Gauri Investments P. Ltd, Mumbai vs Assessee

आयकर अपीलीय अिधकरण, अिधकरण मुंबई IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES 'G' MUMBAI सव[ौी ǒवजय पाल राव, Ûयाियक सदःय एवं ौी डȣ. कǾणाकर रावु लेखा सदःय के सम¢ । SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND BEFORE SHRI D.KARUNAKARA RAO, ACCOUNTANT MEMBER ITA NO.4143/MUM/2011 (A.Y.2003-04)

M/s. Avakash Consultants Private The ITO - 9(1)(4),. Ltd., Mumbai. (Formerly known as Gauri Vs. (Respondent) Investments P. Ltd.) Strategic House, 44, Mint Road, Fort, Mumbai 400 001 (Appellant ) Appellant by : Shri Vimal Punmiya Respondent by : Shri Vivek Batra

Date of hearing : 18/12/2014 Date of pronouncement : 14/01/2015

ORDER

PER VIJAY PAL RAO, J.M:

This appeal filed by the assessee is directed against order passed by Ld. CIT(A)19, Mumbai dated 23/3/2011 for assessment year 2003-04. The assessee has raised the following grounds.

"1.The Ld. Commissioner of Income Tax (A) has erred in confirming disallowance on account of interest payment of Rs.6,37,640/-.

2. The Ld. Commissioner of Income Tax (A) has erred in enhancing disallowance on account of interest payment of Rs.2,65,572/- without considering the submissions filed by the appellant in response to CIT(A)'s show cause Notice for enhancement.

2 ITA NO.4143/MUM/2011 (A.Y.2003-04)

3.The Ld. Commissioner of Income Tax (A) has erred in not allowing Rs.2,55,708/- i.e. earlier years speculation loss against current year's profit from purchase and sale of Bonds.

4. The Ld. Commissioner of Income Tax (A) has erred in not adjudicating on charging of interest under section 234B & 234D of the Income Tax Act, 1961.

5. The Ld. Commissioner of Income Tax (A) has erred in not adjudicating on invoking of the provisions of section 271(1) (c) r.w.s. 274 of Income Tax Act, 1961."

2. Ground No.1 & 2 are regarding disallowance of interest. The assessee is an investment company and deals in shares and securities. During the year the assessee claimed interest payment of Rs.15,94,426/- including a sum of Rs.9,03,212/- paid to M/s. Musuko Trading (P) Ltd. (M/s. MTPL in short). The AO noted that the assessee took loan of Rs.13,45,000/- from M/s. MTPL on 10/4/2000 but no interested was debited for the assessment year 2000-01 and 2001-02. The AO observed that it was only in this year the interest of Rs.9,03,212/- was debited. The AO accordingly, restricted the claim of interest to Rs.2,65,572/- and disallowed the balance on the ground that the same do not pertain to the year under consideration.

3. On appeal before Ld. CIT(A) the assessee submitted that in the year 2000 the assessee availed loan from M/s.MTPL for purchase of 14% non-convertible debentures of Jindal Vijay Nagar Steel Ltd. The parties did not specify the interest as it was depend on the return of investment in the debentures. During the year the debentures were redeemed/sold and the assessee repaid the loan alongwith interest. Ld. CIT(A) did not accept the contention of the assessee and disallowed the entire claim of Rs.9,03,212/- and consequently enhanced the assessment.

4. Before us Ld. AR of the assessee has submitted that the assessee got an opportunity to invest in 14% Jindal Vijay Nagar Steel Ltd.'s NCDs as they were available at a very cheap discount rate in the secondary market at Rs.8.85 3 ITA NO.4143/MUM/2011 (A.Y.2003-04)

to 12.50 against the face value of Rs.20.00. The assessee approached M/s. MTPL to participate in this investment opportunity by providing funds, to which M/s. MTPL agreed. At the time of investment the parties did not finalize the rate of interest on the fund provided by M/s. MTPL as it was agreed to be decided on the basis of the net gain to be made on the investment. The assessee claimed the entire interest expenditure for the year under consideration as the rate of interest was decided in this year and liability was crystallized only on redemption of NCDs. Thus, Ld. AR has contended that the liability of interest was crystallized only during the year and it was not ascertainable in the earlier years. The assessee produced relevant evidence such as confirmation from M/s. MTPL regarding the rate of interest, details of payment and ledger account during the assessment proceedings. The assessee proved the existence of the liability towards loan as well as interest which was paid by the assessee during the year. The Ld. CIT(A) rejected the claim of the assessee on the ground that the liability to pay interest did not exist which is contrary to the evidence produced by the assessee. Ld. AR has submitted that the payments have been made through proper banking channel and by account payee cheques which have not been disputed by the AO. He has further contended that when the assessee obtained the loan it is natural that the interest is also payable on the same and mere postponing the decision regarding the rate of interest cannot lead to the conclusion that interest liability does not exist. The rate of interest was to be decided at the time of redemption so as to consider the profit on entire investment. This was decided with the intention to share over all profit between the parties on the investment. Finally the interest was decided @ 24% keeping in view of the outcome of the investment. It was contractual obligation and liability arises only when it was ascertained. Therefore, the liability cannot be ascertained till the time NCDs are redeemed and profit is known. Ld. AR has relied upon the following decisions:

4 ITA NO.4143/MUM/2011 (A.Y.2003-04) 1. CIT vs. Swadeshi Cotton & Flour Mills Ltd. 53 ITR 134(SC).

2. Saurashtra Cement & Chem. Industries Ltd. Vs. CIT, 213 ITR 523(guj)

3. Swadeshi Cotton Mills Co. Ltd. vs. CIT, 3 Taxman 289 (All).

4. CIT vs. A. Gajapathy Naidu, 53 ITR 114 (SC).

Thus, Ld. AR has submitted that prior to the redemption of the NCDs the profit on the investment could not be estimated and, therefore, the rate of interest was not decided.

5. On the other hand, Ld. DR has submitted that the assessee failed to produce any tangible material in support of the claim that rate of interest was agreed upon between the parties only in the year under consideration and that all alone the assessee has negotiated with the creditor. It is also not in accordance with the human probability that somebody will lend the money without agreeing to the interest payable. He has relied upon the order of Ld. CIT(A) and submitted that the explanation of the assessee cannot be believed when the assessee has not produced any evidence that the rate of interest was decided only during the year under consideration.

6. We have considered the rival submissions as well as relevant material on record. The assessee took the loan in the year 2000 and repaid the same during the year under consideration with interest. There is no dispute about loan taken by the assessee on 10/04/2000 and repaid the same during the year with interest. The AO disallowed the proportionate interest on the ground that the assessee has not claimed interest in the earlier years and, therefore, to the extent of interest pertained to the earlier years cannot be allowed during this year. Ld. CIT(A) disallowed the claim of interest in toto on the ground that assessee failed to produce the evidence on the rate of interest agreed between the parties. It is pertinent to note that there is no dispute between parties about the actual interest paid by the assessee to M/s. MTPL. The assessee invested the loan fund in 14% NCDs at a discounted price and earned a total 5 ITA NO.4143/MUM/2011 (A.Y.2003-04)

return of Rs.16,98,098/- comprising of profit on sale of investment as well as interest income.. Out of the return of Rs.16,98,098/- the assessee paid interest to M/s.MTPL of Rs.9,03,212/-. Therefore, it is not a case of payment of interest without any return on the investment. The assessee has made out a case of mutual understanding between the parties to share the income arising from the investment of funds provided by M/s. MTPL. Since investment was made of a discounted price of the NCDs, therefore, it was expected by the parties to get a good return on the maturity/redemption of the NCDs. As it is apparent from the facts and circumstances of the case that the share of M/s. MTPL was to be determined as per outcome of the return from the investment and, therefore, it was neither decided nor ascertainable as to how much share M/s. MTPL would get from the investment at the time of maturity/redemption of the investment in question. In those circumstances, when the interest liability of the assessee towards M/s. MTPL loan was ascertainable only on the occasion of redemption of the investment, the assessee did not claim any amount of interest expenditure in the earlier year. Only during the year under consideration the investment was sold and final return on the investment was ascertained on the basis of which a sum of Rs.9,03,212/- was paid to M/s.MTPL as interest on the said loan for the entire period. As it was not a transaction between the related parties so that any reason could be ascribed for avoidance of tax. Further the amount is an income in the hands of the recipient (M/s.MTPL) and subjected to tax as assessee has paid the amount after TDS. Therefore, there was no revenue loss by allowing the claim of interest in the year under consideration when the amount was subjected to tax in the hand of the recipient during this year only.

6.1 Even otherwise if amount is not allowable as expenditure in the hand of the assessee on the reasons assigned by the authorities below, then on the same analogy it would not be taxed in the hand of the recipient. Further, this transaction can be looked from another angle of share profit/return arising from the investment. In that case the share of profit and income from 6 ITA NO.4143/MUM/2011 (A.Y.2003-04)

investment given to M/s.MTPL would be excluded from the gross receipt and only the balance being the assessee's share in the return on the investment would be treated as income of the assessee.

6.2 The assessee produced confirmation from the other party to support the claim and arrangement between the parties. If the AO and Ld. CIT(A) had any doubt about the agreement/understanding between the parties then they could have conducted a proper enquiry to prove the contrary. In the absence of any contrary finding or facts, the evidence produced by the assessee cannot be rejected. The interest liability on the loan was dependent on the outcome of the return of the investment, therefore, it was not possible to ascertain the same prior to the redemption/sale of the investment. When the right of M/s.MTPL accrued only on the sale of investment, then the liability of the assessee correspondingly arises only at the time of sale. In any case, the claim of the assessee is revenue neutral when the amount is subjected to TDS and also taxable in the hand of the recipient.

6.3 Accordingly, we are of the view that the interest liability in question is ascertained and became payable during the year and accordingly is an allowable expenditure.

7. Ground No.3 is regarding setting off speculation loss. The assessee had profit on purchase and sale of bond of Rs.2,55,708/-. The assessee claimed setting off brought forward speculation loss against profit from purchase and sale of bonds. The AO held that the profit on sale of bond cannot be treated as speculation profit on the ground that it was in respect of purchase and sale of shares for which delivery was taken. The AO also held that even in the terms of section 43(5) r.w.s. explanation to section 73 of the Act transaction in bonds cannot be treated as speculative. On appeal Ld. CIT(A) has confirmed the action of the AO.

7 ITA NO.4143/MUM/2011 (A.Y.2003-04) 8. Before us Ld. AR has submitted that the profit during the year is derived from the transaction of purchase and sale of securities/bonds, therefore, as per explanation to section 73 the business of the assessee is deemed to be speculative and brought forward speculation loss has to be set off against the profit. Further, Ld. AR has submitted that in some of the transactions there was no delivery and therefore, profit arising from sale and purchase of the non- delivery based securities and bonds is speculation profit as per section 43(5). He has referred the details of the purchase and sale transactions and submitted that in case of number of transactions of purchase and sale no delivery was taken and to that extent the profit is available for set off of the brought forward speculation loss. He has relied upon the following decisions.

1. Prasad Agents (P) Ltd. v. ITO , 180 Taxman 178 (Bom)

2. Metropolitan Traders Pvt. Ltd. vs. ITO, ITA No.1535/Mum/2007,B-Bench (Mum).

9. On the other hand, Ld. DR has submitted that as per explanation to section 73 dealing in shares of a company only constitute the speculation business and not otherwise. He has relied upon the orders of the authorities below.

10. We have considered the rival submissions as well as the relevant material on record. Though the business activity of the assessee cannot be deemed as speculative in nature in terms of explanation to section 73 because the assessee has earned profit from purchase and sale of bond and not shares of companies. However, as per the details of purchase and sale of bonds we find that in case of various transactions the purchase and sale was effected on the same day and, therefore, the possibility of non-delivery based transaction of purchase and sale is not ruled out. Hence, the matter requires a proper verification and consequently the profit from those would be speculation profit available for setting off of the brought forward speculation loss. Accordingly, 8 ITA NO.4143/MUM/2011 (A.Y.2003-04)

this issue is set aside to the record of the AO to examine the same afresh and decide as per law.

11. In the result, the appeal filed by the assesse is partly allowed.

Order pronounced in the open court on 14/01/2015 आदे श कȧ घोषणा खुले Ûयायालय मɅ Ǒदनांकः 14/01/2015 को कȧ गई ।

Sd/- Sd/- (डȣ. कǾणाकर रावु/ D.KARUNAKARA RAO ) (ǒवजय पाल राव/VIJAY PAL RAO ) लेखा सदःय / ACCOUNTANT MEMBER Ûयाियक सदःय / JUDICIAL MEMBER मुंबई Mumbai; Ǒदनांक Dated : 14/01/2015

आदे श कȧ ूितिलǒप अमेǒषत/Copy षत of the Order forwarded to : 1. अपीलाथȸ / The Appellant 2. ू×यथȸ / The Respondent. 3. आयकर आयुƠ(अपील) / The CIT(A)- 4. आयकर आयुƠ / CIT 5. ǒवभागीय ूितिनिध, आयकर अपीलीय अिधकरण, मुब ं ई / DR, ITAT, Mumbai 6. गाड[ फाईल / Guard file.

आदे शानुसार/ ार BY ORDER, स×याǒपत ूित //True Copy//

उप/सहायक उप सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपीलीय अिधकरण, अिधकरण मुब ं ई / ITAT, Mumbai व.िन.स./Vm, Sr. PS