Sarang v. Kotwal, Jj

Priya Soparkar IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.1521 OF 2017 WITH INCOME TAX APPEAL NO.1504 OF 2017WITH INCOME TAX APPEAL NO.1523 OF 2017WITH INCOME TAX APPEAL NO.1524 OF 2017 Principal Commissioner of Income Tax (Central)-4 … Appellant V/s. M/s. Ashok Apparels Pvt. Ltd.… Respondent --- Mr.Tejveer Singh for the Appellant.Mr.Percy Pardiwalla, Senior Counsel with Mr.Madhur Agrawali/by Mr.Atul Jsani for the Respondent. --- CORAM : AKIL KURESHI AND SARANG V. KOTWAL, JJ. DATE : APRIL 8, 2019. P.C.:- 1.These appeals arise in common background. They have been heard together and would be disposed of by common order. Fromconvenience we may refer facts from Income Tax AppealNo.1521 of 2017. Priya Soparkar 2.This appeal is filed by the revenue to challenge the judgment of Income Tax Appellate Tribunal (“Tribunal” forshort). Following questions have been presented for ourconsideration:- “a.Whether on the facts and in thecircumstances of the case and in law, ITAT wasjustified in deleting the disallowance made u/s 14Aof Rs.16.76 lakhs ignoring the fact that the assesseefailed to demonstrate the exact availability of theinterest free funds available in hand at the time ofmaking the said investments? b.Whether on the facts and in thecircumstances of the case and in law, ITAT wasjustified in treating the Bonus Shares asinvestments with a cost of acquisition of Rs.Nil forthe Year under consideration, ignoring the fact thatthe original shares, for which bonus shares wereallotted, were present in the trading stock itself forthe year under consideration, thus the Bonus sharesallotted against the same, were too required to betreated as a part of trading stock itself?” 3.Question (a) pertains to disallowance of expenditureincurred by the assessee for earning exempt income in terms ofSection 14A of the Income tax Act, 1961 (“the Act for short). TheTribunal while deleting such disallowance, for the assessmentyears 2006-07, 2008-09 and 2009-10 made followingobservations:- Priya Soparkar “9.We have heard the rival submissions, perusedthe relevant findings given in the impugned orders.So far as the disallowance of interest in all theassessment years, we find that as far as assessmentyears 2006-07, 2008-09 and 2009-10 areconcerned, there are surplus/interest free fundsavailable with the assessee which was more thanthe investments made during the year, which is quiteapparent from the chart reproduced herein above.Once the surplus/interest free funds are excess ofinvestment made, then in view of the ratio andprinciple laid down by the Hon'ble Bombay HighCourt in above two cases (Reliance Utilities andHDFC Bank) as relied upon by the ld. counsel, nodisallowance under section 14A on account ofinterest expenditure should be made. TheirLordships have clearly opined that, once in theBalance sheet the assessee has reflectedsurplus/own funds and also interest bearing funds,then presumption is that, investments must havebeen made out of interest free funds only and oncethat is so, then no disallowance of interest shouldbe made. As can be seen from the chartincorporated above, for the AYs 2006-07, 2008-09and 2009-10, there are excess of interestfree/surplus funds over the investments, therefore,no interest disallowance should be made undersection 14A for the assessment years 2006-07, 2008-09 and 2009-10 should be made. We orderaccordingly.” 4.In relation to the assessment year 2007-08, giving rise to the Income Tax Appeal No.1504 of 2017 filed by the revenue, the Tribunal restricted the disallowance by making followingobservation :- Priya Soparkar 4.In relation to the assessment year 2007-08, giving rise to the Income Tax Appeal No.1504 of 2017 filed by the revenue, the Tribunal restricted the disallowance by making followingobservation :- Priya Soparkar “10. So far as disallowance of interest undersection 14A for the assessment year 2007-08 isconcerned, we find that amount ofRs.11,67,88,228/- is excess of investment overinterest free funds, that is interest bearing funds aremore than the investments, therefore, on samelogic and reasoning the disallowance of interestshould be made after taking figure ofRs.11,67,88,228/-. However, if such a disallowanceexceeds the exempt income of Rs.25,27,123/-, thensame should be restricted to the exempt incomeonly, in view of Delhi High Court judgment inCheminvest Ltd. vs. CIT, reported in (2015) 378ITR 33. Thus, with this direction the impugnedissue of disallowance of interest under section 14Ain AY 2007-08 is treated as party allowed.” 5.It can thus be seen that in first set of facts, the Tribunalfound that the assessee had interest free funds in excess of theinvestments made for the purpose of earning exempt income. Inthat view of the matter, the Tribunal referred to and relied uponthe decisions of this Court in case of Commissioner of Income-Tax Vs. Reliance Utilities and Power Ltd.[1]and Commissionerof Income Tax Vs. HDFC Bank Limited[2]. In case of RelianceUtilities and Power Ltd. (supra) the Court had held that ifthere are funds available both interest free and interestbearing, then presumption would arise, that investment would be 1(2009) 313 ITR340 (Bom) 2(2014) 366 ITR 505 (Bom) Priya Soparkar out of interest free funds available with the company. If interestfree funds were sufficient to meet such investment, nodisallowance would be made. 6.In case of HDFC bank, this view was reiterated. Afterreferring to the decision in case of Reliance Utilities and PowerLtd. (supra) the Court observed that the Tribunal had come tothe factual finding that the assessee had its own funds and thatsuch non-interest bearing funds were in excess of investments intax free securities. In such circumstances, the Court held thatdisallowance under Section 14A could not have been made. 7.The facts are similar in the present case. The Tribunaltherefore, correctly deleted the disallowance in three out of fourassessment years and restricted the same in forth year to theextent the investments exceeded the interest free funds. Learnedcounsel for the Department however submitted that the assesseefailed to demonstrate that in the present year only interest freefunds were diverted for making tax free investment. In ouropinion as held by this Court in above two decisions the assessee Priya Soparkar 67 itxa 1521-17 and ors-o was not expected to establish the same. Once the presumptionthat the interest free funds were utilized for making exemptinvestment, it would be for the revenue to establish to thecontrary which in the present case has admittedly not beendone. 8.Question (b) as framed does not bring out the controversywith a degree of precision. Having heard learned counsel for theparties and having perused documents on record, we gather thatthe assessee was holding certain shares of a company by way ofstock in trade. The assessee received bonus shares which theassessee claim would be treated as its investments. The revenueargues that the bonus shares have been received out of theshares held by the assessee as stock-in-trade, would automaticallypartake the character of stock-in-trade in the hands of theassessee. The Assessing Officer in his order of assessment, in thisrespect had held and observed as under:- 8.Question (b) as framed does not bring out the controversywith a degree of precision. Having heard learned counsel for theparties and having perused documents on record, we gather thatthe assessee was holding certain shares of a company by way ofstock in trade. The assessee received bonus shares which theassessee claim would be treated as its investments. The revenueargues that the bonus shares have been received out of theshares held by the assessee as stock-in-trade, would automaticallypartake the character of stock-in-trade in the hands of theassessee. The Assessing Officer in his order of assessment, in thisrespect had held and observed as under:- “12.6The submissions of the assessee havebeen perused carefully. The submissions of theassessee are not acceptable under the clear facts inthe case of the assessee. The facts andcircumstances of the case are discussed hereunder.been perused carefully. The submissions of theassessee are not acceptable under the clear facts inthe case of the assessee. The facts andcircumstances of the case are discussed hereunder. Priya Soparkar (i)The assessee received the BONUS sharesduring the period it held the original shares. Theoriginal shares were the trading stock. Thereforethe bonus shares are necessarily the trading stockand not investment stock due to the basis origin ofthe shares being trading stock. (ii)Therefore when the BONUS shares are sold,the character of the same remains the same i.e.Trading stock.”the character of the same remains the same i.e.Trading stock.” 9.The Tribunal by the impugned judgment held in favour ofthe assessee by referring to and relying upon the judgment ofthe Supreme Court in case of Commissioner of Income-Tax,U.P. Vs. Madan Gopal Radhey Lal[1]. 10.In this respect, the counsel for the revenue submitted that the assessee was holding the shares by way of stock-in-trade.When the company declared bonus shares which the assesseereceived, it claimed that the shares were held as investment.Counsel submitted that this was a colourable device applied bythe assessee to avoid legitimate tax. 11.On the other hand, learned counsel for the assessee opposed 1Vol.73 ITR 652 87 itxa 1521-17 and ors-o the appeal contending that the issue is clearly covered by thedecision of the Supreme Court in case of Madan Gopal RadheyLal (supra). There is nothing on record to suggest that theassessee had engaged himself in business in relation to thebonus shares. 12.A very similar situation was examined by the SupremeCourt in case of Madan Gopal Radhey Lal. It is also a casewhere the assessee was holding certain shares for the purpose ofbusiness. These shares gave rise to bonus shares which theassessee received and treated them as his investment. Therevenue objected to this position. Full bench of Allahabad HighCourt held in favour of the assessee. At the hands of the revenuethe issue reached the Supreme Court. The Supreme Courtreferring to a decision of the House of Lords in case ofCommissioners of Inland Revenue Vs. John Blott[1] held andobserved as under:- “The principle of the case was affirmed by theJudicial Committee in a case arising under theIndian Income-tax Act, 1922, Commissioner ofIncome-tax V. Mercantile Bank of India. Accordingly, bonus shares given by a company in proportion tothe holding of equity capital by a shareholder are,in the absence of any express provision to thecontrary, liable to be treated as capital and notincome. “The principle of the case was affirmed by theJudicial Committee in a case arising under theIndian Income-tax Act, 1922, Commissioner ofIncome-tax V. Mercantile Bank of India. Accordingly, bonus shares given by a company in proportion tothe holding of equity capital by a shareholder are,in the absence of any express provision to thecontrary, liable to be treated as capital and notincome. We are unable to agree with the judgment ofthe Bombay High Court (to which reference wasmade by the Tribunal) in Commissioner of Income-tax v. Maniklal Chunnilal and Sons Ltd. (I.T.Reference No.16 of 1948) that bonus sharesreceived by a shareholder who carries on businessin shares and securities “ipso facto become accretionto his stok-in-trade.” Bonus shares would normallybe deemed to be distributed by the company ascapital and the shareholder receives the shares ascapital. The bonus shares are accretions to theshares in respect of which they are issued, but onthat account those shares do not become stock-in-trade of the business of the shareholder. A tradermay acquire a commodity in which he is dealing forhis own purposes and hold it apart from the stock-in-trade of his business. There is no presumptionthat every acquisition by a dealer in a particularcommodity is acquisition for the purpose of hisbusiness; in each case the question is one ofintention to be gathered from the evidence ofconduct and dealings by the acquirer with thecommodity. Bonus shares having been received by theassessees in respect of their stock-in-trade did not,therefore, become part of their stock-in-trade,merely because they were accretions to the stock-in-trade. The bonus shares were received as capital;they could be converted by the assessees into theirstock-in-trade or retained as their capital asset.” Priya Soparkar 10 7 itxa 1521-17 and ors-o the present case. The facts are virtually identical. As observed bythe Supreme Court in the said case shares given by company inproportion to the holding of equity capital by share-holderswould, in the absence of express provision to be contrary betreated as capital and not income. The Assessing Officer hasmerely proceeded on the basis that the origin of the bonusshares being the shares held by the assessee by way of stock-in-trade, necessarily the bonus shares would also partake the samecharacter. 14.In the result, we do not find any questions of law arising.All the appeals, therefore, dismissed. (SARANG V.KOTWAL,J.) (AKIL KURESHI,J.)….