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Income Tax Appellate Tribunal, DELHI BENCH “I-2”: NEW DELHI
Before: SHRI I.C.SUDHIR & SHRI PRASHANT MAHARISHI
This appeal preferred by the assessee against the order of the 1. ld. CIT (A)-XIX, New Delhi dated 16.05.2011 for the Assessment Year 2008-09. Assessee has raised the following grounds of appeal:- 2. “1. That the CIT(A) erred on facts and in law in confirming the disallowance to the extent of Rs, 31,28,9287- made by the assessing officer under section 14A of the Income tax Act, 1961 ('the Act') read with Rule 8D of the Income Tax Rules, 1962 ('the Rules') 1.1 Without prejudice, the CIT(A) erred on facts and in law in not appreciating that the amount disallowable, if any, under section 14A of the Act read with Rule 8D of the Rules was Rs.4,59,0917- only.
2. That the CIT(A) erred on facts and in law in confirming the action of assessing officer in assessing the short term capital gains of Rs. Truine Projects Limited V DCIT 16(1) New Delhi Page 2 of 11 32,35,4527- as "Business Income" without appreciating that assessee was not trader in shares. 2.1 Without prejudice, the CIT(A) erred on facts and in law in not appreciating that short term capital gains under Portfolio Manager (PMS) could not in any circumstance be said to be business income.”
3. Brief facts of the case is that the assessee company was established with a main object of design engineering and consultancy organization with specific strengths in oil and gas (onshore and offshore), petroleum refineries, chemicals, petro chemicals and pipelines.
4. Ground Nos.1 and 1.1 of the appeal are against the disallowance u/s 14A of the Act of Rs.31,28,928/-. During the course of assessment proceedings, it was found by the AO that the assessee has made certain investment in shares, mutual funds, bonds etc. out of fund borrowed either by the assessee or from its own source. Since the income arising out of this investment in the form of dividend and long-term capital gain etc. is exempt and therefore provision of section 14A of the act wasinvoked by the AO. After invoking the provisions he computed the disallowance applying provisions of Rule 8D of the Income Tax Rules 1962 of Rs.37,62,910/-. After that as assesseeitself had disallowed a sum of Rs.1343545/- made net disallowance of Rs.2420365/-. Assessee carried matter before the learned Commissioner of Income-tax (Appeals) who in turn computed the disallowance of Rs.31,28,928/- and after deducting disallowance made by the AO the assessee himself of Rs.13,43,545/- confirmed the net disallowance of Rs.17,85,383/-. Against this the assessee in appeal before us.
Page 3 of 11 5. It was contended that the assessee has earned exempt dividend income as Rs.1,35,35,450/- and adhoc 10% has been disallowed by the assessee. The assessee further contended that while applying Rule 8D the AO has considered the total value of investment including investment in subsidiary, Mutual fund Investments in fixed maturity plans, bonds, shares and other mutual funds etc. It was his contention that in the above investment the AO has included investment in subsidiary as well as investment, which are subject to tax such as investment in bonds etc. for disallowance of expenditure @ 0.5% of the value of investment. It was further argued that the total expenditure incurred by the assessee is only Rs.53.17 lacs out of which Rs.11,56,000/- is already added back in the computation of the total income and an expenditure of Rs.6,46,425/- is pertaining to the specific project. Hence our of remaining expenses of Rs.35,14,664/- AO has disallowed the expenditure Rs. 30,18,766/- withoutrecording any satisfaction on disallowance made by the assessee on its own. It was his argument that without recording the satisfaction AO hasapplied the provisions of Rule 8D of IT rules 1962, which is incorrect. For this proposition, he relied on the decision of honourable Delhi high court CIT Vs.Taikisha Engineering India Ltd. 370 ITR 338 (Del), decisions of Pune Bench of ITAT in the case of Kalyani Steels Ltd Vs. ACIT, ACIT Vs. Magarpatta Township Development and Construction company ltd., M/s. Minda Capital Ltd. Vs. DCIT and host of other decisions. His argument is that if the investment in subsidiaries and in fixed maturity plans and investment in taxable bonds shouldbe excluded for working out disallowance of expenditure Page 4 of 11 @0.5% average value of the investment. He further submitted that in any case disallowable expenditureu/s 14A cannot be exceed Rs.5,69,252/-. Regarding the investment in subsidiary he submitted that these are the strategic investment in the company for this he placed reliance on the decision of ITAT in GE Capital Service India and others Vs. ACIT, Interglobe Enterprise Ltd. Vs. DCIT. In the end he submitted that disallowance made on its own of Rs.13,43,545/- is appropriate.
Against this, the LD DR relied on the order of the learned Commissioner of Income tax (Appeals) and AO and submitted that disallowance has been rightly worked out.
We have carefully considered rival contention as well as the written synopsis placed before us. a. It is apparent on reading of order thatRule 8D has been applied by the AO without placing any satisfaction in assessment order that the computation made by the assessee of disallowance u/s 14A is not appropriate. Without looking into the disallowance made by the assessee Rs.13,43,545/- , ld. AO has straight way issued the show cause notice dated 02.11.2010 to the assessee as to why the provision of Rule 8D should not be applied for working deduction of disallowance u/s 14A of the Act. According to the provision of Section 14A the AO is required to record his satisfaction that claim of disallowance computed by the assessee and having regard to the accounts of the assessee same is incorrect.
Page 5 of 11 After recording that satisfaction only AO can proceed to compute for determination of amount of expenditure incurred which is disallowable u/s 14A(2) of the Act. We could not find any such exercise made by the AO in the course of assessment proceedings. He has merely stated that the assessee company had disclosed expenditure at 10% of the exempt income disallowable u/s 14A is not proper. Therefore without putting across and questioning the reasoning of 10% and without regard to the books of accounts and after that failure to record satisfaction, straight way invoking provision of section 14A and Rule 8D of the Income Tax Rules 1962 is not permissible. our view is also gest support by the decisions of Hon’ble Delhi High Court in the case of CIT Vs. Taikisha Engineering Ltd 370 ITR 338 where Hon’ble High Court has held that AO at the first instance must examine the disallowance made by the assessee and if and only if he has not satisfied on this account after making reference to the accounts he is entitled to adopt the method prescribed under Rule 8D of the Rules. Where the disallowance made by the assessee is found to be unsatisfactory then only AO is entitled and authorizedto compute the disallowance under the rule 8D of the Rules. b. Furthermore we are also of the view that investment made by the assessee in subsidiary companies is also not covered for this purpose of working out disallowance u/s 14A because they are termed as strategic investments. Our view is further fortified by the Decision of Hon’ble Delhi high Page 6 of 11 court in case of CIT V Holcim India Pvt Limited 272 CTR 282 (Delhi) wherein it is held that investments made for the purposes of the business of the company in subsidiaries etc. there cannot be any disallowance u/s 14A of the act irrespective of factum of earning dividend. Therefore, for working out disallowance of expenditure and interest as prescribed under Rule 8D investment in subsidiary is not to be included. c. Furthermore assessee has made disallowances and also submitted that out of the total amount of expenditure incurred by him which is like common expenditure i.e. Rs 3514664/- and out of that CIT (A) and AO has made disallowance of Rs. 30,18,766/-. Hon Delhi high court in CIT V Holcim India P Limited ( Supra has held as under :- “16. What is also noticeable is that the entire or whole expenditure has been disallowed as if there was no expenditure incurred by the respondent-assessee for conducting business. The CIT(A) has positively held that the business was set up and had commenced. The said finding is accepted. The respondent-assessee, therefore, had to incur expenditure for the business in the form of investment in shares of cement companies and to further expand and consolidate their business. Expenditure had to be also incurred to protect the investment made. The genuineness of the said expenditure and the fact that it was incurred for business activities was not doubted by the Assessing Officer and has also not been doubted by the CIT(A). “ Similarly, in this appeal of assessee also out of indirect expenditure of Rs 3514664/- disallowance is made of Rs 3018766/- which is incomprehensible.
Based on the above facts and circumstances we reverse the order of the learned Commissioner of Income-tax (Appeals)
Page 7 of 11 confirming the disallowance to the extent of Rs.31,28,928/-. However, as assessee himself has disallowed an amount Rs.13,43,545/- we direct accordinglyto restrict the disallowance u/s 14A to that extent only. In the result ground, No.1 and 1.1 of the appeal are allowed.
Ground No.2 is with respect to recharacterizing the short-term capital gain of Rs.32,35,452/- as business income of the assessee stating that short-term capital gain arising as per investment in portfolio management scheme could not be said to be business income.
Brief facts of the case is that during the year under consideration the assessee has earned long term capital gain of Rs.75,01,260/- and short term capital gain of Rs.32,35,452/- on sale of shares, mutual funds and portfolio management scheme. The assessee in the balance sheet has classifi it as investment assets. The Assessing Officer treated the longer capital gain chargeable to tax under head capital gain but recharacterized short-term capital gain is business income. The main reason given by the AO was that the assessee company though doing the business of consultancy , due to non - compete clause in agreement it assessee got surplus, theses sum were invested in mutual funds. As the funds given from the business income AO was of the view thattherefore it is business income of the assessee. He also looked at Form No.10DC which is a form of certificate of security transaction tax and held that as in that form it is stated too be ‘value of transaction entered into during the course of business by the assessee’ the mutual funds investments are the business income. It was also hinted by Page 8 of 11 him that as short-term capital gain is chargeable to tax only @10% whereas regular income of the assessee is chargeable to tax @30% therefore there is an arrangement by which the assessee is avoiding payment of tax. The assessee aggrieved by the order of the AO preferred an appeal before learned Commissioner of Income tax (Appeals), who in turn upheld the order of AO on this count. According to CIT (A) as per the transaction entered into in Form 10DC are to the tune of Rs.12.5 crore and investment made by assessee mode to maximize the profit immediately rather than holding them as investment, he confirmed the order of ld. AO.
The ld. AR submitted that assessee has earned capital gain on sale of shares and mutual funds. Investments are also held in portfolio management scheme of the brokers. He took us thorough the details of such investment at Page 16 of the paper book that shows that shares are hold for more than 100 days except in few cases. Further, in thecase of mutual fund he submitted that short term capital gain of such mutual fund is also held for more than 100 days except one or two transaction. He further stated that there are hardly 5 to 7 mutual fund in which the investment is madeand regardingshares, he submitted that number of scripts transacted are 10 to 15. He further submitted that Hon’ble Delhi High Court in the case of Yamaha Ltd. Vs. ACIT dated 04th April 2014 as held that surplus from the sale of the mutual fund had to be treated as income chargeable to tax as capital gain and not as business income. He further relied up on the decision of Honourable Delhi high court in case of Radials International V Page 9 of 11 ACIT Limited dated 25.4.2014. He further submitted that sale of equity shares under the portfolio management scheme are also chargeable to tax under the head capital gain only and not as business income.
Against this ld., DR vehemently supported the order of the learned Commissioner of Income tax (Appeals) as well the order of the AO.
We have carefully considered the rival contention. From the details of investment of sale during the year we could see that the assessee has earned long term capital gain of mutual fund of Rs.75,01,260/- which is accepted by AO as chargeable to tax under head capital gain. Regarding frequency of transactions assessee has dealt in 10 mutual funds and period of holding is 177 days, 249 days etc. except in two funds where holding is less than 30 days. These amounts are classified in the balance sheet of the assessee as investments and not as current assets. The amount of money invested in these mutual funds are owned funds of the assessee and are not out of borrowed funds. The company admittedly is engaged in the principal business of advisory services and is not in the business of trading in mutual funds or securities, which is evident from the objects of the company as well as annual accounts of the company. Ld. OA and CIT (A) has held otherwise for the only reason that in form No 10 Dc of the Securities Transaction tax Rules the column shows the heading about the amount of turnover made by the assessee. We are of the view that that form is required to be given by the STT collecting agencies and which is levied on the amount of turnover i.e. transaction value of