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Income Tax Appellate Tribunal, G BENCH, MUMBAI
IN THE INCOME TAX APPELLATE TRIBUNAL "G" BENCH, MUMBAI SHRI B.R. BASKARAN, ACCOUNTANT MEMBER SHRI RAHUL CHAUDHARY, JUDICIAL MEMBER (Assessment Year: 2010-11) Deputy Commissioner of Income Tax, Room No. 609, 6th Floor, Aayakar Bhavan, M.K. Road, Mumbai - 400020 ……………… Appellant M/s Satya Securities Ltd., Vs 1009, Maker Chamber-V, 10th Floor, Nariman Point, Mumbai - 400021 …………. Respondent [PAN: AAECS9414M] Appearances For the Appellant/Department : Shri A.K. Das For the Respondent/Assessee : Shri A.K. Tibrewal & Saurabh Gupta Date of conclusion of hearing : 15.11.2022 Date of pronouncement of order : 31.01.2023
O R D E R Per Rahul Chaudhary, Judicial Member: 1. By way of the present appeals the Revenue has challenged the order, dated 25/08/2016, passed by the Ld. Commissioner of Income Tax (Appeals)-8, Mumbai [hereinafter referred to as „the CIT(A)‟] for the Assessment Year 2010-11, whereby the Ld. CIT(A) had partly allowed the appeal against the Assessment Order, dated 30/03/2013.
The Revenue has raised following grounds of appeal:
1. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was right in deleting the addition of Rs. 1,27,70,000/- made u/s 68 of the I.T. Act, 1961 on account of unsecured loans obtained.
Assessment Year: 2010-11 2. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was right in deleting the addition of Rs. 34,30,684/- on account of Devaluation of Share Price.
Whether on the facts and circumstances and in law, the Ld. CIT(A) has erred in not appreciating the fact that the amount of disallowance u/s 14A of the I.T. Act, 1961 has to be computed as per Rule 8D of I.T. Rules, 1962 when the computation of the assessee was not found to be correct and as held in the order of the Hon‟ble High Court in the case of M/s Godrej & Boyce Manufacturing Co. Ltd.
The appellant prays that the order of CIT(A) on the above ground be set aside and that of the Assessing Officer be restored.”
3. The relevant facts, in brief, are that Assessee is closely held public limited engaged in the business of trading shares & securities, and making investment in shares, debentures, bonds etc. The Assessing Officer completed the assessment vide Assessment Order, dated 30/03/2013, after making, inter alia, an addition of INR 1,27,70,000/- under Section 68 the Income Tax Act, 1961 Act of the (hereinafter referred to as „the Act‟), disallowance of INR 12,98,886/- under Section 14A of the Act and an addition of INR 34,30,684/- on account of devaluation of the share price. The Assessee preferred appeal before the CIT(A) against the Assessment Order and challenged, inter alia, the aforesaid disallowance/addition made by the Assessing Officer. The CIT(A) partly allowed the appeal vide order dated 25.08.2016 and deleted the aforesaid addition of INR 1,27,70,000/- under Section 68 of the Act, restricted disallowance under Section 14A of the Act to INR 38,147/- and deleted the addition of INR 34,30,684/- on account of devaluation of the share price. The Revenue is now in appeal before us against the aforesaid relief granted by the CIT(A).
Assessment Year: 2010-11 Ground No.1 4. Ground No. 1 raised by the Revenue pertains to the order of the CIT(A) deleting the addition of INR 1,27,70,000/- made by the Assessing Officer under Section 68 of the Act holding the same to be unexplained cash credit.
During assessment proceedings the Assessee was asked to furnish details of unsecured loans. The assessing officer noted that during the relevant previous year the Assessee had received fresh loan of INR 1,27,70,000/- from M/s Basant Marketing Private Limited (BMPL). The Assessee was asked to furnish loan confirmations, copy of income tax returns and bank statements to prove the identity, genuineness and creditworthiness of the loan creditors/transaction. In response, the Assessee furnished the aforesaid documents/details. However, the Assessing Officer was not satisfied and concluded that the Assessee had failed to discharge the onus of proving the genuineness of the transaction and creditworthiness of the lender (i.e. BMPL). The Assessing Officer noted that the Assessee and BMPL were part of the same group of companies, managed and control by Sh. Harsh Dalmia and Arun Dalmia. Placing reliance upon the letter dated 12/12/2013 received from the assessing officer of BMPL the Assessing Officer concluded that BMPL was engaged in the business of providing accommodation entries by way of bogus purchases and loans transactions to various beneficiaries. The Assessing Officer also took note of the fact that a search action was carried out by CBI-ACB, Mumbai at the premises of Sh. Arun Dalmia and Sh. Harsh Dalmia during which it was found that 20 companies were floated by them which were engaged in showing bogus purchase and sale of software. In the aforesaid facts and 3
Assessment Year: 2010-11 circumstances the Assessing Officer made an addition of INR 1,27,70,000/-, being fresh loan taken from BMPL during the relevant previous year, under Section 68 of the Act.
Being aggrieved the Assessee carried the issue in appeal before CIT(A). In the appellate proceedings before the CIT(A) it was contended on behalf of the Assessee that the findings of the Assessing Officer were based upon conjecture and surmise. The Assessing Officer had relied upon the assessment order passed in the case of BMPL for the assessment year 2010-11. However, the findings given by the Assessing Officer in the aforesaid assessment order have been overturned in appeal by the CIT(A) – 20, Kolkatta. The order passed by the CIT(A)-20, Kolkatta has been accepted by the Revenue and no appeal has been preferred against the same. A copy of the order passed by CIT(A)-20, Kolkatta was also placed on record. It was also contended that the Assessee had furnished all the relevant documents/details desired by the Assessing Officer and had, therefore, discharged the onus cast upon the Assessee. It was also brought to the knowledge of the CIT(A) that BMPL has been regularly assessed to tax. Taking note of the aforesaid, the CIT(A) deleted the addition of INR 1,27,70,000/-, made by the Assessing Officer under Section 68 of the Act by placing reliance upon his own order, dated 25/8/2016, passed in appeal for the Assessment Year 2005 – 06.
Being aggrieved the Revenue is now in appeal before us.
The Learned Department Representative relied upon the Assessment Order and took us through the findings recorded by the Assessing Officer therein. Per contra Learned Authorised Representative for the Assessee reiterated the submissions 4
Assessment Year: 2010-11 made before the CIT(A) and supported the order passed by the CIT(A).
We have heard the rival submission and perused the material on record. On perusal of the Assessment Order we find that while the assessing officer has made a reference to the search action conducted by the CBI – ACB, Mumbai, the basis of addition of INR 1,27,70,000/- made by the Assessing Officer under section 68 of the Act was the assessment order passed in the case of the BMPL for the Assessment Year 2010-11 which has since been overturned by the CIT(A) 20, Kolkatta vide order dated 30.01.2015 (placed at page 95 to 120 of the paper- book). Further, the order passed by CIT(A) -20, Kolkatta in appeal has also been accepted by the Revenue. A status report, dated 23.02.2016, to this effect has also been placed at page 88 of the paper-book. The averment made on behalf of the Assessee that BMPL is being assessed to tax on a regular basis has not been controverted. Further, there is nothing on record to show that the order passed by the CIT(A) for the Assessment Year 2005-06 on which the reliance was placed by granting relief to the Assessee in appeal for the assessment year before us has, since, been overturned.
In view of the above, we do not find any infirmity in the order passed by the CIT(A) on this issue. Accordingly, Ground No. 1 raised by the Revenue is dismissed.
Ground No. 2 11. Ground No. 2 pertains to order of CIT(A) deleting the addition of INR. 34,30,684/- on account of Devaluation of Share Price.
During assessment proceedings, the Assessing Officer noted 5
Assessment Year: 2010-11 that the Assessee had claimed business loss of INR 34,30,684/- on account of revaluation of shares forming part of the closing stock. The Assessing Officer rejected the claim holding that the Assessee had claimed arbitrary loss since there was no actual sale of shares during the relevant previous year.
Before the CIT(A), it was contended on behalf of the Assessee that closing stock of shares were valued on the closing date at cost or market price, whichever is lower based upon price quoted at the BSE Stock Exchange. The aforesaid basis of valuation of closing stock has been adopted by the Assessee consistently over the years and there was no change the method of valuation. Further the same Assessing Officer had accepted similar evidences in respect of valuation of closing stock for the assessment years 2005–06 and 2006–07. Therefore, there was no justification in adopting a different approach by the Assessing Officer. The CIT(A) called for remand report from the Assessing Officer. In the remand report shifted the stands and submitted that valuation of closing stock based upon mark to market was not permissible. The CIT(A) referring to his decision in appeal for the Assessment Year 2005-06 and relying upon the judgment of the Hon‟ble Supreme Court in the case of Chainrup Sampatram Vs. CIT (24 ITR 481) and CIT vs. Woodward Governor 294 ITR 451 (SC), overturned the decision of the Assessing Officer and allowed claim of business loss of INR 34,30,684/-.
Being aggrieved the Revenue is now in appeal before us.
Both the sides reiterated the submissions made before the authorities below. We have considered the rival submissions and perused the material on record. The contention of the 6
Assessment Year: 2010-11 Assessee that the same method of valuation as been consistently adopted by the Assessee over the years and that there has been no change in the method of valuation followed by the Assessee has not been controverted. Further, the valuation of closing stock on the basis of mark to market by taking lower of cost or market price as on closing date has been accepted. The CIT(A) has deleted the addition by placing reliance on the judgments of the Hon‟ble Supreme Court which support the case of the Assessee. In the case of Chainrup Sampatram (supra), the Hon‟ble Supreme Court has observed as under: “While we agree with the conclusion that no part of the profits of the firm in the accounting year can be said to have accrued or arisen at Bikaner, the reasoning by which the learned Judges arrived at that conclusion seems to us, with all respect, to proceed on a misconception. It is wrong to assume that the valuation of the closing stock at market rate has, for its object, the bringing into charge any appreciation in the value of such stock. The true purpose of crediting the value of unsold stock is to balance the cost of those goods entered on the other side of the account at the time of their purchase, so that the cancelling out of the entries relating to the same stock from both sides of the account would leave only the transactions on which there have been actual sales in the course of the year showing the profit or loss actually realised on the year's trading. As pointed out in paragraph 8 of the Report of the Committee on Financial Risks attaching to the holding of Trading Stocks, 1919, "As the entry for stock which appears in a trading account is merely intended to cancel the charge for the goods purchased which have not been sold, it should necessarily represent the cost of the goods. If it is more or less than the cost, then the effect is to Assessment Year: 2010-11 state the profit on the goods which actually have been sold at the incorrect figure ................... From this rigid doctrine one exception is very generally recognised on prudential grounds and is now fully sanctioned by custom, viz., the adoption of market value at the date of making up accounts, if that value is less, than cost. It is of course an anticipation of the loss that may be made on those goods in the following year, and may even have the effect, if prices rise again, of attributing to the following year's results a greater amount of profit than the difference between the actual sale price and the actual cost price of the goods in question" (extracted in paragraph 281 of the Report of the Committee on the Taxation of Trading Profits presented to British Parliament in April 1951). While anticipated loss is thus taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into the account, as no prudent trader would care to show increased profit before its actual realisation. This is the theory underlying the rule that the closing stock is to be valued at cost or market price whichever is the lower, and it is now generally accepted as an established rule of commercial practice and accountancy. As profits for income- tax purposes are to be computed in conformity with the ordinary principles of commercial accounting, unless of course, such principles have been superseded or modified by legislative enactments unrealised profits in the shape of appreciated value of goods remaining unsold at the end of an accounting year and carried over to the following year's account in a business that is continuing are not brought into the charge as a matter of practice, though, as already stated, loss due to a fall in price below cost is allowed even if such loss has not been actually realised. As truly observed by one of the learned Judges in Whimster & Co. v. Commissioners of Inland Revenue [1926] 12 Tax Cas. 813, 837, "Under this law
Assessment Year: 2010-11 (Revenue law) the profits are the profits realised in the course of the year. What seems an exception is recognised where a trader purchased and still holds goods or stocks which have fallen in value. No loss has been realised. Loss may not occur. Nevertheless, at the close of the year he is permitted to treat these goods or stocks as of their market value". (Emphasis Supplied)
The above decision of the Hon‟ble Supreme Court was relied upon by the Mumbai Bench of the Tribunal in the case of Edelweiss Capital Limited v. ITO [2010] 8 taxmann.com 157 (Mum.). The CIT(A) has granted relief to the Assessee by following the aforesaid judgment/decision.
In view of the above we do not find any infirmity in the order passed by CIT(A) allowing the claim of business loss of INR 34,30,684/-. Accordingly, Ground No. 2 raised by the Revenue is dismissed.
Ground No. 3 18. Ground No. 3 pertains to the disallowance of INR 12,98,886/- made under Section 14A of the Act. During the assessment proceedings it was submitted by the Assessee that no direct expenditure was incurred in relation to earning tax exempt income of INR 7,44,000/-. However, the Assessing Officer rejected the aforesaid contention and proceeded to compute disallowance at INR 13,95,648/- by invoking provisions of Section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 (hereinafter referred to as „the Rules‟). The Assessing Officer, however, made a disallowance of INR 12,98,886/- under Section 14A of the Act being total
Assessment Year: 2010-11 expenditure claimed by the Assessee.
In appeal, the CIT(A) restricted the disallowance to INR 38,147/- being the actual Dmat charges/STT/direct expenses following the order, dated 25/08/2016 passed by the CIT(A) in appeal for the Assessment Year 2008-09.
We note that while deciding a batch of Special Leave Petitions filed before the Hon'ble Supreme Court, vide judgment dated 12.02.2018, passed in the case of Maxopp Investments Ltd vs. CIT [2018] 402 ITR 640, has held as that earning of exempt dividend income in respect of shares held as stock-in-trade, though incidental or by quirk of fate, triggers the provisions of Section 14A of the Act. Therefore, based upon the theory of apportionment of expenditure between taxable and non- taxable income as held by the Hon'ble Supreme Court in the case of CIT Vs. Walfort Share and Stock Brokers P. Ltd [2010] 326 ITR 1 (SC), the expenditure incurred in acquiring such shares which are held as stock-in-trade would have to be apportioned.
We note that the total exempt dividend income earned by the Appellant during the relevant previous year of INR 7,44,000/- Assessing Officer made a disallowance of INR 12,98,886/- under Section 14A of the Act read with Rule 8D which is more than the exempt income. Whereas the CIT(A) computed the disallowance at INR. 38,147/-. Keeping in view, the above judgment of the Hon‟ble Supreme Court and the facts of the case, we hold that 10% of the exempt income as fair apportionment representing expenses attributable to earning exempt income. In terms of the aforesaid Ground No. 3 raised by the Revenue is partly allowed. 10
Ground No. 4 22. In Ground No. 4 Revenue has sought remand of the issues raised in appeal. We have dismissed Ground No.1 &2, whereas Ground No. 3 has been partly allowed. Accordingly, Ground No. 4 raised by the Revenue is disposed off as being infructuous.
In the result, the present appeal is partly allowed.
Order pronounced on 31.01.2023.