Share application money not to be included in average investment in disallowance u/s 14A r.w. Rule 8D
9:38 amShare application money not to be included in average investment in disallowance u/s 14A r.w. Rule 8D
Citation of the Case:- ITO vs. M/s LGW Ltd. (ITAT Kolkata), Income tax (Appeal) no. 267 of 2013 and Cross appeal no. 29 of 2013, Date of Judgment: 07/10/2015
Brief of the Case
ITAT Kolkata held In the case of ITO vs. M/s LGW Ltd that share application money is only in the nature of an offer to buy shares made by the assessee. It is only after the offer is accepted by the company; the Assessee becomes the shareholder in a company. Till this time the Assessee becomes a shareholder, the assessee cannot have any rights to claim any dividend that may be declared by the company. In such circumstances we are of the view that while working out the average value of the investments u/s 14A read with rule 8D (2)(iii), the share application money should not be included.
Facts of the Case
The assessee is a company engaged in the business of manufacture export and trading of goods. The assessee was in receipt of exempt income of Rs.84, 154/-. The Assessee computed the disallowance of expenses incurred in relation to income which does not form part of the total income u/s 14A of the Act r.w. Rule 8D (2)(iii) of the Rules, a sum of Rs.91,360/-. The AO on perusal of the aforesaid computation noticed that the assessee while working out the average value of investments for the purpose of application of Rule 8D (2)(iii) of the Rules had not considered the share application money to the extent of Rs.2,08,00,000/- .According to the Assessee share application money cannot be considered as investment made by the assessee in earning tax payer income. The AO however was in the view that share application money ought to have been considered while determining the average value of investment.
Deduction on account of forex forward contracts
The assessee claimed as deduction on account of forex forward contracts of Rs.23,66,02,947/-. Out of the above loss to the tune of Rs.2,66,32,552/- and another sum of Rs.1,82,181/- was a loss on account of forex derivatives and gain on account of gold. The remaining loss of Rs.21,01,52,576/- was loss on account of forex forward contracts consequent to cancellation of export orders. This was treated by the AO as speculation loss u/s 43(5) of the Act and was accordingly carried forward to be set off against speculative income in future. As a result a sum of Rs.21,01,52,576/- which is part of Rs.23,66,02,947/- was added to the total income of the assessee.
Loss on sale of long term investment in shares
The assessee incurred a loss of Rs.5,00,160/- on sale of listed shares. This was claimed as deduction in the computation of the total income. The AO was of the view that even where there is loss in view of section 10(38) of the Act the loss will not enter the computation of total income of an Assessee. The CIT (A) confirmed the order of AO.
Contention of the Assessee
The ld counsel of the assessee relied on the decision of ITAT, Chennai Bench in the case of MSA Securities Services Pvt. Ltd. vs ACIT in ITA Nos.1523- 1524/Mds/2012 dated 17.10.2012 and in the case of Rainy Investments P.Ltd vs ACIT in ITA No.5491/Mum/2011 dated 16.01.2013. The Honourable benches have taken the view that the share application money gets converted into shares only on allotment by the company. Till such time the share application money is converted into shares, the applicant does not have any rights of a shareholder/member. The share applicant see was not entitled to any dividend. Therefore share application money cannot be considered as investment which is likely to earn tax free dividend income. Hence, there can be no disallowance u/s 14A.
Loss on sale of long term investment in shares
The ld counsel of the assessee submitted that section 10(38) of the Act used the expression “any income” and therefore loss on sale of long term capital asset being equity shares should be allowed as deduction.
Contention of the Revenue
The ld counsel of the revenue relied on the order of AO.
Held by CIT (A)
CIT (A) agreed with the submissions of the assessee that share application money cannot generate any exempt income and therefore need not be considered for computing average investment under Rule 8D(2)(iii) of the Rules. CIT (A) also observed that the share application money was refunded to the Assessee at a later period.
Deduction on account of forex forward contracts
In the financial year under consideration assessee-company had exported raw cotton mainly to Bangladesh with export turnover of Rs.187.88 crores. In the paper book assessee had filed a summary statement of loss made on the forward booking and assessee also furnish a details statement about the contract number, date, foreign currency booked and cancellation of the contract (due to cancellation or original export order) with the banks viz. SBI and Federal Bank along with the date and amount of loss debited by the respective banks. It is pertinent to mention that the above statement summary contains the details of many contracts which have in fact resulted in profits due to cancellation of export orders and are duly reflected in the books account of assessee. In assessment year 2008-09 there was a net gain in cancellation of foreign exchange contracts with the banks due to cancellation of export orders and the net gain was assessed under the head income from business and profession as per order u/s 143(3).
The net losses (after setting of the profits on account of cancellation of export orders) debited due to cancellation of export with the SBI and Federal Bank were to the tune of Rs.23,66,02,947/- minus Rs.2,66,32,552/- plus Rs.1,82,181/- = Rs.21,01,52,576/-. The paper book contain the statement of profit and loss on account of foreign exchange derivatives and statement of gold booking for Rs.2,66,32,552/- (loss) and profit of Rs.1,82,181/- respectively. These transactions are not related to assessee’s business of export of raw cotton and other miscellaneous products while the other transactions incurring the loss of Rs.21,01,52,576/- were related to the cancellation of export orders. Therefore addition made by the AO for Rs.21,01,52,576/- is deleted as cancellation of export orders and resulting loss on cancellation foreign exchange contracts with the banks was normal business expenditure. The foreign exchange derivative loss for Rs.2,66,32,552/- with no supporting of export orders is treated as speculative loss u/s 43(5) of the Income Tax Act and can only be set off against speculative profits of gold in the financial year for Rs.1,82,181/- and the addition made by AO for net amount of Rs.2,64,50,371/- is confirmed.
Held by ITAT
Share application money
We are agreed with the CIT (A) order. As rightly contended by the ld. counsel for the assessee, share application money is only in the nature of an offer to buy shares made by the assessee. It is only after the offer is accepted by the company resulting in a concluded contract; the Assessee becomes the shareholder in a company. Till this time the Assessee becomes a shareholder, the assessee cannot have any rights to claim any dividend that may be declared by the company. In such circumstances we are of the view that while working out the average value of the investments u/r 8D(2)(iii) of the Rules the share application money should not be included.
Violating the provisions of Rule 46A by admitting fresh evidences
The objection of the AO was that none of the conditions mentioned in clauses (a) to (d) of Rule 46A (1) were satisfied in the case of the assessee so as to admit additional evidence. However it is pertinent to mention that the AO had not raised any objections with regard to the veracity of the additional evidences filed by the assessee before CIT(A) nor any objections with regard to the relevance of those documents to the various issues raised by the assessee before CIT(A).
We are of the view that under Rule 46A (3) of the Rules, the CIT (A) is only required to afford reasonable opportunity to the AO to examine the evidence or documents produced by the assessee as additional evidence before CIT (A). In the present case admittedly all the documents filed by the assessee as additional evidence were confronted to the AO. The AO has thus been afforded reasonable opportunity to examine the additional evidence or documents produced as additional evidence by the assessee.
Rule 46A of the Rules does not contemplate the procedure whereby the CIT(A) should call for objections regarding admissibility of additional evidence first and when such additional evidence are admitted again called for objections with regard to the veracity and relevance of the additional evidences filed by the assessee before CIT(A). It is also clear from the decision of the CIT(A) that the AO had not asked for the additional evidence filed by the assessee before CIT(A) in the course of assessment proceedings and therefore the admissibility of the additional evidence in terms of Rule 46A(1) of the Rules cannot be found fault with. Therefore, we are of the view that there is no merit in ground no.(vii) raised by the revenue. Consequently the same is dismissed.
Deduction on account of forex forward contracts
It is seen from the evidence on record that in A.Y. 2008-09 gains on account of forex forward contract on cancellation was offered as income by the assessee and the same was brought to tax by the AO.
From the sample case set out it is clear that the forward contract in question was purely hedging transactions entered into by the Assessee to safeguard against loss arising out of fluctuation in foreign currency. Such transactions have been held in the following cases to be not speculative transactions falling within the ambit of Sec.43 (5), CIT Vs. Soorajmull Nagarmull (1981) 5 Taxman 289 (Cal), CIT Vs, Badridas Gauridu (P) Ltd., (2004) 134 Taxman 376 (Bom), CIT Vs. Friends and Friends Shipping Pvt.Ltd., Tax Appeal No.251 of 2010 dated 23.8.2011 and CIT Vs. Panchmahal Steel Ltd. Tax Appeal No.131 of 2013 dated 28.3.2013 by the Hon’ble Gujarat High Court. The conclusions of the CIT (A) on this issue, in our view therefore deserve to be upheld.
C.O.No.29/Kol/2013
Loss on sale of long term investment in shares
We are of the view that the stand taken by the Assessee is not acceptable. In Commissioner of Income-tax v. Harprasad and Co. P. Ltd. 99 ITR 118 (SC), it was held that “From the charging provisions of the Act, it is discernible that the words ” income ” or ” profits and gains ” should be understood as including losses also, so that, in one sense ” profits and gains ” represent ” plus income ” whereas losses represent ” minus income ” (1). In other words, loss is negative profit. Both positive and negative profits are of a revenue character. Both must enter into computation, wherever it becomes material, in the same mode of the taxable income of the assessee. Although section 6 classifies income under six heads, the main charging provision is section 3 which levies income-tax, as only one tax, on the ” total income ” of the assessee as defined in section 2(15). An income in order to come within the purview of that definition must satisfy two conditions. Firstly, it must comprise the “total amount of income, profits and gains referred to in section 4(1) “. Secondly, it must be “computed in the manner laid down in the Act “. If either of these conditions fails, the income will not be a part of the total income that can be brought to charge.”
The law laid down by the Hon’ble Supreme Court clearly supports the stand taken by the Revenue. Consequently, the ground of cross-objection is without any merit and the same is dismissed.
Accordingly appeal of the revenue dismissed.
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CA Deepak Aggarwal,
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