Court/Forum: ITAT
Bench: H Bench, Mumbai - Shri P.M. Jagtap, Accountant Member and Shri R.S. Padvekar, Judicial Member
Order Date: 2011-11-11
Outcome: Mixed
Sections: Section 35D, Section 14A, Section 10(33), Section 10(23G), Section 115JA, Section 41(1), Section 45(2), Section 139(5)
If there are sufficient interest-free funds available, it can be presumed that investments were made from these funds rather than borrowed funds.
The ITAT provided mixed relief to both the assessee and the Revenue. The disallowance under Section 35D was remanded to the AO for reconsideration. The Tribunal deleted the disallowance under Section 14A, holding that the assessee had sufficient own funds. The computation of book profit under Section 115JA was decided in favour of the assessee. The claim of exemption under Section 10(15) was allowed by the CIT(A) and upheld by the Tribunal. The addition under Section 41(1) was deleted. The treatment of lease equalisation reserves was decided in favour of the assessee. The disallowance of bad debt was deleted.
Mixed
The central legal question was whether the disallowances made by the AO under various sections, particularly concerning the expenditure related to exempt income and the computation of book profits, were justified.
Reliance Capital Ltd. had claimed various deductions and exemptions in its tax returns for the assessment years 1998-99 to 2001-02. The AO disallowed these claims, leading to appeals by both the assessee and the Revenue.
The assessee argued that it had sufficient own funds for investments, and therefore, no disallowance under Section 14A was warranted. It also contended that the lease equalisation reserve was not a reserve but an adjustment for depreciation.
The Revenue argued that the assessee had used borrowed funds for investments, justifying the disallowance under Section 14A. It also contended that the lease equalisation reserve should be added back to book profits.
The Tribunal held that the assessee had sufficient own funds to cover the investments, and therefore, no disallowance under Section 14A was warranted. The Tribunal also held that the lease equalisation reserve should not be added back to book profits under Section 115JA as it is not a reserve but an adjustment for depreciation.
The issue of disallowance under Section 35D was remanded to the AO for reconsideration.
Practitioners should ensure that sufficient interest-free funds are documented to counter disallowance under Section 14A and understand that lease equalisation reserves should not be added back to book profits under MAT provisions.
ITA No.3303/Mum/2003 (Assessment Year: 1998-99) ITA No.3304/Mum/2003 (Assessment Year: 1999-00) ITA No.5535/Mum/2003 (Assessment Year: 2000-01) ITA No.5413/Mum/2004 (Assessment Year: 2001-02)
Reliance Capital Ltd. (Formerly known as Reliance Capital & Finance Ltd.), Mittal Chambers, Ground Floor, 222, Nariman Point, Mumbai -400 021 .......... Appellant
Vs Dy. Commissioner of Income Tax, Range-3(3), Aayakar Bhavan, M.K. Road, Mumbai -400 020 ........ Respondent
ITA No.3973/Mum/2003 (Assessment Year: 1998-99) ITA No. 3988/Mum/2003 (Assessment Year: 1999-00) ITA No.6115 /Mum/2003 (Assessment Year: 2000-01) ITA No.5737/Mum/2004 (Assessment Year: 2001-02)
Dy. Commissioner of Income Tax, Range-3(3), Aayakar Bhavan, M.K. Road, Mumbai -400 021 .......... Appellant
Vs
ITA 3303/Mum/2003 & other 7 group-appeals M/s. Reliance Capital Ltd. 2 Reliance Capital Ltd. (Formerly known as Reliance Capital & Finance Ltd.), Mittal Chambers, Ground Floor, 222, Nariman Point, Mumbai -400 021 .......... Respondent
Appellant by: Shri Goli Srinivas Rao Respondent by: Shri Jitendra Sanghavi Date of Hearing: 23.09.2011 Date of Pronouncement: 18.11.2011
This is a batch of eight appeals comprise of four appeals by assessee and four cross appeals by the revenue are filed challenging respective impugned orders of the Ld. CIT (A) Mumbai for the A.Ys. 1998-99, 1999-2000, 2000-01 & 2001-02. Most of the issues are common in all the appeals so also about the facts and hence, this batch of appeals are disposed off by this consolidated order for the sake of convenience. We would prefer to go issue-wise as there is multiplicity of grounds in all the appeals.
2. The first issue is disallowance of expenditure claimed u/s.35D of the Act and this issue arises in the assessee’s all appeals, i.e. A.Ys. 1998-99, 1999-00, 2000-01 & 2001-02.
3. The facts pertaining to the issue which are revealed from the assessment orders on record as under. The assessee had claimed the deduction u/s.35D in all the four years are as under:-
ITA 3303/Mum/2003 & other 7 group-appeals M/s. Reliance Capital Ltd. 3 Assessment Year Amount of deduction u/s.35D 1998-1999 ` 2,10,94,580 1999-2000 ` 2,10,95,328 2000-2001 ` 2,21,06,248 2001-2002 ` 1,19,86,670
4. The assessee company had made a public issue in the years 1992 and 1995. The total expenditure pertaining to the public issue and right issue was at ` 23,14,71,569/-. The assessee exercised option as provided in sub-sec. (2B) of Sec. 35D by restricting the amount allowable to 1/10th of 2.5% of the capital employed. The assessee filed the details of the preliminary expenses which are re- produced by the A.O. in the A.Y. 1998-99. The assessee-company had leasing activity and commenced its business in the A.Y. 1991-92. The assessee contended that the major portion of income arising from leasing and other activity and assessee’s undertaking constitute industrial undertaking. The A.O. relying on the assessment orders for preceding years i.e. A.Ys. 1994-95, 1995-96, 1996-97 & 1997-98 disallowed the claim of the assessee save ` 1,19,578/- that was towards preliminary expenses. Same way, the A.O. disallowed the claim of the assessee u/s.35D save small quantum of the preliminary expenditure and so on. The assessee carried the issue before the Ld. CIT (A) but without success.
5. We have heard the parties. The Ld. Counsel submits that the identical issue has been considered by the Hon’ble Tribunal in assessee’s own case for the A.Ys. 1993-94 to 1997-98 ( copy of the order is placed on record) and issue was restored to the file of the A.O. following the order of the Tribunal for the A.Y. 1991-92. We find that on the identical set of facts the issue had been restored by the Tribunal to the file of the A.O. by following the directions of the Tribunal for the A.Y. 1991-92. We, accordingly, following the rule of consistency restore this issue on the allowability of deduction u/s.35D to the file of the A.O. on similar directions which are given by the
ITA 3303/Mum/2003 & other 7 group-appeals M/s. Reliance Capital Ltd. 4 Tribunal in assessee’s own case for the A.Y. 1991-92, which order has been followed in subsequent years. Accordingly, respective grounds taken by the assessee are allowed for statistical purpose.
6. The next common issue is disallowance of the expenditure attributable for earning exempt income i.e. dividend and interest on bonds and debentures and this issue is arising in all the appeals filed by the assessee as well as Revenue. The assessee has challenged the order of the learned CIT(A) for partly sustaining the addition and the Revenue is in appeal against giving relief to the assessee. This issue revolves around section 14A of the Income-tax Act, 1961.
7. So far as assessment year 1998-99 is concerned, the assessee has declared dividend income of ` 2,76,17,268 which was claimed exempt u/s 10(33) of the Act. The Assessing Officer asked the assessee the source of investment in these shares and explain whether borrowed funds have been invested for making investment of the said share. The assessee filed reply stating that the net worth of the company as on 31.03.1998 was `1113.08 crore. The assessee further submitted that it is dealing in purchase and sale of share and the same are held as stock in trade. The basic object of the assessee’s business is not to earn dividend but trading in shares. The quantum of funds utilized in the acquisition of stock in trade is very minimum and therefore no expenditure is attributable to the earning of dividend. The A.O. was not satisfied with the explanation of the assessee. The A.O. referred to the decision of the Hon’ble Supreme Court in the case of Rajasthan Warehousing Corporation Ltd. Vs. CIT 242 ITR 450. The A.O. also referred to section 14A of the Income-tax Act, 1961. The A.O. examined the balance sheet of the assessee and made the following observations:- “Total investment in shares held as stock in trade is ` 117.39 crore. Further, certain shares were held as long term investment of `16.97 crore. Assessee is also holding shares of subsidiary companies
ITA 3303/Mum/2003 & other 7 group-appeals M/s. Reliance Capital Ltd. 5 of `35.05 crore. Total investment in shares is ` 169.41 crore. Balance sheet of the assessee reveals that the total shareholders’ fund as on 31.3.97 to ` 1049.85 crore and the loans are of ` 453.52 crore. Examination of the profit & loss account reveals that in FY 96-97, interest and finance charges of ` 31.37 crore were claimed as expenditure in AY 98-99. The interest on fixed loans, debentures etc has increased to ` 41.26 crore. Assessee company is engaged in the business of purchase and sale of shares and also leasing activity. The shares have been acquired in the past. Direct linkage of the borrowed funds with the investment in the shares is not possible to establish in view of a large number of transactions and the investment being old. Further, in AY 96-97 & 97-98 claim of the assessee of deduction u/s.80M was examined. It was held in AY 96-97 that an expenditure of ` 3 crore out of interest payment of ` 31.71 crore is relatable to earning of dividend income. In AY 97-98 also, it was held that interest expenditure of `3 crore is relatable to the funds invested in shares yielding dividend. In view of the findings recorded in previous Assessment Years and investment being old and no fresh shares having been acquired of substantial amount and interest expenditure having increased from `31.37 crore to ` 41.26 crore, case of AY 98-99 is decided”. On the above reasoning the A.O. held that interest expenditure of ` 3 crore is attributable to the dividend income which is claimed exempt by the assessee.
8. On further examination it was noticed by the A.O. that the assessee has claimed the interest on the following bonds and debentures which was claimed exempt u/s.10(23G) of the Act. Name of the compa ny Particulars Bond Interest Amt Reliance Telecom Limited 10.5% bonds ` 33,99,123 Reliance Utility Power Ltd Debentures ` 6,80,70,059 M.T.N.L. 15% Bonds ` 89,38,356 M.T.N.L. 17% bonds ` 1,38,70,980
Total `. 9,42,78,518
ITA 3303/Mum/2003 & other 7 group-appeals M/s. Reliance Capital Ltd. 6 9. The A.O. sought explanation of the assesse on the source of investment in above bonds and debentures. The assessee filed details of investments with dates which are given in the assessment order on page nos. 10 and 11. So far as Reliance Telecom Limited bonds, Reliance Utility Power Limited bonds and MTNL bonds (17%) are concerned those investments were made in the preceding years. In respect of 17% MTNL bonds the current year investment was `5,64,80,590. The same way 15% MTNL bonds were purchased during the year i.e. the financial year 1997-98 of ` 14,79,89,616. The assessee explained that the investment is made out of the sale proceeds of stock- in- trade of the shares/securities and majority of the investments were made in the preceding years. Investment in RTL debentures of ` 9.20 crore and ` 2 crores had been made out of the income generated during the year. So far as RUPL’s debentures were concerned, those were made out of the assessee’s own funds. The assessee also explained that the assessee generated ` 80.84 crore by selling the shares and those were utilized for making the investment. The A.O. was not impressed with the explanation of the assessee. He examined the balance sheet of the assessee as on 31.03.1997 and on 31.3.1998 and made the following observations:-
“Examination of balance sheet as on 31.3.97 & 31.3.98 reveals that except for the investment of `7.65 crore in 17% MTNL bond, balance investment of `` 14.80 crore in 15% MTNL bond has been made during the year. Investment of ` 11.20 crore in RTL debentures has been made in December 97 and January 98. Investment in RUPL debentures of ` 80.95 crore has been made on 27.9.97. Examination of the balance sheet reveals that the share capital as on 31.3.98 is ` 123.97 crore, same as share capital as on 31.3.97. Shareholders’ fund inclusive of reserve and surplus are ` 1113.08 crore, whereas these were ` 1049.85 crore last year. Total loan funds have increased from `453 crore to `998 crore during the year. This increase is primarily on account of issue of redeemable discount bonds of `470 crore and
ITA 3303/Mum/2003 & other 7 group-appeals M/s. Reliance Capital Ltd. 7 redeemable nonconvertible debentures of ` 209 crore. Examination of assets side of the balance sheet reveals that the fixed assets are ` 576.63 crore compared to ` 537.87 last year. Current assets are ` 749 crore compared to ` 744 crore last year. Net current assets are ` 652 crore compared to ` 670 crore last year. Investments have increased from ` 295 crore to ` 882 crore. Examination of the balance sheet therefore, reveals that the year’s profit after tax is of ` 106 crore. The profits as well as the fresh borrowed funds have been invested mostly in investments. In absence of date-wise details of investment and the corresponding source of investment, one to one nexus of borrowed funds with the investment is not possible to establish. Assessee also failed to furnish information in this regard. On the other hand, it is clear that the assessee company has raised funds of ` 679 crore during the year by way of discount bonds and debentures. Interest on these is payable @ 16%. Investment in RUPL bonds has been made on 27.9.97 and therefore, it is for six months only. Similarly, investment in RTL bonds has been made for a period of 3 months. On account of assessee’s failure to furnish date-wise details of cash receipt and payment, it is not possible to establish the direct source of investment in these bonds and debentures. However, examination of balance sheet and profit & loss account reveals that the assessee company has raised ` 679 crore of funds on investment rate of about 16% on which claim of discount on bonds of ` 37.13 crore and the interest on debentures of ` 29 crore has been made. Total expenditure on interest and finance charges has increased to `87.32 crore during the year compared to ` 31.37 crore last year. Therefore, keeping in view all facts and circumstances of the case, it is held that part of the borrowed funds have been diverted towards these bonds on which interest income has been claimed as exempt. In absence of proper details, an amount of ` 5 crore is held to be attributable to the investment in these bonds. Accordingly, disallowance of ` 5 crore is made on this account”.
ITA 3303/Mum/2003 & other 7 group-appeals M/s. Reliance Capital Ltd. 8 The A.O. finally worked out ` 5 crore as an expenditure attributable for earning of interest income from the bonds and debentures and he worked out the net exempt income of the interest on Bonds/Debentures.
10 So far as assessment year 1999-2000 is concerned the assessee has declared the dividend income of ` 4,20,01,686 and claimed as exempt u/s 10(33) of the Income-tax Act, 1961. Assessee also declared interest income of ` 17,65,46,216 which was claimed as exempt u/s 10(23G) of the Act. The A.O. sought explanation of the assessee in respect of the source of investments. The assessee explained that the net worth of the assessee-company as on 31.3.1999 was ` 1135.78 crore. It was contended that the dividend is earned out of the shares held in stock in trade of the company and there was no intention earn dividend income. So far as the investment in the infrastructure undertaking is concerned, the assessee contended that the investment is made by generating funds on sale of securities held in stock in trade. The A.O. was not impressed with the explanation of the assessee. He examined the balance sheet for the preceding years as well as the assessment year 1999-2000 and after considering the disallowance made in the assessment years 1996-97, 1997-98 and 1998-99, he estimated the interest expenditure of ` 3 crore as attributable to the dividend income which was claimed exempt in the assessment year 1999-2000. So far as the interest income claimed exempt u/s 10(23G) is concerned, which was to the extent of ` 17,65,46,216 received from the same bonds and debentures which details are given while discussing the facts in assessment year 1998- 99. The A.O. sought the assessee’s explanation regarding the source of investment in those bonds and also asked whether the borrowed funds had been invested for making the investment. After considering the disallowance made in the preceding years as well as the revenue generated by selling the MTNL bonds (15%) and MTNL bonds (17%), he estimated ` 9 crore as the interest attributable to investment in
ITA 3303/Mum/2003 & other 7 group-appeals M/s. Reliance Capital Ltd. 9 those bonds. He accordingly made disallowance ` 9 crore and worked out the net interest exempt u/s 10(23G) of the Act. It is pertinent to note here that instead of separately making the disallowance in the final working, the A.O. has made the adjustment in the exempt dividend u/s 10(33) of the Act and exempt interest u/s.10(23G) of the Act by taking the net figures after reducing the estimated attributable interest expenditure for earning those incomes.
11. In assessment year 2000-2001 the assessee has claimed the dividend income of ` 4,72,12,039 claimed exempt u/s 10(33) of the Act. In this year also the A.O. asked the assessee about the source of investment in the shares and whether the borrowed funds had been utilized for making the investment. The assessee filed reply stating that it had sufficient funds and out of the said funds the investment is made. As done in the preceding years, the A.O. examined the balance sheet of the assessee and made the following observations:-
“The assessee company has contended that no expenditure can be held to be attributable to earning of dividend. From the examination of balance sheet, it is seen that the shares on which dividend income has been earned were purchased in the past. However, fresh investment of ` 38.85 crore has been made in Reliance Industries Ltd. shown under investments and investments of ` 10 crore in BSES and ` 2.18 lakh in Forbes Gokak Ltd. on which dividends have been received in the current year. Total investment in shares held as stock in trade is `280.72 crore. Further, certain shares were held as long term investment of ` 129.87 crore. Assessee is also holding shares of subsidiary companies of ` 13.07 crore. Total investment in shares is ` 423.66 crore. Balance sheet of the assessee reveals that the total shareholder’s funds as on 31.03.2000 is ` 1197.96 crore and the loans are of ` 2315.44 crore.”
ITA 3303/Mum/2003 & other 7 group-appeals M/s. Reliance Capital Ltd. 10 12. It is further observed by the A.O. that interest and finance charges of `.31.37 crore were claimed as expenditure in AY 97-98 which increased to ` 41.26 crore in A.Y. 1998-99. This further increased to `75.57 crore in A.Y. 1999-2000 and `159.90 crores in A.Y. 2000-01. The interest on bonds which was Nil in A.Y. 97-98 increased to `` 37.13 crore in A.Y. 1998-99 and further increased to `79.37 crore in A.Y. 1999-2000 and ` 93.48 crore in A.Y. 2000-01. Assessee company is engaged in the business of purchase and sale of shares, lending and also leasing activity. The lease income has increased from `129.86 crore in A.Y. 98-99 to ` 165.27 crore in A.Y. 99-00. It has then decreased to ` 128.95 crore in A.Y. 2000-01. The interest income increased from ` 142.89 crore in A.Y. 98-99 to `195.64 crore in A.Y. 99-00. It further increased to ` 295.38 crore in A.Y. 2000-01. The shares have been mainly acquired in the past. Direct linkage of the borrowed funds with the investment in the shares is not possible to establish in view of a large number of transactions and the investment being old. Further, in A.Y.96-97 & A.Y. 97-98 claim of the assessee of deduction u/s 80M was examined. It was held in A.Y. 97-98 that an expenditure of ` 3 crore out of interest payment of ` 31.71 crore is attributable for earning of dividend income. In A.Y. 97-98 ` 3 crore were held as relatable to earning dividend. In A.Y. 98- 99, ` 3 crore were held to be attributable to dividend income which is claimed exempt. For A.Y. 99-00 also ` 3 crore were held as relatable to earning dividend. From the list of dividend receipt submitted by the assesse, it is seen that the dividends have been earned on investment of ` 56.58 crore (last year ` .18 crore) and stock in trade 178.94 crore (last year `111.53 crore). The main investment of ` .38.58 crore in RIL shown is under investment and `10.01 crore in BSES Ltd. and ` 62.63 crore in L & T Ltd. are shown as stock-in-trade. In respect of RIL, assessee has submitted that shares were purchased at the end of March 2000 as ex-dividend and no dividend on these shares were received. Similar explanation is given for investment in L & T Ltd. Considering all facts and circumstances and findings in A.Y. 1996-97,
ITA 3303/Mum/2003 & other 7 group-appeals M/s. Reliance Capital Ltd. 11 97-98, 98-99 & 99-2000, it is held by the A.O. that the interest expenditure of `4 crore is attributable to dividend income which is claimed exempt for A.Y. 2000-2001.
13. The A.O. finally worked out interest expenditure of ` 4 crore as attributable to earn the dividend income which was claimed exempt. On the same way the assessee had claimed exemption of the interest of ` 19,28,63,025 which was received on Reliance Telecom Limited (10.5% bonds) and Reliance Utility & Power Limited i.e. non- convertible debentures at ` 1,17,92,219 and ` 18,10,70,806 respectively. The A.O. also sought explanation of the assessee on the source of investment. The A.O. referred the preceding years disallowances and considering the disallowance made in the assessment year 1999-2000 on the same reasoning he worked out the interest expenditure attributable for earning the exempt income of ` 19,28,63,025 at ` 9 crore. Accordingly reducing the same from the exempt income and in consequence the total income was enhanced.
14 In assessment year 2001-2002 it was noticed by the A.O. that the assessee-company has claimed dividend income of ` 7,13,51,096 as exempt u/s 10(33) and interest income on the bonds of ` 39,55,92,661 as exempt u/s.10(23G) of the Act. The A.O. asked the assessee to prove that the investment in the said shares and bonds / debentures was not made out of the borrowed funds. The assessee filed a detail reply explaining the source of funds which is reproduced in assessment orders for A. Ys. 1998-99, 1999-2000 and 2000-2001. The A.O. has reproduced the entire explanation of the assessee at page 2 of the assessment order. The A.O. has referred to the decisions of the Hon’ble Supreme Court in the case of Distributors (Baroda) Pvt. Ltd. 155 ITR 120 and Hon’ble Madras High Court in the case of Magganlal Chagganlal Pvt. Ltd. 236 ITR 456. The A.O. has observed that inspite of opportunities given to the assessee, the assessee has not brought anything on record to prove the source of investments in
ITA 3303/Mum/2003 & other 7 group-appeals M/s. Reliance Capital Ltd. 12 stocks and shares because of which the assessee-company had received interest and dividend which has been claimed as exempt from tax. The A.O. also observed on perusal of the balance sheet and P& L account that the assessee-company had utilized borrowed funds to the tune of ` 2316 crore during the current year. The A.O. also observed that most of the stock and shares on which the dividend and interest had been claimed as exempt were purchased in earlier years, during which also the assessee-company had utilized borrowed funds. The A.O. further noted that the assessee-company has increased their investments in Reliance Utilities and Power to ` 265 crore during the current year and has also invested in Reliance Infocom to the tune of ` 800 crore. The A.O. also noted that the assessee-company had debited an amount of ` 182.60 crore as interest and finance charges and an amount of ` 17.14 crore as administrative and other expenses. The A.O. further observed that the assessee had not brought on record anything to prove the nexus on their own funds to make investment. The A.O. has noted that the total receipts of the assessee-company for assessment year 2001-2002 were ` 492.20 crore out of which dividend and interest income is ` 46.69 crore, which is 9.48%. Out of the interest and finance charges, administrative and other expenses incurred during the year of ` 191.60 crore, the A.O. worked out the disallowance of ` 18.16 crore and accordingly made adjustment. In this year the A.O. has made separate addition in respect of the disallowance of interest and other expenses attributable for earning the exempt income i.e. dividend and interest in the final computation.
15. The assessee challenged the disallowance made by the A.O. in all the assessment years before the learned CIT(A). Raising serious grievance against the action of the A.O., the learned CIT(A) gave partial relief to the assessee and sustained disallowance made by the A.O. as under:-
ITA 3303/Mum/2003 & other 7 group-appeals M/s. Reliance Capital Ltd. 13 Asst. Year Expenditure attributable to dividend (u/s 10(33) Expenditure attributable to interest u/s 10(23G)
1998-99 ` 60,00,000 Nil 1999-00 ` 60,00,000 Nil 2000-01 ` 1,00,00,000 Nil 2001-02 ` 69,25,000 Nil
Now the assessee as well as the Revenue both are in appeal, against partial sustenance of addition and partial disallowance of addition made by the Assessing Officer respectively.
16. We have heard the Parties and perused the records. The learned CIT(A) has given a categorical finding that the assessee has its own surplus funds which were utilized for making investments in the shares, bonds and debentures. The learned Counsel argued that the total tax free investment in all the years is much below the paid up capital and reserves available with the assessee-company. He submits that the tax free investment in assessment years 1998-99, 1999-2000 and 2000-2001 is much less than the income before depreciation and element of depreciation must be considered for correct working of the funds generation. In the assessment year 2001-2002 the funds were generated by issuing preference shares to the extent of ` 800 crore but increase in tax free investments in the same year i.e. assessment year 2001-2002 is marginally higher than the profit before tax and preference share capital raised during the year. He further submits that in assessment years 1997-98, 1998-99 the investment in shares and securities was much below the total share capital, reserves and surplus. He submits that the tax free securities were also held as stock in trade and only the dividend is exempt and profit on the sale of stock in trade of shares and securities is taxable as the business income and hence section 14A is not attracted at all. He further submits that the ad hoc disallowance cannot be made as in fact all the details were filed before the A.O. in respect of the generation of funds
ITA 3303/Mum/2003 & other 7 group-appeals M/s. Reliance Capital Ltd. 14 but the same were discarded. The learned Counsel relied on the following decisions :- (i) Punjab State Industrial Dev. Corp. Ltd. Vs. DCIT 102 ITD 1 (SB) (ii) Maruti Udyog Ltd. Vs. DCIT 92 TTJ (Del) 987 (iii) ACIT Vs. Eicher Ltd. 101 TTJ (Del) 369 (iv) Wimco Seedings Ltd. Vs. DCIT 107 ITD 267 (Delhi) (TM) (v) Tata Finance Ltd. 20 SOT 47 (Mum) (vi) Mukand Global Finance Ltd. 20 SOT 82 (Mum)
We have also heard the learned Departmental Representative, who supported the assessment orders passed by the Assessing Officer.
17. We find that there is no dispute in this case that the assessee is also holding securities i.e. shares, debentures, bonds etc. as stock- in- trade. As rightly argued by the learned Counsel though the dividend is exempt, but so far as the profit on sale of the shares and securities is concerned the same is taxable. Let us deal with the case of the A.O.. The main thrush of the A.O. for making the disallowance invoking section 14A is that as per analysis of the Balance Sheet made by him, the assessee has utilised borrowed funds for making the investment, but as per the facts and figures placed before us by way of a consolidated chart for all years, showing the inflow and outflow of funds, we find that the assessee is having sufficient own funds generated from the share capital and reserves and surplus.
18. In assessment year 2001-2002 the assessee received the funds by issuing ‘preference shares’ to the extent of ` 800 crore. So far as the dividend income is concerned, nowhere it is controverted by the Revenue that the basic object of the assessee was not to earn the dividend by holding the shares as an investment and shares were also held as stock-in-trade as part of the business of the assessee- company. So far as the interest on bonds and debentures are concerned, we find that as admitted by the A.O., most of the investments had been made in the preceding years prior to
ITA 3303/Mum/2003 & other 7 group-appeals M/s. Reliance Capital Ltd. 15 assessment year 1998-99 and said fact is clear from his observations in assessment year 1998-99. The assessee made some investment in the assessment years 1999-2000, 2000-2001 and 2001-2002 but we find that the assessee has generated funds from the sale of shares and securities held as stock-in-trade or as the investments. We find that identical issue of disallowance on the dividend income had come for the consideration before the Tribunal in assessee’s own case for the assessment year 1995-96 in context of deduction under sec. 80M of the Act (ITA No.3073/Mum/1996 & other appeals). In that year also the assessee had received the dividend of ` 11,57,98,227. The A.O. worked out the interest expenditure attributable for earning dividend income at ` 1 crore. When the matter reached before the Tribunal, vide order dated 12.1.2007 the Tribunal held that ad hoc dis- allowance of interest expenditure cannot be justified at any cost.
19. In the case of CIT Vs. Reliance Utility and Power Limited 313 ITR 340 (Bom.) the controversy was diversion of the interest bearing funds for making the investment. In the said case the A.O. recorded finding that the sum of ` 313 crore was invested out of their own funds and ` 147 crore were invested out of borrowed funds. The A.O. accordingly worked out the disallowance by taking interest rate at 12% per annum for three months. The assessee pleaded before the Hon’ble High Court that the assessee had sufficient interest free funds as under:- (i) Share capital ` 180.00 crore (ii) Reserves and Surplus ` 120.80 crore (iii) Depreciation reserves ` 95.39 crore ----------------- Total interest free funds ` 398.19 crore ==========
Their Lordship held as under:- “If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the
ITA 3303/Mum/2003 & other 7 group-appeals M/s. Reliance Capital Ltd. 16 investments were from the interest-free funds available. In our opinion, the supreme court in East India Pharmaceutical Works Ltd. v. CIT [1997] 224 ITR 627 had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. [1982] 134 ITR 219 where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcombers of India Ltd.’s case [1982] 134 ITR 219 the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the over draft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle, therefore, would be that if there are funds available both interest-free and over draft and / or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal.”
20. The argument of the learned Departmental Representative that the Hon’ble jurisdictional High Court in the case of Godrej & Boyce
ITA 3303/Mum/2003 & other 7 group-appeals M/s. Reliance Capital Ltd. 17 Ltd. Mfg. Co. VS. DCIT (2010) 328 ITR 81 (Bom) held that the A.O. should work out the reasonable disallowance. With due respect, in our considered opinion, in the present appeals, there is no need to restore the matter to the file of the A.O. as the facts are distinguishable. Here we find that the assessee had sufficient own as well as interest free funds to make the investment in the shares, bonds and debentures. Moreover nothing has been controverted on said findings of the Ld. CIT(A) by the Revenue. So far as the finding of the learned CIT(A) is concerned, after giving anxious consideration the totality of the facts and figures placed before us, we find no reason to sustain any disallowance made by the Assessing Officer in respect of the dividend income claimed exempt u/s 10(33) as well as the interest income on the bonds and debentures claimed exempt u/s 10(23G) of the Act. Moreover it is clear from the orders of the A.O. that all the disallowances are made on ad hoc basis. We, therefore, delete the entire disallowances sustained by the learned CIT(A) in respect interest and other expenditure attributable for earning the dividend exempt u/s 10(33) and also of the interest income exempt u/s 10(23G) of the Act. In the result, the respective grounds of the assessee are allowed and the respective grounds taken by the Revenue are dismissed, in all these appeals.
21. The next issue is computation of book profit u/s 115JA and this issue arises in the assessee’s appeal for assessment years 1998-99, 1999-2000 and 2000-2001. The short controversy before us is whether while computing the book profit u/s 115JA the expenditure attributable for earning the exempt income or income which does not form part of the total income is to be added. In all the assessment years the expenditure attributable to the dividend as well as interest income claimed exempt u/s 10(33) and 10(23G) respectively was added while computing the book profit. The said issue is decided in favour of the assessee and no expenditure is treated as attributable for earning the exempt income i.e. dividend or interest claimed
ITA 3303/Mum/2003 & other 7 group-appeals M/s. Reliance Capital Ltd. 18 u/s.10(23G). This issue does not survive. Hence, the respective grounds taken by the assessee are allowed for technical purposes and the ground raised by the Revenue in A.Y. 1998-99 is dismissed.
22. The next issue is loss on conversion of the shares whether the same pertains to the A.Y. 1996-97 or 1998-99 and this issue arises in the revenue’s appal for the A.Y. 1998-99 being Ground No.1
23. Briefly stated the facts are as under. This issue arises only in A.Y. 1998-99. It was noticed by the A.O. that the assessee had claimed the loss on the sale of the stock-in-trade of the securities/shares amounting to ` 1,82,54,054/-. The assessee has converted the shares/securities as a stock-in-trade on 6.10.1995. In the financial year relevant to A.Y. 1998-99 the assessee sold 319200 shares of M/s. Rallies India Ltd., out of the shares held as stock-in- trade. At the time of conversion of the said shares as stock-in-trade as on 6.10.1995, the fair market value was taken at ` .340/- per share and the cost price as per books of a/c was ` 283/-. The A.O. has noted that on the date of conversion, there was capital gain of ` 1,81,95,214/-. That was worked out by multiplying 319000 shares by ` 57/- (difference between ` 340 and ` 283). The assessee offered the capital gain in the A.Y. 1998-99. In the financial year 1995-96 in which the shares were converted into stock-in-trade, assessee valued said shares at ` 257.50 per share adopting the market price as on 31.03.1996. The cost price as per the books was ` 283/- per share. The difference of ` 25.50 per share was booked by the assessee as a loss in the A.Y. 1996-97. The assessee further made valuation of the said shares on 31st March, 1997 by adopting value at ` 218.50 per share. That also resulted in the loss of ` 39/- per shares which was booked in the A.Y. 1997-98. The said shares were sold @ `.186.6 per share and A.O. booked the loss at ` 31.94 per share (i.e. ` 218.50 value as on 1.4.1997 – ` 186.56 sale price received). The assessee has further booked loss of ` 1,81,95,214/- in the A.Y. 1998-99 and the
ITA 3303/Mum/2003 & other 7 group-appeals M/s. Reliance Capital Ltd. 19 said loss has been claimed on account of price difference of the cost price of ` 283/- per share and valuation on conversion i.e. ` 340/- per share in the A.Y. 1996-97. The A.O. has noted that the assessee has not shown the fair market value of the said shares on the date of conversion at `.340/- per share in the books of account, but while making valuation of the stock as on 31.3.1996, the market price was adopted at ` 257.50 per share and as the assessee has not shown the fair market value on the date of conversion of the said shares as a stock-in-trade, no loss was booked in the A.Y. 1996-97. The assessee- company followed the method for valuation of stock by adopting cost or market price whichever was lower. In the opinion of the A.O. the additional loss claimed by the assessee was not admissible in the A.Y. 1998-99. The A.O. therefore, disallowed the additional claim of loss of ` 1,81,95,214/-. The A.O. accordingly disallowed the loss by interpreting sec.45(2) of the Act. The Ld. CIT (A) deleted the addition made by the A.O. by holding that sec.45(2) is a deeming provision and is meant to bring to tax gains/loss arising from the conversion of investment into stock-in-trade at a particular point of time so that the gains are taxable or assessable at least at one point of time. Now, the revenue is in appeal before us.
24. We have heard the parties. The facts are narrated hereinabove. The assessee has also filed the chart showing that how the shares were valued on the date of conversion and once there was a conversion and it became the stock-in-trade, how the valuation of the closing-stock was done. In our opinion, the short controversy revolve around the interpretation of sec.45(2) of the Act.
25. As per sub-sec.(2) to sec.45, if any capital asset is converted into stock-in-trade of the business then the profit or gain as worked out on the date of conversion shall be taxable in the year in which such stock-in-trade is sold or otherwise transferred. In the present case, there is no dispute about the fact that the assessee offered
ITA 3303/Mum/2003 & other 7 group-appeals M/s. Reliance Capital Ltd. 20 capital gain by adopting the market value on the date of conversion as a sale consideration but also claimed the loss by adopting the value of the opening stock – the value of closing stock or otherwise. As per sec.45(2) on conversion the capital asset either independently becomes stock-in-trade or forms the part of the existing stock-in- trade. In the present case, as per the chart filed by the assessee, we find that the assessee has valued stock of the shares of M/s. Rallies India Ltd. on 31st March, 1996 and 31 st March,1997 by adopting the market price and taken the said value as opening-stock also. As per the scheme of the said provision there are two limbs: (i) gain or loss on the date of conversion of capital asset in to stock-in-trade and (ii) the profit or loss on date of sale or otherwise transfer of said capital asset.
26. So far as the first limb is concerned as per the language used in the said provision, the correct interpretation would be that the gain or loss is determined on the date of conversion of the capital asset into stock-in-trade but the taxability of the same is differ till the date of sale or transfer of the said asset. So far as the second limb is concerned, the profit or loss is to be computed in respect of the stock in trade of the converted capital asset, as business income as per the relevant provisions adopting the fair market value (FMV) on the date of conversion as its cost of acquisition. In the present case the cost of acquisition of the shares being stock in trade on the date of conversion was `` 340 which was reduced to ` 257.50 as on 31.3.1996. It had thus suffered a loss of ` 82.50 per share for the previous year relevant to the assessment year 1996-97. However, loss to the extent of ` 25.50 per share was only claimed by the assessee. The balance loss of ` 57 per share has been claimed in the assessment year 1998-99 which in our opinion cannot be allowed being pursuant to the assessment year 1996-97. We, therefore, set aside the order of the learned CIT (A) on this issue and restore that of the A.O. The relevant ground taken by the Revenue in assessment year 1998-99 is accordingly allowed.
ITA 3303/Mum/2003 & other 7 group-appeals M/s. Reliance Capital Ltd. 21 27. The next issue is the interest income claim of exemption u/s.10(15) in respect of interest on ‘‘Gold Bonds’’ and this issue arises in the revenue’s appeal for the A.Y. 1999-2000.
28. During the assessment proceedings, the assessee made a claim of exemption in respect of interest on ‘Gold Bonds’ of ` 24,38,958/- stating that the same is exempt u/s.10(15) of the I.T. Act. The A.O. rejected the claim of the assessee on the reason that the assessee should have claimed the same by filing the revised return as per the provisions of sec.139(5) of the Act. The assessee carried the issue before the Ld. CIT (A) and Ld. CIT (A) directed the A.O. to allow the claim.
29. We have heard the parties. In view of the decision of the Hon’ble Supreme Court in the case of Goetze (India) Ltd. vs. CIT 284 ITR 323 claim for deduction not made in the return cannot be entertained by the A.O. otherwise than by filing a revise return and hence, the view taken by the A.O. is correct. At the same time, the Tribunal has power to admit any new claim as per the principles laid down in the case of National Thermal Power Co. Ltd. 229 ITR 383 and the same has been clarified in the case of Goetze (India) Ltd. (supra). We, therefore, uphold the order of the Ld. CIT (A) and confirmed the directions using our powers. Accordingly respective grounds i.e. ground no.3 for the A.Y. 1999-2000 is dismissed.
30. The Next issue is addition made u/s.41(1) and this issue arises in revenue’s appeal for the A.Ys. 1999-2000 and 2000-01.
31. In the assessment proceedings relating to the A.Y. 1999-00, it was noticed by the A.O. that ` 43,01,267/- was shown as dividend received but payable to others. The A.O. had noted that the assessee trades in shares and securities in several cases even after the shares are sold, shareholders does not get the shares registered in their name
ITA 3303/Mum/2003 & other 7 group-appeals M/s. Reliance Capital Ltd. 22 before the record date or there are instances of bad deliveries and in such a situation the assessee receives the dividend on the said shares. In the opinion of the A.O., in the reasonable time, the assessee should pass over the dividend received on the shares sold to the purchases of the shares. The A.O. made the break-up of the outstanding dividend payable as per period i.e. less than one year, 1 to 3 years and 3 to 5 years. In the opinion of the A.O. the accumulated and payable with the assessee for the period 3 to 5 years should be treated as income u/s.41(1) of the Act. The assessee claimed that an amount of `12,06,018/- had been disallowed in the A.Y. 1997-98. The A.O., therefore, restricted an addition of `10,05,089/- u/s.41(1). The Ld. CIT (A) deleted the same. The Ld. CIT (A) deleted the same.
32. The identical issue has been considered by the Tribunal in assessee’s own case for the A.Y. 1997-98. Relevant part of the order is as under:-
“82. The next ground pertains to deduction of `12,06,018 on account of other liabilities. The brief facts are that this amount represents income received in respect of units sold in the earlier year. Since the purchaser did not get the units registered in their own name the dividend thereon has been received by us and is payable to the purchaser. Since some bad delivery claims were outstanding from the broker to / through whom scrips are sold, these interest and dividend have been withheld. However, it was the case of the assessing officer that nobody has claimed the dividend from the assessee so far. Nothing has been paid till date and therefore, the liability was not an enforceable liability. The learned CIT(A) however found that this liability was outstanding for the last three years and is an amount payable to third parties on account of their income having been received by the assessee. The liability was no created on account of any expenditure debited by the assessee in any of the previous accounting years. As per the provisions of section 41(1) of the Act addition to the income can only
ITA 3303/Mum/2003 & other 7 group-appeals M/s. Reliance Capital Ltd. 23 be made if the extinguishment is of the liability which was created due to any expenditure claimed as deductible to arrive at the taxable income of the assessee. The learned CIT(A) therefore, deleted the addition made u/s 41(1). We have heard the rival submissions and find no infirmity in the order of the learned CIT(A). This ground is rejected.”
33. As the facts are identical in these impugned years, we respectfully following the decision of the Tribunal in assessee’s own case confirmed the order of the Ld. CIT (A) for both the assessment years viz.1999-2000 and 2000-01.
34. The next issue is treatment of lease equalisation reserves while computing the book profit u/s.115JA of the Act and this issue arises in the revenue’s appeal for the A.Y. 99-2000 and 2000-01.
35. As the provisions of sec.115JA are applicable to the assessee company in the A.Y. 99-2000 and 2000-01 the A.O. computed total income under the normal provisions of the Act and also book profit as per sec.115JA of the Act. While computing the book profit the A.O. made certain adjustments by way of increase or decrease of net profit and one of the additions made in respect of ‘Lease Equalisation Reserve’ as under:- Assessment year Addition made on a/c. of lease equalisation reserve 1999-2000 ` 10,74,56,255 2000-2001 ` 10,54,02,034
36. There is no discussion on this issue in the assessment order. The Ld. CIT (A) accepted the plea of the assessee that book profit cannot be increased by making the addition of the ‘Lease Equalisation Reserves’.
37. Identical issue has been considered by the Tribunal in the assessee’s own case for the A.Y. 1993-94 to 1997-98, copy of the order
ITA 3303/Mum/2003 & other 7 group-appeals M/s. Reliance Capital Ltd. 24 dated 12.01.2007 is placed on record. Operative part of the Tribunal’s Order on this issue is as under:
“83. The last ground in this appeal relates to the working of `book profits’ u/s 115JA of the Act. The dispute is with reference to lease equalization amount of `37,85,98,608 added to the net profit as per P & L Account. During the assessment proceedings the assessee submitted that lease equalization has been provided in terms of the guidance note issued by Chartered Accountants of India. The guidance note requires statutory depreciation to be provided and to work out true profitability of the company it is necessary that the depreciation be provided at a rate which is sufficient to write off the leased assets over the primary period of lease. This means that in the initial years of lease, additional charge on account of depreciation is reduced from the lease rent and the gross block of fixed assets, in order to reflect the true lease rentals and the true net value of fixed assets. The assessee further submitted that in the computation of income the above amount has been added as the same represents the depreciation provision while the allowable u/s 32 is separately worked out. It was further submitted that u/s 115JA the depreciation is to be computed on the same method and rates as adopted in the profit and loss account laid before the AGM. In this way, it was contended that the lease equalization is not a reserve. The assessing officer did not accept the above arguments of the assessee. According to the Schedule XIV of the Companies’ Act provides rates of depreciation. The company is not debarred from providing higher depreciation. As per AO lease equalization represents a reserve created to meet the capital loss. The assessing officer discussed thereafter various case laws to analyze what constitutes reserves or provisions. As per him excess depreciation not required under the Companies’ Act is a reserve. He therefore added back `37,85,98,608 carried to lease equalization treating the same as reserve.
ITA 3303/Mum/2003 & other 7 group-appeals M/s. Reliance Capital Ltd. 25 84. On appeal, the learned CIT(A) observed that the cardinal principle behind introduction of section 115JA is taxability of book profits as opposed to taxable profits. Book profits are required to be determined considering Part II and Part III of Schedule VI of the Companies’ Act. The Institute of Chartered Accountants of India has issued guidance notes on accounting for leases with a view to establish sound accounting principles and practices in the leasing industry. The guidance notes required that against the lease rental a matching lease annual charge is made to the profit and loss account. This annual lease charge should represent recovery of the net investment / fair value of the leased assets over the lease term. It further provides that the method of income measurement is in consonance with the inherent nature of finance lease. Considering the purpose behind creating lease equalization account, it cannot be said that the same represents a reserve or an appropriation of profits. The lease equalization amount of `37,85,98,608 was therefore held as a proper charge on the profits by way of recoupment of the assets leased and represented additional depreciation. The learned CIT(A) accordingly directed the assessing officer not to make adjustment in respect of the lease equalization amount while computing the book profits. Aggrieved the revenue is in appeal before us.
85. We have heard both the sides. In our view the decision of the CIT(A) does not require any interference. The decision taken by the CIT(A) now is in accordance with the ratio laid down by the Hon’ble Supreme Court in the case of Apollo Tyres Ltd. Vs. CIT (2002) 255 ITR 273 (SC) and also having regard to the decision to the Tribunal in the case of Reliance Industrial Infrastructure Ltd. Vs. ACIT, ITA No.3476/M/02 dated 26.5.2003 for the assessment year 1998-99 which is placed at page 38 of the paper book. Respectfully following the above decisions, the order of the CIT(A) is accordingly confirmed.”
ITA 3303/Mum/2003 & other 7 group-appeals M/s. Reliance Capital Ltd. 26 38. We, therefore, respectfully following the order of the Tribunal in assessee’s own case, on a rule of consistency, confirmed the order of the Ld. CIT (A) on this issue in both the A.Yrs. and dismiss relevant grounds take by the revenue in the A.Y. 1999-2000 and 2000-01.
39. The next issue is disallowance of claim of ‘bad debt’ and this issue arises in revenue’s appeal for the A.Y. 2001-02.
40. The assessee claimed the amount of ` 23.54 crore as bad debt. The A.O. asked the assessee-company to substantiate their claim. The assessee filed the reply which is reproduced in the assessment order. The A.O. was of the opinion that the assessee has failed to establish that the debt which has been written off, has become bad. The A.O. therefore disallowed the claim of the assessee. The assessee challenged the disallowance before the Ld. CIT (A) and Ld. CIT (A) deleted the addition made by the A.O. towards ‘bad debt’ claim. Now this issue stands covered in favour of the assessee by the decision of the Hon’ble Supreme Court in the case of TRF Ltd. vs. CIT 323 ITR 397 as well as by the judgments of the jurisdictional High Court in the case of CIT VS. Star Chemical (Bom) Pvt. Ltd. 313 ITR 126 (Bom) and DIT (International Taxation) vs. Oman International Bank (SAOG) 313 ITR 128 (Bom). We find no infirmity in the order of the Ld. CIT (A) on this issue accordingly the same is confirmed and relevant ground taken by the revenue in the A.Y. 2001-02 stands dismissed.
41. In the result, all appeals of the assesse as well as all appeals of the revenue are partly allowed for statistical purposes. Order pronounced in the open court on this day of 11th November 2011. Sd/- Sd/-
Mumbai, Date: 11th November, 2011
ITA 3303/Mum/2003 & other 7 group-appeals M/s. Reliance Capital Ltd. 27 Copy to:-
1) The Appellant. 2) The Respondent. 3) The CIT (A)- III, Mumbai. 4) The CIT-3, Mumbai. 5) The D.R. “H” Bench, Mumbai.
By Order / / True Copy / /
Asstt. Registrar I.T.A.T., Mumbai *Chavan
ITA 3303/Mum/2003 & other 7 group-appeals M/s. Reliance Capital Ltd. 28
Sr.No.
Episode of an order Date Initials Concerned
1 Draft dictated on 27.10.2011 Sr.PS 2 Draft placed before author 09.11.2011 Sr.PS 3 Draft proposed & placed before the second Member JM/AM 4 Draft discussed/approved by Second Member JM/AM 5 Approved Draft comes to the Sr.PS/PS Sr.PS/PS 6 Kept for pronouncement on Sr.PS/PS 7 File sent to the Bench Clerk Sr.PS/PS 8 Date on which file goes to the Head Clerk 9 Date of dispatch of Order