TMI Blog2019 (12) TMI 1036X X X X Extracts X X X X X X X X Extracts X X X X ..... HAT:- Disallowance worked out by the AO, and nothing left for making adjustment except the amounts the assessee itself added back, but apart from that we find that this issue is squarely covered in favour of the assessee by the decision of Special Bench of the Tribunal in the case of Vireet Investment, [ 2017 (6) TMI 1124 - ITAT DELHI] . From the Asstt.Year 2008-09 to 2010-11, the issue has been decided in favour of the assessee by the ITAT. It is also covered by the decision of Hon ble Bombay high Court rendered in the case of Reliance Industries Ltd., [ 2019 (1) TMI 887 - BOMBAY HIGH COURT] . In brief, the outcome of this order is that the disallowance under section 14A is not required to be added back in the book profit under section 115JB of the Act. Interest income from its subsidiary - HELD THAT:- CIT(A) has rightly held that no notional interest income is to be assumed because the assessee has not charged interest on ICDs. from subsidiary. The assessee has offered such interest income as business income in earlier years, and therefore, advancement of loan was considered for the purpose of business. To our mind, the ld.CIT(A) has appreciated the controversy in right pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... off brought forward business loss against income from house property - HELD THAT:- A decided in own case income from warehouse has been shown under the head income from house property which cannot be equated by any cannon of law as profit and gains from business or profession .Both the lower authorities made no mistake in not allowing set off of brought forward business losses against the Income from house property . Loss suffered by the assessee on sale of preferential shares - whether actual sale consideration of the shares supported by the valuation report can be replaced with fair market value of the shares? - HELD THAT:- Full value of consideration would be replaced by way of deeming provision provided in section 50C which is relatable to transfer of capital asset in the shape of land or building or both. No such provision has been provided with regard to the sale of shares. With effect from Asstt.Year 2018-19, a provision has been made for sale of shares also. It is section 50CA. Prior to insertion of this section, there is no power with the Revenue authorities to replace the full sale consideration with fair market value of the shares. Since the ld.CIT(A) was n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on was not found to be sufficient by the AO. He accordingly made additions of ₹ 97,57,920/-, ₹ 63,72,000/- and ₹ 79,05,000/- in the Asstt.years 2012-13 to 2014-15 respectively in addition to amount already disallowed by the assessee itself. This working has been made with help of Rule 8D. Dissatisfied with the disallowance, the assessee carried the matter in appeal before the ld.CIT(A). In the Asstt.Year 2013-14 and 2014-15. The ld.CIT(A) after following orders of the ITAT as well as Hon ble High court in the Asstt.Year 2008-09 deleted the disallowance. However, in the Asstt.Year 2012-13, the ld.CIT(A) has followed order of his predecessor in the Asstt.Year 2011-12 and recorded the following finding while giving directions to the AO: 3.4.1. Since the facts are identical in this year also, I following my order for A.Y. 2011-12 and for the same reasons, hold that the appellant admittedly had incurred expenses for earning the exempted income and hence the provisions of Rule 8D are clearly applicable. However, the Assessing Officer is directed to exclude the interest paid to Alembic Ltd. from the total interest expenditure since t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on specific loan/charges to be excluded, taxable investment to be excluded, only net interest income is to be considered for the purpose of working out the disallowance. At the time of hearing, the ld.counsel for the assessee relied upon the judgment of Hon ble Gujarat High Court in the case of Nirma Credit Chemical Ltd., 85 taxmann.com 72 (Guj). In order to buttress his contention, the assessee has submitted that it had sufficient interest free funds to carry out investment, hence no borrowed funds were utilized. The assessee also pointed out that certain arithmetical errors committed by the AO in calculating the disallowance. In order to appreciate the availability of interest free funds with the assessee, we would like to take note of its submission before the AO exhibiting the investment made from 31.3.2005 upto Asstt.Year 2014-15. This note has been reproduced by the AO, and it reads as under: 1. In the present case, the Company had not made any fresh investments in shares during the year under consideration. 2. The Appellant had sufficient interest free funds to carry out the investments and hence no borrowed funds were utilized. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AY 07-08, your office has verified the fact that the ONGC payments were made out of borrowed funds. Your office also allowed the benefit of exclusion of interest paid on ONGC liability while working out disallowance u/s 14 A r.w.r 8D in AY 07-08, AY 08-09, AY 09-10 andAY10-ll. Thus, it is very clear that the incremental investment amounting to ₹ 4,75,48,314/- have been made out of interest free own funds of the Appellant As on 31.3.2008 borrowed funds have decreased by 91,36,000/- and the investments increased by 1,94,72,995/-. Thus, the incremental investments have clearly not been totally funded out of the borrowings but from own funds. As on 31.3.2009 borrowed funds have increased by ₹ 9,45,23,000 and the investments have decreased by ₹ 1,34,000/-. As on 31.3.2011 borrowed funds have increased by ₹ 1,50,11,000 and there has not been any fresh investments during FY 10-11 As on 31.3.2012 borrowed funds have increased by ₹ 14,59,46,000 and the investments have decreased by ₹ 8,14,46,000/-. As on 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In this case, the Hon'ble Bombay HC has held that where there are funds available, both interest free and borrowed funds, then a presumption would arise that the investments are out of the interest-free funds generated or available with the company, if the interest-free funds were sufficient to meet the investment and accordingly there ought not be any disallowance u/s. 14A of the interest paid on the borrowings. Consequently, the ITAT rightly held that where there are both interest free and borrowed funds then there was no basis for deeming that the assessee had used borrowed funds for investment in tax free securities. Copy of decision is enclosed as Annexure 4(d). 6. Identical note has been filed in other two assessment years, whereby the assessee has quantified the investment upto the end of the accounting years in those years. For example, in the Asstt.Year 2012-13, the total amount of share capital and reserve available with the assessee was ₹ 10419.10 lakhs, and he cost of investment made was ₹ 2634.60 lakhs. In the Asstt.Year 2013-14, again total funds in the shape of share capital and reserves were of ₹ 10829.53 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade under section 14A is required to be added back in the book profit for the purpose of section 115JB of the Act. Though theoretically, we have deleted the disallowance worked out by the AO, and nothing left for making adjustment except the amounts the assessee itself added back, but apart from that we find that this issue is squarely covered in favour of the assessee by the decision of Special Bench of the Tribunal in the case of Vireet Investment, 165 ITD 27 (SB). From the Asstt.Year 2008-09 to 2010-11, the issue has been decided in favour of the assessee by the ITAT. It is also covered by the decision of Hon ble Bombay high Court rendered in the case of Reliance Industries Ltd., 102 taxmann.com 142 (Bom). The ITAT has considered this aspect in the case of Gujarat Flurochemicals Ltd. and other appeals. This order of the ITAT has been upheld by the Hon ble Gujarat High Court. ITAT has followed order of the Special Bench in the case of Vireet Investment (supra). In brief, the outcome of this order is that the disallowance under section 14A is not required to be added back in the book profit under section 115JB of the Act. Therefore, we allow ground no.2 of the assessee s appeal (I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. The interest expenditure on the borrowing advanced to Quick Flight Ltd. was also allowed as an expenditure upto A.Y. 2011-12. Thus, on this very ground, the business expediency has been established in the case of appellant in respect of advances given to sister concern. As a matter of fact, due to huge losses incurred in the case of Quick Flight Ltd., the appellant has not charged interest in the year under consideration which in no way will change the purpose of advances given'to Quick Flight Ltd. It is also noticed that if the business of subsidiary company is not revived, then the appellant will lose entire investment therein in the form of share capital (₹ 2 crores) and advances (₹ 22.78 crores) as on 31.03.2012 also. In view of these facts, the claim of appellant that the advances given to Quick Flight Ltd. were on account of business expediency and for commercial consideration is found to be acceptable. 6.4.1. It is also noticed that under the similar facts and circumstances of the case, the interest expenditure has been held to be an allowable expenditure u/s. 36(l)(iii) of the Act by the Hon'ble Supreme Court in the following case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssistance of learned representatives, we have gone through the record carefully, it emerged out from the record that similar expenditure was made in assessment year 2008-09 and dispute travelled up to the Tribunal. The Tribunal has deleted the disallowance by observing as under: 16. In ground no.3, the assessee has raised the following grievance :- 3. Disallowance of foreign travel expenditure ₹ 9,74,612/- : 3.1 On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming 75% of the disallowance made by the Assessing officer of expenditure on foreign travel incurred by the Appellant presuming it to be for non business purposes. 17. So far as this disallowance is concerned, the relevant material facts are like this. During the course of the assessment proceedings, the Assessing Officer noted that the assessee has incurred expenditure of ₹ 12,99,483 on UK and USA visit undertaken by Ms Y R Amin. It was stated by the assessee that this visit was undertaken to understand opportunities available in expanding and diversifying in the markets. It was also state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness and is allowable as such and cannot be viewed as a personal expense. In the light of the findings of the CIT(A), which have not been challenged by the Assessing Officer, the foreign visit was at least partly for business purposes and, therefore, just because this visit resulted in, assuming it is correct, personal benefit to the director, the expenses incurred on the visit cannot be disallowed as personal expenses. This is at best expense of the assessee company which resulted in benefit to the director. In any event, there is no material whatsoever to come to the conclusion that 75% time on this trip was used for personal purposes of the director. The case relied upon by the CIT(A) was a case in which a detailed analysis of the activities of the director was carried out and then this conclusion was drawn. There is no such material on record in this case. Once the CIT(A) came to the conclusion that the trip was for some business purposes, it was not open to him to deny any part of deduction for these expenses- particularly when there is no material to hold that the visit was for personal purposes. In view of these discussions, as also bearing in mind entirety of the case, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not assessable in the hands of the assessee, or in other words, interest expenses incurred by the assessee on the borrowed funds could not be disallowed to the extent the assessee failed to recover interest income from subsidiary. 21. Dealing with this issue, the ld.CIT(A)has held that it was a genuine business transaction. The assessee has made huge advance of ₹ 22 corres. It has share capital of ₹ 2 crores in this concern, and everything will be at risk if subsidiary is not being revived. Thus, genuineness of the advancement in the shape of ICDs was not in doubt. These were for the purpose of business. The assessee has shown the interest income of ₹ 738 lakhs from F.Y.2008- 09 to F.Y.2010-11. This amount was offered for taxation. If some balance outstanding remains, and written off in the accounts, then it is not for the Revenue to verify the genuineness or to ask the assessee to show whether debts have actually been become bad or not. The moment debts have been written off in the books, it is to be allowed without expecting the assessee to demonstrate whether debts have actually become bad or not. A reliance can be made to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch income even though shown as income from house property. 29. Similarly Hon ble Apex Court in the case of CIT vs. Cokanada Radhaswami Bank Limited held that income by way of interest from security does not seize to be part of the income from business if the security are part of the trading asset and therefore even though losses incurred in the business in the earlier years could be set off against that income. In another case relied on by the assessee in the case of Hickson and Dadajee Pvt. Ltd. (supra), the issue before the Hon ble Court was whether the Tribunal was justified in allowing set off of brought forward business loss against deemed short term capital gain arising from sale of building and plant and machinery. From perusal of the judgment we find that Hon ble Court held that the question referred above does not give rise to any substantial question of law and the issue was not admitted for adjudication. 30. On the other hand we find that special Bench decision by Coordinate Bench Bangalore in ITA No. 1546/Bang/2008 dated 09.12.2011in the case of Nandi Steels vs. ACIT adjudicated similar issue of claiming set off of brought forwar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the head Profits and gains of business or profession is loss to the assessee, not being loss sustained in a speculation business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of sec.71, so much of the loss as has not been so set off or .. where he has no income under any other head, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and - (i) it shall be set off against the profits and gains, if any , of any business or profession carried on by him and assessable for that assessment year;.... Much stress has been laid by both the parties on the term profits and gains if any, of any business or profession mentioned in sub-clause -(i) of subsec.( l) of sec.72 of the IT Act. What are the profits and gains of business or profession ?. Whether it should be the income earned out of the business carried on by the assessee or it may be the income in any way connected to the business or profession carried on by the assessee ?. The answer to this question entirely depends on the interpretation to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court was dealing with the cases of the assessee's whose business was dealing in securities also and it was thus held that these securities were trading assets and therefore, the income therefrom though to be computed under the head income from securities does not lose the character of business income . But in the case of M/s Express Newspapers Ltd., cited supra, the facts of the case are little different and after taking into consideration the facts of the case therein, the HonTDle Supreme Court has held that the capital gains on sale of capital assets is not to be set off against the brought forward loss of earlier years. In our opinion, the decision of the Hon ble Supreme Court in the case of M/s Express Newspapers Ltd., is fairly applicable to the facts of the case before us. The Coordinate Bench of the Tribunal in the case of M/s Steelcon Industries Pvt.Ltd., cited supra, has misplaced its reliance upon the decision of the Apex Court in the cases of M/s United Commercial Bank Ltd., and M/s Cocanada Radhaswami Bank Ltd., In view of the same, we are inclined to reject the grounds of appeal nos.5 6 raised by the assessee. Thus, the reference is answere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the sections enumerated below chapter-VI relating to set off of or carry forward and set off, are section 70 to section 80. In all these sections various heads of income have been discussed. So once again the word head income has been commonly used in this chapter-VI. 34. Now for the purpose of computation of total income as provided in chapter-IV, there are five heads of income namely salary, income from house property, profit and gains of business or profession, capital gains and income from other sources. In our view the heads of income referred under chapter-VI relating to set off and carry forward loss refers to the five heads of income provided under chapter-IV of the Income tax Act and therefore while interpreting the provision u/s. 72(1) of the Act which clearly specify that for the particular assessment year if the net result of the computation under the head profit and gains of business or profession is a loss to the assessee, not being a loss sustained in speculation loss, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provision of section 71 (which deals with set off of loss fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ought forward business losses against the Income from house property . We therefore uphold the view taken by Ld. CIT(A). In the result ground No. 3 of the assessee s appeal for assessment year 2009-10 is dismissed. Respectfully following order of the Coordinate Bench Tribunal passed in the assessee s own case for Asstt.Year 2009-10, in ITA No.937/Ahd/2014, on similar issue, we dismiss this ground of assessee. 23. Ground No.4: Grievance of the assessee in ground no.4 is that the ld.CIT(A) has erred in deleting the loss suffered by the assessee on sale of preferential shares. 24. Brief facts of the case are that on scrutiny of accounts, the ld.AO found that the assessee had shown long term capital gain on sale of land at ₹ 8,33,87,162/-. It has shown long term capital loss on sale of shares at ₹ 5,17,02,554/-. Thus, under long term capital gain of ₹ 3,16,04,608/- was offered to tax by the assessee. The ld.AO has directed the assessee to explain the long term capital loss suffered by the assessee with supporting documentary evidence. He also confronted the assessee to show as to why this capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under: 4.3.2.1. I find that the decision of Hon'ble jurisdictional ITAT in the case of Kruti Marketing Ltd. (supra) has been followed in the case of ITO Ms. Rajvi Securities (P) Ltd. (2012) 50 SOT 592 (And.). In view of the above factual and legal position, thus it emerges that the appellant company was carrying on business of manufacturing of glass wares, machinery and equipments and real estate development and not the business of purchase and sale 'Of shares and hence the provisions of Explanation to section 73 would not apply. I hold accordingly relying upon the above mentioned decisions and particularly the decision of Hon'ble jurisdictional ITAT which is binding on me. Thus, I further hold the loss on sale of shares held as investments has to be treated as long term capital loss. Hence Ground No. 5 is decided in favour of the appellant. 4.3.5. In view of the above factual position and also the decision of Hon'ble Supreme Court/High Court, I hold that transaction of purchase and sale of preference shares entered into by the appellant was not a sham transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO as speculated transaction is concerned, this view was not confirmed by the ld.CIT(A). The ld.CIT(A) has accepted that it is a genuine investment made by the assessee which has given rise to capital gain/loss to the assessee. This part of the ld.CIT(A) order has not been challenged by the Revenue in its appeal. Similarly, the ld.CIT(A) did not uphold conclusion of the AO that this transaction is a colourable transaction, and this finding has also not been challenged by the Revenue. Therefore, according to him the only issue remains to be adjudicated by the Tribunal is, whether actual sale consideration of the shares supported by the valuation report can be replaced with fair market value of the shares. He pointed out that there is no mechanism provided in the Act, and there is no power with the ld.CIT(A) to replace the consideration received by the assessee with fair market value consideration. A provision has been made w.e.f. Asstt.Year 2018-19 by inserting section 50C(A) in the Act. Prior to this assessment year there is no such special provision for the Revenue authorities to replace the sale consideration. He thereafter justified the valuation report on mer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Valuer has valued based on recpgnised valuation guidelines prescribed by Rule 10 of Schedule III to Wealth Tax Act. Valuation rules factors in whether shares are cumulative or non-cumulative and also non-payment of dividend. Rule has been omitted only for the reason that shares were no longer taxable assets for the purpose of Wealth Tax Act. (Tl'(A) has adopted adhoc basis of valuation. Valuation carried out based on prescribed guidelines, that too by the government, ought to be considered by the CIT(A). CIT(A) is not an expert and cannot work out valuation on his own. 7. CIT(A) has erred in stating that the Appellant has accrued right to receive dividend (Pg 64 Para 4.3.6 and page 66 Para 4.3.7) Rebuttal: A person his right to receive dividend only when it is declared by the Company. No dividend income accrues unless it is declared by the Company. Since, no dividend has been declared by the both the Companies, there is no accrued right to receive dividend to appellant. This principle continues to apply even in the case of cumulative preference shares. Without pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Appellant as sham. 29. On the other hand, the ld.DR relied on the orders of the Revenue authorities. 30. We have duly considered rival submissions and gone through the record carefully. Hon ble Gujarat High Court in the case of CIT Vs. Gauranginiben S. Shodhan, 45 taxmann.com 356 (Guj) has observed that section 48 of the Income Tax Act talks about expression full value of the consideration received . This full value of consideration received cannot be replaced by fair market value with the aid of external evidence viz. DVO s report. The Hon ble High Court has considered circumstances in which the full sale consideration should be replaced. In that a reference to section 50C wherein it has been provided that if a capital asset being land or building, and or both are transferred and consideration received or accruing as a result of such transfer, is less than the value adopted or assessed by any authority of a State for the purpose of stamp valuation then full value of the consideration received or accruing as a result of such transfer provided in section 48 would be deemed equivalent to the amount on which stamp duty was paid. Thus, full val ..... X X X X Extracts X X X X X X X X Extracts X X X X
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