TMI Blog2015 (5) TMI 925X X X X Extracts X X X X X X X X Extracts X X X X ..... mutual funds under consideration. In our considered view, the intention of the assessee at the time of acquiring shares of mutual fund has to be ascertained by taking into consideration all the relevant factors, like utilization of borrowed funds, frequency of transaction, volume of transaction, manner in which the acquisition is reflected in the financial statements etc. No single factor is determinative of actual nature of the transaction. In the absence of any material brought before us by the Revenue to show that same shares or the units of mutual funds were frequently purchased and sold, on which short term capital gain was claimed by the assessee, or that no borrowed funds was utilized by the assessee in acquiring the shares and units in question, we do not find any good reason to interfere with the order of the CIT(A) accepting the income shown as short term capital gains. - Decided against revenue. Disallowance of deduction of preliminary expenses under section 35D - CIT(A) allowed the claim - Held that:- In the instant case, it is not in dispute that the expenditure in respect of which the deduction was claimed by the assessee under section 35D was incurred after 31st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted before the AO that most of investments were made in the earlier years and no major efforts were required for earning dividend income, and these investments have been made out of large amount of interest free funds available with the company in the form of share capital and reserve. However, the AO observed that the part of the employees cost and administrative expenses is attributable to earning of dividend income, and therefore, made a lumpsum disallowance of ₹ 5,00,000/-. 4. On appeal, the CIT(A) in the Asstt.Year 2005-06 observed that the AO has made the addition merely on estimation. The CIT(A) observed that the expenses incurred on account of salary to staff, stamp duty, transfer fee and other such expenses do relate to earning of dividend, and therefore, part of such expenses needed to be apportioned to earning of dividend income on the assumption that the assessee might have incurred such expenditure for earning dividend income. The CIT(A) held that in view of the facts, it is held that an ad hoc disallowance of ₹ 50,000/- would be proper in the facts of the case, and accordingly restricted the disallowance to ₹ 50,000/- in place of ₹ 5,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r section 14A at the rate of 2% of the dividend income earned during the year by the assessee. We, therefore, set aside the order of the lower authorities on this issue, and direct the AO to disallow 2% of the dividend income earned by the assessee during the year under consideration under section 14A, as expenditure incurred for earning of dividend income. Thus, this ground of appeal of the assessee is partly allowed. 11. The ground no.1 in the Asstt.Year 2006-07 is directed against the order of the CIT(A), directing the AO to accept the gain as short term capital gains and not business income as treated by the AO of an amount of ₹ 3,36 ,66,893/-. The ground no.2 of the appeal of the Revenue in the Asstt.Year 2005-06 is directed against the order of the CIT(A) accepting the gain as short term capital gain and not business income as treated by the AO of an amount of ₹ 30,65,299/- u/s.111A of the Act. 12. Brief facts of the case are that the AO Asstt.Year 2005-06, observed that the assessee has shown short term capital gain of ₹ 30,65,299/- and ₹ 3,39,98,565/-. The AO observed that the business of the assessee was of dealing in shares and securities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd redemption was ₹ 85.56 crores and ₹ 88.94 crores, and in reply to show cause notice issued by the AO, the assessee replied that its major investment were in the form of share of subsidiary companies, which were not in the nature of stock-intrade and the frequency of transaction was not very high, and that the frequency of the buying and selling could not be used to categorise the income as business income. However, the AO did not accept the explanation of the assessee and observed that almost entire stock-intrade comprises of same subsidiary companies, which were appearing in the investment portfolio, and there were large transactions in shares and securities involving substantial sum of money, therefore, the AO held that short term capital gains shown by the assessee was in fact business income of the assessee. 15. On appeal, the CIT(A) observed that it is seen from the balance sheet filed by the assessee that the assessee has shown the shares and units of mutual fund held as investment as per schedule-5 to the balance sheet. The CIT(A) also observed that the same set of shares and units in mutual funds have been shown as investments from earlier years consistent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... short term capital gains. 19. Before us, the DR relied upon the order of the AO. 20. We find that no material has been brought before us to show, what was the frequency of the transaction in question. It is not the case of the Revenue that any borrowed fund was utilized for acquiring shares or units of mutual funds under consideration. In our considered view, the intention of the assessee at the time of acquiring shares of mutual fund has to be ascertained by taking into consideration all the relevant factors, like utilization of borrowed funds, frequency of transaction, volume of transaction, manner in which the acquisition is reflected in the financial statements etc. No single factor is determinative of actual nature of the transaction. In the absence of any material brought before us by the Revenue to show that same shares or the units of mutual funds were frequently purchased and sold, on which short term capital gain was claimed by the assessee, or that no borrowed funds was utilized by the assessee in acquiring the shares and units in question, we do not find any good reason to interfere with the order of the CIT(A), therefore, this ground of the appeal of the Revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wable under section35D as held in the case of CIT Vs. Hindustan Inspecticides Ltd., 250 ITR 338 (Delhi). He, therefore, disallowed deduction of ₹ 7,93,340/- and added the same to the total income of the assessee. 24. On appeal, the CIT(A) held that the assessee had submitted that it had incurred expenditure in the year 1999-2000, and this is the sixth year, and according to the provision of section 35D, it should be allowed 1/10th of total preliminary expenses. The assessee has submitted before the AO that the allowability of such expenditure has been decided in the first year and deduction has been allowed in subsequent years. The AO did not accept the said reply stating that there was no principle of res judicata in proceedings under the Income Tax Act. The AR has reiterated the same submissions, and that, after considering the facts of the case, the CIT(A) directed the AO to allow the same, if similar claim has been allowed in assessments of earlier years. 25. The DR supported the order of the AO, whereas, the AR of the assessee submitted that the principle of res judicata is not applicable in the income tax proceedings, but consistency should be maintained in the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed. 31. In the Asstt.Year 2005-06, the Revenue has taken the addition ground of appeal, which reads as under: The ld.CIT(A) has erred in law and on facts in deleting the addition of ₹ 11,00,00,000/- made on account of provision for doubtful loans while computing book profit u/s.115JB of the Act. 32. Brief facts of the case that during the course of assessment proceedings, the AO observed that the assessee has calculated book profit under section 115JB after deducting the share in profit of Torrent Financiers and share of dividend earned and no adjustment to book profit has been made in respect of provision for doubtful loans debited by the assessee in profit loss account. The AO show caused the assessee as to why the said provision, amounting to ₹ 11 crores should not be added to the book profit, and in, response to the same, it was explained by the assessee that the provision for doubtful advances are not for making liabilities and are not covered by clause (c) of Explanation below section 11JB(2), for which the assessee placed reliance on the decision of Puna Bench of the Tribunal in the case of ACIT Vs. J.G. Vaccum Flask Pvt. Ltd., 83 ITD 242 (Pune ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the debt is an amount receivable by the assessee and not any liability payable by the assessee and, therefore, any provision made towards irrecoverability of the debt cannot be said to be a provision for liability. Therefore, item (c ) of the Explanation is not attracted to the facts of the case. Item (c) in section 115JA and 115JB(1) are identical. In order to attract the Explanation the debt which is doubtful or bad should satisfy the requirement contemplated in item (c ) of the Explanation. It is the amount or amounts set aside as provisions made for meeting the liability other than the ascertained liabilities. In the instant case also the bad and doubtful debt for which a provision is made which is in the nature of diminution in the value of any asset would not fall within item (c) of Explanation (1). It is in that context the appellate Commissioner as well as the Tribunal has granted relief to the assessee. Realising the fatality of the said argument, it is contended now that item (i) cannot amount to satisfaction as provision for diminishing in the value of assets is substituted, if case of the assessee falls under item (c). In meeting the aforesaid case, the assessee brough ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellate Commissioner to the assessee is in no way affected. In that view of the matter, there is not merit in this appeal. 36. We have heard rival submissions and perused the orders of the lower authorities and material available on record. In the instant case, the assessee debited ₹ 11 crores in its profit loss account under the head provision for bad debts . The AO while computing the book profit of the assessee under section 115JB of the Act added back the aforesaid provision by invoking the provision of clause (c) of Explanation (1) of Section 115JB of the Act. The said clause (c) provides for amount set aside as provision for meeting liabilities other than ascertained liability. 37. On appeal, the CIT(A) deleted the above addition by observing that the said provision was not made in respect of any liability, and therefore, the clause (c) of Explanation (1) to section 115JB is not attracted. We find that the clause (i) has been inserted in Explanation (1) to section 115JB by the Finance (2) Act, 2009 with retrospective effect from 1.4.2001 and the said clause provides for increase of net profit by the amount set aside as provision for diminution in the value of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it and loss account per se would not constitute actual write off. The Apex Court accepted the said legal position. However, it was clarified that besides debiting the profit and loss account and creating a provision for bad and doubtful debt, the assessee correspondingly/simultaneously obliterated the said provision from its accounts by reducing the corresponding amount from loans and advances/debtors on the assets side of the balance sheet and consequently, at the end of the year, the figure in the loans and advances or the debtors on the assets side of the balance sheet was shown as net of the provision for the impugned bad debt. Then the said amount representing bad debt or doubtful debt cannot be added in order to compute book profit. Therefore, after the Explanation the assessee is now required not only to debit the profit and loss account but simultaneously also reduce the loans and advances or the debtors from the assets side of the balance sheet to the extent of the corresponding amount so that, at the end of the year, the amount of loans and advances/debtors is shown as net of the provisions for the impugned bad debt. Therefore, in the first place if the bad debt or doubtf ..... X X X X Extracts X X X X X X X X Extracts X X X X
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