Loading judgment…
No AI summary yet for this case.
सुनवाई क� तारीख / Date of Hearing: 06.04.2017 घोषणा क� तारीख / Date of Pronouncement:02.06.2017 आयकर आयकर अिधिनयम अिधिनयम,1961 क� क� धारा धारा 254(1)केकेकेके अ�त ग�त आदेश आदेश अ�तग�त आयकर आयकर अिधिनयम अिधिनयम क� क� धारा धारा अ�त अ�त ग�त ग�त आदेश आदेश Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद�य सद�य राजे�� राजे�� केकेकेके अनुसार अनुसार/ PER RAJENDRA, AM- लेखा लेखा लेखा सद�य सद�य राजे�� राजे�� अनुसार अनुसार Challenging the orders dated 15/02/2007 and 14/07/2008 of the CIT (A) –III, Mumbai,the Assessing Officer (AO)/assessee have filed appeals for the above-mentioned AY.s. As the issues, raised in the appeals,are almost similar, so we would like passed a common order for both the years.The details of filing of returns of income, returned incomes and assessment dates etc.can be summarised as under: A.Y. ROI filed on Returned Income Assessment dt. Assessed Income 2004-05 29.10.2004 Rs.1,27,02,00,588/- 00.03.2005 Rs.1,62,13,12,640/- 2005-06 31.10.2005 Rs.83,69,89,820/- 20.12.2007 Rs.84,25,87,230/- ITA/3108/Mum/2007,AY.2004-05. 2.First ground of appeal, raised by the assessee, is about disallowance of interest of Rs.33.20 lakhs u/s.36 of the Act on the ground that borrowed funds were used for making investment in shares of subsidy companies.It was agreed by the representatives of both the sides that identical issue stands decided in favour of the assessee by the order of the Tribunal for the AY. 2002-03
3108/M/07;5336/08;3136/07 (04-05&05-06)
(ITA/884 and 928/Mum/2007).We would like to reproduce paragraphs 15-15.4 of pages 42-43 of the order and same reads as under: “15. Ground No.1 & 2 of assessee’s appeal and Ground No.1 of Revenue’s appeal: In these grounds, the assessee has challenged the action of Ld. CIT(A) in confirming the disallowance of interest amounting to Rs.59,40,000/- and Rs.4,03,00,000/- made by the AO, whereas the Revenue has challenged the relief provided by the Ld. CIT(A) of Rs.7,44,10,000/-, out of total disallowance of Rs.11,47,10,000/- made by the AO in the assessment order. 15.1. The AO has discussed this issue at para 2.1 to 2.3, and para 3 of the assessment order, wherein disallowance of interest has been made, on the ground that borrowed funds were used by the assessee company for making investment in shares of subsidiary companies and for tax free securities. 15.2. The Ld. CIT(A) has discussed these issues in para 2 to 2.3 and para 3 of the appellate order, wherein disallowance made by the AO has been partly confirmed, following the appeal orders of preceding assessment years in assessee’s own case for assessment years 2000-01 & 2001-02. 15.3. Before us, the Ld. Counsel has relied upon his submissions made in A.Y. 2000-01 and 2001- 02 and also drew our attention towards the facts and figures as contained 43 ICICI Securities Primary D. Ltd in the working sheet submitted by him to impress upon the point that own funds were far in excess of investment made in these securities. In addition to the above, Ld. Counsel also drew our attention upon the judgment of Hon’ble Supreme Court in the case of SA Builders vs. CIT 288 ITR 1 (SC). On the other hand, the Ld. DR relied upon the orders of Ld. CIT(A) and the AO. 15.4 We have heard both the sides. It is seen by us that facts in the preceding years are identical. In addition to the above, it is further observed that Hon’ble Supreme Court in the case of SA Builders Ltd.,supra, had observed that even if expenditure may not have been incurred under any legal obligation, yet it is allowable as business expenditure if it was incurred on the grounds of commercial expediency. Thus keeping in view the aforesaid factual position and clear position of law and following the order of assessment years 2000-01 and 2001-02, we decide this issue in favour of the assessee and accordingly disallowance of interest of Rs.59,40,000/- is directed to be deleted. Thus, total disallowance of Rs.11,47,10,000/- made by the AO is also deleted and consequently Grounds no.1 and 2 of the assessee’s appeal are allowed.” Respectfully following the above order of the Tribunal, and considering the judgments of Reliance Utilities and Power Limited (313 ITR 340), Tulip Star Hotels Ltd.(338 ITR 482),we decide the 1st Ground of appeal in favour of the assessee.
3.Disallowance of interest expenditure of Rs. 2.44 crores u/s.14A of the Act is the subject matter of next ground. We find that identical issue was decided in favour of the assessee by the Tribunal while deciding the appeals for the AY.s 2000-01 to 2002-03.While dealing with the first ground, we had reproduced paragraph 15-15.4 of the order for the AY. 2002-03.Respectfully following the same, and, considering the judgments of the Hon,ble Bombay High Court in the case of HDFC Bank Ltd (383 ITR 529 and 366 ITR 505), we decide Ground No. 2 in favour of the assessee.
3108/M/07;5336/08;3136/07 (04-05&05-06)
4.Next ground of appeal is about disallowance of brokerage, stamp duty and custodial charges of Rs.4.28 lakhs.The Authorised Representative (AR) fairly agreed that similar ground was decided against the assessee by the Tribunal in the AY.2002-03(supra).Accordingly,we dismiss Ground of Appeal No.3, raised by the assessee.
5.Last ground of appeal is about disallowance of indirect expenses of Rs.3.73 crores u/s.14A on adhoc basis, being 5% of indirect expenditure. It was brought to our notice that similar issue was restored back to the file of the AO by the Tribunal while deciding the appeals for the earlier AY.s including AY. 2002
03. (supra). We find that the Tribunal had directed the AO to decide the issue afresh (paragraphs 17 – 17.2, pages 45 of the said order). Respectfully following the above order we direct the AO to afford a reasonable opportunity of hearing to the assessee before deciding the issue. Last ground is decided in favour of the assessee, in part.
ITA/3136/Mum/2007,AY.2004-05:
6.First ground of appeal, raised by the AO is about restricting the disallowance Rs. 2.44 for crores as against Rs. 9.91crores,made by the AO, u/s.14A of the Act. During the assessment proceedings,the AO found that the assessee had earned dividend income of Rs. 46.53 crore,that the entire income was claimed exempt u/s.10 (33) of the Act without allocating any interest expenditure towards the said income. He directed the assessee to explain as to why proportionate interest expenditure incurred for earning dividend income should not be disallowed u/s.14A. After considering the submission of the assessee, he held that dividend income constituted about 15.90% of the income of the assessee, that interest expenditure to the extent of 15.90% was relatable to dividend income. Accordingly he made a disallowance of Rs. 9.91 crore to the total income of the assessee. 6.1.Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA) and made elaborate submissions. After considering the same, he held that in the earlier years the AO had calculated the interest relatable to dividend income in the ratio of borrowed funds to total funds, that for the AY. 2002-03 he changed the basis, that the expenditure for earning dividend income could be better allocated in the ratio of fund invested in shares to total funds, that the assessee might not receive any dividend in respect of some of the investments, that in other cases it could get higher dividend, that the interest had to be paid on 3
3108/M/07;5336/08;3136/07 (04-05&05-06) investment irrespective of the dividend income, it was more rational to allocate the interest expenditure towards dividend income in the ratio of borrowed funds to the total funds. Accordingly,he restricted the disallowance to Rs.2.44 crore.
6.2.Before us,the Departmental Representative (DR) relied upon the order of the AO.The AR supported the order of the FAA and stated that the dividend income was incidental to main business,that the assessee was carrying out indivisible business, that interest on borrowing from RBI and call money market could only be utilised for funding government securities, that the assessee had own fund of Rs.3191.88 crore,that the FAA had rightly preferred the ratio of borrowed funds/total funds for deciding the issue.
6.3.We have heard the rival submissions. We find that the AO has changed the basis for disallowing interest expenditure, that the FAA has held that ratio of borrowed funds/total funds was the better basis for making disallowance u/s.14A of the Act. In our opinion,there is no legal or factual infirmity in the order of the FAA,as he has opted for a better and more scientific basis for making the disallowance.Therefore, confirming his order,we dismiss first ground of appeal, raised by the AO.
7.Next ground is about restricting the disallowance,u/s.14A to Rs.4.28 lakhs, against Rs.1.30 crores,on account of brokerage, stamp duty and custodial service charges relating to the dividend income. During the assessment proceedings, the AO observed that the assessee had earned dividend income of rupees for Rs.653.40 lakhs,that it constituted 39.35% of income by way of dealing in shares and securities,that it had incurred expenditure of Rs 332.10 lakhs on brokerage, stamp duty, storage service charges, that such expenses related to the dealing in the shares and securities.He made a disallowance of Rs. 1.30 crore (i.e.39.35%of Rs.332.10 lakhs).
7.1.During the appellate proceedings, the assessee made elaborate submissions before the FAA. After considering the assessment order and the available material, he held that all the expenses including stamp duty were related to government securities and other debt instruments, that the income from such activities was wholly taxable,that the brokerage relating to equity share was only Rs.10.90 lakhs.Accordingly,he restricted the disallowance to Rs.4.28 lakhs (39.35% of Rs.10.90 lakhs). 4
3108/M/07;5336/08;3136/07 (04-05&05-06)
7.2.Before us,the DR stated that matter could be decided on merits. The AR supported the order of the FAA.We find that the FAA has given a categorical finding of fact that brokerage and stamp duty related to government securities and other debt instruments and that income from such activities was taxable.The provisions of section 14A are applicable to exempt income and not to taxable income.Therefore,in our opinion his order does not suffer from any infirmity. Confirming the same we dismiss second ground.
8.Loss of Rs. 12.32 crore from sale of shares of South Indian Bank Ltd. (SIBL),Bhushan Steel (BS)and Usha Beltron(UB) is the subject matter of next ground of appeal.During the assessment proceedings,the AO held that loss suffered by the assessee from the sale of shares of SIBL,BS and UB were covered by the explanation to section 73 of the Act.He held that the main income of the assessee was from business,that losses out of trading of shares of other companies were to be treated to be speculation loss as per the Explanation to section 73,that the assessee had purchased shares of SBIL on 16.03.1995 @Rs.60/- per share,that out of Rs.5.74 lakhs it sold out Rs.3.08 lakhs shares,that it claimed loss of Rs.28.20 lakhs with regard to sale of the shares of SBIL,that provisions of Explanation to section 73 were applicable to the transaction in question. The AO further held that loss arising out of sale of shares of BS and BU were also speculation loss.
After considering the submissions of the assessee and the assessment order, the FAA held that the provisions of Explanation had to be applied in respect of overall profit/loss after taking into consideration all the transactions of purchase and sale of shares. The assessee had earned profit from the purchase and sale of shares during the year, that provisions contained in Explanation to section 73 could not be applied. He made a reference to section 43 (5) of the Act and stated that provisions of the said section could not be applicable as the transaction under consideration had been settled by actual delivery of shares. Finally he held the action of the AO in treating the loss suffered by the assessee from the sale of shares of SIBL,BS and UB as speculation loss was not in order.
8.1.Before us,the DR supported the order of the AO. The AR stated that the assessee had earned profits from the purchase and sale of shares during the year, that provisions of explanation to section 73 were not applicable.We find that transactions in dispute were settled by actual 5
3108/M/07;5336/08;3136/07 (04-05&05-06) delivery of shares and therefore same cannot be treated as speculative transactions. In our opinion the FAA had rightly held that for determining speculation loss the resultant profit/loss from purchase/sale of shares had to be considered. In our opinion, his order does not require any interference from our side.Therefore, upholding his order we decide the third ground of appeal against the AO.
9.Ground No.4 raised by AO deals with disallowance of Rs. 1.64 lakhs paid by the assessee on behalf of its employees under the head CFA Examinations Fees Paid.The AO did not allow the expenditure holding that expenses were personal expense of the concerned employees.
9.1.The FAA,during the appellate proceedings, held that expenditure was incurred predominantly for the staff welfare,that if the academic qualifications of the employees improve it would contribute for betterment of the business of the assessee, that the expenses incurred by it for welfare of the employees were allowable under section 37 of the Act.
9.2. Before us,the DR stated that matter could be decided on merits. The AR supported the order of the FAA.After considering the facts of the case we are of the opinion that expenditure incurred by the assessee was allowable as it contributed towards welfare of the employees. Confirming the order of the FAA, we dismiss fourth ground.
10.Allowing the loss of Rs.20.83 lakhs from the transaction carried out in the shares of Maruti Udyog Ltd.(MUL)is the subject matter of last ground of appeal.During the year under considera - tion the assessee acted as a Co-Lead Manager to the initial public offer of MUL, that it had to undertake certain activities as per the mandate later given by MUL,that one of the services to be rendered by it was to market the IPO to the investors including institutional and retail investors, that it was required to collect the application forms from the investors, that the form had to bear the stamp of lead manager or the Co-Lead managers, that due to some technical/administrative problems at the end of the assessee some of the bids received from the investors were not entered by it in the bidding system,that the bidders entitled to allotment of shares could not get the shares because of the technical lapse on part of the assessee, that the application forms of such investors were received through the assessee,that it decided to buy the shares from the market and hand them over to the investors at the allotment price of Rs.125 per share, that it suffered a loss of Rs. 6
3108/M/07;5336/08;3136/07 (04-05&05-06)
20,83,795/-,that it claimed the loss in the books of accounts.However, the AO disallowed the claim made by the assessee.
10.1.Before the FAA, the assessee stated that the decision to buy the shares from the market and to issue them to the applicants was based on commercial expediency and business prudence. After considering the available material, the FAA held that the assessee worked as Co-Lead Manager for the IPO of MUL, that it was required to receive the applications from the investors, it had to enter the bits received by it into electronic bidding system, that due to some technical problems some of the bids received from the investors were not entered into the bidding system, that the assessee made of the loss suffered by the investors, that the assessee had earned fees of Rs.3.12 crore as merchant banker to the idea of MUL, that the decision to buy the shares from the market for the investors was raised on commercial expediency, that the expenditure was allowable under section 37 of the Act.
10.2.The DR left the issue to the discretion of the bench and the AR relied upon the order of the FAA.We find due to certain technical problem some of the investors who had made bids for the IPO of MUL could not get the shares, that the assessee decided to purchase shares of MUL from the market and suffered a loss of Rs. 20.83 lakhs in the process. It was a pure and simple business decision of the assessee to purchase the shares and hand them to the investors.The FAA has rightly held that the expenditure was covered by principle of business expediency.We do not want to disturb his findings. Last ground of appeal, raised by the AO, is decided against him.
ITA/5336/Mum/2008,AY.2005-06:
11.The assessee has raised three grounds of appeal for the year under consideration. First two grounds are about disallowance of interest of Rs. 45.80 lakhs u/s.36 of the Act on the ground that borrowed funds were used for making investment in the shares of subsidy companies and disallowance of interest of Rs. 2.75 crores on the ground that borrowed funds were used for making investment in zero bond coupons of HDFC.While adjudicating the appeal for the earlier year,we had decided both the issues in favour of the assessee. Accordingly Ground no. 1 and 2 are allowed.
3108/M/07;5336/08;3136/07 (04-05&05-06)
12.Third ground dealing with disallowance of indirect expenses is restored back to the file of the AO for fresh adjudication,following our order for the earlier year.