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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
Before: SHRI SANJAY ARORA, AM & SHRI PAWAN SINGH, JM
O R D E R Per Sanjay Arora, A. M.: These are cross appeals, i.e. by the Assessee and the Revenue, arising out of the order by the Commissioner of Income Tax(Appeals)-VI, Mumbai (‘CIT(A)’for short) dated 20.5.2009, partly allowing the assessee’s appeal contesting its’ assessment under section 143(3) of the Income Tax Act, 1961 (‘the Act’ hereinafter) dated 31.12.2007 for the assessment year (A.Y.) 2005-06.
Assessee’s Appeal 2. Vide its Ground 1, the assessee agitates the disallowance u/s. 14A of the Act, since restricted to Rs.13,11,549/-, i.e., as against at Rs.22,21,205/- by the Assessing Officer (AO), comprising disallowance qua interest and the other administrative expenses at Rs.5,01,596/- and Rs.17,19,609/- respectively. The part relief by the ld.CIT(A) has been on account of his direction to the AO for applying Rule 8D; the AO having applied proportionate formula for allocating both, the interest as well as indirect administrative expenditure, for the purpose of disallowance u/s. 14A.
We have heard the parties, and perused the material on record. Before us, the assessee was able to exhibit on the basis of its balance-sheet as at the year-end (PB pages 1-33) the availability of sufficient interest-free capital so as to preclude allocation of interest bearing capital toward investment yielding tax-exempt income. We observe that while investment in shares and securities has increased from Rs. 21.06 lakhs (as at the beginning of the year) to Rs. 243.45 lakhs as at its’ end, there has been, rather, a decline in the borrowed capital during the year, i.e., from Rs. 4352.15 lakhs (as at the beginning of the year) to Rs. 3518.86 lakhs at its end. That apart, as clarified by the ld. AR with reference to Schedule III to the balance-sheet, the bulk of it is in the form of secured loan/s towards working capital. The balance- sheet reflects an adequate balance of net working capital, i.e., current assets less current liabilities, both as at the beginning and the close of the year, being at Rs.52.80 crores and Rs.43.76 crores respectively. That leaves only unsecured loan/s, which continues at the opening balance of Rs.101.37 lakhs during the year. No part of it can therefore be said to finance, even if partly, the increase of Rs.222.39 lakhs in the investment in shares and mutual funds during the year. The opening investment of Rs.21.06 lakhs pales into insignificance in light of the interest-free under capital of Rs.2722.22 lakhs at the beginning of the year, and which stands increased by Rs.1.40 crores during the year. The decision by the Hon’ble jurisdictional High Court in CIT 3 & 4243/M/09 (A.Y. 05-06) Laxmi Ventures (India) Ltd. vs. HDFC Bank Ltd. [2014] 366 ITR 505 (Bom), holding that where sufficient interest-free capital is available, the same must be set off or allocated against investment, is thus clearly applicable in the facts and circumstances of the case. As regards administrative expenditure, the disallowance for the same has been restricted to the ratio (0.5% of the investment) in terms of rule 8D(2)(iii) of the Rules. We find the same as reasonable and, accordingly, confirm the same. We decide accordingly, partly allowing the assessee’s relevant ground.
The second and only other ground of the assessee’s appeal is in respect of the rejection of the assessee’s book results, i.e., in relation to its Bhilai/Tedessara unit, estimating the same at 5% of the gross turnover of Rs. 96.94 lakhs, i.e., instead of taxing it in the hands of Mr. Sunil Aggarwal. Mr. Sunil Aggarwal is the brother of Mr. Anil Aggarwal, Director and Principal Officer of the assessee-company. The two brothers, as it appears, share an estranged relationship. Mr. Sunil Aggarwal resigned as a director of the assessee-company on 14.1.2000. However, he continues to operate as an Incharge of the Bhillai/Tedessara Unit as per the interim order of the Company Law Board (CLB) dated 30.7.2002 (copy on record). Vide the said order the CLB restrained the company (Head Office) not to interfere with the functioning of the said Unit. No accounts of the said unit were received, so that the assessee’s final accounts (balance-sheet, including profit and loss account) for the relevant year were prepared in the absence of the said information, i.e., without incorporating the same. That is, except for Rs.81,05,139/- claimed by way of depreciation on the fixed assets of the said Unit on the ground that the same forms part of the assessee’s block of assets. Shri Sunil Aggarwal, being the person managing the said unit was summoned by the Assessing Officer u/s. 131 of the Act, who attended in response thereto (on 19.10.2007), submitting tax audit report u/s. 44AB of the Act (qua the accounts of the said Unit), and also replied the queries raised by the Assessing Officer, who observed several discrepancies/inconsistencies in the accounts. Apart from statutory disallowances, viz. on account of penalty; late payment of employee’s dues under 4 & 4243/M/09 (A.Y. 05-06) Laxmi Ventures (India) Ltd. ESIC & EPF etc., he observed that the company had incurred expenditure on material at Rs.63.83 lakhs on sales of Rs.56.43 lakhs, i.e., at 113%. Similarly, the proportion of expenditure on employees (Rs. 40.31 lakhs) was also very high in relation to sale/ volume of activity. No details of the material, purchased for Rs.41.07 lakhs, stand furnished. In view of non-furnishing of any satisfactory answer to these queries, he, rejecting the assessee’s books result (i.e., qua the Bhillai unit), disclosing loss of Rs. 47.13 lakhs, estimated its income at 5% of its’ turnover. Further, the claim for deprecation was adjusted for the sale of plant and machinery for Rs. 128.40 lakhs during the previous years relevant to A.Y. 2004-05 & 2005-06, i.e., as reflected in the accounts submitted.
We have heard the parties, and perused the material on record. We firstly observe that the assessee’s grievance is not principally to the invocation of section 145(3) of the Act, or even qua the quantum of the estimated income, but to the income of the Bhillai Unit being brought to tax in its hands, i.e., as against that of Shri Sunil Aggarwal. We are unable to appreciate the same. CLB has not, nor could possibly, divest the assessee company of the ownership of the Bhillai unit. The income or, as the case may be, loss arising there-from from year to year, consequently, is only of/to the assessee-company. All that it has granted, as we understand, is to allow the right of management thereof to Shri Sunil Aggarwal, restraining the company (Head Office) from interfering therewith. He, nevertheless, yet, operates only for and on behalf of the assessee-company, just as Mr. Anil Aggarwal does in respect of the company’s other Units. It is the company, acting through its BOD, to whom Shri Sunil Aggarwal, and other employees of the Bhillai unit, as its agents/employees, are responsible to, and it is the company which is responsible and liable for their acts, including of omission and commission. No doubt, any organisation can work only through human agency and, therefore, in case of prosecution (for any criminal offence), it is the concerned person/s who may be liable therefor. Rather, it appears strange that an interim order should be allowed to 5 & 4243/M/09 (A.Y. 05-06) Laxmi Ventures (India) Ltd. continue for long, so the petition of Sh. Sunil Aggarwal, who is no longer a director, and may also be having either nil or nominal shareholding, continues to remain un- disposed even after over a decade and half, an early disposal of which would be in the interest of the company as well as both the parties. Even if the petitioner (Sh. Sunil Aggarwal) had for some reason/s not pursued the matter, so has not the assessee- company. It has failed to invoke CLB in the matter, seeking its’ indulgence to define the rights in-as-much as it is the company which is statutorily obliged for various compliances as well as in the functioning of its’ Unit. A dispute for or within the Management, cannot, in any case, over-ride the provisions of law, much less the statutory compliances or obligations. In fact, as we observe, the assets of the company’s Bhillai unit are being systematically sold. Operating and running a unit is vastly different from its liquidation, decision in respect of which vests, again, only with the Board of Directors of the company. Are there any Board resolutions authorising the sale of the company’s fixed assets? Further, even if being realised at fair value, the property therein only belongs to the company, which is entitled to the fair value, i.e., apart from any action arising out of the unauthorized sale. Again, the unit incurring loss, it appears strange that there should at all be a dispute to claim the management rights. Be that as it may, the Revenue’s stand is unexceptional. With regard to the invocation of section 145(3), we again do not find or observe any infirmity therein; the company or Shri Sunil Aggarwal failing to furnish any satisfactory reply to the several queries raised by the Assessing Officer in the matter. We may though clarify that the Bhillai unit being a unit of the assessee- company, it’s books of account form part of the accounts of the company. The provision of s. 145(3) would, accordingly, apply to the assessee’s accounts, even as the same may result in the Assessing Officer disturbing the book results only of the said unit, with the accounts of which he is essentially dis-satisfied with, i.e., finds as not reliable and as not reflecting correct income. With regard to the claim for depreciation, we observe that the same stands allowed by the Assessing Officer himself, with the ld. CIT(A) only directing likewise, 6 & 4243/M/09 (A.Y. 05-06) Laxmi Ventures (India) Ltd. i.e., for allowance of depreciation as per law. Without doubt, the allowance of depreciation can only be in terms of the provisions of law, so that the Assessing Officer has rightly reduced the sale consideration (of Rs. 128.40 lakhs) in respect of the fixed assets sold during the previous years relevant to A.Ys. 2004-05 & 2005-06 in computing the written down value (WDV) of the relevant block of assets. As regards sale of fixed assets, even if unauthorized, being not challenged by the company (which has presumably ratified the sale) and no longer its’ property, depreciation thereon could not be allowed. The Revenue’s claim is accordingly allowed.
We next take up the only surviving Gd. 1 of the Revenue’s appeal. The same relates to assessment of income on the sale of shares (Rs.43,90,684/-) as business income, as against short-term capital gain returned by the assessee. The matter has been dealt with extensively by the Assessing Officer, and for which reference is made to para 7 (pages 8-25) of the assessment order. The purchase/sale activity has been examined by him in detail and with reference to its different parameters, and considered in light of certain case laws in the matter, viz.: i. Raja Bahadur Visheshwar Singh vs. CIT [1961] 41 ITR 685 (SC); ii. XYZ/ABC Equity Fund, In re [2001] 250 ITR 194; iii. A. V. Thomas and Co. Ltd. vs. CIT [1963] 48 ITR (SC) 67; iv. CIT vs. P. K. N. Co. Ltd. [1966] 60 ITR 65 (SC); v. CIT vs. Associated Industrial Development Co. (P.) Ltd. [1971] 82 ITR 586 (SC); vi. G. Venkataswami Naidu & Co. vs. CIT (35 ITR 194); vii. CIT vs. Sutlej Cotton Mills Supply Agency Limited (100 ITR 706); and viii. CIT vs. H. Hoick Larsen [1986] 160 ITR 67 (SC).
However, for the sake of completeness of our order, we may analyse his findings and which remains undisputed or uncontroverted even before us: (a) Firstly, in terms of Accounting Standard-17 (AS-17), requiring it to report on its different business segments, clearly states to be dealing in buying/selling of shares and securities and trading in derivatives, as amongst one of its business, viz. soya crushing, oil refining, etc.
(b) The company has during the year made more than 180 transactions of purchases, while the sale transactions, as stated, run into thousands., so that these are, in any case of the matter, much more. Equally importantly, many of them are within a time span of 10 to 15 days (of the purchase). In many cases, shares are sold within a day of the purchase, and toward which the Assessing Officer has also stated examples, viz. transaction in scrips of Reliance Industries, Steel Authority of India and United Western. It is clear therefore that the assessee has traded on the movement in the shares prices from day to day, dealing in the scrips on a day- to-day basis, rather than holding it as an investment.
(c) The said activity entails sizable investment of the company’s resources. By way of an example, the bank statement for 15 days for the month of April has been reproduced, to show and demonstrate that out of a total of 40 transactions, 30 are respect of purchase or sale of securities. It is also relevant to state that the assessee is also trading in derivatives as also and also engaged in speculative transactions of purchase and sale of shares, i.e., is admittedly a trader in the same market, dealing in the same scrips, as a part of it’s business enterprise.
(d) Some scrips have in fact purchased again after selling, even immediately thereafter, as of Steel Authority of India. The inference of the assessee entering the trade to leavarage on the price movement becomes unmistakable.
The primary test for determining whether a transaction is in the nature of trade or business transaction, or in the nature of an investment, is the motive or the intent with which purchase has been made, i.e., the market entered into. Buying and selling activity reflects an intent to capitalize on the movement in the (market) price of the relevant scrips, which may or may reflect a secular or be consistent with the long- term projection of the value and, thus, the market price, which is supposed to capture the same (value). The activity, which in the instant case is systemic and regular, is a manifestation of this intent and, thus, relevant, clearly reflecting a trading activity, i.e., a regular activity of trade. This finding of fact by the Assessing Officer, has not been, as afore-stated, disputed or controverted in any manner. We, accordingly, are in no manner of any doubt that the assessee’s activity of purchase and sale of scrips is, as in the case of speculation business, which is admitted to be business activity (resulting though at a loss of Rs. 42.68 lakhs for the current year) as well as the 8 & 4243/M/09 (A.Y. 05-06) Laxmi Ventures (India) Ltd. trading in derivatives, only a business activity. Rather, the said activities, which are allied and pari materia, being in the same market and in the same scrips, reinforce and endorse the Revenue’s stand of the assessee’s activity of buying and selling of shares as being regular trading activity. The assessee has reported the income on such activity through its profit and loss account which, by definition, reflects the result of the operations of the company (for the account period). As such, regardless of shares held (for the time being) being classified as investment in the assessee’s final accounts (balance-sheet), we confirm the purchase and sale therein as being only a business activity, so that the impugned income is liable to be assessed as business income. We decide accordingly, allowing Revenue’s Ground 1.