2024 (7) TMI 280 - AT - Income Tax

ITAT deletes Section 14A disallowance and bogus LTCL additions due to procedural violations and insufficient evidence

The ITAT Ahmedabad ruled in favor of the assessee on multiple grounds. Regarding Section 14A disallowance, the tribunal held that the AO mechanically ... Disallowance u/s 14A r.w.r. 8D - necessity of establishing a nexus between the expenditure incurred and the earning of exempt income - as contended by assessee no direct expenses were incurred to earn the exempt income and that investments were made from interest-free funds - HELD THAT:- As decided in the case of Maxopp Investment Ltd. [2018 (3) TMI 805 - SUPREME COURT] where it was held that the primary condition for applicability of Section 14A is that the expenditure should have been actually incurred in relation to exempt income. The Court also noted that the AO must record reasons for not being satisfied with the correctness of the claim of the assessee regarding the expenditure incurred in relation to exempt income before proceeding to make a disallowance under Rule 8D. As observed that in the present case, the AO had mechanically applied Rule 8D without recording the requisite satisfaction, thereby violating the procedural requirement stipulated under Section 14A(2) of the Act. We uphold the Ld.CIT(A)’s decision to restrict the disallowance under Section 14A to the exempt income earned by the assessee. Bogus LTCL - loss on sale of shares treated as unexplained transaction - AO's conclusion was primarily based on data from the AST and information from higher authorities, particularly the Investigation Wing, Kolkata - CIT(A) deleted addition - HELD THAT:- We uphold the decision of the Ld.CIT(A) to delete the disallowance made by the AO. We concur with the Ld.CIT(A)'s observation that the AO failed to provide substantial evidence to disprove the genuineness of the transactions. We note the following key-points that AO's disallowance was based on information from the Investigation Wing without conducting independent verification or inquiries. The assessee provided comprehensive documentary evidence to substantiate the genuineness of the transactions. The investigation reports did not specifically implicate the assessee or their broker. The AO did not give the assessee an opportunity for cross-verification by failing to share the underlying information. - Decided against revenue. Addition of Speculation loss claimed under the head “income from other sources” - Assessee claimed proportionate depreciation relating to speculation business. AO concluded that the assessee claimed this as speculation loss under the head “income from other sources” - HELD THAT:- Based on the findings and conclusion drawn by the Ld.CIT(A), it is evident that the amount does not represent a speculation loss, but rather depreciation related to the speculation business. This depreciation has been separately accounted for by making a corresponding addition to the profits from the normal business, thereby having a nullifying effect on the returned income. As such, the observations made by the Assessing Officer are lack of factual basis. Consequently, this ground raised by the Revenue is dismissed. Issues Involved:1. Disallowance under Section 14A read with Rule 8D.2. Addition on account of loss on sale of shares.3. Disallowance of speculation loss claimed under the head 'income from other sources.'Issue-wise Detailed Analysis:On Ground No. 1: Disallowance under Section 14A read with Rule 8DThe issue pertains to the disallowance of Rs. 35,76,934/- made by the AO under Section 14A read with Rule 8D, which was restricted by the Ld.CIT(A) to Rs. 23,970/-. The facts reveal that the assessee earned a dividend income of Rs. 23,970/- as exempt income and claimed no direct expenses for earning this income. The AO applied Rule 8D to calculate the disallowance, while the assessee contended that investments were made from interest-free funds and no administrative expenses were incurred specifically for earning exempt income. The Ld.CIT(A) restricted the disallowance to the actual exempt income earned, citing consistent findings in previous years and judicial precedents, including the judgment of the Hon'ble Gujarat High Court in PCIT v. Gujarat Flurochemicals Ltd. The Tribunal upheld the Ld.CIT(A)'s decision, emphasizing that the AO must record reasons for not being satisfied with the assessee's claim before making a disallowance under Rule 8D. The Tribunal also noted that the AO had mechanically applied Rule 8D without the requisite satisfaction, hence violating procedural requirements under Section 14A(2) of the Act. Consequently, the Revenue's appeal on this ground was dismissed.On Ground No. 2: Addition on account of loss on sale of sharesThis ground pertains to the addition of Rs. 1,71,03,200/- made by the AO on account of loss on sale of shares of Indian Infotech and Software Ltd. and Shree Shalin Textile Ltd., treating the transactions as non-genuine. The AO based his conclusion on information from the Investigation Wing, Kolkata, and other authorities, without independent verification. The Ld.CIT(A) deleted the disallowance, noting that the AO failed to rebut the substantial evidence provided by the assessee, including contract notes, Demat statements, and bank statements. The Ld.CIT(A) also observed that the investigation reports did not specifically name the assessee or their broker, and the AO did not provide the assessee with the information for cross-verification. The Tribunal upheld the Ld.CIT(A)'s decision, emphasizing that the AO's disallowance was based on presumptions and lacked substantial evidence. The Tribunal also referred to the decision of the Co-ordinate Bench in a similar case, which allowed the assessee's claim based on direct evidence of sale/purchase transactions. Consequently, this ground of the Revenue's appeal was dismissed.On Ground No. 3: Disallowance of speculation loss claimed under the head 'income from other sources'This ground relates to the disallowance of Rs. 13,45,857/- made by the AO on account of speculation loss claimed under the head 'income from other sources.' The assessee claimed this amount as proportionate depreciation relating to speculation business, which was added back in the normal business profit and loss calculation. The AO, not satisfied with the explanation, added this amount to the total income. The Ld.CIT(A) deleted the addition after verifying the details, noting that the amount represented depreciation related to the speculation business and was appropriately accounted for. The Tribunal upheld the Ld.CIT(A)'s decision, noting that the AO's observations lacked factual basis. Consequently, this ground raised by the Revenue was dismissed.Conclusion:The appeal filed by the Revenue was dismissed in its entirety. The Tribunal upheld the Ld.CIT(A)'s decisions on all grounds, emphasizing the need for substantial evidence and proper procedural adherence by the AO. The Tribunal also highlighted the importance of independent verification and cross-verification in assessment proceedings.