Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
Before: SHRI R. C. SHARMA & SHRI AMARJIT SINGH
2 & 2702/Mum/2014 (A.Ys. 2009-10 & 2010-11) Khandelwal Laboratories Pvt. Ltd. vs. CIT आदेश / O R D E R Per R. C. Sharma, A. M.: These are the appeals filed by the assessee against the order of CIT passed u/s. 263 for the Assessment Years (A.Ys.) 2009-10 and 2010-11. Common grounds have been taken by the assessee in both the year under consideration. Following grounds have been taken by the assessee in the A.Y. 2009-10:
1. On the facts and circumstances of the case, the order passed by the Ld. Commissioner of Income tax is bad in law, void ab initio without jurisdiction as the order u/s. 263 is passed by the Ld. CIT on the basis of audit objection memo dt: 02/04/2013.
2. On the facts and circumstances of the case, the order passed u/s 263 of the Act by Ld. CIT may be quashed and set aside on the ground that the Ld. CIT did not consider the argument taken by the appellant that the order passed by the AO u/s 143(3) is neither erroneous nor prejudicial to the interest of the revenue. 2.1 That all the issues raised by the ld CIT, a possible view has been taken by the Assessing Officer while passing the order u/s 143(3). Hence neither the order is prejudicial nor erroneous to the interest of revenue. 2.2 The Ld CIT ought to have held that the order passed by the AO was neither erroneous nor prejudicial of the interest of Revenue in respect of the following issues in the light of details/documents and submission made before him during the assessment proceeding: o STT expenses of Rs.19.42,671/-[for disallowance U/S 14A vis-à-vis Rule 8D] o Interest expenses of Rs.2,00,83,931/- for disallowance u/s 14A vis-a-vis Rule 8D (Net of interest received). o sale of brands for Rs.115,88,77,800/- o Delayed payment of PF and ESIC of Rs.27,79,2711- [employees' contribution]. o Clinical support expenses Rs.186,72,348/- o Applicability of Sec.94(7) and 94(8) on sale of shares/mutual fund o Computation of profit u/s 115JB of the Act
3 & 2702/Mum/2014 (A.Ys. 2009-10 & 2010-11) Khandelwal Laboratories Pvt. Ltd. vs. CIT 2. Similar grounds have been taken for the A.Y. 2010-11:
1. 1. On the facts and circumstances of the case, the order passed by the Ld. Commissioner of Income tax is bad in law, void ab initio without jurisdiction as the order u/s 263 is passed by the Ld. CIT on the basis of audit objection memo dt: 02/04/2013.
2. On the facts and circumstances of the case, the order passed u/s 263 by Ld. CIT -6 may be quashed and set aside on the ground that the Ld CIT did not consider the argument taken by the appellant that the order passed by the Assessing Officer u/s 143(3) is neither erroneous nor prejudicial to the interest of the revenue. 2.1 That on all the issues raised by the ld CIT, a possible view has been taken by the Assessing Officer while passing the order u/s 143(3). Hence neither the order is prejudicial nor erroneous to the interest of revenue. 2.2 The Ld CIT ought to have held that the order passed by the AO was neither erroneous nor prejudicial of the interest of Revenue in respect of the following issues in the light of details/documents and submission made before him during the assessment proceeding: • STT expenses of Rs.7,06,432/-[for disallowance u/s 14A vis-a-vis Rule 8D] • Interest Expenses of Rs.2,96,41,520/- [for disallowance u/s 14A vis-a-vis Rule 8D] • Clinical support expenses of Rs.31,36,884/- • Capital gain on sale of land and building.
3. Rival contentions have been heard and record perused. Facts in brief are that the assessee is engaged in manufacturing of pharmaceutical drugs and molecules. After assessments were completed u/s.143(3), the CIT invoked his jurisdiction u/s.
263. During the course of proceedings u/s. 263, the CIT observed that the assessee has incurred STT expenses to the tune of Rs.19,42,671/-. This has been debited under the head "Miscellaneous expenses". No enquiry has been carried out in this regard. The bifurcation of miscellaneous expenses is available on record but these details have not been examined properly by the A.O. The AO was required to consider how much STT 4 & 2702/Mum/2014 (A.Ys. 2009-10 & 2010-11) Khandelwal Laboratories Pvt. Ltd. vs. CIT has been paid for F & O Transactions and how much STT has been paid on account of Purchase and Sale of L & T shares which were on delivery basis. The AO ought to have considered these details for proper working of capita loss on L& T shares as well as business income from F & O. The Assessing Officer merely acted in a mechanical fashion in accepting the claim of assessee with regard to loss on L& T shares and also profits from F&O Transactions. Even for working out disallowance u/s 14A r.w Rule 8D pertaining to exempt income the AO ought to have gathered these basic details. The disallowance under the head "Direct expenses" under Rule 8D hinged upon collecting this vital information. If this information was not there A.O ought to have considered entire amount of STT (Rs.19,42,671/-) as direct expenses for disallowance u/s 14A r.w Rule 8D of the Act.
In respect of interest expenses, the CIT observed that the AO failed to consider the fact that assessee has debited interest amount of Rs.2,00,83,931/- even though this is lesser than last year, it was the duty of the AO to verify how the borrowed funds has been utilized. The source of investment in F&O Transactions (Margin Money & Mark to Market amount etc) and for L& T shares was required to be examined. Further, how much out of the interest borrowed funds has been utilized to earn exempt income was also highly relevant enquiry. The disallowance u/s 14 A r.w. Rule 8D cannot be worked out in absence of these basic details.
With regard to netting of interest, the CIT observed that the A.O also worked out "net interest" paid for working out disallowance u/s 14A. This is highly debatable. There is nothing on record to justify adopting this methodology. The A.O. it seems simply went by version of assessee.
With respect to the sale of brands the CIT observed that the assessee did sell two brands during the year and received sum of Rs.1,15,88,77,800/- (including knowhow fee and non complete fee). The AO was required to examine on what date these funds became available with the assessee and how these were utilized. As per
5 & 2702/Mum/2014 (A.Ys. 2009-10 & 2010-11) Khandelwal Laboratories Pvt. Ltd. vs. CIT CIT the AO ought to have examined whether these two brands were registered under Trade Marks Act and also under the Copy Rights Act. It is seen from perusal of agreement for sale of brands that Trade Marks were to be assigned to buyer for Rs.113.97 crores. The A.O. ought to have verified whether relevant registration of Copy Right and Trade Marks with the office of Controller General of Patents, Designs & Trademarks(CGPDTM) has been done or not. It is difficult to believe that such important Intellectual Property Rights would be allowed to remain unprotected from copy right and trade mark infringement. If these are registered trademark or registered under the Copy Right Act then the consideration for assignment of Trade Marks could be justified. In absence of such evidence it would amount to showing business income as capital gains. Very little amount it seems have been offered for tax as business income for knowhow fee and Non Complete Fee and abnormally high amount as capital gains with regard to assignment of Trade Marks has been shown. The A.O was required to examine these vital aspects by independently getting opinion as to valuation of Trade Marks & know how fee etc. As per CIT, the AO was also required to examine the claim of the assessee that these brands/trade marks were generated/developed by the assessee itself and not purchased by verifying with respect to expenditure incurred in the earlier years for registration of Trade Marks and Copy Right brand building and whether these were claimed as revenue expenditure or treated as capital expenditure. Without making any relevant inquiry the AO accepted the claim of the assessee.
With regard to the expenses incurred on clinical support, the CIT observed that the AO also failed to consider nature of expenses incurred under the head "Clinical Support expenses" without calling for these detail the AO cannot not come to any definite conclusion whether the expenditure incurred would fall within the mischief
6 & 2702/Mum/2014 (A.Ys. 2009-10 & 2010-11) Khandelwal Laboratories Pvt. Ltd. vs. CIT sought to be plugged under Explanation to section 37 of the Act, i.e. whether expenditure is of inadmissible nature as per the Circular No.5/2012 issued by the Medical Counsil of India prohibiting expenditure incurred by pharmaceutical companies which is in the nature of freebees given to / enjoyed by medical practitioner or professional associations The AO has allowed the expenditure of Rs.1,86,72.348/- without verifying what sort of expenditure has been incurred under this head.
With regard to the deduction claimed on account of payment of PPF/ESIC, the CIT observed that the AO also allowed deduction of Rs.27,79,271/- being delayed payment of PPF/ESIC. The AO ought to have considered the fact that section 43B does not apply to payments made u/s 36(1)(va) of the Act. Needless to say, AO without examining tile relevant provisions the A.O allowed the claim of the assessee. It is the contribution of the employer towards PPF, Superannuation Fund, etc. which will be covered by section 43B of the Act but not the contribution of the employees. Without examining these facts AO allowed the claim of deduction even when payments were delayed [violation of section 36(1)(va) of the Act] and the issue was not covered u/s 43B of the Act.
With regard to the sale of L & T shares, the CIT observed that the sale of L & T shares immediately after declaration of bonus share was intend to reduce the taxable income and the AO has failed to examine these aspects.
The CIT also observed that the A.O has not worked out any profit u/s 115JB of the Act. It seems that A.O simply went by claim of the assessee in the footnote of the computation that working u/s 115JB of the Act has not been provided. These fallacious the AO ought to have considered the adjustment required as per law to the book profit to decide whether tax under the normal provision is more than the tax
7 & 2702/Mum/2014 (A.Ys. 2009-10 & 2010-11) Khandelwal Laboratories Pvt. Ltd. vs. CIT payable u/s 115JB of the Act. In the present case, the disallowance made u/s. 14A as well as the amount credited in the capital reserve with regard to profit on sale of 2 brands to the tune of Rs.112.26 crores ought to have been added to the book loss to arrive at the adjusted book profit u/s 115JB of the Act.
With respect to each and every quarry so raised by CIT as stated above, the assessee has filed detailed reply along with documentary evidence, however, being not convinced by the reply of the assessee, the CIT directed the A.O. to frame fresh assessment order.
The ld. AR argued that the A.O. after making the proper enquiry has made the relevant addition/disallowance. Merely because the A.O. has not reproduced each and every reply filed by the assessee and taken a conscious decision after judicial deliberation came to the legally tenable view cannot be faulted only because CIT was of the view that some other view was also possible. The ld. AR also invited our attention to the detailed replies filed by assessee along with evidences with respect to each and every quarry of AO and contended that before setting aside the order of AO for doing fresh assessment. CIT should have considered the justification so filed by the assessee along with documentary evidences. The ld. AR also placed on record the order giving effect passed by the A.O. u/s. 143(3) r/w s. 263 to contend that the Assessing Officer has also not properly appreciated the direction of the CIT and blindly made the addition.
On merits it was argued by ld. AR that issue with regard to disallowance of interest u/s.14A, when the assessee is having sufficient interest free funds is squarely covered by the decision of jurisdictional High Court in the case of Reliance Utilities, 178 taxmann 135. Accordingly no infirmity can be found in the order of AO insofar as assessee was having sufficient interest free funds available with its as well as funds
8 & 2702/Mum/2014 (A.Ys. 2009-10 & 2010-11) Khandelwal Laboratories Pvt. Ltd. vs. CIT received on sale of brands which was interest free. Our attention was invited to the funds received on sale of brands amounting to Rs.113 crores which was interest free and out of which assessee has used the funds as investment in securities. As per the ld. AR since no interest bearing funds were invested, the order of AO cannot be said to be erroneous for not disallowing interest.
With regard to sale of brand being treated by CIT(A) as business receipts, it was contended by ld. AR that issue is covered in favour of the assessee by the order of the Tribunal in assessee’s own case for assessment year 2000-2001, order dated 1st March, 2007, wherein the Tribunal held that profit on sale of brand is capital receipt and not business receipt. As per ld. AR in view of the decision of Tribunal in assessee’s own case decided in its favour and revenue has also not filed any further appeal to the High Court, the decision taken by the AO to the effect that profit on sale of brands were liable to long term capital gains, cannot be said to be erroneous and the same was one of the plausible view correctly taken by the AO.
With regard to disallowance of clinical support expenses, ld. AR placed on record order of the coordinate bench in the case of Syncom Formulations India Ld., order dated 23-12-2015, wherein it was held that CBDT Circular for disallowance of clinical support expenses is applicable from assessment year 2013-2014 and since the relevant assessment years are 2009-2010 & 2010-2011, no disallowance can be made by taking the help of this Circular. In view of the decision of coordinate bench, ld. AR argued that the view taken by the AO is one of the plausible view and cannot be said to be erroneous.
On the other hand, the ld. DR relied on the order of the CIT passed u/s. 263 and contended that the AO has not made full and proper enquiry with regard to the points 9 & 2702/Mum/2014 (A.Ys. 2009-10 & 2010-11) Khandelwal Laboratories Pvt. Ltd. vs. CIT of income and expenses as pointed out by the ld. CIT in his order u/s. 263, therefore no fault can be found in the order of CIT.
We have considered the rival contentions and carefully gone through the order passed by the CIT u/s. 263 and the order by the Assessing Officer u/s.143(3) as well as order passed by AO giving effected to the order of the CIT u/s.
We had also considered the written submissions filed by the assessee before the A.O. during the original assessment proceeding as well as before the CIT in reply to quarries so raised by him while passing the order u/s. 263 respectively. We have also considered judicial pronouncements cited by ld. AR and ld. DR during the course of hearing before us, with reference to the factual matrix of the case.
From the record, we found that in the audit conducted by the internal audit party on 02.04.2013, certain objections were raised in as much as, according to them, there was 'incorrect disallowance of expenses u/s. 14A r.w.r. 8D of IT. Rules amounting to Rs.30,74,312/-', under-assessments due to the treatment of profits from sale of brands of Rs.112,26,98,800/- as capital gain, allowance of clinical support expenses of Rs.1,86,72,348/-. In addition, according to the audit party, short-term capital loss of Rs.41,38,87,308/- were to be ignored in view of Ss. 94(7) and 94(8) of the Act and there was also incorrect computation of book profits. Armed with the report of the audit party, the Commissioner of Income-tax issued a notice u/s. 263 of the Act setting aside the assessment completed u/s. 143(3) of the Act and directing the AO to re-do the same de novo on the aforesaid issues. Rejecting the objections filed, the CIT passed his order u/s. 263 of the Act on 31.03.2014. In this order the CIT directed the Assessing Officer to examine: i) whether STT expenses were incurred on F & O transactions or sale of L&T shares;
10 & 2702/Mum/2014 (A.Ys. 2009-10 & 2010-11) Khandelwal Laboratories Pvt. Ltd. vs. CIT ii) interest expenses of Rs.2,00,83,931/- to find out whether there was direct use of borrowed funds by the assessee for the purpose of investment in shares; iii) the correctness of the treatment given to the amount of Rs.112,66,38,753/- received on sale of brands as capital gain as against business income though it was not an issue in the show cause notice issued; iv) assessability of the amount of Rs.1,86,72,348/- claimed under the head clinical support services; v) applicability of the provisions of S. 94(7) and 94(8) of the Act on sale of shares/mutual fund; and vi) the computation of profit u/s. 115JB of the Act.
From the record we found that the A.O. has disallowed a sum of Rs.7,65,641/- u/s.143(3) order as per rule 8D u/s.14A. The STT paid of Rs.19,42,671/- is against the derivative (F & O) transactions and purchase and sale of shares – the break up is as under: F & O Rs. 4,63,247/- Sale and purchase of shares Rs.14,79,424/- Total Rs.19,42,671/- Profit on sale of F & O transaction is amounting to Rs.22,62,70,605/- which is shown as a taxable income. Therefore the STT paid on the derivative transactions is allowable as an expenditure w.e.f. AY 09-10 as amended by the Finance Act, 2008. The STT paid on sale of shares of L & T, the company has made a loss on these shares at Rs.14,37,81,950/- which was offset with the capital gains. Therefore if the same is to be considered for 14A disallowance, then it is to be reduced from the computation of the capital gain being direct expenditure for earning the capital gains. Therefore disallowance under this section is not prejudicial to the interest of revenue
11 & 2702/Mum/2014 (A.Ys. 2009-10 & 2010-11) Khandelwal Laboratories Pvt. Ltd. vs. CIT being no tax effect. Accordingly, there is no justification for the direction issued by CIT for disallowance of STT u/s. 14A.
With regard to CIT’s direction for disallowance interest, we found that the assessee company has paid interest of Rs.2,00,83,931/- which has been debited to P&L A/c. During this year the assessee has also received the interest on deposits from banks and others at Rs1,56,65,399/-. Net interest of Rs 48,18,532/- is required to be considered for disallowance u/s. 14A. The same view was taken in ITAT Mumbai, in the case of Morgan Stanley India Securities Pvt Ltd Vis ACIT and ITAT Ahemdabad in the case ITO vs. Karnavati Petrochmem Pvt Ltd. Thus the view taken by AO regarding netting of interest is a possible and legally tenable view which cannot be faulted by CIT. From the record, we also found that during the year the interest paid on the loans taken was for the purpose of business activities on bank overdraft limit. Interest was received on the deposits from the customers, from shareholders and directors and the bank commission is for other charges and not any expenditure was incurred for earning the exempted income.
We also found that as per balance-sheet placed on record investment as on 31/3/09 is Rs.15,91,91,128/-. However, the increase in investment is out of the fund received on sale of brand of Rs.113 crores i.e. interest-free. No interest bearing funds has been invested for earning the exempted income. As the investment is made after the receipt of the sale proceeds of brand i.e. interest-free fund. The utilization of the interest-free fund is for investment. Therefore the interest bearing fund has not been utilized for making investments and the investments are made out of the interest-free fund available with the company by way of share capital and reserves & surplus which stood at Rs.89.75 crores as on 31/3/09.
12 & 2702/Mum/2014 (A.Ys. 2009-10 & 2010-11) Khandelwal Laboratories Pvt. Ltd. vs. CIT 22. As per the decision of Bombay High Court in the case of Reliance Utility reported in 178 Taxman 135 whereby if the company's funds are interest free more than the investments the question of disallowing interest u/s.14A does not arise. Accordingly there is no merit in CIT’s order directing disallowance of interest u/s. 14A. In view of the sufficiency of own funds, no disallowance is warranted. We direct accordingly.
With regard to the observation of CIT regarding the treatment of amount received on sale of brands we found that during the year the company sold its two medical brand(s) "Anaforthan" and “Cefi" Agreement(s) of the same are placed on record according to which the assessee received one time amount which was credited to the capital reserve account at Rs.112 .26 crs. Since the brand did not cost anything, the company offered the same as long term capital gains. The objection of the CIT was that instead of charging the capital gain the said sum should have been taxed as business income.
We had carefully gone through the terms of the agreement, whereas per clause (3), the company had during the year sold two of its brand groups Anafortan and Cefi for consideration of Rs.115,88,77,800/-. This includes Rs.91,00,000/- as know How Fee and Rs.1,00,00,000/- towards Non Compete Fee. After adjusting Rs.170,79,000/- for legal and professional services the balance of Rs.112.26,98,800/- which was a receipt of Capital Nature was transferred to Reserve and Surplus A/c. The Non Compete Fees of Rs.100,00,000/- and Rs.91,00,000/- for Know How have been accounted and offered as business income. The brand "Anaforthan" and "Cefi" are the apparatus of the business, they are the tools of the business, and they are the capital asset of the company built over the period of time and in fact they are not stock-in- trade of company. The company does not deals in the brands as a traders.
13 & 2702/Mum/2014 (A.Ys. 2009-10 & 2010-11) Khandelwal Laboratories Pvt. Ltd. vs. CIT 25. Provisions of section 55(2)(e) which deals with the computation of income from capital gains reads as under: a) in relation to a capital asset, being goodwill of a business [or a trade mark or brand name associated with a business] [or a right to manufacture, produce or process any article or thing] [or right to carry 011 any business], tenancy rights, stage carriage permits or loom hours,- (i) in the case of acquisition of such asset by the assessee by purchase from a previous owner, means the amount of the purchase price; and (ii) in any other case [not being a case falling under sub-clauses (i) to (iv) of sub- section (1) of section 491, shall be taken to be nil; Once the act itself, takes the sale of the goodwill, trademark, brand name, as liable to capital gains the question of charging the same as business income do not arises.
In view of the above settled legal position where apparatus of the business is sold, it is the sale of capital asset and not stock-in-trade. As per the provisions of the Act as existed prior to 1995 where the cost of the acquisition could not be ascertained in the case of goodwill , trade mark, or brand the same was not taxable but the legislature in its own wisdom taxed the sale of brand etc as capital gain u/s. 55(2) of the Act. Thus, the assessee has correctly offered the tax on sale of brand as LTCGs insofar as brands was developed by the assessee company and not purchased. From the record we also found that as per agreement dated 15.04.2008 for sale of brand, separate consideration has been assigned to trade-marks, knowhow fee and non- compete fee. The said Trademarks were duly registered and said fact has also been accepted by the CIT on Pg. 9 of his order. The said brands are capital assets of the company built over a period of time, i.e. the brand was developed by the company itself and not purchased. We also found that all the agreements were placed before the 14 & 2702/Mum/2014 (A.Ys. 2009-10 & 2010-11) Khandelwal Laboratories Pvt. Ltd. vs. CIT CIT. The assessee has also filed submission before the CIT to justify the value assigned towards trade-marks, knowhow fee and non-compete fee. It is also relevant to mention here that a similar nature of sale of brand was made by assessee in A.Y. 2000-01 wherein the assessee had treated the sale of brand as income from capital gain and the treatment given by assessee was upheld by the Hon'ble Tribunal in assessee's own case for A.Y. 2000-01 vide order dated 15.3.2007. Accordingly no fault can be found in AO’s order treating the sale proceeds of brand as capital receipts liable to tax as long term capital gains. No where CIT has pointed out as to how the treatment given by assessee was erroneous, i.e. not as per law and as a result of which prejudice was caused to revenue. The CIT has merely asked the Assessing Officer to look into the matter without pointing out any mistake or prejudice caused to revenue. He has simply directed the Assessing Officer, without satisfying himself, to verify whether the bifurcation made by assessee was with a view to reduce tax or not.
In view of the above, we do not found any infirmity for offering the tax on sale of brands as LTCG. There is no merit in CIT’s observation for treating the same as business income. We direct accordingly.
With regard to the claim of clinical support expenses, from the details filed before CIT, we found that these expenses are incurred while launching the new product in the market and also for existing product for obtaining the feedback from the market and to get in touch with the doctors of all India to assemble the data base demographically, territorially, etc. It is normal feature for any pharmaceutical company to obtain the data, feedback from the medical fraternity and it is a necessary expenditure for the company to maintain the business relationship with the customer in turn with the medical fraternity. The circular of Medical Council of India as referred by the CIT speaks about the gift, travel facility, hospital, money granted however none of these facilities are given by assessee. In fact, whatever the separate
15 & 2702/Mum/2014 (A.Ys. 2009-10 & 2010-11) Khandelwal Laboratories Pvt. Ltd. vs. CIT expenditure are incurred by the assessee was in relation to gather the data making aware of the product of the company and remaining in the market. From the order of CIT we observe that no where the CIT has pointed out as to how the treatment given by assessee was erroneous, i.e. not as per law and as a result of which prejudice was caused to revenue. The CIT has merely asked the Assessing Officer to look into the matter without pointing out any mistake or prejudice caused to revenue. He has simply directed the Assessing Officer, without satisfying himself, to verify whether the bifurcation made by assessee was with a view to reduce tax or not. From the record we found that the details with regard to clinical support expenses were verified by the AO in the original assessment proceedings. Since the AO was satisfied with the details furnished by assessee vide letter dated 15.12.2011, no addition was made by the Assessing Officer on account of clinical support expenses.
With regard to the explanation to S. 37(1) of the Act, the CIT has nowhere pointed out as to how the said explanation will be applicable to the assesse. In so far as the direction issued to disallow the said payment on the basis of Circular No. 5/2012 (F. No. 225/142/2012-ITAII) dated 01.08.2012 issued by the Income Tax Department, Government of India after considering the guidelines issued by the Medical Council of India and as per Explanation to S. 37 of the Act, we found that this very issue was considered by a co-ordinate Bench of this Hon'ble Tribunal in the case of Syncom Formulations (I) Ltd. v. DCIT in and 6428/Mum/2012 for AYs. 2010-11 and 2011-12 dated 23.12.2015 and it was held that the said circular was applicable from AY. 2013-14 only. The relevant assessment years under consideration are A.Ys. 2009-10 and 2010-11. Accordingly, the circular is not applicable to the years under consideration which has been made applicable only from A.Y. 2013-14 only. Thus there is no merit in CIT’s direction for disallowing clinical support expenses.
Now coming to the applicability of the provisions of section 94(7) and 94(8) on sale of shares/mutual funds.
We have considered the rival contentions and found that the capital loss arising out on sale of L & T shares was treated by CIT as apparatus to reduce the taxable income. The CIT found that the shares of L & T were purchased just prior to declaration of bonus and then immediately after declaration of bonus in the ration of ½, selling the original shares purchased at loss. As per CIT this clearly shows that ‘capital loss’ arising on L & T shares defies any ‘economic logic’ and that these transactions were undertaken solely to reduce the taxable income.
For better understanding of provision of section 94(8) we reproduce the same as under:
(8) Where - (a) any person buys or acquires any units within a period of three months prior to the record date; (b) such person is allotted additional units without any payment on the basis of holding of such units on such date; (c) such person sells or transfers all or any of the units referred to in clause (a) within a period of nine months after such date, while continuing to hold all or any of the additional units referred to in clause (b), then, the loss, if any, arising to him on account of such purchase and sale of all or any of such units shall be ignored for the purposes of computing his income chargeable to tax and notwithstanding anything contained in any other provision of this Act, the amount of loss so ignored shall be deemed to be the cost of purchase or acquisition of such additional units referred to in clause (b) as are held by him on the date of such sale or transfer.]
17 & 2702/Mum/2014 (A.Ys. 2009-10 & 2010-11) Khandelwal Laboratories Pvt. Ltd. vs. CIT Explanation.-For the purposes of this section,- (a) "interest" includes a dividend; (aa) "record date" means such date as may be fixed by-- (i) a company for the purposes of entitlement of the holder of the securities to receive dividend; or (ii) a Mutual Fund or the Administrator of the specified undertaking or the specified company as referred to in the Explanation to clause (35) of section 10, for the purposes of entitlement of the holder of the units to receive income, or additional unit without any consideration, as the case may be; (b) "securities" includes stocks and shares; (c) securities shall be deemed to be similar if they entitle their holders to the same rights against the same persons as to capital and interest and the same remedies for the enforcement of those rights, notwithstanding any difference ill the total nominal amounts of the respective securities or in the form in which they are held or in the manner in which they can be transferred; (d) "unit" shall have the meaning assigned to it in clause (b) of the Explanation to section 115AB. As per the above section, Short Term Capital Loss incurred when units (and not shares) are purchased within 3 Months prior to the date on which additional units are allotted and subsequently are sold within 9 Months after the date while holding on to all or any of the additional units allotted, is not to be allowed to the extent of the market value of the additional units as on the date they are allotted. Units as referred to in the above section means units of a Mutual Fund as specified in section 10(23D) of the Act. However in the assessee's case, the assessee had purchased shares of L&T Ltd on which Bonus shares were received and which were sold subsequently.
Now coming to the observation made by the CIT with respect to dividend stripping u/s. 94(7) of Rs.2,44,39,308/-. For better clarity we reproduce the provision of section 94(7) as under:
(7) Where- (a) any person buys or acquires any securities or unit within a period of three months prior to the record date; (b) such person sells or transfers- (i) such securities within a period of three months after such date; or (ii such unit within a period of nine months after such date; (c) the dividend or income on such securities or unit received or receivable by such person is exempt, then, the loss, if any, arising to him on account of such purchase and sale of securities or unit, to the extent such loss does not exceed the amount of dividend or income received or receivable on such securities or unit, shall be ignored for the purposes of computing his income chargeable to tax.
As per the above section, Short Term Capital Loss incurred when Shares/Units are purchased within 3 Months prior to the date on which Dividend is declared and subsequently are sold within 3 Months/9 Months respectively after the record date is not to be allowed to the extent of the Dividend received on those Shares/Units. However in the assessee's case, though the Units are sold within 9 Months from the date on which Dividend is received, the same were purchased (19/9/2008) beyond 3 months prior (27/9/2008) to the date of declaration of dividend (26/12/2008). Therefore the provisions of section 94(7) are not applicable as both the conditions 19 & 2702/Mum/2014 (A.Ys. 2009-10 & 2010-11) Khandelwal Laboratories Pvt. Ltd. vs. CIT must be satisfied together for the provisions to apply. In assessee’s case the purchase is prior to 3 months from the record date.
From the record we also found that during the course of original assessment proceedings, complete details were given to the Assessing Officer with regard to working of capital gains on sale of shares and units. On perusal of the said details, it can be seen that the assessee purchased units on 19.09.2008 and sold the same on 26.12.2008. The dividend on the said units was declared on 26.12.2008. Thought the units were sold within nine months from the date on which dividend has been received, since they were purchased more than three months prior to date of declaration of dividend, the provisions of S. 94(7) of the Act will not apply.
With regard to CIT’s observation regarding loss incurred on sale of L & T shares, though the CIT agrees that the provision of section 94(8) will not apply to the shares. The assesse is free to carry out tax planning within the provisions of law. A similar argument was raised by the department before the Hon'ble Supreme Court in case of CIT vs. Walfort Shares and Stock brokers Ltd (326 ITR 1) wherein, even after considering the decision in the case of McDowell & Co. Ltd., it was held by Supreme Court that mere tax planning without any motive to avoid taxes is not a colourable device.
In view of the above, we do not find any merit in CIT’s direction for applying provision of section 94(7) and 94(8) of the IT Act for disallowing loss incurred on L & T shares. 37. Issues with regard to the delayed payment of PF and ESI and computation of book profit u/s. 115JB was not pressed by the ld. AR, the same are therefore dismissed in limine as not pressed. 38. In the result, the assessee’s appeal for A.Y. 2009-10 is allowed in part in terms indicated hereinabove.
20 & 2702/Mum/2014 (A.Ys. 2009-10 & 2010-11) Khandelwal Laboratories Pvt. Ltd. vs. CIT (A.Y. 2010-11) 39. In this order also the CIT has alleged for disallowance STT expenses and disallowance of interest under Rule 8D, clinical expenses and capital gains and sale on land and building.
We have considered the rival contentions and gone through the order of the CIT passed u/s. 263 as well as the order by the A.O. u/s. 143(3), as well as the order passed u/s.143(3) r/w s. 263 as well as reply filed by the assessee before the A.O. and the CIT. From the record we found that the return of income for the captioned assessment year was e-filed on 30.09.2010 declaring total income of Rs.18,54,501/- in which scrutiny proceedings commenced with issuance of statutory notice u/s. 143(2) of the Act dated 02.09.2011. In course of the ensued proceedings, a revised computation declaring a loss of Rs.46,21,76,813/- was filed as it was noticed that while calculating long term capital gain on sale of land, inadvertently, no indexation was claimed on the cost of land. Whatever details and/or information were requisitioned for completion of the assessment were duly submitted which fact has also been acknowledged by AO in the order dated 20.03.2012 passed u/s, 143(3) of the Act, wherein the loss was determined at Rs.45,89,04,220/- as against declared loss of Rs.46,21,76,813/-.
In the audit conducted by the internal audit party on 02.04.2013, certain objections were raised in as much as, according to them, there was 'incorrect disallowance of expenses u/s. 14A r.w.r. 8D amounting to Rs.24,39,606/-, under- assessments to the extent of Rs.31,36,884/- as a result of acceptance of the claim for 'clinical support expenses of Rs.31,36,884/- and u/s. 115JB of the Act. Armed with the report of the audit party the CIT passed order u/s. 263 dated 31.3.2015. The CIT, in his order passed u/s. 263 of the Act, directed the Assessing Officer to examine:
21 & 2702/Mum/2014 (A.Ys. 2009-10 & 2010-11) Khandelwal Laboratories Pvt. Ltd. vs. CIT i) whether STT expenses were incurred on F & O transactions or sale of L&T shares. ii) whether there was direct use of borrowed funds by the assessee for purpose of investment in shares. iii) the nature of expenses incurred under clinical support services. iv) the computation of capital gain with regard to the 'composite sale of factory building with land'. A perusal of sub-para (i) of paragraph No. 2 of the impugned order would reveal that the direction given by the CIT, in so far as STT of Rs. 7,06,432/-, was to examine for which transactions STT was paid and was claimed as expenditure. The Assessing Officer in the order passed u/s 143(3) r.w.s. 263 of the Act disallowed the STT expenses and the same were added to the total income of the assessee. As per the directions of the CIT, the Assessing Officer also examined the issue of disallowance u/s 14A r.w.r. 8D of the Act. While computing disallowance of direct expenditure incurred for the purpose of investment as per Rule 8D(2)(i), the Assessing Officer again considered the said amount of STT paid leading to double disallowance of the same amount i.e. i) Disallowance of STT in the main computation of income ii) Disallowance of STT while computing disallowance u/s 14A r.w.r 8D of the Act by considering such amount as direct expenses for the purpose of making disallowance u/s. 14A r.w.r. 8D of IT. Rules.
In view of the above, we direct the A.O. to delete the double disallowance so made.
With regard to the disallowance of interest u/s.14A r/w Rule 8D, we found that the CIT had directed the Assessing Officer to ascertain as to whether there was direct use of borrowed funds or not. As per the statement of availability of own funds given before the lower authorities which is placed on record, we found that own funds of the assessee was sufficient to cover up the value of the investments, hence no interest 22 & 2702/Mum/2014 (A.Ys. 2009-10 & 2010-11) Khandelwal Laboratories Pvt. Ltd. vs. CIT disallowance can be made as per the decision of Hon'ble jurisdictional High Court in the case of CIT vs. HDFC Bank 366 ITR 505 and Reliance Utility reported in 178 Taxman 135. We direct accordingly.
With regard to the disallowance of clinical support expenses, as per the reasoning given in A.Y. 2009-10, we do not find any merit for applying the CBDT Circular No. 5/2012 dated 01.8.2012 to the A.Y. 2010-11 under consideration. Following the reasoning given herein above, there is no merit for the disallowance of clinical support expenses of Rs.31,36,884/-. In respect of computation of capital gains with regard to the composite sale of factory building with land, the CIT observed that since the consideration received was for the factory building along with land, there was no justification for the Assessing Officer to allow the indexation on land and in computing the gains as long-term capital gain.
The issue under consideration is squarely covered by the decision of the Hon'ble jurisdictional High Court had in the case of CIT v. Citibank NA (261 ITR 570) wherein it was held that for the purpose of computation of capital gains, land and building are two separate and distinct assets, therefore profit arising from sale of land was required to be considered as long term capital gains, whereas profit arising from sale of building was required to be considered as short term capital gains. Further we found that the said finding was repeated by the Hon'ble jurisdictional High Court in CIT v. Cadbury India Ltd. (229 Taxman 5) and by the Hon'ble Delhi High Court in CIT v. I. K. International (P) Ltd. [206 Taxman 622 (Del].
In view of the above, we direct the A.O. to decide the issue afresh in terms of the judicial pronouncement discussed hereinabove. 46. In the result, both the assessee’s appeals are allowed in part in terms indicated herein above.