TMI Blog2014 (2) TMI 1234X X X X Extracts X X X X X X X X Extracts X X X X ..... urpose vehicle, viz., M/s Hassan Biomass Power Company Private Ltd was formed and the assessee has contributed a sum of ₹ 3.25 crores towards its share capital. According to the Ld A.R, the other share holder was M/s Nucon Energy Group, Mauritius. We notice that these factual aspects have not been examined by the assessing officer. However, the factual position narrated by the Ld A.R would show that the assessee was having a commercial interest and also obligation in making investment of ₹ 3.25 crores, referred above. Besides the above, the assessee has also supplied the materials to M/s Hassan Biomass power company Pvt Ltd. We notice that the said investment has been made in the earlier years, i.e., it is reflected in the Balance sheet as at 31.3.2005. Under these set of facts, the Ld CIT(A) has expressed the view that the investment of ₹ 3.25 crores cannot be said to be for non-business purposes. In view of the foregoing discussions, we are also inclined to accept the view expressed by Ld CIT(A). Accordingly, we uphold his view on this issue. Sale of shares - "Income from business" OR "Capital gains" - Held that:- The tax authorities have reached their own co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reasoning that the assessee did not incur any interest expenditure for earning tax free dividend. However, he confirmed the disallowance of part of administrative expenditure made, as he found the same to be in accordance with the provisions of sec. 14A of the Act and Rule 8D of the Income tax Rules. In this regard, the Ld CIT(A) also took support of the decision of the Tribunal in the case of Asstt. City v. City Corpn. Finance (India) Ltd. [2007] 108 ITD 457/12 SOT 248 (Mum). The assessee is aggrieved by the decision of the ld CIT(A) in confirming the part of administrative expenditure amounting to ₹ 4,84,630/-. The revenue is aggrieved by the decision of the ld CIT(A) in deleting the disallowance relating to interest expenditure of ₹ 14,82,201/-. 4. The ld counsel for the assessee submitted that the AO did not record any satisfaction before proceeding to make disallowance u/s 14A of the Act. He further submitted that the assessee did not use loan funds for making investments in shares/mutual funds and hence there was no requirement to disallow any part of interest expenditure. He submitted that the assessee had borrowed funds from is directors long back in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in making disallowance of 0.5% of average value of interest towards administrative expenditure. Alternatively, the ld counsel submitted that the AO should have restricted on the value of investment which has actually yielded income. In this regard, he placed reliance reported in Kolkata Tribunal REI Agro Ltd. v. Dy. CIT [2013] 35 taxmann.com 404 (Kol.). 4.2 On the contrary, the ld DR submitted that the borrowed funds would loose its identity, when it is through in the common pool of funds and hence it is not correct on the part of the assessee to contend that the investments have been made out of interest free funds. The ld DR submitted that the claim of availability of huge interest free funds is also not correct. By inviting our attention to the Balance sheet as on 31.3.2007, which is placed in page 33 of the paper book filed by the assessee, the Ld D.R submitted that the assessee was having interest free funds (own funds) of ₹ 5.40 crores as on the year ending 31.3.2007 i.e. in the year immediately preceding to the year under consideration. In that year also, the assessee had unsecured loans of ₹ 2.12 crores. Thus the aggregate long term funds that were availabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness of the claim made by the assessee, having regard to the accounts of the assessee. The above cited section no where states that the satisfaction needs to be recorded in writing. The very fact that the assessing officer has proceeded to invoke the provisions of sub-section (2) shows that the assessing officer was not satisfied with the correctness of the claim made by the assessee. In this context, it is also pertinent to note sub-section (3) of sec. 14, which reads as under:- (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act. 5.3 In the instant case, the assessee has claimed that it did not incur any expenditure in relation to earning of the dividend income. According to sub-section (3) of sec. 14, the provisions of sub-section shall have automatic application when such a claim is made. In that kind of situation, in our view, the question of examining about satisfaction of the assessing officer with regard to the claim of the assessee does not arise, due to legal fiction embodied in sub-se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose investments which have yielded dividend. Though the Ld A.R placed reliance on the decision rendered by Calcutta bench of Tribunal, we are unable to accept the same in view of the clear provisions prescribed in Rule 2(ii) of Rule 8D of the Income tax Rules. For the sake of convenience, we extract below the relevant provisions:- B the average of value of investmenty, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year . 5.7 A careful perusal of the above said provisions would show that the words does not or shall not have got their own significance, i.e., the words does not refer to the income which has already been received and the words shall not refer to the income that may be received. In our view, the words shall not mandates that the entire investments, the income which shall not form part of the total income are required to be considered, otherwise the words shall not shall loose its significance in the above said provision. Accordingly, we reject the said contentions of the assessee. 5.8 The interest income has been receiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t (NEG) is placed. The ld counsel submitted that the assessee and NEG have agreed to jointly colloborate to design, finance, build and commission 8 MW Biomass fueled power plat at Hassen, Karnataka. As per the agreement, the assessee was required to invest approximately ₹ 3.70 crores towards equity shares capital. In pursuance of the said investment, the assessee was selected as a turn key contractor to build a biomass fuelled power plant. In order to execute the MOU, both the parties cited above have formed a special purpose vehicle, i.e., the company named M/s Hassan Biomass Power Co. Pvt. Ltd and the assessee made investment of 3.25 crores towards the share capital of the said company. The assessee later on entered into a contract with Hassan Biomass Power Co. Pvt Ltd on 26.8.2003 for supplying certain goods required for setting up of 8 MW power plant. In pursuance of contract, the assessee has supplied material to M/s Hassan Biomass P Ltd. The ld counsel invited our attention to the copy of ledger account placed in page 88 to 98 of the paper book to substantiate the claim that the assessee has supplied the material to M/s Hassan Biomass Power Co. Pvt Ltd. Accordingly, he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts relating to the said issue are discussed in brief. During the year under consideration, the assessee declared the profit from sale of shares as under:- Long term capital gains ₹ 16,16,752/- Short term capital gains ₹ 1,74,14,332/- 10.1 The AO noticed that the tax auditor, while giving the details of businesses carried on by the assessee in the Tax audit report, had shown the activity of trading in shares as one of the business activities of the assessee. The assessing officer also noticed that the assessee was dealing in shares very frequently and also in a regular manner. The details of transactions entered into by the assessee were noted as under by the AO:-(a) Total sale transaction of shares 178(b) Total value of sale transactions ₹ 19.62 crores(c) Total purchase transaction against which sales were made during the year 178(d) Value of above purchases ₹ 18.06 crores(e) No. of shares sold ͅ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count and Balance Sheet and it has never treated the same as its Stock in trade . Regarding the volume of transactions noted by the AO, the Ld A.R submitted that the single order of purchase/sales placed by the assessee has been executed by way of several small lots. To substantiate his contention, the Ld A.R invited our attention to the copies of contract notes, which are placed in pages 41 to 54 of the paper book and submitted that the order placed for purchase/sale of particular quantity of shares on a single day has been executed by several smaller transactions. Accordingly, the Ld A.R submitted that the tax authorities are not correct in presuming that there were frequent transactions of purchase and sale of shares. The Ld A.R further submitted that the assessee was indulging in intra day transactions (i.e., purchase and sale of shares on the very same day) only occasionally and the gain realised on such type of transactions was only ₹ 10,20,817/-. Accordingly he submitted that the profit realized on sale of shares should be assessed under the head Capital gains only. 11.1 On the contrary, the Ld D.R submitted that the tax auditor shall give report in Form No.3CD a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ditor do not independently report about the nature of businesses carried on by the assessee. Accordingly to Ld D.R, the tax auditor furnishes such information on the basis of information furnished to him by the assessee. Thus, according to Ld D.R, the intention of the assessee was to carry on share trading transactions as a business activity only. 12.2 However, it is a fact that neither the Ld CIT(A) nor the AO (in remand proceedings) did discuss anything about the clarificatory letter issued by the tax auditor. Further they did not consider it necessary to examine the auditor, when the assessee is disputing the tax audit report. In our view, when the assessee is placing some material to controvert the report given by the tax auditor, the tax authorities should have carried out necessary enquiries, before placing full reliance on the tax audit report, which was disputed by the assessee. Further the assessee is now disputing before us about the finding given on the quantum of transactions carried out in the course of share trading activity, i.e., according to the assessee, a single order of purchase/sales has been executed through a series of smaller transactions. The assessee ..... 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