TaxTMI 
TaxTMI 
2013 (8) TMI 662
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....herefore, we heard all the appeals together and deem it appropriate to dispose off them by this common order. 2. Firstly, we take ITA No.1975/Del/2011 and if we find any ground interconnected with the grounds of appeal raised in this year, then we will take up all those grounds together. 3. The grounds of appeal taken by the assessee read as under :- "1. That the CIT (A) was not justified in sustaining addition of Rs.2,05,00,000/- made by the Assessing officer as unexplained income u/s 68 towards share capital. 2. That CIT (A) had not properly appreciated the facts of the case and vital evidence produced in support of the genuineness of the share capital received from corporate entities. 3. That the CIT (A) was unjustified in sustaining addition of Rs.5.48 lacs made by the Assessing officer on account of education expenses of Shri Dushyant Poddar. 4. That CIT (A) failed to consider the necessary evidence in support of claim to-wards education expenses of Shri Dushyant Poddar. 5. That the CIT (A) committed an error in confirming the addition of Rs.19,53,402/- regarding disallowance of expenditure m....
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....s. It has filed in its return of income on 28.10.2007 declaring a loss of Rs.2,62,08,560/-. The case of the assessee was selected for scrutiny assessment and notice u/s 143(2) was issued and served upon the assessee. In response to the notice, Shri Dinesh Mittal, Chartered Accountant duly authorized by the assessee has appeared before the Assessing Officer from time to time and submitted the requisite details. On scrutiny of the accounts, it revealed to the Assessing Officer that assessee had shown receipts of share application money amounting to Rs.2.05 crores from 13 parties. In order to fulfill the conditions contemplated in section 68 of the Act for explaining the source of investment, ld. Assessing Officer called for explanation of the assessee. It emerges out from record that assessee has filed confirmations from all the 13 applicants, copies of acknowledgement of IT return in 8 cases and copies of bank statement in 10 cases. The remaining details were not filed by the assessee. The ld. Assessing Officer deputed an Inspector in order to verify the identities of the companies. The Inspector submitted hers report on 07.12.2009, whereby she communicated to the Assessing Officer ....
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....e note of the findings recorded by the ld. CIT (A) which read as under :- "4. I have carefully considered the submissions made on behalf of the appellant company and the findings recorded by the ld. AO. I have also very carefully gone through the judgments relied upon by the ld. Counsels for the appellant. On consideration I find that during the course of assessment proceedings, the appellant company has filed copies of confirmations, copies of acknowledgments of IT returns in the cases of all the 13 share applicants. In 10 cases, the appellant company has also filed copies of bank statements so as to establish the fact that the amount of Rs.20500000 was paid out of the bank accounts of the share applicants. Therefore, I find myself in agreement with the ld. Counsels that the initial burden of proving identity of the share applicants was duly discharged. However, as stated earlier, having received the documents filed by the appellant company, the ld. AO made scrutiny of such documents and also took into consideration the fact that out of 13 companies, 4 companies, namely, M/s. Ethnic Creations (P) Ltd., M/s. Fair N Square (P) Ltd., M/s. Shegal Fluid Line & Equipment....
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....the case of Vijay Power Generators Ltd Vs Director of Income Tax & Other wherein after making detailed reference to most of the judgments delivered by the on Hon'ble Apex Court and other High Courts, has made the following important observations: "When we keep in mind the principle of law laid down in the ratio in the aforesaid decisions and apply the same to the facts of this case, it is difficult to find fault with the approach of the Tribunal. We have to keep in mind that the ratio in a decision cannot be applied in each case. The facts and circumstances of each case are to be weighed and examined as to whether a particular ratio decided in a particular case could be applied. As noted above, the initial onus is upon the assessee to establish three things necessary to obviate the mischief of Section 68 of the Act. These are: (i) Identity of investors; (ii) their creditworthiness/investments and (iii) genuineness of the transaction. Only when these three ingredients are established prima facie, it is only then the Department is required to .undertake further exercise as discussed above. In the instant case, no such documents are filed and no steps taken by the asse....
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....egative and dismiss this appeal of the assessee." 4.2 When the facts of the present case are analyzed in the light of the aforesaid observations of the Hon'ble Court, it becomes clear that the evidences filed by the appellant company in order to discharge initial/primary burden which lay upon it were rebutted by the AO by way of going for spotting enquiries. As stated earlier, in the course of spot enquiries neither the share applicant companies were found existing at the given addresses nor any whereabouts of the responsible persons could be gathered by her. The AO has recorded a finding of facts that having received the report of the inspector, the fate of the enquiry was duly brought to the notice of the ld. Counsel of the appellant company and it was only thereafter that he was requested to produce the concerned parties for examination. In view of the aforesaid fact situation and keeping in view the result of enquiry got conducted by the ld. AO in the course of assessment proceedings and also keeping in view the basic parameters laid down by the Hon'ble Court in the case of Vijay Powers Generators Ltd (supra), I am of the view that the assessee had not been able....
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....e had established identity of the shareholders from PAN because before issuing PAN, Department requires address proof of the assessee. Similarly, even ROC requires address proof of the registered office of the assessee Co. Even from the Income Tax Returns, identity was established, moreover, banks also requires address proof before opening the accounts of the customers. Since the assessee had produced bank statement of all the 13 companies, identity had been duly established. f) That the AO has made a reference to the information being available with the Department that M/s Ethnic Creations Pvt. Ltd, M/s Fair N Square Export Pvt. Ltd, M/s Sehgal Fluid Line & Equipments Pvt. Ltd and M/s Shattarchi Finance & Leasing Ltd were appearing in the list of accommodation entry providers. However, neither a copy of report of the Investigation Wing had been provided nor any statement of the Directors of the above said companies was provided stating that the assessee Co. had received cheques in lieu of cash paid to such companies on payment of commission. It was not available as to when this report was made available by the Investigation Wing, whether the statement was recorded ....
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....the AO did not issue any summons to the shareholders. He did not make any inquiry which he was supposed to do, he closed the proceeding on 14.12.2009 itself and passed the order on 17.12.2009. Thus no proper opportunity has been given by the AO to the assessee. k) It is submitted that the assessee had discharged the initial and primary onus laid upon it and this fact has also been accepted by the CIT(A) himself that the assessee had discharged the onus laid upon him. However, CIT(A) was wrong in saying that this onus had been rebutted by the AO by way of going for spot inquiries, during which, it was found that parties were not existing. The CIT(A) is also wrong in saying that vide order-sheet entry dated 08.12.2009, AO had brought the result of inquiry made by the Inspector to the notice of the counsel of the assessee and required him to produce the concerned parties. It was also wrong on the part of CIT(A) that the request of the assessee to the AO to provide an opportunity to cross examine the Directors / Promoters of the share applicant companies in case, was unacceptable. l) It is a well established principle of law that any evidence collected b....
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...., date of allotment, bank statement of the shares subscribers indicating the debit entries against Cheque issued to the assessee and the copy of bank statement of the assessee showing that the cheques were credited in the bank account of the assessee. The AO has made the additions without rejecting the material placed before him. AO has not made any efforts to make inquiry from the AO of these share subscriber companies. It needs to be mentioned that in the case of CIT vs Sofia Finance Ltd (205 ITR 98) (Del) (FB), it has been held that if the shareholders are identified and it is established that they have invested money for the purchase of shares then the amount received by the assessee Co. would be regarded as a capital receipt and no additions can be made u/s 68 of the Act. p) In r/o genuineness of the deposits, it is submitted that all the payment had been received by way of Account Payee Cheques. On a perusal of bank account statements of the respective share subscribers, it is amply clear that the respective shareholder had credits in their bank account by way of clearing, no cash had been deposited before issuing Cheque to the assessee compani....
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....redit Ltd. and Lovely Exports (P) Ltd. have after considering the various judgement deleted the addition made by the AO u/s 68 of the Act holding that the assessee had discharged its onus of proving the identity of the share subscribers. Had any suspicion still remained in the mind of the AO, he could have initiated coercive process but this course of action had not been adopted. Similar are the facts of the present case, assessee had discharged the onus laid upon it. If the AO had any suspicion in his mind on the basis of ITI report, he could have initiated coercive process but he had not issued even the summons u/s 131 of the Act. This judgement have been upheld by the Hon'ble Supreme Court in the case of CIT vs Lovely Exports (P) Ltd. (216 CTR 195, (319 ITR ST 5). v) Thereafter, the judgement of the Delhi High Court in the case of CIT vs Oasis Hospitalities (P) Ltd. (333/119), wherein it is held that where the assessee had filed copies of PAN, acknowledgement of filing ITRs of the companies, there bank account statements for the relevant period but had not produced the Directors of the Co., the addition made by the AO could not be sustained as the primary onus ha....
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....g the course of assessment proceedings had filed various details as has been filed by the present assessee. The AO had not conducted any inquiry in consequent thereto and had closed the proceedings. Accordingly, the Hon'ble Court held that in the absence of inquiries and non-verification of the details at the time of assessment proceeding, the factual finding recorded by the AO were incomplete. y) In the case of CIT vs Expo Globe India Ltd.(ITA NO.1257 of 2011 decided on 20.07.2012), Hon'ble Delhi High Court had again deleted the additions on similar facts holding that the assessee had produced considerable material including ITRs, Balance Sheets, ROC particulars, bank statements etc. and on consideration of the same, CIT(A) had deleted the additions. Even ITAT had confirmed the order of CIT(A) and thus Hon'ble High Court dismissed the appeal filed by the Revenue. z) The recent order of the ITAT Delhi Bench in the case of ITO vs India Texfab Marketing Ltd. (ITA NO.1177/Del/2012 decided on 05.10.2012) is worth noting. In this case, the Tribunal has considered all the judgement including Nova Promoters on the subject and thereafter deleted the addition....
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....on offered by the assessee mean that explanation should be reasonable and acceptable as regards the sums found credited in the books maintained by the assessee. He also pointed out that opinion of the Assessing Officer for not accepting the explanation offered by the assessee as not satisfactory should be based on proper appreciation of material and other attending circumstances. Ld. DR on the strength of Hon'ble Supreme Court's decision in the case of Sumati Dayal vs. CIT reported in Suppl. (2) SCC page 453 has apprised us how to appreciate the material available on record. He also relied upon the decision of Hon'ble Supreme Court in the case of CIT vs. Durga Prasad More reported in 82 ITR 540 and submitted that evidence available on the record has to be weighed according to the human probabilities. 8. We have duly considered the rival contentions and gone through the record carefully. Section 68 of the Act contemplates that where any sum found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfac....
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....ty and it has demonstrated the genuineness of the transactions. The only evidence possessed by the Assessing Officer is the inspection report of the inspector. This report was not confronted with the assessee at the time of assessment proceedings and, therefore, its cognizance cannot be taken. For buttressing this contention, ld. Counsel for the assessee relied upon the decision of Hon'ble Delhi High Court in the case of CIT vs. Pradeep Kumar Gupta reported in 303 ITR 95 . Thus, according to the ld. Counsel for the assessee, if this report is excluded from the record on the ground that assessee was not granted an opportunity to explain its position qua the report, then, there is no evidence available with the Assessing Officer to doubt the evidences submitted by the assessee. She had relied upon number of judgments, namely, Sofia Finance Ltd (205 ITR 98) (Del) (FB), CIT vs. Value Capital Services P. Ltd. reported 307 ITR 334, CIT vs. Divine Leasing and Finance Ltd. 299 ITR 268 and CIT vs. Lovely Exports P. Ltd. (2008) 216 CTR (SC) 195 She has also relied upon the decision of Hon'ble Delhi High Court in the case of CIT vs. Kamdhenu Steel Ltd. reported in 248 CTR 33/206 Taxman 254 an....
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....liar facts which attract the ratio of Lovely Exports (supra). Where the assessee adduces evidence in support of the share application monies, it is open to the assessing officer to examine it and reject it on tenable grounds. In case he wishes to rely on the report of the investigation authorities, some meaningful enquiry ought to be conducted by him to establish a link between the assessee and the alleged hawala operators; such a link was shown to be present in the case of Nova Promoters & Finlease (P) Ltd. (supra) relied upon by the revenue. We are therefore not to be understood to convey that in all cases of share capital added under Section 68, the ratio of Lovely Exports (supra) is attracted, irrespective of the facts, evidence and material." In the case of Kamdehenu Steel Ltd., Hon'ble Delhi High Court has made the following observations which was emphasized by the ld. Counsel for the assessee :- "12. What does follow from the aforesaid? It is not in doubt that the assessee had given the particulars of registration of the investing/applicant companies; confirmation from the share applicants; bank accounts details; shown payment through account payee cheques....
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....me at which the letter was sent or the Inspector visited and no change in address was communicated, perhaps it may have been one factor. In support of the conclusion which the AO wanted to arrive at, that by itself cannot be treated as the conclusive factor. As pointed out above, these applicant companies have PAN and assessed income tax. No effort was made to examine as to whether these companies were filing the income tax return and if they were filing the same, then what kind of returns these companies were filing. If there was no return, this could be another factor leading towards the suspicion nurtured by the AO. Further, if the returns were filed and scrutiny thereof reveals that such returns were for namesake, this could yet another be contributing factor in the direction AO wanted to go. Likewise, when the bank statements were filed, the AO could find out the address given by those applicant companies in the bank, who opened the bank accounts and are the signatories, who introduced those bank accounts and the manner in which transactions were carried out and the bank accounts operated. This kind of inquiry would have given some more material to the AO to find out as to whe....
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....relied upon, but opportunity to cross-examine is not afforded to the assessee. On the contrary, it is a case where the AO(s) did not collect the required evidence which they were supposed to do. To put it otherwise, once the assessee had discharged their onus and the burden shifted on the AO(s), they could not come out with any cogent evidence to make the additions. No doubt, as indicate by us above, the AO(s) could have embarked upon further inquiry. If that is not done and the AO(s) did not care to discharge the onus which was laid down, for this "negligence" on the part of the AO(s), he cannot be provided with "fresh innings". The order of the AO(s) had merged in the order of the CIT(A) and in some of the cases before us and before the CIT(A), the assesses had succeeded. This court is acting as appellate court and has to act within the limitations provided under section 260 of the Act. The appeals can be entertained only on substantial questions of law. In the process, this Court is to examine as to whether the order of the Tribunal is correct and any substanti....
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.... attempt to assist the AO in these proceedings. While it is true that the AO did look into the investigation report and did not allow cross examination of the individuals who made the statement under Section 131 of the Act, that alone cannot be termed as a fatal infirmity in his order. Even if that material were to be ignored, the pattern of share money infusion was the same; amounts were usually deposited in the account of the share applicants a few days before the issue of the shares. Moreover, the material provided about the share applicants' financial and fiscal standing was sketchy; they did not respond to summons under Section 131. Under these circumstances, the inferences drawn by the AO were justified and warranted. The Appellate Commissioner and the Tribunal fell into error in directing their deletion. 13. For the above reasons, this Court is of opinion that the revenue's appeal has to succeed. The questions framed are answered in the affirmative, in favour of the revenue; the impugned order (and that of the Appellate Commissioner), are hereby set aside and the order of the AO is restored. The Appeal is therefore allowed." Similarly, it is also worth to ....
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....come. In the absence of such evidence, it is argued, the finding is erroneous. We are unable to agree. Whether a receipt is to be treated as income or not, must depend very largely on the facts and circumstances of each case. In the present case the receipts are shown in the account books of a firm of which the appellant and Govindaswamy Mudaliar were partners. When he was called upon to give explanation he put forward two explanations, one being a gift of Rs. 80,000 and the other being receipt of Rs. 42,000 from business of which he claimed to be the real owner. When both these explanations were rejected, as they have been it was clearly upon to the Income-tax Officer to hold that the income must be concealed income. There is ample authority for the position that where an assessee fails to prove satisfactorily the source and nature of certain amount of cash received during the accounting year, the Income-tax Officer is entitled to draw the inference that the receipt are of an assessable nature. The conclusion to which the Appellate Tribunal came appears to us to be amply warranted by the facts of the case. There is no ground for interfering with that finding, and these appeals are....
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....before the Assessing Officer. This suggest that claim of the assessee that outcome of the inspector's investigation was not confronted is incorrect. The assessee is a private limited company. As observed by the Hon'ble High Court in the case of N.R. Portfolio (P.) Ltd. that in a private limited company, share applicants are known to the Directors of the assessee company. Had the assessee submitted to the ld. Assessing Officer vide letter dated 14.12.2009 that these are the Principal Officers/Directors of the share applicant companies and these are their residential addresses, you issue the summons and send the process server with the representative of the assessee to effect the service on those persons, then, there could be some substance in the plea of the assessee. By merely pleading that it has approached the shareholders for appearing before the Assessing Officer, who refused to appear, would not absolve the assessee from its duty to file correct and latest addresses, more particularly when it is claiming the bona fide and honesty in its dealing. This type of statement is a self-serving statement only to make space for raising arguments in higher appellate forum. We have indepe....
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....duate would command a salary of Rs.10 to Rs.30 lacs per annum, therefore, it has decided to finance the study of Dushyant Poddar, a graduate in economics from Delhi University, who was taken as an employee at a salary of Rs.10,000/-. He got admission in MBA (Finance) in UK and the assessee took the responsibility of his expenses. He executed a bond of five years for working with the assessee company at a salary ranging between Rs.10,000/- to Rs.25,000/-. According to the assessee, it is a profitable exercise for the assessee and it will save at least Rs.50,000/- per month for the next five years after the return of Dushyant Poddar. Ld. Assessing Officer has rejected the claim of the assessee on the ground that Dushyant Poddar is the son of the Directors. It is a closely held company where majority shares are being held by Shri Lalit Poddar, Smt. Saroj Poddar and Kaladhar Impex & Traders Limited, who is controlled by Shri Lalit Poddar and Smt. Saroj Poddar, who are the father and mother of Dushyant Poddar. Therefore, according to the Assessing Officer, the personal expenditure for educating one's progeny has been tagged with the company. He disallowed the claim. 10. On appeal, th....
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.... for this costly training. 3.5 Interestingly, though the employment bond was executed on 1st April, 2005, Shri Dushyant Poddar had already been selected for doing MBA from the University in UK. This fact is clearly stated in clause (a) on page 1 of the employment bond. 3.6. Therefore, in the above fact situation, I do not find myself in agreement with the appellant company in so for as the claim that the expenditure of Rs.23,16,942/- was in connection with and necessitated out of business expediency of the appellant company. Accordingly, the disallowance of Rs. 23,16,942/- is being up-held." 5.2 In view of the aforesaid and looking to the commonality of circumstances, the disallowance made b the ld.AO is being sustained." 11. Before us, the learned AR for the assessee relied upon the written submissions which read as under :- "a) Expenditure incurred by the assessee on education and training of the employee is eligible for deduction u/s 37(1) of the Act. Copy of Section 37(1) is annexed at page 14. b) As per provisions of Section 37(1) of the Act, any expenditure not being expenditure of the nature d....
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....sions regarding acquisition, retention, maintenance and disposal of investments necessarily entail administrative and other expenses. Therefore, the disallowance made by the AO is contrary to his own observations when he made the addition holding that there was no necessity of MBA (Master of Business Administration) in the business of purchase and sale of shares. h) It is needless to say that the commercial expediency has to be seen from the view point of the businessman. As stated by the Jurisdictional High Court in the case of CIT vs Dalmia Cement (B) Ltd (254 ITR 377), the jurisdiction of the Revenue u/s 37(1) of the Income Tax Act is confined to deciding the reality of the business expenditure viz. whether the amount claimed as deduction was factually expended or laid out and whether it was wholly and exclusively for the purpose of business. The reasonableness of the expenditure could be gone into only for the purpose of determining whether, in fact, the amount was spent. Once it is established that there was nexus between the expenditure and the purpose of the business, the revenue cannot justifiably claimed to put itself in the arm chair of the businessman or ....
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....eduction in determining the business profit of the assessee Co. Hon'ble High Court have held that merely because there was no Commitment or Contract or Bond taken from the trainee, the expenditure which was otherwise proper, cannot be disallowed to the Co., particularly when as a result of that expenditure the trainee had secured both a degree and training which would be of assistance to the assessee Co. and she had, in fact, served the Co. on her return to India. m) Calcutta High Court in the case of Hindustan Aluminium Corporation Ltd vs CIT (159 ITR 673) have allowed the expenditure incurred by the assessee on 28 employees for advance training in foreign country, in order to enable the assessee to run its factory efficiently and competently. In the present case also, assessee had incurred expenditure on the training of his employee, being the son of the Directors, to run its business efficiently and competently. n) Madhya Pradesh High Court in the case of CIT vs Kohinoor Paper Products (226 ITR 220) have also allowed similar expenditure to the assessee holding that the expenditure so incurred was not in the nature of capital expenditure or for per....
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..... Nai Duniya News and Networking. The whole philosophy under which claim of education expense were made allowed/denied have been noticed by Hon'ble Delhi High Court while taking note of CIT (A)'s order in the case of Natco Exports Private Limited vs. CIT. It is advantageous to take note of the Hon'ble High Court's observation including the findings of CIT (A) in that case :- "2. Ld. counsel for the appellant relies upon paragraph 3 and 5 of the impugned order and submits that in the present case, the Tribunal has erred in holding that the expenditure incurred on education of one of the directors Ms. Ruchika Grover, who had undergone a course called Master of Science in Entrepreneurship at United Kingdom from University of Nottingham, was not expenditure wholly and exclusively incurred for the purpose of business. Ld. counsel for the appellant relies on decision of the High Court of Karnataka in Krishna Fabrications Ltd. Vs. Joint Commissioner of Income Tax (2010) 192 Taxman 287 (Kar). The relevant quote from the decision of Karnataka High Court reads as under :- "After hearing the learned counsel for the parties, we are of the....
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....nal expenditure and has no relation with the business activities of the appellant company. The appellant company is a family concern where the parents of Ms. Ruchika Grover and Ms. Ruchika Grover are the directors. Sh. Naresh Inderapal Singh has been taken as director only till the time of property owned by him at Cottage No.9, West Patel Nagar, New Delhi-110008 is mortgaged to Union Bank of India with rider that he shall automatically cease to be the director of appellant company as and when the property is released from mortgage of the Bank meaning thereby that Sh. Naresh Inderpal Singh has no say in the day-to-day running of the appellant company. Ms. Ruchika Grover did Commerce from one of the very reputed institution of Delhi University is concerned and if the argument of the appellant company that higher studies shall benefit the appellant company then the same reasoning is applicable as far as doing graduation from Delhi University and the appellant or for that matter all other assessees doing business shall start taking the plea that the studies are in connection with the business and hence to be allowed as "business expenditure". 3.2....
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....cts and circumstances of the case, the aforesaid expenditure, it has been held, cannot be regarded as wholly and exclusively incurred for the purpose of business. The findings are findings of fact. The findings are not perverse." In the present case also, there is no policy formulated by the assessee company vide which it had invited applications from all the employees for sponsoring their higher education. Rather we have confronted ld. Counsel to show whether any policy in principle is available in the company to provide assistance for higher education. The reply of the ld. Counsel was a negative. Had Dushyant Poddar was not the son of the Directors, his education expenses would have not been met by the company. The assessee claimed that higher education of Dushyant Poddar would give a benefit of more than R.50,000/- per month to the assessee company but who has checked the credentials of Dushyant Poddar and what salary he would claim in the open market. Without there being any material on record, how the assessee can say that the decision to sponsor education of Dushyant Poddar was not influenced by the parental love and affection of the Directors. After taking into considerat....
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....vidend is not an outcome of any separate activity but it is an outcome of the same activity, income/loss of which has been declared as business profit/loss. Section 1 4A disallows only such expenditure which had been incurred in relation to earning of dividend income. As stated, assessee had incurred the expenditure during the course of its business activity. Expenses had been incurred only for the purpose of its business activity of purchase and sale of shares, positive I negative income of which, had been declared under the head "Business Income". Merely because assessee had received dividend on some of its shares, which could not be sold or are held during the year, it will not change the nature and character of expenditure. Since the assessee had not incurred any expenditure in relation to earning the dividend income, provisions of Section 14A are not attracted. e) Section 14A has been amended by the Finance Act 2006 w.e.f. 01.04.2007 whereby the provision which was already existing was renumbered as sub-Section (1) and thereafter sub-Section (2) & (3) are inserted. f) Notes on relevant clause of the Finance Bill is reported at 281 ITR ST 131 at ....
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.... l) In the present case, assessee has started its business from the year 1985 and since then the expenditure incurred by the assessee had been treated as business expenditure and had been allowed under various provisions of Section 28 to 43D of the Act, even after inserting the provisions of Section 14A of the Act by the Finance Act 2001. Nature and character of the expenditure has not been changed with insertion of Section 14A. Therefore, Rule of consistency would demand that the AO cannot disallow the business expenditure invoking provisions of section 14A of the Act. m) Throughout all the years, assessee had shown the assets as trading assets and not as investment on capital account. As held by the Hon'ble Supreme Court in the case of G Venkatswarny Naidu & Co. vs CIT (35 ITR 594), it is the intention of the assessee at the time of making the purchase which is relevant. Where he purchase has been made solely and exclusively with the intention to resell at a profit and the purchaser has no intention of holding the property for himself or otherwise enjoying or using it, it would raise a strong presumption that the transaction is an adventure in the nat....
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.... earning exempted income, no expenditure has been incurred, disallowance u/s 14A cannot stand. The contention of the revenue that directly or indirectly some expenditure is always incurred which must be disallowed u/s 14A and the impact of expenditure so incurred cannot be allowed to be set off against the business income which may nullify the mandate of Section 14A, cannot be accepted. Also see 318 ITR 417 (Bom) CIT vs Shapoorji Pallonji & Co. 319 ITR 204 (P&H) CIT vs Winsome Textile Industries Ltd. 193 ITR 321 (SC) Radha Soami Satsang vs CIT q) Even Supreme Court in the case of CIT vs Wallfort Share & Stock Brokers (P) Ltd (326 ITR 01 AT 17) have held that for attracting Section 14A, there has to be a proximate cause for disallowance of expenditure, which it is its relationship with the tax exempt income. This judgement has also been discussed by the Bombay High Court in 328 ITR 81 point (X) at page 117. r) Section 14A does not authorize estimating the expenditure alleged to "have been" incurred &nbs....
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.... assessed under a separate head, payment of interest by the assessee on amounts borrowed for purpose of investment must be allowed as business expenditure and not as expenditure incurred for earning dividend. (125 ITR 227) (Guj) AT 238 Addl CIT vs Laxmi Agents Pvt. Ltd. (208 ITR 616) (Cal)(208 ITR 616) (Cal) CIT vs Rajeev Lochan Kanoria (238 ITR 777) (Bom) CIT vs Amrita Ben R Shah (210 ITR 991) (Cal) CIT vs Jardine Handersion Ltd (284 ITR 586) (Bom) CIT vs Emerald Co. Ltd (183 Taxmann 159) (Bom) CIT vs Srishti Securities (P) Ltd. u) In CIT vs Frick India Ltd. (ITA No.1185/2008), ITAT has accepted 10% of the dividend income as reasonable for earning dividend income following the principle laid down in Section 80HHC and the same has been upheld by the Hon'ble Jurisdictional High Court. v) It is submitted that as held by the Bombay High Court in the case of Godrej Boyce Manufacturing Company Ltd. vs Dy GIT (328 ITR 81....
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.... "Scope of sub-sections (2) and (3) of Section 14A 29. Sub-section (2) of Section 14 A of the said Act provides the manner in which the Assessing Officer is to determine the amount of expenditure incurred in relation to income which does not form part of the total income. However, if we examine the provision carefully, we would find that the Assessing Officer is required to determine the amount of such expenditure only if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the said Act. In other words, the requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the Assessing Officer returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Therefore, the condition precedent for the Assessing Officer entering upon a determination of the amount of the expenditure incurred in relation to exempt inco....
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....b) the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act for such previous year, the Assessing Officer shall determine the amount of the expenditure in relation to such income in accordance with the provisions of sub-rule (2) of Rule 8D. We may observe that Rule 8D(1) places the provisions of Section 14A(2) and (3) in the correct perspective. As we have already seen, while discussing the provisions of Sub-sections (2) and (3) of Section 14A, the condition precedent for the Assessing Officer to himself determine the amount of expenditure is that he must record his dissatisfaction with the correctness of the claim of expenditure made by the assessee or with the correctness of the claim made by the assessee that no expenditure has been incurred. It is only when this condition precedent is satisfied that the Assessing Officer is required to determine the amount of expenditure in relation to income not includable in total income in the manner indicated in sub-rule (2) of Rule 8D of the said Rules. 31. It is, therefore, clear that determination of the amount of expenditure....
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....ctive effect from 01.04.1962. The proviso was inserted by virtue of the Finance Act, 2002 and it was made clear that nothing in Section 14A empowered the Assessing Officer to either re-assess under Section 147 or pass an order enhancing the assessment or reducing the refund already made or otherwise increasing the liability of the assessee under Section 154, for any assessment year beginning on or before the first day of April, 2001. Thus, in respect of all the assessment years prior to the assessment year beginning on or before the 1st day of April, 2001, concluded assessments could not be disturbed despite the fact that Section 14A had been expressly made retrospective with effect from 01.04.1962. The provisions of Section 14A, which were retrospective with effect from 01.04.1962 are now encapsulated in sub-section (1) of Section 14A. It is also clear that sub-sections (2) and (3) of Section 14A were introduced subsequently by virtue of the Finance Act, 2006 and were introduced with effect from 01.04.2007. However, although subsections (2) and (3) had been introduced with effect from 01.04.2007, they remained empty shells inasmuch as the expression "such method as may be prescrib....
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....rify certain ambiguities which may crept in the statutory provisions. This Explanation cannot override the main provision and enlarge its scope. It was also contended that assessee is a registered broker with the SEBI and all the trading in these shares are through National Stock Exchange and Bombay Stock Exchange. The principal business of the assessee is acquiring, holding and dealing in shares and securities. It is also engaged in the broking business of shares since its inception. Thus, the income from business that is share dealing, share brokering, etc. is a composite business which has to be taken as a whole. If all these factors are located together then it would suggest that assessee is an investment company and Explanation appended to section 73 would not be applicable upon the activities of the assessee. 20. The ld. First Appellate Authority has rejected the contention of the assessee. According to the ld. First Appellate Authority, sub-section (1) to section 73 provides that any loss computed in respect of speculation business carried on by an assessee shall not be set off except against profits and gains, if any, of another speculation business. Ld. CIT (A) has obse....
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....s issued or guaranteed by any Co. constituted or carrying on business in India or elsewhere and debentures, debentures stocks, bonds, obligations and securities issued or guaranteed by any Govt., State, Dominant, Sovereign, Ruler Commissioner, Public Body or Authority Supreme, Municipal, Local or otherwise whether in India or elsewhere, ii) to carryon the business and to Act as commission agents, brokers and to buy, sell and deal in stocks and shares. Memorandum is enclosed at page 64. b) In order to achieve these objects, assessee had registered itself with SEBI and was, during the relevant year, dealing in shares. c) As per the Para 2 of the assessment order itself, the assessee Co. is engaged in the business of stocks and share broker and dealing in shares and securities and making investments. d) The assessee had during the year, purchased the shares and had sold them either on behalf of its constituents or on its own behalf. From the constituents, it had charged the commission and reflected the same as brokerage income in the Profit & Loss Ale. Simila....
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....n while making disallowance invoking the provisions of Explanation to Section 73 of the Act. Explanation to Section 73 had been inserted by the Taxation Laws (Amendment) Act 1975 w.e.f. 01.04.1977. The scope and effect of the Explanation have been elaborated in Circular NO.204 dated 24.07.1976, which is reported at 110 ITR ST 21 AT 32, which is annexed at page 36 to 38. g) It may be stated that Explanation to Section 73 had been inserted on the basis of recommendations of the Wanchoo Committee, which is reported in the commentary of Sampath Iyanger, 10th edition, Vol-3, page 5002: "A tax avoidance device often resorted to by business houses controlling group of companies is manipulation of results from dealing in shares of the companies controlled by them. In our opinion, such manipulation in share dealings for the purpose of tax avoidance can be checked effectively if the results of dealing in shares by such companies are treated for lax purposes in a manner analogous to speculation. No doubt, companies whose main business activities center around investment in shares will have to be left out. Accordingly, we recommend that t....
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....dgement of Bombay High Court in the case of CIT vs Shri Bharat R Ruhia (HUF) (199 Taxmann 87) have held that the exchange traded derivative transactions were not speculative transaction after the insertion of proviso (d) to Section 43(5) w.e.f. 01.04.2006 by the Finance Act 2005 as the inserted clause is prospective in nature. Thus CIT(A) has erred in treating the loss of Rs. 32,78,412/- as speculative loss. The true copy of Notes on Clauses (273 ITR ST 139 AT 149) & Memorandum explaining provisions (273 ITR ST 187 AT 207) are enclosed at page 41 to 42 and 43 to 45. k) It is submitted that as stated in preceding paras, business of the assessee is a composite business i.e. dealing in shares on behalf of customers and on his own behalf. Therefore, the same cannot be bifurcated into the speculation business and non-speculation business. Entire profit/loss earned / incurred by the assessee is a normal business loss. The transactions involving purchase of shares which could not be sold during the day were carried forward to be subsequent date and sold thereafter. The loss incurred by the assessee from the transactio....
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....whichever is lower" for valuation of closing stock. Due to this method adopted by the assessee that the loss has arisen. As per AS-2 (valuation of inventories) or AS-13(accounting for investment) it is a well recognized method of valuation and the assessee was consistently following this method. In the case of Chainrup Sampatram vs CIT (24 ITR 481) Supreme Court have held that it is a misconception to think that any profit arises out of the valuation of closing stock. Though valuation of unsold stock at the close of an accounting year if; a necessary part of the process of determining the trading result of that period, it can in no sense be regarded as source of such profits. The source of the profit and gain of a business is indubitably the business. It is submitted that the income can be taxed only if such has been accrued or arose during the course of business. It is the trading activity of the assessee due to which profit arises. Moreover, the closing stock of the present year will become the opening stock of the subsequent year and therefore there is no loss to the revenue. In CIT vs Shah Doshi & Company (133 ITR 23), Gujarat High Court have hel....
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....ses. Without admitting, even if it is presumed that the establishment expenses are to be allocated to brokerage income, share trading and exempted dividend income then also a sum of Rs. 59,54,517/- is to be allocated. CIT(A) have treated 20% of the expenses as the expenditure towards routine and day-to-day activities. Further Rs. 19,53,402/- have already allocated by the AO to the exempted dividend income (though this issue has been challenged by the assessee), the balance amount has to be allocated to the brokerage income proportionately. Thus assessee had losses under all the 03 heads and therefore, Section 73 cannot be applied. b) CIT(A) has also held that the speculative loss of Rs. 1,94,82,909/- and the expenses of Rs. 49,12,978/- (this is incorrect figure as stated in preceding Para) have to be disallowed and added back. It is submitted that the additions made by the AO have also to be adjusted against this loss only. c) Without prejudice to the aforesaid contention, even if it is presumed that the additions are not adjusted against the so called speculation loss then also the said additions can be adjusted against the brought forward losses. I....
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....st any profit and gains arose from another speculation business. The Explanation to the section provides that if any part of the business of a company consists in the purchase and sales of shares of other companies, then, such company shall for the purpose of this section be deemed to be treated as carrying on speculation business to the extent of which the business consist of purchase and sales of shares. This Explanation exclude certain companies whose gross total income consist mainly of income which is chargeable under the heads 'Interests on securities', 'Income from house property', 'Capital gains' and 'Income from other sources' or whose principal business is of banking or granting of loans. The activities of the assessee do not fall in the ambit of the nature of business provided in the Explanation. The main business of the assessee includes sales of shares. It has shown losses of Rs.76,21,702/- on such activities. Thus, prima facie, Explanation appended to section 73 is clearly applicable on the facts of the assessee's case. The first contention raised by the ld. Counsel for the assessee is based upon the principle of consistency. She submitted that assessee company was in....
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....Therefore, this argument has no more relevance in this case. At the strength of Hon'ble Bombay High Court decision in the case of Bharat R. Ruia HUF reported in 199 Taxman 87, it was contended that exchange traded derivative transactions were not speculative transactions after the insertion of Proviso (d) to section 43(5) w.e.f. 01.04.2006. Thus, according to the assessee, the loss arising out of mark-to-mark (F&O) at Rs.32,78,412/- should not be treated as a speculative loss. The judgment relied upon by the assessee is in respect of specific transactions. The issue in the judgment was altogether different. Applicability of Explanation appended to Section 73 was not called for in that case. It was a case of section 43(5). We have gone through the replies of the assessee available on pages no.328 to 333 before the CIT (A). It has nowhere raised this plea and it was nowhere submitted this bifurcation in the reply. More so trading of derivative at exchange may not be speculative transaction as per section 43(5), but it is trading in shares, which would also trigger the deeming fiction available in Explanation to section 73. The next contention raised by the ld. Counsel for the assesse....
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....eculation Business (alleged) Share Trading Mark to Mark (F&O) Clearing Difference (-) 7621702.00 (-) 3278412.99 (-) 8582975.68 (-)19483090.67 4912978.00 2291524.00 (-) 21774615 Capital Gain Profit on sale Of car 16315.00 Income from other sources Dividend Interest on Deb & FDR 619091.74 9260.00 1953402.00 8582975.68 1953402.00 5306158.00 (-) 1325050 3.1 I have carefully examined the nature of income shown by the appellant under different categories and the allocation of expenses made by the Id. counsel for the appellant. On consideration, I find that the allocation made by the Id. counsel is in order and deserves to be accepted. Accordingly, the AO is directed to re-calculate the activity wise Profit & Loss as per the computation furnished by the Id. counsel for the appellant and reproduced here as-in above. 3.2 Further, the Id. counsel for the appellant has also pointed out that the expenses claimed under the head depreciation are not included in the establishment expenses of Rs.5954517/- and therefore, the depreciation expenses also require ....
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..../2011, the assessee has pleaded that CIT (A) was unjustified in treating the loss of Rs.19,41,82,909/- as speculation loss. This figure has ultimately been determined at Rs.2,25,12,939/- in the order of Assessing Officer dated 09.05.2011. It includes deprecation of Rs.2,19,635/-. In the chart extracted supra, this figure has been worked out by the assessee at Rs.2,17,74,615/- which ultimately was found to be Rs.2.25 crores. The next computation error is pointed out by the assessee in ground no.13 is that ld. CIT (A) has wrongly included as sum of Rs.32,78,412/- in the speculative sales. According to the assessee, it is a loss arising out of mark-to-mark (F&O) transactions. We are of the view that this plea was duly considered by the CIT (A) and it is part of assessee's main activity, i.e., sale and purchase of shares. It cannot be excluded separately on the strength of Hon'ble Bombay High Court decision rendered altogether on different facts. In grounds no.14 & 15, assessee has pleaded that CIT (A) ha erred in disallowing expenses of Rs.49,12,798/-. This was accepted by the CIT (A) as a factual error. What had happened is that CIT (A) took into consideration expenses allocable to e....
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.... any merit in this contention. 31. The ld. Counsel for the assessee also raised alternative contention on the strength of the Hon'ble Delhi High Court decision in the case of M/s. Lavish Apartment Pvt. Ltd. vs. ACIT rendered in ITA No.254 / 2006. She contended that in case an addition of Rs.2.5 crores on account of share application money is confirmed, then, it be set off against carry forward business losses of earlier years. She also contended that expenses added on account of establishment expenses and education expenses are also to be set off against carry forward of losses from earlier years. 32. We have duly considered the rival contentions and gone through the record carefully. In the case of Lavish Apartment Pvt. Ltd., Hon'ble Delhi High Court on an analysis of section 72 observed that as far as heads of income are concerned, they are irrelevant for the purpose of setting off of the profit and gains of the business against the losses of earlier years. The Hon'ble Court has observed that if rental income, commission income, etc. are earned on commercial principles, though assessed under the different heads as per the Act, that is, income from house property or income f....
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....bsp; C. - Income from house property. D. - Profits and gains of business or profession. E. - Capital gains. F. - Income from other sources. 11. Some of the salient features of section 14 in so far as they have material bearing on the issue under appeal are as under: (i) Section 14 merely classifies the income under various heads of income for the purpose of computation of total income under them. Section 14 does not deal with aggregation of income; it merely deals with classification of income under various heads of income. "Computation of total income under various heads of income" under Chapter IV is altogether different from "Aggregation of income" under Chapter VI of the Income-tax Act. They do not mean one and the same thing. They are fundamentally different from each other. (ii) Section 14 is not a charging secti....
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....y permissible in that behalf under the relevant head of income. Aggregation of income under Chapter VI does not provide for any deduction towards any expenditure. It brings the entire sum to the charge of income-tax and thus there is no element of 'computation' of income under Chapter VI as in the case of income falling under specific heads in terms of Chapter IV. It could be for this reason that the sums taxed under Chapter VI have been kept outside the computational provisions of Chapter IV. (iii) Amounts are taxed under the provisions of Chapter VI for the reason that their nature and source are not known. Once their nature and source are known, they have to be pegged to that source/head of income and taxed under the respective heads of income as enumerated in Chapter IV and not under the provisions of Chapter VI. Conversely, if the nature and source of such amounts are not known, they have to be taxed under the specific provisions of Chapter VI. It therefore necessarily follows that what is taxed under the specific provisions of Chapter VI cannot be pegged to any of the sources/heads of income as specified in Chapter IV. 1....
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....ed in sections 2(45)/4/5 of the I-T Act yet that does not mean that the income assessable under section 68 has to be assessed u/s 56. In the case before us, source of unexplained cash credits is not known and hence they cannot be linked to any known source/head of income including income from other sources. In order to constitute income from "other sources", the source, namely, the "other sources", has to be identified. Income from unexplained or unknown sources cannot therefore be considered or taxed as income from other sources. The aforesaid view is fortified by the judgment of the Hon'ble Gujarat High Court in Fakir Mohmed Haji Hasan v. CIT [2001] 247 ITR 290/[2002] 120 Taxman 11 in which the Hon'ble High Court has held as under:- "The scheme of sections 69, 69A, 69B and 69C of the Income tax Act, 1961, would show that in cases where the nature and source of investments made by the assessee or the nature and source of acquisition of money, bullion, etc., owned by the assessee or the source of expenditure incurred by the assessee are not explained at all, or not satisfactorily explained, then, the value of such investments and money or the....
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....are covered under the provisions of sections 69, 69A, 69B and 69C of the Act in view of the scheme of those provisions." 16. In view of the foregoing, we are unable to hold that unexplained cash credits assessed u/s 68 are to be assessed as income from other sources u/s 56. 17. The ld. counsel for the assessee, however, relied upon the judgments in Lakhmichand Baijnath's case (supra) and Kevalchand Nemchand Mehta's case (supra). We have carefully gone through them. They have been rendered in the context of old Indian Income tax Act of 1922 in which there was no provision corresponding to section 68 or Chapter VI of the Income-tax Act 1961. In the absence of any specific provision in the old Indian Income-tax Act of 1922, a view was taken that unexplained cash credits would be assessable as income from other sources. Section 68 under Chapter VI has been inserted in the present Income-tax Act to provide that any sum found recorded in the books of the assessee would be taxed as income of the assessee if he failed to satisfactorily explain the nature and source thereof. In this view of the matter, unexplained cash credits have to be brought to tax under ....