SHRI SURESH VERMA,DELHI vs. ACIT, NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: ‘G’: NEW DELHI BEFORE SH. I.C. SUDHIR, JUDICIAL MEMBER AND SH. O.P. KANT, ACCOUNTANT MEMBER ITA No. 1152/Del/2013 Assessment Year: 2010-11 Sh. Suresh Verma, A-6, Derawal Vs. Asstt. Commissioner of Income Nagar, Model Town, Delhi Tax, Circle-13, New Delhi GIR/PAN : AACPV6441N (Appellant) (Respondent) Appellant by Sh. Salil Kapoor, Adv. Respondent by Smt. Rishpal Bedi, Sr. DR Date of hearing 19.04.2016 Date of pronouncement 14.06.2016 ORDER PER O.P. KANT, A.M.: This appeal of the assessee is directed against order dated 20/12/2012 of learned Commissioner of Income-tax (Appeals)-1, New Delhi, for assessment year 2010-11, raising following grounds: “1. That the Ld. Commissioner of Income Tax (Appeals) [‘CIT (A)’] grossly erred in law & on facts in upholding the order passed by the Ld. Income Tax Officer [‘ITO’] under Section 143 (3) of the Income Tax Act,1961 [‘Act’] is bad in law. 2. That on the facts and circumstances of the case & in law, the Ld. CIT (A) grossly erred in holding that amount of Rs.3,81,13,064/- being the amount surrendered on account of undisclosed investment in stock found during the course of search under the head income from other source as against the income from business considered by the appellant in the return of income. 2.1 That in the facts and circumstances of the case & in law, the Ld. CIT(A) grossly erred in not appreciating that the amount so surrendered would be part of the stock of the appellant’s business, therefore it ought to be considered for computing income from business, and could not be taxed under residuary head income from other source. 2.2 That in the facts and circumstances of the case & in law, the Ld. CIT(A) ought to direct the Ld. AO to take into consideration the amount so surrendered as part of closing stock and allowed to carried forward to succeeding year as opening stock in view of the decision in the case of Mahendra Mills Ltd. vs P. B. Desai Appellate Assistant Commissioner, [1975] 99 ITR 135 (SC). 3. That on the facts and circumstances of the case & in law, the Ld. CIT (A) grossly erred in confirming the addition by the Ld. AO of Rs.64,41,401/-(3,81,13,064/- - 3,16,71,663/-), when the amount of Rs. 3,81,13,064/- has been directed to be charged

2 ITA No.1152/Del/2013 AY: 2010-11 under the head other sources. 4. That on the facts and circumstances of the case & in law, the Ld. CIT (A) grossly erred in not appreciating that such an addition of Rs. 64,41,401 would amount to double taxation. 5. That in the facts and circumstances of the case & in law, the Ld. CIT(A) grossly erred in interpreting Section 14A and Rule 8D by concluding that Rule 8D provides for allocation of expenditure relatable to exempt income and that such expenditure is to be disallowed even when there is actually no exempt income during the previous year. That the above grounds of appeal are without prejudice to each other. That the appellant reserves its right to add, alter, amend or withdraw any ground of appeal either before or at the time of hearing of this appeal.” 2. The facts in brief are that a search and seizure action under section 132 of the Income-tax Act, 1961 (in short ‘the Act’) was carried out at the premises of the assessee on 27/10/2009 along with other cases of Diamond Hut Group. The survey under section 133A of the Act was also carried out at the business premises of the assessee. In the course of survey proceedings, the assessee declared excessive stock of Rs. 3,81,30,064/- as income of the year under consideration. The assessee filed return of income declaring total income of Rs. 3,23,46,890/- on 20/09/2011. The case of the assessee was selected for scrutiny and in the course of scrutiny proceedings, the Assessing Officer observed that the assessee had declared net profit of Rs. 3,16,71,663/- on the sales turnover of Rs. 45,90,85,748/- including the amount of income of Rs. 3,81,13,064/-, declared by the assessee during survey proceedings. According to the Assessing Officer, if the income surrendered during survey of Rs. 3,81,13,064/- is reduced out of the net profit of Rs. 3,16,71,663/-, the net result of the year under consideration was a loss of Rs. 64,41,401/- as against profit at the rate of 0.45% declared in immediately preceding assessment year 2009-10. The Assessing Officer rejected the book result of the assessee and applying the net profit rate of the immediately preceding years over the sales turnover of the current year estimated the profit at Rs. 20,65,885/- instead of loss of Rs. 64,41,401/-, thus, making the net addition of Rs. 85,07,286/-. The Assessing Officer also observed that the assessee had made investment of Rs. 15,13,80,000/- in assets which

3 ITA No.1152/Del/2013 AY: 2010-11 could have earned exempt income, however, no income had been earned during the year from such assets and the assessee also not made any disallowance under section 14A in respect of the investment eligible for earning exempt income. According to the Assessing Officer, Rule 8D of the Income Tax Rules was applicable over the facts of the assessee, and thus he disallowed amount of Rs. 69,02,691/- under section 14A of the Act read with Rule 8D of the Income Tax Rules. Aggrieved with the findings of the learned Assessing Officer, the assessee filed appeal before the learned Commissioner of Income-tax (Appeals), who in his impugned order accepted that trading results of the assessee, however upheld the addition of Rs. 64,41,401/- out of the total addition of Rs. 85,07,286/- made by the Assessing Officer to the trading results of the assessee. He also upheld the disallowance made by the Assessing Officer under section 14A read with Rule 8D of the Income Tax Rules. Aggrieved, the assessee is in appeal before the Tribunal raising the grounds reproduced above. 3. The ground no. 1 being general in nature, not required to adjudicate upon by us. 4. In grounds no. 2 to 2.2, the assessee has challenged the direction of the learned Commissioner of Income-tax (Appeals) to assess the surrendered undisclosed investment in stock under the head ‘income from other sources’ and submitted that the Commissioner of Income Tax (Appeals) ought to have directed to consider the surrendered stock as part of closing stock and carry forward to succeeding year as opening stock. 4.1 Before us, the learned Authorized Representative of the assessee submitted that assessee had surrendered the excess stock found during the course of survey and included the same along with the closing stock in the books of accounts. He drawn our attention to page 93 of the assessee’s paper book according to which stock in books of account at the year end was of Rs. 7,29,87,977.33 and then further, the surrendered stock of Rs. 3,81,13,064/- was added, making a total closing stock to Rs. 11,11,01,041.33/-, which was

4 ITA No.1152/Del/2013 AY: 2010-11 appearing in trading account for the year on page 79 of the assessee’s paper book. Thus, according to the learned Authorised Representative, there was no justification in the direction of the learned Commissioner of Income-tax (Appeals) to assess the surrendered stock separately as income falling under the head ‘income from other sources’. 4.2 On the other hand, the learned Sr. Departmental Representative relied on the findings of the authorities below. 4.3 We have heard the rival submission and perused the material on record. The fact that stock of Rs. 3,81,13,064/- was found in excess in the course of survey proceedings and the assessee agreed to offer the same for taxation as business income and same was not objected by the authorities before whom the assessee made declaration. The excess stock was as a result of the business activity of the assessee and accordingly, the assessee also recorded the same as part of closing stock in its books of accounts. By declaring this excess stock as part of closing stock, the assessee offered the same as part of the profit for taxation and thus we find no basis in the direction of the learned Commissioner of Income-tax(Appeals) to treat the excessive stock declared by the assessee as income under the head ‘income from other sources’. The learned Commissioner of Income-tax(Appeals) has accepted the trading result of the assessee without surrendered stock, which is a loss and thus even if the surrendered excess stock as directed by the learned Commissioner of Income-tax (Appeals) is assessed under the head ‘income from other sources’ , the net result will be the same as loss under the head profit and gains of business will be eligible for adjustment against the ‘income from other sources’ as per the provisions of section 71 of the Act. The learned Commissioner of Income-tax (Appeals) has not mentioned as why the excess stock declared by the assessee should be assessed under the head income from other sources. In our opinion the excess stock was as a result of business activity of the assessee and there was nothing wrong in adding the same with the closing stock of the business and therefore the direction of the

5 ITA No.1152/Del/2013 AY: 2010-11 learned Commissioner of Income-tax (Appeals) in assessing the surrendered stock under the head income from other sources is not justified and accordingly, we direct to assess the same under the head profit and gains of business and give benefit to allow carry forward this stock as opening stock of the succeeding year. The grounds no. 2 to 2.2 of the appeal are accordingly allowed. 5. In grounds No. 3 and 4, the assessee has challenged confirmation of the addition of Rs. 64,41,401/- by the learned Commissioner of Income-tax (Appeals). 5.1 Before us, the learned Authorized Representative of the assessee submitted that the addition was made by the Assessing Officer as part of the trading addition. He further submitted that on one side the learned Commissioner of Income-tax (Appeals) has accepted the trading results of the assessee, however, retained the addition of Rs. 64,41,401/-, which was part of the trading addition and, therefore, confirming of the addition by the learned Commissioner of Income-tax(Appeals) was not justified. 5.2 On the other hand, learned Sr. Departmental Representative relied on the finding of the learned Commissioner of Income-tax (Appeals). 5.3 We have heard the rival submission and perused the material on record. We find that without the excessive stock of Rs. 3,81,13,064/-, the trading result of the assessee was a loss of Rs. 64,41,401/- which was rejected by the Assessing Officer and assessed into profit of Rs. 20, 65, 885/-thus making the total addition of Rs. 85,07,286/-. The learned Commissioner of Income-tax (Appeals) in the impugned order has accepted the trading results of the assessee, however, directed to delete the addition of Rs. 20,65,885/-. In our opinion, once the trading results of the assessee have been accepted, the entire addition of Rs. 85,07,286/- was required to be deleted by the learned Commissioner of Income- tax (Appeals). Accordingly, we direct to delete the addition of Rs. 64,41,401/-. The grounds no. 3 & 4 of the appeal are thus allowed.

6 ITA No.1152/Del/2013 AY: 2010-11 6. In ground No. 5, the assessee has challenged disallowance under section 14A read with Rule 8D of the Income Tax Rules. 6.1 The learned Authorized Representative of the assessee submitted that similar addition was made in preceding assessment year 2009-10, which has been deleted by the Tribunal by order dated 27/11/2015 in ITA No. 1150 & 1151/Del/2013. He further submitted that no exempt income was earned during the year and, therefore, following the judgment of the Hon’ble Jurisdictional High Court in the case of Cheminvest Ltd. Vs. ITO, reported in 378 ITR 33 (Delhi), no disallowance could be made under section 14A of the Act. 6.2 On the other hand, the learned Sr. Departmental Representative relied on the authorities below. 6.3 We have heard the rival submissions and perused the material on record. We find that in the assessment year 2009-10, identical disallowance was made which has been deleted by the Tribunal with following observations:

“8. We have heard both the sides and perused the material on record. In the present case it is an admitted fact that the assessee had not earned any dividend income during the year under consideration. Now this issue is no longer Res-Integra as held by the Hon’ble jurisdictional High Court in Holcim (P) Ltd (supra) and by Punjab and Haryana High Court in M/s Lakhani Marketing Incl (Supra). We take a look at section 14 A(1) of the Act which is reproduced as under below: “For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.” From a bare perusal of the section it is clear that before making the disallowance the following conditions are to exist as noted by co-ordinate Bench in M/s Kee Pharma Ltd. ITA NO 5108/Del/2012: (i) There must be income taxable under the Act; (ii) The said income must not form part of the total income under the Act; (iii) There must be an expenditure incurred by the assessee; and (iv) The said expenditure must have a relation to the income which does not form part of the total income under the Act.

7 ITA No.1152/Del/2013 AY: 2010-11 It was further observed by the Tribunal that from the aforesaid condition it would be clear that in the concerned assessment year as there is no income which does not form part of the taxable income under the Act i.e. dividend from the shares, in our opinion, the provisions of section 14A of the Act cannot be invoked. In the present case, it is an admitted fact that the assessee was not in receipt of any dividend income as such there was no income from the investment in question which was taxable under the Act, therefore, the AO wrongly invoked the provisions of section 14A of the Act. On a similar issue, their lordships of the Hon’ble Punjab High Court in the case of CIT Vs M/s Lakhani Marketing Incl. in ITA No.970/2008 vide order dated 02.04.2014 observed at paras 9 to 11 as under:- “9. The CIT(A) vide order dated 24.6.2004, Annexure A.II recorded as under:- “7.2 Keeping in view the above facts and circumstances of the case it is held that the AO was not correct in applying section 14A of the IT Act in disallowing the expenditure on account of interest amounting to Rs.46,91,684/-. It was incumbent on the AO to establish a nexus between the expenditure incurred and the income which was exempt under the Act. Facts clearly do not support the action of the AO. Disallowance is accordingly deleted. The AO is directed to recompute the income accordingly.” 10. Vide order dated 16.5.2008, Annexure A.III, the Tribunal on appeal by the revenue while upholding the finding recorded by the CIT(A) noticed as under:- “We have heard rival submissions and have perused the material on record. From the reading of section 14A of the Act, it is clear that before making any disallowance the following conditions are to exist:- a) That there must be income taxable under the Act, and b) That this income must not form part of the total income under the Act, and c) That there must be an expenditure incurred by the assessee, and d) That the expenditure must have a relation to the income which does not form part of the total income under the Act.

8 ITA No.1152/Del/2013 AY: 2010-11 9. Therefore, unless and until, there is receipt of exempted income for the concerned assessment years (dividend from shares), we are of the view, Section 14A of the Act cannot be invoked. In this appeal, the revenue has not dispelled the findings of the CIT(A), nor the statement of the assessee before AO that assessee is not in receipt of any dividend income and hence according to us, the Assessing Officer has erred in invoking Section 14A of the Act, to disallow various interest payments on capital account, security deposits and unsecured loans. This conclusion of ours finds support in the decision of Bombay Bench of the Tribunal in the case of Joint Commissioner of Income Tax v. Holland Equipment Co. B. V. reported in (2005) 3 SOT 810 (Mumbai) and the relevant portion of the order of the Bombay Bench of the Tribunals reproduced below:- “Regarding application of Section 14A of the Act, the contention of the learned Department Representative has to be rejected on the face of it inasmuch as the entire income of the assessee is taxable under the Act. Section 14A is applicable only when any part of the income is not to be included in the total income of the assessee and the expenditure relating to that part of income is claimed by the assessee as deduction. In such cases only, the expenditure relating to the exempted income can be disallowed and not otherwise. Since in the present case, the entire income is found to be taxable, no disallowance can be made under section 14A of the Act.’ 10. Moreover, the AO has not established the nexus between invested funds and the interest bearing funds, since the investments in shares are in the years 1995-96, 1998-99 9 ITA Nos.1150 & 1151/Del./2013 and 1999-2000 and the interest disallowance is for the assessment years 2000-01 and 2001-02. On the contrary perusal of the balance sheet for the year ending 31.3.1995, 31.3.1998 and 31.3.1999, it is clear that interest bearing funds have not been utilized for investment for purchase of shares. 11. For the aforesaid reasons, we see no reason to interfere with the order of CIT(A) concerning assessment year 2000-01 and 2001-02 and hence the decision of CIT (A) in deleting the disallowance of interest by invoking section 14A of the Act is correct and in accordance with law.” 11. In view of the aforesaid findings, which could not be shown to be erroneous, the plea of the revenue cannot be accepted. Further, this Court in Hero Cycles Limited’s case (supra) recorded as under:-

9 ITA No.1152/Del/2013 AY: 2010-11 “5. In view of finding reproduced above, it is clear that the expenditure on interest was set off against the income from interest and the investments in the share and funds were out of the dividend proceeds. In view of this finding of fact, disallowance under section 14A was not sustainable. Whether, in a given situation, any expenditure was incurred which was to be disallowed, is a question of fact. The contention of the revenue that directly or indirectly some expenditure is always incurred which must be disallowed under section 14A and the impact of expenditure so incurred cannot be allowed to be set off against the business income which may nullify the mandate of section 14A, cannot be accepted. Disallowance under section 14A requires finding of incurring of expenditure; where it is found that for earning exempted income no expenditure has been incurred, disallowance under section 14A cannot stand. In the present case finding on this aspect, against the revenue, is not shown to be perverse. Consequently, disallowance is not permissible. We have taken this view earlier also in IT Appeal No.504 of 2008, CIT vs. Winsome Textile Industries Limited, decided on 25th August, 2009 wherein it was observed as under:- ‘6. The contention raised on behalf of the revenue is that even if the assessee had made investment in shares out of its own funds, the assessee had taken loans on which interest was paid and all the money available with the assessee was in common kitty, as held by this Court in CIT vs. Abhishek Industries Limited , (2006) 205 CTR (P&H) 304 : (2006) 286 10 ITA Nos.1150 & 1151/Del./2013 ITR 1 (P&H) and therefore, disallowance under section 14A was justified. 7. We do not find any merit in this submission. Judgment of this Court in Abhishek Industries (supra) was on the issue of allowability of interest paid on loans given to sister concerns, without interest. It was held that deduction for interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business. Observations made therein have to be read in that context. In the present case, admittedly, the assessee did not make any claim for exemption. In such a situation, section 14A could have no application.”

10 ITA No.1152/Del/2013 AY: 2010-11 Similarly, the Hon’ble Jurisdictional High Court in the case of CIT Vs Holcim India (P) Ltd. in ITA Nos. 486 & 299/2014 vide order dated 05.09.2014 dismissed the appeal of the revenue and observed in para 14 as under: “14. On the issue whether the respondent-assessee could have earned dividend income and even if no dividend income was earned, yet Section14A can be invoked and disallowance of expenditure can be made, there are three decisions of the different High Courts directly on the issue and against the appellant-Revenue. No contrary decision of a High Court has been shown to us. The Punjab and Haryana High Court in Commissioner of Income Tax, Faridabad Vs. M/s. Lakhani Marketing Incl., ITA No. 970/2008, decided on 02.04.2014, made reference to two earlier decisions of the same Court in CIT Vs. Hero Cycles Limited, [2010] 323 ITR 518 and CIT Vs. Winsome Textile Industries Limited, [2009] 319 ITR 204 to hold that Section 14A cannot be invoked when no exempt income was earned. The second decision is of the Gujarat High Court in Commissioner of Income Tax-I Vs. Corrtech Energy (P.) Ltd. [2014] 223 Taxmann 130 (Guj.). The third decision is of the Allahabad High Court in Income Tax Appeal No. 88 of 2014, Commissioner of Income Tax (II) Kanpur, Vs. M/s. Shivam Motors (P) Ltd. decided on 05.05.2014. In the said decision it has been held : “As regards the second question, Section 14A of the Act provides that for the purposes of computing the total income under the Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income 11 ITA Nos.1150 & 1151/Del./2013 which does not form part of the total income under the Act. Hence, what Section 14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. For the year in question, the finding of fact is that the assessee had not earned any tax free income. Hence, in the absence of any tax free income, the corresponding expenditure could not be worked out for disallowance. The view of the CIT(A), which has been affirmed by the Tribunal, hence does not give rise to any substantial question of law. Hence, the deletion of the disallowance of Rs.2,03,752/- made by the Assessing Officer was in order.” We take note of the fact that the Hon’ble jurisdictional High Court has also considered the decisions of the Hon’ble Punjab and Haryana, Gujarat and Allahabad High Court which are in favour of the assessee and as per the

11 ITA No.1152/Del/2013 AY: 2010-11 ratio laid down by the Hon’ble Jurisdictional High Court in the case of CIT Vs Holcim India (P.) Ltd. order dated 05.09.2014 and the Hon’ble P & H High Court in the case of C IT Vs M/s Lakhani Marketing (supra) we find force in the contention of the Ld. AR that no disallowance u/s 14A of the Act can be made if there is no income earned. In that view of the matter, we delete the disallowance made by the AO and later confirmed by the ld. CIT(A) in both the assessment years.” 6.4 We also find that Hon’ble jurisdictional High Court in the case of Cheminvest Ltd (supra) has held as under:

“23. In the context of the facts enumerated hereinbefore the Court answers the question framed by holding that the expression ‘does not form part of the total income’ in Section 14A of the envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year. 6.5 We find that there is no dispute on the fact that no exempt income was earned by the assessee during the year. Thus, respectfully following the above precedents, the disallowance made by the Assessing Officer and sustained by the learned Commissioner of Income-tax(Appeals) is directed to be deleted. The ground no. 5 of the appeal is accordingly allowed. 7. In the result, the appeal of the assessee is allowed. The decision is pronounced in the open court on 14th June, 2016.

Sd/- Sd/- (I.C. SUDHIR) (O.P. KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 14th June, 2016. Laptop/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi