2019 (7) TMI 1270 - AT - Income Tax

Tribunal rules on tax issues favoring assessee: capital gains, interest disallowances, rental income, judicial consistency

M/s Unitech Limited Versus DCIT, Circle-27 (1), New Delhi. And ACIT, Circle-27 (1), New Delhi. Versus M/s. Unitech Ltd.

The Tribunal ruled in favor of the assessee on various tax issues. The gains from the sale of shares were treated as capital gains, not business income. ... Income from sale of shares - correct head of income - business income OR capital gain - HELD THAT:- Under similar set of facts, it was held by the Tribunal in own case [2019 (4) TMI 1373 - ITAT DELHI] that the income from sale of shares cannot be taxable as business income, but has to be taxed as capital gain. Since there is no dispute as to the similarity of facts, in the absence of any reasons compelling us to take a different view, while following the same, we hold the issue in favour of the assessee Disallowance of proportional interest u/s 36 (1)(iii) - borrowed funds to the extent of funds advanced in respect of share application money - HELD THAT:- This issue also is no longer res integra and is covered by the order in ITA No. 6585/Del/2015 for the assessment year 2011-12 [2019 (4) TMI 1373 - ITAT DELHI]. Since the facts and circumstances are very similar to those involved for the years under consideration, while respectfully following the same, we hold that in view of the decision of the Hon’ble Jurisdictional High Court in the case of CIT vs. Max India Ltd [2017 (3) TMI 1254 - PUNJAB AND HARYANA HIGH COURT] the presumption in favour of the assessee that the advances were only out of this surplus funds and such a presumption does not stand reverted, and consequently the issue is held in favour of the assessee. Addition u/s 14 A and Rule 8D - recording of satisfaction - HELD THAT:- AO failed to record his satisfaction recording the correctness of the claim made by the assessee in relation to expenditure incurred to earn exempt income and therefore, we find it difficult to sustain any disallowance whatsoever on this aspect. We, therefore, while accepting the contention of the assessee and respectfully following the decision of the Hon’ble Delhi High Court in the case of Vedanta [2019 (1) TMI 476 - DELHI HIGH COURT] delete the addition made u/s 14 A and Rule 8D. Deduction u/s 24 - disallowance of prior period expenses - HELD THAT:- All these issues are covered by the order dated 12/02/2019 for the assessment year 2011-12 in assessee’s own case [2019 (4) TMI 1373 - ITAT DELHI] Addition on account of late deposit of PF - HELD THAT:- Ld. CIT(A) deleted the same by following the decision of the Hon’ble Supreme Court in the case of CIT vs. Vinay Cements Ltd [2007 (3) TMI 346 - SC ORDER] and the decision of the Hon’ble Jurisdictional High Court in the case of CIT vs. AIMIL Ltd [2009 (12) TMI 38 - DELHI HIGH COURT] . No fact is brought to our notice which renders these two decisions inapplicable to the facts of the case on hand are as to how the Ld. CIT(A) went wrong in following the decision in these 2 cases. We, therefore, do not find any illegality or irregularity in the conclusion reached by the Ld. CIT(A) on this aspect. Issues Involved:1. Taxation of gains from the sale of shares.2. Disallowance of proportional interest under section 36(1)(iii) on borrowed funds advanced as share application money.3. Disallowance of interest under section 36(1)(iii) on borrowed funds advanced to subsidiaries.4. Disallowance of expenses under section 14A read with Rule 8D.5. Addition out of deduction under section 24.6. Disallowance of prior period expenses.7. Addition on account of late deposit of PF.Detailed Analysis:1. Taxation of Gains from the Sale of Shares:The primary issue was whether the gains from the sale of shares should be treated as business income or capital gains. The Assessing Officer (AO) argued that the transactions were systematic and organized with a profit motive, thus qualifying as business income. However, the Tribunal referred to a previous ruling (ITA No. 6585/Del/2015 for AY 2011-12) which emphasized that the intention behind acquiring shares, the holding period, frequency of transactions, and their treatment in the books are crucial. It was concluded that the intention was not to trade in shares but to earn income from investments. Therefore, the income from the sale of shares should be taxed as capital gains, not business income.2. Disallowance of Proportional Interest Under Section 36(1)(iii) on Borrowed Funds Advanced as Share Application Money:The AO disallowed proportional interest on borrowed funds advanced as share application money, treating it as an interest-free loan. The Tribunal, referencing the decision in ITA No. 6585/Del/2015, highlighted that if the company has sufficient surplus funds, no notional interest disallowance can be made. Given the assessee's significant accumulated reserves, it was presumed the advances were from surplus funds. Thus, the disallowance was deleted.3. Disallowance of Interest Under Section 36(1)(iii) on Borrowed Funds Advanced to Subsidiaries:The AO added interest on interest-free loans to subsidiaries, applying an average interest rate. The Tribunal, following the precedent set in ITA No. 6585/Del/2015, noted that the AO did not establish a nexus between borrowed funds and the advances. It was presumed the advances were for business purposes and from surplus funds. Therefore, the disallowance was deleted.4. Disallowance of Expenses Under Section 14A Read with Rule 8D:The AO applied Rule 8D automatically without recording dissatisfaction with the assessee's voluntary disallowance. The Tribunal, citing the Delhi High Court's decision in Vedanta Limited, stated that Rule 8D cannot be invoked without such a record. Consequently, the disallowance was deleted.5. Addition Out of Deduction Under Section 24:The issue was whether rental income should be treated as business income or income from house property. The Tribunal, referring to the Supreme Court's decision in Raj Dadarkar & Associates v. Asstt. CIT, concluded that rental income from letting out properties should be taxed under 'income from house property', allowing the standard deduction of 30%.6. Disallowance of Prior Period Expenses:The AO disallowed expenses related to the previous year, arguing they should have been claimed earlier. The Tribunal found that the expenses were crystallized and billed in the relevant year, thus allowing the claim.7. Addition on Account of Late Deposit of PF:The AO added an amount for the late deposit of PF. The Tribunal upheld the CIT(A)'s deletion of this addition, referencing the Supreme Court's decision in CIT vs. Vinay Cements Ltd and the Delhi High Court's decision in CIT vs. AIMIL Ltd, which allowed such deductions if deposited before the due date of filing the return.Conclusion:The assessee's appeals were allowed, and the Revenue's appeals were dismissed, with the Tribunal emphasizing the importance of judicial consistency and the need for the AO to establish clear grounds for disallowances. The judgments were pronounced in open court on July 24, 2019.