M/S. CHECONS LIMITED,KOLKATA vs. A.C.I.T., CIRCLE-12(1), KOLKATA, KOLKATA

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ITA 629/KOL/2022Status: DisposedITAT Kolkata17 January 2023AY 2017-20184 pages
AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the mechanism for disallowance under Section 14A read with Rule 8D fails when investments are held for a very short period, making average investments zero. It also held that no disallowance under Section 14A can be made to book profit under Section 115JB.

What were the facts?

The assessee earned exempt income from mutual funds held as stock-in-trade. The AO disallowed expenses under Section 14A, and the CIT(A) upheld this, considering the shares held as stock-in-trade. The assessee also disputed additions made to book profit under Section 115JB.

What were the issues?

Whether expenses related to exempt income from stock-in-trade can be disallowed under Section 14A when the investment period is very short, and whether Section 14A disallowances can be added to book profit under Section 115JB.

Which sections of the Income-tax Act were involved?

Section 14A,Section 115JB,Section 94(7)

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Income Tax Appellate Tribunal, “SMC” BENCH: KOLKATA

Before: Shri Rajesh Kumar & Shri Sonjoy Sarma]

This is the appeal preferred by the assessee against the order of the Ld. Commissioner of Income Tax (Appeals)-NFAC, Delhi (hereinafter referred to as the Ld. CIT(A)”] dated 14.09.2022 for the AY 2017-18.

2.

Issue raised in ground no. 1 is general in nature and does not need any adjudication.

3.

Issue raised in ground no. 2 is against the order of Ld. CIT(A) upholding the addition of Rs. 19,93,513/- as made by the AO u/s 14A of the Act by ignoring the fact

4.

Facts in brief are that during the course of assessment proceedings the AO noted that assessee has earned exempt income by way of dividend however no expenses were apportioned to the said income. The said income was earned on the mutual fund purchased such as JM Balance Mutual Fund and Tarus Bonanza Fund which were purchased and sold during the month itself. The AO rejected the contentions of the assessee that loss incurred on the said mutual funds of Rs. 1,01,42,511/- was disallowed u/s 94(7) and therefore should not be any disallowance of the expenses relating to earning of exempt income. The AO held that loss u/s 94(7) of the Act and disallowance u/s 14A of the Act are two distinct issues. Accordingly the AO computed disallowance of Rs. 19,93,513/- by taking 1% of the opening and closing balance in March, 2017 as stated in para 4.8 of the assessment order and added the same to the income of the assessee. The AO has also added the same in the calculation of book profit under MAT u/s 115JB of the Act.

5.

In the appellate proceedings, the Ld. CIT(A) dismissed the appeal of the assessee by upholding the order of AO by holding that the disallowance is to be made only in respect of shares and securities held stock-in-trade in terms of decision of Hon’ble Apex Court in the case of Maxopp Investment Pvt. Ltd. vs. CIT, New Delhi in [2018] 91 taxmann.com 154 (SC) which yielded exempt income.

6. After hearing the rival contentions and perusing the material on record, the undisputed facts are that the mutual funds were purchased by the assessee during the month of March . We further note that these mutual funds were also sold after few days during the month of March. Therefore there was no opening and closing balance left in the beginning of the month and end of the month so far as the investments in mutual funds are concerned. The formula/mechanism as provided for quantification of expenses to be disallowed u/s 14A of the Act read with Rule 8D(2)(iii) fails and thus we find merit in the contentions of the assessee that since the mechanism

3 Assessment Year: 2017-18 M/s Checons Ltd. provided under the Act itself fails on the issue of average investments becoming zero therefore, we are not in a position to sustain the order of Ld. CIT(A). Accordingly we set aside the order of Ld. CIT(A) and direct the AO to delete the disallowance and consequently the ground no. 2 raised by the assessee is allowed.

7.

Issue raised in ground no. 3 is against the confirmation of addition of Rs. 26,38,625/- by the ld CIT(A) as made by the AO while computing the books profit u/s 115JB of the Act which was over and above the suo-moto disallowance by the assessee of Rs. 3,06,644/-.

8.

After hearing the rival submissions and perusing the material on record including the decision of Special Bench of Delhi Tribunal in the case of ACIT vs. Vireet Investment Pvt. Ltd. in [2017] 82 taxmann.com 415(Del-Trib.), We find that the books profit are to be computed strictly in terms of provision of Section 115JB of the Act. The Hon’ble Special Bench in the case of Vireet Investment Ltd. (surpa) has specifically held that no disallowance u/s 14A read with Rule 8D could be made to the book profit u/s 115JB of the Act. Accordingly we set aside the order of Ld. CIT(A) and direct the AO to delete the disallowance of Rs. 26,38,625/-. Accordingly ground no. 3 raised by the assessee is allowed.

6.

In the result, the appeal of the assessee is allowed.

Order is pronounced in the open court on 17th January, 2023

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