DCIT CIR 3(1), MUMBAI v. EQUEST (INDIA). P. LTD, MUMBAI

ITA 5967/MUM/2009 | 2006-2007
Pronouncement Date: 15-07-2011 | Result: Allowed

Appeal Details

RSA Number 596719914 RSA 2009
Assessee PAN AAACE2414P
Bench Mumbai
Appeal Number ITA 5967/MUM/2009
Duration Of Justice 1 year(s) 8 month(s) 6 day(s)
Appellant DCIT CIR 3(1), MUMBAI
Respondent EQUEST (INDIA). P. LTD, MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 15-07-2011
Appeal Filed By Department
Order Result Allowed
Bench Allotted E
Tribunal Order Date 15-07-2011
Date Of Final Hearing 12-07-2011
Next Hearing Date 12-07-2011
Assessment Year 2006-2007
Appeal Filed On 09-11-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH E BEFORE SHRI PRAMOD KUMAR ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO JUDICIAL MEMBER ITA NO.5967/MUM/09 (ASSESSMENT YEAR : 2006-07) DY. COMMISSIONER OF INCOME TAX 3(1)(3) AAYAKAR BHAVAN M.K.ROAD MUMBAI-400 020. VS. M/S. EQUEST (INDIA) PVT. LTD. 75/77 PARK HOUSE ANNEXE WODE HOUSE ROAD COLABA MUMBAI-400 005 PAN : AAACE2414P APPELLANT. RESPONDENT. C.O. NO.121/MUM/2010 (IN ITA NO.5967/MUM/09) (ASST. YEAR : 2006-07) M/S. EQUEST (INDIA) PVT. LTD. MUMBAI-400 005 VS. INCOME TAX OFFICER 3(1)(3) AAYAKAR BHAVAN M.K.ROAD MUMBAI. APPELLANT. RESPONDENT. APPEARANCES : NISHANT THAKKAR FOR ASSESSEE. C.G.K. NAIR FOR REVENUE. O R D E R PER PRAMOD KUMAR : ITA 5967/MUM/2009 : BY WAY OF THIS APPEAL ASSESSING OFFICER HAS CHALL ENGED CORRECTNESS OF CIT(A)S ORDER DATED 26 TH AUG. 2009 FOR THE ASSESSMENT YEAR 2006-07 ON T HE FOLLOWING GROUNDS : ITA NO.5967/MUM//09 & C.O. 121/MUM/2010 - 2 - ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) ERRED IN RESTRICTING THE LOSS FROM EQUINE BREEDING ACTIVITY AT RS.45 11 294 AS AGAINST RS.59 19 934 COMPUTED BY THE ASSESSING OFFICER. 2. LEARNED COUNSEL FOR THE ASSESSEE SUBMITS THAT GI VEN THE PRESENT SITUATION THIS IS INCONSEQUENTIAL ISSUE AND HE DOES NOT OPPOSE THE GR OUND OF ASSESSING OFFICER. 3. GRIEVANCE OF THE ASSESSING OFFICER IS ACCORDING LY UPHELD. 4. THE APPEAL FILED BY THE ASSESSING OFFICER IS THU S ALLOWED. C.O. NO.121/MUM/2010 5. THAT TAKES US TO THE CROSS OBJECTION FILED BY TH E ASSESSEE WHICH ALSO CHALLENGES CIT(A)S ORDER FOR THE ASSESSMENT YEAR 2006-07. 6. IN THE FIRST GROUND OF CROSS OBJECTION THE ASSE SSEE HAS RAISED THE FOLLOWING GRIEVANCE : 1. THE CIT(A)-XXVIII MUMBAI ERRED IN DISMISSING THE GROUND OF APPEAL BEFORE HER THAT THE PROVISIONS OF SECTION 74 A(3) OF I.T. ACT ARE NOT APPLICABLE IN THE CASE OF THE RESPONDENT. 7. LEARNED REPRESENTATIVES FINALLY AGREE THAT THIS ISSUE IS COVERED AGAINST THE ASSESSEE BY TRIBUNALS ORDER IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEARS 1999-2000 AND 2000-01 WHEREIN SPEAKING THROUGH ONE OF US (I.E. ACCOUNTAN T MEMBER) THE CO-ORDINATE BENCH OBSERVED AS FOLLOWS : HAVING CAREFULLY CONSIDERED FACTS OF THE CASE W E ARE OF THE CONSIDERED VIEW THAT BUSINESS ACTIVITY OF THE ASSESSEE IS TO OWN AN D MAINTAIN THE RACE HORSES SINCE THE DOMINANT PURPOSE OF ALL HIS ACTIVITIES IS TO AC QUIRE AND MAINTAIN THE RACE ITA NO.5967/MUM//09 & C.O. 121/MUM/2010 - 3 - HORSES. THE ACTIVITY OF LEASING MARES FOR BREEDING ENTERING INTO LEASE OPTIONS AND ALL OTHER ACTIVITIES ARE WHOLLY INCIDENTAL TO A SSESSEES MAIN ACTIVITY OF OWNING AND MAINTAINING THE RACE HORSES. THE SALE OF HORSES BY THE A. IS ESSENTIALLY SALE OF RACING DISCARDS AS EVIDENT FROM THE FACT THAT DURI NG THE COURSE OF THIS HEARING AND DESPITE A SPECIFIC REQUISITION FROM US TO THAT EFFECT ASSESSEE COULD NOT POINT OUT A SINGLE CASE IN WHICH THE ASSESSEE HAS SOLD A RACE HORSE. IN CASE BREEDING OF HORSES WAS ITSELF AN ACTIVITY FOR COMMERCIAL GAINS IT WOULD HAVE MADE COMMERCIAL SENSE TO SELL SOME OF THE FOALS OR FILLI ES WHO ARE DOING WELL IN THE RACE COURSE BUT THAT HAS NOT HAPPENED. ONLY SUCH HORSE S ARE SOLD WHO DO NOT HAVE RACING POTENTIAL. WHEN BREEDING IS COMMERCIAL ACTIV ITY THERE CANNOT BE ANY JUSTIFICATION IN KEEPING THE BEST FOALS AND FILLIES UNSOLD. THE SALE OF HORSES IS THUS NOT THE MAIN PURPOSE BUT ESSENTIALLY INCIDENTAL ACT IVITY. IN THE CASE BEFORE US THEREFORE BREEDING OF HORSES CANNOT BE VIEWED AS A COMMERCIAL ACTIVITY IT IS ONLY INCIDENTAL TO THE ACTIVITY OF AS IS THE EXPRESSIO N IN SECTION 74A(3) OWNING AND MAINTAINING HORSES. THE WORDS ACTIVITY OF ARE N EITHER SUPERFLUOUS NOR UNINTENDED. TO OUR UNDERSTANDING THESE WORDS CONN OTE WIDE COVERAGE OF THE EXPENSES; THE EXPENSES NEED NOT ONLY BE FOR OWNING AND MAINTAINING THE RACE HORSES BUT CAN ALSO INCLUDE EXPENSES FOR THE ACTIV ITY OF OWNING AND MAINTAINING RACE HORSES. THIS WOULD INCLUDE ALL SUCH INCIDENTA L ACTIVITIES AS ARE SUBSERVIENT AND ESSENTIALLY LINKED TO OWNING AND MAINTAINING T HE HORSE RACES. THE EXPENSES ON BREEDING OF HORSES FOR THE PURPOSE OF AND AIMED AT OWNING AND DEVELOPING RACE HORSES IS THUS INCLUDED IN THE SCOPE OF SECTI ON 74A(3) OF THE ACT. NO DOUBT ONE OF THE MAIN OBJECTIVES OF THE ASSESSEE COMPANY IS BREEDING MAINTAINING AND RACING OF HORSES BUT THIS EXPRESSION IS ALSO TO BE VIEWED IN ITS SENSE AND VIEWED IN THIS PERSPECTIVE BREEDING AND MAINTAINING OF HO RSES IS ONLY TO THE EXTENT LINKED TO RACING OF HORSES. THE FACTS OF THE CASE ALSO DE MONSTRATE THIS. IN VIEW OF THESE DISCUSSIONS IN OUR CONSIDERED VIEW ACTIVITY OF BR EEDING OF HORSES CANNOT BE VIEWED AS AN INDEPENDENT COMMERCIAL ACTIVITY. WE A RE THEREFORE NOT INCLINED TO UPHOLD ASSESSEES CONTENTION THAT ASSESSEE WAS ENGA GED IN THE BUSINESS OF BREEDING OF HORSES. IN OUR CONSIDERED VIEW THE AS SESSEE WAS ENGAGED IN THE BUSINESS ACTIVITY OF OWNING AND MAINTAINING THE RAC E HORSES. THE NEXT QUESTION THEN IS WHETHER THE EXPENSES INC URRED BY THE ASSESSEE COULD BE SAID T BE CAPITAL EXPENDITURE AND WHETHER IT COULD BE SAID THAT THE BUSINESS OF THE ASSESSEE HAD COMMENCED. TO DECIDE WHETHER OR NOT A BUSINESS HAS COMMENCED IT IS NOT REALLY NECESSARY THAT EARNING OF REVENUES MU ST HAVE STARTED. LEARNED COUNSEL FOR THE ASSESSEES RELIANCE ON HON'BLE SUPR EME COURTS CONFIRMING THE GUJARAT HIGH COURT DECISION IN THE CASE OF SARABHAI MANAGEMENT CORP (SUPRA) IS QUITE APPROPRIATE BECAUSE HON'BLE SUPREME COURT HAS APPROVED THIS PROPOSITION THEREIN. WE AGREE WITH THE LEARNED COUNSEL WITH I T IS NOT A GERMANE CONSIDERATION THAT THE ASSESSEE ;DID NOT EARN ANY R EVENUES IN THE RELEVANT PREVIOUS YEAR. THE AUTHORITIES BELOW WERE MISGUIDE D IN THEIR APPROACH. WE DECLINE TO APPROVE THE SAME. WHAT IS NECESSARY IN OUR CONSIDERED VIEW THAT THE ASSESSEE SHOULD START WORKING ON THE MAIN ACTIVITY FOR WHICH BUSINESS IS SET UP AND THE INFRASTRUCTURE TO DO SO SHOULD BE IN PLACE. IN THE COMPLEX WORLD OF ITA NO.5967/MUM//09 & C.O. 121/MUM/2010 - 4 - BUSINESS IT TAKES A WHILE BEFORE THE RESULTS OF BU SINESS HAVING BEEN SET UP START MATERIALIZING. HOWEVER ONCE THE BUSINESS PROCESS IS SET ROLLING AND JUST BECAUSE THE ASSESSEE MAY STILL BE A STEP AWAY FROM THE CORE COMMERCIAL ACTIVITY IT CANNOT BE SAID THAT BUSINESS HAS NOT COMMENCED. BREEDING O F HORSES IS AN ESSENTIAL PART OF THE BUSINESS OF BREEDING OWNING AND MAINTAININ G RACE HORSES AND THAT ACTIVITY HAVING BEEN STARTED IN THE RELEVANT PREVIO US YEAR IT COULD NOT BE SAID THAT THE BUSINESS HAD NOT COMMENCED. THE ASSESSEE HAD AL SO ENTERED INTO OPTION ARRANGEMENTS AND THE PROCESS OF ACQUISITION OF RACE HORSES HAD ALSO THUS STARTED. ON THESE FACTS IN OUR CONSIDERED VIEW THE BUSINES S OF THE ASSESSEE HAD COMMENCED IN THE RELEVANT PREVIOUS YEAR. AS FOR TH E QUESTION WHETHER THE EXPENSES INCURRED BY THE ASSESSEE IN THIS YEAR COUL D BE SAID TO BE CAPITAL EXPENDITURE WE ARE NOT PERSUADED BY THE REASONING OF THE AUTHORITIES BELOW. THE EXPENSES INCURRED BY THE ASSESSEE ARE NOT DIRECTLY FOR THE PURPOSES OF ACQUISITION OF AN ASSET OR FOR ANY ENDURING BENEFIT BUT ONLY FACILITATE ACQUISITION OF AND DEVELOPING THE RACE HORSES. THE ASSESSEE HAS PAID LEASE CHARGES FOR THE MARES BUT IN CONSIDERATION THEREOF THE ASSESSEE ONLY GE TS THE MARES FOR A LIMITED PERIOD. THE LEASE OPTION CHARGES ALSO ONLY FACILIT ATE ASSESSEES ACQUISITION OF GOOD POTENTIAL RACE HORSES BUT CANNOT BE SAID TO BE PAYMENT FOR SUCH RACE HORSES BECAUSE EVEN AFTER ENTERING INTO OPTIONS ARRANGEME NT THE ASSESSEE HAS TO ACTUALLY PAY FOR FOALS OR FILLIES WHEN THE ASSESSEE SO ACQUIRES THE FOALS AND FILLIES IN EXERCISE OF THE OPTION. AS REGARDS PAYMENT FOR TRANSPORTATION CHARGES OF MARES MEDICAL COSTS AND TRAINING COSTS WE FIND TH AT THESE EXPENSES ARE OF INHERENTLY REVENUE NATURE IN THE ORDINARY COURSE OF ASSESSEES BUSINESS AND JUST BECAUSE THESE EXPENSES ARE LINKED TO SOME CAPITAL A SSET THESE EXPENSES CANNOT TAKE COLOUR OF CAPITAL EXPENDITURE. AS OBSERVED BY THE HONBLE MADRAS HIGH COURT IN THE CASE OF BUSH BOAKE ALLEN INDIA LTD. (1 35 ITR 306) THE ONLY MERIT OF SUCH AN ARGUMENT IS ITS APPARENT LOGICAL SIMPLICITY . ALTHOUGH THESE OBSERVATIONS WERE MADE IN THE CONTEXT OF LEGAL EXPENSES BEING VI EWED AS CAPITAL EXPENSES AS THE TRANSACTION FOR WHICH LEGAL EXPENSES WERE INCUR RED WAS IN THE CAPITAL FILED WE ARE OF THE VIEW THAT THESE OBSERVATIONS ARE EQUALLY RELEVANT IN THE PRESENT CONTEXT AND IT IS EQUALLY NOT POSSIBLE TO VIEW ALL THESE EX PENSES AS DERIVATE EXPENSES TAKING ITS COLOUR FROM THE TRANSACTIONS TO WHICH TH EY RELATE. AN EXPENSES RELATABLE TO A RACING HORSE CANNOT THEREFORE BE VIEWED AS A CAPITAL EXPENDITURE SIMPLY BECAUSE THE RACING HORSE IS TO BE VIEWED AS CAPITAL ASSET. THE DISALLOWANCE ON ACCOUNT OF EXPENSES BEING TREATED AS CAPITAL EXPENS ES THEREFORE DELETED. THAT TAKES US TO THE QUESTION WHETHER THE PROVISIO NS OF SUB-SECTION 74A(3) WILL BE ATTRACTED IN THIS YEAR. IT IS INTERESTING TO NOTE THAT THIS SECTION BEGINS WITH THE WORDS IN THE CASE OF AN ASSESSEE BEING AN OWNER OF HORSES MAINTAINED BY HIM FOR RUNNING IN HORSE RACES AND THEREFORE THE PROVI SIONS OF THIS SUB SECTION CAN ONLY COME INTO PLAY WHEN THE ASSESSEE IS A OWNER OF RACE HORSES ALTHOUGH ONCE AN ASSESSEE IS FOUND TO BE COVERED BY THIS EXPRESSI ON THE SPECIAL TREATMENT IS NOT CONFINED TO EXPENSES ON OWNING AND MAINTAINING THE RACE HORSES BUT IS EXTENDED TO THE ACTIVITY OF OWNING AND MAINTAINING RACE HO RSES. IN THE PRESENT YEAR IT IS NOT EVEN THE CASE OF THE REVENUE THAT THE ASSESSEE OWNED ANY RACE HORSES. ITA NO.5967/MUM//09 & C.O. 121/MUM/2010 - 5 - THEREFORE FOR THIS ASSESSMENT YEAR AND PARTICULARL Y BEARING IN MIND THE FACT THAT THE ASSESSEE DID NOT OWN ANY RACE HORSES THE PROVI SIONS OF SUB SECTION 74A(3) DO NOT COME INTO PLAY. WE HOLD SO. 8. GROUND NO.1 IS THUS DISMISSED. 9. IN GROUND NOS.2 & 3 THE ASSESSEE HAS RAISED THE FOLLOWING GRIEVANCES : 2. THE CIT(A) ERRED IN CONFIRMING THE DISALLOWANC E U/S.14A OF THE I.T. ACT OF RS.3 07 368 COMPUTED BY THE ASSESSING OFFICE R BY APPLYING RULE 8D OF THE I.T. RULES. YOUR RESPONDENT SUBMITS THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF ITS CASE RULE 8D OF THE I.T. RULES IS NOT APPLICAB LE FOR THE A.Y. 2006-07. 3. WITHOUT PREJUDICE TO THE ABOVE IT IS SUBMITTE D THAT THE DISALLOWANCE U/S.14A READ WITH RULE 8D OF I.T. RULES AS WORKED O UT BY THE ASSESSING OFFICER AT RS.3 07 368 IS HIGHLY EXCESSIVE AND UNRE ASONABLE. 10. LEARNED REPRESENTATIVES FAIRLY AGREE THAT THE I SSUE IS COVERED BY HONBLE BOMBAY HIGH COURTS JUDGMENT IN THE CASE OF 328 ITR 81 AND ACCORDINGLY MATTER IS REQUIRED TO BE REMITTED TO THE FILE OF THE ASSESSING OFFICER FOR F RESH ADJUDICATION IN THE LIGHT OF LAW SO LAID DOWN BY THEIR LORDSHIPS. ACCORDINGLY WE REMIT THE MATTER TO THE FILE OF THE ASSESSING OFFICER FOR FRESH ADJUDICATION AS SUCH. 11. GROUND NO.2 & 3 ARE THUS ALLOWED FOR STATISTICA L PURPOSES. 12. IN GROUND NO.4 THE ASSESSEE HAS RAISED THE FOL LOWING GRIEVANCE : 4. THE CIT(A) ERRED IN DISMISSING THE AMENDED GR OUND OF APPEAL FILED BEFORE HER THAT THE CAPITAL GAINS ARE TO BE WORKED OUT WITH REFERENCE TO THE ACTUAL COST OF PURCHASE AND NOT WITH REFERENCE TO T HE MARKET VALUE ON THE DATE OF CONVERSION OF TRADING STOCK INTO INVESTMENTS. 13. LEARNED REPRESENTATIVES ALSO AGREE THAT THIS IS SUE IS ALSO A COVERED ISSUE -THIS TIME IN COVERED IN FAVOUR OF THE ASSESSEE BY TRIBUNALS DE CISION IN THE CASE OF ACIT VS. BRIGHT STAR INVESTMENTS PVT. LTD. (24 SOT 288) AND HONBLE BOMB AY HIGH COURTS JUDGMENT IN THE CASE ITA NO.5967/MUM//09 & C.O. 121/MUM/2010 - 6 - OF CIT VS. JANNHAVI INVESTMENTS (P) LTD. (304 ITR 2 76). WE ACCORDINGLY DIRECT THE ASSESSING OFFICER TO COMPUTE THE CAPITAL GAINS BY T AKING INTO ACCOUNT ORIGINAL COST OF ACQUISITION AND WITHOUT SPLITTING THE GAINS INTO PR OFITS TILL THE DATE OF CONVERSION AND CAPITAL GAIN THEREAFTER. THE ASSESSEE GETS THE RELIEF ACCO RDINGLY. 14. GROUND NO.4 IS ALLOWED. 15. IN THE RESULT CROSS OBJECTION IS PARTLY ALLOWE D IN THE TERMS INDICATED ABOVE. 16. TO SUM UP WHILE APPEAL OF THE ASSESSING OFFICE R IS ALLOWED AND THE CROSS OBJECTION FILED BY THE ASSESSEE IS PARTLY ALLOWED IN THE TERM S INDICATED ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 15.07.2011. SD/- SD/- (VIJAY PAL RAO) (PRAMOD KUMAR) JUDICIAL MEMBER ACC OUNTANT MEMBER MUMBAI DT.15.07.2011. *GPR TRUE COPY COPY TO : 1. THE ASSESSEE. 2. THE ASSESSING OFFICER. 3. CIT(APPEALS) 4. CIT 5. DEPARTMENTAL REPRESENTATIVE ITAT MUMBAI. 6. GUARD FILE. BY ORDER DY./ASST.REGISTRAR