2015 (7) TMI 1132 - AT - Income Tax

Late Appeal Admitted, Income as Capital Gain, Disallowance Overturned, 1% Dividend Disallowed

Income Tax Officer Ward-44 (4), Kolkata, Versus Shri Daulal Kothari

The appeal was admitted despite being filed late, with the Tribunal directing the income from share transactions to be assessed as 'long term capital ... Disallowance in respect of the salary - Held that:- We noted that the Assessing Officer found that the assessee has debited towards salary a sum of ₹ 1,06,339/- in the Profit & Loss A/c. of its proprietary concern M/s. Janardan Hosiery Mills and in addition to this, the salary of ₹ 21,000/- was claimed in the computation of income under the head ‘profit & gains from business’ but the assessee has not adduced any evidence and explain how the salary has been claimed. Before us, the assessee contended that the salary has been incurred for the purpose of business. The CIT(Appeals) has simply rejected the submission of the assessee. We find from the order of CIT(Appeal's) that the CIT(Appeal s) without discussing the submissions made by the assessee just strictly confirmed the order of the Assessing Officer disallowing the salary. We, therefore, set aside the order of the CIT(Appeals) and delete the disallowance in respect of the salary. Disallowance towards the consultancy fees in respect of income-tax matters - Held that:- We have heard the rival submissions and carefully considered the same. The assessee is a proprietor of proprietorship concern M/s. Janardan Hosiery Mills and is also carrying on the business. Therefore, the assessee, in our opinion, is required consultancy from time to time in respect of its business. The expenses incurred by the assessee towards income-tax consultancy are for the purpose of business. We accordingly delete the disallowance made by the Assessing Officer. Thus this ground is allowed. Disallowance u/s 14A as well as Rule 8D - Held that:- We have heard the rival submissions and carefully considered the same. We noted that the Assessing Officer had disallowed the expenditure by invoking Rule 8D read with section 14A of the Income Tax Act. We noted that Rule 8D has been inserted by the Income Tax (5th Amendment) Rules, 2008 w.e.f. 24th March, 2008. Hon’ble Mumbai High Court in the case of Godrej & Boyce Mfg. Co. Ltd. –vs.- DCIT reported (2010 (8) TMI 77 - BOMBAY HIGH COURT ) has clearly held that Rule 8D is not retrospective but prospective. The impugned assessment is the assessment year 2007-08 while Rule 8D has been inserted w.e. f. 24t h March, 2008. Therefore, the Assessing Officer, in our opinion, is not correct in law in allowing the disallowance by applying Rule 8D. We further noted that in the case of Sanjiv Jajodia –vs. - DCIT [2010 (9) TMI 1026 - ITAT KOLKATA ] has taken the view that the disallowance under section 14A out of the expenses should be restricted only to 1% of the dividend income. Respectfully following the above decision we set aside the order of CIT(Appeal s) and direct the Assessing Officer to disallow 1% of the dividend income under section 14A of the Income Tax Act, 1961. Issues:1. Condonation of delay in filing appeal.2. Classification of gain from share transactions as business income or capital gain.3. Disallowance of salary and consultancy fees.4. Application of section 14A and Rule 8D for disallowance of expenses.Analysis:1. The appeal was filed four days late, and the Department sought condonation of the delay, which was granted after considering the application. The appeal was admitted despite being time-barred.2. The main issue in the appeal was the classification of shares held by the assessee as investment and whether the gain from share transactions should be treated as business income or capital gain. The Tribunal referred to a previous order of the Calcutta High Court, which held in favor of the assessee's wife in a similar case, deciding that the income should be assessed as capital gain, not business income. The Tribunal concurred with this decision and directed the Assessing Officer to assess the income from shares under the head 'long term capital gain.'3. In the Cross Objection, certain grounds were raised related to disallowance of salary, consultancy fees, and application of section 14A. The Tribunal found that the disallowance of salary claimed by the assessee was unjustified as the salary was incurred for business purposes. The disallowance of consultancy fees was also overturned as it was deemed necessary for the business. Regarding the application of section 14A and Rule 8D for disallowance of expenses, the Tribunal held that Rule 8D was not applicable retrospectively for the assessment year in question. Following a previous decision, the Tribunal directed the Assessing Officer to disallow only 1% of the dividend income under section 14A.4. The appeal filed by the Revenue was dismissed, while the Cross Objection filed by the assessee was partly allowed, with specific directions given regarding the disallowances and classifications of expenses.This detailed analysis covers the issues of delay condonation, classification of income from share transactions, disallowance of salary and consultancy fees, and the application of section 14A and Rule 8D as addressed in the judgment by the Appellate Tribunal ITAT Kolkata.