Income Tax Appellate Tribunal - Chennai
Sowdambika Finance & Investments Pvt. ... vs Assessee on 1 June, 2012
IN THE INCOME-TAX APPELLATE TRIBUNAL
'D' BENCH, CHENNAI.
Before Shri N.S. Saini, Accountant Member &
Shri Challa Nagendra Prasad, Judicial Member
I.T.A. No. 884/Mds/2008
Assessment Year : 2000- 01
M/s. Sowdambika Finance & The Assistant Commissioner of
Investments Pvt. Ltd., Vs. Income Tax,
Dhun Building, 827, Anna Salai, Company Circle VI (3),
Chennai 600 002. Chennai 600 034.
[PAN:AACCS9335H]
(Appellant) (Respondent)
Appellant by : Shri R. Vijayaraghavan, Advocate
Respondent by Shri Anirudh Rai, CIT & Shri K.E.B.
:
Rengarajan, Jr. Standing Counsel
Date of Hearing : 01.06.2012
Date of pronouncement : 06.07.2012
ORDER
PER Challa Nagendra Prasad, Judicial Member
This is an appeal filed the assessee against the order of the Commissioner of Income Tax (Appeals) XII, Chennai dated 24.12.2007 in ITA No. 229/05-06 for the assessment year 2000-01. Shri R. Vijayaraghavan, Advocate represented on behalf of the assessee.
2. When the case was fixed for hearing on 01.06.2012 for clarifications, the counsel for the Revenue sought for adjournment on the ground that he is out of station. However, on the day when the matter was heard on 21.05.2012, the counsels for the Revenue Shri Anirudh Rai, CIT/Shri K.E.B. Rengarajan, Junior 2 I.T.A. No.884/ No.884/M/ 884/M/08 M/08 Standing Counsel appeared and supported the orders of lower authorities.
Hence, we proceed to dispose off the matter.
3. There is a delay of one day in filing the appeal by the assessee. The assessee has filed an affidavit for condonation of the delay. The counsel for the Revenue did not seriously object on condonation of delay. Accordingly, we condone the delay of one day in filing the appeal and admit the appeal for hearing as there is reasonable cause in not filing the appeal in time.
4. The first issue in the grounds of appeal of the assessee is that the Commissioner of Income Tax (Appeals) erred in confirming the action of the Assessing Officer in computing the profit of `.1,79,24,590/- under the head 'business' by treating the transfer of shares of Shri Vishnu Cements Ltd. as stock in trade as against the claim of the assessee under the head long term capital gains.
5. The facts of the case are that the assessee is a Private Limited Company engaged in the business of investments and finance, filed its return of income on 29.11.2000 for the assessment year 2000-01 admitting loss of `.14,10,27,081/-.
The return was processed under section 143(1) on 18.01.02. Later, the assessment was reopened by issue of notice under section 148 and the Assessing Officer completed the reassessment on 10.03.05 under section 143(3) read with section 147 of the Act. The Assessing Officer, while completing the 3 I.T.A. No.884/ No.884/M/ 884/M/08 M/08 reassessment, assessed the gains on sale of shares as income from business as against the computation of assessee made under the head capital gains. The Assessing Officer while computing the gain on sale of shares as income from business held that the assessee purchased the shares of Shri Vishnu Cements Ltd. for trading purpose and this is evident from the treatment given to the transaction of sale of such shares in the preceding previous year and its treatment in the balance sheet and profit & loss account for that relevant year.
Thus the conversion of closing stock in trade of preceding previous year into opening stock in trade and as investment in the current year is rejected by the Assessing Officer.
6. On appeal, the Commissioner of Income Tax (Appeals) sustained the action of the Assessing Officer in treating the gain on sale of shares of Shri Vishnu Cements Ltd. as income from business as against income from capital gains. Against this order of the Commissioner of Income Tax (Appeals), the assessee is in appeal before us.
7. The counsel for the assessee submitted that the assessee is a company incorporated under the provisions of Companies Act with the object of making investments of any nature including investments in equities, etc. He submitted that during the previous year, the assessee acting in concert with few other associate and subsidiary companies of the India Cements Ltd., have acquired the shares of Rasi Cements Ltd., a listed company. The said acquisition of 4 I.T.A. No.884/ No.884/M/ 884/M/08 M/08 shares by India Cements Ltd. and its associate and subsidiary companies was treated as a strategic investment for gaining and sustaining the control on the company Rasi Cements Ltd. It is submitted that the post acquisition of substantial equity shares of Rasi Cements Ltd. through a scheme of arrangement, the flagship company India Cements Ltd. expressed to vest the cement division of Rasi Cements Ltd. and through the said scheme it was agreed that the share holders of Rasi Cements Ltd. shall be paid `.300 per share towards vesting of the cement division. He submitted that the Hon'ble Andhra Pradesh High Court approved the said scheme and accordingly, India Cements Ltd. paid the share holders of Rasi Cements Ltd., including the assessee company, a sum of `.300/-
per share towards the shares held and in terms of the said scheme the Hon'ble High Court has brought down the value of the residuary company to `.0.50 paise per share. It is submitted that the assessee company in terms of the said scheme approved by the Hon'ble High Court, it has surrendered its share holding in Rasi Cements Ltd. and received consideration for such surrender at `.300/- per share as the period of holding of the shares of Rasi Cements Ltd. was more than one year and the said surrender was treated as long term capital gains.
8. The counsel for the assessee further submitted that the assessee was holding certain equity shares as stock in trade and as at the beginning of the year it was decided that henceforth the shares be held as capital asset, accordingly the stock in trade account was closed in the books and the investments in shares 5 I.T.A. No.884/ No.884/M/ 884/M/08 M/08 was transferred to investment schedule. He submitted that it was so happened in the year in which the shares were so converted, the shares were sold and the resultant gain was taken as a short term capital gain. The counsel submits that the contention of the Assessing Officer is that such conversion of stock in trade to capital asset is not envisaged under the Act. The counsel submitted that it is the decision of the management of the assessee company to appropriately change the status of holding, which is based on periodical views and the strategy to be adopted by the assessee company in the short term or in the long term. One such regular business decision was to convert the stock in trade into capital asset with an intention to hold them for a long term and also for various other strategic reasons that were happening in the investee company i.e. Shri Vishnu Cements Ltd. The counsel submits that it was, for this purpose, the shares were converted into stock in trade, but eventually by the end of the financial year all the shares of Shri Vishnu Cements Ltd. were divested and accordingly the resultant gain was offered as a short term capital gain. The counsel submitted that one of the reasons why the Assessing Officer did not accept the conversion of stock in trade into investment was that the decision to convert the stock in trade into investment was not supported by the Board Resolution of the assessee company. The counsel submits that this is not a mandatory act, which needs to be carried out through a board resolution even as per the provisions of Companies Act. It is a normal routine business decision taken by the management and therefore need not be in the form of board resolution.
6 I.T.A. No.884/No.884/M/ 884/M/08 M/08 Therefore, the counsel submits that the conversion of stock in trade into investment and its gains on sale of shares should be allowed as short term capital gains and should not be taxed as business income. The counsel for the assessee relied on the following decisions in support of his contention that stock in trade can be converted into investment:
CIT v. Dhanuka & Sons [124 ITR 24 (Cal.)] L. Motilal v. CIT [41 ITR 382 (All)] ACIT v. Bright Star Investment (P) Ltd. [120 TTJ (Mumbai) 498]
9. We have heard both sides, perused the materials available on record and orders of lower authorities. The Commissioner of Income Tax (Appeals) has elaborately dealt with this issue in his order at paras 3 to 6 as under:
"3. There are two vital issues that have arisen and are to be considered at greater length. The first question that has to be decided is whether the conversion made by the appellant company of the shares held as 'stock-in-trade' into capital assets or long term investments is permissible. In order to answer this question, the complete facts are to be analysed and the intent and purpose being such conversion by the company has to be gone into. It has to be seen whether such a decision to convert shares held as the stock- in-trade into capital assets or long term investments had happened naturally in the course of the appellant's business or it had been done by various compulsions other than business interest. The specific question to be answered is that whether there had been any attempt to avoid or evade tax liability on the part of the appellant in the process of such conversion.
3.1 The other question that has to be answered is how far the appellant company's claim to capitalise certain interest amounts which it had taken into consideration as part of the cost of the shares held by it as long term investment could be considered as includible in the cost of acquisition' for the purposes of indexation while computing the long term capital gains or loss that had arisen on transfer of these shares. This question has to be decided based on the facts and the method of accounting followed by the company when it had not debited any expenditure on any borrowings in its profit and loss account relating to the acquisition of these shares.
3.2 Actually, both the issues are interlinked and the intricacies involved in settling these issues could be felt from analysing the facts prevailing in the appellant's case to be discussed in the paragraphs to follow. In order to understand the issues involved, it is 7 I.T.A. No.884/ No.884/M/ 884/M/08 M/08 necessary to give a brief account of the activities of the appellant company, the method of accounting followed by it and the nature of the entries passed and also narrate the facts and circumstances under which such a huge claim towards Long Term Capital Loss was shown for the accounting period ended 31.3.2000.
4. The company which is a subsidiary of The India Cements Ltd. was incorporated on 28.3.1998 and basically, it is an Investment company. The assessment year-wise particulars of income and expenditure as per the profit and loss account statements of the company are furnished below;
(i) There was no income shown for the first assessment year 1998-99. But, however, certain administrative expenses of `.3,78,710/- were claimed. There was no claim towards any interest expenditure for this year.
(ii) The company had shown certain business activities for the next accounting period relevant for the assessment year 1999-2000 in the form of trading in shares. There had been purchase of trade investments to the tune of `.2,89,55,899/- and sale of securities to the tune of `.85,83,106/- as per the profit and loss account for the year ended 31.3.1999. Besides, a dividend income of `.6,00,205/- had also been shown. There had been no substantial claim towards interest expenditure for this assessment year. There is only an interest debit of `.37,109/-. A net loss of `.l,14,17,257/- had been claimed for this year. This loss had been arrived at after taking into consideration a credit of `.83,97,200/- representing the value of the closing stock of 'Trade Investments'.
(iii) As far as the next accounting period ending with 31.03.2000 is concerned, which is the impugned accounting period, the profit and loss account statement shows a net loss of `.73,97,148/-. There were no purchases of Trade Investments during this period. But, however, sale of securities was shown to the extent of `.2,64,06,195/-. A sum of `.2,54,52,693/- had been debited as representing 'Loss on sale of investments'. There was no closing stock of Trade Investments in spite of the fact that a sum of `.83,97,200/- had been debited and claimed as opening stock. Further, an interest expenditure of `.4,72,350/-
had also been debited for this accounting year.
(iv) If we look at the Balance Sheet figures for the two accounting periods ending with 31.03.99 and 31.03.2000, the following facts are gathered.
(a) The Paid up Share Capital was `.3000/- only.
(b) The balances under 'Unsecured Loans' are as under:
31.03.1999 31.3.2000
`.125,50,00,000 `. 17,00,00,000
8 I.T.A. No.884/
No.884/M/
884/M/08
M/08
(c) On the Assets side of the Balance Sheet statements are shown huge investments in shares of companies (quoted as well as unquoted) classified under two categories, 'Long Term' and 'Trade Investments'. The face value as well as the cost of these shares had been given.
(d) The details of holding of shares of RCL as reflected by these statements for the two accounting periods are as under:
Quoted-long term 31.3.1999 31.03.2000 No.of shares 39,87,967 NIL (Eq.shares of face value Rs.10/- each) Cost `. 122,23,50, 116/- `.NIL No.of shares NIL 1,99,398 (Eq.shares of Face value of `. 10/- each) Cost NIL `.19,93,980/-
(e) The total of the investments shown under Schedule 2 as at the end of the two accounting periods are as under:
31-03-1999 31-03-2000
`. 136,51,38,285 `.15,29,59,229
(f) The details of holding of shares under 'Current Assets' for the two accounting periods are as under:
31-03-1999 31-03-2000
`.83,97,200 `.Nil
This is shown as representing the value of shares of Sri Vishnu Cements Ltd. which had been sold during the impugned accounting period.
(g) The details of balances under' Sundry Creditors - Current Liabilities and Provisions are as under:
31-03-1999 31-03-2000
`.l3,03,40,176 `.21,44,054
4.1 Thus, it is gathered from the data furnished as above that the appellant
company had classified the shares held by it in the same company RCL, partly as trade investments and partly as long term investments. Apart from this, the company 9 I.T.A. No.884/ No.884/M/ 884/M/08 M/08 had also transferred during the accounting period ending with 31.03.2000 the shares which it had held as stock-in-trade by treating the same as long term investments. Further, though huge balances were shown as outstanding under 'Unsecured Loans' for both the accounting periods ending with 31-03-1999 and 31-03-2000, no interest expenditure on these loan balances had been debited in the profit and loss account or had been claimed under the head, 'business' or was shown to have been actually incurred by the company.
4.2 During the financial year 1998-99, the appellant company, acting in concert with few other associates and subsidiary companies of The India Cements Ltd. is stated to have acquired the shares of Raasi Cements Ltd. The motive behind such acquisition was to take control of the cement division of Raasi Cements Ltd. by the flagship company, The India Cements Ltd. Subsequent to the acquisition of equity shares of RCL, the holding company ICL agreed to pay to the share holders of RCL the rate of `.300/- per share towards vesting of the cement division. This arrangement was approved by the Andhra Court and accordingly, the appellant company had shown sale consideration for vesting its rights over the shares of RCL it was holding at the rate of `.300/- per share. The value of the residuary company was brought down at the rate of `.0.50 per share. According to the appellant company ~ since the period of holding of the shares of RCL by it was more than one year as on the date of surrender of its holding to ICL under the scheme, it had treated the loss or gains arising out of such surrender as 'Long Term Capital Loss'. In that process, the company had also treated the shares of Sri Vishnu Cements Ltd which it was holding as stock-in-trade into long term investment and had worked out Long Term Capital Gains on the transfer of these shares. While computing the Long Term Capital Loss on surrender of the RCL shares, the company had included as part of their cost for the purposes of indexation, certain sums as interest. It has to be noted here that the company however, had not capitalised interest expenditure, if any, on borrowed funds utilised for the acquisition of the shares of Vishnu Cements Ltd; or other shares held as long term investment or as capital asset.
4.3 As brought out in sub-paragraphs 4(iii) and 4(iv) (t), the company had been holding the shares of Sri Vishnu Cements Ltd. as stock-in-trade as n 31.3.99 but the same had been sold during the impugned accounting period, i.e., year ended 31.3 .2000. What the company had done is that it had computed Long Term Capital Gains in respect of the transfer of the shares of Sri Vishnu Cements Ltd. in the computation statement filed alongwith the return for the impugned assessment year, though it had credited the sale consideration of `.2,64,06,195/- in the profit and loss account for the accounting period ended 31.3.2000 by debiting the value of these shares of `.83,97,200/- as opening stock. That is, instead of computing profits under the head 'Business' in respect of the transfer of the shares of Sri Vishnu Cements Ltd. which it had been holding as stock-in-trade, the company had computed only Long Term Capital Gains by treating these shares as 'Long Term Investments' for tax purposes. Therefore, it is necessary to probe into the question as to what was the motive behind the company in making such a shift.
10 I.T.A. No.884/No.884/M/ 884/M/08 M/08 4.3.1 As already stated in paragraph Nos. 4.2 & 1, the company had also surrendered to or made over huge quantities of shares of RCL which it had shown as Long Term Investment to the holding company, ICL during the accounting period ended 31.3.2000 in respect of which it had computed Long Term Capital Loss which it had set of against the income computed as Long Term Capital Gains in respect of the transfer of the shares of Sri Vishnu Cements Ltd. The correctness of the treatment given by the appellant company to the shares of Sri Vishnu Cements Ltd. it had transferred during the impugned accounting period has to be decided keeping in mind this fact.
4.3.2 The Long Term Capital Gains computed by the company on account of transfer of the shares of Sri Vishnu Cements Ltd. is shown as under:
Sale consideration `.2,64,06,195
Indexed cost of acquisition:
1998-99 83,97,200 x 389/351 93,06,299
-------------------
Long term capital gains 1,70,99,896
-------------------
4.3.3 The Long Term Capital Loss claimed on transfer of RCL shares is as per working given below:
Sale consideration `.119,63,90,100
Indexed cost of acquisition:
998-99 122,03,56,136 X 389/351 135,24,74,464
1999-00 14,86,658 X 389/389 14,86,658
---------------------
15,75,71,022
It has to be noted here that the sale consideration shown in the above working is in respect of 39,87,967 shares of RCL, whereas, shares to this extent were not made over to the holding company as the appellant company had retained with itself 1,99,398 shares as at 31-3-2000 as indicated in paragraph Nos. 4(iii) & 4(iv)(d) above. Further, as may be seen from the above working, over and above the interest capitalised during the financial year 1998-99, the company had also included in the cost a further sum of `.14,86,658/- as interest for the purposes of indexation only.
5. As may be seen from the impugned assessment order, the Assessing Officer had re-computed the· income or loss under both the heads 'Business' and 'Capital Gains' by making the following adjustments.
11 I.T.A. No.884/No.884/M/ 884/M/08 M/08 5.1 Not accepting the treatment given by the company to the shares of Sri Vishnu Cements Ltd. as Long Term Investment, the Assessing Officer had computed a business profit of `.l,79,24,590/- from the sale consideration of `.2,64,06,195/- received on transfer of these shares and after giving the benefit of set off of the business loss of `.l,20,19,762/- carried forward from the earlier assessment year 1999-00, the net income was determined at `.59,04,828/-.
5.2 Further, in the impugned order, the Long Term Capital Loss computed in respect of surrender of RCL shares was reduced by making the following adjustments.
(i) Since the Balance Sheet of the appellant company showed 1,99,398 equity shares of RCL as being held by the company as on 31.3.2000, the Assessing Officer was of the view that the number of equity shares of RCL sold by the appellant company during this accounting period must be reduced by this figure and accordingly, he had excluded from the sale consideration as well as the cost of acquisition, the amounts relating to these shares. That is, according to the Assessing Officer, the number of shares of RCL that vested with ICL were only 37,88,569 as on 31-03-2000 and, therefore, the sale consideration and the cost of acquisition to be adopted must be relating to these shares only being `.119,63,90,100 and `.110,16,57,170 respectively. This was so because of the finding given by the Andhra Pradesh High Court that the shareholders of RCL would continue to retain a stake in the residual business of RCL @ `.0.50 per equity share, which aspect the appellant company had not taken into account at the time of filing the return for the assessment year 2000-01.
(ii) The Assessing Officer had not allowed capitalisation of a sum of `.11,83,32,461/- as representing interest for the purposes of indexation of the cost of acquisition of these shares.
(iii) Apart from the above, the Assessing Officer had refused to allow the appellant's claim to add to the cost of these shares a further sum of `.l4,86,858/- as representing interest for the impugned accounting period.
A. Treatment of stock-in-trade as long-term investment -
Assessment of business income: `.59,04,828/-
6. As already stated in paragraph No. 4.3.2 above, the appellant company had computed Long Term Capital Gains of `.l,70,99,796/- in respect of the transfer of the equity shares which was being held as stock-in-trade, that was converted into a Long Term Investment. The Assessing Officer had not permitted the conversion made by the appellant company in respect of these shares. He had elaborately discussed the issue and had adduced sufficient reasons for denying the appellant's claim in the impugned order. Further, as seen from para No.28 in page No.10 of the impugned order, the 12 I.T.A. No.884/ No.884/M/ 884/M/08 M/08 Assessing Officer had computed a net profit of `.l,79,29,590/- in respect of the sale under the head, 'business' against which business loss brought forward from the earlier asst year 1999-00 was set-off and the net business income that was chargeable to tax was arrived at `.59,04,828/-. He had purely gone on the basis of the facts available on record. As brought out by the Assessing Officer in the impugned order, the equity shares of Sri Vishnu Cements Ltd. was taken into consideration in the closing stock as on 31.3.1999 and its value of `.83,97,200 was shown as opening stock in the profit and loss account statement for the accounting period ended 31.3.2000. But, for income tax purposes, the appellant company had computed income by way of Long Term Capital Gains on account of transfer of these shares mainly because there had been a Long Term Capital Loss of `.l5,75,71,022/- for the appellant company on accounting of surrendering to the holding company The India Cements Ltd, of the shares of RCL which were shown as investment. In order to get the benefit of set off of this loss, atleast partially, against the profits on transfer of the SVCL shares, the appellant company had thought of giving a different treatment to the shares of Sri Vishnu Cements Ltd. which it was holding as stock-in-trade. At this juncture, it has to be pointed out that the appellant company had raised an issue regarding the recomputation of the Long Term Capital Loss claimed which is being dealt with separately in this order.
6.1 In the Grounds of Appeal filed, while objecting to the Assessing Officer's action of denying such a benefit to the company by disregarding the method adopted, the appellant has contended that the law does not prohibit an assessee from converting stock-in-trade into a capital asset. Commenting on the Assessing Officer's remark made in the impugned assessment order that such conversion of stock-in- trade to capital asset is not envisaged under the Act, it was submitted that it is for the management of the appellant company to decide and change the status of holding appropriately after making periodical reviews and that the strategy to be adopted by the company is to see whether a particular investment should be treated as short term or long term and in that process the appellant had converted the stock-in-trade as long term investment for certain strategic reasons that were , happening in the investee company, Shri Vishnu Cements Ltd. Thus, it was contended that there was no violation of any provision of law or legal principles. But, however, what were the reasons which forced the appellant company for the conversion of stock-in-trade into a Capital Asset were not spelt out in concrete terms.
6.2 In the written submission filed also, the appellant's representative had not spelt out in concrete terms or made out a case as to what was the commercial expediency which made the appellant company to convert the shares held as stock-in- trade to a capital asset or an investment.
6.3 In the absence of any concrete evidence in support of the appellant's stand, one has to go by the conduct of the business and other facts available on record. As already brought out in paragraph No.4 (ii), the appellant company which was incorporated only in the year 1998 as an investment company had been showing 13 I.T.A. No.884/ No.884/M/ 884/M/08 M/08 activities of trading in shares for and from the financial year J 998~_99 and during the accounting year ended, 31.3 .1999 it had made purchases to the tune of `.2,89,59,899/- and had carried over the stock of trade investments valued at `.83,97,200/- to the succeeding accounting period. And suddenly, it had chosen to treat the sale of these Trade Investments as 'Capital Assets' or 'Long Term Investment'. It is seen from the details of investments as reflected by the Balance Sheet statements that besides these Trade Investments, the company had also acquired equity shares of ICL Sugars Ltd, Visaka Cement Industry Ltd and Raasi Cement Ltd. during the accounting period ended 31.3.1999 and had held them as investments. So, when the appellant company itself had given different treatment to different companies' shares, it shows that there had been a conscious decision taken by application of mind when a particular company's shares were treated as stock-in- trade, while others were treated as investment shares. When a shift is made in that stand, the onus lies on the company to show valid reasons or the commercial expediency that forced it to make such a shift. When there are no such material facts as brought out by the appellant company, the only inference that could be drawn is that the company had resorted to accounting for gains on the sale of the shares of Sri Vishnu Cements Ltd as Long Term Capital Gains so that it would get the benefit of setting off of the loss - Long Term Capital Loss arrived at on the transfer of the shares of RCL to the holding company ICL, and thereby it could escape from the burden of the tax liability which it would have had to incur otherwise on the business profit derived from the transfer of these shares. This is further evidenced from the fact that the net loss for the impugned accounting period was only `.73,97,148/- as per the profit and loss account, whereas, under the changed method the losses computed were in the order of `.14,04,71,126/- as Capital Loss (Net loss after set off) and `.5,55,955/- as 'Business Loss' carried forward alongwith the business loss of `.l,20,96,762/- pertaining to assessment year 1999-00 to the next assessment year. So, the changed method of accounting of income by the appellant company cannot be accepted as correct.
6.3.1 There is yet another point which claims significance. The IT Act permits the conversion of a capital asset into stock-in-trade and when there is transfer, there is liability to capital gains tax. Whereas, it is the opposite act in the case of the present appellant. When such an act on the part of the appellant results in huge Revenue loss the change in the method of accounting is certainly not permissible. The true profits of a particular accounting period cannot be ascertained correctly.
6.3.2 Actually, the Long Term Capital Loss of `.15,75,71,022/- shown by the appellant company does not represent an actual cash loss but had arisen on account of passing certain accommodation entries in the books of the appellant company in the process of acquisition of shares of RCL by the holding company in order to gain controlling interest over the cement manufacturing unit of RCL. On going through all the particulars available in the ITMR, it is revealed that the appellant company is not benefited in any manner whatsoever, by the entire exercise of acquisition of shares of RCL, because a reading of some of the clauses in the Letter of Offer issued by Raasi 14 I.T.A. No.884/ No.884/M/ 884/M/08 M/08 Cements Ltd. makes it clear that there is no proposal to allot any part of the shares of RCL to the appellant company. In the 'Letter of Offer' issued by Raasi Cements Ltd. explaining the procedure of acceptance in respect of the offer, it was only three companies that had been defined as "acting in concert" with the company, The India Cements Ltd. The three companies mentioned specifically as "acting concert" in this Letter of Offer were ICL Financial Services Ltd., ICL Securities Ltd., and Trishul Investments Pvt. Ltd. It is only these three companies which had been defined as "Acquirers" also in the 'Letter of Offer'. Though a reference had been made to Sowdambika Finance and Investments Pvt. Ltd., and also another company Sivasundar Finance and Investments Pvt. Ltd. and they were included as "persons acting in concert", it had been only stated that the Acquirers may acquire further shares apart from the shares they were already holding or acquired in the names of these two companies. At this point of time when the Letter of Offer was issued, the "three Acquirers" had already been acquiring substantial quantity of RCL shares and the total holding was 93,71,716 shares representing 57.45% of the Paid up Equity Capital of Raasi Cements Ltd. Further, it is seen that as per this Letter of Offer, the proposed apportionment of the total holding of the Acquirers were also defined and the total holding was 1,26,80,316 shares.
6.3.2.1 There are certain clauses governing the financial arrangements to be made for acquisition of the shares by the "Acquirers". It was stated in clause (viii) that the total finances required for full acceptance of the offer would be `.9925.8 1akhs and that the three Acquirer companies had made firm arrangements to meet the funding requirements for the offer and that such arrangements had been made from domestic sources only. In this clause also, the name of the appellant company does not feature anywhere. It is further stated in this Letter of Offer that the funding from The India Cements Ltd. to the Acquirers were to be made by way of sale of ship and Bridge Loan committed by Bank of America against the proposed rights issue. There is also mention of direct loans to the "Acquirers" from Infrastructure Leasing and Financial Services Ltd., and Housing Development Finance Corporation Ltd.
6.4 So, on going through all these clauses, it is seen that the only three companies that had been acting in concert with The India Cements Ltd. in the whole deal of acquiring the shares of RCL for taking over the controlling interest of the cement division of RCL were ICL Financial Services Ltd., ICL Securities Ltd., and Trishul Investments Pvt. Ltd. and the funds for acquiring the shares were also to be mobilised by these three companies only. And so, the appellant company does not appear to have played any role in concrete fiscal terms whatsoever in any of the arrangements described as above. Therefore, it is clear that the appellant company had not entered into the venture of acquiring the shares of RCL on its own volition or for the purpose of holding the same as investments for its own benefit, but had acted merely as a name lender or as a conduit pipe for the flagship company, The India Cements Ltd. And, further, the 'Loss on Sale of Investments' of `.2,54,52,693/- (Long Term Capital Loss of `.15,75,71,022/-) as debited in the profit and loss account of the impugned accounting period ended 31.03.2000 is not annual cash loss that had been any as 15 I.T.A. No.884/ No.884/M/ 884/M/08 M/08 claimed. But, in spite of this fact, it had attempted to claim setoff of this loss against the Long Term Capital Gains computed by treating the shares of SVCL as Long Term Investments."
10. The counsel for the assessee contended that shares of Shri Vishnu Cements Ltd. were acquired only as an investment and never shown as stock in trade appears to be not correct as the assessee itself stated in the statement of facts filed before the Commissioner of Income Tax (Appeals) that the shares were shown as stock in trade in the immediately preceding year and they were converted into investment on the first day of the current assessment year. The assessee has not brought out any good reasons, which forced it to make such conversion of stock in trade into capital asset and reasons for such conversion were not spelt out except stating that it is a decision taken by the management to convert the stock in trade into capital asset at the beginning of the assessment year. It is an important decision to convert the stock in trade of the previous year into capital asset of the current assessment year and such an important decision of the management is not supported by the Board Resolution. We also did not find any good reason of conversion of stock in trade into capital asset during this year as the assessee itself had taken a cautious decision to treat them as stock in trade in the immediately preceding assessment year and reversing such decision to treat them as capital asset in the immediately subsequent year i.e. current assessment year.
16 I.T.A. No.884/No.884/M/ 884/M/08 M/08
11. We find from the record that the assessee has not given any reasons as to what was the commercial expediency, which made the assessee company to convert the shares held as stock in trade to capital asset or investment. The counsel submitted that because of the legal tangle, the assessee could not show the acquisition of shares as investment during the preceding assessment year and in subsequent year because of the decision of the management, it had shown as an investment at the beginning of the assessment year and the gains on sale of shares were shown as capital gains and offered to tax. He submitted that the intension always was to treat these shares as an investment, but not as stock in trade and only because of the legal tangle it had to show as stock in trade of the previous year. We are not able to agree with the contention of the assessee that it is a normal routine business decision taken by the management to convert the stock in trade into capital asset because, the assessee company was incorporated in the year 1998 as an investment company and engaged in activities of trading in shares from the financial year 1998-99. During the accounting year ending 31.03.1999, it had made purchases of shares to the tune of `.2,89,59,899/- and it had carried over the stock in trade of shares of `.83,97,200/- to the succeeding accounting year. The assessee acquired equity shares of ICL Sugars Ltd., Visaka Cement Industry Ltd. and Rasi Cement Ltd.
during the accounting period ended 31.03.1999 and held them as investment.
Therefore, when the assessee company itself had given different treatment to different shares of the companies acquired, it shows that the management had 17 I.T.A. No.884/ No.884/M/ 884/M/08 M/08 taken a cautious decision to treat the shares acquired of a particular company as stock in trade or investment. When the assessee company is shifting its stand to convert the stock in trade to investment, it should show valid reasons or the commercial expediency that forced it to make such a shift in its stand. Here, the assessee has not given any valid reasons in shifting its stand to convert the stock in trade to investment except stating that it is a routine management decision to convert stock in trade to investment, which in our view is not a valid reason for conversion of stock in trade to investment.
12. The case law relied on by the assessee are also of no help as none of the decisions are directly on the point and are distinguishable on facts. In one of these decision, the issue of whether the assessee is justified in converting stock in trade into investment in the immediately subsequent assessment year in which the stock in trade was purchased, without valid reasons was considered. Hence, the ratio of these decisions is not applicable to the present assessee's case.
13. Thus, in the totality of the facts and circumstances of the case and on going through the order of the Commissioner of Income Tax (Appeals), the case law relied on by the assessee's counsel and the elaborate reasoning of the Commissioner of Income Tax (Appeals) in coming to the conclusion that the gains on sale of shares are to be assessed as business income, we see no good reason to interfere with the order of the Commissioner of Income Tax (Appeals) in upholding the action of the Assessing Officer in assessing the gains on sale of 18 I.T.A. No.884/ No.884/M/ 884/M/08 M/08 shares as business income. We dismiss the grounds raised by the assessee on this issue.
14. The next issue in the grounds of appeal is that the Commissioner of Income Tax (Appeals) erred in confirming the action of the Assessing Officer in disallowing the capitalization of interest incurred on borrowings towards the cost of acquisition of shares of Rasi Cements Ltd. and for the purpose of indexation.
15. At the time of hearing, it was submitted that this issue is squarely covered in favour of the assessee by the order of this Tribunal in assessee's own case for the assessment year 2001-02 in I.T.A. No. 2436/M/2006 dated 13.05.2008, a copy of the order is placed on record.
16. We have gone through the order of this Tribunal, wherein it was held as under:
"Ground No. 22.1. The learned CIT(A) erred in directing the AO to allow capitalization of interest amounting to `.2,49,09,266 to the cost of share investments.
2.2. The learned CIT(A) failed to appreciate that the decisions relied upon by him, viz.,
(i) CIT v. Rajagopala Rao (252 ITR 459)(Mad)
(ii) CIT v. Maithreyi Pai (152 ITR 247) (Kar)
(iii) AddI.CIT v. K.S.Gupta (1191TR 372 (A.P.) are distinguishable on the facts of this case. The learned CIT(A) failed to note that by not discharging the interest liability, the assessee did not get an improper or defective title of the capital investment namely the shares, in this case. Further, it 19 I.T.A. No.884/ No.884/M/ 884/M/08 M/08 is also not the case of the assessee that by incurring interest expenditure there was a creation of a capital asset.
2.3 Having regard to the following decisions, viz.
(i) CIT v. Chemical Holdings Ltd. (249 ITR 540)(Mad)
(ii) CIT v. Rajendra Prasad Moody (115 ITR 519) (SC) the learned CIT(A) ought to have upheld the action of the assessing officer.
2.4. The learned CIT(A) ought to have seen that 'controlling interest' is not a capital asset vide the decision in Maharani Ushadevi v. CIT (131 ITR 445) (MP).
4. In this ground, it has been contended on behalf of the department, that the CIT(A) erred in directing the AO to allow 'capitalization' of interest amounting to `.2,49,09,266, to the cost of share investments. We find that this issue is covered in favour of the assessee by the decision of the Madras High Court in the case of CIT vs. Trishul Investments Ltd. (2008) 215 CTR (Mad) 96. In this case, the Court held as under.
"The Tribunal correctly held that the interest paid for acquisition of shares would partake character of cost of share and therefore the same was rightly capitalized along with the cost of acquisition of shares. There is no denial regarding the borrowed money for the acquisition of shares by the assessee. The Tribunal correctly held that the interest payable thereon should be added to the cost of acquisition of shares. The reasons given by the Tribunal are based on valid materials and evidence. Under these circumstances, there is no error or legal infirmity in the order of the Tribunal so as to warrant interference. Hence no substantial question of law arises for consideration".
5. The facts of the case in the present appeal, admittedly, are identical and therefore we follow the precedent and reject this ground."
17. Respectfully following the order of Coordinate Bench of this Tribunal in assessee's own case in I.T.A. No. 2436/Mds/2006 dated 13.05.2008, we allow the grounds of appeal of the assessee on this issue.
20 I.T.A. No.884/No.884/M/ 884/M/08 M/08
18. The next issue in the grounds of appeal raised is that the Commissioner of Income Tax (Appeals) erred in holding that interest expenditure had been incurred directly on the acquisition of shares, which had yielded dividend income exempt from tax and hence disallowable under section 14A of the Act.
19. The counsel for the assessee submitted that this issue was also considered by this Tribunal in its order in I.T.A. No. 2436/Mds/2006 for the assessment year 2001-02 dated 13.05.2008. This Tribunal has held as under:
"Ground No. 33.1. The learned CIT(A) erred in holding that 2% of dividend income of Rs.3,01,253, i.e. `.6,024 is the reasonable expenditure attributable to the earning of dividend income and accordingly, `.6,024 is disallowable u/s 14A of the Income Tax Act.
3.2. The learned CIT(A) ought to have seen that when the assessing officer has held that the entire expenditure is revenue in character, there is no need for estimating any percentage of income vis-a-vis disallowance and that the expenditure was not allowed only because of the provisions of section 14A read with section 10(33) of the I.T. Act.
6. In this ground, it has been contended on behalf of the department that the CIT(A) erred in holding that 2% of the dividend income of `.3,01,523 i.e. `.6,024 was the reasonable expenditure attributable to the earning of dividend income u/s 14A of the Act.
7. We have considered the rival submissions in the light of material on record and the precedent cited. It is seen that the CIT(A) has restricted the disallowance u/s 14A to 2% of the dividend income for the reasons given in paragraph 4.2.1. of his order as under.
"4.2.1. ------- The appellant's claim that no part of the expenditure was incurred for earning dividend income is also not acceptable. A part of the total claim of revenue expenditure must have been expended by the appellant in the course of earning of dividend. The Hon'ble ITAT, Chennai Bench vide its order dated 30.09.2005 in ITA Nos. 25(Mds)/1993 & 2020(Mds)/2000 has recently held in the case of M/s.21 I.T.A. No.884/
No.884/M/ 884/M/08 M/08 Sundaram Finance ltd. that 2% of dividend income can reasonably be held to be attributable to the earning of dividend. By respectfully following the said judgment of the Hon'ble ITAT Chennai Bench, I hold that 2% of the dividend income of `.3,0l,253, i.e., 6,024 is the reasonable expenditure attributable to the earning of dividend income by the appellant company and accordingly the sum of `.6,024 is directed to be disallowed u/s 14A of the IT Act. The balance expenditure, i.e. `.36,94,179 is directed to be allowed as the revenue expense, Thus the ground of appeal of the appellant in this regard succeeds partially.
8. We find that the applicability of the provisions of section 14A, introduced with retrospective effect from 01.04.1962, was discussed in great detail by the ITAT Delhi in the case of ACIT v Eicher Ltd. (2006) 101 TTJ (Del) 369. The Tribunal referred to and discussed judgments of various high Courts in the following cases.
i) CIT v. National and Grindlays Bank Ltd. [1993] 202 ITR 559 (Cal.)
ii) CIT v. United Collieries Ltd. [1993]203 ITR 857 (Cal.)
iii) CIT v. Enemour Investments ltd. [1994] 72 Taxman 370 (Cal.)
iv) State Bank of Indore v. CIT (2005) 193 CTR (MP) 62
v) Maruli Udyog Ltd. v. DCIT (2005) 92 ITD 119 (Delhi)
9. The legal position that emerges from the order of the Tribunal in the case of Eicher Ltd. (supra) is that section 14A confers powers / authority upon the AO to disallow such expenditure as satisfies the requirements of the section, that the language employed in section 14A is very wide to include every expenditure irrespective of the head under which it is claimed. that the section does not relieve the AO of the burden of proving, on the basis of evidence or material on record, that the assessee had in fact incurred expenditure which had relation to the exempted income, that the onus is on the AO to prove that the expenditure incurred by the assessee related to the exempted income, that the AO cannot estimate and disallow any notional, or ad hoc expenditure to reduce the exempted income, that only the actual expenditure incurred by the assessee in earning the exempted income can be disallowed by the AO u/s 14A.
10. In the present case there is no evidence or material on record to support the disallowance made by the AO. Therefore, the order of the CIT(A) restricting the disallowance u/s 14A to 2%, on estimate basis, could not be found fault with. The ground no. 3 is accordingly rejected."
20. Respectfully following the order of Coordinate Bench of this Tribunal in assessee's own case for the assessment year 2001-02 in I.T.A. No. 22 I.T.A. No.884/ No.884/M/ 884/M/08 M/08 2436/Mds/2006 dated 13.05.2008, we direct the Assessing Officer to restrict the disallowance under section 14A to 2% of the dividend income.
19. In the result, the appeal of the assessee is partly allowed.
Order pronounced on Friday, the 6th of July, 2012 at Chennai.
Sd/- Sd/- (N.S. SAINI) (CHALLA NAGENDRA PRASAD) ACCOUNTANT MEMBER JUDICIAL MEMBER Chennai, Dated, the 06.07.2012 Vm/- To: The assessee//A.O./CIT(A)/CIT/D.R.