M/S. BRIGGS TRADING CO. P. LTD.,MUMBAI vs. DCIT CIR. - 6(1), MUMBAI

The assessee is engaged in the business of trading and investment in shares. The assessee has filed appeals for AY 2001-02, 2002-03 and 2003-04 and the revenue has filed appeal for AY 2003-04.

We shall take up the appeal filed by the assessee for AY 2001-02. The first issue contested by the assessee relates to the disallowance of loss arising on valuation of shares of M/s LCC Infotech at the year end. The facts relating thereto are set out in brief. The AO noticed that the assessee has claimed to have purchased 28,500 shares of LCC Infotech @ Rs.175.44 per share on 03-04-2000. It was noticed that the assessee has not received the shares either physically or through demat account. The AO further noticed from the rules of Stock exchange provide that the shares should be delivered to the buyer within 15 days of the contract, failing which the contract shall be closed. By following the said circular, the AO took the view that the purchase contract, if any, should have been closed within 15 days. Accordingly computed the financial result of the transaction that should have occurred on closure of the contract as per SEBI rules by adopting the market rate prevailing at that point of time.

The Ld A.R submitted that the assessee is a Non Banking Financial Company (NBFC) registered with RBI and it is engaged in the business of trading and investment in shares, besides carrying on financing activities. He submitted that the assessee has mainly invested in Startup companies. He submitted that the shares held by the assessee as stock in trade has been valued at the yearend as per “Cost or market value whichever is less” method of valuation. Accordingly he submitted that the assessee had valued the shares of M/s LCC Infotech at market value, since the price of the said share had fallen at the year end. He further submitted that the shares were held by the broker on the account of the assessee and hence the same was not received by it. He submitted that the tax authorities have disallowed the claim only on suspicion.

On the contrary the Ld D.R submitted that the assessee could not substantiate its claim that it had actually purchased the shares of M/s LCC Infotech by producing the copy of share certificates or by showing that the shares were credited to its demat account. The assessee has also failed to produce confirmation letter from the broker along with his demat account to show that the shares, if any, were held by the broker. He submitted 4 ITA No.3723-/M/2005,3121/M/06, 4681/M/07 and 4683/Mum/2007 that the assessee did not produce any contract contract note in the prescribed form, but submitted a bill only. Further the said bill shows that the broker has not charged any amount for brokerage and further the purchase amount has been adjusted to a round figure by giving discount to the assessee, which defies the logic of the transaction.

We heard the rival contentions and perused the record. We notice that the Ld CIT(A) has analysed this issue and has taken the decision against the assessee. For the sake of convenience, we extract below the relevant observations made by the Ld CIT(A):-

The next issue relates to the disallowance made u/s 14A of the Act. The assessee had received dividend income of Rs.90,82,176/- and claimed the same as exempt. The dividend had been received from the shares held in M/s Essel Packaging and M/s Zee telefilm Ltd. The AO took the view that the interest pertaining to shares held by the assessee is disallowable u/s 14A of the Act. Accordingly he computed the total investment held by the assessee at Rs.15.27 crores, on which he computed the interest amount @ 16% and accordingly disallowed a sum of Rs.2,44,37,252/-.

The Ld CIT(A) took the view that the interest paid on shares held as stock in trade is allowable u/s 36(1)(iii) of the Act and hence the same need not be disallowed u/s 14A of the Act. The Ld CIT(A) further noticed that the AO did not consider the provision made by the assessee against the fall in the value of shares as well as the amount paid as Share Application money. Accordingly, he asked the assessee to furnish a working with regard to the interest expenditure pertaining to various activities. By making some calculations, the Ld CIT(A) held that the following interest expenditure requires disallowance u/s 14A of the Act:-

The Ld D.R, on the contrary, submitted that the dividend income cannot be assessed as business income as held by the Hon’ble Supreme Court in the case of Bengal and Assam Investors Ltd (1966)(59 ITR 547) and hence the disallowance u/s 14A is required to be made even if the shares are held as stock in trade. He further submitted that the interest paid to purchase shares is required to be disallowed as per the decision of Hon’ble Bombay High Court rendered in the case of CIT Vs. Smt. Amirtaben R Shah (1999) (238 ITR 777).

In the rejoinder, the Ld A.R placed reliance on the decision of Hon’ble Supreme Court rendered in the case of DCIT Vs. Core Health Care Ltd (2008)(298 ITR 194) and the decision of Hon’ble Bombay High Court 7 4681/M/07 and 4683/Mum/2007 rendered in the case of CIT Vs. Phil Corporation Ltd & Anr (2011)(244 CTR (Bom) 226) to contend that the interest disallowance is not called for.

We have heard rival contentions on this issue. We notice that the Ld CIT(A) has already taken the view that the interest pertaining to shares held as stock in trade is required to be allowed u/s 36(1)(iii) of the Act and the revenue has not filed any appeal challenging the said decision. Hence the said issue has attained finality and does not require our consideration. We further notice that the decision rendered in the case of Godrej Agrovet Ltd (supra) fixing a limit of 2% of dividend income for making disallowance u/s 14A of the Act was related to the disallowance required to be made out of administrative expenses. In the instant case, the tax authorities have not made any disallowance out of administrative expenses and hence the said decision also shall not apply to the facts of the instant case.

We have gone through the decisions rendered in the case of Core Health Care Ltd (supra) and Phil Corporation Ltd (supra). The said decisions, in our view, have been rendered in a different context. In the case of Core Health care Ltd (supra), the issue pertaining to the interest paid on the borrowings made for purchase of machinery and in the case of PHIL Corporation Ltd (supra), related to investment made in a subsidiary company in order to have control over it. Hence, in our view both the decisions are not applicable to the facts of the present case.

Now the question agitated before us relates to the disallowance made out of interest expenditure. We notice that the disallowance of Rs.2.01 crores confirmed by Ld CIT(A) includes the interest expenditure relating to (a) interest free loan, (b) interest on advance for purchase of shares, (c) interest on share application money and (b) interest on investments. Out of the above, the interest pertaining to interest free loan is outside the scope of disallowance made by the AO u/s 14A of the Act.

The remaining three items of interest pertain to the purchase of shares. Out of the three, we are of the view that it is required to be ascertained as to what was the intention of the assessee in respect of the advance given for purchase of shares and share application money. If the intention was to hold them as “Investments”, then the interest pertaining to the same requires to be disallowed. If they are intended to be held as stock in trade, then the related interest expenditure is required to be allowed u/s 36(1)(iii) as held by Ld CIT(A). Further, it is also required to be seen as to whether the assessee has actually allotted shares in the subsequent years. If the shares have not been allotted, then the claim of the assessee that the same represents share application money turns out to be incorrect, in which case, the disallowance of interest may be justified. In view of the above, we are of the view that the disallowance of interest expenditure requires to be examined by considering the discussions made above. Accordingly, we set aside the order of Ld CIT(A) on this issue and restore the same to the file of the AO for fresh examination in the light of discussions made above.

Now we are left with the interest on investments. As per the decision of Hon’ble Bombay High Court rendered in the case of CIT Vs. Smt. Amirtaben R Shah (supra), the same is required to be disallowed, since it is a direct expenditure incurred for acquiring shares. Accordingly we confirm the order of Ld CIT(A) on this issue.

The issues urged in (a) and (b) relates to the disallowance of interest expenditure claimed by the assessee. We have decided an identical issue while considering the appeal of the assessee relating to AY 2001-02, wherein we have restored this issue with some directions. Consistent with the view taken therein, we set aside the order of Ld CIT(A) on these issues and restore them to the file of the AO in this year also with similar directions.

The next issue relates to the loss claimed on sale of shares of M/s LCC Infotech. In the appeal of the prior year, i.e., AY 2001-02, we have confirmed the order of Ld CIT(A) that the transactions relating to purchase of shares of LCC Infotech are not genuine. Hence, we are of the view that the Ld CIT(A) was justified in holding that the loss claimed on the alleged sale of shares of LCC Infotech is not allowable. Accordingly, we uphold his order on this issue.

The next issue relates to the disallowance of claim of loss arising on revaluation of value of shares of M/s Pushpanjali Floriculture Ltd. This issue is identical with the issue of revaluation of shares of M/s LCC Infotech, i.e., the assessee has produced only bill and not the broker note in the prescribed form; the assessee has not taken delivery of shares; the assessee has not produced any confirmation letter from the broker. Similarly the contract note issued for sale of shares through another broker M/s Jajodia & Co did not contain any trade number, trade time etc. Hence the tax authorities have taken the view that the claim of loss arising on revaluation of shares is not admissible, since the assessee could not substantiate the claim of purchase of shares.

Before us, the assessee placed reliance on the very same documents, which were found to be deficient by the tax authorities. However, the Ld A.R submitted that the assessing officer has taken different stand in the subsequent years as detailed below:- (a) In AY 2003-04, the diminution in the value of shares amounting to Rs.5.35 lakhs has been allowed. (b) In AY 2004-05, the loss arising on sale of shares amounting to Rs.990/- has been allowed without disputing the sale consideration of Rs.1,52,460/-. Thus we notice that the subsequent view taken by the assessing officer is in contradiction to the view taken in the AY 2002-03, i.e., the year under consideration. In view of this contradiction, we are of the view that this issue requires fresh consideration at the end of the AO. Accordingly, we

The next issue relates to the partial disallowance of interest expenditure made by the Ld CIT(A). The grievance of the assessee is that the Ld CIT(A) has held that the interest income is assessable as income from other sources, where as the AO has accepted the same to be the business income. It is further submitted that the advancing of loans is part of business activity and hence the same should be considered as business income only. In the alternative, it is submitted that the net interest income shown by the assessee should be considered, if at all the contentions of the assessee is not accepted.

We heard the parties on this issue. We notice that the Ld CIT(A) has decided this issue without considering the object clause of the assessee. It is an undisputed fact that the assessee is a NBFC registered with the RBI and hence there appears to be some merit in the contentions of the assessee that the interest income is assessable as business income. Further, according to the assessee, the Ld CIT(A) has determined the net interest income without considering the rate of interest actually paid and charged. Thus we notice that the contention of the assessee that the interest income forms part of its business activities needs to be examined by considering the objects clause and the registration given by the RBI as NBFC. If it is accepted as part of its business activities, then there is no requirement to assess the income as Income from other sources. Accordingly, this issue requires examination at the end of the AO. With regard to the issue relating to ascertainment of net interest income also, we feel that the same requires fresh examination since the assessee is disputing the rate of interest adopted by the Ld CIT(A). In view of the above, we set aside the order of Ld CIT(A) on this issue and restore the