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Income Tax Appellate Tribunal, KOLKATA ‘A(SMC
Before: Shri P.M. Jagtap
These two appeals filed by the assessee are directed against two separate orders passed by the ld. Commissioner of Income Tax (Appeals)- 17, Kolkata, both dated 08.03.2016 for assessment years 2005-06 and 2010-11.
First we take up the assessee’s appeal for A.Y. 2005-06 being ITA No. 1024/KOL/2016, Ground No. 1 of which involves the issue relating to the disallowance of Rs.3,23,969/- made by the Assessing Officer under section 35D and confirmed by the ld. CIT(Appeals).
The assessee in the present case is a Company, which is engaged in the business of transportation, lease financing and trading & investment
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in shares and securities. The return of income for the year under consideration, i.e. A.Y. 2005-06 was filed by it on 04.10.2005 declaring total income of Rs.5,79,330/-. In the Profit & Loss Account filed along with the said return, a sum of Rs.3,23,969/- was debited by the assessee on account of miscellaneous expenditure written off. In this regard, it was explained by the assessee during the course of assessment proceedings before the Assessing Officer that the said expenditure incurred on public issue expenses amounting to Rs.3,22,419/- and preliminary expenses amounting to Rs.1,550/- written off during the year under consideration was deductible under section 35D(2). It was submitted that the said expenditure was incurred before the commencement of its business by the assessee-company and the same was claimed for deduction to the extent of 1/10th in each of the ten consecutive previous years including the year under consideration. The nature of such expenditure aggregating to Rs.32,24,172/- as claimed by the assessee-company was also explained before the Assessing Officer and it was contended that the same was deductible under section 35D to the extent of 1/10th during the year under consideration, as the new business activity was commenced by the assessee during the financial year 1995-96. This claim of the assessee was not found acceptable by the Assessing Officer in the absence of any evidence to substantiate that the assessee-company had commenced its business activity only after the public issue of shares made in the financial year 1995-96. He accordingly disallowed the claim of the assessee for deduction under section 35D for the following reasons:- (i) More than 10 years have ended since the incorporation of the assessee-company;
(ii) The assessee-company is not an Industrial Company;
(iii) Share issue expenses were not for setting up of an Industrial Undertaking;
(iv) Share issue expenses were not for extension of an Industrial Undertaking;
(v) Share issue expenses were in the nature of capital expenditure.
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The disallowance made by the Assessing Officer on account of its claim for deduction under section 35D was challenged by the assessee in the appeal filed before the ld. CIT(Appeals) and since the submissions made by the assessee in support of its case on this issue were not found acceptable by the ld. CIT(Appeals), he confirmed the disallowance made by the Assessing Officer under section 35D for the following reasons given in his impugned order:- “The assessee has claimed share issue expenses of Rs.32,24,172/- as amortisation u/s 35D. It is pertinent to note that the company is already more than ten years old and amortisation of expenses u/s 35D is allowed for preliminary expenses of a new unit. The assessee got itself listed on the Bombay Stock Exchange during the financial year 1995-96. The assessee has contended that the public issue expenses were incurred for commencement of new business and after the public issue the company acquired fixed assets of Rs.2,08,95,425/-. In this context, it is observed that the action of the assessee in going public is a financial decision of the assessee for raising money. Deduction under section 35D is allowed after commencement of business or expansion of the existing industrial unit or for setting up a new industrial unit. The assessee cannot be classified as an industrial manufacturing company as it is engaged in the business of transportation, lease financing and share trading & investment activities. In this case, the nature of business of the assessee remains the same. Moreover, as it is not an industrial company the deduction u/s 35D claimed of Rs.3,23,969/- has rightly been disallowed by the A.O. The same is therefore confirmed”.
I have heard the arguments of both the sides on this issue and also perused the relevant material available on record. It is observed that amortisation of certain preliminary expenses is allowed as per section 35D(1)(i), where an assessee being an Indian Company incurs after 31st March, 1970 any expenditure specified in sub-section (2) before the commencement of its business. In the present case, there is no dispute that the expenditure in question claimed by the assessee was in the nature as specified in sub-section (2) of section 35D. The ld. Counsel for the assessee has also contended that the deduction is being claimed by the assessee under clause (i) of sub-section (1) of section 35D and not
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Clause (ii) thereof as the expenditure in question was incurred by the assessee-company before commencement of its transportation business. In this regard, he has invited my attention to the Profit & Loss Account of the assessee-company for the financial year 1995-96 as placed at pages no. 5 & 8 of the paper book to show that the income from freight having been received by the assessee-company from its operation for the first time in the financial year 1995-96, the business had commenced in that year and the assessee was entitled for deduction on account of preliminary expenses to the extent of 1/10th in each of the ten successive years. It is, however, observed that the similar claim made by the assessee of having commenced the business of transportation in the financial year 1995-96 was rejected by the Assessing Officer on the ground that there was no evidence produced by the assessee to support and substantiate the same. The ld. CIT(Appeals), on the other hand, confirmed the said disallowance made by the Assessing Officer by referring to Clause (ii) of sub-section (1) of section 35D, whereas the claim of the assessee, as submitted by the ld. Counsel for the assessee, is made as per Clause (i) of sub-section (1) of section 35D. Keeping in view all these facts of the case, I consider it fair and proper and in the interest of justice to restore this issue to the file of the Assessing Officer for deciding the same in accordance with Clause (i) of sub-section (1) of section 35D after verifying the claim of the assessee of having commenced the business of transportation in the financial year 1995-96. The assessee is at liberty to produce the relevant documentary evidence to support and substantiate its claim which the Assessing Officer shall verify and decide the issue in accordance with law. Ground No. 1 of the assessee’s appeal is accordingly treated as allowed for statistical purposes.
The issue involved in Ground No. 2 relates to the disallowance of assessee’s claim for set off of speculation loss of Rs.6,49,330/- against the profit of Rs.28,90,809/- earned by the assessee from delivery based transactions.
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During the year under consideration, the assessee-company had incurred speculation loss of Rs.6,49,330/- and the same was adjusted against share trading profit of Rs.28,90,809/- under section 73 of the Act. According to the Assessing Officer, the speculation loss under section 73 of the Act could not be set off against speculation income and the set off of speculation loss as against share trading profit was liable to be disallowed. He accordingly disallowed the claim of the assessee for such set off. The action of the Assessing Officer in disallowing its claim for set off of speculation loss against share trading profit was challenged by the assessee in the appeal filed before the ld. CIT(Appeals) and since the submission made by the assessee in support of its case on this issue was not found acceptable by the ld. CIT(Appeals), he confirmed the action of the Assessing Officer in rejecting the claim of the assessee for set off of speculation loss against the share trading profit for the following reasons given in his impugned order: “The issue here is whether profit of Rs.28,90,809/- earned by the assessee only delivery based share transactions can be treated as speculative profit or not In this case, the assessee had made a speculative loss of Rs.6,49,330/- on share transactions which were settled otherwise than by delivery. The said loss was treated as speculative loss by the AO/ There is no dispute on this point and the assessee also admits the same as speculative loss. However, the AO treated the profit on delivery based share transaction as non-speculative profit. The assessee, on the other hand, treated the same as speculative in nature in terms of the provisions of Explanation to section 73. The AO did not allow the set off of the speculative loss Rs.6,49,330/- against the profit on delivery based transactions of Rs.28,90,809/- treating them as normal business income. The dispute, therefore, is whether the share transaction profits, of Rs.28,90,809/- can be treated as speculative profit under Explanation to section 73. The Explanation has two exceptions: (i) The gross total income of the said company should consist mainly of incomes chargeable under the heads “income from house property”, “capital gains” and “income from other sources”.
I.T.A. Nos 1024 & 1025/KOL/2016 Assessment years:2005-2006 & 2010-2011 Page 6 of 11 (ii) A company the principal business of which is granting of loans and advances.
The company is not engaged in the business of granting of loans and advances so it does not fall in the second category of exception. To examine whether the company falls under the first exception the composition of income under the various heads is analysed as follows: Particulars Amount Profits from (-)Rs.22,53,503/- Transportation Business(A) Non-delivery based share (-)Rs. 6,49,330/- transactions(B) Delivery based share Rs.28,90,809/- transactions(C) Short-term capital gain Rs.25,77,369/- (after brought forward loss set off)(D)
From the composition of the income declare under different heads, it can be seen that the assessee during the year earned short-term capital gain of Rs.33.65 lacs before set off of brought forward losses. After set off the net income under the head capital gain is Rs.25,77,369/-. Therefore, its income under the head capital gains is much more than the business income and accordingly it is not hit by the profits as per explanation to section 73. The action of the AO in treating the profit of Rs.28,90,809/- on delivery based share transactions as normal business income is hereby confirmed”.
I have heard the arguments of both the sides on this issue and also perused the relevant material available on record. As held by the Hon’ble Calcutta High Court in the case of CIT –vs.- Parkview Properties (P) Limited [139 Taxman 38 (Calcutta) cited by the ld. Counsel for the assessee, it is a well settled proposition that the words “income”, “profits” and “gains” have to be understood as including losses in the sense that profit and gains represent positive income whereas loss represents negative income. It was held that this principle is required to be applied even for the purpose of Explanation to Section 73 and if there was a loss in the share dealing account, i.e. Rs.8,98,799/-, which is treated to be a negative profit, then definitely the income from other
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sources and dividend income being Rs.5,73,701/- is lesser. If the said principle is applied in the facts of the present case, I find that the gross total income of the assessee would not consist mainly of income, which is chargeable under the head “capital gains” as its business income could be more than income from capital gains and the profit from the purchase and sale of shares could be deemed to be a speculation profit as per Explanation to section 73. Consequently the assessee would be entitled to set off this speculation loss from the said profit as per section 73 as rightly claimed by it. I, therefore, allow the claim of the assessee for such set off and allow Ground No. 2 of the assessee’s appeal for A.Y. 2005-06.
Now we shall take up the appeal of the assessee for A.Y. 2010-11 being ITA No. 1025/KOL/2016, which involves a solitary issue relating to the disallowance of Rs.11,46,263/- made by the Assessing Officer under section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962, which is confirmed by the ld. CIT(Appeals).
During the previous year relevant to the Assessment Year 2010-11, the assessee-company had earned dividend income of Rs.10,02,821/- which was claimed to be exempt from tax. The disallowance of expenses incurred in relation to the said exempt income to the extent of Rs.3,77,450/- was offered by the assessee in the computation of total income in accordance with section 14A. For the reasons given in the assessment order, the Assessing Officer did not accept the quantum of disallowance offered by the assessee under section 14A and proceeded to work out such disallowance to be made under section 14A by applying Rule 8D as under:- “(1) As per Rule 8D(2)(i): Assessee incurred Demat expenses amounting to Rs.19,867/- and expenses relating to shares amounting to Rs.77,753/- and debited the same in P&L A/c. Hence, disallowance under Rule 8D(2)(i) comes to Rs.97,620/- {Rs.19,867/- + Rs.77,753/-].
(ii)As per Rule 8D(2)(ii): Disallwoance under Rule 8D(2)(ii) = Interest (A) x (B)/(C), where ‘A’ stands for
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amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the year. ‘B’ stands for the average of value of investment, income from which does not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; and ‘C’ stands for the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year.
On perusal of audited balance sheet submitted by assessee, it is seen that the average value of investment in shares and units of mutual funds is Rs.6,10,86,132/- (B); Average value of assets is (Rs.13,70,80,884/- + Rs.17,48,10,702/-)/2 =Rs.15,59,45,793/- (C); and expenditure by way of interest is Rs.28,61,176/- (A). Therefore, disallowance under Rule 8D(2)(ii) = Interest (A) x (B)/(C) =Rs.28,61,176/- x Rs.6,10,86,132/-/Rs.15,59,45,793/- =Rs.11,20,763/-.
(iii)The average value of investment which as per Rule 8D(2)(iii) is worked out as: Opening investment + Closing investment 2
=Rs.5,64,90,504/- + Rs.6,56,81,760/- = Rs.6,10,86,132/- 2
Therefore, disallowance u/s. 8D(2)(iii) = 0.5% of the average of value of investment =0.5% of Rs.6,10,86,132/- = Rs.3,05,430/-“.
The Assessing Officer thus worked out the disallowance to be made under section 14A by applying Rule 8D at Rs.15,23,813/- and since the assessee- company had already made a disallowance of Rs.3,77,450/-, a further disallowance of Rs.11,46,363/- was made by him under section 14A.
The disallowance made by the Assessing Officer of Rs.11,46,363/- under section 14A was challenged by the assessee in the appeal filed before the ld. CIT(Appeals) and since the submissions made by the assessee in support of its case on this issue were not found acceptable by the ld. CIT(Appeals), he confirmed the said disallowance for the following reasons given in his impugned order:-
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“The grievance of the assessee is that while working disallowance as per Rule 80(2)(ii) the AO has taken the figure of interest at Rs. 28,61,176/- as against the figure purposed by them of Rs. 8,14,713/-. The difference in the interest figure comes on account of Interest on loan for purchase of vehicle of Rs. 20,46,463/·. It is the contention of the assessee that since the loan for purchase of vehicle was for acquiring trucks and tankers, which were subsequently used in the transportation business, the same should not be considered for the purposes of computing the disallowance u/s. 14A. In the assessment order the AO has recorded his satisfaction for invoking Rule 8D. The assesee had suomoto offered disallowance of Rs.3,77,450/· u/s. 14A. The AO observed that the assessee had substantial investments in shares from which considerable exempted income was earned, Further, he observed that the assessee had not maintained the separate books of accounts so as to quantify the expenses in relation to the exempt income. Accordingly, he invoked Rule 8D. Now the contention of the assessee is that interest paid towards vehicle loan should not be taken into consideration for computing the disallowance under Rule 8D(2)(ii). The purpose of introduction of Rule 8D was to bring uniformity in the methodology for computing the disallowance u/s. 14A. The basic purpose was to ensure that all AO followed a uniform code while working the disallowance u/s.14A, the intention being to reduce the subjectivity in computing the said disallowance. Now the assessee wants to introduce a further complication with its contention that interest paid for vehicle loan should be excluded while computing the disallowance u/s. 14A. This being so it defeats the basic intention behind the introduction of Rule 8D. It is a settle principle of law that when the language of statute is clear nothing extra should be read into it. The Rule 8D(2)(ii) is simple and gives the disallowance u/s.14A on account of interest' paid. The Rule does not speak about excluding any kind of interest. Therefore, I do not see any infirmity in the order of the AO and the disallowance mae on this ground is hereby confirmed”.
Aggrieved by the order of the ld. CIT(Appeals), the assessee has preferred this appeal before the Tribunal.
I have heard the arguments of both the sides and also perused the relevant material available on record. The ld. Counsel for the assessee has
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mainly disputed the disallowance under section 14A as made by the Assessing Officer on account of interest by applying Rule 8D(2)(ii) at Rs.11,20,763/-. In this regard, he has pointed out from the balance-sheet of the assessee-company for the year under consideration that sufficient own funds in the form of share capital and Reserve & Surplus to the tune of Rs.11.71 crores were available with the assessee-company at the relevant time and the same being more than the investment made by the assessee-company in shares amounting to Rs.6.57 crores, no disallowance on account of interest under section 14A was warranted. Since the ld. D.R. has also not disputed this position which is clearly evident from the relevant balance-sheet of the assessee-company showing that sufficient own funds were available with the assessee-company to make the investment in shares at the relevant time, I find merit in the contention of the ld. Counsel for the assessee that the disallowance on account of interest under section 14A as made by the Assessing Officer by applying Rule 8D and confirmed by the ld. CIT(Appeals) is not warranted. In my opinion, the disallowance under section 14A read with Rule 8D thus works out to Rs.4,03,050/- as against Rs.15,23,813/- worked out by the Assessing Officer. I accordingly direct the Assessing Officer to re-compute the disallowance to be made under section 14A read with Rule 8D and allow partly the appeal of the assessee for A.Y. 2010-11.
In the result, the appeal of the assessee for A.Y. 2005-06 is treated as allowed, whereas the appeal of the assessee for A.Y. 2010-11 is partly allowed. Order pronounced in the open Court on October 12, 2018.
Sd/- (P.M. Jagtap) Accountant Member Kolkata, the 12th day of October, 2018
Copies to : (1) M/s. Inter State Oil Carrier Limited, 113, Park Street, Poddar Point, South Wing, 5th Floor, Kolkata-700 016
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(2) Income Tax Officer, Ward-8(4), Kolkata, Aayakar Bhawan, 5th Floor, Kolkata-700 069 (3) Commissioner of Income Tax (Appeals)-17, Kolkata, (4) Commissioner of Income Tax- , (5) The Departmental Representative (6) Guard File By order
Senior Private Secretary, Head of Office/D.D.O. Income Tax Appellate Tribunal, Kolkata Benches, Kolkata Laha/Sr. P.S.