MANAZ RETAIL P.LTD,MUMBAI vs. DCIT RG 8(2), MUMBAI

Manz Retail P. Ltd. 1013/Mum/2017 ORDER

PER N.K. PRADHAN, AM

s filed by the assessee read as under: 1.1 The Ld. CIT(A erred in confirming the action of the Deputy Commissioner of Income Tax, Range-8(2), Mumbai [“the AO”], in making addition of Rs.1,43,50,000/- u/s 68 of the Income Tax Act, 1961 on account of share application money received by the appellant. 1.2 It is submitted that, in the facts and in the circumstances of the case, and in law, no such addition was called for. 2.1 The Ld. CIT(A) erred in confirming the action of the AO in making disallowance u/s 14A of the Act, to the extent of Rs.18,37,500/- towards alleged expenditure incurred for earning dividend income. 2.2 It is submitted that in the facts and the circumstances of the case, and in law, the case of the appellant was not covered u/s 14A of the Act and in any case, no disallowance was called for under this section. 2.3 Without prejudice to the above, it is submitted that assuming but not admitting that some disallowance was required to be made u/s 14A of the Manz Retail P. Ltd. 1013/Mum/2017 Act, the calculation of disallowance is not in accordance with the law, is arbitrary and is excessive.

3. We begin with the 1st ground of appeal. During the course of assessment proceedings, the AO noticed that the assessee had received share application money from 18 parties amounting to Rs.3,33,54,170/-. Out of these 18 parties, 16 parties belonged to ‘Biyani Family’ i.e. ‘Promoters of Future Group’ and the following two parties were from outside from whom the assessee had taken share application money amounting to Rs.1,43,50,000/-. The details of the two parties are as under:

(i) Anisha Estate Pvt. Ltd. Calcutta Rs.43,50,000/- (ii) Quick Pay Suppliers Pvt. Ltd. Rs.1,00,00,000/- Total Rs.1,43,50,000/- The AO noted that in response to a query raised by him, the assessee submitted details along with documentary evidence in respect of share application money received from ‘Biyani Family’. However, the assessee failed to file any documentary evidence and confirmation in respect of the above two parties. The AO was of the opinion that the assessee failed to prove the identity of the persons, their creditworthiness and the genuineness of the transaction. Therefore, he made an addition of Rs.1,43,50,000/- as ‘unexplained cash credits’ u/s 68 of the Act.

Manz Retail P. Ltd. 1013/Mum/2017 Name of the Parties As on 31.03.2005 As on 31.03.2006 Money received/ (repaid) during AY 2006-07 Aahan Biyani 8,60,000 8,60,000 - Anil Biyani - HUF 75,000 75,00O - Anil Biyani 3,14,900 3,14,900 Anisha Estate & - 43,50,000 43,50,000 Finance Pvt. Ltd. Aryan Biyani 3,40,000 3,40,000 - Ashni Kishore Biyani 7,20,000 - (7,20,000) GodavarideviBiyani 50,000 50,000 - GopikishanBiyani 19,64,900 19,64, 900 GopikishanBiyam - 1,61,750 1,61,750 - HUF IshaBiyani 4,20,000 4,20,000 - KeshavBiyani 6,60,000 6,60,000 - LaxminarayanBiyani 1,34,000 1,34,000 - NikunjBiyani 4,80,000 4,80, 000 NishtaBiyani 1,40,000 1,40,000 - Quick Pay Suppliers 1,00,00,000 1,00,00,000 - Pvt. Ltd. Rakesh Biyani 35,11,500 35,11,500 - Rakesh Biyani-HUF 75,000 75,000 - Sunil Biyani 90,02,120 90,02,120 - Sunil Biyani -HUF 2,15,000 2,15,000 - Total 2,97,24,170 3,33,54,170 36,30,000 7.1 A perusal of the above table clearly indicates that the share application money in the case of Anisha Estate & Finance Pvt. Ltd. Manz Retail P. Ltd. 1013/Mum/2017 amounting to Rs.43,50,000/- is the only fresh one during the AY 2006- 07. The addition of balance amount of Rs.1,00,00,000/- made by the AO relates to earlier years. The issue of taxability can be agitated only for Rs.43,50,000/- during the impugned assessment year. The addition of balance amount of Rs.1,00,00,000/- made by the AO u/s 68 is, therefore, deleted. Now we discuss the issue of taxability of Rs.43,50,000/-. It is well settled that in order to discharge the onus u/s 68, the assessee must prove the following: (i) the identity of the creditor, (ii) the capacity of the creditor to advance money; and (iii) the genuineness of transaction. We are of the considered view that after the assessee has adduced evidence to establish prima facie the aforesaid, the onus shifts to the department. In the instant case, we find that the assessee has adduced evidence to establish prima facie the aforesaid and the onus has shifted to the department. However, the department has arrived at a finding without proper enquiry and the conclusion is based on presumptions. Therefore, the addition of Rs.43,50,000/- made by the AO is deleted. Thus the 1st ground of appeal is allowed.

8. Then we come to the 2nd ground of appeal. During the course of assessment proceedings, the AO observed that the assessee had earned dividend income of Rs.18,37,500/-. In response to a query raised by the AO, the assessee submitted before him that the above dividend was Manz Retail P. Ltd. 1013/Mum/2017 received only on shares of Pantaloon Retail (India) Ltd. The assessee also submitted before the AO that no expenditure had been claimed directly or indirectly in earning the dividend income and therefore, no expenditure would be disallowed. Further, the assessee submitted before the AO that investment in Pantaloon Retail (India) Ltd. had been made out of reserves and surplus and no interest bearing fund was involved. However, the AO was not convinced with the above explanation of the assessee for the reason that the assessee had reserves and surplus only to the extent of Rs.4.78 crores and non-interest bearing funds which at the most considered by the assessee could be unsecured loan amounting to Rs.19.50 crores as against shares of Pantaloon Retail (India) Ltd. of Rs.58.29 crores. Further, the assessee had taken secured loan as high as Rs.64.96 crores and the acquisition of shares had been done through secured loans only. Therefore, the AO made a disallowance of Rs.25,92,128/- u/s 14A r.w. Rule 8D.

9. Aggrieved by the order of the AO the assessee filed an appeal before the Ld. CIT(A). We find the Ld. CIT(A), after considering the contentions of the assessee held that the disallowance u/s 14A r.w. Rule 8D should not exceed the amount of exempt income earned and relying on the order of the Tribunal in the case of Daga Global Chemicals Pvt. Ltd. (ITA No. 5592/Mum/2012 dated 01.01.2015), restricted the disallowance to the extent of the exempt income of Rs.18,37,500/-.

10. Before us, the Ld. counsel of the assessee submits that in order to make a disallowance u/s 14A r.w. Rule 8D, the pre-conditions like Manz Retail P. Ltd. 1013/Mum/2017 satisfaction of the AO, examination of the books of the assessee, establishment of proximate connection of expenditure with exempt income etc. have to be first met. Only then, Rule 8D can be invoked. Further it is stated that the AO has to establish that some expenditure has actually been incurred by the assessee or the claim of the assessee is incorrect and in absence of such finding, no disallowance can be made u/s 14A r.w. Rule 8D. Also it is submitted that disallowance u/s 14A cannot exceed the amount of exempt income. Finally, it is stated that once an expenditure is allowed/disallowed under normal provisions, double addition cannot be made u/s 14A of the Act.

As held by the Hon’ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd. (ITA No. 626 of 2010 dtd. 12.08.2010), Rule 8D of the Income Tax Rules 1962 is applicable only prospectively i.e. from A.Y. 2008-09. As further held by the Hon’ble Bombay High Court in the said case, the quantum of disallowance u/s 14A for the years earlier to A.Y. 2008-09 has to be worked out by adopting some reasonable method. In this context, the ld. Counsel for the assessee has submitted that in the earlier years, a similar disallowance made by the A.O. has been sustained by the ld. CIT(A) to the extent of 2% of the total exempt income earned by the assessee and the same being Manz Retail P. Ltd. 1013/Mum/2017 reasonable, the assessee has accepted it. We, therefore, direct the A.O. to verify this aspect from the assessment records of the earlier years and accordingly restrict the disallowance out of common administrative expenses to 2% of the total exempt income.

The above order of the Tribunal has been affirmed by the Hon’ble Bombay High Court.

12.1 In the instant case, we are concerned with the AY 2006-07. Facts being identical, we follow the above order of the Co-ordinate Bench and direct the AO to restrict the disallowance out of common administrative expenses to 2% of the total exempt income. Thus the 2nd ground of appeal is partly allowed. Assessment Year: 2006-07

filed by the revenue read as under:

1. Whether on the facts and in circumstances of the case and in law, the Ld. CIT(A) was justified in holding the income from sale of shares of Rs.1,32,93,168/- as 'income from Short Term Capital Gain' as against 'Income from Business' held by the Assessing Officer, without appreciating the relevant facts; being, the source of purchase of shares were from borrowed funds and there has been no other income earned by the assessee company during the year.

2. Whether on the facts and in circumstances of the case and in Law, the Ld. CIT(A) was justified in holding the income from sale of shares at Rs.1,32,93,168/- as 'Income from Short Term Capital Gain' as against 'Income from Business' held by the Assessing Officer, without appreciating the circumstantial facts that the shares were purchased and sold within a span of Manz Retail P. Ltd. 1013/Mum/2017 three weeks, involving spurts of 19 transactions and intention was not to hold it as investment.

3. Whether on the facts and in circumstances of the case and in Law, the Ld. CIT(A) was justified in holding the income from sale of shares at Rs.1,32,93,168/- as 'Income from Short Term Capital Gain' as against 'Income from Business' held by the Assessing Officer, by merely following the case laws, rather than appreciating the intention emanating from the quantum, frequency and period of holdings, resulting in the gain.

4. Whether on the facts and in circumstances of the case and in Law, the Ld. CIT(A) was justified in restricting the disallowance mode u/s. 14A of the Income Tax Act, 1961, to the extent of exempt income without appreciating the fact that no such provision exist in the Income Tax Act, 1961, for the same, and ignoring the method prescribed for computation of such disallowance under the Income Tax Act, 1961/ Income Tax Rules, 1962.

14. We discuss below the 1st, 2nd and 3rd ground of appeal together as they address a common issue. During the course of assessment proceedings, the AO noticed that the assessee had declared short term capital gains (STCG) of Rs.1,32,93,168/- during the year. The AO treated the above sum of Rs.1,32,93,168/- as business income for the following reasons : (i) the assessee had share capital of Rs.1,00,000/- and reserve and surplus of Rs.4,78,58,879/-. As against the own funds of Rs.479.59 lakhs, the assessee had made investment in shares which is Rs.6697 lakhs. Also, the assessee had acquired as many as 17,42,814 shares of Pantaloon Retail (India) Ltd. for a cost of Rs.58.29 crores. Thus from the quantum of investment and its comparison to own funds, it is clear that Manz Retail P. Ltd. 1013/Mum/2017 the assessee is engaged in the business of trading in shares and not in investment. (ii) as per the balance sheet, the assessee company has taken loan from banks and financial institutions to the extent of Rs.64.97 crores. As per the loan sanction letters from financial institution, it is observed that all the loans have been taken where the purpose has been specified as “to meet the group fund requirement” and in majority of the cases, share of Pantaloon Retail (India) Ltd. has been pledged as a security at a margin of 60%. Also the same is against the personal guarantee of Shri Kishore Bhiyani and Shri Vijay Bhiyani, who are the main promoters of ‘Future Group’. (iii) as per the P&L account, the income received by the assessee comprises of profit on sale of shares of Rs.132.93 lakhs, dividend income of Rs.18.30 lakhs and interest income of Rs.0.42 lakhs. Therefore, whatever, income is earned on purchase and sale of shares needs to be taxed under the head “Income from business” only. (iv) the value of investment in shares is Rs.66.97 crores against total funds available of Rs.92.67 crores. Hence the ratio of shares to total funds available comes to 72.26%. It indicates that the main business of the assessee is purchase and sale of shares. (v) the assessee has effected sales of Rs.20.36 crores worth of shares, whereas it had purchased total shares worth Rs.80.99 crores. Under no circumstances, an investor can buy such a huge amount of shares, that too against loan.

Manz Retail P. Ltd. 1013/Mum/2017 (vi) further the total holding period of the shares in which profit earned and offered as STCG varies from 7 days to maximum of 30 days, thus on this aspect as well, the assessee cannot be considered an investor. In view of the above reasons, the AO treated the STCG of Rs.1,32,93,168/- as business income.

Manz Retail P. Ltd. 1013/Mum/2017 In Commissioner of Inland Revenue v. Fraser [(1942) 24 TC 498, 502] Lord Normand said: ‘The individual who enters into a purchase of an article or commodity may have in view the resale of it at a profit, and yet it may be that that is not the only purpose for which he purchased the article or the commodity, nor the only purpose to which he might turn it if favourable opportunity for sale does not occurr. . . .. . An amateur may purchase a picture with a view to its resale at a profit and yet he may recognise at the time or afterwards that the possession of the picture will give him aesthetic enjoyment if he is unable ultimately, or at his chosen time, to realise it at a profit . . . . . . .’ An accretion to capital does not become income merely because the original capital was invested in the hope and expectation that it would rise in value; if it does so rise, its realisation does not make it income. Lord Dunedin said in Leeming v. Jones at page 360: ‘The fact that a man does not mean to hold an investment may be an item of evidence tending to show whether he is carrying on a trade or concern in the nature of trade in respect of his investments but per se it leads to no conclusion whatever.’ This court laid down in G. Venkataswami Naidu & Co. v. CIT [1959] 35 ITR 594 (SC) that the dominant or even sole intention to resell is a relevant factor and raises a strong presumption, but by itself is not conclusive proof, of an adventure in the nature of trade. The intention to resell would, in conjunction with the conduct of the assessee and other circumstances, point to the business character of the transaction.” 17.1 We are of the considered view that the substantial nature of transactions, the manner of maintaining books of account, the magnitude of purchases and sales and the ratio between purchases and sales and the holding would furnish a good guide to determine the nature of transactions. Also ordinarily the purchase and sale of shares with the motive of earning a profit, would result in the transaction being in the nature of trade/adventure in the nature of trade; but where the object of the investment in shares of a company is to derive income by