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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI G.S.PANNU, AM & SHRI AMARJIT SINGH, JM
The assessee as well as revenue has filed an appeal against the order dated 26.05.2014 passed by the Commissioner of Income Tax (Appeals)- 30, Mumbai [hereinafter referred to as the “CIT(A)”] relevant to the assessment year 2009-10. 2. The assessee has raised the following grounds:-
“1. On the facts and in the circumstances of the case the Learned Commr. Of Income Tax (A) has erred in confirming the addition made by the Learned Assessing Officer regarding the disallowance u/s.14A amounting to Rs.1,35,25,433/-. The conclusion reached by the Learned Commr. Of Income Tax (Appeals) that disallowance be restricted to Rs.1,35,25,433/- is erroneous. The appellant prays that no addition be made u/s.14A and the addition confirmed by the Learned Commr. Of Income Tax (Appeals) may be deleted.
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.
3. The Learned Assessing Officer has erred in levying interest u/s.234B at Rs.14,12,268/- & Rs.64,299/- under Sec. 234C. The appellant denies the liability of payment of &5223/M/14 A.Y. 2009-10
interest u/s.234B & Sec.234C. On the facts & circumstances of the case the appellant submit that levy of interest u/s.234B of Rs.14,12,268/- and Rs.64,299/- under Sec 234C is not justified and be deleted.”
The revenue has also raised the following grounds:-
1. On the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in directing the AO to compute the Long Term Capital Loss on account of sale/transfer of shares of IL & FS during the year by determining cost of acquisition u/s.45(2A) of the I.T.Act, 1961 read with Circular No.768 dated 24.06.1998 of the CBDT instead of average cost method adopted by the AO whereby he disallowed long term capital loss of Rs.7,50,92,618/- 2. The appellant prays that the order of the CIT(A) on the above ground be set aside and that of the AO be restored.
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)
ISSUE NO.1:-
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.
Details Amt (Rs) Voluntarily Claimed disallowed as in Return deduction in Return Employee 10,709,710 10,709,710 Disallowed since taken to be Welfare application of income Expenses Interest 2,510,473 2,510,473 Disallowed voluntarily u/s.14A Expenses Legal & 325,000 325,000 Claimed as deduction since the same Professional are tobe incurred at any point of time Expenses and are not related to investments (like consultancy fee, lawyer fee etc.) Miscellaneous 65,629 65,629 Expenses Total 13,610,812 13,220,183 390,629 As can be seen from the above, against an expense claim of Rs.390,629 made by the Trust as deduction, the AO has determined an addition of Rs.1,15,20,952/- as disallowance u/s.14A which is not feasible. Moreover, Rs.390,629 claimed in the Return is actually allowable as a deduction since the same are not related to investments .
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.
ISSUE NO.2:-
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:-
“Our view, as stated above, consistently for 30 years, the assessee was valuing the stock-in-trade at cost for the purpose of statutory balance sheet, and for the income-tax return, &5223/M/14 A.Y. 2009-10 valuation was at cost or market value, whichever was lower. That practice was accepted by the Department and there was no justifiable reason for not accepting the same. Preparation of the balance-sheet in accordance with the statutory provision would not disentitle the assessee in submitting the income-tax return on the real taxable income in accordance with the method of accounting adopted by the assessee consistently and regularly. That cannot be discarded by the departmental authorities on the ground that the assessee was maintaining the balance-sheet in the statutory form on the basis of the cost of the investments. In such cases, there is no question of following two different methods for valuing its stock-in-trade (investments) because the bank was required to prepare the balance sheet in the prescribed form and it had not option to change it. For the purpose of income-tax as stated earlier, that is to be taxed is the real income which is to be deducted on the basis of the accounting system regularly maintained by the assessee and that was done by the assessee in the present case.”
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.
ISSUE NO.3:- &5223/M/14 A.Y. 2009-10
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.
I.T.A. No.5223/M/2014 (Revenue’s Appeal)
ISSUE NO.1:-
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.
“4. I have duly considered the submission of the appellant and in the said respect it is relevant to refer to section 45(2A) of Act, which is as follows:
&5223/M/14 A.Y. 2009-10
“(2A) Where any person has had at any time during previous year any beneficial interest in any securities, then, any profits or gains arising from transfer made by the depository or participant of such beneficial interest in respect of securities shall be chargeable to income-tax as the income of the beneficial owner of the previous year in which such transfer took place and shall not be regarded as income of the depository who is deemed to be the registered owner of securities by virtue of sub- section (1) of section 10 of the Depositories Act, 1996, and for the purpose of –
(i) section 48; and (ii) (ii) proviso to clause (42A) of section 2, the cost of acquisition and the period of holding of any securities shall be determined on the basis of the first-in-first-out method.
Inserted by the Depositories, Act, 1996, w.e.f from 20.09.1995, which provides as follows:
……….
The appellant’s is contention that it has domiciled IL & FS shares in two different demat accounts. In F.Y. 2008- &5223/M/14 A.Y. 2009-10
09, 11,54,613 shares were lying as opening stock in the demat account with DP ID 11177127 and 56,09,953 IL &FS shares lying as opening stock in the demat account with DP ID 11396032 and since these shares were transferred by IEWT (the appellant) in demat form, it has applied sec. 45(2A), and, on the basis of FIFO, taken cost of 11,54,613 shares Rs.150 per share and for the balance 4,25,138 shares at Rs.85.06 per share. I, therefore, find that se.45(2A) is a specific provision under the Act, which prescribed the method to determine the cost of acquisition and the period of holding of any security, i.e. on the basis of first-in and first-out method. The AO has not disputed that the shares have been held by the depository and transferred in the demat form and FIFO method is not applicable in such cases. He has also not doubted the computation of capital gain on FIFO basis. He has merely applied the above two referred decisions without discussing as to how se.45(2A) is not applicable in the above case and how the two decisions without discussing as to how sec.45(2A) is not applicable in the above case and how the two decisions over-ride specific provisions of the Act. I further find that the decision in the case of Bombay High Court in the case of Dahiben Umedbhai (Supra) and Emerald & Co. (Supra) were &5223/M/14 A.Y. 2009-10 rendered prior to the insertion of provision of sub-section (2A) u/s. 45 of the Act. In view of the same, the above two conditions are not applicable. I therefore, direct the AO to compute the Long Term Capital Gain / Loss on account of sale/transfer for shares of IL & FS during the year by taking into account the provisions of sec.45(2A) of the Act and Circular No.768 dated 24.06.1998. Further, while computing the income / loss under the above head, he should take into account the correct figures of opening stock as also for the purpose of calculation of cost of the shares.
4.1 The above grounds of appeal taken by the appellant, thus, stand allowed.”
11. At the time of argument no distinguishable facts have been placed on record by the revenue to which it can be assume that the CIT(A) has passed the order wrongly and illegally. The specific directions has been given by the CIT(A) to determine the cost of acquisition u/s.45(2A) of the Act read with Circular No.768 dated 24.06.1998. Nothing seems unjustifiable. Since the matter of controversy has rightly been adjudicated by the CIT(A), therefore, we nowhere found any ground to interfere with this order, therefore we uphold this issue in favour of the assessee and against the revenue. &5223/M/14 A.Y. 2009-10 Accordingly, this issue is decided in favour of the assessee and against the revenue.
Accordingly, appeal of the assessee is hereby allowed and appeal of the revenue is hereby dismissed.
Order pronounced in the open court on 26th August, 2016