2016 (8) TMI 459 - AT - Income Tax

Court limits Section 14A disallowance, rules on income classification & book results.

The High Court partly allowed the assessee's appeal regarding the disallowance under Section 14A of the Income Tax Act. The Court restricted the ... Disallowance u/s. 14A - Held that:- The balancesheet reflects an adequate balance of net working capital, i.e., current assets less current liabilities, both as at the beginning and the close of the year, being at ₹ 52.80 crores and ₹ 43.76 crores respectively. That leaves only unsecured loan/s, which continues at the opening balance of ₹ 101.37 lakhs during the year. No part of it can therefore be said to finance, even if partly, the increase of ₹ 222.39 lakhs in the investment in shares and mutual funds during the year. The opening investment of ₹ 21.06 lakhs pales into insignificance in light of the interest-free under capital of ₹ 2722.22 lakhs at the beginning of the year, and which stands increased by ₹ 1.40 crores during the year. The decision by the Hon’ble jurisdictional High Court in CIT vs. HDFC Bank Ltd. [2014 (8) TMI 119 - BOMBAY HIGH COURT] holding that where sufficient interest-free capital is available, the same must be set off or allocated against investment, is thus clearly applicable in the facts and circumstances of the case. As regards administrative expenditure, the disallowance for the same has been restricted to the ratio (0.5% of the investment) in terms of rule 8D(2)(iii) of the Rules. We find the same as reasonable and, accordingly, confirm the same. Activity of purchase and sale of scrips - in the nature of trade or business transaction, or in the nature of an investment - Held that:- The activity, which in the instant case is systemic and regular, is a manifestation of this intent and, thus, relevant, clearly reflecting a trading activity, i.e., a regular activity of trade. This finding of fact by the Assessing Officer, has not been, as afore-stated, disputed or controverted in any manner. We, accordingly, are in no manner of any doubt that the assessee’s activity of purchase and sale of scrips is, as in the case of speculation business, which is admitted to be business activity (resulting though at a loss of ₹ 42.68 lakhs for the current year) as well as the trading in derivatives, only a business activity. Rather, the said activities, which are allied and pari materia, being in the same market and in the same scrips, reinforce and endorse the Revenue’s stand of the assessee’s activity of buying and selling of shares as being regular trading activity. The assessee has reported the income on such activity through its profit and loss account which, by definition, reflects the result of the operations of the company (for the account period). As such, regardless of shares held (for the time being) being classified as investment in the assessee’s final accounts (balance-sheet), we confirm the purchase and sale therein as being only a business activity, so that the impugned income is liable to be assessed as business income Invocation of section 145(3) - quantum of the estimated income - Held that:- With regard to the invocation of section 145(3), we do not find or observe any infirmity therein; the company or Shri Sunil Aggarwal failing to furnish any satisfactory reply to the several queries raised by the Assessing Officer in the matter. We may though clarify that the Bhillai unit being a unit of the assesseecompany, it’s books of account form part of the accounts of the company. The provision of s. 145(3) would, accordingly, apply to the assessee’s accounts, even as the same may result in the Assessing Officer disturbing the book results only of the said unit, with the accounts of which he is essentially dis-satisfied with, i.e., finds as not reliable and as not reflecting correct income. With regard to the claim for depreciation, we observe that the same stands allowed by the Assessing Officer himself, with the ld. CIT(A) only directing likewise, i.e., for allowance of depreciation as per law. Without doubt, the allowance of depreciation can only be in terms of the provisions of law, so that the Assessing Officer has rightly reduced the sale consideration (of ₹ 128.40 lakhs) in respect of the fixed assets sold during the previous years relevant to A.Ys. 2004-05 & 2005-06 in computing the written down value (WDV) of the relevant block of assets. As regards sale of fixed assets, even if unauthorized, being not challenged by the company (which has presumably ratified the sale) and no longer its’ property, depreciation thereon could not be allowed. The Revenue’s claim is accordingly allowed. Issues Involved:1. Disallowance under Section 14A of the Income Tax Act.2. Rejection of assessee's book results for Bhilai/Tedessara unit.3. Assessment of income from sale of shares as business income versus short-term capital gain.Detailed Analysis:1. Disallowance under Section 14A of the Income Tax Act:The assessee contested the disallowance under Section 14A, which was restricted to Rs. 13,11,549 by the Commissioner of Income Tax (Appeals) [CIT(A)], as opposed to Rs. 22,21,205 by the Assessing Officer (AO). The CIT(A) directed the AO to apply Rule 8D, while the AO had used a proportionate formula for allocating interest and administrative expenses. The assessee demonstrated sufficient interest-free capital to preclude allocation of interest-bearing capital toward tax-exempt income investments. The High Court's decision in CIT vs. HDFC Bank Ltd. was applicable, confirming that sufficient interest-free capital should be set off against investment. The disallowance for administrative expenditure was restricted to 0.5% of the investment per Rule 8D(2)(iii), which was found reasonable and confirmed. The assessee's ground was partly allowed.2. Rejection of Assessee's Book Results for Bhilai/Tedessara Unit:The assessee's second ground was the rejection of its book results for the Bhilai/Tedessara unit, estimating income at 5% of the gross turnover instead of taxing it in the hands of Mr. Sunil Aggarwal. The unit was managed by Mr. Sunil Aggarwal under an interim order from the Company Law Board (CLB), and the assessee's final accounts were prepared without incorporating the unit's accounts. The AO found discrepancies in the unit's accounts, leading to the rejection of the book results and estimation of income. The assessee's principal grievance was the taxation of the unit's income in its hands rather than Mr. Sunil Aggarwal's. However, the Tribunal held that the ownership and income of the unit belonged to the assessee company, as the CLB's order did not divest the company of ownership. The invocation of Section 145(3) was justified due to unsatisfactory replies to the AO's queries. The depreciation claim was allowed as per law, with the AO reducing the sale consideration of fixed assets sold in previous years. The Revenue's stand was upheld.3. Assessment of Income from Sale of Shares as Business Income:The Revenue's appeal contested the assessment of income from the sale of shares as business income instead of short-term capital gain. The AO examined the purchase/sale activity in detail, considering various parameters and case laws. The assessee's activities included more than 180 purchase transactions and thousands of sale transactions, many within a short time span, indicating trading rather than investment. The company also engaged in trading derivatives and speculative transactions. The primary test was the intent behind the transactions, with the AO finding the activity systemic and regular, reflecting a trading intent. The Tribunal confirmed the AO's finding, classifying the income from the sale of shares as business income. The Revenue's ground was allowed.Conclusion:The assessee's appeal was partly allowed regarding the disallowance under Section 14A, while the Revenue's appeal was allowed concerning the assessment of income from the sale of shares as business income. The rejection of the assessee's book results for the Bhilai/Tedessara unit and the related depreciation claim were upheld in favor of the Revenue. The order was pronounced in the open court on June 30, 2016.