Loading judgment…
No AI summary yet for this case.
Before: Shri I.C. Sudhir & Shri L.P. Sahu
In the Income-Tax Appellate Tribunal, Delhi Bench ‘B’, New Delhi Before : Shri I.C. Sudhir, Judicial Member And Shri L.P. Sahu, Accountant Member ITA No. 286/Del./2013 Assessment Year: 2008-09 Eastman Industries Ltd., vs. A.C.I.T., Circle 10(1), Plot No. 101, 1st Floor, Community New Delhi. Centre, Naraina Industrial Area, Phase-I, New Delhi. PAN- AAACE 0633N (Appellant) (Respondent) ITA No. 45/Del./2013 Assessment Year: 2008-09 A.C.I.T., Circle 10(1), vs. Eastman Industries Ltd., New Delhi. Plot No. 101, 1st Floor, Community Centre, Naraina Industrial Area, Phase-I, New Delhi. PAN- AAACE 0633N (Appellant) (Respondent)
Assessee by Sh. D.C. Agrawal, Advocate and Sh. Sachin Vasudeva, C.A. Revenue by Sh. Atul Kumar Sharma, Sr. DR
Date of Hearing 11.05.2017 Date of Pronouncement 09.06.2017
ORDER Per L.P. Sahu, A.M.: These two cross appeals by the assessee and the Revenue are directed against the order of ld. CIT(A)-XIII, New Delhi for the assessment year 2008-09. Both the parties have raised following grounds in their respective appeals :
ITA Nos. 286 & 45/Del./2013 2
Grounds raised by the assessee : 1. (a) That the Learned CIT(A) has erred in sustaining the disallowance under section 14A of the Act at Rs. 14,43,230 by applying Rule 8D of the Income-tax Rules, 1962 on the alleged contention that the said expense has been incurred for earning dividend income and long term capital gain without giving credence to the explanations furnished by the appellant in this regard that no disallowance is warranted as per the aforesaid Rule in view of the appellant itself having disallowed the actual expenditure of Rs.1,05,329 incurred for earning the exempt income. (b) That in this connection the learned CIT(A) has also erred in sustaining the disallowance under section 14A read with Rule 8D as there is no satisfaction recorded by the Learned Assessing Officer that the appellant has incurred expenditure in excess of the amount already disallowed to earn exempt income. Before any addition can be sustained, the Assessing Officer had to establish the proximate relationship between the expenditure incurred for earning such exempt income. (c) Without prejudice to the above, the learned CIT(A) has erred in stating that the appellant had received dividend income from the subsidiary company and thereby, included the investment made in subsidiary company while computing the amount of average investments. 2. (a) That the Learned CIT(A) has erred in upholding the decision of the learned Assessing Officer in not allowing the benefit of carry forward of long term capital loss amounting to Rs. 21,06,266/- out of the total loss of Rs 38,58,662 incurred by the appellant on winding up of its subsidiary in Dubai in the relevant assessment year. (b) Without prejudice to above, the learned CIT(A) has not given its comments on the facts that if the loss is not allowed as long term capital loss, then the same be treated as trading loss of the appellant. 3. Without prejudice to the above, if the loss amounting to Rs 21,06,266/- is not allowed to be carried forward as a capital loss then the loss may be allowed as a deduction under section 28 of the Act as a trading loss.
Grounds raised by the Revenue:
ITA Nos. 286 & 45/Del./2013 3
On the facts and circumstance of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.10,064/- made on account of excess depreciation on computer peripherals. 2. On the facts and circumstance of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.10,19,203/- made on account of guarantee commission paid to Directors. 3. On the facts and circumstance of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.68,81,00/- made under section 14A read with Rule 80 of Income Tax Rules, 1962. 4. On the facts and circumstance of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.93,99,131/- made on account of capital gain treated as business income.
From the above grounds of both the appeals, following issues are emerged for adjudication by us :
(i). Sustenance of disallowance u/s. 14A – Rs.14,43,230/- & deletion of disallowance u/s. 14A – Rs.68,81,000/- as against total disallowance made by AO of Rs.83,24,231/-. (ii). Partial benefit of carry forward capital losses.
(iii). Deletion of disallowance made by AO on account of excess depreciation claimed on UPS & Data Drive of Rs.10,064/-.
(iv). Deletion of disallowance u/s. 37(1) of Guarantee Commission paid to directors - Rs.10,19,203/-. (v). Treatment of profit on sale and purchase of shares - Rs.93,99,131 - Whether business income as considered by AO or capital gains as considered by ld. CIT(A).
On issue No. (i), both the assessee and Revenue have challenged the impugned order of the ld. CIT(A). Brief facts relevant to this issue are that the assessee company is engaged in the business of manufacturing, trading
ITA Nos. 286 & 45/Del./2013 4
and export of cycle parts and auto parts etc. The assessee and the Revenue have challenged the order of ld. CIT(A) by way of grounds Nos. 1(a)(b)(c) and ground No. 3 respectively.
There is dispute regarding application of section 14A by the Assessing Officer for calculation of income which does not form part of the total income. The assessee had submitted detailed calculation before the ld. CIT(A), in which he has already disallowed a sum of Rs.1,05,329/- whereas the Assessing Officer has mentioned in his order only Rs.971/-. The ld. CIT(A) after discussing the facts in his order, has taken the disallowance by the assessee of Rs.1,05,329/-. During the assessment year as well as preceding assessment year, the assessee has invested in the partnership firm viz., Eastman Industrial Company at Rs.9,64,70,056/- & Rs.6,83,06,387/- respectively and he has received interest of Rs.84,17,935/- which has been stated to have been offered for tax by the assessee. During the year, the assessee has also earned share of profit from partnership firm for a sum of Rs.12,95,735/- as credited into the profit and loss account which are exempt u/s. 10(2A) of the IT Act. During the assessment year and preceding assessment year, he has also invested in his subsidiary company a sum of Rs.4,96,00,000/- and Rs.96,00,000/- respectively. During the year, the assessee has paid interest of Rs.1,83,97,713/- and this total interest expenditure has been considered while calculating the disallowance u/s. 14A by the Assessing Officer. The breakup of interest is as under :
ITA Nos. 286 & 45/Del./2013 5
(i). Working capital Rs.64,23,126/- (ii). Interest paid on unsecured loan Rs. 80,943/- (iii). Interest paid to supplier(Imports) Rs.56,27,029/- (iv). Bank & other charges Rs.62,66,615/-
The assessee contended before the CIT(A) that only working capital loan interest of Rs.64,23,126/- and interest paid on unsecured loan of Rs.80,943/- should be taken as per Rule 8D(ii) of the IT Rules, 1962 and interest paid to supplier (imports) and bank and other charges should not be considered for that purpose and this contention has been accepted by the ld. CIT(A).
There was total average investment of Rs.16,50,67,554/-. The assessee contended before the ld. CIT(A) that investment in shares, securities, investments in subsidiary company in which dividend received is exempt and capital gain on sale of shares is also exempt. He also contended that on investment in partnership firm, the assessee had received interest of Rs.84,17,935/- which is taxable income. Therefore, such investment cannot be considered for earning exempt income and the same has to be reduced from the average total investment of Rs.16,50,67,554/-. Accordingly, the ld. CIT(A) has reduced Rs.8,23,88,221/- and considered average value of investment at Rs.8,26,79,332/-. The ld. CIT(A) has also taken average value of total assets at Rs.52,21,73,804/- whereas the assessee calculated total value of Rs.54,03,73,804/-. The assessee had relied on various case laws before the authorities below. Accordingly, the ld. CIT(A) calculated the disallowance u/r. 8D(2)(ii) of Rs.10,29,833/-. He further calculated the
ITA Nos. 286 & 45/Del./2013 6
disallowance u/s. 8D(2)(iii) at Rs.4,13,397/- being 0.5% of average investment of Rs.8,26,79,332/-. Therefore, the total disallowance u/s. 14A comes to Rs.13,37,901/- (10,29,833 + 4,13,397 – 1,05,329/-). Aggrieved by this disallowance, the assessee and revenue both are in appeal before the ITAT.
The ld. AR submitted that the calculation made by the ld. CIT(A) is not justified because he has not considered the explanations made before him. The detailed submissions were made with respect to suo moto disallowance of Rs.1,05,329/- made by assessee u/s. 14A by the assessee himself and the details were placed before the ld. CIT(A). The calculation made by the CIT(A) u/r 8D(2)(ii) regarding value of total investments and total assets both are wrong. While calculating average investment by the Assessing Officer, the investment in subsidiary company has been taken wrongly. The ld. CIT(A) has also wrongly calculated the average value of total assets. He had placed a calculation before the ld. CIT(A) in which there was a total disallowance of Rs.10,09,602/-. He further submitted that these calculations were not considered by the ld.CIT(A) in spite of detailed submissions made before him. No satisfaction was recorded by the Assessing Officer in his order and applied Rule 14A whereas the assessee had already disallowed Rs.1,05,329/-
The ld. DR relied on the order of the AO. He further submitted that the CIT(A) has wrongly calculated the disallowance u/s. 14A which is not justified.
ITA Nos. 286 & 45/Del./2013 7
After hearing both the sides and perusing the relevant material on record, we find that the ld. CIT(A) has reduced the investment made in the partnership firm by considering that the assessee has received interest from the partnership firm and therefore, it is not a exempted income. While analyzing the profit and loss account of the assessee, the assessee has shown share of profit from the partnership firm of Rs.12,95,735/-. The appellant has submitted that sum of Rs.84,17,935/- has been received as interest on investment in partnership firm, but nowhere it is appearing in the income head under schedule VIII and schedule IX of the financial statement. The appellant has received share of profit from partnership firm which is exempt u/s. 10(2A) of the IT Act. Further the ld. CIT(A) has taken average value of total assets of Rs.52,21,73,804/- whereas the appellant has calculated average value of total assets at Rs.54,03,73,804/-. The calculation made by the CIT(A) in the total value of average assets is not clear from his order, as this difference has not been clarified in the impugned order.
It is clear from the order of ld. CIT(A) that the assessee has made payment of interest of Rs.1,83,97,713/- which were categorically submitted before the ld. CIT(A) and the ld. CIT(A) has accepted only the interest of Rs.65,04,069/- (working capital loan interest Rs.64,23,126 & interest paid on unsecured loan of Rs.80,943/-) and rest interest and bank & other charges has not been considered by the ld. CIT(A). The ld. CIT(A) has accepted the details of interest component.
ITA Nos. 286 & 45/Del./2013 8
In presence of all the above facts, we deem it expedient in the interest of justice to restore this entire issue to the file of AO (i) to examine that amount of Rs.84,17,935/- received as interest income from the partnership firm is not shown in the profit & loss account nor any explanation with regard to it has been placed on record as to where and under which, the said income has been shown by the assessee in its books of account. (ii) The ld. CIT(A) has reduced the investment in partnership firm from the value of average investment whereas the share of profit from partnership firm is exempt u/s. 10(2A) of the Act and the share of profit from partnership firm has been credited into the profit and loss account. However, while calculating the average investment, the investment in partnership firm is not to be reduced in the light of decision dated 25.05.2012, of Special Bench, Ahmedabad Bench in ITA No. 3002/Ahd./2009 for the assessment year 2006-07 in the case of Shri Vishnu Anant Mahajan. The AO is directed to recalculate the average investment in the light of this decision of Special Bench of Tribunal and (iii). The ld. CIT(A) has considered the average value of total assets at Rs.52,21,73,804/- whereas the appellant has calculated average value of total assets at Rs.54,03,73,804/- and we do not find any clarification regarding this difference of Rs.1,82,00,000/- in the impugned order. The AO is, therefore, directed to examine as to what is the exact figure representing average value of total assets – whether Rs.54,03,73,804/- as declared by the assessee or Rs.52,21,73,804/- as considered by the ld. CIT(A) and shall accordingly calculate the average
ITA Nos. 286 & 45/Del./2013 9
value of total assets afresh for the purpose of disallowance u/r. 8D of the Act. Accordingly, the issue is restored to the file of Assessing Officer to decide the same afresh in the light of observations made in the body of this order. Needless to say, the assessee shall be given reasonable opportunity of being hears. As a result, ground No. 1(a)(b)(c) raised by the assessee and ground No. 3 raised by Revenue deserve to be allowed for statistical purposes.
With respect to issue No. (ii) raised by assessee in ground No. 2 & 3, the relevant facts are that the assessee claimed to have invested Rs.18,35,954/- in equity share of Eastman Middle East, LLC, Dubai, an associate concern of assessee and given loan of Rs.17,62,904/- to one Khalid Kazim Mohd. Abdullah for buying equity shares of Eastman Middle East, LLC, Dubai. Since this subsidiary company stood closed, therefore, the assessee worked out the total capital loss of Rs. 41,29,932/- (Rs.20,23,666 on account of Equity shares + Rs.21,06,266/- on account of loan given to Khalid Kazim Mohd.) after taking benefit of indexation on the amounts of investments. After deducting the gain on mutual funds of Rs.2,71,270/-, the assessee claimed total long term capital loss of Rs.38,58,662/- to be carried forward. The ld. Assessing Officer did not address this issue in the assessment order. The ld. CIT(A), however, keeping in view the fact that the assessee company was holding 49% of the shares of said company, restricted the claim of capital loss attributable to investment made in only equity share of the said foreign company and directed the AO to allow
ITA Nos. 286 & 45/Del./2013 10
capital loss keeping in view 49% of the share holding after due verification. The ld. CIT(A), however, rejected such claim amounting to Rs. 21,06,266/- which was attributable to the loan given to Khalid Kazim Mohd. Abdulla allegedly for purchasing equity shares. Being aggrieved, the assessee has challenged impugned order on this issue before the Tribunal.
The ld. AR submitted that the assessee was share holder of 49% in Eastman Middle East, LLC, Dubai, which was wound up. In addition to investment in equity shares, the assessee had also given loan to Khalid Kazim Mohd Abdulla for buying the equity shares in the said company. The contention of the assessee before the ld. CIT(A) has been that as per the regulations of UAE, any company which intends to set up a limited liability company in Dubai has to have one shareholder who is a local resident of Dubai. In addition to this stipulation, there is another condition that such a local resident should own 51% shareholding of the LLC and in order to meet this requirement the company had given loan amounting to Rs.18,34,860/- to Mr. Khalid Kazim Mohd who in turn gave this money as his share capital in the LLC and also entered into a share value contribution agreement confirming as under :
(a) Under no circumstances he will be entitled to or claim benefits, rights and value attached to or accrued with the said shares (b) He will not be responsible for any loss, dues, claims etc (c) He shall never sell, assign, sale and/or transfer the shares under any circumstances
ITA Nos. 286 & 45/Del./2013 11
(d) He will pledge the shares with the Company (e) He irrevocably assigns all dividend and income accruing on those shares
He further submitted that since the company had wound up, therefore, it should be treated as capital loss or alternatively, it should be treated as loss deductible u/s. 28 of the IT Act.
On the other hand, the ld. DR relied on the order of the ld. CIT(A) and submitted that the ld. CIT(A) has passed good order, which needs no interference on this issue.
We have heard the rival submissions and have gone through the entire material available on record. We find that the Assessing Officer has not dealt with this issue and detailed submissions were made before the ld. CIT(A). The ld. CIT(A) has allowed capital loss keeping in view 49% of the share holding of the assessee company, but he did not allow the loss claimed due to loan given to Khalid Kazim Mohd. Abdulla. The ld. CIT(A) appears to have not examined this issue in right perspective. We deem it expedient in the interest of justice to send this issue back to the file of AO to examine as to for what purpose, the impugned loan was advanced by the assessee company to Mr. Khalid Kazim Mohd. Abdulla, as there is no evidence on record before us to examine whether the amount was actually sent/transferred to foreign country after due approval from RBI. Therefore,
ITA Nos. 286 & 45/Del./2013 12
unless the transfer of money to foreign country as per rules and the purpose of such transfer is verified/proved, it will not be proper to decide this issue. We, therefore, restore this issue to the AO for deciding this issue in the light of observations made above. Accordingly, ground Nos. 2 & 3 of assessee’s appeal are allowed for statistical purposes.
The brief facts relating to issue No. (iii) are that in the course of assessment proceedings, the AO noticed from depreciation chart that during the year, the assessee had claimed depreciation on UPS systems and data drive of Rs.50,824/- @ 60%. However, the Assessing Officer allowed depreciation on these items at the rate of 35% and 17.5% depending upon their duration of usage, i.e., above 180 days and below 180 days on the premise that these equipments are part of plant and machinery for depreciation purposes. He, therefore, disallowed the excess claim of depreciation on UPS system and Data Drive amounting to Rs.10,064/-. The ld. CIT(A), after following the decision of Hon’ble jurisdictional High Court in the case of CIT vs. BSES Yamuna Power Ltd. (2010) TIOL 636 and CIT vs. Orient Ceramics & Industries Ltd. (2011)TIOL 6, allowed the depreciation on UPS and data drive systems @ 60% if the said equipments were used for more than 180 days and @ 30% in case of their use for less than 180 days. The Revenue was not satisfied with this decision of ld. CIT(A), hence, the same has been challenged by way of ground No.1 of Revenue’s appeal.
ITA Nos. 286 & 45/Del./2013 13
The ld. DR reiterating the observations of the Assessing Officer, submitted that the ld. CIT(A) was not justified in allowing higher depreciation on the equipments of computers as noted above. On the other hand, the ld. AR of the assessee relied on the order of first appellate authority who has allowed higher depreciation after following the decisions of Hon’ble Jurisdictional High Court.
Having considered the rival submissions in the light of material available on record, we find no justification to interfere with the order of the ld. CIT(A) on this issue. The ld. CIT(A) has noted that during the year under consideration, the assessee had purchased new UPS systems and data drive of Rs.50,824/- to be used with computers. Out of aforesaid UPS and data drive aggregating to Rs.29,692/- were put to use for more than 180 days and the remaining UPS system and data drive aggregating to Rs.21,132/- were put to use for less than 180 days. There is no dispute on this fact. There is also no contrary material from the side of Revenue that these equipments are used along with the computers and thus, constitutes integral part of computer system. Hon’ble Jurisdictional High Court in the cases of CIT vs. BSES Yamuna Power Ltd. (supra) and CIT vs. Orient Ceramics & Industries Ltd. (supra) have clearly held that UPS and Data drive are to be treated as part and parcel of the computer system and depreciation has to be allowed at higher rate as applicable to the computer @ 60%. Accordingly, we do not find any good reason to interfere with the order of the ld. CIT(A)
ITA Nos. 286 & 45/Del./2013 14
on this count. Ground No. 1 of the Revenue’s appeal is, therefore, dismissed.
The brief facts, relevant to issue No. (iv) above, are that during the assessment proceedings, the assessee had debited a sum of Rs.10,19,203/- under the head “Commission paid against guarantee by directors”. On being asked, the assessee explained that the assessee company had obtained working capital limits from bank which were secured by way of hypothecation of plant & machinery, fixed assets, stocks, bicycles and auto parts in process, finished goods, book debts, export bills & other receivables and goods in transit. It was further explained that the loans were also secured by equitable mortgage of lease hold rights of Plot No. C- 87 & C-88, Phase V, Focal Point, Ludhiana and also by personal guarantee given by two directors of the company. In lieu of this personal guarantee, the assessee company had paid commission @ 0.6% of the amount of guarantee amounting to Rs.10,19,293/-. The details of these expenses are as under : Name of the director Amount of Commission Commission Guarantee in (Rs) allowed at paid in (Rs) the rate Shri J.H. Singal 141410060 @0.60% 927000 Smt. Darshana Singal 14095148 @0.60% 92203 TOTAL 155505208 @0.60% 1019203
The assessee claimed that this expenditure was incurred for the purpose of business and, therefore, is eligible for deduction u/s. 37(1) of the IT Act.
ITA Nos. 286 & 45/Del./2013 15
The Assessing Officer after considering the reply of assessee, rejected the claim on the premise that the assessee failed to submit any loan sanction documents of the Bank in support of its claim of personal guarantee given by both the above directors. He also failed to adduce any evidence to show the compliance of TDS provisions. The AO further observed that in Schedule X of the Tax Audit Report, the auditors have mentioned payment of commission amounting to Rs.92203/- to Smt. Darshana Singal and there is no reference with respect to commission paid of Rs.9,27,000/- to Sh. J.H. Singal, the other director. The AO further observed that there being no nexus of these expenses with the business of assessee company, the guarantee commission so paid is not allowable u/s. 37(1) of the Act. He accordingly, disallowed this expenditure amounting to Rs.10,19,203/-.
The assessee carried the matter in appeal before the ld. CIT(A), who after considering the elaborate submissions made by the assessee and the case laws relied upon by him, deleted the addition observing as under : “I have considered the submission of the appellant and observation of the Assessing Officer. It has been submitted that the company had obtained working capital limits from bank secured by hypothecation of plant and machinery, stock etc. and personal guarantee by the Directors of the company for which guarantee commission was paid at the rate of 0.6% of the amount of working capital loan. It was also submitted that if personal guarantee of the Directors would not have been given then such refusal would have resulted in reduction or non availability of the loan, thus, affecting the business of the company. The appellant has also relied on the following cases:- (a) CIT Vs. Metalliziing Equipment Co. Pvt. Ltd. 220 CTR 366 (RAJ)
ITA Nos. 286 & 45/Del./2013 16
(b) CIT vs. Ayurvedic Seva shtam Pvt. Ltd. ,54 CTR 119 (RAJ) (c) CIT vs. Indian Aluminium Cables Ltd., 154 ITR 516 (DEL) (d) CIT vs. LH Sugar Factories and Oils Mills Pvt. Ltd.123 ITR 596 (All) On going through the case of CIT vs. Indian Aluminum Cables of the jurisdictional High Court it is seen that the case is similar to the facts of the case under consideration. In the case referred to above there was a finding of the fact that the bank from which the assessee company had borrowed funds insisted on personal guarantee of the Directors and as such the assessee had no choice but to give the guarantee. In the case under consideration even the appellant has claimed that guarantee of Directors was insisted upon by the bankers for sanctioning of credit limits. In support of its contention, the appellant has filed renewal of credit limits under SBI Exporters Gold card Scheme in the paper book, which is placed at page 16 to 41 of the paper book. Ongoing through the letter it is seen that bank has insisted upon the personal guarantee of the Directors of the appellant company Sh. J.R. Singal and Smt. Darshana. Therefore, it is established that bank has insisted upon the personal guarantee of the Directors for renewal of the credit limits. Therefore, the payment of commission to Directors at the rate of 0.6% of the sanctioned credit limit was justified and allowable expenditure. Considering the facts of the case and the judicial pronouncements on the issue, the guarantee commission to Directors is an allowable expenditure. Hence, the disallowance made by the Assessing Officer of Rs.10,19,203/- is deleted.”
Aggrieved by this order of ld. CIT(A), the Revenue has challenged the above decision by way of ground No. 2 of its appeal before us.
The ld. DR, relying on the order of the Assessing Officer, submitted that the assessee could not adduce any documentary evidence before the AO in support of his claim. He further submitted that the guarantee commission which has been paid to the directors is not legitimate and has no nexus with the business of the assessee company. It was submitted that the assessee company had given sufficient security to the bank as per their requirements and the personal guarantee of the directors was not the part
ITA Nos. 286 & 45/Del./2013 17
of loan documentation. The comparison of commission paid to directors against their personal guarantee with the commission charged by the bankers against their own guarantee is not justified, as the nature of both the guarantees is quite different. On the strength of these contentions, the ld. DR submitted that the Assessing Officer had rightly disallowed this expenditure u/s. 37(1) of the Act and the ld. CIT(A) was not justified to delete the same.
On the other hand, the ld. AR of the assessee, relying upon the elaborate submissions made before the ld. CIT(A), submitted that the first appellate authority was justified in deleting the disallowance. It was submitted that personal guarantee of the directors was given on the insistence of Bank. Had the directors not given their personal guarantee to the Bank against the limit sanctioned, the assessee company would have not be able to obtain the credit limit, which would be perilous to the business of the company. Therefore, the personal guarantee so given by the directors to the bank and the commission paid to them for this has direct nexus with the business of the assessee company and such commission expenditure is, thus, eligible for deduction u/s. 37(1) of the Act.
We have considered the rival submissions, gone through the orders of the authorities below, paper book filed by the assessee and the case laws relied upon. The assessee has submitted before us the renewal documents of the credit limit of working capital loans, available at page 38 of the paper
ITA Nos. 286 & 45/Del./2013 18
book, in which the bank has mentioned the details of primary security & collateral security. In addition to above security, the Bank has mentioned that “in addition, the credit facilities will be secured by the personal guarantees of the company’s promoter Directors, namely , 1. Shri Jagdish Rai Singh 2. Smt. Darshana Singal From the above renewal documents, it is no doubt true that the bank has required the assessee company to furnish the personal guarantee of the above two directors in order to secure the credit facilities. Thus, the finding of the ld. CIT(A) that the directors of the company had offered their personal guarantee on the insistence of the bank is supported by the renewal documentation filed before him. However, the question to be adjudicated by us is – “Whether the commission paid to the directors for their personal guarantee was lawful/justified to qualify the deduction in terms of u/s. 37(1) of the IT Act ?”
A perusal of the findings recorded by the ld. CIT(A), as reproduced hereinbefore, we find that the ld. CIT(A) has considered the only aspect that the personal guarantee of the directors was given by the assessee company on the instance of the Bank. He however, has not addressed on the core issue whether the commission paid to the directors in lieu of their personal guarantee was legally justified or not to qualify for deduction. In this context, the contention of the assessee has been that whenever any
ITA Nos. 286 & 45/Del./2013 19
guarantee is given by any person on behalf of some other person, the person giving the guarantee always charges an amount of consideration in the form of commission as a fixed percentage of the amount of guarantee given. The assessee has also contended that no security was required by the bank to be furnished for availing the personal guarantee from the directors of the company. We do not find substance in the above contention of the assessee that each guarantee is given by the guarantor subject to commission. In fact, it depends upon the nature of guarantee and the guarantor. The assessee itself is the best exemplar to support this finding. It is worthwhile to note that the assessee company itself has given guarantee by extending equitable mortgage over land & building situated at C-87 & C- 88, Focal Point Phase V, Ludhiana (the same property which has also been mortgaged as collateral security in the instant case) for working capital limit of Rs.20 crores, sanctioned by the Bank to Eastman Industrial Company, a partnership firm. This fact is evident from Schedule-III of the balance sheet placed at page 41 of the paper book. However, the assessee company itself has not shown any commission having been received from the said partnership firm. In this context, while considering the justification of payment of impugned commission, as envisaged in the first limb of aforesaid question, we are aware of the Master Circular of Reserve Bank of India pertaining to Guarantees and Co-acceptances, bearing No. RBI/2007- 2008/44 – DBOD. No. Dir.BC.10/13.03.00/2007-08 dated July 2, 2007, which is relevant for the year under consideration. In this Circular, Clause 2.10 stipulates as under :
ITA Nos. 286 & 45/Del./2013 20
“2.10. Guidelines relating to obtaining of personal guarantees of directors and other managerial personnel of borrowing concerns Personal guarantees of directors.
Banks should take personal guarantees of directors for the credit facilities, etc. granted to corporate, public or private, only, when absolutely warranted after a careful examination of the circumstances of the case and not as a matter of course. In order to identifying the circumstances under which the guarantee may or may not be considered necessary, banks should be guided by the following broad considerations:
A. …………………………. B. ………………………… C). Worth of guarantors, payment of guarantee, commission etc. Where personal guarantees of directors are warranted, they should bear reasonable proportion to the estimated worth of the person. The system of obtaining guarantees should not be used by the directors and other managerial personnel as a source of income from the company. BANKS SHOULD OBTAIN AN UNDERTAKING FROM THE BORROWING COMPANY AS WELL AS THE GUARANTORS THAT NO CONSIDERATION WHETHER BY WAY OF COMMISSION, BROKERAGE FEES OR ANY OTHER FORM, WOULD BE PAID BY THE FORMER OR RECEIVED BY THE LATTER, DIRECTLY OR INDIRECTLY. THIS REQUIREMENT SHOULD BE INCORPORATED IN THE BANK'S TERMS AND CONDITIONS FOR SANCTIONING OF CREDIT LIMITS. DURING THE PERIODIC INSPECTIONS, THE BANK'S INSPECTORS SHOULD VERIFY THAT THIS STIPULATION HAS BEEN COMPLIED WITH. There may, however, be exceptional cases where payment of remuneration may be permitted e.g. where assisted concerns are not doing well and the existing guarantors are no longer connected with the management but continuance of their guarantees is considered essential because the new management's guarantee is either not available or is
ITA Nos. 286 & 45/Del./2013 21
found inadequate and payment of remuneration to guarantors by way of guarantee commission is allowed.”
If the case of the assessee is tested on the anvil of captioned guidelines, we find that the assessee has failed to submit the original credit facility documentations of the bank either before the authorities below or before us in order to verify whether the terms and conditions of bank documentations/agreement are in consonance with the above guidelines or not. The assessee, however, has submitted before us the renewal documentation of the bank, which no where contain the stipulation made by RBI as noted above. Unless it is ascertained from the original bank documentations that the said Bank documents/agreements contain the terms and conditions, as stipulated by RBI in the aforesaid guidelines, it is not possible to decide whether the commission paid by assessee company to its directors in lieu of their personal guarantee was lawful/justified or not. As per the captioned guidelines of RBI, it is abundantly clear that neither the assessee company was legally obliged to extend any commission to their directors against their personal guarantee given to the bank nor the directors of the company were entitled to receive any such commission in lieu of their personal guarantee. The exceptional stipulation given in the later part of the above guidelines is in different context, which is not applicable to the assessee’s case. On perusal of the exceptional stipulation, as noted above, we find that payment of commission/remuneration is
ITA Nos. 286 & 45/Del./2013 22
permissible to the directors against their personal guarantee only on the following conditions:
(i) Where the assisted concerns are not doing well; (ii) Where the existing guarantors are no longer connected with the management; (iii) Where the personal guarantee of existing guarantors is essential to continue; and (iii) Where new management’s guarantee is either not available or is found inadequate.
Given the facts of the present case, we find that none of the aforesaid exceptional conditions, which permit payment of guarantee commission to the directors, exists in the instant case. In the decisions relied by the ld. CIT(A) as well as the assessee, the question of propriety of payment of commission in the light of RBI guidelines, noted above, was not involved before the Hon’ble Court and therefore, the said decisions, being distinguishable on facts do not render any help to the assessee. We, therefore, restore this issue to the file of the Assessing Officer to examine from the original bank documentations/agreements/sanction letter and to ascertain whether the requirement of non-payment of commission to the guarantors was incorporated in the terms and conditions of bank for sanctioning of credit limit or whether any undertaking to this effect was taken from the company or not in terms of RBI guidelines noted above. In case, the result of enquiry comes in affirmative, it shall be deemed that the
ITA Nos. 286 & 45/Del./2013 23
assessee was well aware of the fact that no commission etc. was to be paid against personal guarantee of directors, but the same has been paid to take undue benefit thereof by seeking deduction u/s. 37(1), which is not permissible under the Act. If the result of enquiry comes in negative, the Assessing Officer shall proceed to test the allowability of the above expenditure, as claimed by the assessee as per law. Accordingly, the ground No. 2 of the Revenue’s appeal is allowed for statistical purposes.
Adverting to issue No. (v) involved in ground No.4 of appeal of the Revenue, the brief facts are that the assessee-company declared short term capital gain of Rs.71,23,102/- and long term capital gains at Rs.22,76,029/-. The Assessing Officer treated the above capital gains as business income after considering the nature of transactions made by the assessee in the light of certain tests laid down in CBDT Circular No. 04 dated 15.06.2007, frequency of transactions of purchase and sale of shares, definition of capital asset as defined in sec. 2(14), provisions of section 2(29A) and 2(29B) with respect to long term capital gains and sections 2(42A) & 2(42B) with respect to short term capital gains and Instruction No. 1827 dated 31.08.1989, held that the main business of the assessee was trading of shares and therefore, the short term capital gain of Rs.71,23,102/- and long term capital gain of Rs.22,76,029/- totaling to Rs.93,99,131/- earned on entire sale and purchase of shares was treated as business income instead of capital gains declared by the assessee and added the same to the total
ITA Nos. 286 & 45/Del./2013 24
income of the assessee. The assessing Officer while considering the capital gains as business income has relied on the following decisions : (i). CIT(Central) v. Associated Indl. Development Co. (P) Ltd., 82 ITR 588 (SC). (ii). CIT vs. H. Holck Larsen, 160 ITR 67 (SC) (iii). Authority for Advance Ruling in Fidelity Group, 288 ITR 641. (iv). CIT vs. P. Manonmani, 245 ITR 48 (Mad). (v). CIT vs. JH Gotla MANU/SC/0126/1985 The assessee carried the matter in appeal before the ld. CIT(A), who after considering the detailed submissions, facts of the case and various decisions, directed the Assessing Officer to treat the surplus received on sale and purchase of shares as short term capital gain and long terms capital gains as claimed by the assessee in its return of income and not as business income as treated by the AO. The relevant portion of decision reached by the ld. CIT(A) on this issue reads as under :
“I have considered the submission of the appellant, observation of the assessing officer and various judicial pronouncements relied upon by the appellant in this regard. The appellant is engaged in the business of manufacturing, trading and export of Cycle parts and auto parts. Its total turnover from the said business is around Rs.93.30 Crores during the year under consideration. It also makes occasional investments in shares and securities. During the year the appellant has purchased and sold shares through portfolio management scheme. Most of the transactions of the appellant are from brought forward holding and security purchased by the portfolio managers during the year. Such investments in portfolio scheme have been accepted from preceding years as investment. It is observed from the balance sheet of the appellant that appellant is maintaining separate account for investment. The investment in shares is a continuous activity and same has been accepted by the Department in earlier years wherein short term and long term capital gain were declared by the appellant in the return of income. It is observed from the balance sheet of the appellant that it has shown investment in shares as on 01.04.2007 of Rs. 13,33,64,052/-. The
ITA Nos. 286 & 45/Del./2013 25
investment as on 31.03.2008 was shown at Rs.19,67,71,056/-. Out of these investments the appellant has sold shares during the year and has declared long term capital gain of Rs. 22,76,029/-and short term capital gain of Rs.71,23,102/-. It is observed that entire long term capital gain has been earned by the appellant out of shares held by the appellant as on 31.03.2007. The appellant has consistently been showing the investment in shares in his balance sheet from last many years. The AR of the appellant has brought to my notice that long term and short term capital gain declared by the appellant out of sale of such investments has been accepted by the department in the A.Y. 2003-04 onwards in the scrutiny assessments and no adverse view has been taken by the department. It is contended by the AR of the appellant that there is no change in facts and circumstances of the case with that of earlier years wherein the long term capital gain and short term capital gain has been accepted by the department. On going through the submission filed by the appellant it is observed that all sale and purchases are delivery based. The holding period of the shares on which long term capital gain has been declared is more than 12 months and in the cases where short term capital gain has been declared, the holding period varies from few days to 4 to 6 months. The appellant vide his submission dated 31.01.2012, 13.02.2012 and 26.10.2012 has argued that investment was made in shares with the intention to hold the same for long term appreciation and for earning dividends. However in few cases the investment was off loaded after a short holding due to receipt of certain adverse market reports or because of short term funds requirements. Appellant also contended that period of holding of shares and non receipt of dividend income is not a decisive factor for treatment of particular transactions as investment or trading transaction. It is contended by the appellant that except in few cases, in majority of transactions, the holding period of shares was 4 to 6 months wherein short term capital gain has been earned. In the cases of long term capital gain the holding was more than 12 months. It is also contended by the appellant that because of off loading of some shares in short period his entire investments cannot be held as business transactions. I am in full agreement with the submission of the appellant that period of holding of shares and non receipt of dividend income is not a decisive factor for treatment of particular transactions as investment or trading transaction. One has to see the intention of the person who is doing sale and purchase of shares. The circular No. 4 of 2007 issued by the CBDT also does not prescribe any time limit for holding of shares where shares are purchased for investment purposes.
ITA Nos. 286 & 45/Del./2013 26
It is observed from the details that appellant has dealt in the shares of 150 companies wherein long term and short term capital has been declared. The quantum of sale and purchase in the shares of 150 companies is not very large in the entire year. If the appellant had been engaged in the trading of shares the frequency of sale and purchase would have been very high on daily basis. However that element is not evident in the instant case. It is also observed from the details that for making investment in shares the appellant has used his own funds and there are no borrowings made for investment. The ASSESSING OFFICER in the-assessment order has also relied upon the contents of circular no. 4 of 2007 dated 15.06.2007. It is clearly mentioned in the CBDT circular that a person can have two portfolios, one for investment purposes and another for trading purposes. In this circular no time limit has been prescribed for holding a share to determine whether the shares were held for investment or stock in trade. These things have to be determined by the intention of the person who is doing investment or sale or purchase of shares. In the case of appellant the circumstances clearly suggest that he had purchased shares only for investment purposes and not for trading purposes. In the entire year it has dealt only in shares of 150 companies and the frequency of the transactions is limited. The appellant has not entered into any transaction of F & O, or day trading during the entire year. In view of the facts stated above, it is clearly established that the shares purchased by the appellant were for investment purposes and capital gains received on such sale is liable to be tax under the head short term capital gain and long term capital gain. Hence, the action of the assessing officer of treating the short term capital gain and long term capital gain as business income was not justified. I therefore direct the assessing officer to treat the surplus received on sale and purchase of shares as short term capital gain and long term capital gain as claimed by the appellant in the return of income. As a result, this ground of appeal of the appellant is allowed.
The learned DR relying upon the order of the Assessing Officer submitted that the ld. CIT(A) was not justified in accepting the claim of assessee of capital gains ignoring the fact that the conclusion reached by the AO to treat the capital gains as business income was corroborated by
ITA Nos. 286 & 45/Del./2013 27
CBDT Circular as well as various decisions of higher courts. The ld. AR, on the other hand, relying on its submissions made before the ld. CIT(A), urged for sustenance of the decisions reached by the ld. CIT(A) which too is based on various decisions of various courts.
Having considered the rival submissions in the light of relevant records available before us, we find no justification to discard the decision reached by the ld. CIT(A). It is notable that the appellant has been consistently showing capital gains in the identical facts and circumstances since long and the department has been accepting the same as such from assessment year 2003-04 onwards in the scrutiny assessment proceedings. There is nothing on record to demonstrate any change in the facts and circumstances during the year under consideration. Cogent finding has been given by the ld. CIT(A) on the frequency of share transactions and there is nothing on contrary on record to the finding of the ld. CIT(A) that holding period of shares and receipt of dividend income is not a decisive factor for treatment of a particular transaction as investment or trading transaction. In support of its conclusions, the ld. CIT(A) has relied on the following decisions : (i). CIT vs. Gopal Purohit, 188 Taxman 140 (Bom.) (ii). ITO vs. Rohit Anand, 34 SOT 42 (Del.) (iii) ARA Trading & Investments (P) Ltd. vs. DCIT, 47 SOT 172 (Pune) (iv). ITO vs. Radha Birju Patel 46 SOT 23 (Mum) (v). Apoorva Patni v. Addl. CIT, 24 Taxmann.com 223 (Pune)
ITA Nos. 286 & 45/Del./2013 28
We have also gone through the above decisions and we find that the claim of the assessee is supported by the above decisions. No contrary decisions are cited on behalf of the Revenue to support the stand taken by the Assessing Officer. We accordingly find no justification to support the findings of the Assessing Officer that the capital gain claimed by the assessee was in the nature of business income or that the main business of the assessee was that of share trading. Accordingly, this issue is decided against the Revenue and ground No. 4 raised by the Revenue deserves to be dismissed.
In the result, the appeal of the assessee is allowed for statistical purpose and that of Revenue is partly allowed for statistical purposes. Order pronounced in the open court on 09.06.2017. Sd/- Sd/- (I.C. Sudhir ) (L.P. Sahu) Judicial member Accountant Member
Dated: 09.06.2017 *aks* Copy of order forwarded to: (1) The appellant (2) The respondent (3) Commissioner (4) CIT(A) (5) Departmental Representative (6) Guard File By order Assistant Registrar Income Tax Appellate Tribunal Delhi Benches, New Delhi