order of the learned CIT – A in deleting the disallowance of INR 8 403/– u/s 14 A of the income tax act. Accordingly, ground number 2 of the appeal is dismissed.
Ground number 2 is with respect to the disallowance deleted by the learned CIT – A on account of loss on sale of securities of INR 1 2435157/–. The learned assessing officer noted that assessee has claimed the loss on sale of securities of INR 1 2435157/–. The assessee was asked to justify its claim. The assessee submitted that company is in the nature of investment company. Making of investment is the only business of the company. Assets held are not in the nature of capital asset but are business assets of the company. Therefore, the profit and loss, which arises as to the assessee on transfer of such assets, is chargeable to tax only under the head business income. The learned assessing officer noted that assessee company is not engaged in the business of dealing in shares of securities but the surplus fund which were available with the assessee were invested for earning of the income such was the claim of the assessee as per his letter dated 19/11/2007. On consideration of the above explanation of the assessee, he held that there is a contradiction in both the above reply of the assessee. In the 1st reply the assessee has stated that assessee company is an investment company in the nature and making of investment is the only business of the assessee company. In the 2nd reply the assessee stated that the investment in shares of other company as well as investment in security is not the main object of the assessee company. He further perused the schedule 3 of the balance sheet for the year ended on 31/3/2005 wherein the securities of INR 1 828328401/– has been shown by the assessee as investment and not in stock in trade. It further referred to the object of the investment in shares stating that it was to earn income by way of a dividend Page | 4 etc. , hence the losses incurred by the assessee on sale of shares should be capital loss and not revenue loss. He further stated that losses, which are not deductible from business income, include losses due to sale of security held as investment. He further referred to the circular number 4 of the central board of direct taxes which provides that when the assessee company has an investment comprising of securities than same are to be treated as capital asset and not the trading asset. Therefore, he held that the loss on sale of securities is a capital loss and loss on sale of securities cannot be debited to the profit and loss account and it is being disallowed.
The assessee aggrieved with the order of the learned assessing officer on this ground preferred an appeal before the learned CIT – A who held that such losses are business losses of the assessee.
The learned departmental representative on this ground submitted that assessee has shown the above as „investment‟ and not as „stock in trade‟ but as capital investment under the schedule of the balance sheet as investment and therefore the transfer of such assets or sale of such assets would only result into the capital loss or capital gain to the assessee. It cannot be held to be the business loss of the assessee. He therefore submitted that the learned CIT – A has erred in holding that such capital loss is to be treated as a business loss of the assessee.
The learned authorised representative reiterated the submissions raised before the learned CIT – A.
We have carefully considered the rival contention and perused the order of the learned lower authorities. The fact shows that the assessee has debited loss on sale of securities of INR 1 2435157/– in its profit and loss account and claimed it as business loss. The claim of the assessee is that assessee company is in the business of investment in making of investment, that is the only business of the company. Therefore investemnst hld by the assessee in non life insurance business held are not in the nature of capital asset but are business assets of the assessee company. Therefore any profit or loss arising in liquidation of such asset is in the nature of business income/loss as has been rightly claimed by the assessee. It was further claimed by the assessee that from the conduct of the assessee in the earlier years which is of treating the income arising from sale of purchase of securities as business income in assessment year 2004 – 05, which is assessed as such u/s 143 (3) of the act for that year , now the stand of the assessing officer to treat it otherwise, when there is a loss on sale of securities as capital loss is changing the stand in the year in which it is beneficial to revenue to treat it as business income and when there is a loss to treat it as capital loss. The learned CIT – A has considered the whole issue after considering circular number 4/2007 dated 15/6/2007. He held as under:- “Ground no 3 (a) to 3 (c) In these grounds of appeal, the appellant has objected to the treatment of loss incurred by the appellant on the sale of securities and claimed as a business loss to be in the nature of a short-term capital loss. As per the main object of the appellant company, the company was incorporated to promote life insurance Company for conduct of life insurance business. In pursuance of its main object of the appellant company made investment in Sahara India life insurance Co Ltd and promoted the same and also purchased shares and securities of other companies from the market which were kept by it in its investment portfolio. From time to time, the appellant company was trading in securities and shares of other companies except for the life insurance company, which it had promoted. The appellant company has been showing income, which has been derived from the trading in the securities et cetera, as well as interest under the head business income in the past, which has been accepted by the Department all along. During the relevant previous year, there was a loss on sale of securities, which was claimed as business loss, and the same was disallowed by the assessing officer on the pretext that the assessee has given contradictory replies to his queries. During the course of assessment proceedings the assessing officer raised a quarry to the appellant as to justify the claim of loss on sale of securities in response to which the appellant‟s responded that the business of the appellant is in the nature of that of an investment company and making of investment is the only business carried on by the appellant company and therefore, the assets held by the appellant are not in the nature of capital assets but are business assets and company thereof had shown the profits and/losses as business income. Thereafter, on further query of the assessing Officer the appellant replied to the assessing officer that the appellant company is not engaged in the business of dealing in shares and securities but the surplus funds, which were available with it, were invested by it to earn income from shares on securities. According to the assessing officer the appellant‟s reply is in contravention and, therefore referring to the sum circular number 4 of CBDT he proceeded to treat the loss claimed by the appellant on the sale of securities to be in the nature of capital loss and not as business loss and disallowed the same. On behalf of the appellant it was vehemently argued that the assessing officer has misunderstood the reply of the appellant as the main object of the appellant company was to promote life insurance company and to invest in purchase of shares, debentures and stocks of other companies and the appellant company was, therefore, in the nature of an investment company. The nature of the activity of the appellant company is that of investing turnaround, selling and buying of shares and securities on a regular basis and, therefore the appellant was entitled to show income as business income and to claim the loss as business loss. I have carefully considered the facts and circumstances of the case and I have also perused the circular referred to by the assessing officer in which circular, the board has given directions for distinction between shares held as stock in trade and shares held as capital asset. In paragraph number 10 of that circular it is categorically stated that CBDT also wishes to emphasise that it is possible for a taxpayer to have 2 portfolios i.e. investment portfolio comprising of securities which are to be treated as capital asset and trading portfolio comprising of stock in trade which are to be treated as trading assets and the appellant has 2 portfolios. The appellant may have income under both the heads, capital gain as well as business income. On perusal of the objects of the appellant company, it is categorically clear that the main object of the appellant company was to promote life insurance business and, therefore, the investment, which the appellant company has made in the investment promotion of life insurance business, can be treated as an investment, which will be subjected to capital gains. As regards the other investment although wrong nomenclature given by the company, the same was in the nature of short- term investment, which was being regularly, switched over and traded by the appellant company. The same is in the nature of short-term investment or stock in trade and therefore, the business of the appellant company being a keen to that of investment company, the income/loss arises there from was in the nature of business income/loss. Further, the action of the appellant in the preceding years of treating the income as business income also further strengthens stand of the appellant that the law is also is in the nature of business loss or otherwise the appellant would have opted to get the profit on purchase, sales of securities taxed under the head capital gains which, in turn, would have also helped it to save tax. The conduct of the appellant shows that the income arising from the sale and purchase of securities is in the nature of business income and sale conduct stands accepted by the assessing officer in the earlier years, I find no reason to change the stand during the year under appeal only for the reason that loss has occurred during the year on sale of securities.
For the above proposition of principles of consistency, I follow the decision of the honourable Delhi High Court in case of CIT vs Lagan Kala upvan (259 ITR 489 (Delhi). As a result, I direct the assessing officer to treat the laws of the sale of securities as business loss in the hands of appellant and compute the income accordingly.” [ underline supplied by us ] 15. It is interesting to note that in assessment year 2004 – 05 the assessee has earned profit on sale of the securities which has been assessed by the learned assessing officer u/s 143 (3) of the income tax act as business income. However, during the year the learned assessing officer has changed his stand when assessee has incurred loss and tried to justify it as short- term capital loss incurred by the assessee. The learned departmental representative could not point out any distinction between the transactions entered into by the assessee in assessment year 2004 – 05 and transactions entered into by the assessee in assessment year 2005 – 06. In view of the above facts, it is a clear-cut case of the change of opinion by the learned assessing officer only to extract the higher tax. The assessing officer is blowing hot and cold on the same set of facts in two different assessment years to cough up more taxes from the assessee. This tactic of the learned assessing officer deserves to be condemned. The learned departmental representative also could not point out any infirmity in the order of the learned CIT – A in he stated that assessee has maintained two portfolios whereas the life insurance investment is held to be an investment portfolio and other securities are held to be the trading assets. In view of this, we dismiss ground number 3 of the appeal of AO.
Now we come to ground number 4 of the appeal wherein the disallowance under section 35D in respect of preliminary expenses return of Rs. 224140/– was made by the learned assessing officer and deleted by the learned CIT – A. This issue is squarely covered in favour of the assessee by the decision of the honourable Supreme Court in case of Shashun chemicals and drugs Ltd 73 taxman.com 293 (Supreme Court). Admittedly this is not the 1st year of the claim u/s 35D out of block of 5 years. The honourable Supreme Court in para number 13 of the decision has held that in any case, it warrants reputation that in the instant case under the very same provisions benefit is allowed for the first two assessment years and, therefore, it could not have been denied in the subsequent block period. The issue before the honourable Supreme Court was also with respect to the benefit of section 35D of the act. In view of this, we dismiss ground number 4 of the appeal of the learned assessing officer.
Ground number 5 of the appeal is with respect to the disallowance of prior period expenses of Rs. 11425/– which is deleted by the learned CIT – A. The above issue is also squarely covered against the assessee in the decision of the Supreme Court in Saurashtra cement and chemical industries Ltd vs Commissioner of income tax 213 ITR 523/–. In the present case also the bills for the expenditure was received in the current financial year relating to the earlier financial year and therefore such expenditure has crystallized during this year and therefore they are allowable. After considering the argument of the rival parties, we do not find any infirmity in the order of the learned CIT – A in deleting the above disallowance. Therefore, ground number 5 is dismissed.
In the result ITA number 2477/del/2011 filed by the learned deputy Commissioner of income tax for assessment year 2005 – 06 is dismissed.
Now we come to the appeal of the assessing officer for assessment year 2007 – 08 wherein he has raised the following grounds of appeal in Assessment Year 2007-08:- “1. The order of the ld CIT(A) is not correct in law and facts.
2. On the facts and in the circumstances of the case, the ld CIT(A) has erred in law and facts in deleting the addition of Rs. 2,24,140/- made by AO on the account of preliminary expenses written off during the year.
3. On the facts and in the circumstances of the case, the ld CIT(A) has erred in law and facts in deleting the addition of Rs. 1,01,54,708/- made by the AO on the account of interest expenses.”
20. In short the fact shows that assessee is a company, filed its return of income at INR 1 33033102/– on 31/10/2007. The assessee company is a promoter company of Sahara India life insurance Company for conduct of life insurance business. During the year the assessee company has received interest of INR 1 22813372/– and income from sale of securities of INR 1 Page | 10 04410014/–. The assessment u/s 143 (3) of the act was passed by the learned assessing officer on 23/12/2009 determining total income of the assessee at INR 1 33257250/–. During the assessment proceedings the addition of INR 1 0378848 was made by the learned assessing officer stating as under:- “3. Disallowance of expenses claimed u/s 35D and interest paid The assessee company has claimed deduction u/s 35D of income tax act 1961 amounting to INR 2 24140/– and interest expenditure of INR 1 0996898/–. Out of interest expenses of INR 1 0996898/– an amount of INR 8 42910/– has been added back in the computation as it is an interest on income tax. Under the head income from profits and gains of business or profession, the expenses are expressly allowed u/s 30 to 37 of the income tax act 1961. The income of the assessee is the income from other sources wherein deductions are to be allowed only u/s 57 of the income tax act. Therefore, the deduction claimed u/s 35D amounting to INR 2 24140/– and expenses of INR 1 0154708/– (INR 1 0996898/– less INR 8 42910/–) claimed as interest expenses cannot be allowed and being added back to the income of the assessee.”
21. The assessee aggrieved with the order of the learned assessing officer preferred an appeal before the learned CIT – A. He granted the deduction of the claim of the assessee of Rs. 224140/– under section 35D of the income tax act. He further directed the learned assessing officer to delete the disallowance of INR 1 0154708/– holding that the income is chargeable to tax of the assessee under the head business income and therefore assessee is entitled to deduction of interest expenditure claimed by it as same is related to the borrowed funds which in turn has been utilized in the business of the appellant. He also alternatively held that above expenditure is also deductible u/s 57 of the act under the head income from other sources. Therefore the revenue is aggrieved with the order of the learned CIT – A against the deletion of the addition of Rs. 224140/– and Page | 11 10154708/– of the interest expenses has preferred this appeal in ITA 981/del/2011.
22. Ground number 1 of the appeal is general in nature and therefore it is dismissed.
23. Ground number 2 is identical to ground number 4 in the appeal of the learned assessing officer for assessment year 2005 – 06 wherein we have dismissed the above ground following the decision of the honourable Supreme Court in 73 taxmann.com 293 (SC ) in case of Shashun chemicals and drugs Ltd vs Commissioner Of Income Tax , wherein it has been held that where the assessee company was granted deduction under section 35D for a period of 10 years and same was granted for initial 2 years, the assessing officer could not reject claim for subsequent year stating that such expenditure are capital in nature. As in the present case also the deduction allowed to the assessee under section 35D initially has not been disturbed, therefore the learned assessing officer cannot now disturbed in subsequent years this deduction. Accordingly, ground number 2 of the appeal is dismissed.
24. Ground number 3 of the appeal is with respect to the disallowance deleted by the learned CIT – A on account of interest expenditure of INR 1 0154708/–. The briefly the fact shows that the assessee has earned interest on income tax refund of INR 8 42910/– which has been shown by the assessee under the head income from other sources however assessee has claimed the total interest expenditure of INR 1 0378848/– under the head profits and gains of the business and the claimed it as allowable u/s 36 of the income tax act. The learned assessing officer noted that income of the assessee the income from other sources and therefore the deduction is only allowable u/s 57 of the income tax act. Therefore a disallowed the interest expenditure. The learned CIT – A deleted the above disallowance holding that interest expenditure incurred by the assessee is for the purposes of the business and therefore it is allowable u/s 36 of the income tax act. Alternatively, he also held that it is also allowable as deduction under section 57 of the income tax act.
The learned departmental representative vehemently supported the order of the learned assessing officer and stated that as assessee does not have any business, therefore the interest expenditure claimed by the assessee is not allowable to the assessee has deduction u/s 36 of the income tax act. He also contested that it is also not allowable to the assessee as deduction u/s 57 of the income tax act.
The learned authorised representative vehemently supported the order of the learned CIT – A.
We have carefully considered the rival contentions and perused the orders of the lower authorities. The learned CIT – A has dealt with the whole issue along with the deduction claimed by the assessee u/s 35D of the income tax act as under:- “5.3.2 I have gone through the facts and circumstances of the case and argument placed before me by the learned counsel for the appellant. As already held by me in my decision against the ground number 2, the income which has been on by the appellant should be subjected to tax under the head business income as rightly claimed by the appellant and consequently the appellant is entitled to deduction of interest which has been claimed by him as an expenditure, the sum being relatable to the borrowed funds which in turn have been utilized in the business of the appellant. It is not the case of the assessing officer that the funds on which interest is being paid have not been used for the business purposes of the appellant and therefore I find no justification in disallowing the expenditure of INR 1 0154708/–. Alternatively also, if the income is subjected to tax under the head income from other sources the appellant is entitled to deduction of claim of interest on the funds borrowed which, in turn, have augmented the income of the appellant under the head income from other sources and therefore the same is a direct Nexus with the earning of income and is fully allowable u/s 57 of the income tax act. In light of the above, I direct the assessing officer to delete the addition of INR 1 0154708/–.”