2019 (7) TMI 863 - AT - Income Tax

Disallowing short term capital loss on mutual funds - investment was made after taking loan from IIFL - loss was set off against capital gain on sale of immovable property - AO alleged colorable device just to set off the capital gain earned on sale of immovable property and also by claiming exemption on the dividend - notices were issued U/s 133(6) to M/s JM Financial Mutual Funds, HDFC Bank Ltd, IIFL, SEBI, JM Financial Trustee Co. Ltd. and replies received - HELD THAT - In view of documentary evidence, we found that the lower authorities completely failed to rebut evidences and explanations so filed by these agencies so as to conclude that it was a colourable device or any connivance with the companies to evade tax by booking loss. In this case, once the authorities below admittedly found, that subjected transaction completely falls out of the clutches of Sec. 94(7) i.e. the restrictions placed by the legislature, it is beyond one s comprehension as to how they still bent upon to deny the claims made by the assessee. An utter disregard shown by the revenue when the legislature in its wisdom, being fully aware of the fact that some of the assessees might make use of the transactions to their benefit and plan their affair, put some restriction by the prospective amendment by introduction of Section 94(7) w.e.f. 1st April, 2002 but when the case of the assessee do not fall/ suffers from those restrictions, it has to be inferred that the assessee could not have been denied that benefit as claimed. No merit in the disallowance of assessee s genuine claim of loss incurred on redemption of mutual funds. The A.O. is directed to delete the same and allow set off such loss against the long-term capital gains so earned. Disallowance on account of employee benefit expenses - HELD THAT - As carefully gone through the orders of the authorities below and found from the record that as per material placed on record, it is wrong to say that the assessee was not engaged any business in as much as the assessee has already declared business income of ₹ 59.91 Lakh. This was the income generated in connection with various mutual funds (other than the mutual funds purchased through JM Financial Ltd.). There apart, the assessee company has declared huge interest income of ₹ 21.06 lac (PB 229) from several debtors to whom interest bearing loans were advanced and interest on FDR of ₹ 7.74 lac totaling to ₹ 28,80,856/- was also declared. To carry out the activities at such a large scale, one certainly needs some persons to manage the show. The observation of the paper formalities, accounting and banking transaction and receiving/delivery of the papers/documents, consultation with counsel and other government agencies/investment advisors, was not possible in absence of employees. Otherwise also, out of the salary paid of ₹ 10 lac, remuneration paid to the extent of ₹ 5.47 lac related to the directors only. Such expenditure thus having been incurred exclusively for business purposes was fully allowable. It is not the case of the A.O. that any personal element was involved in these expenses. We also found that the same A.O. was also assessing these incomes as business income only. Moreover, the borrowed funds having been utilized wholly and exclusively for business purposes and the AO not having pointed out any personal user or diversion for non-business purposes, the subjected interest was fully allowable u/s 36(1)(iii). It was also contended by the ld AR that no disallowance for such expenses made in the A.Y. 2014-15 while finalizing the scrutiny assessment U/s 143(3) of the Act. Keeping in view the totality of the facts and circumstances of the case vis a vis observation of the A.O., we restrict the disallowance to the extent of 10% of the expenditure so incurred amounting to ₹ 15,42,282/-. - Accordingly, the A.O. is directed to restrict this disallowance to ₹ 1,54,228/-. Disallowance on account of other expenses - HELD THAT - From the record we found that the assessee claimed expenses of ₹ 8,63,428/- ₹ 18,38,428/- less ₹ 9,75,000/- (reduced from income in computation) on total business income of ₹ 60,53,568/- this year as against expenses of ₹ 4,67,361/- claimed on total business of Rs.(-) 4,58,003/- in last year i.e. A.Y. 2014-15 in the preceding year. The claim made this year, was proportionately much lower because qua the business income such expenses stood at 14.26% only as against 102% claimed last year. Further, though there is some increase if only quantum is compared but there are sufficient and justifiable reasons behind such an increase. To achieve such a huge income the assessee has to incur such a meagre expense. Such expenses were mainly incurred on Travelling, Electric Expenses and Repair Maintenance. No specific instance of disallowable nature was pointed out by the A.O. Donation paid of ₹ 51,000/- has been reduced while computing the income under the head Business Profession. In other words, the entire donation of ₹ 51,000/- has been added back to the business income as evident from the computation of the total income. Hence there is no addition to this extent also. It is settled law that a businessman is the best judge to take care of its own interest to take decisions. Here, whatever decisions were taken by the assessee, has to be understood as taken out of commercial expediency.

Summary

Issues Involved:
1. Jurisdiction and validity of additions and disallowances.
2. Disallowance of Short-Term Capital Loss (STCL) of ?24,04,26,504.
3. Disallowance of ?14,42,282 on account of Employee Benefit Expenses.
4. Disallowance of ?8,13,000 on account of Other Expenses.
5. Charging and withdrawal of interest under sections 234A, 234B, 234C, 234D, and 244A of the Income Tax Act.

Detailed Analysis:

1. Jurisdiction and Validity of Additions and Disallowances:
The assessee challenged the jurisdiction and validity of the additions and disallowances made under section 143(3) of the Income Tax Act, 1961. The Tribunal did not find any specific arguments or evidence from the assessee to substantiate the claim of lack of jurisdiction. Therefore, this ground was not elaborated upon in the final judgment.

2. Disallowance of Short-Term Capital Loss (STCL) of ?24,04,26,504:
The Assessing Officer (AO) disallowed the STCL claimed by the assessee on the grounds that the transactions involving the purchase and redemption of mutual fund units were not genuine and were part of a colorable device to evade tax. The AO alleged that the assessee, in connivance with JM Financial Mutual Funds and India Infoline Finance Ltd. (IIFL), concocted a scheme to set off the capital gains from the sale of immovable property against the STCL and to claim exemption on dividend income.

The CIT(A) confirmed the AO's disallowance, citing irregularities and collusion between the assessee and IIFL. The CIT(A) referred to external sources like Wikipedia and allegations against IIFL by regulatory bodies to support the claim of a sham transaction.

The Tribunal, however, found that the AO and CIT(A) failed to provide concrete evidence of collusion or a colorable device. The Tribunal noted that the transactions were carried out in the normal course of business, with proper documentation and compliance with regulatory requirements. The Tribunal also highlighted that the mutual fund in question had declared dividends in the past, contrary to the AO's claims. The Tribunal relied on the Supreme Court's judgment in the case of Walfort Share & Stock Brokers (P) Ltd., which held that mere tax planning within the legal framework does not constitute an abuse of law. Consequently, the Tribunal directed the AO to delete the disallowance of the STCL and allow its set-off against the long-term capital gains.

3. Disallowance of ?14,42,282 on Account of Employee Benefit Expenses:
The AO disallowed the entire employee benefit expenses claimed by the assessee, stating that no business activity was carried out during the year. The CIT(A) provided partial relief by allowing ?1,00,000 and disallowing the remaining ?14,42,282.

The Tribunal found that the assessee had declared business income and interest income, which necessitated the employment of staff for various administrative and operational tasks. The Tribunal noted that the expenses were incurred exclusively for business purposes and were supported by proper documentation. The Tribunal restricted the disallowance to 10% of the total employee benefit expenses, amounting to ?1,54,228, and directed the AO to allow the remaining amount.

4. Disallowance of ?8,13,000 on Account of Other Expenses:
The AO disallowed other expenses claimed by the assessee, amounting to ?8,13,000. The CIT(A) allowed ?50,000 and disallowed the remaining amount.

The Tribunal examined the nature of the expenses, which included traveling, electricity, postage, office expenses, legal fees, and repair and maintenance. The Tribunal found that these expenses were necessary for the assessee's business operations and were proportionate to the income generated. The Tribunal noted that no specific instances of disallowable expenses were pointed out by the AO. Consequently, the Tribunal directed the AO to allow the entire amount of other expenses claimed by the assessee.

5. Charging and Withdrawal of Interest under Sections 234A, 234B, 234C, 234D, and 244A:
The assessee contested the charging of interest under sections 234A, 234B, 234C, and 234D, as well as the withdrawal of interest under section 244A. The Tribunal did not provide a detailed analysis of this issue, as it was contingent upon the final determination of the tax liability after considering the Tribunal's directions on the other issues. The AO was directed to recompute the interest liability in accordance with the Tribunal's findings.

Conclusion:
The Tribunal allowed the appeal of the assessee in part, directing the AO to delete the disallowance of the STCL, restrict the disallowance of employee benefit expenses to ?1,54,228, and allow the entire amount of other expenses. The AO was also directed to recompute the interest liability based on the revised tax liability. The judgment emphasized the importance of concrete evidence and proper documentation in tax assessments and disallowances.