DCIT - 7(2), MUMBAI vs. M/S ROBUST MARKETING SERVICES LTD., MUMBAI

The assessee is aggrieved by the decision of Ld CIT(A) in confirming the disallowance of loss on revaluation of stock of equity shares and also the disallowance made u/s 14A of the Act.

The revenue is aggrieved by the decision of Ld CIT(A) in allowing interest expenditure claimed against property income.

The facts of the case are that the assessee is engaged in market development of fertilizers, agro products and also provides advisory services in investment activities in equities and mutual funds. The first issue relates to the disallowance of claim of loss on revaluation of shares. During the year the assessee purchased shares of a company named M/s Deepak fertilizers and Petrochemicals Corporation Ltd during the period from September, 2008 to March, 2009 in various instalments. The assessee claimed the shares as its “Stock in trade” and accordingly valued it as at the year end at cost or market prices whichever is less. Since the market price of the shares has fallen down, the revaluation of the shares resulted in a loss of Rs.1,19,17,194/- and the assessee claimed the same as business loss. The AO noticed that the assessee did not sell any of the shares purchased by it either during the year under consideration or in the subsequent year. The assessee had not purchased shares of any other company either during the year under consideration or in the preceding or succeeding years. Accordingly, the AO held that the purchase of shares of the company cited above shall be taken as “Investment” activity of the assessee and accordingly rejected the claim of “Stock in trade”. Accordingly he disallowed the claim of loss arising on account of revaluation of shares. The Ld CIT(A) also confirmed the same.

The Ld A.R submitted that the assessee has classified the shares as “Stock in trade” in its books of accounts. Further, the assessee has purchased the shares out of borrowed funds. He further submitted that the memorandum of association of the assessee company permits dealing in shares. Accordingly he submitted that the assessee’s intention at the time of purchase of shares was to hold it as “Stock in trade” only. Accordingly he submitted that the assessee has valued the closing stock of shares at “Cost or market value whichever is less” and accordingly contended that the loss arising on revaluation of shares should be allowed.

On the contrary, the Ld D.R submitted that the memorandum of articles usually lists out all types of businesses and hence, what is required to be seen is only the activities that are carried on by the assessee. The assessee does not carry on the business of dealing in shares. The assessee has only accumulated the shares of Deepak Fertilizers and Petrochemical corporation Ltd, since it is in the business of market development of fertilizers and agro products. Thus, the intention of the assessee was very clear that the assessee has purchased the shares of the above said company in order to enjoy the pride of possession and the same shows that the intention of the assessee was to hold the shares as investment only. He submitted that the assessee did not purchase shares of any other company in the past and also in the future. He submitted that the assessee has claimed the same as stock in trade, only because the price of the shares has fallen down. Accordingly he submitted that the Ld CIT(A) was justified in confirming the disallowance.

We have heard rival contentions on this issue. The fact remains that the assessee did not purchase shares of any other company during the year under consideration. The assessee has started purchasing shares of And Deepak Fertilizers and Petrochemical Corporation Ltd only during the year under consideration. It has not purchased shares of that company either in the earlier year or in the succeeding year. It is also a fact that the assessee is engaged in the business of market development of fertilizers and agro products, in which the above said company is engaged. Hence, in our view, there is merit in the contention of the Ld D.R that the assessee was motivated to purchase the shares of the above said company with the intention to hold the shares as a pride of possession. There is a possibility that the assessee might have been motivated by the business prospects of the above said company and hence, it has started accumulating the shares of the above said company. This is further fortified by the fact that the assessee did not sell any of the shares either during the year under consideration or in succeeding year, which is against the business principles of trading. If the assessee had intended to consider the shares as stock in trade, it would have indulged in repeated purchase and sale of shares. On the contrary, the assessee has proceeded to purchase shares continuously every month and also held it for a quiet a long time.

The assessee has relied upon the entries passed in the books of account and also the fact that the shares were purchased out of borrowed funds in order to support its contentions that it intended to purchase the shares as stock in trade. However, as held by Ld CIT(A), these two factors alone cannot be taken as determinative factors and accordingly the intention of the assessee should be gathered from the conduct of the party and surrounding circumstances. We also notice that the assessee had originally disallowed part of interest expenditure relating to the purchase of shares of M/s Deepak Fertilizers & Petrochemicals Ltd treating the same as investment, but retracted from the same only during the course of And assessment proceedings. Hence, in our view, the conduct of the assessee and the factors surrounding the issue shows that the assessee had intended to purchase the shares of the above said company only to hold them as investments. Hence we are of the view that the tax authorities are justified in rejecting the claim of the assessee that it was held as stock in trade. Consequently, the tax authorities are justified in rejecting the claim of revaluation loss arising on account of fall in the price of shares.

The Ld A.R submitted that the Ld CIT(A) did not adjudicate the alternative grounds urged before him. However, on a perusal of the grounds urged before the first appellate authority, we notice that the grounds relating to the disallowance of loss arising on revaluation of shares have been raised in Ground No.2 only and the same has been adjudicated by Ld CIT(A). We do not find any alternative grounds as submitted by Ld A.R.

The next issue urged by the assessee before us relates to the disallowance made u/s 14A of the Act. The assessee had earned dividend income of Rs.1,33,720/-, which was claimed as exempt. The above said dividend income was earned out of mutual fund investments. The assessee made a disallowance of Rs.86,915/- out of interest expenditure relating to mutual fund investments and Rs.40,94,203/- as the interest relating to investments made in purchase of Shares of M/s Deepak Fertilisers and Chemicals Ltd. However, during the course of assessment proceedings, the assessee requested the AO to allow the interest expenditure of RS.40,94,203/- referred above on the grounds that the shares of Deepak Fertilizers have been purchased as stock in trade. Since the assessing officer has held that the shares of Deepak Fertilizers have been purchased

Since we have upheld the view taken by the tax authorities and since the shares of Deepak Fertilizers & Petrochemicals Ltd has been purchased to hold them as investments, we are of the view that the Ld CIT(A) was justified in holding that the provisions of sec. 14A read with Rule 8D shall apply. Before us, the assessee placed reliance on certain case laws to contend that the disallowance u/s 14A should not exceed the dividend income. The Ld A.R further submitted that the assessee had received dividend income only from mutual funds and it did not receive any dividend from Deepak Fertilizers and Petrochemicals Ltd. Accordingly, it was contended that no disallowance is called for in the absence of dividend income.

However, we notice that the assessee itself has admitted that the shares of Deepak Fertilizers & Petrochemicals Ltd were purchased out of loan of Rs.20.75 crores taken from M/s Nova Synthetics Ltd and the assessee itself has computed the interest of Rs.40.94 lakhs as pertaining to the investment made in the shares of Deepak Fertilizers. Hence the interest expenditure of Rs.40.94 lakhs cannot be taken as expenditure relating to the business carried on by the assessee, but it is related to the investment made in the shares. Hence, the interest expenditure is otherwise not allowable under the normal provisions of the Act. Accordingly, we confirm the disallowance of Rs.40.94 lakhs made by the AO.

We shall now take up the appeal filed by the revenue, which relates to the disallowance of interest expenditure of Rs.71,72,215/- claimed by And the assessee. The assessee had purchased a flat for a sum of Rs.12.43 crores out of funds borrowed from M/s Nova Synthetics. Initially the assessee disallowed a sum of Rs.90,811/- out of interest expenditure as relating to purchase of flat. During the course of assessment proceedings, it revised the amount of interest attributable to purchase of flat to Rs.71,72,215/- and claimed the same as deduction u/s 24 of the Act under the head “Income from House property” by computing the notional rental income of Rs.3.25 lacs. The AO held that the interest expenditure cannot be deducted as business expenditure, since the assessee itself has held it to be so. Since the assessee had not let out the house property, the AO held that the assessee cannot claim the same u/s 24 of the Act also.

The Ld CIT(A) observed that there cannot be a case of personal use of flat, since the assessee is a company. Since the assessee has not treated the house property as its business assets, the income from the same is required to be computed under the head Income from House property. The Ld CIT(A) further noticed that the assessee has let out the property from 1.4.2010. Accordingly, the Ld CIT(A) held that the income from the house property is required to be computed in terms of sec. 23(1)(a) of the Act, even it remained vacant during the year. Accordingly he held that the interest expenditure is allowable u/s 24 of the Act.

We have heard the parties on this issue. The Ld D.R submitted that the assessee has changed the character of the property from business asset to house property. But the question here is whether the assessee is entitled to claim deduction of interest expenditure u/s 24 of the Act. The Ld CIT(A) has observed that the question of using of personal purposes shall not arise in the case of the assessee herein, since it is a legal person. Hence the restrictions placed in the Act in respect of property held for And personal purposes shall not apply to the case on hand. The Ld D.R could not demonstrate as to how the decision rendered by Ld CIT(A) is contrary to the provisions of the Act. Hence, we do not find any reason to interfere with the view taken by Ld CIT(A) on this issue.