2017 (11) TMI 1310 - AT - Income Tax

Tribunal rules in favor of assessee, dismissing Revenue's appeal on interest addition, allowing part of assessee's appeal.

Dy. Commissioner of Income Tax CC 4 (3) Cen Rg-4, Andheri (W) Versus M/s Growmore Leasing and Investment Ltd. And Vice-Versa

The Tribunal dismissed the Revenue's appeal, upholding the deletion of the addition of interest on bonds. The assessee's appeal was partly allowed on ... Disallowance of short term capital Loss - provisions of Sec.94(1) applicability - Held that:- The provisions of Sec.94(4) of the Act had been introduced with a view to levy tax on the interest income, which was being sought to be avoided by certain persons by carrying on transactions in shares and securities. The intention of the Legislature was to tax the interest income in the right hands, which had been avoided by transferring the shares and then repurchasing the some after the interest was received by the other persons. Therefore, it was necessary for the AO to prove that the assessee had attempted to avoid payment of tax. Since the interest income on 9% IREC Bonds was exempt from tax, there was no question of the assessee or Harshad S. Mehta adopting any such methods to avoid tax on the income. Further, we are of the view that the provisions of Sec.94(4) of the Act would apply only in cases where the assessee had carried on the transactions of purchase and sale of securities during the course of business and since the purchase and sale of the bonds in question was not a business activity, the provisions of Sec.94(4) of the Act was not applicable to the transaction. Accordingly, We direct the AO to allow the claim of set off of loss of ₹ 2,44,62,328/- suffered from 9% IRFC Bonds, against profit from sale of shares. Unexplained investment in 9% tax free NTPC bonds - Held that:- We find from the facts of the case that the assessee has purchased 9% tax free bonds of NTPC of face value of ₹ 4.40 crores on 19.06.1991 through the broker Harshad S Mehta and these bonds have been sold on 17-12-1991. The same are reflected by the assessee in its books of accounts under account No. 2008 titled as, ‘investment in PSU bonds’. We find that the assessee has not paid any consideration on account of purchase of these bonds and these are standing as credit in the firm Harshad S Mehta. It means that holding of the assessee in NTPC bond is to the tune of ₹ 4.40 crores only and not more than that. Even now before us, the learned Counsel claimed that Revenue could not show to the assessee that it is holding NTPC bond of ₹ 4.50 crores as alleged by the Revenue and this information was never made available to the assessee and unless the said evidence is placed at the disposal of the assessee, the same cannot be explained. In view of the above facts, we delete the addition and allow this issue of assessee’s appeal. Unexplained investments in shares - proof of ingenuity of transaction - Held that:- It is noticed that the assessee made investment and the share holding in Coventry Coil is to the extent of 56,600/- shares and in ITW signode to the extent of 1500, whereas the allegation of the Revenue is that the assessee is holding 200 more shares in Coventry Coil and 1400 shares in ITW signode, which are not reflected. Before us, the learned counsel for the assessee explained that there is no such holding by the assessee as alleged by Revenue and there is no evidence qua that with the revenue. Assessee made a categorically statement that he is holding only the shares as above declared and not more than that. In our view, the onus on Revenue to prove first that there are more shares held by the assessee in the Coventry Coil and ITW signode. As the Revenue failed the same, the addition cannot be made in the hands of the assessee. This issue of assessee’s appeal is allowed. Disallowance on account of car rental expenses at 50% - Held that:- We find that the Revenue has disallowed excessive at 50%, but 15% is quite reasonable because the personal element cannot be denied. Accordingly, this issue of assessee’s appeal is partly allowed. Addition u/s 14A - Held that:- We find that the AO has disallowed expenses relatable to exempt income under section 14A of the Act amounting to ₹ 11,65,140/-. The assessee claimed the exempt income earned by the assessee from PSU bonds of NTPC amounting to ₹ 1.84 crores. Accordingly, AO attributed the expenses at ₹ 11,65,140/- as relatable to exempt income. The CIT(A) restricted to the extent of 50% of the amount at ₹ 5,82,570-/- on this account. We find that no specific finding of relation of expenses there in the orders of the lower authorities and hence, we restrict the disallowance at 1% of the exempt income. We direct the AO accordingly. Disallowance of audit fee claim - Held that:- This issue is squarely covered in assessee’s group cases as held No adverse inference can be drawn merely from the fact that audit could not be done due to seizure or the books of accounts as well as from the fact that subsequently the Court directed that audit be done through new Auditor. In view of the same and following the decision of the Tribunal mentioned above, we do not find any merit in the ground raised by the Revenue. Recompute the interest u/s 234A, 234B and 234C after taking into account the tax deductible on total income of the assessee by affording fair and reasonable opportunity of being heard to the assessee Addition on account of interest on bonds - Held that:- AO while framing assessment noted that the assessee has actually made investment in the government bonds at ₹ 50 crores and interest thereon @ 9% worked out to ₹ 2.25 crores for the period of 6 months. According to AO, the assessee has disclosed the interest to the extent of ₹ 1,84,50,000/- only, resulting into short interest of ₹ 40.50 lakhs. Accordingly, AO added the differential amount of ₹ 40.50 lakhs to the returned income of the assessee. Aggrieved, assessee preferred appeal before CIT(A), who deleted the addition for the reason that the entire investment in IFRC bonds is tax free and whatever the quantum of interest same cannot be brought to tax. According to us also this IFRC bonds interest is tax free and even differential amount cannot be brought to tax. Accordingly, this issue of Revenue’s appeal is dismissed. Issues Involved:1. Assessment of income and in whose hands it should be taxed.2. Disallowance of short-term capital loss.3. Addition of unexplained investment in NTPC bonds.4. Addition of unexplained investments in shares.5. Disallowance of car rental expenses.6. Disallowance of expenses related to exempt income under Section 14A.7. Disallowance of audit fee.8. Disallowance of depreciation.9. Levy of interest under Sections 234A, 234B, 234C, and 220.Issue-wise Detailed Analysis:1. Assessment of Income and In Whose Hands It Should Be Taxed:The first issue was regarding the assessment of income and whether it should be taxed in the hands of the appellant or Late Shri Harshad S. Mehta. The learned Counsel for the assessee did not press this ground, and accordingly, it was dismissed as not pressed.2. Disallowance of Short-term Capital Loss:The assessee purchased 9% tax-free IRFC bonds worth Rs. 50 crores from Harshad S. Mehta and sold them within 15 days, claiming a short-term capital loss of Rs. 2,44,62,328/-. The AO disallowed this loss under Section 94(4) of the Income Tax Act, 1961, considering it a business transaction aimed at earning tax-free interest and claiming a loss. The CIT(A) upheld the AO's decision. However, the Tribunal found that the provisions of Section 94(4) could not be invoked as the AO failed to prove that the provisions of Section 94(1) were applied to the counterparty. Therefore, the Tribunal directed the AO to allow the claim of set-off of the loss.3. Addition of Unexplained Investment in NTPC Bonds:The AO added Rs. 10 lakhs as unexplained investment in 9% tax-free NTPC bonds based on information from NTPC. The CIT(A) partly deleted the addition but sustained Rs. 10 lakhs. The Tribunal found that the assessee's holding in NTPC bonds was Rs. 4.40 crores and not Rs. 4.50 crores as alleged by the Revenue. Since the Revenue could not provide evidence of the additional holding, the Tribunal deleted the addition.4. Addition of Unexplained Investments in Shares:The AO made an addition of Rs. 5,40,700/- for unexplained investments in shares due to the assessee's failure to produce contract notes for certain shares. The CIT(A) upheld the AO's decision. The Tribunal found that the Revenue failed to prove the assessee's additional holding in shares, and hence, the addition could not be made. The Tribunal allowed the assessee's appeal on this issue.5. Disallowance of Car Rental Expenses:The AO disallowed 50% of car rental expenses claimed by the assessee. The Tribunal found this excessive and deemed 15% disallowance reasonable, allowing the assessee's appeal partly.6. Disallowance of Expenses Related to Exempt Income under Section 14A:The AO disallowed Rs. 11,65,140/- as expenses related to exempt income. The CIT(A) restricted this to 50%, amounting to Rs. 5,82,570/-. The Tribunal found no specific finding of relation of expenses in the lower authorities' orders and restricted the disallowance to 1% of the exempt income, directing the AO accordingly.7. Disallowance of Audit Fee:The CIT(A) disallowed the audit fee claim of Rs. 1 lakh. The Tribunal referred to its earlier decision in the assessee's group cases, where such disallowance was deleted, and allowed the assessee's appeal on this issue.8. Disallowance of Depreciation:The assessee did not press this issue due to the smallness of the amount (Rs. 61,640/-), and it was dismissed.9. Levy of Interest under Sections 234A, 234B, 234C, and 220:The Tribunal referred to its earlier decision in the assessee's group cases, where the matter was remanded to the AO to recompute the interest after considering the tax deductible at source. The Tribunal directed the AO to recompute the interest accordingly.Revenue's Appeal:The only issue in the Revenue's appeal was the deletion of the addition of Rs. 40,50,000/- as interest on bonds. The AO had added this amount, assuming the assessee made an actual investment of Rs. 50 crores in bonds. The CIT(A) deleted the addition, reasoning that the interest on IRFC bonds was tax-free. The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal.Conclusion:The appeal of the Revenue was dismissed, and the assessee's appeal was partly allowed for statistical purposes.