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TMI Blog2017 (11) TMI 1310X X X X Extracts X X X X X X X X Extracts X X X X ..... nce the purchase and sale of the bonds in question was not a business activity, the provisions of Sec.94(4) of the Act was not applicable to the transaction. Accordingly, We direct the AO to allow the claim of set off of loss of ₹ 2,44,62,328/- suffered from 9% IRFC Bonds, against profit from sale of shares. Unexplained investment in 9% tax free NTPC bonds - Held that:- We find from the facts of the case that the assessee has purchased 9% tax free bonds of NTPC of face value of ₹ 4.40 crores on 19.06.1991 through the broker Harshad S Mehta and these bonds have been sold on 17-12-1991. The same are reflected by the assessee in its books of accounts under account No. 2008 titled as, ‘investment in PSU bonds’. We find that the assessee has not paid any consideration on account of purchase of these bonds and these are standing as credit in the firm Harshad S Mehta. It means that holding of the assessee in NTPC bond is to the tune of ₹ 4.40 crores only and not more than that. Even now before us, the learned Counsel claimed that Revenue could not show to the assessee that it is holding NTPC bond of ₹ 4.50 crores as alleged by the Revenue and this information wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll as from the fact that subsequently the Court directed that audit be done through new Auditor. In view of the same and following the decision of the Tribunal mentioned above, we do not find any merit in the ground raised by the Revenue. Recompute the interest u/s 234A, 234B and 234C after taking into account the tax deductible on total income of the assessee by affording fair and reasonable opportunity of being heard to the assessee Addition on account of interest on bonds - Held that:- AO while framing assessment noted that the assessee has actually made investment in the government bonds at ₹ 50 crores and interest thereon @ 9% worked out to ₹ 2.25 crores for the period of 6 months. According to AO, the assessee has disclosed the interest to the extent of ₹ 1,84,50,000/- only, resulting into short interest of ₹ 40.50 lakhs. Accordingly, AO added the differential amount of ₹ 40.50 lakhs to the returned income of the assessee. Aggrieved, assessee preferred appeal before CIT(A), who deleted the addition for the reason that the entire investment in IFRC bonds is tax free and whatever the quantum of interest same cannot be brought to tax. Accordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee sold these bonds within a short period of 15 days on 11-10-1991 for a total consideration of ₹ 47,87,32,877/-. In this process the assessee claimed loss of ₹ 2,44,62,328/-. The assessee also received tax free interest from these IRFC bonds at ₹ 1,84,50,000/-. The AO noted that the assessee held these bonds for less than a month and obviously, the transaction entered into with an intention of earning tax free interest and claiming short term loss. According to AO, this is a business transaction in the nature of trade and hence, the provisions of section 94(4) of the Act applies, which provides that even if the assessee is partly carrying on the business of dealing in securities, the same will be hit by the provisions of section 94(4) of the Act. Accordingly, he held that the assessee is carrying on the business of dealing in securities, the same securities and the transactions of purchase and sale of 9% IRFC bonds worth ₹ 50 crores is squarely covered in the provisions of section 94(4) of the Act and disallowed these claim of short term capital loss of ₹ 2,44,62,328/-. Aggrieved, assessee preferred the appeal before CIT(A), who also confirmed the act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sequence of events, it appears that this transaction of the assessee was deliberate, with a view to earn tax-free interest of ₹ 1,84,50,000/- on the one hand and to claim loss of ₹ 2,44,62,328/- on the other hand. Such situation is taken care of by the provisions of Sec.94(4) of the Act, which say that any loss arising in such transactions of buying and selling of securities will not be allowed to the assessee. That is what the learned AO has done in the assessment order. Though the assessee claims that purchase and sale of bonds is not part of its business activity. However, I am unable to buy such an explanation of the assessee. In my opinion, the entire assessee group is engaged in the business of purchase and sale of shares and securities, etc., and, therefore, mere technicalities will not come in the way to see as to what is the net impact of a particular transaction and whether it had happened in normal course of business or it is a deliberate attempt in the direction of tax avoidance. Therefore, I am unable to agree with the learned AR that the provisions of Sec.94(4) of the Act are not applicable to the facts of the present case. In the circumstances, I hol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... then, if the result of the transaction is that interest becoming payable in respect of the securities is receivable by him but is not deemed to be his income by reason of the provisions contained in sub- section (1), no account shall be taken of the transaction in computing for any of the purposes of this Act the profits arising from or loss sustained in the business. (5)------------------------------------------- 7. From the above provision, it is clear that where the honour of any securities sales or transfers those securities and buys back or reacquire the securities, then, if the result of the transaction is that any interest becoming payable in respect of securities is receivable otherwise then by the owner, the interest payable thereof shall be deemed to be the income of the owner for the purposes of chargeable to income tax under this Act. It means that, in the present case before us, the IRFC bonds was owned by Harshad S Mehta and assessee purchase the same for a total consideration of ₹ 50,31,95,205/- on 26-09-1991 and sells the same back to Harshad S Mehta within a short period of 15 days on 11-10-1991 for a total consideration of ₹ 47,87,32,877/-. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of Sec.94(1) of the Act had not been invoked in the said case, and, therefore, the provisions of Sec.94(4) of the Act could not be invoked in the case of the assessee. Going by the intent, we are of the view that the provisions of Sec.94(4) of the Act had been introduced with a view to levy tax on the interest income, which was being sought to be avoided by certain persons by carrying on transactions in shares and securities. The intention of the Legislature was to tax the interest income in the right hands, which had been avoided by transferring the shares and then repurchasing the some after the interest was received by the other persons. Therefore, it was necessary for the AO to prove that the assessee had attempted to avoid payment of tax. Since the interest income on 9% IREC Bonds was exempt from tax, there was no question of the assessee or Harshad S. Mehta adopting any such methods to avoid tax on the income. Further, we are of the view that the provisions of Sec.94(4) of the Act would apply only in cases where the assessee had carried on the transactions of purchase and sale of securities during the course of business and since the purchase and sale of the bonds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment as disclosed by the assessee and as reported by NTPC. It is also relevant to mention over here that the AC has added only the differential interest of ₹ 45,000/- in respect of unexplained investment in NTPC Bonds (apparently, for a period of six months), and not the entire interest attributable to investment of ₹ 4.5 crores. Since the AC has considered the unexplained investment in NTPC Bonds only at ₹ 10,00,000/- for The purpose of making addition towards interest on such Bonds, he should not have made an addition of ₹ 4.50 crores as unexplained investment in NTPC Bonds Therefore, considering the overall fats of the case, it will be fair and reasonable to sustain an addition of ₹ 10,00,000/- out of total addition of ₹ 4,50,00,000/- made by the AO. The assessee, thus, gets a relief of ₹ 4,40,00,000/-, on account, and this ground of appeal (ground No.8) is, accordingly, partly allowed. Aggrieved, assessee is in second appeal before Tribunal. 10. We have heard the rival contentions and gone through the facts and circumstances of the case. We find from the facts of the case that as per information received from National Thermal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entry Coil on about 1200 shares and ITW Signode of about 1400 shares. Accordingly, AO made addition of ₹ 5,40,700/- by observing as under: - 1. Coventry Coil: In the original assessment an addition of ₹ 57,80,000/- was made as unexplained investment in 57800 shares of Coventry Coil. In the set aside proceeding assessee produced contract notes in respect of 56600 shares. Hence the investment in respect of 1200 shares is treated as unexplained. For the purpose of valuation, the purchase rate quoted by the assessee in the last transaction of the F.Yr. is taken at ₹ 66.75. The total addition on this account is ₹ 80,100/- (1200 x 66.75). b. ITW Signode: An addition of ₹ 7,25,000/- in respect of 2900 shares was made in the original assessment order. Assessee has now produced contract notes for 1500 shares only. In view of this investment in 1400 shares is treated as unexplained. The value is taken @ Rs, 329/. being the purchase rate quoted by the assessee. The addition on this account is ₹ 4,60,600/- Aggrieved assessee preferred the appeal before CIT(A). The CIT(A) without verifying the facts confirmed the addition vide Para 27 of his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wance of expenses relatable to exempt income by invoking the provisions of section 14A of the Act to the extent of ₹ 50%. For this assessee has raised following ground no. 6: - 6. The Ld. Commissioner of Income-Tax (Appeals) erred in law and in facts in confirming the disallowance u/s. 14A of the Act to the extent of 50% of ₹ 11,65,140/- disallowed by the Assessing Officer in the assessment order. 17. We have heard the rival contentions and gone through the facts and circumstances of the case. We find that the AO has disallowed expenses relatable to exempt income under section 14A of the Act amounting to ₹ 11,65,140/-. The assessee claimed the exempt income earned by the assessee from PSU bonds of NTPC amounting to ₹ 1.84 crores. Accordingly, AO attributed the expenses at ₹ 11,65,140/- as relatable to exempt income. The CIT(A) restricted to the extent of 50% of the amount at ₹ 5,82,570-/- on this account. We find that no specific finding of relation of expenses there in the orders of the lower authorities and hence, we restrict the disallowance at 1% of the exempt income. We direct the AO accordingly. 18. The next issue in this appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this issue. 20. In view of the above, taking a consistent view we also delete the disallowance of audit fee and allow this issue of assessee s appeal. 21. The next issue in this appeal of assessee is against the order of CIT(A) confirming the disallowance of depreciation at ₹ 61,640/-. For this assessee has raised following ground No.8: - 8. The Ld. Commissioner of Income-Tax (Appeals) erred in law and in facts in confirming the disallowance of depreciation of ₹ 61,640/- out of the total depreciation of ₹ 3,38,636/- disallowed by the Assessing Officer. 22. At the outset, the learned Counsel for the assessee stated that he has instructions from the assessee that this issue is not pressed due to smallness of the amount. Accordingly, the same is dismissed. 23. The next common issue in this appeal of assessee is against the order of CIT(A) confirming the levy of interest under section 234A, 234B, 234C and 220 of the Act. For this assessee has raised following ground No. 9,10,11: - 9. The Ld. Commissioner of Income-Tax (appeals) has erred in law and in facts in confirming the levy of interest under section 23A, 234B and 234C of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be charged after considering the amount of tax deductible at source on the income assessed. Similar plea of the assessee was upheld by our Co-ordinate Bench in the case of Eminent Holdings Pvt. Ltd. (supra). Following the same, we deem it fit and proper to restore the matter back to the file of AO who shall recompute the interest chargeable under section 234A, 234B 234C of the Act after considering the amount of tax deductible at source on the income assessed. Needless to mention, the AO shall allow the assessee a reasonable opportunity of being heard and thereafter, recompute the interest chargeable under section 234A, 234B 234C of the Act, as per law. Thus, on this aspect, the assessee partly succeeds. 5. Respectfully following the decision of the Co-ordinate Bench of the Tribunal in assessee s own case, we restore the issue to the file of the AO with a direction to recompute the interest u/s 234A, 234B and 234C after taking into account the tax deductible on total income of the assessee by affording fair and reasonable opportunity of being heard to the assessee. 25. In view of the above, we direct the AO to recompute the interest under section 234A, 234B, 234C ..... X X X X Extracts X X X X X X X X Extracts X X X X
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