1. The appeal by the assessee is directed against order dt, 30th Nov., 1994, passed by learned CIT(A)-V, Ahmedabad for asst. yr. 1991-92. The assessee has raised the following grounds : (1) The learned CIT(A) has erred in disallowing Rs. 18,30,000 of short-term capital loss as speculation loss.
(2) The learned CIT(A) has erred in disallowing Rs. 35,451 of garden expenses as business expenditure.
(3) The learned CIT(A) has erred in disallowing Rs. 1,58,000 of repairs made to Plant & Machinery as revenue expenditure.
(4) The learned CIT(A) has erred in disallowing Rs. 52,963 of architect fees as revenue expenditure.
(5) The learned CIT(A) has erred in disallowing Rs. 9,486 as entertainment expense.
(6) The learned CIT(A) has erred in disallowing Rs. 48,000 of professional charges as revenue expenditure. .
2. The assessee is a limited company engaged in manufacturing of taxtile. The assessee's name in the assessment order is mentioned as R.B. Rodda & Co., Rakhial Road, Ahmedabad. In the memorandum of appeal Form No. 36, address where notice may be sent to the appellant it has been mentioned as M/s Soma Tetiles & Industries Ltd. [Formerly known as M/s R.B. Rodda & Co. Ahmedabad].
3. The first ground relates to disallowance of Rs. 18,30,000 on account of short-term capital loss. The assessee claimed a loss of Rs. 18,30,000 on account of sale of units of Unit Trust of India as short-term capital loss: The AO disallowed the loss as short-term capital loss by application of Explanation to Section 73 of the IT Act, 1961. The CIT(A) has confirmed the action of the AO of disallowance of loss. Therefore, the assessee is in appeal before us.
(a) The AO completed the assessment for the year under consideration under Section 143(3) and disallowed short-term capital loss of Rs. 18,30,000. Before making assessment under Section 143(3), the return was processed vide Intimation under Section 143(l)(a) on 4th Dec., 1992, the said short-term capital loss was disallowed and an addition of Rs. 18,30,000 made in the declared total income of the assessee. The assessee submitted an application under Section 154 against the said addition of Rs. 18,30,000 but same was rejected by AO. It has been observed by the AO that the assessee-company had claimed short-term capital loss of Rs. 18,30,000 on purchase and sale of 10 lacs units of UTI. These units were purchased by the assessee-company on 28th May, 1990, at the rate of 'Rs. 15.0375 per unit and sold on 17th July, 1990, at the rate of Rs. 13.2825 per unit. In the computation of total income, short-term capital loss has been set off against the heads of income which mainly consists of income from textile business. The statement of revised income (from pp. Nos. 30 to 32 of assessee's paper book) which is considered as relevant is reproduced as under :Name : M/s R.B. Rodda & Co. Ltd. P.A/c No. 31-038-CA-1736/Dy.
CIT(A)/Spl. Range-2/ABD. The return has been revised because of mistake in calculation of carried forward investment allowance. Correct carried forward investment allowance as per revised statement No. 3 is Rs. 2,47,67,941 but by mistake previously it was considered Rs. 2,16,98,941 in the original IT Return filed on 30th Dec., 1991, vide ack. receipt No. 000463 in Dy. CIT (Asstt.) Spl. Range-2, Ahmedabad.
Business incomeNet Profit (before tax) as per Profit & Loss a/c prepared in accordance with the provisions of Part-II & III of the Sixth Schedule of the Companies Act, (Copy of annual reports & final accounts grouping attached herewith).
Bonus disallowed in last year under s. 43B and written back during the year Less : Earlier years unabsorbed depreciation & unabsorbed investment allowance (as per Statement No. 3) 2. Under s. 80-M : Total dividend received Rs. 18,00,000. But, dividend declared by the Co. is of Rs. 10,40,000 deduction available is (b) Statement showing working of short-term capital loss (From, page No. 34 of paper book) 10,00,000 Units sold at Rs. 13.2825 on 17th July, 1990, which comes to Rs. sLess : 10,00,000 Units purchased @ 15,0375 Rs. 15.0375 on 28th May, 1990, which comes to Rs. 1,50,37,500 plus expenses Rs. 75,000 (c) Copy of Hongkong Bank Account (From page No. 40 of paper book) Dal-Dalhousif SQ. (d) Dal-Dalhousie Sq Lyon 7 Lyon Prop; R.B. Rodda 7 Co. Ltd. 2 Red Cross Place Cal 700 001 154. The relevant abstract from the order under Section 154 (from page book pp. 44 to 46) is as under : "The contention of the assessee that the said adjustment is not prima facie adjustment is not correct. The adjustment is squarely covered by Explanation to Section 73 of the Act. With due respect, there is no violation of the Instructions and circulars of the CBDT. So far as the decision of the Hon'ble Supreme Court is concerned, it has no direct bearing on the issue.
The assessee's another contention is that, the assessee is dealing in textile, and the units were held as "Investments" and not for the purpose of carrying out business of sale and purchase of shares, as the assessee is not having licence to do the business of sale and purchase of shares.
I agree with the assessee that the main business is of the manufacturing and selling of cloth, but the contention of the assessee that the said units were held as investment is not correct.
Proximity of dates of purchases and sale of units makes it obvious that it has never been the intention of the assessee to hold it as investments. The said units were purchased on 28th May, 1990, at the rate of Rs. 15.0375 and sold it within two months i.e., on 17th July, 1990, at the lower rate of 13.2825. So far as applicability of Explanation to Section 73 is concerned, it has been introduced to cover such type of transactions only. It is apparent from the P&L.a/c of the assessee that a part of the business of the assessee-company consists in purchases and sale of shares of units.
It is not essential that there, should be a series of transactions and even a single or isolated transaction may constitute business, as have been held by Hon'ble Delhi High Court in the case of CIT v. Bharat Insurance Co. Ltd: (1983) 142 ITR 342 (Del), The Hon'ble Supreme Court has defined the word "business" in the case of Narain Swadeshi Weaving Mills v. CEPT (1954) 26 ITR 765 (SC) that it connotes some real, substantial and systematic or organised course of activity or conduct with a set purpose. In this case, the assessee. has translated with a set purpose. However; it has been admitted by the assessee itself an its letter under reference that in earlier years, assessee has sold its investments, to be units, shares of other companies. Thus, as per its own admission, it has been dealing in sale and purchase of shares.
It may be mentioned here that licence to deal in purchase and sale of share are never given to corporate sector. It is given to "individual" only, which are called brokers. This type of business of sale and purchase of shares is done through broker. Hence, this ground of the assessee is not valid and tenable, in the matter.
It may be noted here that the said transaction is a deemed speculative business in view of Explanation to Section 73 of the Act. Hence the question of applicability of Section 43(5) is not material.
It is immaterial as to what has been done in earlier years, so far as processing under Section 143(l)(a) is concerned. Processing under Section 143(l)(a) has to be done on the basis of details and information available on the particular return.
Since the facts for asst. yr. 1992-93 are also relevant, we refer to these as under: During the assessment proceedings for asst. yr. 1992-93 it was found by the AO that there was dividend income of Rs. 19,50,000 against which assessee claimed deduction under Section 80M. A short-term capital loss of Rs. 20,30,000 was claimed. The AO has given the details of short-term capital loss at p. 3 of his order for asst.
yr. 1992-93 which is reproduced below : 5. The learned authorised representative contended that Explanation to Section 73 is not applicable in this case as the business of the assessee was textile and not the business of purchase and sale of shares of other companies. The assessee purchased 10 lacs unit of UTI at the rate of Rs. 15.0375 per unit on 28th May, 1990, and the same were sold on 17th July, 1990, at the rate of Rs. 13.2825. He argued that such transaction could not be said as business of the assessee. He further contended that no such disallowance was made in earlier years while framing the assessment under Section 143(3). He relied upon the judgment of the Hon'ble Kerala High Court in the case of CIT v. Appolo Tyres Ltd (1999) 237 ITR 706 (Ker). He pointed out that in the said judgment it has been held by the Hon'ble Kerala High Court that units of UTI are not treated as shares either under the Companies Act or under the UTI Act, It was also submitted that Explanation to Section 73 was not applicable in the case of purchase and sale of units by the assessee. The learned authorised representative reiterated the submissions and arguments before us which he has made before the Revenue authorities.
5.1 The case was again fixed for certain clarifications and for submission of copy of account of M/s Rahul & Co. and bank account etc.
During the course of hearing, it was specifically asked to the learned AO that why Accounting Standard, AS-13, Accounting for Investments issued by Council of Chartered Accountants of India is not applicable to the facts of the case for the year under consideration. The relevant para-12 of the said AS-13 is reproduced as under : "12. Interest, dividends and rentals receivables in connection with an investment are generally regarded as income, being the return on the investment. However, in some circumstances, such inflows represent a recovery of cost and do not form part of income. For example, when unpaid interest has accrued before the acquisition of an interest-bearing investment and is therefore, included in the price paid for the investment, the subsequent receipt of interest is allocated between pre-acquisition and post-acquisition periods; the pre-acquisition portion is deducted from cost. When dividends on equity are declared from pre-acquisition profits, a similar treatment may apply. If it is difficult to make such an allocation except on an arbitrary basis, the cost of investment is normally reduced by dividends receivable only if they clearly represent a recovery of a part of the cost." In reply, the learned authorised representative submitted that said AS-13, Accounting for Investments is applicable w.e.f. 1st April, 1995, whereas the case of the assessee under consideration relates to asst.
yr. 1991-92. Therefore, AS-13 is not applicable to the case under appeal. It has been submitted by the learned authorised representative that the case of the assessee is covered by Accounting Standard AS-9, Revenue Recognition, issued by The Institute or Chartered Accountants of India. He drew our attention to para 8.4 of AS-9 that dividends from investment in shares are not recognised in the statement of P&L A/c until a right to receive payment is established. The relevant para. 8.4 of AS-9 is reproduced below; "9. Dividends from investments in shares are not recognised in the statement of profit and loss until a right to receive payment is established." Here, we may clarify that effective date of AS-13 is for the purpose of audit, that it is mandatory for the Chartered Accountants to consider AS-13 while preparing audit report after 1st April, 1995, but the accounting principle of AS-13 is very much there even before 1st April, 1995. AS-9 is not relevant for the case under consideration as it deals with accrual of income.
The learned authorised representative vehemently argued that the issue before the Revenue authorities was that whether Explanation to Section 73 was applicable in the case of assessee or not. Explanation to Section 73 is very clear and apparently not applicable in the case of the assessee for the year under consideration. The learned authorised representative has also contended that the assessee was having no intention to do the business in purchase and sale of units of UTI, the only purpose of purchase of units was making an investment and to hold as investments only, And that the profit or loss on such transactions of investment are subject to capital gain, therefore, the assessee has correctly claimed the loss as short-term capital loss. The learned authorised representative concluded his arguments that there was no dispute about the genuineness of the transaction as the Revenue authorities have already accepted its genuineness. Therefore, he urged that the assessee's claim of short-term capital loss of Rs. 18,30,000 be allowed.
6. The learned Departmental Representative, on the other hand, supported the orders of the Revenue authorities. He drew our attention to p. 31 of the assessee's paper book that short-term capital loss of Rs. 18,30,000 has been claimed and simultaneously dividend income of Rs. 18 lacs has also been claimed and on the basis of said dividend of Rs. 18 lacs, the assessee has claimed deduction under Section 80M for Rs. 10,40,000. He argued that the assessee was having no intention that the disputed transactions were for the purpose of investment in the units of UTI. He submitted that the assessee adopted yearly this type of practice to claim short-term capital loss which can be set off against other income of assessee, and by showing the income from dividend, the assessee get the benefit of deduction under Section 80M.The learned Departmental Representative drew our attention that in asst yr. 1991-92 the assessee has shown loss of Rs. 18,30,000 in purchase and sale of 10 lacs units of UTI. By similar nature of transaction and by similar number of 10 lacs units the assessee declared loss of Rs. 20,30,000 for asst. yr. 1992-93. He strongly argued that these were abnormal transactions, and that the same were not the transactions of a prudent businessman, that to enter into such transactions which resulted into loss in lacs of rupees within a short period/or a few months or a few days or even on the same day. He vehemently argued that the sole purpose of the transactions was to reduce the tax burden. In support of his arguments he submitted that the assessee deposited advance tax of Rs. 28,00,000 and same was claimed as refund. He also contended that the assessee has not taken the delivery of the disputed 10 lacs units. Therefore, according to Section 43(5) the transaction was clearly in the nature of a speculative transaction. It has also been submitted by the learned Departmental Representative that it has been prima facie found by the AO that there was a speculation loss and he has not gone to other aspects. According to s.43(5) it was a speculation loss; the AO has simply applied Explanation to Section 73 and treatment as speculation loss. In support of his arguments he referred some judgments of Hon'ble Supreme Court viz. CIT v. Sutlej Cotton Mills Supply Agency (1975) 100 ITR 706 (SC); Rajputana, Textiles (Agencies) Ltd. v. CJT (1961) 42 ITR 743 (SC) and Saroj Kumai Mazumdar v. CIT (1959) 37 ITR 242 (SC). He concluded his arguments and urged that the orders of the Revenue authorities may be confirmed or the matter may be sent back to Revenue authorities for verifying the facts whether the delivery of units were taken or not and facts relating to application of Section 43(5) can be put on record.
7. We have considered the rival submissions and perused the records.
The issue under consideration is whether result of the transaction is speculation loss or short-term capital loss, the Revenue has treated as speculation loss whereas the claim of the assessee was of short-term capital loss. First we take up the Revenue's stand. The provisions relevant to speculation business/loss in IT Act are, Expln, 2 to Section 28, Sections 43(5), 94 and 73. According to Expln. 2 to Section 28, where an assessee carries on speculative transactions which constitute a business, such business shall be considered as a separate and distinct business. A speculative transaction is defined under Section 43(5) to mean a transaction in which a contract for purchase or sale of a commodity including stock of shares is periodically or ultimately settled otherwise than by actual delivery or transfer of the commodity or scrips. According to Section 73, loss of a speculation business cannot be set off against the income from regular business or against income under any other head of income. Section 94 deals with avoidance of tax by certain transactions in securities.
7.1 From the facts recorded by the Revenue authorities, it has been found that holding period of units of UTI with the assessee was less than two months (28th May, 1990 to 17th July, 1990). It is pertinent to bring on record a fact related to subsequent year i.e., asst. yr.
1992-93 that the holding period of the units of UTI was only one day i.e., 30th May, 1991 to 1st June, 1991. It was known fact to the assessee that UTI declares its dividend in June every year, so he purchased the units of UTI just before declaration of dividend and sold immediately after the date of declaration of dividend by UTI. It was also known fact to the assessee that before declaration of dividend the prices were high and after declaration of dividend same were bound to fall, therefore, it suited to assessee, on the one hand to claim short-term capital loss and on the other hand on the basis of dividend claim deduction under Section 80M.7.2 Apart from above facts, we would like to mention some other facts, which are as below : (1) There are various factors for which no satisfactory explanation is forthcoming. From para 3(c) and 3(d) of this order, it has been noticed that Hongkong Bank through which the transaction made was in the name of "Lyon & Lyon" Proprietor M/s R.B. Rodda & Co. Ltd. In other words it can be said that when M/s Lyon & Lyon was proprietor of M/s R.B. Rodda & Co. Ltd. the assessee-company cannot be said to be the proprietor of M/s R.B. Rodda & Co. Ltd. (2) In Form No. 16, name and address of the person to whom payment made is written as R.B, Rodda & Co. Ltd. C/o MRPK Banerji (A.G.M.), United Bank of India, DCH St. RRN 16 Old Court House Street, Calcutta-700001, why address of assessee was not given (3) In Form No. 16, column of Permanent Account Number/AO Code, is left blank. In subsequent year, i.e., 1992-93 the TDS certificate form was related to the period 1st July, 1990 to 30th June, 1991, whereas the related units were sold on 1st June, 1991. As per the material on record it has been noticed that so called dividend received by assessee on 17th July, 1990. The UTI has deposited TDS amount on four different dates 19th July, 1990, 24th July, 1990, 17th Sept., 1990 and 12th Sept., 1990. The reasons and explanations for that different dates are not on record.
(6) The contract notes, photo copies of which appear at p. Nos. 38 and 39 of assessee's paper book, have not found in order, it appears from their typing etc. that these have been prepared in one sitting and these have not been found properly sealed & signed. Not only this, but these have not been properly numbered. Moreover, these do not seem to have been issued in routine course of business. In view of the above facts their genuineness is in doubt.
(7) On specific query by the Bench about an entry of Rs. 1,31,37,500 on deposit side of Hongkong Bank account of which a photo copy is appearing at p. 40 of assessee's paper book, learned authorised representative submitted that it was related to loan from broker, Rahul & Co. on the basis of his submission a necessary mark is put by us on that photo copy. But as per entry No. 19 of Annex. "G" to the Audit Report, the entry is found in the name of Peerless General Finance & Investment Co. Ltd, It is pertinent to mention that in subsequent year in asst. yr. 1992-93 the units are claimed to have been purchased from Peerless General Finance & Investment Ltd. On the basis of above entry the possibility of link with Peerless General Finance & Investment Ltd. for the transaction of the year under consideration cannot be ruled out.
7.3 Neither any cogent material have been found on record nor the assesses has submitted reasonable and convincing reasons and explanations about the above facts. Under the facts and circumstances of the case, it is apparent that an assessee who deals in such type of transactions of which result is loss of lacs of rupees within a short period or within a day raises a strong question about the genuineness of the transaction.
7.4 Assuming the transaction as genuine, we proceed to consider whether the transaction of sale and purchase of units is a speculative transaction. Section 43(5) of IT Act, 1961, defines "speculative transaction" which is reproduced below : (5) speculative transaction means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips : From above Section 43(5), if a transaction is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips, such transaction is called as speculative transaction. Now let us examine whether the transaction of units of UTI under consideration has been settled by actual delivery or transfer. There are no material on record on which basis it can be said that the transaction has been settled by actual delivery or units were transferred in the name of assessee.
7.5 A question arises as to who is to discharge the burden of proof that the transaction was settled through actual delivery or transfer.
In this regard the relevant observations of Hon'ble Madras High Court in case of CIT v. Krishna Veni Amma (1986) 158 ITR 826 (Mad) is reproduced below (pp. 829-830): "The law of evidence mandates that if the best evidence is not placed before the Court, an adverse inference can be drawn as against the person who ought to have produced it. In this case, there were cross cheques but they were not produced." In that case cross cheques were not produced by the assessee, therefore, an adverse inference was taken against the assessee. Since the burden of proof regarding actual delivery or transfer of units of UTI in the name of assessee, was on assessee as he was holding the relevant evidence such as unit certificate, dividend warrant and related details regarding unit number, registered folio number, name of previous holders from whom those were purchased etc. it was their duty to produce the same before the Revenue authorities or even before us.
7.6 In respect of burden of proof in such circumstances, the Hon'ble Supreme Court has held as under in the case of CIT v. Joseph John (1968) 67 ITR 74 (SC).
"that the burden of proof was upon the assessee to show that the transactions were merely hedging transactions within meaning of proviso (a) and in the absence of an evidence produced on the part of the assessee, Expln. 2 applied to the case and the transactions must be held to be speculative transactions as defined therein." The Hon'ble Gauhati High Court has held in the case of Shakuntal Devi Killa v. CIT (1993) 202 ITR 108, 110 and 111 (Gau) that the transactions must be considered as speculative transactions in view of the fact that the assessee has failed to produce materials suggesting actual delivery.
7.7 As regards actual delivery, Hon'ble Supreme Court held in the case of Davenport and Co. (P) Ltd. v. CIT (1975) 100 ITR 715 (SC) that constructive or symbolic delivery is not sufficient, must be actual delivery.
7.8 From above observations of Hon'ble Supreme Court and Hon'ble Madras and Gauhati High Courts, we find that there was a heavy burden of proof on assessee. The assessee was to discharge burden of proof by submitting necessary cogent materials & evidence such as unit certificate and dividend warrant or by other documents and evidence, that actual delivery of units were taken by the assessee or has been transferred in assessee's name. It is pertinent to mention here that in case of second sale of units of UTI, the name of selling party is there and the necessary endorsement on the back of UTI certificates must be there and it could have been verified if assessee has produced those certificates of UTI. The assessee has failed in discharging its heavy burden that the transaction was not in the nature of speculation as necessary evidence neither were produced before the Revenue authorities nor before us. When it is found that the transaction is in the nature of speculation it is not material that the Revenue authorities have quoted a wrong section or given different reasons or basis for disallowing the claim regarding short-term capital loss of the assessee. The AO found, since the transaction is in the nature of speculation in accordance with Explanation to Section 73, therefore, he did not find necessary to consider Section 43(5). It does not mean that the burden of assessee to prove that the loss was not speculative loss, stands automatically discharged.
7.9 In subsequent year in asst. yr. 1992-93 the AO applied Section 94 of the Act and dividend income Rs. 19,50,000 from units of UTI has been taxed substantively in the hands of M/s Peerless General Finance & Investment Co. Ltd. based at Calcutta and protectively in the hands of the assessee. The related loss of Rs. 20,40,000 has not been taken into consideration for computing the income of the assessee, as the transactions were treated "as no transactions had taken place". This fact also supports the view that the transaction for the year under consideration is speculative transaction in accordance with Section 43(5).
In the light of above discussion the action of the Revenue authorities in disallowing the claim of the assessee regarding short-term capital loss 'deserves to be uphold.8. Now we examine the' stand of assessee that units of UTI purchased were as "investment" and its claim of short-term capital loss is correct. A general accepted mathematical formula of calculation of profit/loss on purchase or sale is, sale price - purchase price = profit/loss. According to this formula the calculation of profit/loss for disputed transactions is as under: (Rs. 18,00,000 was the part of sale consideration of sale of units of UTI, therefore, same is added to consider the total sale consideration).
From above calculation it is clear that the claim of the assessee of loss of Rs. 18,30,000 is not correct.
For the purpose of systematic accounting of those disputed transactions, we may refer "Chapter 22", Investment Accounts of an accounting book, Modem Accountancy Volume II by A Mukherjee M Hanif Fourth Reprint Edition 1998. Some relevant material from said Chapter is reproduced below : "A business may buy shares, debentures, bonds, stocks, etc. of other businesses either to provide a continuous source of income and to control the affairs of another business or the earn some return on idle cash. The former types of investments are treated as fixed, assets because they are held for a long period and are known as Trade Investments. The latter types of investments are treated as current assets and are known as Marketable Securities. Marketable Securities are expected to be converted into cash within a very short period of time. These are held as a temporary means of earning income on funds eventually intended for other use." Here it is pertinent to mention the finding of the AO at p. 11 of his order for asst. yr. 1992-93, that the assessee can not be termed as "bona fide investor" because the assessee-company changed its investment at the time when the dividend of Rs. 19,50,000 was declared and assessee preferred to purchase 10 lacs units of UTI "cum-dividend basis" and sold back to the same company "ex-dividend basis". The similar nature of transaction is there for the year under consideration. Therefore, the above type of transaction is B in the nature of 'cum dividend' and 'ex dividend'. How these transactions are to be recorded in books of account, has been illustrated in above referred book at p. 968 Illustration No. 16.
The assessee purchased 10 lacs units of UTI on 28th May, 1990, at the rate which was 'cum dividend'. That any dividend received on pre-acquisition profit is credited to investment account. It is to be recorded in the 'cost column'. However, dividend received out of post-acquisition period is credited to 'income column'. The dividend received from pre-acquisition profit will reduce average cost of units and dividend from post-acquisition profit will increase the income. The holding period in the case of the assessee under consideration was 33 days only, 28th May, 1990 to 30th June, 1990, if the said dividend of UTI was pertaining to the year ended 30th June, 1990, then from following units accounts the calculation of dividend income from the disputed transactions comes to Rs. 1,62,740 and short-term capital loss Rs. 1,92,740 : On the basis of accounting system at the most the loss in the transactions was for Rs. 1,92,740 and dividend was Rs. 1,62,740. In view of this fact, the claim of assessee of loss of Rs. 18,30,000 is fit for rejection.
The decision referred by the learned authorised representative is not applicable, as the facts in this case are different from the facts of the case, under consideration. In the case of CIT v. Appolo Tyres Ltd. (supra) the issue before the Hon'ble Kerala High Court was, whether units of UTI are treated as shares and Explanation to Section 73 is applicable to be treated the business of purchasing and selling of units of UTI as speculation business, The facts of that case were that business in the purchase and sale of units and business in the manufacture and sale of tyres was constituted one and same business and the AO considered the dealing of assessee in the purchase and sale of units as business. Under these circumstances the Hon'ble Kerala High Court held that since units are not treated as shares neither under the Companies Act nor under the UTI Act and so the Explanation to Section 73 was not attracted. But such issue is not before us; the real issue of the case under consideration is whether the nature of the transaction is a "business" or "an investment" or a speculation business. Therefore, the above judgment is not applicable to the case under consideration. But it is relevant to note the observations of the Hon'ble Kerala High Court regarding object of insertion of Explanation to Section 73. The observation of the Court was based on a circular of CBDT. Circular No. 204, dt. 24th July, 1976 (1977) 110 ITR (St) 22, "Paragraph 19.2 of the Circular says that the object of this provision is to curb the device sometimes resorted to by business houses controlling groups of companies to manipulate and reduce the taxable income of companies under their control." After considering the stands of both sides, we think it proper to examine the intention of the assessee for carrying the transaction because to determine whether the transaction was in the nature of a business or in the nature of an investment, the intention of acquirer is the deciding factor. The principles underlying the distinction between a capital sale and an adventure in the nature of trade were examined by Hon'ble Supreme Court in G. Venkataswami Naidu and Co. v.CIT (1959) 35 ITR 594 (SC) where their Lordships held that the character of a transaction cannot be determined solely on the application of any abstract rule, principle or test but must depend upon all the facts and circumstances of the case. The observations of Hon'ble Supreme Court in the case of CUT v. Sutlej Cotton Mills Supply Agency Ltd (supra), referred by the learned Departmental Representative is reproduced below : "Mr. Chagla for the respondent contended that the only question to be asked and answered is what was the dominant intention of the assessee when it purchased the shares If the dominant intention was to carry on an adventure in the nature of business, the profit can be taxed; otherwise not. In other words, the question is whether the assessee purchased the shares in a commercial spirit with a view to make profit by trading in them. The Tribunal found, after taking into account all the relevant circumstances, that the dominant intention of the assessee was to make profit by resale of the shares and not to make an investment." From the facts and from the circumstances of the case under consideration, it has been found that the intention of assessee for carrying the transaction was neither of a business nor of an investment, the sole purpose was to avoid and reduce its tax liability.
These are admitted facts that during the year under consideration apart from claiming of short-term capital loss of Rs. 18,30,000 and its set off against other taxable income, the assessee on the basis of so-called dividend income of Rs. 18,00,000 claimed deduction under Section 80M for Rs, 10,40,000 and that advance tax. Rs. 28,00,000 deposited was claimed as refund. Not only in this year but in subsequent year, on the basis of same practice, short-term capital loss of Rs. 20,30,000 and deduction under Section 80M on dividend income of Rs. 19,50,000 were claimed. In view of these facts the principle of McDowell is clearly applicable in the case under consideration. It is pertinent to mention certain observations of their Lordships of Hon'ble Supreme Court which has been expressed in that case McDowell and Co.
Ltd v. CTO (1985) 159 ITR 148 (SC) that tax planning may be legitimate, provided it is within the framework of the law. Colourable devices cannot be part of the tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methods. It is the obligation of every citizen to pay the taxes honestly without restoring to subterfuges.
At the cost of repetition it may be held that even if short-term capital loss was to be allowed as per para No. 8 of this order, the short-term capital loss of Rs. 1,92,740 only and dividend income of Rs. 1,62,740 are allowable. But it is pertinent to mention here that above loss cannot be allowed because an excess relief has been already granted under Section 80M for Rs. 8,77,260 (10,40,000-1,62,740) as in that case the dividend income is to be considered only for Rs. 1,62,740. Under the facts of the case we are of the considered opinion that disallowance of loss of Rs. 18,30,000 is warranted, in view of it we uphold the disallowance of loss by the Revenue authorities on the aforementioned grounds.
9. The second ground relates to disallowance of Rs. 35,451 on account of garden expenses as business expenditure, The AO disallowed garden expenditure of Rs. 35,451 as the same was disallowed in last year. The CIT(A) also confirmed the said addition on the basis of his order of last year.
9.1 The learned authorised representative submitted that the issue is covered by the decision of Tribunal Ahmedabad "A" Bench in ITA No.3594/Ahd/94. The learned Departmental Representative has not controverted the fact. We respectfully follow the above decision of Tribunal and delete the addition of Rs. 35,451.
10. The third ground relates to the disallowance of Rs. 1,58,000 made by the AO on account of repairs to plant & machinery. The AO disallowed Rs. 1,58,000 out of repairs of plant and machinery and building account, on the ground that this expenditure was related to shifting as well as re-erection of processing machinery. The AO has treated these expenditures as capital expenditure and depreciation was allowed. The CIT(A) confirmed the said addition.
10.1 The learned authorised representative contended that books of account of the assessee were subject to audit and no such qualification was given by the auditor. The arguments and submissions put forward before the Revenue authorities have been reiterated before us. He cited a judgment of Hon'ble Delhi High Court in the case of CIT v. Delhi Cloth and General Mills Co. Ltd (1981) 131 1TR 641 (Del) the learned Departmental Representative relied on the orders of the Revenue authorities. He cited two judgments viz. (i) CIT v. Otis Elevator Co.
(I) Ltd, (1990) 51 Taxman 443 (Bom) and (ii) CIT v. Bimetal Bearings Ltd. (1994) 210 ITR 945 (Mad). In respect of above judgments, the learned authorised representative submitted that these decisions are not applicable in case of assessee as the facts are different, that the assessee shifted his machinery within the same factory premises whereas in these cases machinery were shifted from one place to another place.
10.2 We have considered the submissions made by the learned representatives of both the parties, perused the records and gone through the decisions cited by both the sides. It is admitted fact that the impugned expenditure was incurred for shifting of plant and machineries. It means that this expenditure was not incurred for the purpose of carrying on the concern but was incurred in setting up the concern with a greater advantage for the trade than it had in its previous set up. The expenditure was not incurred in earning profits but was incurred only for putting its machinery, factory, that is, its capital, in better shape so that it might produce larger profits when worked. Therefore, the expenditure incurred in dismantling and refitting the existing plant at a better site produced an advantage which enabled the trade to prosper and which could be expected to last for ever and was, therefore, capital expenditure. We refer a decision of Hon'ble Madras High Court CIT v. Bimetal Bearing Ltd. (supra). The issue is decided against the assessee and in favour of the Revenue. The orders of Revenue authorities are confirmed.
11. The fourth ground relates to disallowance of Rs. 52,963 of architect fees. The AO disallowed an amount of Rs. 52,963 on account of architect fees as no details were produced, The CIT(A) confirmed the action of the AO and treated it as capital expenditure.
11.1 The learned authorised representative drew our attention on p. 61 of the paper book where details of provision of architect fees is given. The details given are as under : It appears from the record that these details were not given to Revenue authorities. Furthermore the papers of paper book have not been properly certified as required by Rule 18 (Income-tax Appellate Tribunal Rules, 1963).
11.2 Under these circumstances, without going on merit of the issue, we set aside the orders of Revenue authorities on this issue and restore the matter back to the CIT(A) to examine the issue on the line that whether this expenditure is related to the year under consideration and the architect fee was related to the work as given in the above details, which have been allowed as revenue expenditure, then naturally the architect fee will be allowed as revenue expenditure. If is relates to capital expenditure, then this architect fee will also be treated as capital expenditure. The CIT(A) is directed to decide this issue afresh in accordance with law and in accordance with above discussion after giving reasonable opportunity of hearing to both the sides.
12. Ground No. 5 relates to disallowance of Rs. 9,486 as entertainment expenses. The learned authorised representative did not press this ground, therefore, the same is rejected, as not pressed.
13. Ground No. 6 relates to disallowance of Rs. 48,000 professional charges. The above amount involved two payments : Rs. 12000 paid for survey, maps, etc., and Rs. 36,000 for developing Computer FAS system.
The AO treated these expenditures as capital expenditure. The CIT(A) has confirmed the action of the AO, The learned authorised representative explained that Rs, 12,000 was paid for survey and preparing map showing open and construction portion for the purpose of payment of municipal tax. The another payment is for developing a computer programme. The purpose of expenditure related to computer programme was to facilitate the running of business and to do accounting and office work economically, efficiently, quickly, accurately and in better presentation form. All these relate to save revenue expenditure of the business. The programme developed is only to be used by the assessee not for the public at large. Not only this but looking to the economic globalisation particularly in computer area such expenditure cannot be treated as capital expenditure. After considering totality of facts and the circumstances of the case, we hold that these are revenue expenditures. The orders under appeal of Revenue authorities relating to this issue are set aside and addition of Rs. 48,000 is deleted.
14. In the result, the appeal of the assessee is allowed in part for statistical purpose.