Income Tax Appellate Tribunal - Mumbai
Dcit 15(1)(1), Mumbai vs Apcotex Industries Ltd., Raigad on 14 November, 2018
1
Apcotex Industries Ltd
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "A", MUMBAI
Before Shri Joginder Singh(VICE PRESIDENT)
AND
Shri G Manjunatha (ACCOUNTANT MEMBER)
I.T.A No.2634/Mum/2016 - AY 2006-07
I.T.A No.2635/Mum/2016 - AY 2007-08
I.T.A No.2636/Mum/2016 - AY 2008-09
Dy.CIT-15(1)(1), Mumbai vs M/s Apcotex Industries Ltd
Plot No.3/1, MIDC Industrial Area
Taloja-410 208, Raigad
PAN : AAACA 3427G
APPELLANT RESPONDENT
I.T.A No.3002/Mum/2016 - AY 2008-09
M/s Apcotex Industries Ltd vs ACIT-10(3), Mumbai
Plot No.3/1, MIDC Industrial
Area
Taloja-410 208, Raigad
PAN : AAACA 3427G
APPELLANT RESPONDENT
Assessee by Shri Piyush Chajed & Shri MP
Chahed
Revenue by Shri Nitin Waghmode
Date of hearing 04-10-2018
Date of pronouncement 14-11-2018
ORDER
Per G Manjunatha, AM :
These three appeals filed by the revenue and one appeal by the assessee are directed against common order of the CIT(A)-24, Mumbai dated 19-01-2016 and they pertain to AYs 2006-07, 2007-08 & 2008-09. 2
Apcotex Industries Ltd Since facts are identical and the issues are common, for the sake of convenience, these appeals were heard together and are disposed of by this common order.
2. The revenue has taken more or less common grounds of appeal for all assessment years. For the sake of brevity, the grounds of appeal taken for AY 2006-07 in ITA No.2634/Mum/2016 are reproduced below:-
"(i) "On the facts and circumstances of the case and in law, the Ld.CIT(A] erred in treating the sale of investment amounting to Rs.1,09,74,197/- as capital gain [short term capital gain] ignoring the fact that the assessee company was running losses from, the business and there was no excess surplus to utilize for investment purpose and also the volume of share transaction, holding period and number of transactions carried out by the assessee under the head "short term capital gain" and "long term capital gain" resulting into business income".
(ii) "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of interest expenses made of Rs.37,430/- U/S.14A of the Income Tax Act despite the fact that the expenditure incurred in relation to the income does not form part of the total income".
(iv) The appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of appeal."
3. The assessee, in its appeal, has taken a single ground on the issue of disallowance of expenses incurred in relation to exempt income u/s 14A of the Income-tax Act, 1961. The ground taken by the assessee is extracted below:-
"1) On the facts and circumstances of the case, the learned Commissioner of Income Tax (Appeals) erred in confirming the addition u/s.14A amounting to Rs.14,51,5097- without appreciating the fact that there was no expenditure incurred to earn the Exempt Income."
4. The brief facts of the case are that the assessee company is engaged in the business of manufacturing synthetic rubber and latex. 3
Apcotex Industries Ltd The assessee has filed its return of income for AY 2007-08 on 31-10- 2007 declaring total income of Rs.2,06,64,383 being short term capital gain taxable at 10% and claimed carry forward of business loss of Rs.1,58,38,935. During the course of assessment proceedings, the AO noticed that the assessee has declared short term capital gains from sale of shares. Therefore, called upon the assessee to file necessary evidence including period of holding, frequency of purchase and sales and the volume in order to verify whether the share trading activity carried out by the assessee is in the nature of an adventure in trade or commerce. In response to show cause notices, assessee filed necessary details including financial statements to prove that investments in shares have been treated as current investments in its balance-sheet and also necessary explanations with regard to how income derived from sale of shares is taxable under the head 'capital gains'. The AO, after considering relevant submissions of the assessee held that there is no merit in the arguments of the assessee that its investment in shares are out of its own funds generated from its business activity as the facts gathered during the course of assessment proceedings clearly establishes that the assessee has incurred losses in its business and also the assessee has borrowed loans from bank. The AO further observed that in the absence of any one to one co-relation 4 Apcotex Industries Ltd between investment in shares and its own funds and also the fact that when mixed funds are available including interest bearing funds for the purpose of investment in shares, it cannot be accepted that investment is out of own funds. The AO further observed that even otherwise the assessee has carried out systematic activity of share trading which is evident from the fact that in many cases, the period of holding is less than 30 days and assessee carried out voluminous transactions, therefore, he came to the conclusion that profit derived from sale of shares is assessable under the head 'Income from business or profession' in place of short term capital gain declared by the assessee. Aggrieved by the assessment order, assessee preferred appeal before the CIT(A).
5. Before the CIT(A), assessee has filed elaborate written submissions which have been reproduced by the Ld.CIT(A) in his order at para 2.3.1. on pages 4 to 11. The sum and substance of the arguments of the assessee before the Ld.CIT(A) are that investment in shares is out of its own funds and there is no merit in the findings of the AO that the assessee has used borrowed funds. The assessee further submitted that investments in shares has been treated as 'current investments' in its financial statements. Sofar as period of holding and frequency of transaction, it was submitted that the assessee has 5 Apcotex Industries Ltd entrusted its investment portfolio management to a portfolio management service company, which is actively involved in managing assesse's portfolio investment, therefore, assessee does not have any control over purchase and sale of shares and which is at the discretion of PMS in order to maximize its investments. Assessee further submitted that even otherwise, except in one or two cases, the period of holding of shares is compared to be long, therefore, by taking one or two instances of short term holding, the activity undertaken by the assessee cannot be considered as business.
6. The Ld.CIT(A), after considering submissions of the assessee and also by following certain judicial precedents including the decision of Hon'ble Bombay High Court in the case of Gopal Purohit vs CIT 336 ITR 287 (Bom) held that the investment was made only through portfolio manager for which PMS have been charged. Secondly, number of transactions undertaken by the assessee are few and far between. Thirdly, the assessee has earned substantial long term gains and in the past also the Ld.AO in AY 2005-06 had accepted the claim of capital gains. Similarly in AYs 2009-10, 2010-11 & 2012-13 also similar stand has been accepted. Therefore, by following the decision of Hon'ble Bombay High Court in the case of Gopal Purohit (supra), the Ld.CIT(A) held that there is no justification for the AO in adopting a 6 Apcotex Industries Ltd divergent approach for the year under consideration and accordingly directed the AO to treat capital gain derived from sale of shares under the head 'long term capital gain / short term capital gain as claimed by the assessee. Aggrieved by the order of CIT(A), the revenue is in appeals before us.
7. The Ld.DR submitted that the Ld.CIT(A) was erred in treating the sale of investments as capital gain ignoring the fact that the assessee company was running into losses from its business and there was no excess / surplus to utilize for investment purpose and also the volume of share transaction, holding period and number of transactions carried out by the assessee, clearly establishing the fact that profit derived from share trading activity falls under the head 'business income'.
8. The Ld.AR for the assessee, on the other hand, strongly supported the order of the Ld.CIT(A) and submitted that the Ld.CIT(A) has appreciated the facts in right perspective in the light of decision of Hon'ble Bombay High Court in the case of CIT vs Gopal Purohit (supra) and it is further supported by the circular issued by CBDT vide its circular No.4 of 2007 dated 15-06-2007 wherein it was clarified and instructed its field formation that in case of assessment of profit derived from sale of shares, the assessee can have two portfolios, i.e. one for investment and another for trading and the resultant income shall be assessed 7 Apcotex Industries Ltd accordingly. The Ld.AR further submitted that the Board has issued further circular vide its circular No.6 of 2016 dated 29-02-2016 in order to reduce litigation and gave clear direction to the field formation in respect of assessment of profit from sale of shares in the light of various judicial precedents and clarified that once the assessee has desired to treat the profits / gains from sale of shares under the head 'capital gain', irrespective of the period of holding and other facts, the AO cannot disturb the head of income so long as the assessee continued to claim the same head of income in the subsequent years. In this regard, he relied upon plethora of judicial precedents including the decision of Hon'ble Bombay High Court in the case of CIT vs Smt. Datta Mahendra Shah (2015) 317 ITR 304 (Bom).
9. We have heard both the parties, perused the material available on record and gone through the orders of authorities below. The AO has treated profit generated from sale of shares under the head 'profit and gains from business or profession' for the reason that the assessee is involved in systematic activity of share trading which is evident from the fact that the holding period of some shares is less than 30 days and also there is voluminous transactions in purchase and sales. According to the AO, although the assessee claims to have used its own funds generated from business activity for investments, but fact reveals that the assessee 8 Apcotex Industries Ltd has incurred losses from its business and also there is huge borrowings from banks and financial institutions and hence, the possibility of using borrowed funds for the purpose of share trading cannot be ruled out. The AO never disputed the fact that the assessee has accounted investments in shares under the head 'current investments' in its balance-sheet. The assessee also filed certain evidences to controvert the findings of the AO with regard to the events, as per which the findings of the AO insofar as use of borrowed funds for the investment activity is not supported by any cogent evidence. On the other hand, the assessee has filed necessary evidence to prove that it was having sufficient own funds in the form of share capital and reserves which is almost 3 times more than the value of investments in shares. The assessee also controverted the findings of the AO insofar as period of holding , frequency of purchase and sale and volume of transactions by filing necessary evidences, as per which, the assessee's portfolio investment has been managed by PMS services and the assessee does not have any direct control over purchase and sale of shares. All these factors go to prove an undisputed fact that the assessee has investment in shares as an investor. Therefore, there is no merit in the findings of the AO that the assessee is involved in systematic share trading activity which is in the nature of adventure of trade.
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Apcotex Industries Ltd
10. Coming to other observations made by the AO with regard to the period of holding, frequency of purchase and sales and volume of transactions. The CBDT had issued a circular No.4 of 2007 dated 15-06- 2017 in order to clarify the position of taxability of profit derived from sale of shares. As per the said circular, the CBDT clarified that it is possible for a taxpayer to have two portfolios, i.e. investment portfolio comprising of shares which are to be treated as capital asset and the trading portfolio comprising as stock in trade, which are to be treated as trading assets. When an assessee has two portfolios, he may have income under both heads, i.e. capital gains as well as business income. The CBDT further stated that the substantial nature of transactions, the manner of maintaining books of account, the magnitude of purchase and sales and the ratio between purchase and sales and the holding period would give a good guide to determine the nature of transactions. We further notice that over the years, the Courts have laid down different parameters to distinguish the shares held as investments from the shares held as stock in trade. Disputes ever continued to exist on the application of these principles to the facts of an individual case since the taxpayers find it difficult to prove the intention in acquiring such shares / securities. In order to overcome/ reduce the litigation and uncertainty in the matter, in partial modification of its earlier circular, and further to 10 Apcotex Industries Ltd instruct the AO in holding whether surplus generated from sale of listed shares would be treated as capital gain or business income issued a circular No.6 of 2016 dated 29-02-2016 clarifying its earlier circular No.4 of 2007 dated 15-06-2007 as per which listed share and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desired to treat the income deriving therefrom as capital gain, the same shall not be put to dispute by the AO as long as the stand once taken by the assessee in a particular assessment year shall remain applicable to subsequent assessment years. Therefore, we are of the considered view that insofar as the issue of taxability of long term capital gain, there is no ambiguity and it has been clarified by the Board itself vide its circular. Therefore, we are of the view that the AO was incorrect in treating long term capital gain derived from sale of shares under the head, 'Income from business or profession'.
11. Coming to the short term capital gain. The Hon'ble Gujarat High Court in the case of PCIT vs Bhanuprasad D Trivedi, HUF (2017)
87.taxmann.com 137 held that where assessee had purchased share with clear intention of being an investor and held shares by way of investment, gain arising out of transfer of shares should be treated as capital gain and not business income. The Hon'ble Bombay High Court in the case of Smt. Dutta Mahendra Shah (supra) held that where 11 Apcotex Industries Ltd assessee earned profits on sale of shares, in view of the fact that number of share transaction entered into during relevant year was not high and moreover 75% of profits came up from shares held for more than 9 months, amount in question was to be taxed as short term capital gain. In this case, on perusal of facts available on record, we find that except in few cases, the holding period of shares is quite long and also there is no much frequency of purchase and sale of shares. We further notice that the AO himself, in earlier and subsequent years had accepted long term as well as short term capital gain derived by the assessee. Therefore, we are of the considered view that without there being any material changes in facts for the year under consideration, there is no reason for the AO to deviate from the stand taken in earlier and subsequent assessment years. Hence, we are of the considered view that profit derived from sale of shares is assessable under the head 'capital gains' as declared by the assessee. The Ld.CIT(A), after considering relevant facts, has rightly directed the AO to assessee profit derived from sale of shares under the head 'long term capital gain / short term capital gain. We do not find any error or infirmity in the order of the Ld.CIT(A). Hence, we are inclined to uphold the findings of Ld.CIT(A) and reject ground taken by the revenue.
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Apcotex Industries Ltd
12. A similar issue arose for our consideration from ITAs No. 2635 & 2636/Mum/2016 for AYs 2007-08 & 2008-09. The AO has treated profit derived from sale of shares under the head 'profit & gains of business or profession', for similar reasons. The reasoning given by us in the preceding paragraphs in ITA No.2634/Mum/2016 shall mutatis mutandis apply to these appeals also. Therefore, for similar reasons, we direct the AO to assessee profit derived from sale of shares under the head, 'capital gains', as claimed by the assessee.
13. The next issue that came up for our consideration is disallowance of expenses incurred in relation to exempt income. The assessee has earned dividend income from shares and mutual funds and claimed exemption u/s 10(38) of the I.T. Act, 1961. During the course of assessment proceedings, the AO observed that the assessee has not made any disallowance of expenses in relation to exempt income, therefore, called upon the assessee to explain as to why the provisions of section 14A r.w.r. 8D(2) shall not be invoked to determine disallowance of expenses in relation to exempt income. In response to notice, the assessee has submitted that it has disallowed on its own direct expenses incurred in relation to exempt income being PMS fees and demat charges in the statement of total income and, therefore, further disallowance of other expenses including interest does not arise 13 Apcotex Industries Ltd as its investment in shares are out of its own interest free funds and the assessee has entrusted its investment portfolio management to PMS services for which a separate fee has been paid. The AO, after considering the submissions of the assessee and also by relying upon certain judicial precedents held that with the introduction of section 14A of the Act, any expenditure incurred in relation to earning income not forming part of total income is not allowable as deduction. The administrative & other expenses incurred by the assessee company facilitate earning of all incomes including exempt income. The funds of business are mixed, of own as well as borrowed funds. Hence, incurring of interest expenditure in relation to earning exempt income cannot be ruled out. Accordingly, he has invoked the provisions of rule 8D to quantify disallowance contemplated u/s 14A and made addition.
14. Aggrieved by the assessment order, assessee preferred appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assessee submitted that prior to AY 2008-09, the provisions of Rule 8D(2) has no application. Therefore, the AO was erred in invoking rule 8D(2) to compute disallowance contemplated u/s 14A of the Act. The assessee further claimed that prior to AY 2008-09, number of judicial decisions held that a proportionate disallowance could be made for arriving at the expense incurred in relation to exempt income. The Ld.CIT(A), after considering 14 Apcotex Industries Ltd relevant submissions of the assessee and also by following the decision of Hon'ble Bombay High Court in the case of CIT vs Godrej & Boyce Mfg Co Ltd in I.T. Appeal No.934 of 2011 dated 08-11-2013 held that prior to AY 2008-09, provisions of rule 8D has no application and the expenses incurred in relation to exempt income can be determined on proportionate basis and accordingly, for AYs 2006-07 & 2007-08, directed the AO to restrict disallowance of expenditure incurred in relation to exempt income to the extent of 2% of total exempt income. Insofar as AY 2008-09, the Ld.CIT(A) observed that from AY 2008-09 onwards rule 8D came into operation and hence, the decision of proportionate disallowance would not hold good. Nevertheless, invoking provisions of rule 8D, the ld. AO had to bring out the nature of direct expenses and nexus between exempt income, and in this regard it was found that once PMS charges amounting to Rs.88 lakhs and demat charges amounting to Rs.1.82 lakhs had already been disallowed, there was no occasion for the AO to forcibly disallow the same. Therefore, to that extent, the AO was directed to modify the disallowance of direct expenses. However, with regard to the interest and other expenses, the Ld.CIT(A) observed that the AO was erred in disallowing interest in spite of the fact that the assessee has filed necessary evidence to prove that it was having sufficient own funds. Accordingly, he directed the AO to 15 Apcotex Industries Ltd cause necessary enquiries in the light of decision of Hon'ble Bombay High Court in the case of Reliance Power & Utilities Co Ltd vs CIT 313 ITR 340 (Bom) and HDFC Bank Ltd vs CIT 366 ITR 505 (Bom). Aggrieved by the order of Ld.CIT(A), the assessee as well as the revenue are in appeal before us.
15. The Ld.DR submitted that the Ld.CIT(A) was erred in deleting disallowance of interest expenses made by the AO u/s 14A of the Act despite the fact that the expenditure incurred in relation to the income does not form part of total income cannot be allowed as deduction. The Ld.DR further submitted that although the provisions of rule 8D has no application prior to AY 2008-09, yet, the disallowance restricted by the Ld.CIT(A) at 2% of total exempt income is not commensurate with the exempt income earned by the assessee and relevant expenses incurred in relation to exempt income. Insofar as assessment year 2008-09, although the Ld.CIT(A) has accepted the fact that rule 8D(2) has to be strictly applied for computation of disallowance, still, not given any clear finding in respect of interest expenses, therefore, the matter may be set aside to the file of the AO for fresh verification.
16. The Ld.AR, on the other hand, submitted that the Ld.CIT(A) erred in confirming the addition u/s 14A amounting to Rs.14,51,509 without appreciating the fact that there was no expenditure incurred to earn 16 Apcotex Industries Ltd exempt income. The Ld.AR further submitted that in order to invoke section 14A, there must be a direct nexus between actual expenditure incurred and earning of tax free income and in this regard, the AO is not empowered to deem or assume such expenditure to have been incurred in relation to tax free income.
17. We have heard both the parties and perused the material available on record. The facts with regard to earning of exempt income in form of dividend from shares and mutual funds are not disputed by the assessee. The assessee has earned exempt income being dividend from shares and mutual funds for all three assessments and claimed the same as exempt u/s 10(38) of the Income-tax Act, 1961. The assessee has made suo moto disallowance of direct expenses being PMS fees and demat charges in the statement of total income. In respect of interest and other expenses, the assessee has not made any suo moto disallowance. The AO has determined disallowance contemplated u/s 14A by invoking rule 8D(2) for all assessment years. The Ld.CIT(A) held that prior to AY 2008-09, the provisions of rule 8D(2) has no application and accordingly restricted the disallowance to the extent of 2% of total exempt income. In respect of AY 2008-09, the Ld. CIT(A) accepted that rule 8D(2) shall be applied for determining disallowance contemplated u/s 14A. The Ld.CIT(A) further observed that in respect of direct 17 Apcotex Industries Ltd expenses being PMS fees and demat charges, since the assessee has already disallowed direct expenses in statement of total income, no further disallowance u/r 8D(2)(i) of I.T. Rules, 1962 could be made. In respect of interest expenses, the Ld.CIT(A) observed that assessee has failed to prove one to one nexus between investment in shares and interest free funds, in order to apply the principles laid down by the Hon'ble Bombay High Court in the case of HDFC Bank Ltd vs CIT (supra). The Ld.CIT(A) is silent on the aspect of disallowance quantified by the AO u/r 8D(2)(iii).
18. Having considered arguments of both the sides, we find that there is no dispute with regard to the fact that the provisions of rule 8D(2) has no application prior to AY 2008-09. This fact has been reiterated by the Hon'ble Bombay High Court in the case of CIT vs Godrej Boyce & Mfg Co Ltd (supra). Once the provisions of rule 8D(2) has no application, the expenses incurred in relation to exempt income has to be determined on proportionate basis considering the nature of expenses incurred by the assessee and the quantum of exempt income earned for the year. The Ld.CIT(A) has restricted expenses in relation to exempt income to the extent of 2% of total exempt income. There is no hard and fast rule for applying the percentage in determining the quantum of expenses. Various courts and tribunals have taken rate of 1 to 10% depending upon 18 Apcotex Industries Ltd facts of each case. In this case, the assessee has earned substantial dividend income from shares and mutual funds. Although the assessee has disallowed direct expenses being PMS charges and demat charges, but did not disallow interest expenses and other expenses. Insofar as interest expenses, the assessee has filed necessary evidences to prove availability of own funds. In view of the binding nature of decision of Hon'ble Bombay High Court in the case of Reliance Power & Utilities Ltd vs CIT (supra) and HDFC Bank Ltd vs CIT (supra),once the availability of funds is established even though there is borrowed funds, then a general presumption is drawn in favour of the assessee that investment is made out of own funds. Therefore, the question of disallowance of interest expenses does not arise. Accordingly, we direct the AO to delete disallowance made towards interest expenses u/r 8D(2)(ii) of I.T. Rules, 1962.
19. As regards other expenses, the AO has applied Rule 8D(2)(iii). At the cost of repetition, we reiterate that the provisions of rule 8D(2) has no application prior to AY 2008-09. Therefore, other expenses needs to be quantified by applying proportionate rate on the basis of exempt income. Although the Ld.CIT(A) has directed the AO to restrict the disallowance to the extent of 2%, we find that considering the nature of expenses incurred by the assessee and quantum of exempt income, the rate 19 Apcotex Industries Ltd applied by the Ld.CIT(A) appears to be on lower side. Therefore, to meet the ends of justice, we deem it appropriate to direct the AO to restrict the disallowance of expenses to the extent of 5% of total exempt income u/r 8D(2)(iii) for AY 2006-07 & 2007-08. Insofar as AY 2008-09, there is no dispute with regard to the direct expenses which have already been disallowed by the assessee on its own. Insofar as interest expenses, our findings given for AYs 2006-07 & 2007-08 holds good as the assessee has proved availability of own funds. As regards other expenses, from AY 2008-09 onwards rule 8D(2) came into picture and accordingly disallowance contemplated u/s 14A shall be determined by applying the prescribed formula provided u/r 8D(2)(iii). The AO has determined other expenses @0.5% of average value of investments. We find that the AO has rightly applied the principles laid down under rule 8D(2)(iii) to disallow other expenses and accordingly, we are of the considered view that there is no error in the action of the AO in applying the principles and hence, uphold disallowance of other expenses for AY 2008-09.
20. Accordingly, the ground taken by the revenue for AYs 2007-08 & 2008-09 are partly allowed and ground taken by the assessee for AY 2008-09 is also partly allowed.
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Apcotex Industries Ltd
21. In the result, all the appeals filed by the revenue are partly allowed and the appeal filed by the assessee for AY 2008-09 is also partly allowed.
Order pronounced in the open court on 14th November, 2018.
Sd/- sd/-
(Joginder Singh) (G Manjunatha)
VICE PRESIDENT ACCOUNTANT MEMBER
Mumbai, Dt : 14th November, 2018
Pk/-
Copy to :
1. Appellant
2. Respondent
3. CIT(A)
4. CIT
5. DR
/True copy/ By order
Sr.PS, ITAT, Mumbai