Income Tax Appellate Tribunal - Ahmedabad
Devraj R.Agarwal,, Ahmedabad vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL AT
AHMEDABAD
AHMEDABAD "A"BENCH
Before Shri G.D. Agarwal, Vice-President (AZ) and
Shri Mahavir Singh, Judicial Member
ITA No.1484/ Ahd/2005
[Asstt.Year 2001-02]
Asstt. Commissioner of Incom e-tax -vs- Shri Devraj R Agarwal
Circle-10, 1 s t Floor, Nara yan P3 & 4, City Corner
Cham bers, Ashram Road, Ahmedabad Nr. Swastik Char Rasta,
C.G. Road, Ahm edabad
P AN No. ABHP A2467M
(Appellant) (Respondent)
Revenue by : Shri R.K.Dhanesta, DR
Assessee by: Shri M.K. Patel, AR
ORDER
PER Mahavir Singh, Judicial Member:-
This appeal by Revenue is arising out of order of Commissioner of Income-tax (Appeals)-XVI, Ahmedabad in appeal No. CIT(A)-XVI/circle-10/71/04-05 dated 18- 02-2005. The assessment was framed by ACIT, Circle-10, Ahmedabad u/s.143(3) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act') vide his order dated 31-03-2004 for the assessment year 2001-02.
2. The first issue in this appeal of Revenue is against the order of CIT(A) in directing the Assessing Officer to re-compute the deduction u/s.80HHC without clubbing the turnover of all the proprietary concerns. For this, Revenue has raised the following ground No.1:-
"1. The learned CIT(A) has erred in law and on facts in directing to compute the deduction u/s.80HHC without clubbing of the turnover of all the proprietary ITA No.1484/Ahd/2005 A.Y. 2001-02 ACIT, Cir-10, A'bd v. Sh. Devraj R Agarwal Page 2 concerns of the assessee for the purpose of calculating the deduction u/s.80HHC."
3. At the outset, Ld. Counsel for the assessee, Shri M.K.Patel stated that this issue has been considered by Tribunal in assessee's own case in ITA No.918/Ahd/ 2005 dated 30-04-2007 for assessment year 2000-01 the immediate preceding year, wherein Tribunal has allowed the issue in favour of Revenue and against the assessee in para-4 & 5 as under:-
"4. Therefore, the Special Bench decision of the Tribunal in the case of International Research Laboratories Ltd. Vs. ACIT [2123 ITR 1 (AT)] squarely apply. In that case, it is observed that "Section 80HHC(3) of the Income-tax Act, 1961, was intended to provide incentives to promote exports to earn foreign exchange for the country. The incentive provided is exemption of the profits relatable to exports. Apportionment of profits on the basis of turnover is an accepted method of arriving at the profit. In the Excess Profits Tax Act this was the method adopted and also in the Business Profits Tax Act. There is no ambiguity in the language of section 80HHC(3) (as sit existed in the assessment year 1990-91) as to call in aid any particular rule of interpretation. There is nothing in the language to suggest that it is limited total export turnover. The "business" includes not only the turnover of exports but also the domestic turnover. All the undertakings put together constitute one single business coming under one single head "profit and gains of business or profession." This test for the purpose of sub-section (3) of section 80HHC is whether the assessee is carrying on business of exclusive export or exports and domestic business also. If it is the former, clause(a) of section 80HHC(3) would apply and if it is the letter, clause (b) would apply. If clause (a) applies, the entire profits are to be computed in the manner in which the profits under the head "profit and gains of business or professions" are to be computed and the whole of them are entitled to deduction. But if clause (b) of sub-section (3) of section 80HHC applies, the profits of the entire business have first to be ascertained and then apportioned in the proportion the export turnover bears to the total turnover to arrive at the profits derived from the export of goods or merchandise. Section 80AB postulates only the computation of deduction by permitting the Revenue to reduce it by the possible expenditure incurred to earn that income. But that is not the purpose of section 80HHC deals with a different nature of income. Therefore, it is a complete code by itself. Although reading sections 80HH, 80HHB, 80-I, 80JJ appearing in the same Chapter VIA, it will be found that the basis for deduction is the profits computed separately for the specified business or specific type of industrial undertaking to which that particular section applies, section 80HHC is related to the nature of activity, totally unrelated to the type of goods. Another important departure of section 80HHC compared to other sections is that profits and gains of export business are not required to be computed as per the books of account of the assessee but as provided for in rule 18BBA in the prescribed Form No.10CCA. The Board's Circular No.564 dated July 5, 1990, stated how the deduction under section 80HHC of the Income-tax Act is to be computed. This ITA No.1484/Ahd/2005 A.Y. 2001-02 ACIT, Cir-10, A'bd v. Sh. Devraj R Agarwal Page 3 circular leaves no doubt both by the clarification and examples given in paragraph 9 that what was contemplated and intended was not the profit relatable to the export of goods exclusively but the profit of the entire business including export turnover and domestic turnover, irrespective of the source from which the domestic turnover was derived provided it is in respect of profits and gains of business. The total profits in the entire business have to be ascertained and then have to be apportioned in the proportion the export turnover bears to the total turnover to arrive at the profit derived from export of goods, on which exemption under section 80HHC is available. "This view also finds support from the Kerala High Court in the case of CIT Vs. Jose Thomas [253 ITR 553] where in the assessee was engaged in various business activities such as processing and export of sea foods, construction and sale of flats, shipping agency business and also deriving income in the form interest and dividend. For the purpose of computing deduction u/s.80HHC, the total turnover was directed to be including cost of flats constructed by the assessee because in the opinion of the Lordship, turnover in respect of works contract shall be the aggregate amounts received or receivable by the dealer for the transfer of goods involved in the execution of such contract, and it was held the Tribunal an error of law in holding that the total turnover for the purpose of computation of eligible deduction u/s.80HHC(3) did not include the cost of flats constructed by the assessee.
5. The reliance on the decision of The Tribunal in the case of DCIT Vs. Madhusudan Inds. Ltd. [ITA No.2136/Ahd/97 order dated 6.7.2005] would be of no help to the assessee because it was contrary to the decisions of the Special Bench of the Tribunal in the case of International Research Laboratories Ltd. (supra) and also the Kerala High Court in the case of Josh Thomas (supra). In these circumstances, we reverse the order of the CIT(A) and restore that of the Assessing Officer."
The Ld. counsel for assessee admitted that the fact are exactly identical in this year also, however, he relied on the order of CIT(A).
4. After hearing Ld. counsel for assessee as well as Ld. Departmental Representative, we find that the issue is squarely covered in favour of Revenue and against the assessee by the Tribunal's decision in assessee's own case (supra). Respectfully following the findings of Tribunal, we allow this issue of the Revenue's appeal.
5. The next issue in this appeal of Revenue is against the order of CIT(A) in directing the Assessing Officer to delete the disallowance of short-term capital loss amounting to Rs.63,54,210/-.
ITA No.1484/Ahd/2005 A.Y. 2001-02ACIT, Cir-10, A'bd v. Sh. Devraj R Agarwal Page 4
6. The brief facts are that during the course of assessment proceedings the Assessing Officer found that the assessee claimed short term capital loss of Rs.63,54,210/- and total short term capital loss of same amount was set of against capital gain. It was noticed that the assessee had purchased and sold the units of two mutual funds within a short period of two days and claimed loss of same amount. At the same time, the assessee has earned dividend income of Rs.52,89,797/- and the details of purchases and sales of mutual fund and dividend income have been shown at page No.6 of assessment order. The assessee has claimed dividend income of Rs.52,89,797/- as exempt u/s.10(33) of the Act. We find that the assessee claimed the dividend as exempt u/s.10(33) of the act and also claimed the expenditure by way of short term capital loss incurred to earn the tax free dividend, which was not considered as allowable in view of provisions of Section 14A of the Act. The CIT(A) allowed the claim of the assessee by giving following findings in para-5.3.5 and 5.3.6 of his appellate order:-
"5.3.5. On consideration of the entire set of facts of the case relating to the impugned issue, it is observed that the A.O has not doubled the genuineness of any of the transactions involved, such as, obtaining of loan from TFL for subscribing to the units of the mutual funds, allotment of units, allotment of units against dividend earned or the payments to TFL, on behalf of the appellant, on redemption of the units. Further, the A.O has not disputed the fact that the payments/receipts on these transactions were through cheques/regular banking channel. Therefore, there is considerable force in the argument of the Ld. A.R that the transactions involved were legal and genuine business transactions. Further, it is not the case of the A.O that the parties to the transactions were dummy and mere paper entities or that there was any collusion between the appellant and the concerned mutual funds or TFL. The A.O has also snot brought any material on record to indicate that any of the transactions was sham or only on paper or was in the form of an artificial inserted steps. Further, I find merit in the contention of the appellant that the tax planning within four corners of law was permissible and every attempt of tax reduction made as per the provisions of law by an assessee should not be viewed or treated as an instance of tax avoidance. This view is supported by the following case laws:
i) Union of India vs. Azadi Bachao Andolan (2003) 263 ITR 706 (SC)
ii) Banyan & Berry vs. CIT (1996) 222 ITR 832 (Guj)
iii) CGT Vs. Satya Nand Munjal, (2002) 256 ITR 516 ( P&H)
iv) CIT Vs. George Williamson (Assam) Ltd. (2004) 265 ITR 626 (Gauh.) 5.3.6 Finally, it is seen that a similar issue has been decided in favour of the assessee by Hon. ITAT in the case of ACIT vs. Premium Consolidated Capital Trust (I) Ltd. (2004), 83 TTJ 843 (Mum). In that case, Hon. Tribunal have, ITA No.1484/Ahd/2005 A.Y. 2001-02 ACIT, Cir-10, A'bd v. Sh. Devraj R Agarwal Page 5 under almost similar circumstances, held that loss on purchase and sale of tax free bonds incurred by the assessee-company, when the genuineness of sale or the price received by the assessee was not doubted, and even if it was assumed that this was a premeditated transaction, there was nothing to impeach the genuineness of the transaction because the assessee had merely made use of the provisions of law, and use of provisions of law could not be considered to be abuse of law. Accordingly, the assessee was found entitled to allowance of the loss. In this matter, the Tribunal had threadbare considered the similar such issue, that is there in the present case, and passed the order after taking into consideration the decision of Hon. Apex Court rendered in the case of McDowell & Co. Ltd. (supra)."
7. We find that this issue is squarely covered in favor of the assessee and against the Revenue by the decision of Hon'ble apex court referred by the Ld. counsel for the assessee, Shri M.K. Patel of CIT v. Walfort Share And Stock Brokers P. Ltd. (2010) 326 ITR 1 (SC), wherein the Hon'ble apex court held as under:-
"20. The real objection of the Department appears to be that the assessee is getting tax-free dividend; that at the same time it is claiming loss on the sale of the units; that the assessee had purposely and in a planned manner entered into a pre-mediated transaction of buying and selling units yielding exempted dividends with full knowledge about the fall in the NAV after the record date and the payment of tax-free dividend and, therefore, the loss on sale was not genuine. We find no merit in the above argument of the Department. At the outset, we may state that we have two sets of cases before us. The lead matter covers assessment year before insertion of section 94(7) vide the Finance Act, 2001 with effect from April 1, 2002. With regard to such cases we may state that on the facts it is established that there was a "sale" The sale price was received by the assessee. That, the assessee did receive dividend. The fact that the dividend received was tax free is the position recognized under section 10(33) of the Act. The assessee had made use of the said provision of the Act. That such use cannot be called "abuse of law". Even assuming that the transaction was pre-planned there is nothing to impeach the genuineness of the transaction. With regard to the ruling in McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 (SC), it may be sated that in the later decision of this court in Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 it has been held that a citizen is free to carry on its business within the four corners of the law. That, mere tax planning, without any motive to evade taxes through colourable devices is not frowned upon even by the judgment of this court in McDowell and Co. Ltd.'s case (supra). Hence, in the cases arising before April 1, 2002, losses pertaining to exempted income cannot be disallowed. However, after April 1, 2002, such losses to the extent of dividend received by the assessee could be ignored by the Assessing Officer in view of section 94(7). The object of section 94(7) is to curb the short-term losses. Applying section 94(7) in a case for the assessment year(s) falling after April 1, 2002, the loss to be ignored would be only to the extent of the dividend received and not the entire loss. In other words, losses over and above the amount of the dividend received would still ITA No.1484/Ahd/2005 A.Y. 2001-02 ACIT, Cir-10, A'bd v. Sh. Devraj R Agarwal Page 6 be allowed from which it follows that Parliament has not treated the dividend stripping transaction as sham or bogus. It has not treated the entire loss as fictitious or only a fiscal loss. After April 1, 2002, losses over and above the dividend received will not be ignored under section 94(7). If the argument of the Department is to be accepted, it would mean that before April 1, 2002 the entire loss would be disallowed ass not genuine but, after April 1, 2002, a part of it would be allowable under section 94(7) which cannot be the object of section 94(7) which is inserted to curb tax avoidance by certain types of transactions in securities. There is one more way of answering this point. Sections 14A and 94(7) were simultaneously inserted by the same Finance Act, 2001. As stated above, section 14A was inserted with effect from April 1, 1962 whereas section 94(7) was inserted with effect from April 1,2002. The reason is obvious. Parliament realized that several public sector undertakings and public sector enterprises had invested huge amounts over last couple of years in the impugned dividend stripping transactions so also declaration of dividends by mutual fund are being vetted and regulated buy SEBI for lat couple of years. If section 94(7) would have been brought into effect from April 1, 1962, as in the case of section 14A, it would have resulted in reversal of large number of transactions. This could be one reason why Parliament intended to give effect to section 94(7) only with effect from April 1,2002. It is important to clarify that this last reasoning has nothing to do with the interpretations given by us to sections14A and 94(7). However, it is the duty of the court to examine the circumstances and reasons why section 14A inserted by the Finance Act 2001 stood inserted with effect from April 1, 1962 while section 94(7) inserted by the same Finance Act as brought into force with effect from April 1, 2002.
21 The next question which we need to decide is about reconciliation of sections 14A and 94(7). In our view, the two operate in different fields. As stated above, section 124A deals with disallowance of expenditure incurred in earning tax-free income against the profits of the accounting year under sections 30 to 37 of the Act. On the other hand, section 94(7) refers to disallowance of the loss on the acquisition of an asset which situation is not there incases falling under section 14A. Under section 94(7), the dividend goes to reduce the loss. It applies to cases where the loss is more than the dividend. Section 14A applies to cases where the assessee incurs expenditure to earn tax-free income but where there is no acquisition of an asset. In cases falling under section 94(7), there is acquisition of an asset and existence of the loss which arises at a point of time subsequent to the purchase of units and receipt of exempt income. It occurs only when the sale takes place. Section 14A comes in when there is a claim for deduction of an expenditure whereas section 94(7) comes in when there is a claim for allowance for the business loss. We may reiterate that one must keep in mind the conceptual difference between loss, expenditure, cost of acquisition, etc., while interpreting the scheme of the Act.
22 Before concluding, one aspect concerning paragraph 123 of Accounting Standard AS-13 relied upon by the Revenue needs to be highlighted. Paragraph 12 indicates that interest/dividends received on investments are generally regarded as return on investment and not return of investment. It is ITA No.1484/Ahd/2005 A.Y. 2001-02 ACIT, Cir-10, A'bd v. Sh. Devraj R Agarwal Page 7 only in certain circumstances where the purchase price includes the right to receive crystallized and accrued dividends/interest, that have already accrued and become due for payment before the date of purchase of the units, that the same has got to be reduced from the purchase cost of the investment. A mere receipt of dividend subsequent to purchase of units, on the basis of a person holding units at the time of declaration of dividend on the record date, cannot go to offset the cost of acquisition of the units. Therefore, AS-13 has no application to the facts of the present cases where units are bought at the ruling NAV with a right to receive dividend as and when declared in future and did not carry and vested right to claim dividends which had already accrued prior the purchase.
23 For the above reasons, we find no infirmity in the impugned judgment of the High Court and, accordingly, these civil appeals filed by the Department are dismissed with no order as to costs."
8. In view of the decision of Hon'ble apex court in the case of Walfort Share And Stock Brokers P. Ltd. (supra), the issue being exactly identical and admittedly the assessment year involved is 2001-02, respectfully following the Hon'ble apex court we confirm the order of CIT(A) on this issue. Revenue's appeal is dismissed.
9. In the result, Revenue's appeal is partly allowed.
Order pronounced on this day of 17th Sept,2010
Sd/- Sd/-
(G.D.Agarwal) (Mahavir Singh)
(Vice President) (Judicial Member)
Ahmedabad,
Dated : 17/09/2010
*Dkp
Copy of the Order forwarded to:-
1. The Assessee.
2. The Revenue.
3. The CIT(Appeals)-XVI, Ahmedabad
4. The CIT concerns.
5. The DR, ITAT, Ahmedabad
6. Guard File.
BY ORDER,
/True copy/
Deputy/Asstt.Registrar
ITAT,
Ahmedabad