TMI Blog2017 (6) TMI 520X X X X Extracts X X X X X X X X Extracts X X X X ..... lla, as there is no evidence on record to examine whether the amount was actually sent to foreign country after due approval from RBI - thus matter is restored back to AO for statistical purposes Disallowance of depreciation on UPS systems and data drive @60% - Held that:- Depreciation on UPS and data drive systems @ 60% is allowed if the said equipments were used for more than 180 days and @ 30% in case of their use for less than 180 days - these equipments are used along with the computers and thus, constitutes integral part of computer system - Decided in favor of assessee Disallowance of Commission paid to directors for their personal guarantee - Held that:- Personal guarantee of the directors was given on the insistence of Bank - if the guarantee is not given then the assessee company would have not be able to obtain the credit limit - assessee has failed to submit the original credit facility documentations of the bank - thus the matter is restored back AO to examine from the original bank documentations/agreements/sanction letter and whether any undertaking to this effect was taken from the company or not in terms of RBI guidelines - allowed for statistical purposes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re any addition can be sustained, the Assessing Officer had to establish the proximate relationship between the expenditure incurred for earning such exempt income. (c) Without prejudice to the above, the learned CIT(A) has erred in stating that the appellant had received dividend income from the subsidiary company and thereby, included the investment made in subsidiary company while computing the amount of average investments. 2. (a) That the Learned CIT(A) has erred in upholding the decision of the learned Assessing Officer in not allowing the benefit of carry forward of long term capital loss amounting to ₹ 21,06,266/- out of the total loss of ₹ 38,58,662 incurred by the appellant on winding up of its subsidiary in Dubai in the relevant assessment year. (b) Without prejudice to above, the learned CIT(A) has not given its comments on the facts that if the loss is not allowed as long term capital loss, then the same be treated as trading loss of the appellant. 3. Without prejudice to the above, if the loss amounting to ₹ 21,06,266/- is not allowed to be carried forward as a capital loss then the loss may be allowed as a deduction under sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly ₹ 971/-. The ld. CIT(A) after discussing the facts in his order, has taken the disallowance by the assessee of ₹ 1,05,329/-. During the assessment year as well as preceding assessment year, the assessee has invested in the partnership firm viz., Eastman Industrial Company at ₹ 9,64,70,056/- ₹ 6,83,06,387/- respectively and he has received interest of ₹ 84,17,935/- which has been stated to have been offered for tax by the assessee. During the year, the assessee has also earned share of profit from partnership firm for a sum of ₹ 12,95,735/- as credited into the profit and loss account which are exempt u/s. 10(2A) of the IT Act. During the assessment year and preceding assessment year, he has also invested in his subsidiary company a sum of ₹ 4,96,00,000/- and ₹ 96,00,000/- respectively. During the year, the assessee has paid interest of ₹ 1,83,97,713/- and this total interest expenditure has been considered while calculating the disallowance u/s. 14A by the Assessing Officer. The breakup of interest is as under : (i). Working capital Rs.64,23,126/- (ii). Intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the CIT(A) u/r 8D(2)(ii) regarding value of total investments and total assets both are wrong. While calculating average investment by the Assessing Officer, the investment in subsidiary company has been taken wrongly. The ld. CIT(A) has also wrongly calculated the average value of total assets. He had placed a calculation before the ld. CIT(A) in which there was a total disallowance of ₹ 10,09,602/-. He further submitted that these calculations were not considered by the ld.CIT(A) in spite of detailed submissions made before him. No satisfaction was recorded by the Assessing Officer in his order and applied Rule 14A whereas the assessee had already disallowed ₹ 1,05,329/- 7. The ld. DR relied on the order of the AO. He further submitted that the CIT(A) has wrongly calculated the disallowance u/s. 14A which is not justified. 8. After hearing both the sides and perusing the relevant material on record, we find that the ld. CIT(A) has reduced the investment made in the partnership firm by considering that the assessee has received interest from the partnership firm and therefore, it is not a exempted income. While analyzing the profit and loss account of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Bench of Tribunal and (iii). The ld. CIT(A) has considered the average value of total assets at ₹ 52,21,73,804/- whereas the appellant has calculated average value of total assets at ₹ 54,03,73,804/- and we do not find any clarification regarding this difference of ₹ 1,82,00,000/- in the impugned order. The AO is, therefore, directed to examine as to what is the exact figure representing average value of total assets whether ₹ 54,03,73,804/- as declared by the assessee or ₹ 52,21,73,804/- as considered by the ld. CIT(A) and shall accordingly calculate the average value of total assets afresh for the purpose of disallowance u/r. 8D of the Act. Accordingly, the issue is restored to the file of Assessing Officer to decide the same afresh in the light of observations made in the body of this order. Needless to say, the assessee shall be given reasonable opportunity of being hears. As a result, ground No. 1(a)(b)(c) raised by the assessee and ground No. 3 raised by Revenue deserve to be allowed for statistical purposes. 10. With respect to issue No. (ii) raised by assessee in ground No. 2 3, the relevant facts are that the assessee claimed to have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rights and value attached to or accrued with the said shares (b) He will not be responsible for any loss, dues, claims etc (c) He shall never sell, assign, sale and/or transfer the shares under any circumstances (d) He will pledge the shares with the Company (e) He irrevocably assigns all dividend and income accruing on those shares He further submitted that since the company had wound up, therefore, it should be treated as capital loss or alternatively, it should be treated as loss deductible u/s. 28 of the IT Act. 12. On the other hand, the ld. DR relied on the order of the ld. CIT(A) and submitted that the ld. CIT(A) has passed good order, which needs no interference on this issue. 13. We have heard the rival submissions and have gone through the entire material available on record. We find that the Assessing Officer has not dealt with this issue and detailed submissions were made before the ld. CIT(A). The ld. CIT(A) has allowed capital loss keeping in view 49% of the share holding of the assessee company, but he did not allow the loss claimed due to loan given to Khalid Kazim Mohd. Abdulla. The ld. CIT(A) appears to have not examined this iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailable on record, we find no justification to interfere with the order of the ld. CIT(A) on this issue. The ld. CIT(A) has noted that during the year under consideration, the assessee had purchased new UPS systems and data drive of ₹ 50,824/- to be used with computers. Out of aforesaid UPS and data drive aggregating to ₹ 29,692/- were put to use for more than 180 days and the remaining UPS system and data drive aggregating to ₹ 21,132/- were put to use for less than 180 days. There is no dispute on this fact. There is also no contrary material from the side of Revenue that these equipments are used along with the computers and thus, constitutes integral part of computer system. Hon ble Jurisdictional High Court in the cases of CIT vs. BSES Yamuna Power Ltd. (supra) and CIT vs. Orient Ceramics Industries Ltd. (supra) have clearly held that UPS and Data drive are to be treated as part and parcel of the computer system and depreciation has to be allowed at higher rate as applicable to the computer @ 60%. Accordingly, we do not find any good reason to interfere with the order of the ld. CIT(A) on this count. Ground No. 1 of the Revenue s appeal is, therefore, dismi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company, the guarantee commission so paid is not allowable u/s. 37(1) of the Act. He accordingly, disallowed this expenditure amounting to ₹ 10,19,203/-. 19. The assessee carried the matter in appeal before the ld. CIT(A), who after considering the elaborate submissions made by the assessee and the case laws relied upon by him, deleted the addition observing as under : I have considered the submission of the appellant and observation of the Assessing Officer. It has been submitted that the company had obtained working capital limits from bank secured by hypothecation of plant and machinery, stock etc. and personal guarantee by the Directors of the company for which guarantee commission was paid at the rate of 0.6% of the amount of working capital loan. It was also submitted that if personal guarantee of the Directors would not have been given then such refusal would have resulted in reduction or non availability of the loan, thus, affecting the business of the company. The appellant has also relied on the following cases:- (a) CIT Vs. Metalliziing Equipment Co. Pvt. Ltd. 220 CTR 366 (RAJ) (b) CIT vs. Ayurvedic Seva shtam Pvt. Ltd. ,54 CTR 119 (RAJ) ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n guarantee is not justified, as the nature of both the guarantees is quite different. On the strength of these contentions, the ld. DR submitted that the Assessing Officer had rightly disallowed this expenditure u/s. 37(1) of the Act and the ld. CIT(A) was not justified to delete the same. 21. On the other hand, the ld. AR of the assessee, relying upon the elaborate submissions made before the ld. CIT(A), submitted that the first appellate authority was justified in deleting the disallowance. It was submitted that personal guarantee of the directors was given on the insistence of Bank. Had the directors not given their personal guarantee to the Bank against the limit sanctioned, the assessee company would have not be able to obtain the credit limit, which would be perilous to the business of the company. Therefore, the personal guarantee so given by the directors to the bank and the commission paid to them for this has direct nexus with the business of the assessee company and such commission expenditure is, thus, eligible for deduction u/s. 37(1) of the Act. 22. We have considered the rival submissions, gone through the orders of the authorities below, paper book filed by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equitable mortgage over land building situated at C-87 C- 88, Focal Point Phase V, Ludhiana (the same property which has also been mortgaged as collateral security in the instant case) for working capital limit of ₹ 20 crores, sanctioned by the Bank to Eastman Industrial Company, a partnership firm. This fact is evident from Schedule-III of the balance sheet placed at page 41 of the paper book. However, the assessee company itself has not shown any commission having been received from the said partnership firm. In this context, while considering the justification of payment of impugned commission, as envisaged in the first limb of aforesaid question, we are aware of the Master Circular of Reserve Bank of India pertaining to Guarantees and Co-acceptances, bearing No. RBI/2007- 2008/44 DBOD. No. Dir.BC.10/13.03.00/2007-08 dated July 2, 2007, which is relevant for the year under consideration. In this Circular, Clause 2.10 stipulates as under : 2.10. Guidelines relating to obtaining of personal guarantees of directors and other managerial personnel of borrowing concerns Personal guarantees of directors. Banks should take personal guarantees of directors for the credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to decide whether the commission paid by assessee company to its directors in lieu of their personal guarantee was lawful/justified or not. As per the captioned guidelines of RBI, it is abundantly clear that neither the assessee company was legally obliged to extend any commission to their directors against their personal guarantee given to the bank nor the directors of the company were entitled to receive any such commission in lieu of their personal guarantee. The exceptional stipulation given in the later part of the above guidelines is in different context, which is not applicable to the assessee s case. On perusal of the exceptional stipulation, as noted above, we find that payment of commission/remuneration is permissible to the directors against their personal guarantee only on the following conditions: (i) Where the assisted concerns are not doing well; (ii) Where the existing guarantors are no longer connected with the management; (iii) Where the personal guarantee of existing guarantors is essential to continue; and (iii) Where new management s guarantee is either not available or is found inadequate. Given the facts of the present case, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gain of ₹ 22,76,029/- totaling to ₹ 93,99,131/- earned on entire sale and purchase of shares was treated as business income instead of capital gains declared by the assessee and added the same to the total income of the assessee. The assessing Officer while considering the capital gains as business income has relied on the following decisions : (i). CIT(Central) v. Associated Indl. Development Co. (P) Ltd., 82 ITR 588 (SC). (ii). CIT vs. H. Holck Larsen, 160 ITR 67 (SC) (iii). Authority for Advance Ruling in Fidelity Group, 288 ITR 641. (iv). CIT vs. P. Manonmani, 245 ITR 48 (Mad). (v). CIT vs. JH Gotla MANU/SC/0126/1985 The assessee carried the matter in appeal before the ld. CIT(A), who after considering the detailed submissions, facts of the case and various decisions, directed the Assessing Officer to treat the surplus received on sale and purchase of shares as short term capital gain and long terms capital gains as claimed by the assessee in its return of income and not as business income as treated by the AO. The relevant portion of decision reached by the ld. CIT(A) on this issue reads as under : I have considered the submiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g period of the shares on which long term capital gain has been declared is more than 12 months and in the cases where short term capital gain has been declared, the holding period varies from few days to 4 to 6 months. The appellant vide his submission dated 31.01.2012, 13.02.2012 and 26.10.2012 has argued that investment was made in shares with the intention to hold the same for long term appreciation and for earning dividends. However in few cases the investment was off loaded after a short holding due to receipt of certain adverse market reports or because of short term funds requirements. Appellant also contended that period of holding of shares and non receipt of dividend income is not a decisive factor for treatment of particular transactions as investment or trading transaction. It is contended by the appellant that except in few cases, in majority of transactions, the holding period of shares was 4 to 6 months wherein short term capital gain has been earned. In the cases of long term capital gain the holding was more than 12 months. It is also contended by the appellant that because of off loading of some shares in short period his entire investments cannot be held as busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business income was not justified. I therefore direct the assessing officer to treat the surplus received on sale and purchase of shares as short term capital gain and long term capital gain as claimed by the appellant in the return of income. As a result, this ground of appeal of the appellant is allowed. 26. The learned DR relying upon the order of the Assessing Officer submitted that the ld. CIT(A) was not justified in accepting the claim of assessee of capital gains ignoring the fact that the conclusion reached by the AO to treat the capital gains as business income was corroborated by CBDT Circular as well as various decisions of higher courts. The ld. AR, on the other hand, relying on its submissions made before the ld. CIT(A), urged for sustenance of the decisions reached by the ld. CIT(A) which too is based on various decisions of various courts. 27. Having considered the rival submissions in the light of relevant records available before us, we find no justification to discard the decision reached by the ld. CIT(A). It is notable that the appellant has been consistently showing capital gains in the identical facts and circumstances since long and the department has ..... X X X X Extracts X X X X X X X X Extracts X X X X
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