Income Tax Appellate Tribunal - Mumbai
Assistant Commissioner Of Income Tax vs Premier Consolidated Capital Trust (I) ... on 11 March, 2004
Equivalent citations: (2004)83TTJ(MUM)843
ORDER
R.V. Easwar, J.M.
1. The appeal for the asst. yr. 1989-90 is by the Department and that for the asst. yr. 1991-92 is by the assessee. Since they were heard together and since a common issue is also involved, they are disposed of by a single order.
2. The assessee is a company whose main object is the carrying on of business in investments and financial management activities such as hire-purchase finance equipment leasing, portfolio management, inter-corporate deposits, bill discounting and Government securities and units of the Unit Trust of India.
3. In the accounting year relevant for the asst. yr. 1989-90, the assessee incurred a loss of Rs. 8,44,156 in the purchase and sale of tax-free bonds. It also received interest of Rs. 6,96,480 on tax-free public sector bonds, which was claimed to be exempt under Section 10 of the IT Act. While completing the assessment, the AO noted that the assessee has claimed exemption in respect of the interest received whereas it has kept the loss on the sale of tax-free bonds merged into the sale and purchase transactions of shares and securities. This treatment given by the assessee was not proper, according to the AO. He noted that while buying and selling the tax-free bonds, the important factor to be noticed was the interest accrued on them and the price of the bonds depended on the interest accrued thereon. He, therefore, held that the purchase and sale transactions in the bonds and the assessee's right to receive the interest thereon are not mutually exclusive, but were merged into each other. He, therefore, held that the interest in respect of which exemption was claimed under Section 10 can only be the net interest. Accordingly, he held that there was only a negative earning from the tax-free bonds (Rs. 6,96,460 - Rs. 8,44,156) and hence, the assessee will not be eligible for any exemption under Section 10. In this view of the matter, the loss on sale of tax-free bonds was added back in the assessment. On appeal, the assessee contended that the business loss of Rs. 8,44,156 cannot be ignored. It was pointed out, relying on the judgment of the Supreme Court in Vijaya Bank Ltd. v. Addl. CIT (1991) 187 ITR 541 (SC), that the entire consideration paid for the purchase of bonds, including the interest accrued thereon upto the date of purchase, shall be considered as capital outlay and no part thereon can be set off against the interest received. The argument was accepted by the CIT(A) who held that the interest received cannot be attributed to the cost of the bonds and adjusted against the interest paid and held that the interest received was exempt under Section 10. In this view, he held that the AO was not justified in disallowing the loss of Rs. 8,44,156.
4. The Revenue is in appeal. The learned standing counsel for the Revenue submitted that the assessee was systematically attempting to reduce its taxable income by adopting the device of buying and selling tax-free bonds and claiming the loss on sale of bonds as business loss and at the same time enjoying tax-free interest. He submitted that this was opposed to the ruling of the Supreme Court in the case of McDowell & Co. Ltd. v. CTO (1985) 154 ITR 148 (SC). He further submitted, relying on the judgment of the Bombay High Court in American Express International Ltd. v. CIT (2002) 258 ITR 601 (Bom), that the matching principle must be adopted, which requires that the interest received on the tax-free bonds should be adjusted against the interest paid and if that is done, there will be no scope for claiming any loss. On this basis, it was contended that the decision of the CIT(A) was erroneous.
5. On the other hand, the learned counsel for the assessee submitted that the assessee's business itself is in trading of securities and it was a business decision to invest in tax-free securities, that the assessee is a registered owner of the bonds, that there was no dispute about the rates of purchase and sale of the bonds, that the purchase and sale of the bonds was a systematic activity which amounted to the assessee's business, that there was no illegality or tax evasion in the transaction, that it was permitted by law and, therefore, the CIT(A) was right in his decision. Without prejudice, it is contended that the genuineness of the loss was not doubted even by the AO and it was for the first time that it is being raised before the Tribunal, by the learned standing counsel which should not be permitted. With regard to the ruling in McDowell (supra), it was pointed out that in the later decision of the Supreme Court in Union of India v. Azadi Bachao Andolan (2003) 263 ITR 706 (SC), the Supreme Court has approved of the judgment of the Gujarat High Court in Banyan & Berry v. CIT (1996) 222 ITR 831 (Guj), where it was held that a citizen is free to carry on his business in any manner provided the same is within the four corners of the law. It was also submitted that the ruling in McDowell (supra) has been considerably watered down in the later judgment of the Supreme Court. As regards the judgment of the Bombay High Court in American Express International (supra), it was contended that the judgment was distinguishable on facts. It was pointed out that, in that judgment the assessee was consistently adjusting the broken period interest, both received and paid, against each other and the Department had also accepted the adjustment as correct for a long period of time. In the present case, the controversy is whether the loss in the sale of bonds could be disallowed. Further, it was submitted that the interest in the present case is tax-free which was not the case in the cited judgment. It was thus pointed out that this decision is inapplicable to the facts of the present case.
6. In the asst. yr. 1991-92, the AO on the same lines has disallowed the business loss of Rs. 5,75,994 on the sale of 10 per cent tax-free bonds of MTNL. The disallowance was confirmed by the CIT(A), who took a view different from the view taken by the CIT(A) for the asst. yr. 1989-90, purporting to follow the order of the CIT(A) for the asst. yr. 1990-91. He held that the AO was right in holding that the loss pertaining to exempted income is not deductible against the chargeable income. He further held that the assessee purposely and in a planned manner entered into a premeditated transaction of buying and selling bonds yielding exempted income with the full awareness about the guaranteed fall in the market value of the bonds and the payment of tax-free interest. In this view, he upheld the disallowance.
7. Thus, in the asst. yr. 1989-1990, the Revenue is in appeal, whereas in the asst. yr. 1991-92 the assessee is in appeal. The facts relating to the controversy as well as the rival arguments are common for both years. On a careful consideration of the same, we are of the view that the AO was not justified in disallowing the loss. There is no dispute that the bonds' purchased and sold by the assessee were tax-free bonds, the interest on which was free from income-tax. In Vijaya Bank v. CIT (supra), it was held by the Supreme Court that where the assessee purchases securities at a price determined with reference to their actual value as well as the interest accrued thereon till the date of purchase, the entire price paid for them would be in the nature of a capital outlay and no part of it can be set off as expenditure against income accruing on those securities. When the securities held by the assessee yielded interest, that interest would not attract tax because the bonds are tax-free bonds. For example, if the bond of the face value of Rs. 100 is to be purchased by the assessee, the cost of purchase would be Rs. 100 + the interest of, say Rs. 5 accrued thereon till the date of purchase. Thus, the total cost would be Rs. 105. The assessee may hold this bond for some time and may earn interest of, say Rs. 6 till the coupon date, This interest will be tax-free because of the provisions of the IT Act. Supposing the bond is sold after the coupon date at Rs. 98, the loss would be Rs. 7 (105 - 98). This loss is what is claimed by the assessee in the computation of the business income which included dealings in shares and securities. What the AO has done is to disallow the loss of Rs. 7 for the reasons already mentioned. But when the genuineness of the sale or the price received by the assessee is not in question, we do not see how the loss can be disallowed. There is no evidence brought on record in the assessment order for both the assessment years to the effect that either the sale or the sales price is not genuine. The fact that the interest received is free of income-tax is a position recognised by the IT Act itself. The assessee has merely made use of the provisions of the law. Use of the provisions of the law cannot be considered to be abuse of law. Even if it is assumed that this is a premeditated transaction, there is nothing to impeach the genuineness of the transaction. Mere tax planning, without any motive to evade taxes through dubious or colourable devices, is not frowned upon even by the McDowell principle.
8. As regards the judgment in American Express International (supra), as rightly pointed out on behalf of the assessee, that was a case where the interest received was assessable to tax and the question was whether the interest received and paid, both for the broken period, could be adjusted on the basis of the matching principle. Distinguishing Vijaya Bank's case, it was held that since both the assessee and the Department had accepted the matching principle for a number of years, there was no justification for any departure. The facts of the present case are not on par with the facts in this case. The real objection of the IT authorities in the present case appears to be that the assessee is getting tax-free interest. But at the same time is also claiming loss on the sale of the tax-free bonds. But, as we have already noticed, the claim is in accordance with the judgment of the Supreme Court in Vijaya Bank's case, where the interest paid upto the date of purchase was considered to be part of the cost. Naturally, when the bond is sold, after the coupon date and after the interest is received, the price would have fallen and there is bound to be a loss. Howsoever strong one may feel, this position cannot be wished away and has to be accepted and full effect has to be given in the assessment. Thus, we are of the view that assessee is entitled to the allowance of the loss of Rs. 8,44,156 for the asst. yr. 1989-90 and Rs. 5,75,994 for the asst. yr. 1991-92. Accordingly, the first ground in the appeal filed by the Department for the asst, yr. 1989-90 is dismissed and the first ground filed by the assessee in the appeal for the asst. yr. 1991-92 is allowed.
9. In the appeal for the asst, yr. 1989-90, the Revenue has taken another ground to the effect that the CIT(A) erred in deleting the disallowance of the interest and administrative expenses amounting to Rs. 3,88,162 and Rs. 5,675 respectively, related to the transactions in tax-free bonds. The AO noted that the assessee had incurred financial expenses (interest paid to banks and companies) and administrative expenses, The AO took the view that a part of such expenses has to be apportioned towards the tax-free income arising from the bonds and accordingly, called for details from the assessee. He noted that the paid-up capital of Rs. 5 lakhs and the reserves and surplus of Rs. 17.57 lakhs were not sufficient for making the investment in tax-free bonds and accordingly held that the business funds ought to have been utilised by the assessee for the corpus. Accordingly, he attributed a part of the financial and administrative expenses for the investment in tax-free bonds. He calculated such part at Rs. 3,88,162 and Rs. 5,675 being financial expenses and administrative expenses, respectively. On appeal, the assessee furnished details to show that the purchases of public sector bonds were directly financed by M/s Bimal S. Gandhi, M/s Hiten P. Dalai and M/s Industrial Credit & Development Syndicate Ltd. The CIT(A) held that the money invested in the tax-free bonds came out of direct financing from certain parties. He also held on the basis of the, judgment of the Supreme Court in the case of CIT v. Indian Bank (1965) 56 ITR 77 (SC), that even if the amount is borrowed and interest is paid thereon on the purchase of tax-free securities, the interest would be an allowable deduction. In this view of the matter, he disapproved of the action of the AO in apportioning a part of the financial and administrative expenses for the earning of the tax-free interest. The Revenue is in appeal to contend that Section 14A is attracted to the present case. It was pointed out that the CIT(A) was not justified in accepting the assessee's unsubstantiated submission that the purchase of tax-free bonds was directly financed by certain other parties. In this connection, it is submitted that there was no movement of cash, but only book entries were made to regularise these transactions. On the other hand, the learned counsel for the assessee strongly supported the finding of the CIT(A).
10. We have carefully considered the issue Section 14A which has been introduced by the Finance Act, 2001, w.e.f. 1st April. 1962, says that for the purpose of computing the total income under Chapter IV, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act, There is no dispute that the income from bonds was not chargeable to income-tax and was exempt under Section 10. The expenditure incurred in relation to such income is, therefore, to be disallowed. This is what the AO has done. He has attributed a part of the financial and administrative expenses as expenditure incurred in relation to the tax-free income and has disallowed the same. In our view, this action of the AO is authorised by the section. Before us, though the learned counsel for the assessee contended that the amounts borrowed for interest were not used for the purchase of tax-free bonds, but was unable to furnish any details to show how the loans taken from M/s Bimal Gandhi. Hiten P. Dalal and Industrial Credit & Development Syndicate Ltd. were repaid. Though funds might have been provided by these persons without Interest for the purpose of acquiring the tax-free bonds, in the absence of any details to show that the assessee did not use interest-bearing funds to repay the above loans, it must be taken that the AO was right in his view. Accordingly, we reverse the decision of the CIT(A) and restore the disallowance made by the AO. The ground is allowed.
11. In the appeal by the assessee for the asst yr. 1991-92, the only other ground is that the CIT(A) erred in treating the loss of Rs. 2,32,505 as speculation loss. This ground was not pressed at the time of hearing and is, therefore, dismissed.
In the result, both the appeals are partly allowed.