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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
Before: SHRI AMIT SHUKLA, JM & SHRI RAJESH KUMAR, AM
आदेश / O R D E R PER RAJESH KUMAR, A. M: These cross appeals are directed against the order dated 04/08/2011 of Commissioner of Income Tax (Appeals)- 12, Mumbai (Hereinafter called as the CIT(A) for assessment year 2008-09. The assessee has raised the following grounds of appeal:-
2. Ground No.1 pertains to assessment made u/s 144A r.w.s.143(3) of the Act, at the time of hearing, the ld.AR did not press this ground therefore dismissed as not pressed..
3. Grounds no.2 to 4 are reproduced below : “2. In law and in the facts and the circumstances of the appellant case, the learned CIT(A) has grossly erred in upholding the disallowance of education of Rs.1,66,07,045/- made by the learned Assessing Officer after assuming jurisdiction under Rule 8D read with section 14A on the ground that “Some Part of administrative and management expenses must be attributed to the earning of exempt dividend income.” Without appreciating, inter alia,: (a) That, in the peculiar facts and the circumstances of the appellants case, it was not at all open to the learned Assessing Officer to assume jurisdiction under Rule 8D read with section 14A for making the impugned disallowance and further, and in case, to make the disallowance without even giving a show cause notice to the appellant in that behalf.; (b) That it cannot be open to the learned Assessing Officer to make the impugned disallowance of Rs. 1,66,07,045 on the ground that “some part of administrative and management expenses must be attributed to the earning of exempt dividend income” when he very well knew that the very aggregate of the administrative and other expenses debited to the appellant‟s Profit and Loss Account was of the order of only Rs. 32,56,129/- deserved to be disallowed, his action of disallowing Rs. 1,66,07,045/- really meant that he had disallowed non-existent expenditure of a huge Rs. 1,33,50,916/-
(c) That even if it were assumed that any disallowances u/s. 14A was at all warranted out of the total expenditure of Rs. 32,56,129/- debited to the appellants profit and loss account, the quantum of that disallowance had got to bear some reasonable proportion to the exempt dividend income of Rs. 61,71,115/- that far from any such thing, the quantum disallowed by the learned Assessing Officer was of the order of 2.7 times the quantum of the exempt dividend income itself. (d) That when the learned Assessing Officer has not given a show cause notice on the issue, there was no question for the learned CIT(A) to proceed to decide the impugned ground against the appellants on the ground that the appellant has not been able to give satisfactory answer to the query raised by the assessing officer regarding expenditure attributable to earning exempt income;
(e) That, in any case it was not open to her to uphold the impugned disallowance without dealing with such vital issues as above, which the appellant had raised in its Ground of appeal before her backed by relevant material in the Statement of Facts accompanying its appeal.
3. In law and in the facts and circumstances of the appellant‟s case the learned CIT(A) has grossly erred in holding that charging of interest u/s. 234B was mandatory and in merely directing the learned Assessing Officer to give consequential effect to the levy made by him, while giving effect to the Appellate order. She ought to have appreciated, inter alia, that vide Ground Appeal no. 5 of its appeal, the appellant had challenged the very levy of interest and considering the peculiar facts and circumstances of the appellants case and the authorities on which the appellant had relied, the levy itself deserved to be cancelled.
4. In law and in the facts and circumstances of the appellant‟s case, the learned CIT(A) has grossly erred in treating Ground No. 6 of the appellants appeal challenging initiation of penalty proceedings u/s. 271(1)(c), as premature. She ought to have appreciated, inter alia, that since in the peculiar facts and circumstances of the appellants case, there could be absolutely no question for alleging that the appellant was guilty of concealing its income or of furnishing inaccurate particulars of its income, she ought to have ordered for the cancellation of the proceedings and thereby saved both the Departments and the appellant from undergoing avoidable litigation.
4. Ground No.5 is general in nature, therefore, not reproduced and dismissed.
5. At the outset, the ld AR did not press Grounds No. 2 (a), 2(d) , 2(e), 3 and 4 are not pressed, therefore, dismissed as not pressed.
6. The only effective ground no 2(b) and 2(c) is against the confirmation and upholding the additions by the CIT(A) of Rs.1,66,07,045/- as made by the AO u/s 14A r.w.r. 8D of the Act whereas as a matter of fact the expenses actually charged under the head of administrative and other expenses were Rs. 32,56,129/- in the profit and loss account and even if the entire expenses debited to the profit and loss account were disallowed there would be excess and non-existent disallowance of Rs.1,33,50,916/-.Thus the assessee prayed for reasonable disallowance in view of the exempt income of Rs. 61,71,115/-.
The facts of the case are that the assessee was engaged in the business of trading and investments of shares and securities and during the year there was amalgamation of two wholly owned subsidiary companies namely Vikram Capital Resources P Ltd. and M/s M. Capital Lease Ltd with the assessee after scheme of amalgamation was approved by the Bombay High Court vide order dated 08.10.2007. The assessee filed its return of income on 16.09.2008 by declaring a loss of Rs.87,93,59,786/- . During the year the assessee had an exempt income of Rs.61,71,115/-. The case of the assessee was selected for scrutiny and statutory notices were issued u/s 143(2) and 142(1) of the Act and were served upon the assessee.
The ld AO framed the assessment at Rs.1,35,23,232/- under the normal provisions of the Act and at Rs. 927,34,44,006/- u/s 115JB of the Act by inter alia adding Rs. 1,66,07,045/- under section 14A rule 8D(2)(iii) on the basis of 0.5% of the average investments which was also upheld by the CIT(A) on the ground that the AO had rightly invoked the provisions of section 14A Rule 8D which were applicable from AY 2008-09 as has been held by the Bombay High court in the case of Godrej & Boyce Mfg Co Ltd and the assessee had itself stated that there were no direct expenses were incurred by the assessee and therefore the expenses relating to earning of exempt income which did not form the part of the total income had to worked out on the basis of rule 8D(2)(iii).
The AR vehemently submitted before that the order of AO and that of CIT(A) were bad in law as both the authorities had failed to appreciate that the disallowance could not be more than the actual expenses claimed, charged and debited to the profit and loss account. The ld counsel did agree with the findings of the CIT(A) and AO that rule 80 was applicable from AY 2008-09 but strongly opposed the manner in which the disallowance u/s 14A 80D(2)(iii) was calculated without considering the fact that assessee only debited Rs, 32,56,129/- under the head “Administrative and Other Expenses” schedule 8 to the annual account by filing a copy of the annual accounts which were before the lower authorities. The rule 8D(2)(iii) provides for disallowance of 0.5% of the average investments but this was not to be applied blindly irrespective of the fact that the actual expenses in the profit and loss claimed by the assessee were much lower to the disallowance as calculated under rule 8D. The Ld AR submitted that the disallowance as made by AO was Rs. 1,66,07,045/- vis a vis the actual expenses of Rs. 32,56,129/-.In any case the disallowance could not have exceeded Rs. 32,56,129/-. Finally the ld AR prayed for setting aside the order of CIT(A) and giving direction for a reasonable disallowance on the basis of actual expenses of Rs. 32,56,129/- .The ld DR on the other hand relied heavily on the orders of authorities below.
We have considered the rival submissions and perused the materials on records. We find from the records and orders of authorities below that the during the year the assessee debited to the profit and loss account Rs. 32,56,129/- for various expenses including that of D. Mat charges of Rs. 21,43,746/-, legal professional charges Rs. 4,90,126/-salaries to staff Rs. 3,85,000/- and various other expenses as is clear from schedule 8 of the annual accounts filed by the AR before us. During the year the assessee made huge investments which have gone up from Rs. 72,74,04,425/- to Rs. 591,54,13537/- as per schedule 4 of the annual accounts. We are also in complete agreement with the AO and CIT(A) that disallowance is required to made as during the year the assessee earned dividend income of Rs. 61,71,115/-.Now the issue before us as to what should be the amount to be disallowed as attributable to the dividend income not forming part of taxable income of the assessee. The AO„s action of blindly disallowing Rs. 1,66,07,045/- by applying the formula as provided in rule 8D(2)(iii) mechanically is completely wrong and unsustainable and so the action of CIT(A) in upholding the AO‟s order especially when the actual expenses incurred and debited by the assessee to the profit and loss were Rs. 32,56,129/-. In our opinion the disallowance at the most could have been Rs. 32,56,129/- but not Rs. 1,66,07,045/- and if we come to reasonability, it should have been even less than Rs. 32,56,129/- particularly in view of the fact the assessee was carrying on other activity of trading also and the turnover from such business during the year was Rs. 3,36,88,739/-. Keeping in view all these facts and circumstances we reverse the order of CIT(A) and direct the AO to disallow Rs. 21,43,746/- as direct expenses being D. Mat charges and Rs. 30% of the remaining amount towards the indirect expenses i.e 20% of Rs. 11,12,383/- (total expenses minus D-mat expenses) . The appeal of the assessee is partly allowed by deleting the addition of Rs. 1,41,29,584 thereby sustaining Rs. 24,77,461/-. .
In result the appeal of the assessee is partly allowed.
Now we will take up the appeal bearing I.T.A. No. 6840/Mum/2011. The ground raised in the appeal of the revenue are as under:- 1. “On the fact and in the circumstances of the case and in law, whether the Ld. CIT(A) was correct in holding the short term capital loss claimed by assessee (at Rs. 87.66 Crores) (Correct by assessee at Rs. 88.50 Crores) is not fictitious;? 2. “On the fact and the circumstances of the case and in law, whether the Ld. CIT(A) was correct in ignoring the circumstantial evidences relied upon by the Assessing Officer?
“On the facts and in the circumstances of the case and in law, whether in view of ratio in the case of Madathil Bros V/s. DCIT (301 ITR 345) and considering the A.O‟s finding that the companies whose shares were purchased were not finally sound, should Ld. CIT(A) not have upheld the A.O‟s order? 4. “The appellant prays that the order of Ld. CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored.”
The common issue raised in all the grounds of appeal is against allowing of short term loss on sale of preference shares amounting to Rs. 88.50 Cr by the CIT (A) which was not allowed by the AO on the ground of being fictitious loss resulting from the purchase and sale of preference shares of group company by ignoring the circumstantial evidences.
During the year the assessee subscribed to the preference shares of three group companies namely M/S Anand Tradelink Movers P Ltd 10,69,800 shares for Rs. 106,98,00,000/-, M/S Milestone Tradelink P Ltd 16,00,000/- shares for Rs. 160,00,00,000/- and M/S Fortune Tradelink P Ltd 11,92,100 shares for Rs. 119,21,00,000/- on 29.02.2008 and directly allotment to the assessee @ Rs. 1,000/- at a premium of Rs. 990/- and the considerations for these shares were directly paid to the above companies through banking channel. Within one month of the subscription and allotment the above preference shares were sold to M/S Welspun Trading Limited at a price of Rs. 773/-in discharge of amounts which the assessee owed to M/S Welspun Trading Ltd and thereby incurring a short term loss on sale of these shares of Rs. 87.66 Cr. In other words the shares were sold at a premium of Rs. 763/- per shares.
The AO during the course of scrutiny observed that all these transactions were sham and were entered into group companies in which 99 % of the shareholding were owned by M/S Welspun Trading Ltd and thus a artificial and fictitious loss of Rs. 87.66 Cr was created by making transactions in the group companies each of which had share capital of Rs. 1.00 Lacs .The AO further observed in para 4.4 of the assessment order that the said fictitious loss was created to be adjusted against the profit on sale of shares of M/S Adani Ltd which was 869.17 Cr. The assessment was framed by the AO vide order dated 31.12.2010 by makings various disallowances and additions inter alia of short term loss of Rs. 87,66,51,300/-on sale of preference shares by relying the decision in the case of Indo Tech Electric C. Vs DCIT appeal no 2209 and 2210of 2006 dated 16.12.2010, Workmen of Associated Rubber Industry Ltd Vs Associated Rubber Industry Ltd( 1986)157 ITR77, K. Ramasway Vs CIT (2003) 261 ITR 358, Jaggilal Kamlapat Vs CIT (1969)73ITR702 and CIT Vs Indian Express Newspapers (Madurai) P Ltd 238 ITR 701.
Aggrieved by the order of AO, the assessee preferred an appeal before the CIT(A) who allowed the appeal of the assessee by holding that the AO failed to investigate the matter and bring on records any materials except the information from ROC. The sales and purchase of shares were not doubted nor were the group companies held to be bogus. The AO had only doubted the loss on shares by paying higher premium. The CIT(A) also upheld the finding of the AO that fictitious loss created to adjust against the gain from sale of shares of Adani Ltd. The sources of funds were not doubted however the AO made no attempt to investigate the sources of funds utilized to purchase the shares. The AO doubted the sale and purchase of preference shares within the group companies however a perusal of the order of assessment revealed that the assessee received Rs. 869.17 Cr from the sale of shares of Adani group which were stated to be partly utilized for investments on quoted and unquoted shares and this lent credence to the statement of the appellant that the funds realized from sale of shares of Adani group were partly used to purchase the preference shares and the assessee deserved benefit of doubt unless proved otherwise by establishing a nexus.
The DR vehemently submitted before us that the whole transactions of purchase and sale of preference shares were under cloud and the fact that the transactions were made within the group companies. The Ld DR argued that the assessee purchased the preference shares in three group companies having share capital of Rs, 1,00,000/- as mentioned in para 4.2 of the assessment order @ a premium of Rs. 990/- and sold within a month to Welspun Trading Ltd at a price of Rs. 773/- thereby incurring short term loss of Rs. 87.66 Cr (later corrected to Rs. 88.50 Cr) by way of book adjustment of money the assessee owed to M/S Welspun Trading Ltd. The transactions got colored and tainted by reason of the fact that M/S Welspun Trading Ltd held 99% shares in all the four companies the assessee and three other company which issued preference shares to the company. The said transactions were entered into with a view of avoiding tax in the current year by adjusting the profit from Adani shares under MAT provisions and in the subsequent years by claiming the set off against the income. Ld DR finally submitted that the AO of CIT(A) had ignored all the facts brought on records by the AO without any application of mind and therefore prayed that the order of CIT(A) be reversed and assessment order be upheld. In the alternative submissions the ld DR argued that the orders both the lower authorities be set aside by restoring the matter to the file of AO to make the assessment de novo on the issue of purchase and sale of preference shares in the group companies by lifting the corporate veil to ascertain the fact as to how and under what circumstances the price of preference shares which were fixed income yielding security came down from Rs. 1,000/- to Rs. 773/-.The ld DR submitted that lifting of corporate veil would be of paramount necessity for the reasons that preference shares had a precedence in the matter of payment over equity shares and thus there was no reason of loss on preference shares meaning thereby that the whole transaction was a sham to evade tax.
We have heard the rival submissions and perused the materials on records and find that M/S Welspun Trading Ltd was holding 99 % in the assessee and other three companies namely M/S Anand Tradelink Movers P Ltd, M/S Milestone Tradelink P Ltd and M/S Fortune Tradelink P Ltd and thus all were group companies. During the year the assessee purchased preference shares on 29.02.2008 from these three companies at Rs. 1,000/- at a premium of Rs. 990/- and also sold the said preference shares on 25.03.2008 at Rs.773/- to M/S Welspun Trading Ltd within one month as per the details incorporated in para 4 of the assessment order incurring a short term capital gain of Rs. 87.66 Cr (corrected to 88.60 Cr.) which was claimed by the assessee as deduction in the profit & loss account in order to arrive at the book profits and under the normal provisions claimed the carried forward of the same under the provisions of section 72 of the Act. The AO added the same to the book profit of the assessee for the purpose of MAT u/s 115JB and also did not allow the carried forward of the same for set off in subsequent years. From the above facts it is very clear that all these transactions of sale and purchase of shares and incurring short term loss of Rs. 87.66 Cr within month of purchase that too in the group companies are not free from doubt. However the AO did not brought anything on records to show that the whole exercise was undertaken in the group companies to create fictitious loss which was claimed as deduction in the books of accounts under MAT provisions and carried forward under normal provisions so that the same could be set off in subsequent years. The AO relied on the various judicial decisions in support of his action. The CIT(A) reversed the order of AO by holding that the AO failed to investigate the matter and bring on records any materials except the information from ROC and the sales and purchase of shares were not doubted nor the group companies were held to be bogus and only doubted the loss on shares by paying higher premium. The CIT(A) also held the finding of the AO that fictitious loss created to adjust against the gain from sale of shares of Adani Ltd beside doubting the sources of funds however the AO made no attempt to investigate the sources of funds utilized to purchase the shares and motive behind the said transactions within the group companies and thus deleted the additions by giving benefit of doubt to the assessee on the ground that the AO failed to establish any nexus between these companies and the assessee. Further there is a lot of difference between equity capital and preference capital. The price of the equity shares depends upon several factors such as financial strength of the company , revenue generation capacity whether a profit or loss making company and past track record and potential of the company and the share prices fluctuate with the market forces and performance of the company etc whereas the preference shares are fixed dividend/ interest bearing instruments and hardly anything to do with the market forces. Therefore such a fall within a period of one month from the date of purchase within the group companies raises the doubts about the purpose and intent of the entire transaction. We are in agreement with the observation of the ld CIT (A) that the AO did not investigate the matter properly but disagree on the point of benefit of doubt to the assessee as all the transactions were between the assessee and other four companies which are group companies. We are therefore restore the matter to the file of the AO with the direction to decide the matter de novo after thorough examination of the same.