ITO, WD-12(1), KOLKATA, KOLKATA vs. M/S LYONS & ROSES PVT. LTD., KOLKATA

This is an appeal by the Revenue against the order dated 29.02.2016 of C.I.T.(A)-10, Kolkata relating to A.Y.2005-06.

Grounds of appeal

The Assessee is a company. It is engaged in the business of making investments. The assessee filed return of income for A.Y.2005-06 showing a total income of Rs.32,21,523/-. An order of assessment u/s 143(3) of the Income Tax Act, 1961 (Act) was passed by the AO on 20.12.2007. One of the issues that was considered by the AO in the assessment was as to whether the income declared by the assessee under the head Long Term Capital Gain and Short Term Capital Gain was to be regarded as income from business or income under head ‘Capital gain ‘. The AO held that income declared under the head ‘Capital Gain’ has to be assessed under the head ‘Income from business ‘. The AO passed an order of assessment on 20.12.2007. While concluding the assessment the AO noticed that the assessee had paid a sum of Rs.36,12,000/- as service charges to Bonanza Trading Co. Pvt. Ltd.(BTC) The AO was of the view that if ultimately the income declared under the head ‘capital gain’ which was treated by him as income from ‘capital gain’ then the assessee should not be allowed deduction of Rs.36,12,000/- being Service Charges to BTC for rendering advice on investment, as Busines is held to be income under the head business expenses. In this regard it is also worthwhile to mention that the assessee was also in the business of purchase and sale of shares. The assessee also held the shares as investments which were purchased and sold. The gain arising from purchase and sale of shares which were held as stock in trade of business was declared under the head income from business. The income arising from purchase and sale of shares held as investments were declared under the head ‘capital gains’. Since the AO treated all the activities of purchase and sale of shares as giving rise to the income from business, the AO allowed service charges paid to BTC as deduction in the order of assessment. The AO has made it clear that if income declared under the head capital gain which were being treated by him as income under the head income from business then service M/s Lyons & Roses (P)Ltd. A.Y.2005-06 charges paid to BTC should not be allowed. The following were the relevant observations of the AO in this regard :- “However, it may be mentioned that if the above income is held as investment income under the head Capital Gains, the assessee would not be allowable huge expenses claimed especially service charges paid to BTC as business expenses.”

It may be relevant to point out that with regard to the service charges paid to BTC the assessee had taken a specific stand before the CIT(A) as follows :- M/s Lyons & Roses (P)Ltd. A.Y.2005-06 5.2.15 In the last page of the Assessment Order, the Assessing Officer recorded a note duly underlined to state that if the above income is held as investment under the head Capital Gains the Assessee would not be held liable to allowable huge expenses claimed specially service charges paid to Bonanza Trading Company Private Limited as business expenses. Regarding the Assessee Company's 'establishment cost and service charges paid to carry out trading activities efficiently, the Assessee submitted a copy of letter of Bonanza Trading Co. Pvt. Ltd. to whom the Assessee paid service charges which clearly states the intention of the Assessee that they were taking professional advice for its trading activity of purchase and sale of shares. Hence, employment of such infrastructure is necessary for business activity and for which necessary expenses has to be incurred.”

The CIT(A) did not render any decision on the aforesaid submissions made by the assessee.

The AO passed an order on 15.06.2009 giving effect to the directions contained in the order dated 31.03.2009 of CIT(A)-XII, Kolkata. In the aforesaid order the AO treated the income declared by the assessee under the head ‘capital gain ‘as declared by the assessee in the return of income. The AO however added to the total income so determined by him the service charges paid to BTC. For doing so the AO relied on the observations made by him in the order of Assessment in which he had specifically mentioned that if income declared by the assessee under the head ‘capital gain’ which is treated by the AO as income from business is ultimately held to be income from capital gain, then the service charges paid to BTC should be disallowed. The following was the relevant observations of the AO in the order passed u/s 251 of the Act dated 15.06.2009. “Total Income as per return Rs.32,21,522/- Add: Disallowance u/s 14A Opening balance of investment Rs.1,61,36,538/- Closing balance of investment Rs.3,00,07,426/- Rs.4,61,43,964/- Average Investment Rs.4,61,43,964/- Rs.2,30,71,982/- 2 ½ % of average investment of Rs.2,30,71,982/- Rs.1,15,360/- (As per Rule 8D(2)(III), ½ % of average investment In the balance sheet) Service charges paid to BTC Rs.36,12,000/- (As per observation of the A.O. In his order that if the Income is held as investment income under the head M/s Lyons & Roses (P)Ltd. A.Y.2005-06

Another issue which was considered by the AO in the order of assessment passed u/s 143(3) dt. 20.12.2007 was with regard to the disallowance u/s 14A of the Act. The AO disallowed 5% of the exempt income earned by the assessee which resulted in addition of Rs.23,195/-. Against the aforesaid addition the assessee preferred appeal before the CIT(A) and CIT(A) in his order dated 31.03.2009 directed that the disallowance should be made in accordance with Rule 8D (2)(iii) of the Rules. In the order giving effect to the aforesaid directions of the CIT(A) passed by the AO on 15.06.2009 the AO made an addition u/s 14A of the Act of Rs.1,15,380/-. We have already given the computation of total income made by the AO in the order passed u/s 251 of the Act dated 15.06.2009.

Aggrieved by the aforesaid order of AO passed u/s 251 of the Act dated 15.06.2009, the assessee filed an application dated 15.07.2009 u/s 154 of the Act. In this application u/s 154 of the Act, the assessee submitted that the action of the AO in adding the service charges paid to BTC and making disallowance of Rs.1,15,380/- under Rule 8D(2)(iiii) as against the original disallowance of 5% of the exempt income made in the order of assessment of Rs.23,195/.- was an apparent error on the face of record . The submissions of the assesse was that as far as the service charges paid to BTC is concerned it was never the subject matter of the addition made by the AO in the order of assessment passed u/s 143(3) of the Act dated 20.12.2007. In the appeal filed by the assesse before CIT(A) the only issue was with regard to the head under which income declared by the assessee as giving rise to the capital gain should be assessed. The CIT(A) in his order dated 31.03.2009 has given only a direction that income declared by the assessee under the head ‘capital gain ‘ should be assessed under the head ‘capital gain ‘ not under the head ‘income from business ‘. The AO while giving effect to this order of CIT(A) cannot make disallowance of service M/s Lyons & Roses (P)Ltd. A.Y.2005-06 charges paid to BTC as that was not the subject matter of the appeal at all. With regard to disallowance u/s 1A of the Act r.w.r. 8D (2)(iii) of the rules the submission of the assessee was that the expenditure was wholly and exclusively in relation to the business of the assessee.

The AO dismissed the application of the assessee even without an opportunity of being heard to the assessee summarily without any discussion by an order dated 29.01.2010.

Against the aforesaid order dated 29.01.2010 passed u/s 154 of the Act the assessee preferred appeal before the CIT(A). The submission made in the application u/s 154 of the Act were reiterated by the assessee before CIT(A). The CIT(A) held that the addition of Rs.36,12,000/- on account of service charges paid to BTC was beyond the scope of the directions of the CIT(A) in the order dated 31.03.2009 and gave rise to a mistake apparent in the face of the record. Therefore the AO ought to have deleted the said addition by allowing the application u/s 154 of the Act on the above issue. With regard to the disallowance u/s 14A of the Act the CIT(A) was of the view that in several decisions rendered by the Hon’ble ITAT 1% of the exempt income alone should be disallowed u/s 14A of the Act with reference to the assessment years prior to A.Y.2008-09. The CIT(A) was of the view that the AO therefore ought to have restricted the disallowance u/s 14A of the Act to 1% of the exempt income.

Aggrieved by the aforesaid order of CIT(A), the revenue has preferred the present appeal before the tribunal.

We have heard the rival submissions. The ld. Counsel for the assessee reiterated the submissions as were made before the lower authorities. The ld. DR submitted that the issue sought to be raised in the application of the assessee u/s 154 of the Act before the AO were highly debatable and therefore outside the purview of the proceedings u/s 154 of the Act. According to him the AO was justified in rejecting the application u/s 154 of the Act.

We have given a very careful consideration to the rival submissions. As far as the service charges paid to BTC is concerned this was never the subject matter of M/s Lyons & Roses (P)Ltd. A.Y.2005-06 addition in the original order of assessment passed by the AO u/s 143(3) of the Act dated 20.12.2007. In the appeal by the assessee against the order of the AO the only issue was whether income declared by the assessee under the head ‘capital gain ‘ should be assessed under the said head or under the head ‘income from business’. The CIT(A) held that income declared by the assessee under the head ‘capital gain ‘should be assessed under the head ‘capital gain ‘. If the AO was aggrieved by the absence of direction by CIT(A) in his order with regard to service charges paid to BTC, he ought to have filed either an appeal against the order of CIT(A) dated 31.03.2009 or an application u/s 154 of the Act. The AO did not even bring to the notice of CIT(A) in the course of appellate proceedings the issue with regard to service charges paid to BTC. In these circumstances while giving effect to the directions of CIT(A) in his order dated 15.06.2009, the AO could not have disallowed the service charges paid to BTC. The ld. Counsel for the assessee has placed reliance on the decision of the Hon’ble Calcutta High Court in the case of ITO vs Ryam Sugar Co. Ltd. 1905 ITR 819 (Cal). In the aforesaid decision it was held that while giving effect to the order of the first appellate authority the AO was not competent to travel beyond the subject matter of the appeal before CIT(A). The ld. Counsel has also placed reliance on the decision of the Hon’ble ITAT, Pune in the case of Bhgwandas Associates vs ITO 229 ITD 1 (Pune) wherein it was held that when the AO in an order giving effect to the appellate order commits a mistake by travelling beyond the subject matter of the appeal before CIT(A) it gives rise to a mistake apparent on the face of the record which should be rectified u/s 154 of the Act. The aforesaid decision support the conclusion of CIT(A). Therefore we do not find merit in ground no.1 and 3 raised by the revenue.

As far as ground no.2 is concerned, the directions of CIT(A) in the order dated 30.03.2009 are very clear in that the CIT(A) has directed the AO to make disallowance u/s 14A of the Act by invoking Rule 8D(2)(iii). The AO in the order passed u/s 251 of the Act dated 15.06.2009 has followed the directions of CIT(A). The contention in the application filed by the assessee u/s 154 of the Act against the order dated 15.06.2009 on this issue was that no disallowance u/s 14A could be made over M/s Lyons & Roses (P)Ltd. A.Y.2005-06 and above 5% of the exempt income as was made in the original order passed u/s 143(3) of the Act. In our view this issue cannot be the subject matter of proceedings u/s 154 of the Act. The question whether the CIT(A) enhanced the disallowance u/s 14A of the Act without proper notice or any disallowance could at all be made u/s 14A of the Act cannot be subject matter of the order dated 15.06.2009 u/s 251 of the Act passed by the AO. If the assessee is aggrieved with the directions of CIT(A) he ought to have fled an appeal against such directions. Filing the application u/s 154 of the Act was not an appropriate remedy available to the assessee. The CIT(A) in our view erred in directing the AO to restrict the disallowance u/s 14A of the Act to 1% of the exempt income. To this extent we find merits in ground no.2 raised by the revenue. Thus ground no.1 and 3 raised by the revenue are dismissed while ground no.2 raised by the revenue is allowed.

In the result the appeal raised by the revenue is partly allowed. Order pronounced in the open Court on 02.02.2018.