Section 68 and 115BBE addition deleted; capital loss and commission expenses allowed; Section 14A disallowance limited to exempt income

The ITAT Delhi allowed the assessee's appeal on multiple grounds. The addition under section 68 read with section 115BBE relating to cash deposits during demonetization was deleted as the revenue failed to prove the source was not genuine. The long-term capital loss on forfeiture of commercial property rights was accepted, directing the AO to allow the loss with indexation benefits. The short-term capital loss on sale of shares through a recognized stock exchange was upheld, dismissing the revenue's appeal. Commission expenses paid to relatives of the director were allowed as legitimate transfer expenses for computing capital gains. Lastly, the disallowance under section 14A was restricted to the actual exempt income earned, consistent with HC and SC rulings, and the amendment to section 14A was held prospective, supporting the CIT(A)'s order. All relevant grounds raised by the assessee were allowed, while the revenue's appeals were dismissed.

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ISSUES:

Whether cash deposits made during demonetization period can be disallowed under section 68 read with section 115BBE for want of source proof.Whether forfeiture of advance payments for a commercial plot, resulting in extinguishment of rights, amounts to a "transfer" of a capital asset entitling the assessee to claim long-term capital loss with indexation benefit.Whether short-term capital loss claimed on sale of shares traded in the recognized stock exchange through a registered broker can be disallowed on grounds of alleged artificial loss.Whether commission payments made to relatives of a director are allowable transfer expenses while computing long-term capital gains.Whether disallowance under section 14A of the Income-tax Act can exceed the amount of exempt income earned by the assessee.

RULINGS / HOLDINGS:

The source of cash deposits of Rs 12 lakhs during demonetization period was duly proved by the assessee through cash book and audited balance sheet showing opening cash balance; the addition under section 68 read with section 115BBE was deleted as the revenue failed to discharge the onus of disproving the source.The forfeiture of advance payments and consequent extinguishment of the assessee's right in the commercial plot constitutes a "transfer" within the meaning of section 2(47) of the Act; hence, the assessee is entitled to claim long-term capital loss with indexation benefit despite no sale consideration received.The short-term capital loss on sale of shares purchased and sold in the open market through a registered broker on a recognized stock exchange, with payment of securities transaction tax, is genuine and allowable; the loss cannot be disallowed merely on suspicion of artificiality.Commission payments made to relatives of the director, supported by bank statements, tax returns, and proof of services rendered for enabling the sale of property, are allowable transfer expenses under the Act while computing long-term capital gains; there is no bar on commission payments to related parties if services are genuine.The disallowance under section 14A cannot exceed the amount of exempt income earned; restricting the disallowance to the exempt dividend income of Rs 3 lakhs is consistent with binding judicial precedents and statutory interpretation.

RATIONALE:

The Court applied the principle that the onus to disprove the source of cash deposits lies on the revenue, relying on precedents that the revenue must prove that cash balances were utilized elsewhere and not available at the time of deposit; the businessman's conduct cannot be dictated by the revenue.The Court interpreted "transfer" under section 2(47) to include extinguishment of rights in a capital asset, supported by the legal position that forfeiture of rights amounts to transfer; the statutory provision allows claiming indexed cost of acquisition even when no sale consideration is received.The Court relied on the evidentiary standard that genuine transactions carried out in the recognized stock exchange through registered brokers, with payment of securities transaction tax, cannot be disregarded without contrary evidence; suspicion alone is insufficient for disallowance.The Court considered the provisions of section 40A(2)(b) and found no prohibition on payments to related parties where services are rendered and evidenced; the genuineness of services and proper documentation justify allowance of commission as transfer expenses.The Court followed binding decisions of the jurisdictional High Court and Supreme Court holding that section 14A disallowance cannot exceed exempt income; it noted that amendments to section 14A are prospective and do not apply retrospectively, reinforcing the limitation on disallowance.

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