2015 (12) TMI 1119 - AT - Income Tax

Tax Tribunal directs deletion of income addition under section 68 & disallowance under section 14A

Premlata Baid, Chandralekha Baid, C/o M/s. Basant Trading Co. Versus D.C.I.T, Central Cir-XXVII, Kol

The Tribunal allowed the appeals of the assessees, directing the Assessing Officer to delete the addition made under section 68 of the Income Tax Act. The ... Bogus long term capital gains in shares - whether long term capital gains could be treated as unexplained cash credit u/s 68 - Held that:- The action u/s 68 of the Act has been taken merely on the basis of the statement of the third party. We find that the assessees have duly proved the identity, creditworthiness and genuineness of the broker from whom the sale proceeds of shares were received by the assesses and hence the resultant long term capital gains thereon cannot be doubted with. Hence there is no scope for making any addition u/s 68 of the Act in the facts and circumstances of the case. Thus we have no hesitation in directing the Learned AO to delete the addition made u/s 68 - Decided in favour of assessee Disallowance u/s 14A read with Rule 8D - Held that:- We find that though the provisions of Section 14A of the Act which provides for disallowance of expenditure incurred by the assessee for the purpose of earning an income which do not form part of the total income is brought in the statute book by the Finance Act 2001 with retrospective effect from 1.4.1962, the computation of disallowance is provided in Rule 8D of the IT Rules. Rule 8D of the Rules came into effect from 24.3.2008. We find that the Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing case reported in (2010 (8) TMI 77 - BOMBAY HIGH COURT ) had held that provisions of Rule 8D could be made applicable only from Asst Year 2008-09. The assessment year under appeal for all the assesses before us is Asst Year 2005-06 and hence the Learned AO erred in invoking Rule 8D of the Rules for making disallowance u/s 14A of the Act. - Decided in favour of assessee Issues Involved:1. Whether the assessee had paid cash to arrange for bogus long-term capital gains in shares and if such gains could be treated as unexplained cash credit under section 68 of the Income Tax Act.2. Whether the disallowance under section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules could be made for the assessment year 2005-06.Issue-wise Detailed Analysis:1. Bogus Long-term Capital Gains and Unexplained Cash Credit under Section 68:The first issue to be decided was whether the assessee had paid cash to arrange for bogus long-term capital gains in shares of various companies, and if such gains could be treated as unexplained cash credit under section 68 of the Income Tax Act. The assessee claimed long-term capital gains from transactions in shares of M/s Continental Fiscal Management Limited and M/s Swastik Securities & Finance Ltd. A search and seizure operation conducted at the premises of Shri Narendra Kumar Shyamsukha revealed incriminating materials, including documents showing notings regarding certain persons, including the assessee. Shri Narendra Kumar Shyamsukha stated that the seized papers contained details of bogus long-term capital gains taken by these persons, who had laundered cash, and he acted as an intermediary earning a commission. The assessee denied knowing Shri Narendra Kumar Shyamsukha and denied making any cash payments. The transactions recorded on the seized papers matched the details of long-term capital gains filed by the assessee. The Assessing Officer (AO) treated the transactions as bogus and made additions under section 68 of the Act.On appeal, the CIT(A) confirmed the addition, holding that the appellant had paid cash to obtain bogus long-term capital gains. The assessee argued that the transactions were genuine, supported by documentary evidence such as purchase bills, contract notes, delivery challans, and demat account statements. The AO and CIT(A) did not find these documents to be false or fabricated but alleged that they did not prove the genuineness of the transactions.The Tribunal found that there was no direct evidence that the assessee had paid any cash to Shri Narendra Kumar Shyamsukha or any other person. The broker, through whom the transactions were made, also denied knowing Shri Narendra Kumar Shyamsukha. The Tribunal held that the addition was confirmed by the CIT(A) out of mere suspicion, surmise, and conjecture, ignoring the legal provisions and principles of onus of proof. The presumption under section 292C of the Act would apply only to Shri Narendra Kumar Shyamsukha, and no addition was made in his hands regarding the capital gains. The Tribunal relied on the decision in Niranjan Kumar Agarwal vs ACIT, holding that the burden of proof lies with the department to show that the receipts were actually made by the assessee. The Tribunal also noted that the assessee had disclosed the purchase of shares in their balance sheets, made payments through account payee cheques, and received sale proceeds through proper banking channels. The Tribunal directed the AO to delete the addition made under section 68 of the Act.2. Disallowance under Section 14A read with Rule 8D:The second issue was whether the disallowance under section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules could be made for the assessment year 2005-06. The Tribunal noted that Rule 8D came into effect from 24.3.2008, and the Hon'ble Bombay High Court in Godrej & Boyce Manufacturing case held that Rule 8D could be applied only from the assessment year 2008-09. The assessment year under appeal was 2005-06, and hence the AO erred in invoking Rule 8D for making disallowance under section 14A. The Tribunal also found that the AO did not discuss whether there was any receipt of exempt income claimed by the assessee or whether any expenditure was incurred to earn exempt income. In the absence of these factual findings, the AO could not make disallowance under section 14A. The Tribunal deleted the addition made on this account.Conclusion:The appeals of the respective assessees were allowed. The Tribunal directed the AO to delete the addition made under section 68 of the Act and also deleted the disallowance made under section 14A read with Rule 8D.