Income Tax Appellate Tribunal - Delhi
Essix Biosciences Ltd., New Delhi vs Department Of Income Tax
ITA NO. 2129/Del/2011
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "B", NEW DELHI
BEFORE SHRI I.C. SUDHIR, JUDICIAL MEMBER
AND
SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER
I.T.A. No. 2129/Del/2011
A.Y. : 2007-08
DCIT, Circle-11(1), vs. M/s Essix Biosciences Ltd.,
New Delhi, Room No. 312, Flat No. 711-712, 7th floor,
CR Building, 98, Modi Tower, Nehru Place, New
New Delhi Delhi - 110 019
(PAN/GIR NO. : AAACE0210F)
(Appellant ) (Respondent )
Assessee by : Sh. Rakesh Gupta, CA
Department by : Ms. Shumana Sen, Sr. D.R.
ORDER
PER SHAMIM YAHYA: AM This appeal by the Revenue is directed against the order of the Ld. Commissioner of Income Tax (Appeals)-XII, New Delhi dated 28.2.2011 pertaining to assessment year 2007-08.
2. The grounds raised read as under:-
i) On the facts and circumstances of the case and in law, the Ld. Commissioner of Income Tax (A) has erred in deleting the addition of Rs. 2,05,588/- on account of business income instead of Long Term Capital Gain u/s. 10(38) of I.T. Act.
ii) On the facts and circumstances of the case and in law, the Ld. Commissioner of Income Tax (A) has erred 1 ITA NO. 2129/Del/2011 in deleting the addition of Rs. 25,81,645/- on account of u/s. 14A by applying Rule 8D of I.T. Rules.
iii) The appellant craves leave to add, alter or amend any ground of appeal raised above at the time of hearing.
3. Apropos the deletion of addition of Rs. 2,05,588/-
In this case during the year the assessee company which is primarily engaged in the business relating to research and experimental development on natural sciences and engineering has also disclosed income from long term gain on sale of shares for Rs. 2,05,588/- as well as sale of shares for short term capital gain for Rs. 9,56,491/-. The assessee has also received divided for Rs. 20,14,851/- besides the income from research and analysis for Rs. 45,21,500/-. The Assessing Officer issued a show cause to the assessee as to why the short term and long term capital gains declared by the assessee shall not be assessed as business income. Upon consideration of the submission of the assessee the Assessing Officer held that although the assessee has mentioned these purchases as investments in its books of accounts but looking to the nature of transactions of shares it was found that the assessee was doing frequent transactions for sale and purchase of shares like stock in trade, which shows that the motive of assessee was to earn profit on sale and purchase of shares and not to earn dividend. Thereafter Assessing Officer has made reference to Circular No. 4/2007 dated 15.6.2007 issued by the CBDT as also the cases of C.I.T. vs. Associated Industrial Development Co. 82 ITR 586; C.I.T. vs. Holck Larsen 160 ITR 67 and the decision of Authority of Advance Ruling in case of Fidelity Group reported in 288 ITR 641. It has been concluded that the action of the assessee of 2 ITA NO. 2129/Del/2011 treating the gain from sale and purchase of shares as capital gains instead of business income is not acceptable for the following reasons:-
a. The assessee is not maintaining separate books of accounts for the alleged investments and regular business, no separate account is maintained to differentiate the alleged investment made and for business activity. The assessee was utilizing the sales proceeds of the alleged investments for the purpose of business. Similarly, the assessee was utilizing the funds of business for alleged purchase of investment / shares. Merely, an assumption by the assessee that a particular purchase is investment is not sufficient. If it is allowed then every person shall opt for income from trading of shares as capital gain income. Only because tax on capital gain is either levied lesser of Nil. This in itself shows that it was trading activity. b. The assessee was frequently trading in a particular script i.e. a particular share was frequently purchased and sold. If the intention of the assessee was to earn dividend then they would have held those shares for a longer period instead of selling and purchasing at short intervals.
c. The assessee is transferring shares from stock in trade to investment account as per their sweet will. The fact is evident from the Balance sheet produced by the assessee. This is also indicates the intention of assessee, that they were only classifying these shares as investment only to avoid tax incidence.3
ITA NO. 2129/Del/2011 In the light of above discussion the Assessing Officer has held the short term capital gain and long term capital gain declared by the assessee in its return as business income.
4. Upon assessee's appeal Ld. Commissioner of Income Tax (A) considered the issue. He observed that the counsel of the assessee has argued that the assessee has maintained the books of accounts clearly indicating that the shares are investment on long term basis treating them as investment and not stock-in-trade. He further noted that valuation of the investment in shares is reflected in the balance sheet at cost and not as cost/ market value whichever is lower, it would have been the case when the shares were held as stock-in-
trade. He further observed that the capital gain statement placed on record shows that all shares sold were delivery based and these shares have been held for a period ranging between a few months to more than 3 years by the assessee. In light of the above, Ld. Commissioner of Income Tax (A) observed that the capital gain should be assessed under the head capital gain and not under the head business income as held by the Assessing Officer. In this regard, Ld. Commissioner of Income Tax (A) further referred to the Board Circular No. 7 dated 15.6.2007 on this issue. He observed that the Circular provides guidance and lays down the principles so as to determine whether in case shares have been held as investment or as stock-in-trade. Ld. Commissioner of Income Tax (A) further referred to the decision of the Hon'ble Delhi High Court in the case of C.I.T. vs. Rohit Anand Reported in 46 DTR 236. Ld. Commissioner of Income Tax (A) further placed the decision of the Hon'ble Mumbai High Court in order dated 61.2010 in C.I.T. vs. Gopal Purohit 226 CTR 582. Considering the above, Ld. Commissioner of Income Tax (A) concluded as under:-
4ITA NO. 2129/Del/2011 "In the instant case, as already noted above, the appellant had made only investment in equity shares and no stock in trade account is depicted and identifiable in the books of accounts. The magnitude of transactions in the investment account in comparison to the turnover disclosed in trading account are negligible. It is also observed from the capital gain statements placed on record that the delivery of shares has taken place and that these shares have been held for a period ranging between a few months, in case of short term capital gain in equity shares and more than 3 years in case of long term capital gains by the appellant. It is also observed that while the long term capital has arisen on account of sale of 10000 shares in Ind Swift Ltd., this sale forms only .28% of the total holding by the appellant in Ind Swift Ltd. and that all these shares have been transferred only through one transaction on 6.7.2006. Likewise 30000 shares of Lok Housing Company have been sold only through one transaction and shares of Micro Tech have been transferred through 3 transactions. In case of shares of paramount the shares have been sold through total 9 transactions between 3.4.06 to 28.4.06. From these details it is noted that the number of transactions are not large enough and neither they are frequent to hold that there has been any intention on part of the appellant to indulge into business of trading in shares. It is also noted that the appellant has earned substantial dividend income for Rs.
20,14,851/- during the year, which is indication of appellant's intention of investment is shares for earning dividend income.
These factors clearly show that there was a clear intention of investment in shares on the part of the appellant. Therefore, 5 ITA NO. 2129/Del/2011 the short term capital gain and long term capital gain, which is directly relating to the shares held on the investment account, deserves to be assessed as capital gain and not as business income from sale of shares. In view of above discussion and applying the principles as enunciated in the cases of Rohit Anand (Supra) and Gopal Purohit (Supra) the profit arising on sale of shares held as investment by the appellant, deserves to be assessed as short term capital gain and long term capital gain as disclosed by the appellant."
5. Against the above order the Revenue is in appeal before us.
6. We have heard the rival contentions in light of the material produced and precedent relied upon. Ld. Departmental Representative submitted that Ld. Commissioner of Income Tax (A) in this case had not rebutted all the points brought on by the Assessing Officer. She argued that the order of the Ld. Commissioner of Income Tax (A) is non-speaking order. She also placed reliance on the order of the Assessing Officer. Ld. Counsel of the assessee on the other hand place reliance upon the orders of the Ld. Commissioner of Income Tax (A).
7. We have carefully considered the submissions. We find that in this case Ld. Commissioner of Income Tax (A) has given a finding that the assessee has maintained the books of accounts clearly indicating that the shares are investment on long term basis treating them as investment and the not the stock-in-trade. Furthermore, the valuation of the investment in shares is reflected in the balance sheet at cost and not as cost / market value whichever is lower. Furthermore, all the shares which have been sold were delivery based and the shares 6 ITA NO. 2129/Del/2011 have been held for the period ranging between few months to more than 3 years by the assessee. Thus, we find that the assessee has only made investment in equity shares and not in stock in trade, this is depicted and identifiable and the books of accounts in this regard. Further, the magnitude of the transactions in the investment account in comparison to the turnover disclosed trading account were negligible. The long term capital gain has arisen on account of sale of 10000 shares in IndSwift ltd. These sales forms only .28% of the total holding by the assessee in Ind. Swift Ltd. and all these shares have been transferred only through one transaction and shares of Micro Tech. have been transferred through 3 transactions. In case of shares of paramount the shares have been sold through total 9 transactions between 3.4.06 to 28.4.06. From this Ld. Commissioner of Income Tax (A) has rightly concluded that number of transactions are not large enough and neither they are frequent to hold that there has been any intention on part of the of the assessee to indulge into business of trading in shares. Furthermore, assessee has earned substantial dividend income of Rs. 20,14,851/- during the year which is indication of the assessee's intention of investment in shares for earning dividend income. Furthermore, we find that the case law relied upon by the Ld. Commissioner of Income Tax (A) are also germane and supports the case of the assessee. In the case of C.I.T. vs. Rohit Anand (Supra), it was held that it was relevant to see the intention of the assessee at the time of making of investment so as to determine whether the transactions was for dealing in shares or making investment for earning dividend and appreciation from such investments. Furthermore, in the case C.I.T. vs. Gopal Purohit (Supra) the Hon'ble Mumbai High Court has also approved the order of the 7 ITA NO. 2129/Del/2011 Tribunal holding that delivery based transactions should be treated as though in the nature of investment transactions and profits received therefrom should be treated as either as short term or long term capital gain depending upon the period of holding. Therefore, we find that the Ld. Commissioner of Income Tax (A) is right in holding that the short term capital gain and long term capital gain which is directly related to shares held on investment account deserves to be assessed as capital gain and not as business income from sale of shares. Thus, we do not find any infirmity in the conclusion that profit arisen on sale of shares held as investment by the assessee deserves to be assessed as short term capital gain and long term capital gain as disclosed by the assessee.
8. Apropos the issue of deletion of addition of Rs. 25,81,645/-
In this case Assessing Officer noted that assessee has shown tax free dividend income of Rs. 20,14,851/-. Assessing Officer opined that section 14A was applicable and he applied Rule 8D in this regard and computed the total disallowance of Rs. 25,81,645/- as expenses incurred in relation to earning of tax free income.
9. Upon assessee's appeal Ld. Commissioner of Income Tax (A) considered the issue. Ld. Commissioner of Income Tax (A) opined that Rule 8D was not applicable for asstt. year 2007-08. He further held as under:-
"As regards the issue as to whether any interest expenditure for Rs.26,24,997/- which is debited In P&L Account is attributable to earning of the exempt dividend income or not it has been submitted by the appellant through the copy of statement of account of M/s Cholamandalam Investment and Finance Ltd. for 8 ITA NO. 2129/Del/2011 FY 06-07 the this whole of the interest for Rs. 26,24,997/- on which TDS has also been deducted has been paid only to M/s Cholamandalam Investment and not to any other party during the year. It has also been observed that this amount of interest relates to the loan of Rs. 2.5 Crores taken by the appellant from M/s Cholamandalam Investment during the previous financial year 05-06 and which has been used for the purposes of business and not for making any investment in shares. This has been substantiated by the appellant through the fact that there has been substantial amount of increase in the following business heads during FY 0506 namely in fixed assets for Rs. 1.28 crores ; loans and advances for Rs. 3.50 Crores ; sundry debtors for Rs. 2.34 Cores and Decrease in sundry liabilities for Rs. 1.44 Crores. Thus there has been a total increase in assets for Rs. 8.57 Crores during FY 05-06, which has partly been met out of the loan of Rs. 2.5 Crores taken from M/s Cholamandalam Investment on which the interest for Rs. 26.24 Lacs has been paid during FY 06-07. It has also been submitted that during FY 05-06 there has been an additional investment in shares for only Rs. 16,48,498/- which is made out of appellant's own resources in the form of reserves and share capital the total of which during FY 05-06 is for Rs. 20.11 crores as against the total investments in shares during FY 05-06 for Rs, 16.63 Crores. From these submissions of the appellant the point made is the interest expenses debited in the P&L Account during the year are on account of business activities of the appellant and are not related to investment in earning of the exempt dividend income. It has additionally been submitted that during FY 06-07 there has been an additional investment in 9 ITA NO. 2129/Del/2011 shares for Rs. 5,07,05,603/- thus making a total investment in shares for Rs. 21,70,59,7881- as on 31.03.07. As against this the total of share capital & Reserves and Surplus in appellant's case stands at Rs. 20,56,98,566/- as on 31.03.07. The appellant has also submitted that during FY 2006-07 it has also received advance against share application for Rs. 4,52,50,000/-, which has been partly used for making the additional investment in shares. Thus the submission of the appellant is that it has sufficient resources of it's own through which the investment in shares has been made and that these resources are interest free funds.
From the above discussions of the financials of the appellant it is observed that the ratio of the decision in Reliance Utilities & Power Ltd. 313 ITR 340 (Bom) (supra), wherein the High Court has held that "if there be interest free funds available to an assessee sufficient to meet its investments and that at the same time the assessee had raised a loan it can be presumed that the investment were from the interest free funds available" is applicable to facts of the appellant's case and therefore there is no question of attribution of "interest expenditure" for earning of tax exempt income u/s 14A in appellant's case. Therefore disallowance of Rs. 16,23,111/- made on account of interest by the AO through application of Rule 8D, [which in any case is not applicable to AY 2007-08 in terms of the decision of Mumbai High Court in the case of Godrej & Boyce (supra)] is even otherwise deleted."10
ITA NO. 2129/Del/2011 9.1 Further, Ld. Commissioner of Income Tax (A) considered the issue as to whether provision of section 14A can be applied to disallow the part of administrative expenses on a reasonably estimated basis in absence of the Assessing Officer pointing out any specific / particular expense or drawing any direct nexus between the expense incurred and earning of the dividend income. Ld. Commissioner of Income Tax (A) in this regard referred to the decision of the Hon'ble Mumbai High Court in the case of Godrej & Boyce Mfg. Co. Ltd. vs. DCIT. Ld. Commissioner of Income Tax (A) held as under:-
"In terms of the above observations of Bombay High Court in case of Godrej Boyce (Supra) it is observed that for making disallowance under section 14A there needs to be a reasonable and proximate nexus between the expenditure and the exempt income & that the AO is not precluded from making apportionment in a case where the assessee does not maintain separate accounts. Further the Bombay High Court in the case of Godrej & Boyce (supra) has also held that disallowance under section 14A(1) can be made on a reasonable basis and that expenses can be apportioned for the above purpose, as per the extensive quotations from the relevant portions of the said judgment.
It would be relevant to consider the details of the various expenses incurred under the head administrative expenses to determine whether there was any proximate nexus between the expenditure incurred and the exempt dividend income.
On a perusal of the details of the above expenses and nature of functions performed by the personnel, I find that the 11 ITA NO. 2129/Del/2011 administrative expenses would mostly relate to the carrying on of the normal & primary business activities of the appellant. The expenses which are related to the primary business of the appellant are depreciation for Rs. 2,79,051; legal charges & ROC fees for Rs. 15,500/-; LIC Premium for Rs. 1,42,373/-; auditor remuneration for Rs. 19,200/-, contract research expenses for Rs. 13,17,694/-, preliminary expenses for Rs. 49,985/- & Business promotion expenses for Rs. 72,420/-
Accordingly only such of the administrative expenses which can be reasonably co-related to earning of exempt income are considered for disallowance. These expenses are in the nature of salary for Rs. 4,04,623/-, professional fees for Rs. 1,12,000/- rent for Rs. 1,33,030/-, staff welfare for Rs. 16,510/-, printing and stationary for Rs. 88,000/-, travelling and conveyance for Rs. 12,542/. Considering the fact that there has been an additional investment of Rs. 5.07 Crores in shares during the year and substantial dividend income for Rs. 20,14,851/- therefore it would be reasonable to attribute 20% of the salary expense to earning of exempt dividend income which works out to Rs. 80,924/-. Further out of the other expenses which total upto Rs. 3,62,082/- 10% thereof that is Rs. 36,208/- is reasonably attributed to earning of the exempted income. This works out to a total disallowance ofRs. 1,17,132/-. Apart from this disallowance for Rs 1,17,132/- which is confirmed, the disallowance of Rs. 9,58,534/- made by the Assessing Officer through application of Rule 8D read with section 14A is directed to be deleted."
10. Against the above order the Revenue is in appeal before us.
12ITA NO. 2129/Del/2011
11. We have heard the rival contentions in light of the material produced and precedent relied upon. We can gainfully refer here the Hon'ble Jurisdictional High Court decision in the case of Maxopp Investment Ltd. vs. C.I.T., New Delhi (203 Taxman 364) wherein it has been expounded in the Head Notes as under:-
"Section 14A of the Income Tax Act, 1961, read with Rule 8D of the Income Tax Rules, 1962 - Expenditure incurred in relation to income not includible in total income - Whether in terms of section 14A(2) condition precedent for Assessing Officer to determine amount of expenditure incurred in relation to exempt income is that he must record his dissatisfaction with correctness of claim of expenditure made by assessee or with correctness of claim made by assessee no expenditure has been incurred. Held, yes -
Whether therefore, determination of amount of expenditure in relation to exempt income under rule 8D would only come into play when Assessing Officer rejects claim of assessee in this regard - Held, yes - Whether rule 8D, which was introduced by virtue of Notification No. 45/2008, dated 24.3.2008, is prospective in operation and cannot be regarded as being retrospective - Held, yes - Whether 13 ITA NO. 2129/Del/2011 though sub-sections(2) and (3) of section 14A were introduced with prospective effect form assessment year 2007-08 onwards, they would be workable only with effect from date of introduction of rule 8D which gave content to expression 'such method as may be prescribed' appearing in section 14A(2) - Held, yes - Whether, however, fact that sub-sections (2) and (3) of section 14A and rule 8D would operate prospectively (and, not retrospectively) does not mean that prior to that period Assessing Officer is not to satisfy himself with correctness of claim of assessee with regard to such expenditure - Held, yes - Whether even for pre-rule 8D period, whenever issue of section 14A arises before an Assessing Officer, he has, first of all, to ascertain correctness of claim of assessee in respect of expenditure incurred in relation to income which does not form part of total income under Act and if he is satisfied on an objective analysis and for cogent reason that amount of such expenditure as claimed by assessee is not correct, he required to determine amount of such expenditure on basis of a reasonable and acceptable method of apportionment -
Held, yes."14
ITA NO. 2129/Del/2011
12. It is clear from the above exposition that addition made by the Assessing Officer is not sustainable as Rule 8D is not applicable for asstt. year 2007-08. Further, we find that Ld. Commissioner of Income Tax (A) has noted that the amount of interest on loan has been paid to M/s Cholamandalam. The interest related to loan of Rs. 2.5 crore taken by the assessee from M/s Cholamandalam Investment during the previous financial year 2005-06. The Ld. Commissioner of Income Tax (A) gave a finding that this has been used for the purpose of business and not for making any investment in shares. This was substantiated by the assessee through various details. Ld. Commissioner of Income Tax (A) analysed these submissions. On the basis of discussion in this regard, Ld. Commissioner of Income Tax (A) opined that assessee had sufficient source of its own through which investment in shares have been made and these sources are interest free funds.
13. As regards the application of provision of section 14A to disallow the part of the administrative expenses, Ld. Commissioner of Income Tax (A) has made a detailed analysis in this regard. It is in accordance with the ratio emanating from Hon'ble Jurisdictional High Court decision cited above. The quantification of expenses in this regard, ` 1,17,132/- by the Ld. Commissioner of Income Tax (A) is quite 15 ITA NO. 2129/Del/2011 cogent enough. Under the circumstances, we do not find any infirmity in the order of the Ld. Commissioner of Income Tax (A), accordingly, we uphold the same.
14. In the result, the appeal filed by the Revenue stands dismissed.
Order pronounced in the open court on 12/4/2013.
Sd/- Sd/-
[I.C. SUDHIR]
SUDHIR] [SHAMIM YAHYA]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Date 12/4/2013
"SRBHATNAGAR"
Copy forwarded to: -
1. Appellant 2. Respondent 3. CIT 4. CIT (A)
5. DR, ITAT
TRUE COPY
By Order,
Assistant Registrar,
ITAT, Delhi Benches
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ITA NO. 2129/Del/2011
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