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2017 (11) TMI 1826 - AT - Income TaxAddition of unclaimed refunds - whether unclaimed refunds of application money outstanding in the Books of Accounts of the assessee can be treated as its income? - assessee s contention that its liability to refund does not cease to exist as it continues to reflect it as liability in the Balance Sheet and would be liable to refund the amount whenever claimed in future or adjust it against allotment of any plot of land - HELD THAT - Out of the outstanding liability on account of un-claimed refund of ₹ 3,67,81,729/-, liabilities which have been outstanding for a period of more than three years, after the issuance of cheques of refund, only be treated as the income of the assessee subject to adjustment being made out of them on account of the following a) The refunds against which cases, filed by the applicants for allotment of plots, in courts are pending. b) The amounts which have been subsequently adjusted by way of allotment of plots. c) The amounts which have been subsequently adjusted by way of refund claimed /issued even after the expiry of three years from the date they became due to the claimants/applicants. - Ground of appeal No.1 of the assessee is, therefore, disposed off in above terms and stands partly allowed. Addition on account of income from Industrial Area Activity - addition made relates to profits earned from Industrial Estate development activity, which the assessee claimed was being carried out on a no loss no profit basis, accounted for on cash basis and surplus or deficit in the receipt over expenses reflected in the Balance Sheet, while the Revenue negated this contention stating that profit was actually earned by the assessee, from the indirect cost component recovered on account of the said activity ,which was thus liable to be taxed - HELD THAT - In the light of certificate filed by the assessee to this effect from the statutory auditors of the company, we consider it fit to restore the issue to the Assessing Officer to verify the correctness of the claim made in the certificate that the income for the impugned year had been reflected in assessment year 2014-15 and further to verify that the same had been included in the taxable income of the assessee for the impugned year and due taxes paid thereon, and thereafter decide the issue in accordance with law. We may add that the assessee be given due opportunity of hearing and is free to adduce all evidences it wishes to rely upon. Ground of appeal No.2 raised by the assessee stands allowed for statistical purposes. Correct head of Income - gain on sale of shares - Capital Gain or Business Income - Nature of the activities carried out by the assessee - HELD THAT - As in PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPORATION LIMITED. VERSUS DEPUTY COMMISSIONER OF INCOME-TAX, SPECIAL RANGE - II, CHANDIGARH. 2006 (4) TMI 187 - ITAT CHANDIGARH issue decided in favour of the assessee holding the profits earned to be in the nature of capital gains At the time of the start of the project, the assessee corporation makes investment and when the production in the projects reaches upto a certain level where after the projects become self-sufficient, it disinvests those holdings in that project by selling it to the other promoter with a view to realize funds for investments in other projects. Thus basically the investment in shares of companies which were jointly promoted by the assessee alongwith other industrial undertakings is in the nature of an investment and any profit/gain earned by the assessee on the realization of such an investment is liable to tax under the head 'Capital gains' and this position has all along been accepted even by the departmental authorities upto the assessment year 1989-90. Accordingly we hold that the profit and gain realized by the assessee on account of disinvestment of shares is liable to tax as capital gains. Whether the deduction u/s 80M on the dividend earned was to be determined after deducting proportionate administrative expenses or interest expenses? - HELD THAT - Since inception the assessee has been claiming the profits earned from sale of shares as capital gains which has never been disturbed by the Revenue. No change in the circumstances in respect of the impugned assessment year have also been brought to our notice. Therefore, we agree with the Ld. counsel for assessee that there was no reason to disturb that position in the impugned year. In the case of Radha Soami Satsang Vs. CIT 1991 (11) TMI 2 - SUPREME COURT held that where fundamental aspect permeating through different assessment years has been found as a fact one way or the other and parties had allowed that position to be sustained by way of not challenging that order, then it would not at all be appropriate to permit that position to be challenged in subsequent year. We hold that the profits earned by the assessee from sale of shares be treated as capital gain and addition made by treating the same as income from business of the assessee be deleted. Ground therefore stands allowed. Addition u/s 14A - HELD THAT - The Finance Act, 2003 inserted clause (34) to section 10 which deals with income which are exempt from taxation and do not form part of the total income at all, excluding the income by way of dividend from the purview of taxation. At the same time, we find section 115O was inserted in the Act making the companies distributing dividend to pay tax at a specified rate thereon. Thus taxation of dividend changed hands from the recipient to the payer of dividend by virtue of this amendment brought about in the Act. Dividend of all nature and colour whether sourced from the business activities of the assessee or otherwise is not taxable in the hands of the recipient but is to be taxed by the payer of dividend or in other words, the companies declaring and distributing dividend. In view of the same, therefore, we cannot agree with the contentions of the Revenue that the said dividend is to be taxed in the hands of the assessee being in the nature of business income. The reliance placed on the decision in the case of Brook Bond India Ltd. 1986 (9) TMI 2 - SUPREME COURT does not apply to the present case since it related to the assessment year 1955-56 and 1956-57 when the position of law vis- -vis taxation of dividend was governed by the Income Tax Act, 1922 which taxed dividend in the hands of the recipient. Even otherwise we have already held that the income earned from sale of shares be treated as capital gains, holding the activity of the assessee as investment and not trading in shares, therefore, the dividend income earned from the shares cannot be said to be from business activity of the assessee. However since the dividend income is exempt from tax, the provisions of section 14A disallowing expenses incurred for earning the same, are attracted.For the limited purpose of applying the provisions of section 14A ,the issue is restored back to the file of the AO,with a direction to decide the issue in accordance with law after giving due opportunity of hearing to the assessee. Addition made to the income of the assessee on account of dividend income is, therefore, deleted. And the issue of determining the expenses disallowable as per section 14A is restored to the file of the Assessing Officer.
Issues Involved:
1. Unclaimed Refunds 2. Income from Industrial Area Activity 3. Capital Gains on Sale of Shares 4. Dividend Income 5. Disallowance of Interest Expenditure Detailed Analysis: 1. Unclaimed Refunds: The primary issue was whether unclaimed refunds of application money outstanding in the assessee's books could be treated as income. The assessee argued that these amounts were liabilities as they were refundable upon demand or court direction. The Assessing Officer (AO) contended that since the refunds were unclaimed, they should be treated as income. The ITAT held that unclaimed refunds should not be treated as income immediately but could be considered income if they remained unclaimed for more than three years, subject to adjustments for pending court cases, subsequent allotments, or actual refunds. The decision was partly in favor of the assessee, allowing for a reasonable period of limitation. 2. Income from Industrial Area Activity: The AO added profits from industrial area activities to the assessee's income, arguing that the assessee earned profits from indirect cost components. The assessee claimed this activity was on a no-profit-no-loss basis and followed a cash accounting method. The ITAT upheld the AO's findings but acknowledged that the income from these activities was accounted for in a subsequent year due to a change in accounting methods. The ITAT directed the AO to verify the inclusion of this income in the subsequent year to avoid double taxation. The issue was allowed for statistical purposes. 3. Capital Gains on Sale of Shares: The AO treated profits from the sale of shares as business income, arguing that the assessee's primary intention was to earn interest through financing activities. The assessee contended that these were long-term investments, supported by collaboration agreements and past assessments. The ITAT referred to the Special Bench decision in Punjab State Industrial Development Corporation Ltd. and the Hon'ble jurisdictional High Court's ruling, holding that such profits should be treated as capital gains. The ITAT ruled in favor of the assessee, allowing the treatment of profits as capital gains. 4. Dividend Income: The AO treated dividend income as business income, relying on the nature of the assessee's activities. The assessee argued that dividend income was exempt under section 10(34) of the Act. The ITAT agreed with the assessee, noting that dividend income is exempt from tax in the hands of the recipient and should be taxed by the payer. The ITAT directed the AO to apply section 14A for disallowing expenses incurred to earn the exempt income. The issue was partly allowed, with the addition deleted and the matter of disallowance of expenses remanded to the AO. 5. Disallowance of Interest Expenditure: The AO disallowed interest expenditure, arguing that the assessee incurred non-business expenses on the Kundli-Manesar-Palwal (KMP) Expressway. The CIT(A) agreed with the AO but allowed for verification of the fund flow to determine if borrowed funds were used. The ITAT found no arguments advanced by the assessee on this issue, leading to the dismissal of the ground. The ITAT upheld the disallowance where borrowed funds were used for non-business purposes. Conclusion: The ITAT's judgment provided a balanced approach, addressing each issue based on the merits of the case and relevant legal precedents. The judgment allowed for reasonable adjustments and remanded certain issues for verification, ensuring that the assessee was not unfairly taxed while upholding the principles of the Income Tax Act. The appeals were partly allowed, providing relief to the assessee on several grounds.
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