M/S. REPCO HOME FINANCE LTD.,CHENNAI vs. ACIT, CHENNAI

आदेश / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER

These two appeals of the assessee are directed against

different orders of the Commissioner of Income-tax (Appeals)-3,

Chennai dated 29.07.2016 & 30.06.2016 pertaining to assessment

years 2009-10 & 2012-13 respectively. Since these two appeals are

filed by the same assessee, these appeals are clubbed together, heard

ITA Nos.2732 & 2733/16 :- 2 -:

together, disposed off by this common order for the sake of

convenience.

The first ground raised in this appeal is with regard to

validity of reopening of assessment as the original assessment was

completed u/s.143(3) of the Act and there was no fresh tangible

material to re-open the concluded assessment.

filed e-return for assessment year 2009-10 on 27.09.2009 admitting

total income of `29,44,58,482/- and the assessment u/s.143(3) of the

Act was completed on 29.11.2011 determining income `29,58,43,681/-

Later it laws noticed by the AO that the assessee deducted a sum of

`1,35,99,036/- being loss on sale of shares from the total income. It

was also noticed by the AO that while calculating the eligible deduction

u/s.36(i)(viii) of the Act, the assessee had not deducted the income

from other sources of `3,17,60,073/- being interest on deposits. As

such, notice u/s.148 of the Act dated 09.01.2014 was issued to

re-open the assessment. In response, the assessee vide its letter dated

03.02.2014 stated that the return filed originally filed may be treated

as one in response to notice u/s.148 of the Act. While framing the

assessment, the AO made addition by disallowing the loss on sale of

ITA Nos.2732 & 2733/16 :- 3 -:

shares at `1,35,99,036/- and disallowance of interest u/s.36(i)(vii) of

the Act at `63,52,015/-. Aggrieved by the order of ld. Assessing

Officer, the assessee carried the appeal before the Ld.CIT(A). On

appeal, the CIT(Appeals) observed that the re-assessment has been

taken up in the assessee’s case within 4 years and the AO had

supplied reasons for re-opening the assessment. The assessee had

filed objections, which have been disposed of by the AO. Hence,

Ld.CIT(A) confirmed the re-opening of assessment as well as the

addition made by the ld. Assessing Officer. Against the order of

Ld.CIT(A), now the Assessee is in appeal before us.

specifically disclosed and examined in the original assessment

proceedings. Since, no new fresh facts have come to the AO for

resorting to the reassessment of concluding proceedings u/s.143(3) of

the Act, the AO cannot reopen the case u/s.147 of the Act. Further,

the ld. AR contended that there is no mention that the AO had got

‘tangible materials’ to exercise his power to reopen the concluded

assessment. Hence, the present notice issued u/s.148 of the Act is

totally without jurisdiction and he relied on the decision in the case of

CIT vs. Kelvinator India Ltd.(320 ITR 561(SC) ) to support his view.

ITA Nos.2732 & 2733/16 :- 4 -:

record. The main contention of ld.A.R is that in this case the original

assessment was completed u/s.143(3) of the Act on 29.11.2011. The

assessee has furnished all details to the AO at the time of filing of

return of income and according to the A.R, there was no failure on the

part of the assessee to disclose all material facts necessary for the

purpose of assessment. He submitted that the reopening vide notice

u/s.148 of the Act dated 09.01.2014, it is only a change of opinion. He

submitted that the AO going through the same documents, which were

already on record, wanted to re-open the assessment, which is nothing

but review of the earlier opinion, which is not possible u/s.147 of the

Act. In this case, the assessment was reopened after recording the

reasons that the assessee has wrongly claimed loss on sale of shares

as business loss and also the claim of interest expenditure is incorrect.

6.1 Admittedly in this case, there was original assessment

u/s.143(3) of the Act vide order dated 29.11.2011. It is a settled law

that on the basis of material, prima facie, available before the

Assessing Officer, opined that income chargeable to tax has escaped

assessment can be formed. The word ‘reason’ in the phrase ‘reason to

believe’ would mean cause or justification. In case the Assessing

ITA Nos.2732 & 2733/16 :- 5 -:

Officer has a cause or justification to know or suppose that income has

escaped assessment, action u/s 148 can be taken. But obviously, there

should be relevant material on which a reasonable man could have

formed a requisite belief. Whether this material(s) would conclusively

prove the escapement of income is not the concern at that particular

stage. So what is required is the subjective satisfaction of the

Assessing Officer based on objective material evidence. The reason

was recorded as discussed above. The argument of the ld.AR is that

where there was no fresh tangible material to reopen the assessment

u/s 147, no action could be taken after the expiry of four years from

the end of the relevant assessment year unless the assessee has

disclosed fully and truly all material facts necessary for the assessment

for that assessment year, inter alia.

6.2 As seen from the assessment order, it gives a clear picture

that the Assessing Officer has got material evidence to form his

opinion for taking recourse to section 147 r.w.s 148 of the Act. There

cannot be two opinions. At the point of time when the reasons are

recorded, forming opinion of ‘escapement of income’ is only relevant.

It is true that u/s 147, the Assessing Officer can either assess or re-

assess but for taking action there under, he has to record reasons that

income chargeable to tax has escaped assessment . It is also

mandated by section 148(2) to record reasons in writing. The

ITA Nos.2732 & 2733/16 :- 6 -:

reassessment proceedings u/s 147 are further subject to sections

148,149,150,151,152 and 153. But in the present case, we are

required to decide the limited issue regarding the validity of

proceedings undertaken within four years from the end of relevant

assessment year in question. The Assessing Officer is required to see

if the conditions laid in Explanation 2(c) are satisfied because in this

case, assessment was completed u/s 143(3) of the Act. In case, (i)

income chargeable to tax has been under assessed; or (ii) such

income has been assessed at too low rate; or (iii) such income has

been made the subjective of excess relief under this Act; or

(iv)excessive loss or depreciation allowance or any other allowance

under this Act has been computed, then the Assessing Officer would

have valid cognizance u/s 147 of the Act. The reasons recorded by the

Assessing Officer clearly speak for the under assessment of tax.

Hence, the conditions laid above stand fulfilled in so far as re-

assessment proceedings are concerned. In so far as the reasons

recorded, extracted in the earlier portion of this order, we are satisfied

that the Assessing Officer has ‘reason to believe’ that income has

escaped assessment. This fact confers jurisdiction on him to reopen

the assessment. The power to re-assess post 1st April, 1989 are much

wider than these used to be before.

6.3 Explanation 2 of Section147, it is very clear that due to non-

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disclosure of full facts, the income chargeable to tax had escaped

assessment. The assessee has not produced anything before the A.O

/ Commissioner of Income Tax (Appeals) to show as to how there is

no incidence of tax in this assessment year. Hence, the action of

Commissioner of Income Tax (Appeals) and that of Assessing Officer

is fully covered by the provisions of Explanation 1 to Section 147 of

the Act is not correct. The said provision reads as under:

‘’Production before the Assessing Officer of accounts books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso’’.

It is possible that with due diligence of the Assessing Officer would

have ascertained this fact at the time of assessment, if any also, but in

view of the explanation (1) it does not mean that there was no default

on the part of the assessee. Hence, we hold that the entire

reassessment proceeding in this case is valid and therefore, the action

of the Assessing Officer is upheld. As such in this case, the issue

taken up by the AO in reopening of assessment viz. to consider loss

on sale of shares and also deduction u/s.36(1)(iii) of the I.T Act, which

was not at all considered in the course of original assessment, though

it was completed u/s.143(3) of the Act and mere production of

records by the assessee before the AO at the time of original

ITA Nos.2732 & 2733/16 :- 8 -:

assessment itself cannot be led to the conclusion that the AO had

applied his mind wherein it requires due diligence and application of

mind from the end of the AO.

6.4 The ld.A.R relying on the judgement of Supreme Court in the

case of CIT Vs. Kelvinator of India Ltd., in (2010) 320 ITR

561(SC)cannot be of any assistance to the facts of the case in hand on

the reason that where the AO has not applied his mind and not taken

any decision on the disputed issue. Hence, in our opinion, the original

assessment is valid and the same is confirmed. Therefore, this ground

of appeal raised by the assessee is dismissed.

loss of shares by treating the same as capital loss of `1,35,99,036/-.

deducted a sum of `1,35,99,036/- being a loss on sale of shares as

business loss while computing the income earned from the business or

profession. According to the ld.A.R, the assessee had converted the

capital assets into stock in trade during the financial year 2008-09 and

the loss arose out of sale of shares to be considered as a business loss

and it cannot be considered as a capital loss. Further it was stated by

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the ld.A.R that entry in books of accounts cannot be considered as

conclusive and the entitlement of particular deduction depends upon

the provisions of law relating thereto. The ld.A.R relied on the

judgement of Supreme Court in the case of Kedarnath Jute

Manufacturing Co. Ltd., Vs. CIT 82 ITR 36(SC).

8.1 According to lower Authorities, shares have been held as

investments for the year ended on 31.03.2009 relevant to assessment

year 2009-10, as such the loss arising out of sales of investment to be

considered as a capital loss as the investments was in capital field.

Against the order of the Revenue, now the Assessee is in appeal

before us.

record. In this case the assessee is engaged in the business of Home

Finance and not engaged in buying and selling of shares, and the

assessee was never in business of trading of shares. The term

“business” is defined in Sec.2(13); ‘capital asset’ is defined in

Sec.2(14) of the Act. The test to decide whether it was investments or

adventure in the nature of trade is a very thin line of the demarcation.

Even a single incidence of transaction can be recorded as business and

even multiple transactions sometimes are deemed as investments. So,

the criteria for deciding whether it is investment or business is that of

ITA Nos.2732 & 2733/16 :- 10 -:

the intention of the assessee, namely, whether the assessee’s real

intention is to invest or the intention in the nature of trade. As seen

from the facts of the case, the assessee was engaged in the housing

financing activity and not at all engaged in trading in shares. The

buying of the shares was only the intention of holding it as an

investment. The assessee has no intention to trade in shares. Hence, it

cannot be business assets in the hands of assessee rather than it was

treated as investment.

9.1 The investments in shares are classified as long term

investment or current investments and long term investments are

valued on historical cost method. On the other hand, current

investments are valued at cost or market value whichever is lower. In

other words, investments in shares were not at all considered as stock

in trade as the assessee was not dealing in shares. Once the shares

are treated as investments, loss arising out of purchase and sale of

shares is only a capital loss and it is not a business loss. In other

words, assessee having carried on no business activity and treated the

shares as investments from year to year, income or loss arising out of

sale of such shares is to be considered as capital gain or capital loss.

The share being a capital asset cannot acquire different character

because of treatment accorded to it by the assessee in its return of

ITA Nos.2732 & 2733/16 :- 11 -:

income; contrary to the treatment given in the books of accounts.

Hence, this ground of appeal of assessee stands rejected.

non-granting of deduction u/s.36(i)(viii) towards interest on deposit at

`63,52,015/-.

for the purpose of advancing housing loan. The assessee made a fixed

deposit between the span of time lag in borrowing and advancing the

housing loan to the borrower and earned interest on fixed deposit. The

assessee claimed set off of the said interest from the interest

expenditure. The ld. Assessing Officer observed that interest earned

on deposit cannot be considered as profit out of eligible business of

the assessee and not eligible for deduction u/s.36(i)(viii) of the Act.

For this purpose, he placed reliance in the judgement of Supreme

Court in the case of Cambay Electric Supply Industrial Co. Ltd Vs. CIT

in 113 ITR 84(SC) and in the case of CIT Vs. Sterling foods in 237 ITR

579(SC) and judgement of jurisdictional High Court in the case of CIT

Vs. Menon Impex P Ltd., in 259 ITR 403 (Mad.). Further, ld. Assessing

Officer was of the opinion that there was no direct nexus between the

interest income and interest paid by the assessee for which the

assessee also not objected. Therefore, the AO disallowed 20% of the

ITA Nos.2732 & 2733/16 :- 12 -:

interest earned on deposit of `63,52,015/-. Aggrieved by the order of

ld. Assessing Officer, the assessee carried the appeal before the

Ld.CIT(A). On appeal, Ld.CIT(A) following the judgement of

jurisdictional High Court in the case of South India Shipping Corpn.

Ltd. in 240 ITR 24 (Mad.), endorsed the view of the ld. Assessing

Officer. Against the order of Ld.CIT(A), now the Assessee is in appeal

before us.

record. The main plea of assessee is that the assessee availed loan for

the purpose of advancing the same for home finance and during the

time gap between borrowing and advancing, it was made deposit in

bank and earned interest income and the same to be set off against

the interest paid by the assessee. Though the assessee took such a

plea, there was no iota of evidence brought on record to show that the

assessee used the loan fund, which was availed for the purpose of

advancing home loan to make deposit and to earn interest thereon. In

our opinion, the interest income earned on deposit of surplus money

would be assessable as income from other sources. If the interest

income is from a fund, which has been kept as deposit from surplus

capital, it would be assessable as income from other sources only.

Hence, in our opinion, if the surplus funds are invested instead of

ITA Nos.2732 & 2733/16 :- 13 -:

keeping them idle, the income by way of interest should be treated as

income from other sources. In the present case, in our opinion, since

there is no evidence to show that the borrowed fund was used for

making fixed deposit, it is to be considered as assessee has deposited

its surplus fund as fixed deposit instead of keeping them idle, the

income by way of interest should be treated as income from other

sources. More, so the assessee before the AO accepted this

disallowance and at this stage, the assessee cannot have any

grievance. Hence, this ground of appeal of assessee stands rejected.

No.2732/Mds./2016 stands dismissed.

The sole grievance of the assessee in this appeal is with regard to

disallowance u/s.14A r.w.Rule 8D.

income for financial year 2011-12. However, the AO invoked provisions

of the section 14A r.w.Rule 8D and disallowed `43,82,057/-.

Aggrieved by the order of ld. Assessing Officer, the assessee carried

the appeal before the Ld.CIT(A). On appeal, Ld.CIT(A) confirmed the

disallowance made by the AO amounting to `43,82,057/-. Against the

order of Ld.CIT(A), now the Assessee is in appeal before us.

ITA Nos.2732 & 2733/16 :- 14 -:

earned by the assessee and placed reliance in the judgement of

jurisdictional High Court in the case of CIT Vs.Chettinad Logistics (P.)

Ltd., in 92017) 80 taxmann.com 221 (Mad.) wherein held that:-

“In our opinion Section 14A, can only be triggered, if, the Assessee seeks to square off expenditure against income which does not form part of the total income under the Act. The legislature, in order to do away with the pernicious practice adopted by the Assessees', to claim expenditure, against income exempt from tax, introduced the said provision. In the instant case, there is no dispute that no income i.e., dividend, which did not form part of total income of the Assessee was earned in the relevant assessment year. Therefore, to our minds, the addition made by the AO by relying upon Section 14 A of the Act, was completely contrary to the provisions of the said Section. It was submitted that the Revenue could disallow the expenditure even in such a circumstance by taking recourse to Rule 8D. According to us, Rule 8D, only provides for a method to determine the amount of expenditure incurred in relation to income, which does not form part of the total income of the Assessee. Rule 8 D, in our view, cannot go beyond what is provided in Section 14A of the Act.”

record. Similar issue came for consideration before the judgement of

Jurisdictional High Court in the case of Redington (India) Ltd., in T.C

No.520/16 dated 23.12.2016 wherein held that:-

ITA Nos.2732 & 2733/16 :- 15 -:

“13. Reliance is also placed on a decision of the jurisdictional High Court in the case of Beach Minerals Company Pvt. Ltd. Vs. Assistant Commissioner of Income Tax in TCA No.681 of 2013, dated 2.12.2013. In that case, payments of interest by the assessee were sought to be disallowed invoking the provisions of s.14A on the premise that the same related to borrowings that had been invested and would yield exempt returns. The assessee contested the disallowance u/s 14A on multiple grounds. It was contended that there were sufficient reserves and surpluses available for the purpose of investments, and borrowed funds, for which the payment of interest had been incurred, had not been invested. The assessee sought to draw a nexus between the borrowed funds and the interest payments, highlighting the position that the quantum of available free funds was far in excess of the investments made. The Bench, in the light of the above submissions, remanded the issue to the file of the assessing officer to be considered de novo and after conducting a proper enquiry. Inter alia a direction was issued to the assessee to tender a proper explanation for the interest payments. The open remand was made in the facts and circumstances of that case and no conclusion was drawn by the Bench on the position of law involved. In fact, the substantial question of law raised in that case for the consideration of the Court was couched in general terms as follows “Whether on the facts and in the circumstances of the case, the Income Tar Appellate Tribunal is right in law in confirming the disallowance under Section 11.1 of the income Tax Act, of an amount of Rs.55,00.000/- in relation to assessment year 2007- 2008?” 14. Nothing much turns on the use of the word ‘includable’ and the phrase ‘under the act’ in s. 14A and we are not persuaded to accept the emphasis laid or the interpretation of the same by the Revenue. An assessment in terms of the Income tax Act is specific to an assessment year and the related previous year. S.4 of the Act, which imposes the charge to tax reads thus:

Charge of income-tax 4. (1) Where any Central Act enacts that income —tax shall be charged for any assessment year at any rate or rates, income-

ITA Nos.2732 & 2733/16 :- 16 -:

tax at that rate or those rates shall be charged for that year in accordance with and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person: Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income tax shall be charged accordingly.

Thus, where the statute indented that income shall be recognized for taxation in respect of any previous other than that immediately preceding the relevant assessment year, the provision shall expressly state so. The provisions of s.1O in Chapter III of the Act dealing with ‘Incomes not included in total income’ commences with the phrase ‘In computing the total income of a previous year, any income falling within any of the following clauses shall not be included.

of Chettinadu Logistics in Tax Case No.24 of 2017 vide order dated

13.03.2017. Since the investment does not yield any exempted

income, there cannot be any applicability of sec.14A r.w. Rule 8D of

the Income Tax Rules, 1962. Accordingly, this ground of the assessee

in this appeal is allowed.

ITA Nos.2732 & 2733/16 :- 17 -:

Sd/- Sd/- (एन.आर.एस. गणेशन)) (चं� पूजार�) (CHANDRA POOJARI) (N.R.S. GANESAN) लेखा सद�य /ACCOUNTANT MEMBER �या�यक सद�य/JUDICIAL MEMBER चे�नई/Chennai �दनांक/Dated: 20th September, 2017. K S Sundaram

आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 3. आयकर आयु�त (अपील)/CIT(A) 5. �वभागीय ��त�न�ध/DR 2. ��यथ�/Respondent 4. आयकर आयु�त/CIT 6. गाड� फाईल/GF