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TMI Blog2014 (12) TMI 139X X X X Extracts X X X X X X X X Extracts X X X X ..... ly Rule 8-D for the purpose of disallowance u/s 14A without satisfying or complying with the mandatory requirement of section 14A(2) or Rule 8-D(1) - once the AO has failed to comply the statutory requirement, then he cannot proceed to make the disallowance u/s 14A(1) and the disallowance made by the AO and partly sustained by the CIT(A) over and above the disallowance made by the assessee is deleted – Decided in favour of assessee. Computation of book profits u/s 115JB – Held that:- As admitted by both the parties, once the disallowance u/s 14A has been made, then the same disallowance shall also form part of the computation while calculating the book profit u/s 115JB of the Act - Thus the disallowance as made by the assessee in its computation of income will be the disallowance while computing the book profit u/s 115JB – Decided partly in favour of assessee. Treatment of forfeiture of share application money for equity warrants – Capital receipt or revenue receipt – Applicability of the SC’s decision in Commissioner of Income-Tax Versus TV Sundaram Iyengar And Sons Limited [1996 (9) TMI 1 - SUPREME Court] - Held that:- During the FY 2007-08, the assessee company had issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l take up the assessee s appeal in ITA No. 3542/Mum/2013, for the A.Y. 2009-10, vide which the following four issues have been raised in various grounds of appeal. In ground No. 1 and subgrounds, the assessee has challenged the disallowance of ₹ 30,98,264/- u/s 14A being 0.5% of the average investment computed under Rule 8-D of the Income Tax Rules, 1962; in Ground No. 2, the assessee has challenged the disallowance of ₹ 94,79,290/- u/s 35D of the Act, in Ground No. 3, the assessee has challenged the addition of ₹ 8,50,00,889/- confirmed by the ld. CIT(A) by treating the forfeiture of share application money for equity warrants as taxable income, ignoring the claim of the assessee that such forfeiture of application money is in the nature of a capital receipt, lastly, and in ground No. 4, the assessee has challenged the disallowance u/s 14A which has been made while computing book profit u/s 115JB of the act. 3. At the outset, the ld. Counsel for the assessee, Shri Vijay Mehta submitted that ground No. 2, vide which disallowance of ₹ 94,79,290/- u/s 35D of the Act was raised, the same is not pressed. This has been stated vide letter dated 14-10-2013 filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A= Interest expenses 3,30,59,947 B= Average of Investments 61,96,52,831 C=Average of total assets 314,77,64,095 iii)0.5% of Average Investment (0.5% X ₹ 36,65,96,041 (Rule 8D (2)(ii)] 30,98,264 Total disallowance as per Rule 8D(i+ii+iii) 96,06,277 Since the assessee had already disallowed an amount of ₹ 2 lacs, therefore, he sustained the disallowance up to ₹ 96,06,277/- u/s 14A. 6. Before the ld. CIT(A), the assessee submitted detailed submission which has been incorporated by the ld. CIT(A) from pages 6 to 14 of his order. The main contention of the assessee was that it had a huge surplus fund in the balance sheet as on 31-3-2009 and also as on 31-3-2008, the details of availability of such funds were given in the following manner:- Particular 1.3.2009(Rs.) 31.3.2008(Rs.) Net Own Fund Share capital Reserves Surplus [share capital + Reserves Surplus] Less: In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f its claim. During the course of hearing the AR furnished the details of the share capital which have been invested in tax free investments. As these details were not furnished before the AO, the AO is directed to examine these details and compute the disallowance strictly in accordance with rule-8D in terms of the jurisdictional high court judgment in Godrej Boyce Mfg. Co. (supra). However, as regards the disallowance made under clause-C of rule 8-D at 0.5% of the average investment of ₹ 366596041/- at ₹ 30,98,264/- the same is sustained. This ground of appeal is accordingly partly allowed. 8. Before us, the ld. Counsel for the assessee, Shri Vijay Mehta submitted that so far as the disallowance of interest is concerned which is the subject matter of ground raised by the Department, the assessee had given the details of not only the availability of huge surplus funds for the purpose of investment but also the utilization of loan, which was mainly for the business purpose and therefore no interest component can be disallowed u/r 8-D. Besides that, once the assessee has given the details of actual allocable expenses before the A.O., then the A.O. without recording ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 Telephone Exp (600pm) 4,800 Peon Salary (Balaram Choudhari 4000 pm) 36,000 Professional fees 84,000 Other Misc 5,000 Total B 193,400 Rounded off to 200,000 11. Once all these details were made available along with the entire accounts of the assessee, the A.O. was required to record his satisfaction or satisfied himself that having regard to the accounts of the assessee, the claim of the assessee in respect of expenditure debited is not correct and there could have been certain other expenditures which can be said to have been incurred in relation to the earning of exempt income. The disallowance u/s 14A (1) can only be triggered, once the conditions under sub section (2) are satisfied. To work out the disallowance u/r 8-D, the A.O. has to first examine the accounts of the assessee and the correctness of the claim and then, if having regard to such accounts and the claim he is not satisfied with either the correctness of the cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... granted by the Bombay Stock Exchange. The allottees/holder of each warrant was entitled to apply and obtain allotment of one equity share against each warrant at the rate of ₹ 283.42 per share. On application, the assessee company was to receive only ₹ 28.34 against each warrant being 10% of allotment money. As per the provisions of SEBI (Disclosure and Investor Protection) Guideline 2000, the warrant holder had to exercise the right for conversion of warrants into equity shares within 18 months from the date of allotment i.e. within 18 months from the date of allotment by paying the balance amount. Out of the five allotees, who had subscribed to the equity warrants, only one allottee had exercised the option and in lieu of that, 44,10,462 equity shares were issued in the financial year 2007-08. The remaining four allottees had only paid the application money in the following manner :- Name of Allotee No. of Securities to be allotted Application Money (Rs.) Amount Insheild Insurance Consultants Private Limited 900,000 28.342 2,55,07,800 Conroe Finance Limited 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were capital in nature at the point of time of receipts, however, they can change the character by afflux of time and can attain the character of trading receipts. He also strongly relied upon the decision of Hon ble Bombay High Court in the case of Solid Containers vs. DCIT [2009] 308 ITR 417 (Bom) wherein the assessee company had taken a loan for the business purpose which was written back in the relevant assessment year and the said loan was treated as capital receipt. The Department treated the said amount as income u/s 41(1) and on this back ground, Hon ble High Court held that the loan taken for trading activity and ultimately upon waiver of the amount which has been retained in the business by the assessee, then the amount was assessable as income which is taxable. Thus, after analyzing all the judgments and the facts, he concluded that the amount which was forfeited by the assessee was ultimately used for the extension of the business which is evident from the fact that the assesse has claimed huge revenue expenses u/s 37 not only in the earlier years but also in the current year for its business purpose and therefore such forfeiture amount is nothing but revenue receipt. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g activity. The said amount was transferred to P L account and on these facts it was held that it is assessable u/s 41. The facts as well as the principle laid down in the case of Solid Containers are totally different from the assessee s case. Even the decision of Hon ble Supreme Court in the case of T.V. Sundaram Iyengar Sons (supra) is also not applicable here in this case because in that case the amount was received as deposits from customers during the course of trading transaction which was not taxable in the year of receipt. However such an amount in the form of deposits were not claimed by the customers and the claim had become barred by limitation and therefore, such and unclaimed balance which was transferred to the P L account was treated as assessable income. Admittedly, these are not the facts of the present case. On the contrary, the decisions of the Tribunal in the case of Prism Cements Ltd. (supra) and Brijlaxmi Leasing Finance Ltd. (supra) are squarely applicable on the facts which were on account of forfeiture of share application money. In these cases, the decision of Hon ble Supreme Court in the case of T.V. Sundaram Iyengar Sons Ltd. (supra) was discussed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receipt in the balance sheet. Once the four allottees did not exercise the right for conversion of warrant into equity shares till the expiry of 18 months (i.e. within the stipulated time), the assessee has transferred the said amount as warrant forfeiture account . As the forfeiture of equity warrant application was in the nature of capital receipt, the assessee has transferred the forfeiture amount to its capital reserve. Thus the assessee treated it as capital receipt and therefore it was not offered as income. 22. Now on these facts, we have to examine, whether the decision of Hon ble Supreme Court in the case of T.V. Sundaram Iyengar Sons Ltd. (supra) and the decision of Hon ble Bombay High Court in the case of Solid Containers (supra) are applicable or not, on which heavy reliance has been placed by the Department. In the case of T.V. Sundaram Iyengar Sons Ltd. (supra), the ITO found that the assessee had transferred an amount of ₹ 17381/- to the P L account for the year ending 31-3-1982 and ₹ 38975/- for the year ending 31-3-1983. These amounts were not included in the income of the assessee. It was stated by the assessee that these are credit balances st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same to its P L account. The A.O. had made the addition on the ground that it was arising out of the business activity and therefore the same was taxable u/s 28(iv) of the Act. The Hon ble Bombay High Court on these facts held that the loan was taken for the trading activity and ultimately upon waiver of the amount it was retained and utilized for the business purpose and therefore, such an amount is nothing but trading operation transferred to P L account which is to be held as income of the assessee. For arriving to this conclusion, the Hon ble Bombay High Court has applied the principle laid down in the case of T.V. Sundaram Iyengar Sons Ltd. (supra). The Principle laid down by the Hon ble Bombay High Court is again not applicable on the facts of the present case, firstly, it is not a case of loan taken for the business purpose and it has not arisen out of assessee s own trading activity. Once the amount received or forfeited is on account of trading operation then such an amount can only be treated as assessable income u/s 41(1) or section 28(iv) of the Act. Any amount which is to be held as assessable u/s 28(iv), has to be in the nature of benefit or perquisite or ..... X X X X Extracts X X X X X X X X Extracts X X X X
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