2016 (8) TMI 898 - AT - Income Tax

Revision u/s. 263 - disallowance of STT u/s. 14A - Held that - Profit on sale of F & O transaction is amounting to ₹ 22,62,70,605/- which is shown as a taxable income. Therefore the STT paid on the derivative transactions is allowable as an expenditure w.e.f. AY 09-10 as amended by the Finance Act, 2008. The STT paid on sale of shares of L & T, the company has made a loss on these shares at ₹ 14,37,81,950/- which was offset with the capital gains. Therefore if the same is to be considered for 14A disallowance, then it is to be reduced from the computation of the capital gain being direct expenditure for earning the capital gains. Therefore disallowance under this section is not prejudicial to the interest of revenue being no tax effect. Accordingly, there is no justification for the direction issued by CIT for disallowance of STT u/s. 14A. Disallowance interest - Held that - We found that the assessee company has paid interest of ₹ 2,00,83,931/- which has been debited to P&L A/c. During this year the assessee has also received the interest on deposits from banks and others at ₹ 1,56,65,399/-. Net interest of ₹ 48,18,532/- is required to be considered for disallowance u/s. 14A. The same view was taken in ITAT Mumbai, in the case of Morgan Stanley India Securities Pvt Ltd Vis ACIT 2014 (1) TMI 1412 - ITAT MUMBAI and ITAT Ahemdabad in the case ITO vs. Karnavati Petrochmem Pvt Ltd. 2014 (1) TMI 920 - ITAT AHMEDABAD . Thus the view taken by AO regarding netting of interest is a possible and legally tenable view which cannot be faulted by CIT. From the record, we also found that during the year the interest paid on the loans taken was for the purpose of business activities on bank overdraft limit. Interest was received on the deposits from the customers, from shareholders and directors and the bank commission is for other charges and not any expenditure was incurred for earning the exempted income. We also found that as per balance-sheet placed on record investment as on 31/3/09 is ₹ 15,91,91,128/-. However, the increase in investment is out of the fund received on sale of brand of ₹ 113 crores i.e. interest-free. No interest bearing funds has been invested for earning the exempted income. As the investment is made after the receipt of the sale proceeds of brand i.e. interest-free fund. The utilization of the interest-free fund is for investment. Therefore the interest bearing fund has not been utilized for making investments and the investments are made out of the interest-free fund available with the company by way of share capital and reserves & surplus which stood at ₹ 89.75 crores as on 31/3/09. If the company s funds are interest free more than the investments the question of disallowing interest u/s.14A does not arise. Accordingly there is no merit in CIT s order directing disallowance of interest u/s. 14A. Treatment of amount received on sale of brands - Held that - We had carefully gone through the terms of the agreement, whereas per clause (3), the company had during the year sold two of its brand groups Anafortan and Cefi for consideration of ₹ 115,88,77,800/-. This includes ₹ 91,00,000/- as know How Fee and ₹ 1,00,00,000/- towards Non Compete Fee. After adjusting ₹ 170,79,000/- for legal and professional services the balance of ₹ 112.26,98,800/- which was a receipt of Capital Nature was transferred to Reserve and Surplus A/c. The Non Compete Fees of ₹ 100,00,000/- and ₹ 91,00,000/- for Know How have been accounted and offered as business income. The brand Anaforthan and Cefi are the apparatus of the business, they are the tools of the business, and they are the capital asset of the company built over the period of time and in fact they are not stock-in-trade of company. The company does not deals in the brands as a traders The assessee has filed submission before the CIT to justify the value assigned towards trade-marks, knowhow fee and non-compete fee. It is also relevant to mention here that a similar nature of sale of brand was made by assessee in A.Y. 2000-01 wherein the assessee had treated the sale of brand as income from capital gain and the treatment given by assessee was upheld by the Hon ble Tribunal in assessee s own case for A.Y. 2000-01 vide order dated 15.3.2007. Accordingly no fault can be found in AO s order treating the sale proceeds of brand as capital receipts liable to tax as long term capital gains. No where CIT has pointed out as to how the treatment given by assessee was erroneous, i.e. not as per law and as a result of which prejudice was caused to revenue. The CIT has merely asked the Assessing Officer to look into the matter without pointing out any mistake or prejudice caused to revenue. He has simply directed the Assessing Officer, without satisfying himself, to verify whether the bifurcation made by assessee was with a view to reduce tax or not. No infirmity for offering the tax on sale of brands as LTCG. There is no merit in CIT s observation for treating the same as business income. Claim of clinical support expenses - Held that - Whatever the separate expenditure are incurred by the assessee was in relation to gather the data making aware of the product of the company and remaining in the market. From the order of CIT we observe that no where the CIT has pointed out as to how the treatment given by assessee was erroneous, i.e. not as per law and as a result of which prejudice was caused to revenue. The CIT has merely asked the Assessing Officer to look into the matter without pointing out any mistake or prejudice caused to revenue. He has simply directed the Assessing Officer, without satisfying himself, to verify whether the bifurcation made by assessee was with a view to reduce tax or not. From the record we found that the details with regard to clinical support expenses were verified by the AO in the original assessment proceedings. Since the AO was satisfied with the details furnished by assessee vide letter dated 15.12.2011, no addition was made by the Assessing Officer on account of clinical support expenses. Applicability of the provisions of section 94(7) and 94(8) on sale of shares/mutual funds - Held that - Short Term Capital Loss incurred when units (and not shares) are purchased within 3 Months prior to the date on which additional units are allotted and subsequently are sold within 9 Months after the date while holding on to all or any of the additional units allotted, is not to be allowed to the extent of the market value of the additional units as on the date they are allotted. Units as referred to in the above section means units of a Mutual Fund as specified in section 10(23D) of the Act. However in the assessee s case, the assessee had purchased shares of L&T Ltd on which Bonus shares were received and which were sold subsequently. Therefore the provisions of Section 94(8) are not applicable as shares are purchased & sold. From the record we also found that during the course of original assessment proceedings, complete details were given to the Assessing Officer with regard to working of capital gains on sale of shares and units. On perusal of the said details, it can be seen that the assessee purchased units on 19.09.2008 and sold the same on 26.12.2008. The dividend on the said units was declared on 26.12.2008. Thought the units were sold within nine months from the date on which dividend has been received, since they were purchased more than three months prior to date of declaration of dividend, the provisions of S. 94(7) of the Act will not apply. With regard to CIT s observation regarding loss incurred on sale of L & T shares, though the CIT agrees that the provision of section 94(8) will not apply to the shares. The assesse is free to carry out tax planning within the provisions of law. A similar argument was raised by the department before the Hon ble Supreme Court in case of CIT vs. Walfort Shares and Stock brokers Ltd (2010 (7) TMI 15 - SUPREME COURT) wherein eld by Supreme Court that mere tax planning without any motive to avoid taxes is not a colourable device. No merit in CIT s direction for applying provision of section 94(7) and 94(8) of the IT Act for disallowing loss incurred on L & T shares.

Summary

Issues Involved:
1. Validity of the CIT's order under section 263 based on audit objection memo.
2. Examination of various expenses and their disallowance under section 14A vis-à-vis Rule 8D.
3. Treatment of sale proceeds from brands as capital gains or business income.
4. Disallowance of clinical support expenses.
5. Applicability of sections 94(7) and 94(8) on sale of shares/mutual funds.
6. Computation of profit under section 115JB.
7. Delayed payment of PF and ESIC.

Detailed Analysis:

1. Validity of the CIT's Order under Section 263:
The assessee challenged the CIT's jurisdiction to pass an order under section 263 based on an audit objection memo dated 02/04/2013. The Tribunal found that the CIT's order was based on the audit party's objections, leading to the issuance of a notice under section 263. The CIT directed the AO to re-examine various issues, including the treatment of expenses and the computation of income.

2. Examination of Various Expenses and Their Disallowance under Section 14A vis-à-vis Rule 8D:
- STT Expenses: The CIT observed that the AO failed to properly examine the bifurcation of STT expenses between F&O transactions and the purchase and sale of shares. The Tribunal noted that the AO should have considered the entire STT amount as direct expenses for disallowance under section 14A.
- Interest Expenses: The CIT noted that the AO did not verify the utilization of borrowed funds for earning exempt income. The Tribunal found that the assessee had sufficient interest-free funds, and therefore, no disallowance was warranted under section 14A.
- Netting of Interest: The CIT observed that the AO's methodology of netting interest was debatable and lacked justification. The Tribunal upheld the AO's view, citing precedents that support netting of interest.

3. Treatment of Sale Proceeds from Brands as Capital Gains or Business Income:
The CIT questioned the treatment of ?115.88 crores received from the sale of brands as capital gains. The Tribunal found that the brands were capital assets developed by the assessee and not stock-in-trade. The sale proceeds were correctly treated as long-term capital gains, as supported by previous Tribunal decisions in the assessee's favor.

4. Disallowance of Clinical Support Expenses:
The CIT directed the AO to examine the nature of clinical support expenses. The Tribunal noted that these expenses were necessary for maintaining business relationships and were not in the nature of freebees prohibited by the Medical Council of India. The Tribunal also cited a precedent that the CBDT Circular disallowing such expenses was applicable from AY 2013-14, not the relevant assessment years.

5. Applicability of Sections 94(7) and 94(8) on Sale of Shares/Mutual Funds:
- Section 94(8): The Tribunal found that this section applies to units of mutual funds, not shares. Therefore, the CIT's direction to apply section 94(8) was not applicable.
- Section 94(7): The Tribunal noted that the units were purchased more than three months prior to the record date for dividend declaration, making section 94(7) inapplicable.

6. Computation of Profit under Section 115JB:
The CIT observed that the AO did not compute profit under section 115JB. The Tribunal found that the AO should have considered adjustments to book profits, including disallowance under section 14A and amounts credited to the capital reserve.

7. Delayed Payment of PF and ESIC:
The CIT noted that section 43B does not apply to employees' contributions, and the AO allowed deductions for delayed payments without proper examination. The Tribunal did not address this issue in detail as it was not pressed by the assessee's representative.

Conclusion:
The Tribunal allowed the assessee's appeals in part, directing the AO to delete double disallowances and reconsider certain issues in light of judicial precedents. The CIT's directions under section 263 were found to be partly justified, but the Tribunal upheld the AO's original treatment of several expenses and income classifications. The order was pronounced on June 23, 2016.