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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI A.K. GARODIA & SMT. ASHA VIJAYARAGHAVAN
Date of hearing : 26-09-2016 Date of Pronouncement : 03-11-2016 O R D E R Per A.K. Garodia, Accountant Member These are Cross Appeals filed by the assessee and revenue which are directed against the order of CIT (Appeals)–I, Bangalore dated 28.03.2013 for the assessment year 2009-10.
2. In the assessee’s appeals, the grounds raised
by the assessee are as under:- “Short term loss on sale of shares:
1. The learned Commissioner of Income Tax (Appeals) has erred in disallowing the appellant’s claim of short term loss on sale of the following investments: 1,00,000 equity shares of Rs 10 each of Fedex Finance Limited 1,30,000 equity shares of Rs 10 each of Fedex Securities Limited.
2. The learned Commissioner of Income Tax (Appeals) erred in holding that because shares were allotted against a loan given and that the purchase was ratified by the board, the investment cannot be treated as stock in trade of the appellant.
3. The learned Commissioner of Income Tax (Appeals) has presumed that the companies in which investments are made are sister concerns of the appellant. This is factually incorrect.
4. The appellant has made an investment for furtherance of its business. The intention of making the investment is clear.
5. The appellant has no representation on the Board of the companies in which the shares have been allotted nor do they have majority control.
6. The assumptions of the assessing officer that the transaction is colorable device is not based on any facts or findings. The assessing officer has not bought to record any direct nexus between investing and sale of the said shares to deem it a colorable device.
7. The fact the transaction was genuine and carried out in an arms length manner, thought admitted have not been appreciated. The transaction is carried out in the course of business of the appellant.
8. The appellant craves permission to add, delete or alter any f the grounds at the time of hearing. Prayer The appellant humbly request the Honorable Tribunal to :
1. Hold the order of the CIT (A) is against the law and not in the interest of justice.
The loss as claimed by the appellant be allowed, based on the facts of the matter.”
It was submitted by the learned AR of assessee that in para No. 4.4 of pages 13-15 of his order, this is the finding of learned CIT (Appeals) that assessee had not acquired the shares under normal business transactions and hence, the same cannot be taken as stock in trade and therefore, this is a capital loss and not business loss. In this regard, she submitted that to determine this aspect as to whether investment is for business purpose or for investment purpose, the intention of the assessee at the time of acquisition of shares is most important and relevant. In this regard, she submitted a copy of Board resolution in the Board meeting held on 3.9.2007 and it was pointed out that as per the Board’s resolution, it was decided that this investment in shares of these two companies viz., M/s. Fedex Finance Ltd., and M/s. Fedex Equity Ltd. of Rs. 500 lakhs and Rs. 650 lakhs respectively is being made as stock-in- trade at a price of Rs.500/- per share at a premium of Rs. 490/- per share. Thereafter, it is submitted that the balance sheet of the assessee’s company for the year ending 31/3/2008 is available at page 13 of PB and this investment of Rs. 11.50 crores was shown as inventory and it was valued at cost whereas investment of Rs. 63.01 crores was shown as investment, as can be seen on page 12 of PB. She also drew attention to page 15 of Paper Book i.e., Schedule V being significant accounting policies and it was pointed out that as per this accounting policy, the assessee was valuing long term investments at cost and investment in shares of body corporate held in inventory were valued at cost or net realisable value, whichever is less. Thereafter, she drew our attention to Board’s Circular No. 4/2007 dated 15.6.2007, and particularly para 10 of this Board’s Circular where it is specified that a company can have two portfolios i.e., as an investment portfolio comprising of securities which are to be treated as capital assets and a trading portfolio comprising of stock-in-trade which are to be treated as trading assets. She submitted that under these facts, there is no dispute that assessee had incurred loss on account of its purchase and sale of shares and the only objection of CIT (Appeals) is this, that it is capital loss and not business loss but at the time of acquisition of shares itself, the shares were purchased as stock-in-trade and in view of the Board Circular No. 4/2007 dated 15.2.2007, it should be accepted that the loss is a business loss and not a capital loss.
At this juncture, a query was raised by the Bench that even if it is held that loss in the present case is a business loss, then also, the assessee will be hit by Explanation to Section 73 (1) and in that situation, the loss has to be treated as speculation loss which cannot be set off against normal business income and it can be set off only against the speculation income. In reply, it was submitted by the learned AR of the assessee that on this aspect, the matter is covered in favour of the assessee by the Tribunal’s order rendered in the case of M/s. Laxmi Feeds & Export Ltd. vs. ACIT as reported in 62 ITD 315 (Mum). He submitted that in that case, it was held by the Tribunal that there is difference in purchase of shares and acquisition of shares by its allotment on application and in the second situation, the transaction is not hit by Explanation to Section 73(1). It was submitted that in the present case also, shares of both the companies were not purchased by the assessee but were allotted by these companies and the respective share application form for acquiring shares of M/s. Fedex Finance Ltd., and M/s. Fedex Equity Ltd., are available at pages 26-32 of Paper Book respectively. She submitted that under these facts this Explanation to section 73(1) is not applicable. She also submitted that in this tribunal order, the tribunal has followed a judgment of Hon’ble apex court rendered in the case of Sri Gopal Jalan & Co. vs. Calcutta Stock Exchange as reported in 1964 AIR 250 wherein it was held that the word “Purchase” cannot be applied to the legal transaction under which a person by the machinery of application and allotment becomes a share holder in the company.
As against this, learned DR of revenue supported the orders of the authorities below:
We have considered the rival submissions. First of all, for ready reference, we reproduce Para 4.4 of the order of ld. CIT(Appeals) hereinbelow:-
“4.4 I have considered the facts and submissions made by the appellant. The AO disallowed the said loss of Rs.11,27,000/- claimed in the profit and loss account for the following reasons - i) that it is not a business loss as there was no object in the Memorandum of Association of the appellant company. ii) the loss claimed is of a capital nature and cannot be allowed u/s 37 of the Act. iii) the transaction is a colourful device and not eligible for deduction. As regards the first aspect, it may be seen that the appellant's main activity is advertisement and publicity. The appellant is not in the business of purchase and sale of shares. Further the shares were not acquired by a normal purchase by the appellant company. M/s Asianet TV Holdings(P) Ltd. gave advances to M/s Fedex Finance Ltd and M/s Fedex Securities Ltd., and later by the decision of the Boards of M/s Asianet TV Holdings and the appellant company the said amounts were treated as share application money of the assessee and accordingly the shares were issued. Thus the appellant company never purchased the shares directly but acquired due to the Boards' decision. Therefore the transaction can not be called as regular business transaction. Further as rightly pointed out by the A.O there is no object in the Memorandum of Association of the appellant company regarding the purchase and sale of shares. The appellant showed the shares of the said company under current assets in schedule 5 of the balance sheet as on 31.03.2009 as stock in trade. It is also seen from the profit and loss account for the year ending 31.03.2009 the appellant showed certain transactions of purchase/sale of shares. Mere disclosure of the shares as a stock in trade under current assets is not enough for claiming the said asset as a trading asset. The transactions recorded in the books is one of the indicators for deciding the issue and the same can not be taken as a sole reason for supporting the appellants view. The intention behind the acquisition of the shares is a dominant factor in the instant case. The appellant had not acquired the shares under normal business transactions so that the same can be taken as stock in trade. It is as per the decision of the Boards' of the Asianet TV Holdings L td. and the appellant company, the advances were converted into shares of the appellant company. Such a transaction can be treated as an investment transaction and the shares acquired thereby are to be treated as investments. In view of this, the transaction cannot be called as trading transaction. Hence the loss suffered by the appellant company is not eligible for deduction. Alternatively the said loss is a capital loss. Therefore, I fully agree with decision of the A.O in this regard.”
From the above Para of the order of ld. CIT (A), we find that this is the only objection of the ld. CIT (A) that the loss in question is a capital loss and not business loss. In order to determine as to whether the loss in question is capital loss or business loss, one has to find out the intention at the time of acquisition of shares. The shares were acquired by way of application and as per the Board Resolution, these shares were acquired as stock-in-trade. This is not in dispute that shares are in fact acquired by the assessee at Rs.500 per share in the FY 2007-08 and were shown by the assessee in its balance sheet as on 31.3.2008 as inventory and thereafter in the present year, these shares are sold by the assessee at a lower price resulting into loss in question and there is no valid reason or basis indicated in the order of CIT (A) to say that it is capital loss particularly when the loss itself is being accepted by the CIT(A) and the Revenue is not in appeal against this decision of CIT(A) that the loss in question is a fact.
The only objection of the ld. CIT(A) is that it is not a business loss but capital loss and the reasoning of the CIT(A) is this that the assessee has not acquired the shares under normal business transaction so that the same can be taken as stock-in-trade. We find no merit in this objection of CIT(A) in view of this fact that shares were acquired by the assessee as per Board Resolution dated 3.9.2007, as per which, the shares in these two companies are to be acquired as stock-in-trade. Hence, on this issue, we reverse the order of the CIT(Appeals) and hold that loss in question is a business loss and not a capital loss.
Having held that the loss in question is a business loss, we have to examine and decide as to whether this business loss in shares is hit by explanation to section 73(1) or not. The ld. AR of assessee had placed reliance on the Tribunal order rendered in the case of M/s. Laxmi Feeds & Export Ltd. vs. ACIT (Supra) and on the judgment of Hon’ble Apex Court rendered in the case of Sri Gopal Jalan & Co. vs. Calcutta Stock Exchange (Supra). As per this judgment, it was held by the tribunal that if the shares are acquired by the assessee on application and allotment and not by way of purchase, the said acquisition of shares is not a purchase of shares because on application of shares, whether the assessee will get allotment of shares or not is not certain and as per Explanation to section 73(1), only that business is hit by this Explanation which consists of purchase and sale of shares. Since acquisition of shares in the present case is not by way of purchase, but is by way of allotment on application, loss on sale of such shares which are acquired by application and allotment are not hit by Explanation to section 73(1). The tribunal in this case has applied and followed the Ratio of the judgment of Hon’ble apex Court rendered in the case of Sri Gopal Jalan & Co. vs. Calcutta Stock Exchange (Supra) wherein it was held that the word “Purchase” cannot be applied to the legal transaction under which a person by the machinery of application and allotment becomes a share holder in the company. In the present case, the facts are similar because in the present case also, shares were acquired by application and allotment of shares and not by way of purchase. Hence this Tribunal order and this judgment of Hon’ble apex court are squarely applicable in the facts of the present case and therefore, respectfully following these judicial pronouncements, we hold that the loss in question in the present case is not hit by Explanation to section 73(1) and therefore, such loss is entitled to be set off against normal business income of the assessee.
In the result, the appeal of assessee is allowed.
Now we take up appeal of the Revenue. The grounds raised by the Revenue are as under:-
“1. The order of the Learned CIT(Appeals), in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case.
2. The CIT (A) erred in deleting the disallowance made under section 14A read with rule 8D (2)(ii) for the reason that the investment was not made during the year without appreciating the fact that the when the investment of Rs 63 cr in share capital and in group companies was made the company did not have either own or surplus funds to make such investments.
3. The learned CIT (Appeals) erred in allowing the appeal on the issue of disallowance made under section 14A read with rule 8D (2)(ii) for the reason there was no evidence on record to show that any borrowed funds were utilised for the said investments year without appreciating the fact when the interest expense incurred cannot be directly attributed to any particular income or receipt, provisions of rule 8D(2)(ii) automatically become applicable.
4. The learned CIT (Appeals), erred in not appreciating that the borrowings are neither directly attributable to borrowings specifically used for tax exempt incomes or receipts, nor is directly attributable to borrowings specifically used for taxable incomes or receipts and as such, provisions of rule 8D(2)(ii) automatically become applicable for the said interest.
5. The learned CIT (Appeals) erred in allowing the appeal on the issue of disallowance under sec 36(1) (iii) holding that the advances were made for commercial expediency and to have controlling interest as a larger business activity in the course of business without appreciating the fact that the advances were made out of funds borrowed from ICDS 6. The learned CIT (Appeals) erred in allowing the appeal on the issue of disallowance under sec 36(1) (iii) holding that where there were interest free funds by way of capital or reserve or by way of interest free deposits from customers, there is an inference that borrowed funds are not diverted for non-buisness purposes without appreciating the fact that the funds from ICDS were diverted for non business purposes 7. The learned CIT (Appeals) erred in allowing the appeal on the issue of disallowance of managenment consultancy fee of Rs 6,89,59,600 holding that there is no finding by the AO that the expenditure is excessive or unreasonable in relation to anyone of the three requirements prescribed in sec 40A(2) without appreciating the fact that the AO had given a finding that the AR of the company was asked to give exact details of the consultancy provided and the AR had preferred not to produce any further evidence relating to the same.
8. The learned CIT (Appeals) erred in allowing the appeal on the issue of disallowance of managenment consultancy fee of Rs 6,89,59,600 holding that as there was no material on record to show that the expenditure was in the nature of capital expenditure or not for thew purposes of business, the alternative disallowance u/s 37 was also not Justifiable without appreciating the fact that the AO had given a finding that the AR of the company was asked to give exact details of the consultancy provided and the AR had preferred not to produce any further evidence relating to the same and therefore the AO disallowed the same giving a finding that the expenditure was not incurred exclusively for the purposes of business.
9. The learned CIT (Appeals) erred in holding that the payments of Rs 1,79,88,838 cannot be disallowed under sec 37 as the said payments were not in the nature of capital.
10. The learned CIT (Appeals) erred in holding that the expenses were incurred for the purpose of business of joint venture with the star group without appreciating the fact that the balance sheet did not show any investment regarding the joint venture 11. The learned CIT (Appeals) erred in holding that loans and advances of Rs 25,69,43,380 from Hindustan Infrastucture Project and Engineering Limited cannot be treated as deemed dividend without appreciating the fact that the amounts were advanced by Hindustan Infrastucture Project and Engineering Limited to the assessee company and the company Jupier Capital Pvt Ltd is a common shareholder both in the assessee company and the lender company.
The Learned CIT(A) has erred in law in not appreciating that section 2(22)(e) of the I.T.Act, 1961 covers concerns having common shareholder(s) with substantial beneficial interest in both the companies / concerns that is payer and payee.
13. The Learned CIT(A) has erred in law in not appreciating that section 2(22)(e) of the I.T.Act, 1961 also refers to payment to any concern wherein such shareholder is common having a substantial interest in the company as well as payee concern.
14. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT(A) be reversed and that of the Assessing Officer be restored.
15. The appellant craves leave to add, to alter, amend or delete any of the grounds that may be urged at the time of hearing of the appeal.” 12. As per grounds No.1 to 4, the issue involved is regarding deletion of disallowance made by AO u/s. 14A. The ld. DR of revenue supported the assessment order, whereas the ld. AR of assessee supported the order of ld. CIT (A). She also submitted that in view of this fact that no exempt dividend income was earned by the assessee in the present year, no disallowance can be made u/s. 14A in the present year and in support of his contention, reliance was placed by her on the judgment of Hon’ble Delhi High Court rendered in the case of Cheminvest Ltd. Vs . CIT as reported in 378 ITR 33 (Del).
We have considered the rival submissions. We find that as per the profit & loss account of the assessee for the present year available on pages 11 of PB, there is no income earned by the assessee under the head ‘dividend’ which is exempt u/s 10. In the case of Cheminvest Ltd. (supra) cited by the ld. AR of assessee, it was held by the Hon’ble Delhi High Court that where the assessee had not earned any exempt income, no disallowance can be made u/s. 14A. Since there is no actual receipt of exempt income by the assessee in the present year, we are of the considered opinion that no disallowance can be made u/s. 14A as per this judgment of Hon’ble Delhi High Court rendered in the case of Cheminvest Ltd. (supra). Respectfully following this judgment of Hon’ble Delhi High Court, we decline to interfere in the order of CIT(Appeals) on this issue. Accordingly, ground Nos. 1 to 4 of Revenue’s appeal are rejected.
Ground Nos.5 to 6 are regarding the disallowance made by the AO u/s. 36(1)(iii). Ld. DR of revenue supported the assessment order and the ld. AR of assessee supported the order of CIT(A). In particular, our attention was drawn to para 6.4 to 6.6 appearing on pages 24 to 27 of the order of CIT(Appeals.
We have considered the rival submissions. First of all, we reproduce para 6.4 to 6.6 from the order of ld. CIT(Appeals) on page 24 to 27 of his order as under:-
“6.4. I have considered the facts and submissions made by the appellant and also the reason given by the A.O in the assessment order. The A.O made the disallowance of Rs. 1,45,83,467/- u/s . 36(1)(iii) r.w.s. 37(1) of the Act. The A.O made this disallowance on protective basis on the ground that the same was considered for disallowance u/s 14A of the Act r.w. Rule 80 of I.T. Rules. It may be mentioned here the disallowance u/s 14A has been deleted by vide para no.s 4.4 & 4.5 of this order. The A.O also stated that the loans to the sister concerns were given out of borrowed funds and there was no commercial expediency. The A.O also relied on certain judicial decisions in this regard. 6.5. The amount of advance given to M/s Asianet T.V Holding (P) Ltd. is Rs. 79.49 crores. The appellant paid this amount as a share application amount to consolidate the appellants holding in the said company. As the shares were yet to be allotted the shares can not be treated as investment in shares. Since it is a share application amount no interest is receivable in the normal course. This investment is made by the appellant company out of commercial expediency. Even though, the borrowed monies are utilized for this purpose the payment of interest cannot be denied. Therefore, no interest can be disallowed. An amount of Rs. 10.2 crores was invested in M/s India Radio Ventures Pvt. Ltd. This investment is also made by the appellant company to have controlling interest. Therefore, there is a commercial expediency for making the said business investment, hence no interest is disallowable on this count. The other advance of Rs. 3.23 crores given to M/s. India Radio Ventures Pvt. Ltd. was also for the purpose of business expediency. The appellant had advanced certain smaller amounts to various other group companies and these advances were stated have been given as a part of the larger business strategy in the ordinary course of business. The appellant's submission that these advances are given for business purpose, therefore, are justifiable. Further, in the absence of specific findings / evidence on record that the borrowed funds have diverted for non business purpose it is difficult to reject the assessee's submission. 6.6. Even otherwise, where the appellant had interest-free funds by way of capital and reserves or by way of interest-free deposits from customers, there is an inference that borrowed funds are not diverted for non-business purpose. In such circumstances, there can be no disallowance. This is the ratio laid down by the Hon'ble High Court of Allahabad in the case of Prem Engineering Pvt. Ltd. [285 ITR 554]. A similar view has been expressed by the High Court of Bombay in the case of Reliance Utilities & Power Ltd. [313 ITR 340]. It was held that, where there were funds available both interest- free and interest-bearing, a presumption could arise that investments could be out of interest-free funds generated or available with the company if the interest-free funds were sufficient to meet their investments. In the present case, sufficient interest-free funds were available with the appellant, as per the Balance Sheet. Thus there cannot be any disallowance of interest on account of interest-free advances made to the sister concerns in the instant case. It is also the argument of the appellant that the interest-free advances were for commercial expediency. Therefore, the decision of the Hon'ble Supreme Court in the case of SA Builders [288 ITR 1] is applicable to the instant case. The AO relied on the following decisions i. M/s. Continental Construction Ltd. (195-ITR-81) ii. Hindustan Conductors P. Ltd. (240-ITR-762(Bom. H.C) iii. K. Somasundaram & Bros. (238-ITR-939(Mad. H.C) iv. Abhishek Industries Ltd. (286-ITR-1 (P&H H.C) The decision in the case of M/ s. Continental Construction Ltd. (195- ITR-81) is with regard to 80HHB & 80O of the Act and the A.O quoted an observation in the context of finance charges in respect of the said section hence the said section is not applicable to the present facts of the case. The decision in the case of Hindustan Conductors P.
Ltd. (240-ITR-762(Bom. H.C) is on different facts and distinguishable. In the said case there is a finding that the appellant advanced money to sister concern for extra commercial consideration and the Hon'ble High Court stated that the interest paid for extra commercial consideration is disallowable and allowed to the extent which is paid for business purpose u/s 36(1)(iii) of the Act. In the instant case there is no evidence to show that there were any extra commercial considerations. The decision in the case of K. Somasundaram & Bros. (238-ITR-939(Mad. H.C) is also on different facts. In the said case there was a sufficient proof to show diversion of borrowed funds. The Hon'ble High Court held that the borrowed funds were used for business and some time later diverted would not entitle the assessee to claim the interest paid on the borrowing as deduction. Therefore, the said decision is not applicable to the present facts of the case. The decision in the case of Abhishek Industries Ltd. (286-ITR-l (P&H H.C) was overruled by the Apex Court in the case of Manjula Sales Corpn. (298- ITR-298(S.C) hence, not applicable. In view of the detailed discussion above, the AO is not justified in making the disallowance of interest in the present case. Hence, the same is deleted.”
In the above paras reproduced from the order of CIT(Appeals), we find that a categorical finding has been given by the CIT(A) that the advances given to M/s. Asianet T.V. Holding (P) Ltd. of Rs.79.40 crores and to M/s. India Radio Ventures of Rs.10.2 crores and Rs.3.23 crores and the remaining advances given to M/s. Azure Services Pvt. Ltd. and some more advance to other group companies were all given as part of larger business strategy in the ordinary course of business and hence these advances were given for business expediency and therefore, as per judgment of Hon’ble Apex Court rendered in the case of S.A. Builders as reported in 288 ITR 1, no disallowance of interest in respect of this interest free advance is justified. Since this finding of act of ld. CIT (Appeals) could not be controverted by the ld. DR of revenue and in view of the facts of the present case, this issue is covered in favour of assessee by judgment of Hon’ble Apex Court in the case of S.A. Builders (supra) and we find no justification to interfere in the order of ld. CIT(Appeals) on this issue also. Accordingly, grounds Nos. 5 & 6 are also rejected.
Ground Nos. 7 & 8 of Revenue’s appeal are in respect of deletion of disallowance of Rs.6,89,59,600 and in this regard also, the ld. DR supported the assessment order and ld. AR of assessee supported the order of ld. CIT(Appeals). She also submitted that the decision of ld. CIT (A) on this issue is contained in Para 7.4 on page No.30 of his order. In the rejoinder, it was submitted by the ld. DR that there is no specific finding given by the CIT (Appeals) on this issue.
We have considered the rival submissions. First of all, we reproduce para 7.4 of the order of CIT (Appeals) which is available at pages 30 to 33 of his order. The same is as under:- “7.4 I have considered the facts and submissions made by the appellant and the reasons given by the A.O in this regard. The A.O disallowed the above sums u/s 40A(2) of the Act. She also disallowed the same on an alternative reason that the said expenditure was not incurred for the exclusive business purpose u/s 37 of the Act. The major amount of the disallowance is Rs. 6,06,65,000/- paid to M/ s. Hindustan infrastructure Project and Engineering Ltd (HIPE). It is submitted by the appellant that the said amount was paid for the management and consultancy services. The appellant produced the copy of the invoice for making the said payment and also the agreement entered with M/s. HIPE on 11.01.2008. However, the A.O rejected the evidence and resorted to the disallowance on the ground that the appellant paid the said amount for reducing the tax liability. The appellant seriously contested the A.O’s reasons stating that M/s. HIPE was the tax paying company during that period. The A.O also stated that M/ s. Jupiter capital Pvt. Ltd. which was the share holder of the appellant company had also share holding in M/s. HIPE hence presumed that the transactions was only for reduction of tax liability. The A.O’s presumptions are not based on any evidence. The appellant paid the said amount for the following reasons as per the agreement dated 11.08.2008. Commencing on the Effective Date and continuing throughout the Term, HIPE shall be responsible for providing to JEVL:
1. 1. Duly qualified personnel for assisting J EVL in its business related to Entertainment and Media. HIPE shall assist JEVL in preparing Business Plan, strategies, and Management resources to conceptualise, Build and roll out in a cost effective manner its business in Entertainment, Media and Publishing.
2. Assistance in liasoning with Banks, Financial Institutions, Statutory and Government agencies and any international business that JEVL may set up at a future date.
3. The services in accordance with the terms of this Agreement and as necessary to meet the Requested Service Standards as set out in this agreement., the administrative processing requirements and 4. Any incidental services., functions and responsibilities not specifically described in this Agreement., but which are required for the performance and delivery of the Services (1) and (2) collectively. In the absence of any contrary evidence it is difficult to reject the above as the appellant had discharged its onus. The appellant has very limited employees as can be seen from the employees cost debited to the Profit and Loss account hence, the argument that the payment made to M/s. HIPE for managing its affairs cannot be rejected. A plain reading of s. 40A(2) reveals that where an assessee incurs any expenditure in respect of which payment is required to be made or has been made to any person referred to in cl. (b) of s. 40A(2) and the AO is of the opinion that such expenditure is excessive or unreasonable having regard to (a) fair market value of the goods., services or facilities for which the payment is made; or (b) the legitimate needs of the business of the assessee; or (c) the benefits derived by or accruing to the assessee on receipt of such goods, services or facilities., then the AO shall not allow as a deduction so much of the expenditure as is so considered by the AD to be excessive or unreasonable. Therefore, it becomes apparent that the AO is required to record a finding as to whether the expenditure is excessive or unreasonable in relation to anyone of the three requirements prescribed., which are independent and alternative to each other. But in instant case there is no such finding by the A.O. Alternatively the disallowance u/s 37 of the Act is also not justifiable. There is no material on record to show that the expenditure was in the nature of capital expenditure or not for the purpose of business. The Expenditure is covered under the normal provisions of the Act. Therefore, the disallowance can not be confirmed u/s 37 of the Act. Hence, the disallowance is deleted.”
From the above Para from the order of CIT (Appeals), we find that the disallowance made by the AO was on this basis that the amount paid is excessive and he invoked the provisions of section 40A(2) of the I.T. Act and he also held that this is to be disallowed u/s. 37 also because as per AO, this expenditure was not utilized exclusively for the purpose of business.
The ld. CIT (Appeals) has given a categorical finding that section 40A (2)(b) can be invoked when the AO feels that such expenditure is excessive or unreasonable having regard to fair market value of goods , services or facilities for which the payment is made and since, the AO has not given a categorical finding that the expenditure in question is excessive or unreasonable, he cannot invoke the provisions of section 40A(2). On this aspect, we find no infirmity in the order of CIT (Appeals) because in fact, no such finding is given by the A.O. that the amount paid is excessive or unreasonable.
Regarding the second aspect i.e., whether the expense was for business purpose or not, a categorical finding has been given by the CIT(Appeals) that there is no material on record to show that expenditure was in the nature of capital expenditure or not for the purpose of business. Although in the assessment order, the AO has stated that this expenditure was not incurred exclusively for the business or profession, no basis or reason has been indicated by the AO for saying so. On this issue also, we find no infirmity in the order of CIT (Appeals). Accordingly, grounds Nos. 7 & 8 of revenue’s appeal are also rejected.
Regarding ground Nos. 9 & 10 in respect of deletion of disallowance of Rs.1,79,88,838 made by the AO u/s. 37 by holding that this expense is capital in nature, the ld. DR supported the assessment order, whereas the ld. AR of assessee supported the order of CIT(Appeals). In particular, our attention was drawn to para 8.4 of the order of ld. CIT(Appeals). It was submitted that a categorical finding has been given by CIT(Appeals) that there was nothing in the invoices submitted by the assessee to show the payments for acquisition of shares and decision was taken by the AO on this basis that this payment is towards acquisition of shares without any basis.
We have considered the rival submissions. First of all, we reproduce para 8.4 from the order of ld. CIT(Appeals) which is available on page 35 of his order:- “8.4 I have considered the facts and submissions made by the appellant and the reasons given by the A.O in this regard. The payments of management consultancy fees paid to M/s. Lexicon Finance Ltd. and M/s. Lexicon Securities Ltd. was disallowed u/s 37 of the Act rejecting the evidence in the form of invoices filed by the appellant before the A.O on the ground that the said expenditure can not be allowed as revenue expenditure. The A.O also was of the opinion that the said payments were towards acquisition of shares. The appellant seriously contested the findings of the A.O stating that the reasons given by the A.O were based on presumption without any valid evidence. It may be seen from the copies of the invoices of page no. s 25 & 26 of the assessment order that the said payments were paid as a consultancy fees for setting joint venture with a star group. The evidence was rejected without any contrary material on record. There was nothing on the invoices submitted by the appellant to show that the said payments were for acquisitions of shares. The appellant incurred the above expenditure for the purpose of business of joint venture with the star group. Therefore, the said payments were not in the nature of capital hence, can not be disallowed u/s 37 of the Act.”
As per Bill of Lexicon Finance Ltd. available at page 197 of PB, this amount is paid towards consultation fee for setting up a joint venture with Star Group and there is no mention about any purchase of shares. In para 10.4 of the assessment order also, it is noted by the AO that no investment has been shown in the balance sheet of assessee regarding any joint venture. In the same para, he has given a finding that the said expenditure is in the nature of capital expenditure and it is related to cost of acquisition of shares. This finding of AO is without any basis that this expenditure is capital in nature and the same is in respect of purchase of shares particularly in view of this finding of the A.O. in the same Para of the assessment order that there is no investment shown in the balance sheet of assessee regarding any joint venture and hence, on this aspect also, we decline to interfere in the order of ld. CIT (Appeals).
Regarding the first aspect as to whether expenses in question is allowable u/s. 37 or not, this is the objection of AO that the genuineness of expenditure is suspect. In this regard, this was the statement of assessee before the CIT (Appeals) that assessee had neither purchased nor sold any shares. In this connection, this fact was brought to the notice that in fact, the subsidiary company had held certain shares and assessee company had received non-compete fee and fees paid by the assessee is relating to negotiating non-compete agreement and related transaction. If an effort is made for a joint venture and the same is aborted, then the expenses incurred for the joint venture has to be allowed as revenue expenditure. In the present case, expenses were incurred in relation to joint venture with Star Group and categorical finding of AO is that no such venture has taken place and therefore, we find no reason to interfere in the order of CIT(Appeals) on this aspect of the matter also. Hence grounds Nos.9 & 10 are also rejected.
Regarding ground Nos. 11 to 13 of revenue’s appeal which are related to issue in respect of deletion of addition made by the AO of Rs.25,59,43,380 as deemed dividend u/s. 2(22)(e) of the Act, the ld. DR supported the assessment order whereas the ld. AR of assessee supported the order of ld. CIT(Appeals). She also placed reliance on the judgment of Hon’ble Karnataka High Court rendered in the case of DCIT v. Shri Rajiv Chandrashekar in dated 23.02.2016. She submitted a copy of the judgment. She pointed out that in this case, the assessee was not a shareholder of the lender company and under these facts, it was held by the Hon’ble Karnataka High Court that the matter is covered in favour of assessee by the decision of Hon’ble Rajasthan High Court in the case of CIT v. Hotel Hill Top as reported in 313 ITR 116 (Raj) and the matter was decided by the Hon’ble Karnataka High Court also in favour of assessee. It is submitted that in the present case also, the lender companies are Jupiter Capital Pvt. Ltd. and Hindustan Infrastructure Projects and Engg. Pvt. Ltd. and on page 27 of assessment order, the AO himself has noted the shareholding pattern of these two companies and as per the same, the assessee is not a shareholder of these two companies and therefore, as per the judgment of Hon’ble Karnataka High Court, no addition can be made u/s. 2(22)(e) of the Act in respect of these advances from these two companies.
We have considered the rival submissions. We find force in the submissions of the ld. AR of assessee and we find that the dispute is regarding receipt of loan advanced by the lender company Jupiter Capital Pvt. Ltd. Rs.5432.90 lakhs and Hindustan Infrastructure Project & Engg. Pvt. Ltd. Rs.2569.43 lakhs and as per the AO also, the assessee is not a shareholder in any of these two companies. Under these facts, the judgment of Hon’ble Karnataka High Court rendered in the case of DCIT v. Sri Rajiv Chandrashekar (supra) is squarely applicable wherein it was held by the High Court that if the assessee is not a shareholder in the lender company, addition cannot be made u/s. 2(22)(e) of the I.T. Act. Respectfully following this judgment of Hon’ble Karnataka High Court, we decline to interfere in the order of ld. CIT(Appeals) on this issue. Grounds Nos.11 to 13 of Revenue are also rejected.
In the result, the appeal of the revenue is dismissed.
In the combined result, the appeal of assessee is allowed, and the appeal of the revenue is dismissed.
Pronounced in the open court on this …… day of November, 2016.