2012 (5) TMI 434 - AT - Income Tax

Business income or Capital gain - shares - investment or stock in trade - Held that - as long as shares are acquired on the grounds of business expediency, any loss on sale thereof is also required to be treated as an admissible business deduction - Tribunal held that the investment was made by way of commercial expediency for the purpose of carrying on the assessee s business and that, therefore, the loss suffered by the assessee on the sale of the investment must be regarded as a revenue loss - Appeal is dismissed

Issues Involved:
1. Treatment of loss on sale of shares as business loss.
2. Taxability of differential amount on sales tax deferral scheme under section 41(1).
3. Inclusion of cash discounting in total turnover.
4. Inclusion of foreign exchange gain in total turnover for deduction under section 80HHC.
5. Reduction of tax-free interest from profits for section 80HHC deduction.
6. Applicability of interest under section 234D.

Issue-wise Detailed Analysis:

1. Treatment of Loss on Sale of Shares as Business Loss:
The assessee claimed a deduction for a loss of Rs. 5.50 crores on the sale of shares in Camelot Investment Pvt. Ltd., a wholly-owned subsidiary. The Assessing Officer (AO) argued that these shares were investments, not business assets, and thus the loss should not be treated as a business loss. The AO highlighted that the investment was made for enduring benefits and not for business purposes. The CIT(A) overturned the AO's decision, stating that the investment was made for commercial expediency, as Camelot was set up to manufacture toothbrushes exclusively for the assessee. The Tribunal upheld the CIT(A)'s decision, emphasizing that the investment was made to serve the business interests of the assessee, and thus the loss should be treated as a business loss.

2. Taxability of Differential Amount on Sales Tax Deferral Scheme under Section 41(1):
The AO added Rs. 4,38,12,912 to the assessee's income under section 41(1), arguing that this amount represented the remission of sales tax liability. The CIT(A) reversed this decision, referencing the Tribunal's judgment in DCIT vs. Sterlite Optical Technologies Limited, which held that such differential amounts are on capital account and not taxable under section 41(1). The Tribunal upheld the CIT(A)'s decision, also referencing the Special Bench decision in Sulzer India Ltd vs DCIT, which supported the non-taxability of such amounts under section 41(1).

3. Inclusion of Cash Discounting in Total Turnover:
The AO included Rs. 1,36,25,787 as cash discounting in the total turnover. The CIT(A) ruled in favor of the assessee, referencing earlier Tribunal decisions for the assessment years 1998-99 and 1999-2000, which had decided similar issues in favor of the assessee. The Tribunal confirmed that the issue was indeed decided in favor of the assessee in those years and dismissed the AO's grievance.

4. Inclusion of Foreign Exchange Gain in Total Turnover for Deduction under Section 80HHC:
The AO included Rs. 65,325 as foreign exchange gain in the total turnover for deduction under section 80HHC. The CIT(A) gave relief to the assessee, relying on his order for the previous assessment year. The Tribunal, referencing the Special Bench decision in ACIT vs Prakash L Shah, upheld the AO's grievance and vacated the relief granted by the CIT(A).

5. Reduction of Tax-Free Interest from Profits for Section 80HHC Deduction:
The AO reduced 90% of the tax-free interest from the profits for the purpose of section 80HHC deduction. The CIT(A) ruled that since the interest income did not form part of the taxable income, it should not be reduced from the profits. The Tribunal upheld the CIT(A)'s decision, stating that tax-exempt income does not form part of 'profits and gains from business and profession' and thus should not be excluded.

6. Applicability of Interest under Section 234D:
The AO levied interest under section 234D for excess refund paid to the assessee. The CIT(A) directed the AO to delete this interest, referencing the ITAT Delhi (SB) decision in ITO v. Ekta Promoters (P) Ltd., which held that section 234D applies only from A.Y. 2004-05 onwards. The Tribunal upheld the CIT(A)'s decision, also referencing the jurisdictional High Court's decision in CIT v. M/s. Bajaj Hindustan Ltd, which supported the non-retrospective application of section 234D.

Conclusion:
The Tribunal upheld the CIT(A)'s decisions on issues 1, 2, 3, 5, and 6, while reversing the CIT(A)'s decision on issue 4. The appeal was thus partly allowed in favor of the Assessing Officer.

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