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 ITO vs. Vikram A. Pradhan (ITAT Mumbai)

Femstex Trading Co. Pvt. Ltd. 228, Sanjay Bldg. No. 5B, Mittal Industrial Estate, M.V. Road, Andheri (E), Mumbai-400 059 Vs. Income Tax Officer-8(1)(4) 2nd Floor, Aaykar Bhavan, M. K. Road, Mumbai-400 020
February, 20th 2015
                    ""   
     IN THE INCOME TAX APPELLATE TRIBUNAL "F" BENCH, MUMBAI

          ,        ,                                    
     BEFORE SHRI JOGINDER SINGH, JM AND SHRI SANJAY ARORA, AM

                     ./I.T.A. No. 1834/Mum/2011
                    (   / Assessment Year: 2007-08)

Femstex Trading Co. Pvt. Ltd.                       Income Tax Officer-8(1)(4)
228, Sanjay Bldg. No. 5B,                  /        2nd Floor, Aaykar Bhavan,
Mittal Industrial Estate, M.V. Road,       Vs.      M. K. Road, Mumbai-400 020
Andheri (E), Mumbai-400 059
     . /  . /PAN/GIR No. AAACF 0582 D
         ( /Appellant)                        :            (     / Respondent)

         / Appellant by                      :     Shri Rahul K. Hakani

           /Respondent by                    :     Shri Pawan Kumar Beerla

                         /                   :     04.12.2014
                   Date of Hearing
                      /
                                             :     19.02.2015
           Date of Pronouncement

                                    / O R D E R
Per Sanjay Arora, A. M.:

       This is an Appeal by the Assessee directed against the Order by the Commissioner
of Income Tax (Appeals)-16, Mumbai (`CIT(A)' for short) dated 11.01.2011, partly
allowing the assessee's appeal contesting its assessment u/s.143(3) of the Income Tax
Act, 1961 (`the Act' hereinafter) for the assessment year (A.Y.) 2007-08 vide order dated
21.12.2009.

2.     The issue raised per ground # 1 of the appeal is the disallowance of the claim of
loss on the sale of investment in mutual funds at Rs.11.59 lacs, claimed as business loss.
                                             2
                                                   ITA No. 1834/Mum/2011 (A.Y. 2007-08)
                                                           Femstex Trading Co. Pvt. Ltd. vs. ITO

The brief facts are that the assessee was during the course of assessment proceedings
observed to have claimed a sum of Rs.11,59,047/- on account of `loss on mutual fund'
through its profit and loss for the year, under the head `administrative expenses'
(Schedule XII to Annual Accounts/PB pgs. 1-24, at pg.19). The assessee-company, a
merchant exporter, since 1990, explained that its business of exports, which was
principally to Western African countries, had suffered and stood considerably reduced
due to depressed economic conditions and recession in the world market. The idle funds
of its business had been therefore deployed for investment purposes, in mutual funds and
other instruments, viz. shares, FDRs, etc. However, as the mutual fund/s did not perform
as anticipated, they were liquidated, yielding the impugned loss. The same, therefore,
bears the character of a business loss, and for which reference may be made to para 22 of
Part IIIA of its Memorandum of Association (MOA), defining its objects, and which
permit investment of the company's funds, not immediately required, for investment in or
otherwise dealing in immovable property, shares, stocks, bonds, debentures, etc. In fact,
gain on sale of mutual funds (Rs.1.08 lacs) had been accepted in assessment for A.Y.
2006-07 as business income. Further, gain of Rs.7,84,064/- for A.Y. 2008-09 had been
similarly accepted as part of business income. This sums up the assessee's case. The
same did not find acceptance with the Assessing Officer (A.O.), in whose view, the
provision of section 14A would apply in-as-much as the assessee had invested its' idle
funds for the time being to earn income; in fact, earning dividend income for the year at
Rs.25,74,134/-, which had been claimed and allowed as tax-exempt. In view of the ld.
CIT(A), i.e., in appeal, the fact of cessation of the assessee's business, and the
concomitant investment of its surplus funds, was considered as decisive of the matter.
The income on the sale of investment/s could not therefore be considered as business
income, but would only stand to be assessed under the head of income `capital gains',
being a specific provision for assessing such income, which would, therefore, prevail
over the other, general provisions, viz. section 56, relying on the decision in the case of
CIT v. Govinda Choudhary & Sons [1993] 203 ITR 881 (SC). The decision of the A.O.,
albeit for different reasons, was accordingly upheld.
                                               3
                                                     ITA No. 1834/Mum/2011 (A.Y. 2007-08)
                                                             Femstex Trading Co. Pvt. Ltd. vs. ITO




3.     Before us, the cases of both the parties were along with some lines. Further, on a
query by the Bench during hearing, it has been, vide letter dated 12.12.2014, confirmed
by the assessee's counsel that the tenure of the FDRs was for one year; one month; and
another for 46 days, so that these were for short periods.

4.     We have heard the parties, and perused the material on record, giving our careful
consideration to the matter.
       We are unable to appreciate the controversy arising, or rather the reason/s there-
for, in the instant case, i.e., given that the primary facts are undisputed as well as the clear
position of law. We find no cessation of business, as stated by the ld. CIT(A), even as we
observe substantial reduction in the business operations, the turnover/ other income for
the three year period, referred to during hearing being as under: (Amt. in Rs. lacs)
                            Turnover/other
           Year ending                              Purchase             Refer
                               income
           31.03.2006          444.81               362.21          PB pg. 2,18
           31.03.2007          722.60               599.11         PB pgs.2,18, 93
           31.03.2008           38.98                Nil          PB pgs. 18,77, 93

       The assessee carrying zero inventory (of stock-in-trade) for all the three years
afore-stated, the corresponding purchases have also been tabulated to highlight the
validity of the turnover figures; the other income being only marginal. Further, the value
of its gross block of fixed assets as well as that of the other dominant constituents of its
net working capital, are as under (refer: PB pgs. 12, 16, 87 & 91):
                                                                             (Amt. in Rs. lacs)
             Year ending       Fixed asset (gross     Debtors        Secured loan
                                    block)
             31.03.2006             131.92             262.59            126.00
             31.03.2007              33.43             19.02              Nil
             31.03.2008              22.40              Nil               Nil

       The only unmistakable conclusion from the foregoing figures, which are self
speaking, is that the assessee is engaged in liquidation of and exiting its regular business
of a merchant exporter. There is, thus, firstly, no, cessation of its business during the
                                             4
                                                   ITA No. 1834/Mum/2011 (A.Y. 2007-08)
                                                           Femstex Trading Co. Pvt. Ltd. vs. ITO

relevant year. The same is, in our view, though inconsequential, in-as-much as there is no
dispute qua the allowance of any of the expenses, including on administration, claimed at
Rs.45.89 lacs (i.e., excluding the impugned loss of Rs.11.59 lacs for the current year),
and in fact also for the immediately preceding and succeeding years. Thus, from all
available accounts, the company is engaged in liquidating its assets, supplying, as it
appears, only outstanding orders, or perhaps purchasing only goods that it perceives it
can readily supply. There is no indication as to the future course of the action to be
pursued by the company even in the Directors' Report for the year ending 31.03.2007
(PB pg. 2-3) or 31.03.2008 (PB pgs. 52-53), on record. Two, the liquidity thus realized is
being invested in various investment avenues, including mutual funds, so as to profitably
use these funds, idle for the time being. The income arising by way of interest or dividend
would, under the circumstances, only stand to be assessed as `income from other
sources', even as dividend is by law (s.56(2)(i)) assessable under the said head of income.
In fact, the assessee's avowed and stated position is of the same representing investment
of funds, idle for the time being, which a reading of its annual accounts only confirms.
The Auditors, vide para 14 of their report u/s.227(4A) of the Companies Act, 1956 for the
current and the immediately following year, have clearly stated of the company being not
a dealer or trader in shares, securities, debentures and other investments (PB pgs. 10-11;
80,86). We are, therefore, unable to fathom as to how the investment in mutual funds or
other securities could be regarded as the assessee's trading assets. Reference to para 22 of
part IIIA of its object clause is again misplaced. The same only authorizes the company
to invest its funds, surplus for the time being, in certain securities, immovable property.
The same is admittedly not an object being pursued by the company, but only an enabling
provision. The gain or loss arising on the sale of such investments would thus be liable to
be assessed as `capital gains'; the investments, including in Mutual Funds, being only
capital assets, within the meaning assigned to the term under the defining clause
(s.2(14)). The assessee's claim of the loss on their transfer as assessable as business loss
is, again, incorrect. Loss, as explained time and again by the apex court, is only negative
income, so that the difference is only qua the quantitative, and not the qualitative aspect
                                             5
                                                   ITA No. 1834/Mum/2011 (A.Y. 2007-08)
                                                           Femstex Trading Co. Pvt. Ltd. vs. ITO

(refer: CIT vs. Harprasad & Co. (P.) Ltd. [1975] 99 ITR 118 (SC)). The intent in the
instant case is only to park the surplus funds for the time being profitably. We are
therefore unable to see as to how the income accruing could be classified as business
income or that on transfer of an asset, where found as not qualifying as a `trading asset',
much less as stock-in-trade of its business, as other than under the head `capital gains',
and which would obtain irrespective of whether the gain arising is positive or negative,
i.e., a loss.
        The loss on the sale of investment (in mutual funds) for A.Y. 2006-07, at
Rs.48,43,750/-, stands specifically excluded by the assessee in computing its business
income u/s.28 for that year (PB pgs. 13, 50). Rather, it being so done, and which stands
admittedly accepted in assessment u/s.143(3), the non-adjustment, likewise, of the gain
on sale of mutual fund investment (which, though, at Rs.1.08 lacs is only marginal) by
the assessee, would therefore be of no moment; rather, points to an inherent contradiction
in its stand. There has been no assessment u/s. 143(3) of the Act for A.Y. 2008-09. In
fact, even for this year, the assessee has suffered a loss of Rs.157.35 lacs on the sale of
investments. No assertion or contention of the same being claimed as business loss, even
per the return of income for that year, stands made by the assessee at any stage of the
proceedings. Reference to the assessment for the previous and succeeding years is, thus,
apart from the clear position of law that the principle of res judicata is not applicable to
the proceedings under the Act, misplaced in the facts and circumstances of the case.
There is, in any case, no estoppel against law, so that the issue/s arising is to be decided
in accordance therewith, upon appreciation of the facts of the case. In fact, our decision,
being based on an appreciation of the facts of the case, is supported by the decision in the
case of CIT vs. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306 (SC), clarifying, as
well as per its decision in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. vs.
CIT [1997] 227 ITR 172 (SC), that the manner in which the income is derived is
indicative of the head under which the income falls. We, accordingly, find no merit in the
assessee's claim of the impugned loss on the sale of mutual funds as a business loss, and
uphold its assessment u/s. 45 of the Act. We decide accordingly, and the assessee fails.
                                             6
                                                    ITA No. 1834/Mum/2011 (A.Y. 2007-08)
                                                            Femstex Trading Co. Pvt. Ltd. vs. ITO

5.     The second ground of appeal pertains to the disallowance of salary in the sum of
Rs.35,000/-, being the salary paid during the month of December, 2006, TDS in respect
of which was paid on 31.01.2007, i.e., as against the due date of 07.01.2007. The
disallowance was confirmed as the subsequent amendment to section 40(a)(ia), so that no
disallowance would arise where the tax deducted was paid by the deductor by the due
date of the filing the return for the year was not retrospective and came into effect only
from 01.04.2010 and, thus, inapplicable for the current assessment year. The decisions by
the higher courts of law, as in the case of CIT v. Rajinder Kumar [2014] 362 ITR 241
(Del), have read down the said amendment, holding it as retrospective on the ground of it
being only clarificatory and toward mitigating the hardship being caused and, further, of
the payment by due date qua the deductions effected for the first eleven months of the
relevant previous year as sufficient compliance of the provision. Accordingly, the
disallowance stands to be deleted. We decide accordingly.




6.     The third and the final ground challenges the assessment of the interest on bank
FDRs, earned by the assessee for the year at Rs.27.88 lacs, besides other interest at
Rs.0.58 lacs, as `income from other sources', as against `business income'. We have,
while discussing the assessee's ground no. 1, rendered our decision that the income on
the funds parked by the assessee in different investment avenues, pending their
deployment for the purpose of its business, would stand to be assessed as `income from
other sources'. For the same reasons that have informed the said decision; the facts and
circumstances of the case being the same, we confirm the assessment of the interest
income as `income from other sources'. Reference for the purpose may be made to para 4
of this order. The decision in the case of CIT v. Lok Holdings [2009] 308 ITR 356 (Bom),
relied upon by the assessee, is clearly distinguishable on facts. In the facts of that case,
the deposits, on which interest sought to be classified as to its character was earned, arose
during and in the conduct of the assessee's business. The investment in the bank FDRs in
the present case arises on the liquidation of its business by the assessee, so much so that
the Revenue regards it, though incorrectly, to be a case of cessation of business. Further,
                                             7
                                                    ITA No. 1834/Mum/2011 (A.Y. 2007-08)
                                                            Femstex Trading Co. Pvt. Ltd. vs. ITO

the investment is for short tenors, with a view to earn income on the funds, idle for the
time being. Rather, the hon'ble jurisdictional high court distinguishes the reliance by the
Revenue on the decision in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd.
(supra), binding on it, and since followed by the apex court in CIT v. Coromandal
Cements Ltd. [1998] 234 ITR 412 (SC), stating that the investment by way of loans in
that case was not a part of the business, so that interest thereon was therefore not business
income. The said decision, thus, in principle, only follows the law laid down by the apex
court, and is in ratio, which only is binding, supportive of our decision. Reliance thereon
would thus be of no moment. We decide accordingly.

7.     In the result, the assessee's appeal is partly allowed.
                   
                Order pronounced in the open court on February 19, 2015

            Sd/-                                         Sd/-
      (Joginder Singh)                               (Sanjay Arora)
         / Judicial Member                             / Accountant Member
 Mumbai;  Dated : 19.02.2015
. ../Roshani, Sr. PS
         /Copy of the Order forwarded to :
1.  / The Appellant
2.  / The Respondent
3.     () / The CIT(A)
4.      / CIT ­ concerned
5.                 ,     ,   / DR, ITAT, Mumbai
6.     / Guard File
                                                     / BY ORDER,



                                              /  (Dy./Asstt. Registrar)
                                          ,  / ITAT, Mumbai

 
 
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