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Income Tax Appellate Tribunal, DELHI BENCH: ‘A’ NEW DELHI
Before: SHRI G.D. AGRAWAL & SHRI SUDHANSHU SRIVASTAVA
ORDER PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER: The present appeal is preferred by the assessee against the order dated 04/02/2013 passed by the ld. CIT (Appeals)-IV, New Delhi for AY 09-10. In its appeal the assessee has assailed the action of the ld. CIT (Appeals) in upholding the addition of Rs. 407,158/- u/s 14A of the Act and had also challenged the action of the ld. CIT (Appeals) in upholding the treatment of capital gains of Rs. 9,139,000/- as business income. Page 1 of 14 ABR Auto P. Ltd.
The brief facts of the issues before us are that the assessee company had made an investment in shares of closely held unquoted companies. The total amount of investment made on 31/03/08 was Rs. 80,471,569/-, whereas on 31/03/09 it was Rs. 82,391,569/-. It was the assessee’s contention that no dividend was received by it during the year under consideration. However, the AO made an addition of Rs. 407,158/- u/s 14A being half percent of average investments. On appeal, the ld. CIT (Appeals) upheld this disallowance. As far as the second issue regarding treatment of capital gains as business income is concerned, the assessee company had purchased rights of acquiring space in Paradise Mall, vide agreement dt. 10/03/05, for a sum of Rs. 49,400,000/-. It was the assessee’s contention that due to some problems in the management of the Mall, the construction was delayed and the matter also went for arbitration. Since the Mall was under construction and no registered deed had been executed, the amount paid was shown under loans and advances. The assessee finally sold the said property on 15/09/08 and the AO treated the consequential capital gains as business income of the assessee and the ld. CIT (Appeals) further confirmed the same.
3. The ld. AR submitted that the assessee company had purchased shares of one closely held unquoted group company Mark Auto Ltd. It was further submitted that Mark Auto Ltd. was purchased by the assessee company during FY 05-06 in which the assessee company is holding around 48% share capital. It was Page 2 of 14 ABR Auto P. Ltd. further submitted that another 48% of the shares are held by Maruti Udyog Ltd. and the purpose of acquiring the shares of Mark Auto Ltd. was not to earn dividend but to secure the right to manage the company. The ld. AR further submitted that no continuous monitoring was required for the investment made in the above said company and that no expenditure in this regard was ever made by the assessee company. It was further submitted that no interest was paid by the assessee for any loan raised for the above said investment in shares and that the shares were purchased purely out of non interest bearing funds raised by the assessee and that the AO had mechanically applied the provisions of Rule 8D without verifying the quantum of expenditure. The ld. AR relied on the decision of the Hon’ble Delhi High Court in the case of CIT vs. Holcim India P. Ltd. in ITA Nos. 486/2014 & 299/2014 for the proposition that the disallowance u/s 14A was not tenable.
3.1 On the issue of treatment of capital gains as business expenditure, the ld. AR submitted that the assessee intended to hold the above rights for long term investments which can be established from the following facts: i. The agreement for purchase and sale of the said space were for the purpose of commercial property and the assessee had to sell the same for its bonafide needs and requirements; Page 3 of 14 ABR Auto P. Ltd. ii. As per the purchase agreement the assessee had no right to sub-divide the said property; iii. The assessee held the property for more than three and a half years; iv. No subsequent modification was carried out on the property to make it marketable; v. The assessee is holding other properties also and one property has also been given on rent and the assessee is earning rent on the same; vi. The sale had to be effected only for the purpose of realizing its blocked funds; vii. Since the Registry had not been executed the assessee had shown advances and the assessee has been following this practice regularly.
3.2 The ld. AR also submitted copies of assessment orders for assessment years 2011-12, 2012-13 and 2013-14 and drew our attention to the fact that in all the three assessment years the AO has given a finding that the assessee earned rental income. The assessee also placed reliance on the decision of the ITAT Mumbai ‘D’ Bench in for AY 2006-07.
4. The ld. DR relied on the order of the ld. CIT (Appeals) and supported the order of the AO. Page 4 of 14 ABR Auto P. Ltd.
5. We have heard the rival submissions and perused the relevant records. As far as the issue of disallowance u/s 14A read with Rule 8D is concerned it is seen that the scheme of section 14A has within it implicit notion of apportionment in the cases where the expenditure is incurred for the composite/indivisible activities in which taxable and non-taxable income is received. But when it is possible to determine the actual expenditure in relation to the exempt income or when no expenditure has been incurred in relation to the exempt income, then principle of apportionment embedded in section 14 A has no application. The objective of section 14 A is not allowing to reduce tax payable on the normal exempt income by debiting the expenditure incurred to earn the exempt income. Thus, the expenses incurred to earn exempt income cannot be allowed and the expenses shall be allowed only to the extent they are related to the earning of taxable income. If there is expenditure directly or indirectly incurred in relation to exempt income, the same cannot be claimed against the income, which is taxable as it is held by the Hon’ble Supreme Court in case of Commissioner of Income-tax v. Walfort Share and Stock Brokers P. Ltd. reported in 326 ITR 1 (SC) that for attracting the provisions of section 14 A, there should be proximate cause for disallowance which as relationship with the tax exempt income. The expenditure incurred in relation to the income which does not form part of total income has to be disallowed. However, it should be proximate relationship between the expenditure Page 5 of 14 ABR Auto P. Ltd. and the income, which does not form part of total income. Once such proximity relationships exist, the disallowance is to be effected. In case the assessee had claimed that no expenditure has been incurred for earning the exempt income, it is for the assessing officer to determine as to whether the assessee had incurred any expenditure in relation to income which did not form part of total income and if so, to quantify the extent of disallowance. Thus, in order to disallow the expenditure under section 14A, there must be a live nexus between the expenditure incurred and the income not forming part of total income. No notional expenditure can be apportioned for the purpose of earning exempt income unless there is an actual expenditure in relation to earning the income not forming part of total income. If the expenditure is incurred with a view to earn taxable income and there is apparent dominant and immediate connection between the expenditure incurred and taxable income, then no disallowance can be made under section 14A merely because some tax exempt income is received by the assessee.
5.01 It is the assessee’s claim that the impugned disallowance has been made without due deliberation. The assessee has claimed that no expenditure has been incurred in making the investments whereas the department has not considered the assessee’s assertions before making the disallowance. Further, the Assessing Officer has presumed that the assessee must have incurred some expenditure but the justification for calculating the disallowance is missing. The Hon'ble Delhi Page 6 of 14 ABR Auto P. Ltd. High Court in the case of Maxopp Investment Ltd. vs CIT (I.T.A. 687/2009) has opined in para 29 of the order as under:-
“29. Sub-section (2) of Section 14 A of the said Act provides the manner in which the Assessing Officer is to determine the amount of expenditure incurred in relation to income which does not form part of the total income. However, if we examine the provision carefully, we would find that the Assessing Officer is required to determine the amount of such expenditure only if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the said Act. In other words, the requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the Assessing Officer returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Therefore, the condition precedent for the Assessing Officer entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the Assessing Officer must record that he , is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Sub-section (3) is nothing but an offshoot of sub-section (2) of Section 14A. Sub-section (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act. In other words, sub-section (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the said Act and sub-section (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of Section 14A of the said Act. It is only if the Assessing Officer is not satisfied with the correctness of Page 7 of 14 ABR Auto P. Ltd. the claim of the assessee, in both cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the said Act in accordance with the prescribed method. The prescribed method being the method stipulated in Rule 8D of the said Rules. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the same.”
5.02 Similarly, the Hon'ble High Court of Punjab & Haryana in the case of CIT-II vs Hero Cycles Ltd. in of 2009 (O&M) has held in para 4 of the judgment that, “the contention of the Revenue that directly or indirectly some expenditure is always incurred which must be disallowed u/s 14A and the impact of expenditure so incurred cannot be allowed to be set off against the business income which may nullify the mandate of section 14A, cannot be accepted.
Disallowance u/s 14A requires finding of incurring of expenditure. Where it is found that for earning exempted income, no expenditure has been incurred disallowance u/s 14A cannot stand.”
Mumbai ‘J’ Bench of the ITAT has held in the case of Justice Sam P. Bharucha vs ACIT in that no disallowance u/s 14A of the Act is called for when the assessee has not incurred and claimed any expenditure for earning the exempt income. Page 8 of 14 ABR Auto P. Ltd. 5.03 Therefore, on an overall consideration of the facts of the case and respectfully following the ratio of the judgments as aforementioned, we hold that the disallowance u/s 14A was made without due deliberation and analysis by the Assessing Officer and the Ld. CIT(A) was also patently wrong in confirming the disallowance without testing the sustainability of the disallowance. Hence, we set aside the findings of the Ld. CIT (A) on this issue and restore the matter to the file of the AO for fresh adjudication after due verification of the claim of the assessee regarding no expenditure having been incurred. Needless to say, the AO shall afford a proper opportunity to the assessee to present its case. This ground of appeal is accordingly allowed for statistical purposes.
5.4 As far as the second issue regarding the treatment of long term capital gains as business income is concerned the Hon’ble Bombay High Court in CIT vs. V.A.
Trivedi 172 ITR 95 (Bom.) has held that “ordinarily where a person acquired land with a view to selling it later after developing it and actually divided the land into plots and sold the same in parcels, the activity could only be described as a business adventure. Generally speaking, the original intention of the party in purchasing the property, the magnitude of the transaction of purchase, the nature of the property, the length of its ownership and holding, the conduct and subsequent dealings of the appellant in respect of the property, the manner of its disposal and the frequency and multiplicity of transactions afforded valuable Page 9 of 14 ABR Auto P. Ltd. guides in determining whether the appellant was carrying on a trading activity and whether a particular transaction should be stamped with the character of a trading adventure.”
5.4.1. The Hon’ble Madras High Court in V. Ramanathan vs. CIT 51 ITR 640 (Mad.) has held that “the distinguishing mark which differentiates a trading adventure from ordinary transaction of purchase and sale ending in a profit is not the profit motive of the individual, is not the speculative instinct of the individual, is not the risk that he undertakes in the matter, but the commercial character of the venture. The test to apply is whether the operations involved in it are of the same kind and carried on in the same way as those which are characteristics of ordinary trading in the line of business in which the venture was made.”
5.4.2. The coordinate Bench of Lucknow ITAT in Saarnath Infrastructure P.
Ltd. vs. ACIT in has curled out the principles which can be applied on the facts of the case to find out whether the transactions in question are in the nature of trade or are merely for investment purposes. The principles read as under:
“What is the intention of the appellant at the time of purchase of the shares (or any other item)? This can be found out from the treatment it gives to such purchase in its books of account. Whether it is treated as stock-in- Page 10 of 14 ABR Auto P. Ltd.
trade or investment. Whether shown in opening/closing stock or shown separately as investment or non-trading asset.
2. Whether appellant has borrowed money to purchase and paid interest thereon? Normally, money is borrowed to purchase goods for the purpose of trade and not for investing in an asset for retaining.
Whether purchase and sale is for realizing profit or purchases are made for retention and appreciation in its value? Former will indicate intention of trade and latter, an investment. In the case of shares whether intention was to enjoy dividend and not merely earn profit on sale and purchase of shares. A commercial motive is an essential ingredient of trade.
How the value of the items has been taken in the balance sheet? If the items in question are value at cost, it would indicate that they are investments or where they are valued at cost or market value or net realizable value (whichever is less), it will indicate that items in question are treated as stock in trade.
How the company (appellant) is authorized in memorandum of association/articles of association? Whether for trade or for investment? If authorized only for trade, then whether there are separate resolutions of the board of directors to carry out investments in that commodity? And vice versa.
6. It is for the appellant to adduce evidence to show that his holding is for investment or for trading and what distinction he has kept in the records or otherwise, between two types of holdings. If the appellant is able to discharge the primary onus and could prima facie show that particular item is held as investment (or say, stock-in-trade) then onus would shift to Revenue to prove that apparent is not real.
Page 11 of 14 ABR Auto P. Ltd.
The mere fact of credit of sale proceeds of shares (or for that matter any other item in question) in a particulars account or not so much frequency of sale and purchase will alone will not be sufficient to say that appellant was holding the shares (or the items in question) for investment.
One has to find out what are the legal requisites for dealing as a trader in the items in question and whether the appellant is complying with them. Whether it is the argument of the appellant that it is violating those legal requirements, if it is claimed that it is dealing as a trader in that item? Whether it had such an intention (to carry on illegal business in that item) since beginning or when purchase were made? 9. It is permissible as per CBDT’s Circular No. 4 of 2007 of 15th June, 2007 that an appellant can have both portfolios, one for trading and other for investment provided it is maintaining separate account for each type, there are distinctive features for both and there is no intermingling of holdings in the two portfolios. 10. Not one or two factors out of above alone will be sufficient to come to a definite conclusion but the cumulative effect of several factors has to be seen.”
5.4.3. Coming to the facts of the case, the assessee has not shown the rights in the property as stock-in-trade. No opening and closing stock was shown by the assessee. Since the Registry of the ‘rights’ was not done, the assessee had shown the same under the head “loans and advances”. It is undisputed that the assessee has entered into only one transaction of sale. The rights were purchased in 2005 and were sold in 2008 after retaining the rights for more than three and a half Page 12 of 14 ABR Auto P. Ltd. years. It is also undisputed that the assessee has been in receipt of rental income from other properties in subsequent assessment years which have been duly mentioned in the respective assessment orders. Hence, applying the ratio as laid down by the Hon’ble Bombay High Court and the Hon’ble Madras High Court as well as the coordinate Bench of the Lucknow ITAT, we are of the concerned opinion that the surplus resulting from the sale of rights is assessable to tax only as capital gains and not as business income because the Department has not been able to demonstrate that purchase and sale of the rights was affected in the usual course of carrying on the business of the assessee. The frequency of the purchase and sale is isolated in the case of the assessee and, therefore, there is no reason to allege that this was only a device to pay lesser taxes. It is also seen from the records that the assessee company is in the practice of passing separate resolutions for making investment in properties/rights. In our considered view, the assessee has discharged its primary onus by showing that the sale of rights was not in the regular course of business or trade but rather an isolated transaction and now the onus was on the Revenue to show that the apparent was not real. No material whatsoever has been brought on record by the Revenue to show that the transaction was only a smoke screen to camouflage the trading receipts. Therefore, in absence of any material to the contrary and on appreciation of cumulative effect of several ITA No. 2375/D/13 Page 13 of 14 ABR Auto P. Ltd. factors present we hold that the surplus is chargeable to capital gains only and not as business income. As a result, this ground of appeal of the assessee is allowed.
In the final result, the appeal of the assessee is allowed.
Order pronounced in the open court on 05/08/2016