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Income Tax Appellate Tribunal, “D” BENCH, AHMEDABAD
Before: SHRI S.S. GODARA & SHRI MANISH BORAD
आदेश / O R D E R
PER MANISH BORAD, ACCOUNTANT MEMBER
This appeal by revenue relating to assessment year 2010-11 is directed against the order of Learned Commissioner of Income Tax (Appeals)-1, Ahmedabad dated 16.03.2015 which is arising out of order u/s. 143(3) of the Act dated 01.03.2013 framed by ITO, Ward- 1(2), Ahmedabad.
Briefly stated facts as culled out from the records are that the assessee is a Private Limited Company engaged in business of trading in shares and commodities and consultancy. E-return of income was filed on 16.09.2010 declaring Nil income. Case selected for scrutiny. Notices u/s. 143(2) & 142(1) of the Act were duly
ITA.No. 1728/Ahd/2015 Assessment year 2010-11 - 2 – served upon the assessee. Necessary details as called for were furnished. Ld. Assessing Officer completed the assessment on 01.03.2013 after making various additions, assessing the income at Rs.78,32,450/- and book profit at Rs. 14,85,672/-.
Aggrieved assessee preferred appeal before the Ld. CIT(A) against various additions and partly succeeded.
Aggrieved Revenue is now in appeal before the Tribunal raising three grounds of appeal. Ld. Departmental Representative supported the order of the Assessing Officer on all the three grounds and ld. Counsel strongly relied on the findings of the ld. CIT(A).
We have heard the rival contentions and perused the records placed before us.
In the first Ground of appeal, the Assessing Officer has raised the following grievance: “The ld.CIT(A) has erred in deleting the disallowance of Rs.22,75,481/- u/s 14A despite the fact that the assessee has earned dividend income from shares and securities held as stock in trade and the same have been claimed as exempt.”
Briefly facts relating to this issue are that at the close of year, assessee held closing stock of equity shares. Assessee also earned exempt income amounting to Rs.5,91,946/-. Ld. AO applied the provision of section 14A and calculated the disallowance at Rs.23,21,975/-. In appeal before first appellate authority, ld. CIT(A) appreciating the fact that assessee is into the business of trading of
ITA.No. 1728/Ahd/2015 Assessment year 2010-11 - 3 – shares and securities, sustained a minor disallowance at Rs.46,494/-. Revenue is in appeal for the deletion of disallowance u/s.14A by ld. CIT(A).
We observe that revenue has not disputed this fact that the assessee is into the business of trading shares and earning of exempt income is mere incidental to the carrying of business activity of share trading. Hon’ble Karnataka High Court in the case of CCI Ltd. vs. Joint Commissioner of Income Tax, (2012) 206 Taxman 563 has held that provision of section 14A of the Act are not applicable in the case of assessee who is engaged in the business of share trading.
We further observe that ld. CIT(A) sustained the disallowance of Rs.46,494/- observing as follows: “(C) Ground No.3.1 & 3.2 is against the disallowance of Rs. 23,21,975/-u/s 14A read with Rule 8D of the Act. The appellant contended that since appellant is in the business of share trading, provisions of section 14A are not applicable. The appellant objected the computation of disallowance as per Rule 8D also. As discussed at para 4A above, the A.O. after observing from audited P&L a/c and computation of income that appellant claimed Rs. 5,91,946/- as exempt income being dividend, and also no disallowances were made relatable to such exempt income despite there being continuous activity of investment in shares & securities, he rejected appellant's explanation that appellant has not made any investment and in invoked the the provisions of Rule 8D. The A.O. after following ratio of Hon'ble Bombay High Court decision in the case of Godrej & Boyce Manufacturing co. ltd. (supra) and Hon'ble ITAT Mumbai Special bench decision in the case of Daga Capital Management Pvt. Ltd. after drawing satisfaction and identifying various expenses (as discussed in impugned order as relevant facts before computation of disallowances as per Rule 8D) computed disallowances of Rs. 23,21,975/- for both direct expense as per Rule 8D (2)(i) and indirect expense out of interest as per Rule 8D(2)(ii) as well as out of administrative expenses as per Rule 8D(2)(iii). The appellant in
ITA.No. 1728/Ahd/2015 Assessment year 2010-11 - 4 – appeal proceedings (as discussed at para 4B above) contended that (i) The claim of exempt income is of Rs. 4,64,942/- and not Rs. 5,91,946/-as taken by A.O.
(ii) There is no investment, the appellant is in the business of share trading and the closing stock (inventory) as on 31st March is treated by A.O. as investment which is not true.
(iii) Even if such inventory is considered as investment, the interest claimed in P&L a/c is for the purpose of business allowable u/s 36(1)(iii) of the Act. Further appellant's interest free funds are not considered by A.O.
The appellant further contended relying on the decision of Hon'ble Gujarat High Court in the case of Hitachi Homes and Life Solution (supra) that such interest free fund are required to be considered. There is interest income of Rs. 13,80,822/- and A.O. disallowed claim of interest of Rs. 6,00,000/-hence only net interest expenses are required to be considered.
(iv) As per ratio of Hon'ble ITAT Ahmedabad order in the case of Jivraj Tea Ltd. (supra) and Hon'ble ITAT Delhi order in the case of Sahara India Financial Corporation Ltd., disallowances u/s 14A of the Act cannot be more than exempted income.
I am inclined with appellant that A.O. has considered incorrect income. Further, I am inclined with appellant that there are no investment in shares, securities or other such investment, income from which is exempt i.e. the appellant's business of share trading given rise to dividend as incidental income which is by the provision of section 10 is exempt. But, I am not inclined with appellant that there cannot be any expenses (direct as well as indirect) which are relatable to such exempt income. The continuous business activities which resulted into incidental income in the form of dividend definitely have indirect cost in the form of remuneration, demat charges and other such expenses hence provisions of section 14A of the Act are applicable. Now coming to disallowances of such expenses as per Rule 8D, I am inclined with appellant that as per ratio as relied on by it, the disallowances in the peculiar facts of appellant cannot be more than exempt income. It is therefore, following the ratio of such case laws, Hon'ble Bombay High Court decision in the case of Godrej & Boyce Man. Co. Ltd. (supra), a reasonable disallowance will do the justice for both end. Following ratio of provision of section 80HHC where 10% of expenses are recognized by
ITA.No. 1728/Ahd/2015 Assessment year 2010-11 - 5 – legislature from the income in the nature of interest, commission etc., I treat 10% of the exempt income as expenses relatable to it. This will give Rs. 46,494/-(10% of Rs. 4,64,942/-) as disallowances. Therefore the A.O. is directed to allow the balance expenses of Rs. 22,75,481/- (2321975 - 46494) and delete the addition to this extent. The disallowances and addition to the extent of Rs. 46,494/- are upheld and confirmed. The appellant gets part relief. These grounds are treated as partly allowed.”
We therefore in the given facts and circumstances of the case and respectfully following the Judicial precedence find no infirmity in the order of ld. CIT(A) sustaining disallowance at Rs.46,494/- by observing that assessee main object is to derive income from trading in shares and not for earning exempt income by way of investment in shares and securities. In the result, ground no.1 of the revenue’s appeal is dismissed.
In the second Ground of appeal, the Assessing Officer has raised the following grievance: “The ld.CIT(A) has erred in law and on facts in directing the AO to delete the disallowance of interest of Rs.6,00,000/- despite the fact that the assessee has incurred the said interest for non- business purpose.”
Ld. Assessing Officer computing the disallowance of interest of Rs.6,00,000/- on account of interest free advance given to M/s. Isha Investment. He further observed that assessee has used interest bearing funds for the purpose of giving the interest free loan to M/s. Isha Investment. Ld. CIT(A) deleted the addition as the alleged interest free loan to M/s. Isha Investment at Rs.50,00,000/- was given during F.Y. 2008-09 and there was no new advance given during the year.
ITA.No. 1728/Ahd/2015 Assessment year 2010-11 - 6 – 13. We find that assessee provided complete details about the nature of transaction, confirmation from M/s. Isha Investment and also all these details were directly received by the Assessing Officer from M/s. Isha Investment in compliance to notice issued u/s.133(6) of the Act. There was no such disallowance of interest in the preceding assessment year i.e. A.Y. 2009-10 when the alleged loan was actually advanced.
We therefore in the given facts and circumstances of the case find no reason to interfere in the findings of ld. CIT(A) and deleting the impugned addition of Rs.6,00,000/- on account of disallowance of interest observing as follows: “(D) Ground No. 4 is against the disallowance of interest of Rs. 6,00,000/- on the ground that A.O. held that appellant extended interest free loan of Rs. 50 lac to M/s Isha Investment from interest bearing fund. The A.O. in the impugned order (as discussed above at para 4A above) after calling for complete details about nature of transaction, details of various transactions and confirmation for the transactions with M/s Isha Investment and also such details were called directly from M/s Isha Investment u/s 133(6) of the Act, held that appellant as well as said party failed to submit the nature of transaction and in view of appellant claimed interest of Rs. 33,02,672/- on borrowed fund, such advances can only be treated as given out of interest bearing fund for non-business purpose hence A.O. computed such interest at 12% and disallowed Rs. 6 lac out of such claim. The appellant contended during appeal that advances of Rs. 50 lac (Rs. 10 lac on 06.03.09 and Rs. 40 lac on 13.03.09) were given to M/s ISHA Investment i.e. in F.Y. 08-09 relevant to A.Y. 09-10. It was also submitted with evidences (Bank a/c at HDFC No. 9514) that the same were made out of interest free fund. The same advances as opening balances carried to impugned previous year and no transaction of any payment or receipt is undertaken during previous year. The A.O. has not disallowed interest on such advances in A.Y. 09-10. It is further contended with copy of tax audit report that loans taken during impugned previous year are not for making advance to M/s Isha Investment hence disallowance of interest is not justified. The
ITA.No. 1728/Ahd/2015 Assessment year 2010-11 - 7 – appellant relied on Hon'ble Karnataka High Court decision in the case of Sridev Enterprise (supra). I am inclined with appellant that when appellant able to establish direct nexus of advances so granted out of interest free fund as evidenced from bank account and also said advance was related to F.Y. 08-09 (A.Y. 09-10) duly confirmed by M/s Isha Investment and no new advance were given during previous year, then disallowance of interest from the claim of interest for impugned previous year is neither justified nor sustainable. The A.O. is directed to delete the addition so made of Rs. 6 lac. The appellant gets relief accordingly. This ground is allowed.
In the result, ground no.2 of the revenue is dismissed.
In the third Ground of appeal, the Assessing Officer has raised the following grievance:
“The Ld. CIT(A) has erred in law and on facts in deleting the addition on account of under valuation of closing stock of Rs.58,85,251/-.” 17. In the course of assessment proceedings ld. Assessing Officer while examining the valuation of closing stock of equity shares held by the assessee, observed that for the purpose of valuing the closing stock “At cost or market price whichever is less”, assessee has taken the market price as on 29.03.2010. Ld. AO accordingly re-calculated the valuation, taking the basis of market price as on 31.03.2010 thereby adding Rs.5885251/- to the value of closing stock disclosed by the assessee. When the matter came up before the ld.CIT(A), assessee succeeded in getting this addition deleted as ld.CIT(A) observed that assessee being in the business of trading shares and securities, calculates the closing stock on the basis of value of shares and securities as on the last date of last settlement, which in this case was 29.03.2010.
ITA.No. 1728/Ahd/2015 Assessment year 2010-11 - 8 –
We find substance in the findings of ld.CIT(A), as the books of accounts of assessee are audited u/s.44AB, method of closing stock is consistent with the preceding year and there is no variation. Further we also find that the last date of settlement was 29.03.2010 and the assessee has calculated the valuation of closing stock at Rs.6,20,62,436/- by adopting the valuation method of “cost or market value which were is less” for each script held as on 29.03.2010. The detailed working of closing stock also forms parts of the order of ld. CIT(A). We therefore, in the given facts and circumstances as well the factual material of the issue raised in this ground fail to differ with the view taken by ld.CIT(A) deleting the addition of Rs.58,85,251/- observing as follows: “(E) Ground No. 5.1 & 5.2 are against the A.O.'s holding that appellant understated its closing stock. As an alternative, it was contended by appellant that if such understatement is upheld with addition of valuation, then direction be given to A.O. to consider it as opening stock of same value in A.Y. 11-12. The A.O. in the impugned order after observing auditor's remarks at point no. 6 that "Inventories are valued at market value as on cutoff date" called for the details of valuation for closing stock reflected at Rs. 6,20,62,436/-. The A.O. thereafter compared value as on 30th / 31st March 2010 as per BSE/NSE and as taken by appellant and show caused appellant for difference-of such valuation of Rs. 58,85,251/-and made the addition. The A.O. attached with impugned order the value of various script taken from NSE/BSE as on 30.03.2010 / 31.03.2010 (Inclusive of lower value if there) The appellant in appeal (as discussed above at para 4B above) contended that (i) It followed consistent method of valuation of inventory as reported by tax auditor in tax audit report at cl. 12(a) as “at cost or market value whichever is lower" and remarks at sr. No. 6 of sch. 9 of audited annual report is not factually correct. This is supported by fact that valuation of closing stock submitted by appellant is based on this consistently followed method of valuation of closing stock.
ITA.No. 1728/Ahd/2015 Assessment year 2010-11 - 9 – (ii) There are minor variations of value for many scripts even if A.O.'s method of valuation is adopted (iii) If the A.O.'s working is adopted, then it will be tax neutral on the fact that for the subsequent year this will be opening balance hence will reduce the profit reflected there. In view of fact that appellant is paying tax at maximum marginal rate, it won't affect tax payments.
It is verified from the Annual report for financial year 2009- 10 that at schedule-9 being schedule forming part of the balance sheet as at 31.03.2010 and the profit and loss account for the period ending 31.03.2010 under the head "significant Accounting policies" at point 6 in reference to "Inventories" mentioned that "Inventories are valued at market value as on cutoff date". It is also verifiable from the tax audit report in Form 3CA & Form 3CD dt. 19.08.10 in compliance of section 44AB of the Act at cl. 12(a) for "Method of valuation of closing stock employed in the previous year" it is mentioned that "Closing stock is valued at cost or market value whichever is lower". In reference to cl. 12(b), for details of deviation, if any, from the method of valuation prescribed u/s 145A and the effect there of on the profit or loss it is mentioned 'No'. It is therefore, the important issue one has to adjudicate is which method of accounting and results thereof has to be considered for Income tax Act proceedings. The answer is clearly the consistent method followed by tax auditor as per tax audit u/s 44AB of the Act. The appellant is permitted to follow any other type of accounting or method of valuation or within companies Act but as per Income tax Act section 145 and 145A of the Act, mercantile system of accounting and consistent method of valuation has to be followed and if there is any deviation, the tax auditor has to report about it with effect on profit thereof. As contended by appellant that details of closing stock valuation at Rs. 6,20,62,436/- is based on such consistent method of valuation on "cost or Market value whichever is low". It is therefore, I am inclined with appellant that on an 'incorrect' or even if the same is correct, the comment at annual report cannot be adopted overlooking tax audit report for method of valuation to be followed. I am also inclined with appellant with its alternative argument that on account of fact that appellant is paying tax at maximum rate for impugned previous year as well as subsequent year, such adjustment if made with given its effect for opening stock in next year, it will be a tax neutral exercise. The appellant's valuation chart reflecting market value as well as cost value at Rs. 6,67,91.183/- and at Rs. 6,24,24,431/- respectively and adopting of closing stock at lowest of two resulting in valuation at Rs.
ITA.No. 1728/Ahd/2015 Assessment year 2010-11 - 10 – 6.20,62,436/- is attached herewith this order as Annexure-A for ready reference. This chart clearly reflect that for market value is taken at stock price on 29.03.2010 i.e. last date of last settlement while A.O. has taken stock price on 31.03.2010. The cut off price in the share trading market goes by last date of settlement while in case of investment it goes with price on last date of financial year. It is therefore, the A.O. for adoption of figures from BSE/NSE website has taken incorrect figures though this issue is now academic. The A.O. is therefore directed to delete the addition so made of Rs. 58,85,251/-. The appellant gets relief accordingly. This ground is allowed.”
In the result, ground no.3 of the revenue’s appeal is dismissed.
In the result, appeal of the revenue is dismissed.
Order pronounced in the Court on 28/12/ 2017 at Ahmedabad.
Sd/- Sd/- (S.S. GODARA) ( MANISH BORAD) JUDICIAL MEMBER ACCOUNTANT MEMBER Priti Yadav, Sr.PS Dated, 28/12/2017 आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त ( अपील ) / The CIT(A)-1, Ahmedabad. 5. �वभागीय ��त�न�ध , आयकर अपील�य अ�धकरण , अहमदाबाद /DR,ITAT, Ahmedabad. 6. गाड� फाईल /Guard file. आदेशानुसार/ BY ORDER, सहायक पंजीकार (Asstt.Registrar) आयकर अपील�य अ�धकरण ITAT, Ahmedabad True copy