M/S. Frost International Ltd.,, Kanpur vs Department Of Income Tax

ITA Nos.419 & 420/LKW/2012 A.Yrs.:2008-09 & 2009-10 A.C.I.T.-6, Vs. M/s Frost International Ltd., Kanpur. 410-411, Kalpana Plaza, 24/147-A, Birhana Road, Kanpur. PAN:AAACF2299P (Appellant) (Respondent)

Appellant by Shri Rajnish Yadav, D. R. Respondent by Shri Abhinav Mehrotra, Advocate Date of hearing 25/11/2014 Date of pronouncement 07/01/2015 ORDER PER A. K. GARODIA, A.M.

Both these appeals are filed by the Revenue, which are directed against two separate orders of learned CIT(A)-II, Kanpur both dated 19/04/2012 for the assessment year 2008-09 and 2009-2010. Both these appeals were heard together and are being disposed of by way of this common order for the sake of convenience.

2. The grounds raised by the Revenue for assessment year 2008-09 i.e. I.T.A. No.419/Lkw/2012 are as under:

"1. Whether on the facts and circumstances of the case, the Ld. Commissioner of Income Tax(A)-II was justified in ignoring the facts that the issue under consideration is not settled yet. The Kolkata High Court in his decision in the case of Dhanuka & sons Vs CIT has decided that the it was for assessee to show by production of materials that those shares were acquired from funds available in its hand at relevant point of time without taking benefit of any loan.

2 2. Whether on the facts and circumstances of the case, the Ld. Commissioner of Income Tax(A)-II was justified to decide the expenditure as revenue expenditure without giving any reasoning or any case law.

3. That the order of the Ld. Commissioner of Income Tax(A)-

II Kanpur being erroneous in law and on facts deserves to be vacated and the order of the Assessing Officer be restored."

3. The grounds raised by the Revenue for assessment year 2009-2010 i.e. I.T.A. No.420/Lkw/2012 are as under:

"1. Whether on the facts and circumstances of the case, the Ld. Commissioner of Income Tax(A)-II was justified in ignoring the facts that the issue under consideration is not settled yet. The Kolkata High Court in his decision in the case of Dhanuka & sons Vs CIT has decided that the it was for assessee to show by production of materials that those shares were acquired from funds available in its hand at relevant point of time without taking benefit of any loan.

2. That the order of the Ld. Commissioner of Income Tax(A)-

II Kanpur being erroneous in law and on facts deserves to be vacated and the order of the Assessing Officer be restored."

4. Learned D. R. of the Revenue supported the assessment order whereas learned A. R. of the assessee supported the order of learned CIT(A). He also submitted that this issue is covered in favour of the assessee by the Tribunal order in I.T.A. No.399 & 400/Lkw/2010 dated 31 May 2013. He submitted a copy of the Tribunal decision.

5. We have considered the rival submissions. We find that no doubt, in assessee's case for assessment year 2006-07 & 2007-08, the issue in dispute regarding disallowance to be made u/s 14A was decided by the Tribunal in favour of the assessee but in those years, the decision of the Tribunal was on 3

the basis that Rule 8D is not applicable but in the present cases, the assessment years involved are 2008-09 and 2009-10 and therefore, Rule 8D is applicable and therefore, this Tribunal decision is not applicable in the present years.

6. Learned AR of the asessee has also placed reliance on the decision of Hon'ble Karnataka High Court rendered in the case of CCI Limited vs. JCIT, 250 CTR 291 wherein it is held that if the assessee is dealer in shares, it has to be accepted that dividend income is incidental to his business of dealing in the shares and therefore, the expenditure incurred in acquiring shares, cannot be apportioned to the extent of dividend income for making disallowance u/s 14A of the Act. In the present case, this has to be examined as to whether the assessee is dealer in shares or not. In this regard, when we examine the balance sheet of the assessee for the year ending on 31/03/2008, as appearing on page No. 6 of the paper book, we find that the assessee is showing an investment of Rs.60.20 lacs and as per the profit & loss account of the assessee, particularly Schedule-8, appearing on page No. 12 of the paper book, we find that the assessee has shown an income of Rs.728.23 lacs on account of gain on short term investment in addition to dividend income of Rs.90.18 lacs and therefore, it is seen that the assessee is not a dealer in shares but investor in shares. Similarly, as per the balance sheet of the assessee for the year ending on 31/03/2009 also, we find that the assessee is showing investment of Rs.340.80 lacs as on 31/03/2009 in the balance sheet appearing on page No. 28 and as per Schedule-8 to the profit & loss account, appearing on page No. 34 of the paper book, the assessee is showing income of Rs.10.13 lacs under the head 'profit from trading in securities' and in the previous year column, the assessee is showing income of Rs.709.93 lacs under the same heading whereas in the Schedule-8, for the preceding year, the assessee is showing income of Rs.728.23 lacs under the heading gain on short term investment and Rs.62.70 lacs under the heading 4

profit from derivative. Both these items were clubbed together in the present year for showing as income under the heading profit from trading in securities and therefore, it cannot be accepted that the assessee company is dealing in shares merely because in one year, a different nomenclature is given to report the income because, generally trading income is not reported in net figure but is reported by showing opening stock, purchase, closing stock and sale. A specific approved method of valuing closing stock is also disclosed in such cases which has to be consistently followed by the assessee. In the present case, all these features are missing. Therefore, this judgment of Hon'ble Karnataka High Court is not applicable because the assessee is not dealer in present case.

6.1 We have also seen that in Schedule No. 6 of the Balance Sheet as appearing on page 11 of the paper book, the assessee is showing Inventories on account of Shares of unlisted Indian companies Rs. 53 Lacs and Listed Securities Rs. 2431.49 Lacs as on 31.03.2008. Similarly, as on 31.03.2009 also on page 33 of the paper book, inventory of Rs. 53 Lacs of Shares of Unlisted Indian Companies and Rs. 795.36 Lacs of Listed Securities is shown as inventories. But merely giving a nomenclature of inventories to the stock of shares cannot change the nature of investment in shares into trading in shares particularly when the assessee company is valuing inventories of trading goods at cost or market price whichever is lower but the stock of shares is valued at cost as stated on page 13 and 35 of the paper book.

6.2 Moreover in clause 17 of Notes to Accounts for year ending on 31.03.2008 on page 16 of paper book and in clause 18 of Notes to Accounts for year ending on 31.03.2009 on page 37 of paper book, it is stated that the company is engaged in trading of various commodities and quantitative details as required by paragraph 3 of part II to the Schedule VI of the 5 Companies Act, 1956 are stated in these paras which include Agri Commodities, Diamonds, Iron Ore Fines and metals but the shares are not included here. In other words, the quantitative details as required by paragraph 3 of part II to the Schedule VI of the Companies Act, 1956 are not given in respect of shares. It shows that as per the assessee also, the company is not dealing in shares because had the assessee company was dealing in shares, it must have given quantitative details as required by paragraph 3 of part II to the Schedule VI of the Companies Act, 1956 for shares also as was given for other commodities. Hence we have no hesitation in holding that as per the facts coming out from above discussion, the assessee company was not dealing in shares.

7. Reliance was also placed by Learned A.R. of the assessee on a Tribunal decision rendered in the case of ACIT, Bareilly vs. Dhampur Sugar Mills (P) Ltd. Bijnor in I.T.A. No.542/Lkw/2011 dated 31/01/2014, copy of which is available on pages 44 to 51 of the paper book. In this case, it was noted by the Tribunal in Para 5 of its order that investments were made by the assessee in 1993 and the term loan, on which interest was paid during the present year, was received for specific purposes after 1993 and the cash credit was used for working capital of the business. Hence, it is seen that when the shares were acquired in 1993, there was no borrowing. In the present case, the facts are not similar and therefore, this Tribunal decision is not applicable in the present case.

8. Reliance was also placed by Learned A.R. of the assessee on another Tribunal decision in the case of DCIT, Kolkata vs. M/s Trade Apartment Ltd. in I.T.A. No.1277/Kol/2011 dated 30/03/2012, copy of which is available on pages 52 to 55 of the paper book. In that case, it is noted that there is no net interest expenditure after setting off interest receipt and interest payment. On this basis, it was held that no payment of interest expenditure, 6

which is already set off, can be disallowed u/s 14A of the Act. Regarding other expenses, it is noted by the Tribunal that the entire expenses incurred by the assessee have been disallowed and therefore, nothing remains for further disallowance u/s 14A. In the present case, the facts are not shown to be similar and therefore, this Tribunal decision is not applicable in the present case. In the present case, the CIT(A) has deleted the disallowance out of interest expenditure by following the judgment of Hon'ble Karnataka High Court in the case of CCI Limited vs. JCIT (Supra). We have seen that in the present case, this judgment of Hon'ble Karnataka High Court is not applicable because the assessee is not dealer in shares. This is not shown by the assessee before us or before any of the authorities below that the interest expenditure incurred by the assessee was directly relatable to taxable income and therefore, in the facts of the present case, Rule 8D is applicable with regard to such interest expenditure. The Assessing Officer has made disallowance as per Rule 8D and hence, we reverse the order of CIT(A) in both the years and restore that of the Assessing Officer.

9. In the result, both the appeals of the Revenue are allowed.

(Order was pronounced in the open court on the date mentioned on the caption page)

Sd/. Sd/.

(SUNIL KUMAR YADAV) ( A. K. GARODIA ) Judicial Member Accountant Member

Dated:07/01/2015 *C.L.Singh

Copy of the order forwarded to : 1. The Appellant 2. The Respondent. 3. Concerned CIT 4. The CIT(A) 5. D.R., I.T.A.T., Lucknow Asstt. Registrar