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Income Tax Appellate Tribunal, ‘C’ BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI B.R BASKARAN
Per N.V. Vasudevan, Vice President
This is an appeal by the assessee against the order dated 29/6/2016 of CIT(A)-2, Bengaluru relating to asst. year 2010-11.
The grounds of appeal
raised by the assessee reads as follows:- “1. That the order of the Assessing Officer/ CIT(Appeals) in so far as it is against the appellant is against the law, facts, circumstances, natural justice, equity and all other known principles of law.
2. That the total income computed and the total tax computed is hereby disputed.
The enhancement notices issued by the CITA) is without jurisdiction and contrary to the position of law.
The Learned CITA) erred in issuing notices for enhancement in a case which has been decided based on satisfaction of the AO and thereby violated principles of natural justice.
5. The Learned CITA) erred in issuing a notice of enhancement for disallowing the business loss of Rs. 16,77,865/-.
The Learned CIT-Appeals erred in upholding the disallowance u/s 14A of the Act of Rs. 10,80,322/-.
7. The authorities below erred in invoking sec. 14A without recording any reasons.
For the above and other grounds and reasons which may be submitted during the course of hearing of this appeal, the assessee requests that the appeal be allowed as prayed and justice be rendered.”
3. The assessee is a company engaged in the business of investments in shares and mutual funds. In the course of asst. proceedings u/s 143(3) of the Income Tax Act, 1961 (Act), the AO noticed that the assessee received dividend income of Rs.5,28,695/- which was exempt u/s 10(34) of the Act. In view of the provisions of sec. 14A of the Act, the AO disallowed expenses incurred in earning exempt income by invoking the provisos of Rule 8D of the Income-tax Rules 1962 (Rules) resulting in disallowance of Rs.10,80,322/- computed in the following manner.
(i) The amount of expenditure directly relating NIL to income which does not form part of total income (ii) Interest expenses not directly attributable Rs.9,25,590/- to any particular income or receipt then A X B / C*, (Rs.13,07,442 X Rs.3,09,46,389/Rs.4,37,13,296 (iii) ½ % of othe average of the value of Rs.1,54,732/- investments, income from which does not or shall not form part of the total income (1/2 % of (Rs.3,09,46,389/-) Disallowance as per Rule 8D Rs.10,80,322/- • Where A amount of expenditure by way of interest other than the amount of interest included in caluse (i) incurred during the previous year (Rs.13,07,442/-) • B the average of value of investment, income from which does not or shall not form part of the total income as appearing int eh balance sheet of the assessee on the first day and the last day of the previous year, (Rs.4,91,44,313 + Rs.127,48,466)/2] = Rs.3,09,46,389/- C the average of total assetsas appearing in the balance sheet of the assessee, on the first day and the last day of the previous year, (Rs.70,89,248 + Rs.3,03,37,345/2) Rs.4,37,13,296/-.
4. Aggrieved by the aforesaid order of the AO, assessee filed an appeal before the CIT(A). In the course of proceedings before the CIT(A), the CIT(A) issued a notice for enhancement of the income of the assessee.
We have already stated that the assessee filed return of income for asst. year 2010-11 declaring total income of Rs.65,03,161/-. The sum declared by the assessee in the return of income was arrived at in the following manner.
COMPUTATION OF TOTAL INCOME Particulars Rs. Rs. Rs. Rs. Rs.
INCOME FROM PROFIT/GAINS OF BUSINESS/PROFESSION Income from Business/Profession 1. Dastur Investments Pvt. Ltd., Net Profit (Loss) 2945530 Add : Disallowable and /Items Considered Separately STT 89047 Interest u/s 201(1A) 64702 153749 Less : Items(s) Treated Separately Dividend from Shares/mutual fund 528695 Profit on Shares/Mutual Fund Units 4248449 -4777144 -1677865 ------------ --------------- - 1677865 INCOME FROM CAPITAL GAINS II.
Short Term 1. As Per List of Shares/Units Sold (Short Term) (Cap. Gain Rs. 10000933 Cap. Loss Rs. 0 10000933 -------------- TOTAL SHORT TERM CAPITAL GAINS 10000933 Less : Brought Forward Loss Setoff -1819907 -------------- GROSS TOTAL INCOME 6503161 TOTAL INCOME 6503160 ----------------
6. The short term capital gain declared by the assessee according to the CIT(A) had to be regarded as business income because the assesee was in the business of dealing in shares and mutual funds. The assessee filed written submissions in response to said notice dated 22.9.2015. The CIT(A) after considering the above reply issued another notice of enhancement dated 25/5/2016 in which the CIT(A) took the view that the assessee arrived at the total income declared in the return after arriving at a loss from business. According to the CIT(A), there was no business what so ever conducted by the assessee during the previous year and, therefore, loss declared by the assessee in the return of income which is only due to expenses debited in the profit and loss account of Rs.16,77,865/- should be disallowed. The assessee made submissions in response to the aforesaid show cause notice taking a stand that the assessee was in the business of financing, hire purchase, leasing, bill discounting etc., and also making investments in shares. The assessee submitted that the expenses in question was necessarily required to be incurred by any company and, therefore, absence of income from business should not be the criteria in disallowing expenses debited in the P & L account. The CIT(A) however did not agree with the aforesaid submissions and she disallowed the expenses debited in the profit and loss account. The CIT(A) however also directed that the disallowance made u/s 14A of the Act should be deleted because no expenses are being allowed. Therefore, the disallowance u/s 14A of Rs.10,80,322/- was substituted by an by an addition of Rs.16,77,865/- which the was the expenses debited in the profit and loss account.
Aggrieved by the order of the CIT(A), the assessee is in appeal before the Tribunal.
8. The ld counsel for the assessee reiterated the submission as were made before the CIT(A). The ld DR relied on the order of the CIT(A). After considering the rival submissions, we are of the view that the issue with regard to the disallowance of expenses debited in the profit and loss account as well as the issue of disallowance u/s 14A of the Act requires to be examined afresh by the CIT(A). It is the plea of the assesee that it was engaged in financing, lease and hire purchase and bill discounting business. It was also plea of the assessee that due to temporary lull in the business the activity of buying and selling shares alone took place. It was also submitted that many of the expenses debited in the profit and loss account are with reference to maintaining the corporate status of the assessee in respect of carrying out any business those expenses have to be allowed. We are of the view that such a plea has to be substantiated with required evidence regarding the business as per the Memorandum of Association (MOA) of the assessee and as to how in the past business was carried on by the assessee and owing to temporary lull in the business no activities were carried on during the previous year. The assessee should also point out that there was no closure of business and that the assessee always intend to carry on the business as contemplated in its MOA. With these observations, the order of the CIT(A) set aside and the issue in question remanded to the AO for fresh consideration after affording opportunity of being heard to the assessee.
In the result, appeal of the assessee is allowed for statistical purposes.
Pronounced in the open court on 15th February, 2019.