Income Tax Appellate Tribunal - Kolkata
Dcit, Circle-6, Kolkata, Kolkata vs M/S. Umil Share & Stock Broking Services ... on 22 June, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
KOLKATA BENCH 'A', KOLKATA
[Before Shri P.M. Jagtap, AM and Shri S.S. Viswanethra Ravi, JM]
I.T.A. No. 2089/Kol/2014
Assessment Year: 2009-10
DCIT CIRCLE 6 Kolkata................................................................................................Appellant
Aayakar Bhawan, 6th Floor,
Room No. 6/17,
P-7, Chowringhee Square,
Kolkata - 700 069.
M/s. UMIL Share & Stock Broking Services Ltd................................................Respondent
24, R.N. Mukherjee Road,
Kolkata - 700 001.
[PAN : AAACU 3331 K]
Appearances by:
Shri P.K. Srihari, CIT appearing on behalf of the Revenue.
Shri A.K. Tibrewal, FCA appearing on behalf of the Assessee.
Date of concluding the hearing : May 09, 2018
Date of pronouncing the order : June 22, 2018
ORDER
Per P.M. Jagtap, AM
This appeal is preferred by the revenue against the order of Ld. CIT(A) - VI, Kolkata dated 28.08.2014.
2. In ground no 1, the revenue has challenged the action of the Ld. CIT(a) in restricting the disallowance of Rs. 1,27,34,577/- made by the AO under section 14A of the Act read with rule 8D to Rs. 36,39,744/-.
3. The assessee in the present case a finance and investment company. The return of income for the year under consideration was filed by it on 11.08.2009 declaring a total income of Rs. 50,52,842/-. In the said return, dividend income of Rs. 1,73,65,973/- earned 2 I.T.A. No. 2089/Kol/2014 Assessment Year: 2009-10 M/s. UMIL Share & Stock Broking Services Ltd.
during the year under consideration was claimed to be exempt by the assessee. The expenditure incurred in relation to the said exempt income as worked out at Rs. 5,19,456/- was disallowed by the assessee suo moto as required by section 14A of the Act. According to the AO, the investment decision was very complex in nature which are required substantial market research and day to day analyse of market trends so as to take the decisions with regard to acquisition, retention and sale of shares and other securities at the most appropriate times. He held that the claim of the assessee of having earned the substantial income by way of dividend by incurring a nominal expenditure thus was not correct. He also observed that when section 14A read with rule 8D prescribed computation of such disallowance, approximation as done by the assessee was not acceptable. He, therefore, applied rule 8D to compute the expenditure incurred by the assessee in relation to earning dividend income at Rs. 1,27,34,577/- and made a disallowance to that extent in the assessment completed u/s 143(3) vide an order dated 30.12.2011.
4. Against the order passed by the AO under section 143(3), an appeal was preferred by the assessee before the Ld. CIT(A) challenging inter alia the disallowance of Rs. 1,27,34,577/- made by the AO under section 14A and after considering the submissions made by the assessee as well as the material available on record, the Ld. CIT(A) restricted the same to Rs. 36,39,744/- for the following reasons given in paragraph no 3.3 of his impugned order:
"It is seen that in the year under consideration, the disallowance offered u/s 14A by the appellant is somewhat on the same lines as in the immediately preceding year. In this year, the disallowance offered is 5% of certain administrative expenses, estimated salary of Rs. 3 lacs and lump 3 I.T.A. No. 2089/Kol/2014 Assessment Year: 2009-10 M/s. UMIL Share & Stock Broking Services Ltd.
sum of Rs.2 lacs. As stated earlier, such estimated method of computing disallowance had been held to be unsatisfactory by my ld. predecessor. Following the reasoning given by him and after considering the facts mentioned by the assessing officer in the assessment order, I am not satisfied with the correctness of claim to, expenditure incurred in relation to the exempt income made by the appellant. Once the assessee's claim is rejected, the disallowance has to be made in accordance with Rule BD as prescribed in the sub-section (2) of section 14A. However, it is noted that during the year, net amount of interest in the appellant's profit & loss account is income of Rs.2,93,82,451/-. Therefore, there is no net expenditure on account of interest. Jurisdictional bench of tribunal has held in the case of DCIT, Cir-4, Kol vs. M/s. Trade Apartment Ltd. ITA No.1277/Ko112011, that for purpose of disallowance u/s 14A read with Rule 8D, only net expenditure is to be taken into account. In the appellant's own case also this view has been upheld by the ITAT vide order dated 29.11.2013 in ITA No. 640/Koll2012 for A.Y.2008-09. Hence, no disallowance has to be made under clause (ii) of Rule 8D(2). Coming now to clause (iii), it has been held by jurisdictional bench of tribunal in the case of REI Agro Ltd vs. DCIT 144 ITD 141 that for purpose of clause
(iii) of Rule 8D (2), only the investment which had actually given rise to exempt income is to be taken into account. Though the ratio of the said decision is contrary to that of the decision of special bench of ITAT Delhi in the case of Cheminvest Ltd. 121 ITD 318 (Delhi)(SB)), as well as the Board's Circular no. 5/2014 dated 11.2.2014 on the issue. I am. in line with principle of judicial discipline, following the ratio given by the jurisdictional bench of tribunal. According to the appellant, on following this ratio disallowance under clause (iii) of Rule 8D(2) would be reduced to Rs. 36,39,744/-.
Thus total disallowance under Rule 8D(2) would be of Rs. 4,91,16/- under clause (i) + nil under clause (ii) + Rs. 36,39,744/- under clause (iii) totalling to Rs. 41,30,880/-. The assessing officer shall, verify various figures taken in the working prepared by the appellant. Subject to this, the assessing officer is directed to reduce the disallowance accordingly."
5. The learned DR mainly raised one contention in support of the revenue's case on this issue by submitting that the disallowance made by the AO on account of interest under section 14A as computed by applying rule 8D(2)(ii) is deleted by the Ld. CIT(A) on the ground that 4 I.T.A. No. 2089/Kol/2014 Assessment Year: 2009-10 M/s. UMIL Share & Stock Broking Services Ltd.
the interest income earned by the assessee being more than the interest expenditure incurred, there was no net expenditure incurred by the assessee on account of interest. He contended that such netting of interest can be allowed only if there is inextricable link between the interest earned and interest paid. He contended that there being no such inextricable link between the interest earned and interest paid established by the assessee in the present case, the deletion by the Ld. CIT(A) of the disallowance on account of interest u/s 14A by allowing the netting of interest is not justified. In support of this contention, he relied on the decision of Bangalore Bench of this Tribunal in the case of Cranes Software International Ltd. vs DCIT 152 ITD 737 as well as the decision of Mumbai Bench of this Tribunal in the case of Sitsons India (P) Ltd. vs ACIT 63 SOT 37.
6. The learned counsel for the assessee, on the other hand, contended that this Tribunal in assessee's own case for A.Y. 2008-09 has allowed the netting of interest while deleting the disallowance made under section 14A on account of interest vide its order dated 29.11.2013 passed in ITA No. 640/Kol/2012. He also relied on the decision of Hon'ble Gujarat High Court in the case of Principal CIT vs Nirma Credit & Capital Pvt. Ltd. (tax appeal no 409 and 514 of 2017 dated 31.08.2017 wherein it was held that for the purpose of applying rule 8D(2)(ii) of the Income Tax Rules, 1962 prior to amendment with effect from 02.06.2016, what would be considered as amount of expenditure by way of interest would be the interest paid by the assessee on the borrowings minus the taxable income earned in the financial year. He contended that it is therefore not necessary to have any inextricable link between the interest earned and interest paid 5 I.T.A. No. 2089/Kol/2014 Assessment Year: 2009-10 M/s. UMIL Share & Stock Broking Services Ltd.
for applying the theory of netting for the purpose of making disallowance under section 14A read with Rule 8D(2)(ii).
7. We have heard the arguments of both the sides and also perused the relevant material available on record. It is observed that the interest income earned by the assessee during the year under consideration being more than the interest expenditure incurred, the disallowance made by the AO on account of interest under section 14A by applying Rule 8D(2)(ii) was deleted by the Ld. CIT(A) on the ground that there was no net interest expenditure incurred by the assessee. The benefit of netting of interest thus was allowed by the Ld. CIT(A) to the assessee and while challenging the same, the contention raised by the learned DR before the Tribunal is that there being nothing brought on record by the assessee to show an inextricable link between the interest earned and interest paid, the Ld. CIT(A) was not justified in allowing the benefit of netting of interest to the assessee. In support of this contention he has relied on the decision of the Bangalore Bench of this Tribunal in the case of Cranes Software International Ltd. (supra) and also that of Mumbai Bench of this Tribunal in the case of Sitsons India (P) Ltd. (supra). It is however observed that the Coordinate Bench of this Tribunal in assessee's own case has allowed the benefit of netting of interest in the similar facts and circumstances of the case. Moreover, Hon'ble Gujarat High Court in its recent judgement delivered on 31.08.2017 in the case of Nirma Credit & Capital Pvt. Ltd. (supra) cited by the learned counsel for the assessee has held that for the purpose of applying Rule 8D(2)(ii) prior to its amendment with effect from 02.06.2016, what would be considered as amount of expenditure by 6 I.T.A. No. 2089/Kol/2014 Assessment Year: 2009-10 M/s. UMIL Share & Stock Broking Services Ltd.
way of interest would be the interest paid by the assessee on the borrowings minus the interest income earned during the financial year. The benefit of netting of interest thus has been allowed by the Hon'ble Gujarat High Court without emphasising on the need of having any inextricable link between the interest earned and interest paid. Keeping in view the said decision of the Hon'ble Gujarat High Court as well as the decision of Coordinate Bench of this Tribunal in assessee's own case for A.Y. 2008-09 on a similar issue, we uphold the impugned order of the Ld. CIT(A) allowing relief to the assessee on the issue of disallowance of under section 14A and dismiss ground no 1 of the revenue's appeal.
8. The next issue raised by the revenue in this appeal relates to the deletion by the Ld. CIT(A) of the disallowance of Rs. 8,00,31,083/- made by the AO on account of assessee's claim for long term capital loss and the same is raised in ground no 2 which reads as under:
"That on the facts and in circumstances of the case, the CIT(A) erred on facts as well as in law in holding that disallowance of loss incurred in off market sale of shares of group company was not warranted, ignoring the fact that delivery of shares were not done within 31.03.2009, which indicates that it was afterthought and as such, colourable device used by the assessee to lower its tax liability as decided by the Hon'ble Apex Court in the case of M/s. Mc. Dowell Company Ltd. (154 ITR 148), wherein the Hon'ble Supreme Court held that the colourable device means something which seems to be real but not actual, used to lower the burden of tax is not allowable."
9. In the return of income filed for the year under consideration, a long term capital loss of Rs. 13,25,28,636/- was claimed by the assessee on the sale of 722008 equity shares of Usha Martin Infotech Ltd. and long term capital gain of Rs. 1,83,61,185/- was shown on the 7 I.T.A. No. 2089/Kol/2014 Assessment Year: 2009-10 M/s. UMIL Share & Stock Broking Services Ltd.
sale of 1575000 equity shares of Usha Martin Ltd. On verification of the relevant documentary evidence produced by the assessee in the form of Demat accounts, bills, contract notes etc., it was noticed by the AO that out of 722008 equity shares of Usha Martin Infotech Ltd., 525000 shares had been sold off market to a group company showing a loss of Rs. 9,83,92,268/- while the remaining 197008 shares were sold through stock exchange after payment of STT showing a loss of Rs. 3,41,36,368/-. He also found that 1575000 shares of Usha Martin Ltd. were sold by the assessee off market to a group company showing a gain of Rs. 1,83,61,185/-. He further noticed the shares sold by the assessee company to other group companies off market had not been delivered till 31.03.2009. He therefore held that the assessee had entered into these transactions with the group companies off market only to claim the loss and reduce its tax burden. He accordingly treated the said transactions as colourable devise by relying on the decision of Hon'ble Supreme Court in the case of Mc. Dowell & Co. Ltd. 154 ITR 148 and disallowed the claim of the assessee for long term capital loss of Rs. 800,31,083/- (9,83,92,268/-
- 1,83,61,185/-).
10. The disallowance made by the AO on account of its claim for long term capital loss was challenged by the assessee in the appeal filed before the Ld. CIT(A) and after considering the submissions made by the assessee as well as the material available on record, the Ld. CIT(A) deleted the said disallowance made by the AO on account of long term loss for the following reasons given in paragraph no 5.2 of his impugned order:
8I.T.A. No. 2089/Kol/2014 Assessment Year: 2009-10 M/s. UMIL Share & Stock Broking Services Ltd.
"I have carefully considered the facts of the case. The Assessing Officer has made the disallowance on the ground that the off market sale of equity shares of group companies to other group companies was nothing but a colourable device to reduce the tax liability. However, apart from the fact that the transactions were with group companies, he has not brought any material on record to support his view that this was a colourable device. The transactions in shares are duly supported by documentary evidence and shares have actually transferred to the buyers. The transactions are duly reflected in demat account. Though the sales were off market, the price on which the shares have been sold is the market price prevailing in the stock exchange as on date of sale. The shares were prior to their sale, held by the appellant since long back and their cost was appearing in the balance sheet for earlier years. Merely because a transaction is between group companies, the same does not become a colourable device. At most, it may involve same amount of tax planning. However, an assessee is always at liberty to do tax planning as long the same is in a legitimate manner within the frame work of law. Various decisions cited by the appellant, including that of jurisdictional bench of tribunal in the case of ACIT vs Turner Morrison & Co. Ltd. 47 ITD 638 and of Punjab & Haryana High Court in the case of CIT vs Pivet Finance Ltd. 192 Taxman 21 also provide support to the appellant on this point. As mentioned earlier, the loss under consideration has arisen on account of sale of shares at market value and the transactions were duly supported by documentary evidence, which has to be treated as genuine transaction. Considering this, the loss cannot be disallowed by making a vague assertion that this was a colourable device. The disallowance of long term capital loss of Rs. 8,00,31,083/- is accordingly deleted."
11. The learned DR strongly relied on the order of the Assessing Officer in support of the revenue's case on this issue and contended that the transactions entered into by the assessee company for sale of shares to group companies off market were rightly held by the AO as a colorable devise by relying on the decision of Hon'ble Supreme Court in the case Mc. Dowell & Co. (supra). He contended that the Ld. CIT(A) however did not appreciate properly the case made out by the AO and allowed the claim of the assessee for the long term capital loss by simply accepting the contention of the assessee.
9I.T.A. No. 2089/Kol/2014 Assessment Year: 2009-10 M/s. UMIL Share & Stock Broking Services Ltd.
12. The learned counsel for the assessee on the other hand contended that all the transactions of sale of shares entered into by the assessee company with its group companies were legal and duly supported by the relevant documentary evidence. He contended that even the price charged in the said off market transactions was the same as quoted in the stock market and the AO therefore was not justified in treating the said transactions as a colorable devise merely because the same were entered into with the group companies. He invited our attention to the various judicial pronouncements cited on behalf of the assessee before the Ld. CIT(A) and contended that the same directly applicable to the facts of the assessee's case were rightly relied upon by the Ld. CIT(A) to allow the claim of the assessee for long term capital loss. He also relied on the CBDT Circular No. 704 of 28.04.1995 to contend that the transactions of shares taking place off market have any recognised even by the CBDT.
13. In rejoinder, the learned DR contended that the relevant transactions of shares may be legal and genuine but the purpose of the same being to reduce the tax liability, the AO was fully justified in treating the said transactions as a colorable devise by relying on the decision of Hon'ble Supreme Court in the case of Mc. Dowell & Co. Ltd. He contended that the intention beyond entering into the said transactions was very clear to reduce the tax burden by claiming the loss and it was thus a clear case of reduction of tax liability through a colorable devise.
10I.T.A. No. 2089/Kol/2014 Assessment Year: 2009-10 M/s. UMIL Share & Stock Broking Services Ltd.
14. We have considered the rival submissions and also perused the relevant material available on record. It is observed that 5,25,000 shares of M/s. Usha Martin Finance Ltd. and 15,75,000 shares of M/s. Usha Martin Infotech Ltd. were sold by the assessee company during the year under consideration to other companies belonging to the same group in off market transactions and the loss suffered in the said transactions amounting to Rs. 8,00,31,083/- was claimed as a long term capital loss. The AO however treated the said transactions as a colorable devise adopted by the assessee to reduce its tax burden inter alia on the ground that the shares sold by the assessee company had not been delivered till 31.03.2009. As submitted on behalf of the assessee company before the Ld. CIT(A) as well as before us, the shares were sold on 31.03.2009 itself and the instructions were also issued by the assessee company on 31st March, 2009 itself to the depository participant to deliver the said shares to the D-mat account of the buyer companies. The assessee company had also duly complied with all the statutory provisions of law relating to the sale of the said shares and even the information of the same was given to the regulatory authority i.e. SEBI in terms of Regulation 7(1A) of SEBI (substantial acquisition of shares and take over) Regulations 1997. The shares so sold were held by the assessee company for a long term and genuineness of the sale of the said shares involving legal transactions was never doubted by the A.O.. He however treated the said transactions as a colorable devise mainly because it resulted in a substantial long term capital loss on the ground that the said transactions were entered into by the assessee company with its group companies off market.
11I.T.A. No. 2089/Kol/2014 Assessment Year: 2009-10 M/s. UMIL Share & Stock Broking Services Ltd.
15. As pointed out by the learned counsel for the assessee by relying on CBDT Circular No. 704 dated 28.04.1995, the off market transactions are recognised even by the CBDT by clarifying that in case of transactions taking place between the parties off market and not through stock exchanges, the date of contract of sale as declared by the parties shall be treated as the date of transfer provided it is followed up by actual delivery of shares and transfer deeds. In the present case, the transactions of sale of shares were duly supported by the required documentary evidence and the fact that delivery instructions were also issued by the assessee company to the depository participant on the date of sale itself clearly shows that the same were followed by actual delivery of shares. Moreover, the relevant share transactions were affected at the same price as was quoted on the stock exchange on the same date.
16. As regards, the reliance placed by the Assessing Officer on the decision of Hon'ble Supreme Court in the case of Mc. Dowell & Co. Ltd. to treat the said transactions as a colorable devise, it is observed the assessee in the case of CIT vs Pivete Finance Ltd. 192 taxman 21 cited on behalf of the assessee before the Ld. CIT(A) had continuously resorted to sale of shares to another group company to reduce the tax burden and the revenue disallowed the resultant losses claimed by the assessee by treating the relevant transactions as a colourable devise to reduce the tax burden by relying on the decision of Hon'ble Supreme Court in the case of Mc. Dowell & Co. Ltd. (supra) Hon'ble Punjab & Haryana High Court however did not accept the stand of the revenue and allowed the claim of the assessee for loss by holding that once it was found that the transactions were genuine, then it could 12 I.T.A. No. 2089/Kol/2014 Assessment Year: 2009-10 M/s. UMIL Share & Stock Broking Services Ltd.
not be dubbed with 'colorable devise'. In support of this conclusion, Hon'ble Punjab & Haryana High Court relied on the decision of Hon'ble Supreme Court in the case of Union of India vs Azadi Bachao Andolan 263 ITR 706 (SC) wherein it was held that act which is otherwise valid in law cannot be treated as non-est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interest, as perceived by the respondents. In our opinion, the decision of Hon'ble Punjab & Haryana in the case of Pivete Finance Ltd. (supra) is squarely applicable to the facts of the present case and the Ld. CIT(A) was fully justified in deleting the disallowance made by the AO on account of assessee's claim for long term capital loss by relying on the said decision. We, therefore, uphold the impugned order of the Ld. CIT(A) giving relief to the assessee on this issue and dismiss ground no 2 of the revenue's appeal.
17. In the result, the appeal of the revenue is dismissed.
Order Pronounced in the Open Court on 22nd June, 2018.
Sd/- Sd/-
(S.S. Viswanethra Ravi) (P.M. Jagtap)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 22/06/2018
Biswajit, Sr. PS
Copy of order forwarded to:
1. M/s. UMIL Share & Stock Broking Services Ltd., 24, R.N. Mukherjee Road, Kolkata - 700 001.
13I.T.A. No. 2089/Kol/2014 Assessment Year: 2009-10 M/s. UMIL Share & Stock Broking Services Ltd.
2. DCIT, Circle 6, Aayakar Bhawan, 6th Floor, Room No. 6/17, P-7, Chowringhee Square, Kolkata - 700 069.
3. The CIT(A)
4. The CIT
5. DR True Copy, By order, Sr. P.S. / H.O.O. ITAT, Kolkata