DCIT - 3(2), MUMBAI vs. M/S. KOTAK MAHINDRA FINANCE LTD., MUMBAI

Revenue by Ms. Anju Garidia –DR Assessee by Sh. F V Irani – AR Date of hearing 17.05.2016 Date of announcement 24.06.2016 ORDER

PER PAWAN SINGH ,JM

2. Brief facts of the case are the assessee company is engaged in the business of investment Banking, filed return of income for relevant assessment year on 20 Nov 2003. The return of income was selected for scrutiny. While making assessment the AO made various Kotak Mahindra Capital Company Ltd addition / disallowance including the disallowance under section 14 A, of Rs.7,54,500/- being 10% of the exempt income, disallowance of club entrance fee of Rs.22,75,000/-, addition on account of interest income from the government securities relating to the broken period amounting to Rs. 47,391/- , reclassified the brought forward capital gain of Rs. 51,827,121/- pertaining to AY 2001-02, and further disallowed to set off a loss of Rs. 65,99,665/- pertaining to AY 2001-02. Aggrieved by the order of AO assessee filed appeal before Commissioner of Income Tax Appeals. Learned CIT(A) partly allowed the ground raised under section 14A, allowed the ground relating to the club entry fee, the ground relating with interest income from government securities, and directed the AO to take the long term capital loss at Rs.4,52,27,456/- and the balance of Rs. 65,99,665/- as short term capital loss. And further directed the AO to allow set of for loss of Rs. 6,59,966/-pertaining to AY 2001-02,reclassified by AO as long term capital loss, against the short term capital gain of Rs. 2,21,91,308/-. Aggrieved by the order of Commissioner of appeals the Revenue has filed the present appeal before this Tribunal.

3. We have heard Learned DR for Revenue and AR for assessee and perused the material available on record. First Ground for our consideration is disallowance under section 14 A of the Act. At the outset Ld AR of assessee argued he does not want to oppose and argue this ground. Ld DR for revenue submits as this ground of appeal is not oppsedby assessee, so this ground may be allowed in his favour. Considering the rival contention of the parties this ground of appeal is allowed in favour of Revenue.

4. Ground N. 2, for our consideration is related with the entrance fees paid to various clubs. Ld DR for Revenue relied on the order of authority below. Ld AR of the assessee argued that this issue is covered in favour of assessee by the judgment of Hon’ble Supreme Court in case of CIT Vs United Glass Manufacturing Co. Ltd in Civil Appeal No. 6449 of 2012 and judgment of Hon’ble Delhi High Court in case of Samtel Colours Ltd and Nestlé India Ltd. We have seen the order of Hon’ble Apex Court in United Glass Mfg. Co. (supra) wherein it was held as under: “In this civil appeal, following two questions arise for determination: “(i) . ……. (ii) whether club membership fee for employees incurred by the assessee is a business expenses and liable to be deducted under section 37(1) of the income tax act 1961?” “ As far as question No. 2 is concerned, we find that a series of judgments have been passed by High Courts holding that club membership fees for employees incurred by the Kotak Mahindra Capital Company Ltd assessee is business expenses under section 37 of the Income Tax Act, 1961. We find that none of the decisions have been challenged in this court. Even otherwise, we are of the view that it is a pure business expenses. In the circumstances, this civil appeal filed by the Department stands dismissed. With no order as to costs.”

5. Thus, respectfully following the order of Hon’ble Apex Court, we allowed this ground in favour of assessee. In the result, the Ground raised

by revenue is dismissed.

6. Ground No. 3 raised in the present appeal is related with deletion of interest on government securities. DR for revenue argued that Commissioner of appeals wrongly deleted the addition made by AO and prayed that order of AO be restored and that order of CIT(A) be reversed. AR for assessee is argued that this Ground of appeal is covered in his favour by the decision of Bombay High Court in CIT Vs Bank of Rajasthan 326 ITR 525(Bom) and in DIT(IT) Versus Credit Suisee First Boston(Cyprus) Ltd 351 ITR 323 , and further by the decision of Kerala High Court in CIT versus Federal bank Ltd 301 ITR 188(Ker). We have gone through the various decisions relied by ld AR of the assessee and considered the ratio laid down therein. In CIT versus bank of Rajasthan the jurisdictional High Court while considering the identical ground held as under “Insofar as the 3rd question is concerned, it is brought to our notice that in the assessment years 1991 – 92 and 1992–93, this issue was considered by the Jodhpur bench of the Tribunal. Interest on government securities can be said to accrue only when it becomes due and, therefore, there cannot be is charged to such income and until such time that it became due. Counsel appearing on behalf of the revenue had stated before the court that he has written instructions to the fact that an appeal against the order of the Jodhpur bench of the tribunal was dismissed by the High Court of Rajasthan on January 23, 2008. In that view of the matter and particularly, since the finding of the Tribunal has not been shown to suffer from any perversity, no substantial question of law arise.” Further Kerala High Court in CIT versus Federal Bank(supra), while deciding the identical grounds held as under: “we are unable to accept the contention of the Department based on the decision above referred, that was the assessee shows the amount in the profit and loss account, as income, it is assessable under the act. Income accrued obviously means some income that has become to receive able by the assessee. In this case, the Department has no case that the securities held by assessee were matured during the relevant year or the assessee was entitled to receive the interest on such securities. Since the securities had not matured for payment, the assessee was obviously not entitled to interest, and the interest was duly not due to them in the previous year. The assessee had shown and the profit and loss account, only to show what Kotak Mahindra Capital Company Ltd it is entitled in due course, which is statement may help better explanation of the financial position of the assessee. Merely because the assessee has declared it is amount receivable in the course of time, it does not mean that interest on income had in fact accrued to the assessee. As held by Supreme Court in state bank of Travancore’s case, (1986) 158 ITR 102 above referred, only real income is assessable under the act. Though interest due is assessable under the mercantile system, since the interest on the securities involved in this case, was neither received nor receivable during the previous year, such interest cannot be assessed and the tribunal rightly hold so upholding the order of Commissioner of income tax (appeals).” Thus keeping in view the above legal position as held by jurisdictional High Court and by Kerala High Court, we do not find any illegality or perversity in the order passed by ld CIT appeals for deletion of interest on government securities, thus, this ground of appeal raised by revenue is dismissed.

7. Ground No. 4 and 5 raised in the present appeal are related with the deletion of reclassifying brought forward capital loss and setting off as LTGL with STCG. While framing assessment AO observed that there is no clarity in the assessment order for AY 2001 – 02, as to the nature of Capital Loss carried forward i.e, whether it is a Long Term Capital Loss or a Short Term Capital Loss. Therefore, the AO reworked the Capital Loss by setting off Short Term Capital Loss against Short Term Capital Gain and Long Term Capital loss against Long term capital gain and worked out Capital Loss at Rs.5,18,27,121/- as Long Term Capital Loss. The AO disallowed the assessee’s claim for the set off of Long Term Capital Loss for AY 2001-02, as determined by him, on the ground that same could not be adjusted against Short Term Capital Gain. The Learned CIT(A) while considering this claim concluded that the issue relating to the set off of loss from one source against income from another source under this same head of income is governed by section 70 of I. T. Act. In the said section, there is no separate provision for set off of Long Term or Short Term Capital Loss. Although, through Finance Act 2002, provisions have been inserted in section 72. The fact that short term capital loss can be set off only against Short Term Capital Gain and Long Term Capital Loss can be set off only against Long Term Capital Gain, but said provision are applicable only for AYs 2003 -04 onwards. The issue under consideration relates to the working out of capital loss for AY 2001-02, till AYs 2002-03, the assessee had liberty to set off the loss from any source of income falling under any head of income against the income under any other ITA No.799/M/2007 Kotak Mahindra Capital Company Ltd source of income in the same head of income. And on the basis of decision of ITAT Special Bench Mumbai in Montgomery Emerging Market Fund allowed the assessee to set off the Long Term Capital Loss against Short Term Capital Gain and directed the AO. Accordingly. Similarly AO not allowed the set off of capital loss against the capital gain of Rs.2,21,90,308/- on two grounds. Firstly the capital loss carried forward by the assessee for AY 2001–02 at Rs.65,99,665/– as Short Term Capital Loss was actually a Long Term Capital Loss. Secondly, the loss of Rs. 2,21,90,308/- being a Short Term Capital Gain cannot be set off against the Long Term Capital Loss. Ld CIT(A) further concluded that the assessee had an average of Short Term Capital Loss of Rs. 4 291526/- pertaining to AYs 2001-02. As per section 74(1) (a) of I. T. Act, the brought forward STCL pertaining to any other year can be set off against LTGC or STGC. Therefore, the assessee is entitled to set off the STCL of Rs. 65,99,665/- against the STCG of Rs .2,21,91,308/- and further concluded that the set off of forward Long Term Capital Loss of Rs. 4 2,91,526/-can be set off only against Long Term Capital Gain. It cannot be set off against Short Term Capital Gain. Up to AY 2002 -03, the assessee had adoption to set of Long Term Capital Loss against Short Term Capital Gain. However, from AY 2003- 04, brought forward Long Term Capital Loss can be set off only against Long Term Capital Gain. Thus the claim of assessee seeking set off of absorbed Long Term Capital Loss against Short Term Capital Gain cannot be accepted. As the assessee is held not entitle to set of Long Term Capital Loss of Rs. 42,91,526/- against Short Term Capital Gain of Rs 2,21,91,308/- thus the Short Term Capital Gain for AYs 2003-04 is worked out at Rs. 1,55,91,643/-. DR for Revenue argued that Commissioner of appeal wrongly given the set off of different source of income. On the contrary AR for assessee argued that Ground No. 4 and 5 are interconnected and are covered in favour of assessee by the decisions of Special Bench of ITAT, Mumbai, in in assessee’s own case and further by the decision of JCIT Vs Montgomery Emerging Markets Fund in ITA No.829/M/1999.

8. We have considered the rival contention of both the parties and gone through the orders of authorities below. We have considered the ratio of decisions in ITA No 521/M/2007 in assessee’s own case and further by the decision of JCIT Vs Montgomery Emerging Kotak Mahindra Capital Company Ltd Markets Fund in ITA No.829/M/1999. We find that Commissioner of appeals also relied upon the decision of the special bench of this terminal in Montgomery Emerging Marketing Funds (supra). Commissioner of appeals further considered the statutory changes in the law regarding allowability of set off in respect of long term capital loss and long term capital gain and short-term capital loss against short term capital gain while granting partial relief to the assessee. As both the grounds are covered in favour of assessee and against the revenue by the decisions of special bench of Mumbai Tribunal, thus, we do not find any illegality or infirmity in the order passed by Commissioner of appeals. We order accordingly.