IL & FS EMPLOYEES WELFARE TRUST,MUMBAI vs. ADDL CIT 19 (3), MUMBAI

On the facts and circumstances of the case the Learned Commr. Of Income Tax (A) has erred in confirming the disallowance made by the Learned Assessing Officer regarding diminution in the value of the shares amounting to Rs.52,31,313/-. The appellant prays that they are entitled to deduction of Rs.52,31,313/- and the addition made by the Learned Assessing Officer and confirmed by the Learned Commr. Of Income Tax (Appeals) may be deleted.

The revenue has also raised the following grounds:-

The assessee filed the return of income for the A.Y.2009-10 declaring total income to the tune of Rs.4,90,71,388/- on 29.09.2009. The return of income was processed u/s.143(1) of the Income Tax Act, 1961( in short “the Act”). The case was selected for scrutiny assessment and notice u/s.143(2) of the Act dated 24.08.2010 was issued and served upon the assessee. Thereafter notice u/s.142(1) of the Act was also issued and served upon the assessee. The assessee is a trust settled by Infrastructure Leasing & Financial Services Ltd. in the year 1990 for the welfare of its employees and the employees of &5223/M/14 A.Y. 2009-10 its associate and affiliated companies. The beneficiaries of the Trust are all employees of the company and the employees of the associate and affiliated companies without any specific ratio of sharing of income or trust fund. It’s main business activities is the investment in shares and securities, dealing in shares, debentures and other securities. The income of the assessee was assessed to the tune of Rs.(-)3,20,61,655/-, thereafter, the assessee filed an appeal before the learned CIT(A) and the learned CIT(A) confirmed the expenditure incurred to earn the exempt income u/s.14A of the Act to the tune of Rs.1,35,25,433/- and also confirmed the disallowance made by the Assessing Officer to the tune of Rs.52,31,313/- on account of diminution in the value of the shares and also confirmed the interest u/s.234B of the Act to the tune of Rs.14,12,268/- and Rs.64,299/- u/s.234C of the Act, therefore the present appeal has been filed before us. Whereas the revenue has challenged the direction given by the CIT(A) to the Assessing Officer to compute the Long Term Capital Loss on account of sale/transfer of share of ILFS during year by determining cost of acquisition u/s.45(2A) of the Act read with Circular No.768 dated 24.06.1998 of the CBDT instead of average cost method adopted by the Assessing Officer whereby the Assessing Officer disallowed the Long Term Capital Loss to the tune of Rs.7,50,92,618/-. &5223/M/14 A.Y. 2009-10 I.T.A. No.5235/M/2014 (Assessee’s Appeal)

Assessee has challenged the disallowance restricted by the learned CIT(A) to the tune of Rs.1,35,25,433/- u/s.14A of the Act. In the relevant assessment year the assessee received the dividend income of Rs.7,33,91,985. However, at the time of filing of return, the assessee disallowed the interest expenses to the tune of Rs.25,10,473/- u/s.14A of the Act. The contention of the assessee is that the expenditure which has not been incurred to earn the exempt income is not liable to be considered while application of the provision u/s.14A read with Rule 8D of the Act. The contention of the assessee is also that the assessee incurred only the interest expenditure which has not been claimed and deducted on account of interest u/s.14A of the Act. The assessee has filed the details at page 20 of the paper book in which he has shown the expenditure on different head. The assessment of the assessee is for the year of 2009-10. No doubt the provision u/s.14A r.w. Rule 8D of the Act is applicable. It is not in dispute that the principle laid down in case of Godrej & Boyce Manufacturing Company Ltd. Vs. DCIT, 234 CTR 1 (Bom) is also applicable in this case. But while following the above said law no doubt the expenditure which has not been incurred to earn the exempt income is not liable to be considered while assessing the expenditure &5223/M/14 A.Y. 2009-10 u/s. 14A r.w. Rule 8D of the Act. It is necessary to mentioned the detail the expenditure incurred by the assessee.

Assessee voluntarily disallowed the employee welfare expenses in sum of Rs.10,709,710/- and interest expenses to the tune of Rs.2,510,473/-. Now the expenses remains to the tune of Rs. 325,000/- on account of legal and professional expenses and an amount of Rs.65,629/- on account of miscellaneous expenses. Disallowance is not required to be made more than the expenditure. The expenditure remains Rs.325,000/- + Rs.65,629/- =390,629/-. These expenses have shown on different head but finding no justifiable piece of evidence, we are of the view that Rs.25,000/- can &5223/M/14 A.Y. 2009-10 also be disallowed as expenditure to earn the exempt income. Therefore, in view of the said circumstances the finding of the CIT(A) on this issue is hereby ordered to be set aside and Assessing Officer is directed to assess the income of the assessee in view of the observations made above. Accordingly this issue is decided in favour of the assessee against the revenue.

Under this issue the assessee challenged the confirmation of disallowance made by the Assessing Officer regarding the diminution of value of shares amounting to Rs.52,31,313/-. The contention of the appellant is that the investment in which the above diminution have been treated by the Trust as stock in trade and as per the accounting standard it has been valued at market value or cost, whichever is lower. Assessing Officer was of the view that as the stock in trade was not sold therefore notional profit or loss could not be taken for assessment under the provision of the Act. The contention of the assessee is that the assessee has treated shares of listed companies as stock in trade and the regular profit and loss on the sale of the shares if any has been offered to tax as business income and as the market value as on 31.03.2009 for such shares is less than its cost sub diminution in the value of the shares is to be treated as business loss. The Assessing Officer relied upon the case Indian Overseas Bank 51 taxaman 283 (Madras). The finding of the Assessing Officer was &5223/M/14 A.Y. 2009-10 confirmed by the CIT(A). However, the assessee has also placed reliance on the law settled by the Hon’ble Supreme Court in case of United Commercial Bank reported in 240 ITR 355 but the CIT(A) nowhere discussed the said law and endorsed the view of the Assessing Officer. CIT(A) was also of the view that the trust was not carrying out the activity of shares therefore the contention of the appellant has been declined. Infact, assessee in his accounts books was treating the investment as stock in trade and accordingly books of accounts were being maintained. Therefore, in the said circumstances the finding of the CIT(A) on this issue was on wrong path. Moreover, the law relied by the assessee was not seen and discussed. The details of the investment and diminution of value of shares has been furnished which lies at page 15 of the paper book. No doubt it is to be seen whether diminution of investment in the shares is liable to allowable or not. This matter of controversy has already been adjudicated by the Hon’ble Supreme Court in case of United Commercial Bank reported in 240 ITR 355 wherein this controversy has been decided in favour of the assessee against the revenue. The observation of the Hon’ble Supreme Court has been reproduced below:-

In view of the said observation, we allowed the diminution in the value of the share amounting to Rs.52,31,313/-, therefore, we set aside the order passed by the CIT(A) on this issue. Accordingly, this issue is decided in favour of the assessee against the revenue.

According to issue no.3, the assessee has challenged the interest u/s.234B to the tune of Rs.14,12,268/- and Rs.64,299/- u/s.234C. Since the issue no.2 has also been decided in favour of the assessee and against the revenue, therefore the consequential result is liable to be followed. Accordingly, we set aside the finding of the learned CIT(A) on this issue.

The revenue has challenged the direction given by the CIT(A) on this issue to the Assessing Officer to compute the Long Term Capital Loss on account of IL & FS during the year by determining cost of acquisition u/s.45(2A) of the Act read with Circular No.768 dated 24.06.1998. However, the revenue is of the view that the average cost method adopted by the Assessing Officer is liable to be implemented whereas the Assessing Officer disallowed the Long Term Capital Loss to the tune of Rs.7,50,92,618/-. Before going further it is necessary to advert the finding of the learned CIT(A) in this regard.

Accordingly, appeal of the assessee is hereby allowed and appeal of the revenue is hereby dismissed.