Referred Sections:
Section 14 A of the income tax act
Section 35D
Section 57 of the income tax act.
Referred Cases / Judgments:
Delhi High Court in case of CIT vs Lagan Kala upvan (259 ITR 489 (Delhi).
Chemical industries Ltd vs Commissioner of income tax 213 ITR 523/–.
Shashun chemicals and drugs Ltd vs Commissioner Of Income Tax ,
INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "A": NEW DELHI
BEFORE SHRI KULDIP SINGH, JUDICIAL MEMBER
AND
SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER
ITA No. 2477 & 981/Del/2011
(Assessment Year: 2005-06 & 2007-08)
DCIT, Vs. Sahara Care Ltd,
Central Circle-8, 1, Kapurthala Complex,
New Delhi Aliganj, Lucknow
PAN: AAGCS9819Q
(Appellant) (Respondent)
Revenue by : Smt Naina Soin Kapil, Sr. DR
Assessee by: Shri Rohit Jain, Adv
Shri Bharath Janarthanan, Adv
Date of Hearing 29/04/2019
Date of pronouncement 18/07/2019
ORDER
PER PRASHANT MAHARISHI, A. M.
1. These are the two appeals filed by the learned Assessing Officer against the
order of the learned COMMISSIONER OF INCOME TAX (APPEALS) 1, New
Delhi dated 25/2/2011 for assessment year 2005 06 and 15/11/2010 for
assessment year 2007 2008.
2. The revenue has raised the following grounds of appeal in ITA No.
2477/Del/2011 for the Assessment Year 2005-06
"1. The order of the ld CIT(A) is not correct in law and facts.
2. Whether on the facts and in the circumstances of the case, the CIT (A)
has erred in deleting disallowance of Rs. 8,403/- made u/s 14A.
3. Whether on the facts and in the circumstances of the case, the ld CIT(A)
has erred in deleting addition of Rs. 1,24,35,157/- on account of loss
on sale of securities.
4. Whether on the facts and in the circumstances of the case, the ld CIT(A)
has erred in deleting addition of Rs. 2,24,140/- made u/s 35D in
respect of preliminary expenses written off during the year.
5. Whether on the facts and in the circumstances of the case, the ld CIT (A)
has erred in deleting addition of Rs. 11,425/- made on account of prior
period expenses."
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3. Briefly, the fact shows that Assessee Company is a promoter company of
Sahara India life insurance Co Ltd having the main object to promote life
insurance Company for conduct of the life insurance business. The
assessee during the year received from dividend income of INR 1640946/
and interest income of INR 57064296/. It filed its return of income on
31/10/2005 declaring income of Rs. 44104390/. The assessment u/s 143
(3) of The Income Tax Act was passed on 28/12/2007 by the learned
assessing officer determining the total income of the assessee at INR 5
6783515/ by making following additions.
a. Disallowance u/s 14 A of the income tax act of INR 8 403/
b. disallowance of loss on sale of securities debited to the profit and loss
account of INR 1 2435157/
c. disallowance of expenses claimed under section 35D of INR 2 24140/
d. disallowance of prior period expenses of Rs. 11425/
4. Assessee aggrieved with the order of the learned assessing officer preferred
an appeal before the learned CIT A. He deleted the disallowance of INR
8403/ u/s 14 A of the income tax act. He also directed the learned
assessing officer treated the loss on sale of securities as business loss in the
hands of appellant and compute the income accordingly. He further
directed the learned assessing officer to delete the disallowance u/s 35D of
the income tax act of Rs. 224140/. He also deleted the disallowance of Rs.
11425/ under the head prior period expenses. In short, he allowed the
appeal of the assessee and therefore the revenue is aggrieved with the order
of the learned CIT A and is in appeal before us.
5. Ground number 1 of the appeal is general in nature and therefore it is
dismissed.
6. Ground number 2 is against the disallowance u/s 14 A of the income tax
act of INR 8 403/ deleted by the learned CIT appeal. The learned assessing
officer noted that assessee has earned dividend income of INR 1 640946/
and operational expenses against such income have claimed deduction.
However no deduction is to be allowed under section 14 A of the income tax
act in respect of the expenditure incurred by the assessee in relation to the
income which does not form part of the total income. As per order sheet
entry dated 4/10/2007 the assessee was asked to show cause as to why the
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proportional disallowance of expenses against this dividend income should
not be made. The assessee submitted that these expenses incurred by the
assessee are minimum expenses, which are required by a corporate entity to
retain its status as a corporate entity and should not be disallowed. After
considering the explanation of the assessee, he proportionately disallowed
the expenses of INR 8 403/ out of total operational expenses incurred by
the assessee of INR 3 00608/. On appeal before the learned CIT A , he
held that the above disallowance has been made on ad hoc basis since no
expenditure has been directly pointed out by the learned assessing officer to
be attributable to earning of dividend income during the year. He further
held that there should be proximate link between the expenditure to be
disallowed with the exempted income. Since the entire disallowance is on
ad hoc basis, without pinpointing any particular expenditure, which can be
attributable to the earning of dividend income by the assessing officer, he
deleted the above disallowance.
7. The learned departmental representative vehemently submitted that as the
assessee has earned huge dividend income and therefore the disallowance
u/s 14 A of the income tax act is required to be made which has been made
by the learned assessing officer on proportionate basis.
8. The learned authorised representative vehemently submitted that the
assessee has earned dividend income however; no expenditure has been
incurred by the assessee for earning of exempt income. He submitted that
in absence of any satisfaction of the learned assessing officer that assessee
has incurred any expenditure for the purpose of earning of exempt income
the disallowance cannot be made.
9. We have carefully considered the rival contention and perused the orders of
the lower authorities. In the present case the learned assessing officer has
failed to record his satisfaction under section 14 A of the income tax act that
assessee has incurred any expenditure for the purpose of earning of the
exempt income. It is mandatory for learned assessing officer to first record
his satisfaction with reference to the books of accounts of the assessee that
explanation of the assessee, that
a. it has not incurred any expenditure for the purpose of earning of
the exempt income of the income or
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b. quantified disallowance by assessee
under the provisions of section 14 A of the income tax act is incorrect. In
the present case, we do not find any such satisfaction recorded by the
learned assessing officer in his assessment order. Further, the assessee has
shown us in the paper book that such dividend income received does not
have any efforts on the side of the assessee; therefore, no such expenses are
incurred for earning it. Hence, on this score we do not find any infirmity in
the order of the learned CIT A in deleting the disallowance of INR 8 403/
u/s 14 A of the income tax act. Accordingly, ground number 2 of the appeal
is dismissed.
10. Ground number 2 is with respect to the disallowance deleted by the learned
CIT A on account of loss on sale of securities of INR 1 2435157/. The
learned assessing officer noted that assessee has claimed the loss on sale of
securities of INR 1 2435157/. The assessee was asked to justify its claim.
The assessee submitted that company is in the nature of investment
company. Making of investment is the only business of the company. Assets
held are not in the nature of capital asset but are business assets of the
company. Therefore, the profit and loss, which arises as to the assessee on
transfer of such assets, is chargeable to tax only under the head business
income. The learned assessing officer noted that assessee company is not
engaged in the business of dealing in shares of securities but the surplus
fund which were available with the assessee were invested for earning of the
income such was the claim of the assessee as per his letter dated
19/11/2007. On consideration of the above explanation of the assessee, he
held that there is a contradiction in both the above reply of the assessee. In
the 1st reply the assessee has stated that assessee company is an
investment company in the nature and making of investment is the only
business of the assessee company. In the 2nd reply the assessee stated that
the investment in shares of other company as well as investment in security
is not the main object of the assessee company. He further perused the
schedule 3 of the balance sheet for the year ended on 31/3/2005 wherein
the securities of INR 1 828328401/ has been shown by the assessee as
investment and not in stock in trade. It further referred to the object of the
investment in shares stating that it was to earn income by way of a dividend
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etc. , hence the losses incurred by the assessee on sale of shares should be
capital loss and not revenue loss. He further stated that losses, which are
not deductible from business income, include losses due to sale of security
held as investment. He further referred to the circular number 4 of the
central board of direct taxes which provides that when the assessee
company has an investment comprising of securities than same are to be
treated as capital asset and not the trading asset. Therefore, he held that
the loss on sale of securities is a capital loss and loss on sale of securities
cannot be debited to the profit and loss account and it is being disallowed.
11. The assessee aggrieved with the order of the learned assessing officer on
this ground preferred an appeal before the learned CIT A who held that
such losses are business losses of the assessee.
12. The learned departmental representative on this ground submitted that
assessee has shown the above as ,,investment and not as ,,stock in trade
but as capital investment under the schedule of the balance sheet as
investment and therefore the transfer of such assets or sale of such assets
would only result into the capital loss or capital gain to the assessee. It
cannot be held to be the business loss of the assessee. He therefore
submitted that the learned CIT A has erred in holding that such capital
loss is to be treated as a business loss of the assessee.
13. The learned authorised representative reiterated the submissions raised
before the learned CIT A.
14. We have carefully considered the rival contention and perused the order of
the learned lower authorities. The fact shows that the assessee has debited
loss on sale of securities of INR 1 2435157/ in its profit and loss account
and claimed it as business loss. The claim of the assessee is that assessee
company is in the business of investment in making of investment, that is
the only business of the company. Therefore investemnst hld by the
assessee in non life insurance business held are not in the nature of
capital asset but are business assets of the assessee company. Therefore
any profit or loss arising in liquidation of such asset is in the nature of
business income/loss as has been rightly claimed by the assessee. It was
further claimed by the assessee that from the conduct of the assessee in the
earlier years which is of treating the income arising from sale of purchase of
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securities as business income in assessment year 2004 05, which is
assessed as such u/s 143 (3) of the act for that year , now the stand of the
assessing officer to treat it otherwise, when there is a loss on sale of
securities as capital loss is changing the stand in the year in which it is
beneficial to revenue to treat it as business income and when there is a loss
to treat it as capital loss. The learned CIT A has considered the whole
issue after considering circular number 4/2007 dated 15/6/2007. He held
as under:-
"Ground no 3 (a) to 3 (c)
In these grounds of appeal, the appellant has objected to the
treatment of loss incurred by the appellant on the sale of
securities and claimed as a business loss to be in the nature of
a short-term capital loss.
As per the main object of the appellant company, the company
was incorporated to promote life insurance Company for
conduct of life insurance business. In pursuance of its main
object of the appellant company made investment in Sahara
India life insurance Co Ltd and promoted the same and also
purchased shares and securities of other companies from the
market which were kept by it in its investment portfolio. From
time to time, the appellant company was trading in securities
and shares of other companies except for the life insurance
company, which it had promoted.
The appellant company has been showing income, which has
been derived from the trading in the securities et cetera, as well
as interest under the head business income in the past, which
has been accepted by the Department all along. During the
relevant previous year, there was a loss on sale of securities,
which was claimed as business loss, and the same was
disallowed by the assessing officer on the pretext that the
assessee has given contradictory replies to his queries.
During the course of assessment proceedings the assessing
officer raised a quarry to the appellant as to justify the claim of
loss on sale of securities in rsponse to which the appellants
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responded that the business of the appellant is in the nature of
that of an investment company and making of investment is
the only business carried on by the appellant company and
therefore, the assets held by the appellant are not in the nature
of capital assets but are business assets and company thereof
had shown the profits and/losses as business income.
Thereafter, on further query of the assessing Officer the
appellant replied to the assessing officer that the appellant
company is not engaged in the business of dealing in shares
and securities but the surplus funds, which were available
with it, were invested by it to earn income from shares on
securities. According to the assessing officer the appellants
reply is in contravention and, therefore referring to the sum
circular number 4 of CBDT he proceeded to treat the loss
claimed by the appellant on the sale of securities to be in the
nature of capital loss and not as business loss and disallowed
the same.
On behalf of the appellant it was vehemently argued that the
assessing officer has misunderstood the reply of the appellant
as the main object of the appellant company was to promote
life insurance company and to invest in purchase of shares,
debentures and stocks of other companies and the appellant
company was, therefore, in the nature of an investment
company. The nature of the activity of the appellant company
is that of investing turnaround, selling and buying of shares
and securities on a regular basis and, therefore the appellant
was entitled to show income as business income and to claim
the loss as business loss.
I have carefully considered the facts and circumstances of the
case and I have also perused the circular referred to by the
assessing officer in which circular, the board has given
directions for distinction between shares held as stock in trade
and shares held as capital asset. In paragraph number 10 of
that circular it is categorically stated that CBDT also wishes to
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emphasise that it is possible for a taxpayer to have 2 portfolios
i.e. investment portfolio comprising of securities which are to
be treated as capital asset and trading portfolio comprising of
stock in trade which are to be treated as trading assets and the
appellant has 2 portfolios. The appellant may have income
under both the heads, capital gain as well as business income.
On perusal of the objects of the appellant company, it is
categorically clear that the main object of the appellant
company was to promote life insurance business and,
therefore, the investment, which the appellant company has
made in the investment promotion of life insurance business,
can be treated as an investment, which will be subjected to
capital gains.
As regards the other investment although wrong nomenclature
given by the company, the same was in the nature of short-
term investment, which was being regularly, switched over and
traded by the appellant company. The same is in the nature of
short-term investment or stock in trade and therefore, the
business of the appellant company being a keen to that of
investment company, the income/loss arises there from was in
the nature of business income/loss. Further, the action of the
appellant in the preceding years of treating the income as
business income also further strengthens stand of the
appellant that the law is also is in the nature of business loss
or otherwise the appellant would have opted to get the profit on
purchase, sales of securities taxed under the head capital
gains which, in turn, would have also helped it to save tax.
The conduct of the appellant shows that the income arising
from the sale and purchase of securities is in the nature of
business income and sale conduct stands accepted by the
assessing officer in the earlier years, I find no reason to change
the stand during the year under appeal only for the reason that
loss has occurred during the year on sale of securities.
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For the above proposition of principles of consistency, I follow
the decision of the honourable Delhi High Court in case of CIT
vs Lagan Kala upvan (259 ITR 489 (Delhi).
As a result, I direct the assessing officer to treat the laws of the
sale of securities as business loss in the hands of appellant
and compute the income accordingly."
[ underline supplied by us ]
15. It is interesting to note that in assessment year 2004 05 the assessee has
earned profit on sale of the securities which has been assessed by the
learned assessing officer u/s 143 (3) of the income tax act as business
income. However, during the year the learned assessing officer has changed
his stand when assessee has incurred loss and tried to justify it as short-
term capital loss incurred by the assessee. The learned departmental
representative could not point out any distinction between the transactions
entered into by the assessee in assessment year 2004 05 and transactions
entered into by the assessee in assessment year 2005 06. In view of the
above facts, it is a clear-cut case of the change of opinion by the learned
assessing officer only to extract the higher tax. The assessing officer is
blowing hot and cold on the same set of facts in two different assessment
years to cough up more taxes from the assessee. This tactic of the learned
assessing officer deserves to be condemned. The learned departmental
representative also could not point out any infirmity in the order of the
learned CIT A in he stated that assessee has maintained two portfolios
whereas the life insurance investment is held to be an investment portfolio
and other securities are held to be the trading assets. In view of this, we
dismiss ground number 3 of the appeal of AO.
16. Now we come to ground number 4 of the appeal wherein the disallowance
under section 35D in respect of preliminary expenses return of Rs.
224140/ was made by the learned assessing officer and deleted by the
learned CIT A. This issue is squarely covered in favour of the assessee by
the decision of the honourable Supreme Court in case of Shashun
chemicals and drugs Ltd 73 taxman.com 293 (Supreme Court). Admittedly
this is not the 1st year of the claim u/s 35D out of block of 5 years. The
honourable Supreme Court in para number 13 of the decision has held that
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in any case, it warrants reputation that in the instant case under the very
same provisions benefit is allowed for the first two assessment years and,
therefore, it could not have been denied in the subsequent block period.
The issue before the honourable Supreme Court was also with respect to the
benefit of section 35D of the act. In view of this, we dismiss ground number
4 of the appeal of the learned assessing officer.
17. Ground number 5 of the appeal is with respect to the disallowance of prior
period expenses of Rs. 11425/ which is deleted by the learned CIT A.
The above issue is also squarely covered against the assessee in the decision
of the Supreme Court in Saurashtra cement and chemical industries Ltd vs
Commissioner of income tax 213 ITR 523/. In the present case also the
bills for the expenditure was received in the current financial year relating
to the earlier financial year and therefore such expenditure has crystallized
during this year and therefore they are allowable. After considering the
argument of the rival parties, we do not find any infirmity in the order of the
learned CIT A in deleting the above disallowance. Therefore, ground
number 5 is dismissed.
18. In the result ITA number 2477/del/2011 filed by the learned deputy
Commissioner of income tax for assessment year 2005 06 is dismissed.
19. Now we come to the appeal of the assessing officer for assessment year 2007
08 wherein he has raised the following grounds of appeal in ITA No.
981/Del/2011 for the Assessment Year 2007-08:-
"1. The order of the ld CIT(A) is not correct in law and facts.
2. On the facts and in the circumstances of the case, the ld CIT(A) has
erred in law and facts in deleting the addition of Rs. 2,24,140/- made
by AO on the account of preliminary expenses written off during the
year.
3. On the facts and in the circumstances of the case, the ld CIT(A) has
erred in law and facts in deleting the addition of Rs. 1,01,54,708/-
made by the AO on the account of interest expenses."
20. In short the fact shows that assessee is a company, filed its return of
income at INR 1 33033102/ on 31/10/2007. The assessee company is a
promoter company of Sahara India life insurance Company for conduct of
life insurance business. During the year the assessee company has received
interest of INR 1 22813372/ and income from sale of securities of INR 1
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04410014/. The assessment u/s 143 (3) of the act was passed by the
learned assessing officer on 23/12/2009 determining total income of the
assessee at INR 1 33257250/. During the assessment proceedings the
addition of INR 1 0378848 was made by the learned assessing officer stating
as under:-
"3. Disallowance of expenses claimed u/s 35D and interest
paid
The assessee company has claimed deduction u/s 35D of
income tax act 1961 amounting to INR 2 24140/ and
interest expenditure of INR 1 0996898/. Out of interest
expenses of INR 1 0996898/ an amount of INR 8
42910/ has been added back in the computation as it is
an interest on income tax. Under the head income from
profits and gains of business or profession, the expenses
are expressly allowed u/s 30 to 37 of the income tax act
1961. The income of the assessee is the income from
other sources wherein deductions are to be allowed only
u/s 57 of the income tax act. Therefore, the deduction
claimed u/s 35D amounting to INR 2 24140/ and
expenses of INR 1 0154708/ (INR 1 0996898/ less INR 8
42910/) claimed as interest expenses cannot be allowed
and being added back to the income of the assessee."
21. The assessee aggrieved with the order of the learned assessing officer
preferred an appeal before the learned CIT A. He granted the deduction of
the claim of the assessee of Rs. 224140/ under section 35D of the income
tax act. He further directed the learned assessing officer to delete the
disallowance of INR 1 0154708/ holding that the income is chargeable to
tax of the assessee under the head business income and therefore assessee
is entitled to deduction of interest expenditure claimed by it as same is
related to the borrowed funds which in turn has been utilized in the
business of the appellant. He also alternatively held that above expenditure
is also deductible u/s 57 of the act under the head income from other
sources. Therefore the revenue is aggrieved with the order of the learned
CIT A against the deletion of the addition of Rs. 224140/ and
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10154708/ of the interest expenses has preferred this appeal in ITA
981/del/2011.
22. Ground number 1 of the appeal is general in nature and therefore it is
dismissed.
23. Ground number 2 is identical to ground number 4 in the appeal of the
learned assessing officer for assessment year 2005 06 wherein we have
dismissed the above ground following the decision of the honourable
Supreme Court in 73 taxmann.com 293 (SC ) in case of Shashun chemicals
and drugs Ltd vs Commissioner Of Income Tax , wherein it has been held
that where the assessee company was granted deduction under section 35D
for a period of 10 years and same was granted for initial 2 years, the
assessing officer could not reject claim for subsequent year stating that
such expenditure are capital in nature. As in the present case also the
deduction allowed to the assessee under section 35D initially has not been
disturbed, therefore the learned assessing officer cannot now disturbed in
subsequent years this deduction. Accordingly, ground number 2 of the
appeal is dismissed.
24. Ground number 3 of the appeal is with respect to the disallowance deleted
by the learned CIT A on account of interest expenditure of INR 1
0154708/. The briefly the fact shows that the assessee has earned interest
on income tax refund of INR 8 42910/ which has been shown by the
assessee under the head income from other sources however assessee has
claimed the total interest expenditure of INR 1 0378848/ under the head
profits and gains of the business and the claimed it as allowable u/s 36 of
the income tax act. The learned assessing officer noted that income of the
assessee the income from other sources and therefore the deduction is only
allowable u/s 57 of the income tax act. Therefore a disallowed the interest
expenditure. The learned CIT A deleted the above disallowance holding
that interest expenditure incurred by the assessee is for the purposes of the
business and therefore it is allowable u/s 36 of the income tax act.
Alternatively, he also held that it is also allowable as deduction under
section 57 of the income tax act.
25. The learned departmental representative vehemently supported the order of
the learned assessing officer and stated that as assessee does not have any
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business, therefore the interest expenditure claimed by the assessee is not
allowable to the assessee has deduction u/s 36 of the income tax act. He
also contested that it is also not allowable to the assessee as deduction u/s
57 of the income tax act.
26. The learned authorised representative vehemently supported the order of
the learned CIT A.
27. We have carefully considered the rival contentions and perused the orders of
the lower authorities. The learned CIT A has dealt with the whole issue
along with the deduction claimed by the assessee u/s 35D of the income tax
act as under:-
"5.3.2 I have gone through the facts and circumstances of
the case and argument placed before me by the learned
counsel for the appellant. As already held by me in my
decision against the ground number 2, the income which
has been on by the appellant should be subjected to tax
under the head business income as rightly claimd by the
appellant and consequently the appellant is entitled to
deduction of interest which has been claimed by him as an
expenditure, the sum being relatable to the borrowed funds
which in turn have been utilized in the business of the
appellant. It is not the case of the assessing officer that the
funds on which interest is being paid have not been used for
the business purposes of the appellant and therefore I find
no justification in disallowing the expenditure of INR 1
0154708/.
Alternatively also, if the income is subjected to tax under the
head income from other sources the appellant is entitled to
deduction of claim of interest on the funds borrowed which,
in turn, have augmented the income of the appellant under
the head income from other sources and therefore the same
is a direct Nexus with the earning of income and is fully
allowable u/s 57 of the income tax act.
In light of the above, I direct the assessing officer to delete
the addition of INR 1 0154708/."
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The learned CIT A has examined the allowability of expenditure under the
head ,, profits and gains of business or profession as well as under the
other head of ,,income from other sources , and in both the heads, he held
that the expenditure is allowable to the assessee. On analysis of the annual
accounts of the assessee and further when deduction u/s 35D of the income
tax act under the head profits and gains of the business has been allowed to
the assessee as per the decision of the honourable Supreme Court, it cannot
be said that assessee does not have any business, therefore, the interest
expenditure incurred by the assessee is allowable as deduction under both
the heads. In AY 2005-06, we have also held that assessee ,,s loss of sales of
securities is chargeable to tax under the head business income and ld AO
himself has accepted in AY 2004-05 that profit earned by the assessee on
sale of securities is business income of the appellant, now it cannot be said
that assessee does not have any business in this year. The learned
departmental representative could not point out any infirmity in the order of
the learned CIT A. In view of this, we do not find any infirmity in his order
and dismiss ground number 3 of the appeal.
28. In the result ITA number 981/Del/2011 filed by the learned assessing
officer for the assessment year 2007 08 is dismissed.
Order pronounced in the open court on 18/07/2019.
-Sd/- -Sd/-
(KULDIP SINGH) (PRASHANT MAHARISHI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 18/07/2019
A K Keot
Copy forwarded to
1. Applicant
2. Respondent
3. CIT
4. CIT (A)
5. DR:ITAT
ASSISTANT REGISTRAR
ITAT, New Delhi
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