Income Tax Appellate Tribunal - Mumbai
Asst. Commissioner Of Income Tax vs Sri Dakshesh S. Shah on 19 February, 2003
Equivalent citations: [2004]90ITD519(MUM), [2005]272ITR131(MUM)
ORDER
D. Manmohan, Judicial Member
1. This appeal filed by the revenue is directed against the order of CIT(A) XIV, Mumbai and it pertains to the AY 98-99. Three grounds were urged by the revenue which are taken up in seriatim.
2. Vide ground No. 1, the revenue contends that the CIT(A) erred in deleting Rs. 72,880/- referable to the addition made by the assessing officer on account of interest claimed by the assessee. The facts concerning the issue under dispute are briefly stated. The assessee is a co-owner of flat No. 1005 in Chandanbala, R.R. Thakkar Marg, Off. Ring Road, Mumbai-400 006. While computing the income assessable Under Section 22 of the Income Tax Act, the assessee claimed a deduction towards interest payable on the amount borrowed for the purpose of purchasing the co-ownership property.
3. The assessing officer disallowed the claim of deduction on the ground that the flat was not owned by the assessee as per the record of M/s. Walkeshwar Chandanbala Co-op. Housing Society Ltd., He, further observed that the property was purchased from Mahendra Jethalal Shah by Mr. Suresh Chandra N Shah and Mrs. Dharmishtha S Shah vide agreement dated 23.04.1993 and, even in the said deed, the name of the assessee herein was not mentioned. Though, there is a separate co-ownership agreement dated 25.04.1993, the assessing officer was of the view that it being merely on a Rs. 10/- stamp paper and not registered, it cannot have any evidentiary value. At any rate, since the society has not recognized the assessee as the co-owner, the amount given by the assessee was treated as mere advance and not towards purchase of the property. The payment made by the assessee and reflected in the balance sheet was treated as interest free loan to Mr. Sureshchandra Shah and Mr. Dharmishtha S Shah. Therefore, it was concluded that the assessee is not a co-owner of the property and accordingly he disallowed the claim of deduction.
4. Aggrieved assessee challenged the order of the assessing officer before the CIT(A) contending, interalia, that the co-ownership agreement and the entries made in the accounts are sufficient to show that the assessee is a co-owner which ought to have been appreciated by the assessing officer. It was further contended that the housing society do not record the property in the name of more than three co-owners and mere non mention of assessee's name in the society's records should not be viewed adversely. It was further submitted that there is no need to register a co-ownership agreement and, on account of non-registration, the assessing officer was not justified in ignoring the co-owner ship agreement. In other words, the assessing officer ought to have taken due cognizance of the co-ownership agreement which was entered into soon after the purchase of the flat. In the sale deed, father and mother of the assessee were shown as the purchasers of the property and stamp duty was duly paid on that. The assessee paid Rs. 10,00,000/- to Mr. Jignesh S Shah vide cheque No. 039219 dated 31.05.1994. This payment was directly paid to the seller of the property. The assessing officer was not justified in treating the same as interest free loan to Mr. Sureshchandra S Shah and Mrs. Dharmishtha S Shah. Thus, it was strongly contended that the disallowance made by the assessing officer was not in accordance with law. The learned CIT(A) accepted the contention of the assessee.
5. Aggrieved, Revenue is in appeal before the Tribunal. The learned DR submitted that the flat was not registered in the name of the assessee and there is no evidence to show that the assessee is a co-owner and thus strongly relied upon the orders of the tax authorities. On the other hand, the learned counsel submitted that the property was purchased by the assessee and his family members. Therefore, there was no need for them to again pay heavy registration fee and stamp duty upon entering into co-ownership agreement. He submitted that on 24.4.1993, Sale agreement was entered into between the vendor i.e. Mr. Mahendra Jethalal Shah and the vendees i.e. assessee's father and mother and immediately on the next day i.e. 25.4.1993 Co-ownership agreement was entered between the assessee's parents and the assessee as well as Mr. J. Shah. At the time of entering into co-ownership agreement Mr. J. Shah and the assessee were minors and hence their names were not included in the agreement of sale. But the fact that the co-ownership agreement was entered on the next day clearly shows that the assessee is a co-ownership agreement was entered on the next day clearly shows that the assessee is a co-owner. Apart from adverting our attention to the agreement, the learned counsel adverted our attention to the balance sheet of Mr. Dakshesh Shah, bank account copies etc. to highlight that the assessee invested a sum of Rs. 10,00,000/- in the said property. The cheque was directly given to the seller. He further, submitted that though the assessing officer summoned the secretary of the cooperative society and obtained information, it was not put to the assessee during the course of assessment proceedings and hence the assessing officer should not have relied upon such evidence in the light of the decision of the Honourable Supreme Court in the case of Sri Kishenchand Chellaram. He thus strongly relied upon the order of the CIT(A).
6. I have carefully considered the rival submissions and perused the record. No doubt, an un-registered document may not carry the same evidential value as that of registered document but if the existence of such document is proved with the held of other circumstantial evidence, cognisance can be taken of un-registered document also. In the instant case, the property was purchased in the name of the assessee's parents and co-ownership agreement is being entered between the parents and children. They might have thought that there is no need to register the same and spend additional sum towards registration fees etc. But the fact remains that the assessee paid the amount by cheque directly to the seller of the property and the same was recorded in the bank account. Similarly, Mr. Mahendra Jethalal Shah also has directly paid the amount by cheque. It was also stated before us that it was treated as co-ownership property since the date of purchase and the assessee is filing returns accordingly. Assessment of the assessee as well as assessment of the other co-owners were accepted without raising any objection in this regard which lends support to the contention of the assessee that the money was given by him as a co-owner. Under these circumstances we hold that the claim of deduction of interest paid by the assessee is in order. Thus the order of the CIT(A) is upheld and ground No. 1 is hereby rejected.
7. Vide ground No. 2, the Revenue contends that the CIT(A) erred in deleting the addition of Rs. 5,16,118/- made by the assessing officer on account of sale proceeds of shares of Tata Tea Limited. The facts in short are that the assessee had claimed long term capital gains on sale of 375 shares of M/s Tata Tea Limited. The assessing officer was of the opinion that the assessee is not the owner of the shares. He observed that the shares were purchased in the name of S.N. Shah Family trust and the assessee has been not declaring dividend income in any of the previous years. He has further observed that the assessee's name is not entered in the share register. Therefore, he has come to the conclusion that the capital gains should be brought to tax in the hands of Sri S.N. Shah Family trust. However, on protective basis the same was brought to tax in the hands of the assessee. Before the CIT(A), the assessee contended that the dividend income was offered to tax in the S.N. Shah Family trust in the AY 97-98. It was further contended that the trust was dissolved, though the dissolution deed was not registered. It was contended that there was no requirement in law to register the dissolution deed as per Section 17 of the Registration Act 1908. By placing reliance on the copy of the return of income of the trust for the AY 1994-95, it was submitted that there is sufficient evidence to show that the trust was dissolved in 01.04.1993. It was also contended that the assessing officer was not justified in taxing entire capital gains in the hands of the assessee ignoring the fact that only 1/3 of total amount is assessable to tax in the hands of the assessee, in view of the fact that the other two beneficiaries have offered for taxation their share of long term capital gains on the sale of these shares, in their returns of income for the AY 98-99.
8. The learned CIT(A) agreed with the contention of the assessee and deleted the addition of Rs. 5,16,118/- by observing as under:
"After hearing the arguments of the learned AR and after going through the several documents, filed by the appellant, in the form of the paper book, being the copy of the registration act 1908, the copy of declaration of dissolution of the trust, the copies of acknowledgement of returns of income of other two beneficiaries and the copy of acknowledgement of the last return of income filed in respect of S N Shah Family Trust, I am of the opinion that, the Assessing Officer was wrong in presuming that, the entire sales proceeds of the shares of Tata Tea Ltd. was the income of the appellant as an adventure in the nature of business of trade and assessed the income of rs. 5,16,118/- protectively in the hands of the appellant, ignoring all the above documents and evidences filed by the appellant. Accordingly, I have no any alternative but to direct to delete the addition of Rs. 5,16,118/- and restore the amount of L.T.C.G. declared by the appellant, in the return of income. Accordingly, this ground of appeal is allowed".
9. Aggrieved revenue is in appeal before the Tribunal. The learned DR submitted that there is no authentic evidence to prove that the shares were owned by the assessee and other beneficiaries. Thus he strongly supported the order of the assessing officer.
10. On the other hand, the learned counsel submitted that though the assessing officer observed that the income is assessable to tax in the hands of the trust, even after more than a decade, reckoned from the AY under consideration, the assessing officer has not included the impugned income in the hands of S.N. Shah Family trust and thus it is not correct to treat the assessment made herein as protective assessment. He has also adverted my attention to the returns of the income filed by the other two beneficiaries and assessments made therein to highlight that 1/3rd share of long term capital gains was assessed in the hands (each) of the other two beneficiaries and hence the assessing officer was not justified in bringing to tax the entire capital gain in the hands of the assessee and also in view of the fact that the no substantive assessment was made in the name of S.N. Shah Family trust. The capital gain offered by the assessee is assessable on substantive basis and there is no room for treating it as protective assessment even at this stage, in the circumstances of the case.
11. I have carefully considered the rival submission and perused the record. After considering all facts and circumstances of the case, I do not find any infirmity in the order of CIT(A). Accordingly, ground No. 2 of the revenue is rejected.
12. Ground No. 3 reads as under:
"On the facts and circumstances of the case the learned CIT(A) erred in law in allowing interest claimed of Rs. 4,97,000/- without considering the income from share was exempt".
13. The facts of the case revolve in the narrow compass. In the computation of income the assessee claimed loss under head "other sources" which was arrived at after deducting interest payable to M/s Pankaj Investments amounting to Rs. 6,41,970/-. The assessing officer called for the details of the investments and loans. Upon verification of details, the assessing officer noticed that the interest paid/payable to M/s Pankaj Investments is deductible in view of the fact that dividend income is exempt from tax in the hands of the receiver, as per the provisions of 103(33) r.w.s. Section 115(O) of the Income Tax Act, 1961. Since the income is exempt from tax, the expenditure incurred for earning of such income cannot be allowed as deduction Under Section 57(iii) of the Income Tax Act 1961. When the same was put to the assessee, it was submitted that genuineness of the borrowings is not in doubt. Since the borrowing was for the purpose of earning income, interest paid by the assessee on such loan has to be allowed as deduction. It was also contended that the interest was paid on account of debit balances comprising of withdrawals spread over number of years and it would be inappropriate to link the same to the investment in shares.
14. The assessing officer was not convicted with the explanation of the assessee. He observed that Section 56 of the Income Tax Act 1961 is exclusive Section and it lays down what is excludible from the same. Section 57 speaks about deduction from the income chargeable to tax under the head "Income from other sources". In the instant case the dividend income has been excluded from the computation of taxable income by virtue of it's being exempt from tax, as per the provisions of Section 10(33) r.w.s. 115(O) of the Income Tax Act, 1961. Since dividend income is not chargeable under the head 'Other sources', interest expenditure referable to the investment thereon is not allowable as a deduction Under Section 57 of the Income Tax Act 1961.
15. Aggrieved, the assessee contended before the CIT(A) that disallowance of interest of Rs. 4,97,090 is not in accordance with law in as much as, the assessee was having a running account with M/s Pankaj Investments since two years and it was not possible to link the loan amount with the purpose for which the same was utilised and it was more difficult to decide as to which loan out of several types of loans was repaid, whenever there was a repayment. The learned counsel contended that the assessing officer tried to attribute the repayment first towards the loan taken for the purpose of house property, so that the claim of the assessee for interest against house property gets reduced.
16. The learned AR further contended that merely because the dividend income from shares is exempt, interest paid/payable on investments towards purchase of shares should not have been disallowed by the assessing officer. In order to claim deduction of expenditure, the assessee need not show that the investment generated any taxable income.
17. The contention of the assessee was accepted by the CIT(A). The operative portion of his order is extracted below for the purpose of immediate reference:
"After going through the facts of the case from the assessment order and after hearing the arguments of the learned AR, I am of the opinion that, the Assessing Officer's analysis of the borrowed loans from AY 95-96 to AY 98-99 and the calculation of interest thereon and an attempt to co-relate such interest with particular repayment of loan was based on hypothetical calculation, without any basis. The Assessing Officer has not rejected the books of accounts of the appellant. He has not also pointed out any mistakes in the books of accounts and in calculation of interest. Accordingly, there was no any cause for the Assessing Officer to try to reframe and correlate the interest payment to the repayment of loans as per his imagination. The assessing officer has not denied the fact that, the appellant has made investment in shares by obtaining borrowed loans, from Pankaj Investment. Considering all these facts, I am of the opinion that the Assessing Officer was wrong in disallowing the interest paid for investment in shares of Rs. 4,97,080/-. Accordingly, I hereby direct to allow the interest payable to M/s Pankaj Investments amounting to Rs. 4,97,090/- . Accordingly, this ground of appeal is allowed."
18. Aggrieved by the order of the CIT(A), the revenue is in appeal before the Tribunal. The learned DR submitted that out of the total interest paid by the assessee to Pankaj Investments, a portion is attributable to the interest referable to the amount borrowed from Pankaj Investments and utilised for the purpose of purchase of shares which in turn earned dividend income. Thus, in order to allow claim of deduction of interest referable to such borrowal, the Income Tax Act mandates that the income should be assessable to tax. In other words, if the dividend income is fully exempt the assessee should not be given double advantage in the form of deduction of interest income from other income earned by the assessee. The intention of legislation is clear from the introduction of Section 14A of the Income Tax Act 1961 inserted by the finance Act 2001 w.r.e. 01.04.1962, which reads as under: Section 14A:" for the purpose of computing total income under this chapter, 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 this Income Tax Act 1961 ....".
19. He submitted that if dividend income is otherwise assessable to tax but not earned during the year it does not preclude the assessee from claiming deduction of interest whereas, if dividend income is not at all assessable to tax, the question of claiming deduction on interest income does not arise, either Under Section 57(iii) of the Income Tax Act 1961 or in view of Section 14A of the Income Tax Act 1961. He, thus, strongly relied upon the order of the assessing officer.
20. On the other hand, the learned counsel submitted that the legislative history has to be taken into consideration in order to appreciate as to whether dividend income was in fact exempt or not. Explaining further the learned counsel submitted that the legislature always intended to tax dividend income but because of the difficulty in collecting tax from the recipients of dividend it was thought fit to collect the tax from the companies who declare dividend but the net effect is that the assessee pays tax on the dividend income. The tax is collected from the company on behalf of the assessee to whom dividend was to be paid. He has taken us to various provisions of the Income Tax Act 1961 and also amendments made from time to time to highlight the intention of the legislature. He has also referred to the "REPORT OF THE EXPERT GROUP TO RATIONALISE AND SIMPLIFY INCOME TAX LAW" wherein the group observed as under:
"After discussion, the group came to the conclusion that the better way to realize the revenue from the dividend without causing any hardship to individual shareholder, was to levy a tax on companies, mutual funds and co-operative societies on the profit distributed by them by way of dividend/income. The tax should be levied on the entity concerned directly at a flat rate of 10%. The tax would be payable in lump-sum by the entity before the distribution of profit. This would obviate the necessity of millions of tax deduction certificates being sent to shareholders, annual returns being filed by the entities etc. There will be no scope for leakage of revenue under the system and the full 10% of the amount distributed by way of dividend/income by all entities will fetch substantial revenue to the exchequer.
21. The learned counsel thus submitted that it is an indirect way of collecting tax from assessee and thus it cannot be said that the dividend income is not assessable to tax. Therefore, interest expenditure referable to the dividend income is allowable as deduction.
22. He raised an alternative contention i.e. even though, dividend income is not taxable, the gain on the sale of shares is not exempt from tax. In other words, income from shares in the form of capital gains, is not exempt and hence interest expenditure is allowable as deduction. In this regard, he relied upon the following decisions:
a. CIT v. Indian Bank (56 ITR 77) (supreme court) b. Royal Calcutta Turf Club v. CIT (144 ITR 709) (Calcutta) He further contended that if two views are possible, the one which is in favour of the tax payer should be adopted.
22. I have carefully considered the rival submissions and perused the record. Chapter IV of the Income Tax Act 1961, provided five heads of income, the first four being specific heads of income, whereas the fifth one is residuary in nature. Income or expenditure has to fall under specific head of income in which event the claim of the assessee can be considered under such specific head. In the instant case, the assessee appears to have claimed deduction Under Section 57(iii) of the Income Tax Act, 1961. In order to allow deduction Under Section 57(iii) the assessee has to show that the dividend income is assessable Under Section 56 whereas in the instant case, dividend income is exempt from tax by virtue of the provisions of Section 10/33 of the Act, 1961. At any rate, Section 14A, which was inserted in the statute book w.r.e.f. 01.04.1962, expressly prohibits allowance of such claims. The intention of legislature can be understood from the Memo explaining the provisions in the Finance Act, 2001 [248 ITR 195 (St)] which reads as under:
"No deduction for expenditure incurred in respect of exempt income against taxable income.
Certain incomes are not includible while computing the total income as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, i.e. gross income minus the expenditure, is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income."
23. Section 14A is part of Chapter IV. In other words, it applies to expenditure referable to any head of income referred to in Section 14 of the Act, 1961. The contention of the learned counsel is that dividend income is not exempt from tax but the legislature intended to collect the tax indirectly by deducting tax in the hands of company. I am unable to appreciate the contention of the assessee. There are lakhs of shareholders whose income falls below the taxable limit and in their case there may not be any assessable income which is liable to tax even if dividend income is held to be taxable in the hands of such assessees. Hence, if the intention of the legislature is only to collect the tax from the recipients of the dividend through medium of company, then there should have been a provision whereby the company should not be made to pay tax in respect of that part of dividend, which is attributable to assessees who has an taxable income. In the absence of such a provision it cannot be said that the tax is collected from the company though the legislature intended to collect tax from the recipients of the dividends. At any rate, Section 14A is couched in specific terms which does not leave any room for doubt or dispute with regard to the fact that in order to claim deduction of expenditure in relation to a particular income, the assessee has to show that the said income forms part of the total income. Thus, looking at from any angle, I am of the opinion that the assessee is not entitled to claim deduction of the interest referable to the amount borrowed for the purpose of investment in shares. No doubt, the learned counsel raised an alternative plea that the shares as and when they are sold, the income/loss is assessable to tax under the head 'capital gains' in which event, expenditure has to be allowed as deduction. However, it may be noticed that the assessee ha s not sold any shares till date and so far as this year is concerned, the contention of the assessee is academic. The case laws cited by the learned AR are distinguishable on facts, particularly in the light of Section 14A of the Income Act 1961.
23. Under these circumstances, the order of the CIT(A), on this issue, is reversed and the order of the A.O. is upheld.
24. The appeal filed by the revenue is partly allowed.