2024 (4) TMI 199 - HC - Income Tax

Disallowance under section 14A and penny stock loss additions challenged; appellate findings sustaining deletion lead to dismissal

Whether disallowance under section 14A and Rule 8D may exceed exempt income was posed as a legal question, but the court did not disturb the appellate ... Disallowance u/s 14A - as per tribunal addition cannot exceed the exempt income earned by the assessee - HELD THAT:- Revenue submitted that Questions a, b and c of the proposed questions would be taken care of by the questions which are already admitted by this Court in [2022 (6) TMI 1468 - GUJARAT HIGH COURT] in case of the respondent. Accordingly, the following question is admitted - “Whether in the facts and in the circumstances of the case and in law the Appellate Tribunal has erred in holding that disallowance under section 14A of the Act cannot exceed the exempt income earned by the assessees?” Disallowance of losses booked in penny stocks - there was a price fluctuation in the stock exchange - whether CIT(A) and the Tribunal have committed an error by setting aside the addition made by the AO as the assessee failed to prove the genuineness of such transaction before the AO? - HELD THAT:- As considered the concurrent findings of fact arrived at by the CIT(A) and Tribunal and are in complete agreement with such findings to the effect that the assesse has proved the genuineness of the transactions and established on online trading platforms that it had no control whatsoever on share prices and thus, incurred losses in shares of Alang Industries Gas Ltd. It was also found by both the authorities that the assessee sold only the part of the shares and remaining shares have been held by the assessee in the subsequent assessment year also. With regard to shares of Kappac Pharma Ltd., it was rightly held by the Tribunal that since the market rate was lower, the assessee had incurred business loss though the shares are not sold. No substantial question of law. Issues Involved:The issues involved in the judgment are related to the interpretation of disallowance under section 14A of the Income Tax Act, 1961, the applicability of circulars issued by the CBDT, the effect of clarificatory amendments, and the deletion of addition made by the Assessing Officer on account of disallowance of losses booked in penny stocks.Disallowance u/s 14A - Circular 5/2014 vs. Clarificatory Amendment:The appellant-Revenue questioned the disallowance u/s 14A of the Income Tax Act, read with Rule 8D(iii), in relation to the exemption income. The issue was whether the ITAT erred in restricting the disallowance contrary to circular 5/2014 issued by the CBDT and the clarificatory amendment by the Finance Act, 2022. The Court admitted the question regarding whether the disallowance under section 14A cannot exceed the exempt income earned by the assessees.Addition of Losses in Penny Stocks:The Assessing Officer made an addition on account of disallowance of losses booked in penny stocks, specifically in Kappac Pharma Ltd. The appellant argued that the CIT(A) and the Tribunal erred in setting aside the addition as the genuineness of the transactions was not proven before the Assessing Officer. The appellant claimed the loss due to low market value, stating that it was shown as stock-in-trade and thus not allowable. The Tribunal found that the appellant proved the genuineness of the transactions beyond doubt, providing contract notes, ledger accounts, and bank transactions, while the AO disallowed the losses without material evidence. The Tribunal upheld the deletion of the addition, emphasizing that the appellant had no control over share prices and incurred losses in the penny stocks.Conclusion:The Court dismissed the appeal, agreeing with the findings of the CIT(A) and Tribunal that the appellant had proven the genuineness of the transactions in penny stocks and had no control over share prices. The Tribunal correctly held that the appellant incurred business losses despite not selling the shares, and the market rate justified the losses. As no substantial question of law arose from the concurrent findings, the appeal was deemed meritless and dismissed.