TaxTMI 
TaxTMI 
TaxTMI 
2014 (12) TMI 300
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....following the observation made in assessment order passed for AY 2006-07 on the very same issue quantified notional interest income at Rs. 58,10,000 on the loans and advances where there is no written agreement between assessee and other party and made addition accordingly which resulted in the reduction of loss to Rs. 2,37,51,957 as against Rs. 2,95,61,957 as claimed in the revised return. Being aggrieved of the addition so made, assessee preferred appeal before ld. CIT(A). Ld. CIT(A) following the orders passed by him for AY 2005-06 and 2006-07 confirmed the addition made. 4. The learned AR, at the outset, submitted before us that additions made for the AY 2005-06 and 2006-07, in the meanwhile have been deleted by ITAT while considering assessee's appeal in ITA Nos. 468/Hyd/09 and 1111/Hyd/2011 dated 05/09/14. Ld. DR also agreed that the issue has been decided in favour of assessee in the preceding AYs' by ITAT in assessee's own case. 5. We have considered the submissions of the parties and perused the orders of the revenue authorities as well as other material on record. A perusal of the assessment order as well as order passed by ld. CIT(A) would make it clear that addition o....
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..... Accordingly, for the purpose of determining whether there has been accrual of real income or not, recourse is to be made to ascertain the nature of business and character of the transaction and the realities and peculiarities of the situations. The decision very heavily relied upon by the first appellate authority in the case of State Bank of Travancore Vs CIT (1986) 158 ITR 102 was subsequently overruled in its land mark decision in the case of UCO Bank Vs CIT 237 ITR 889. In this regard, we place reliance on the ratio laid down by various judicial authorities on the proposition that the income cannot be taxed on hypothetical basis, and it is only the real income that is to be brought to tax. In this behalf, we also rely, giving below summary of the ratio laid down, on the following decisionsa) CIT vs. Godhra Electricity Co. 225 ITR 746 (SC), The view expressed was that if income does not result at all, there cannot be any tax and that if an income has not materialized, then merely an entry made about a hypothetical income by following book keeping methods, the liability to tax cannot be attracted. b) Andhra bank(225 ITR 447)(SC): It was held, that there cannot be a tax if n....
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....n the case of NSL Power Infrastructure Ltd. V/s. CIT in ITA No. 1219/Hyd/2011 dated 24.1.2013, relied upon by the learned counsel for the assessee before us, duly pointing that the High Court in ITTA No. 607 of 2013, has dismissed the appeal by the Department, by holding that non-offering of interest income is distinguished when there is no certainty and the company has not derived any interest. As for the decision of State Bank of Travancore V/s. CIT (158 ITR 102), relied upon by the learned CIT(A) in the impugned order, as pointed out by the learned counsel for the assessee the Hon'ble Supreme Court has reversed the view taken in that case, vide its decision in UCO Bank (237 ITR 889) wherein it has been held as follows: "......The question whether interest earned, on what have come to be known as "sticky" loans, can be considered as income or not until actual realisation, is a question which may arise before several Income-tax Officers exercising jurisdiction in different parts of the country. Under the accounting practice, interest which is transferred to the suspense account and not brought to the profit and loss account of the company is not treated as income. The question wh....
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....vision. The officers, therefore, were asked to intimate to all the companies that if the loans were repaid before June 30, 1955, in a genuine manner, they would not be taken into account in determining the tax liability of the shareholders to whom they may have been advanced despite the new section. This circular was held by this court as binding on the Revenue, though limiting the operation of section 12(1B) or excluding certain transactions from the ambit of section 12(1B). It was so held because the circular was considered as issued for the purpose of proper administration of the provisions of section 12(1B) and the court did not look upon this circular as being in conflict with section 12(1B). A similar view of the Central Board of Direct Taxes circulars has been taken in the case of K.P. Varghese v. ITO [1981] 131 ITR 597, by a Bench of two judges consisting of P.N. Bhagwati and E.S. Venkataramiah, JJ. The Bench has held that circulars of the Central Board of Direct Taxes are legally binding on the Revenue and this binding character attaches to the circulars even if they be found not in accordance with the correct interpretation of the section and they depart or deviate from s....
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....e the purchase price shown as the apparent consideration under the agreement between the parties, was held to be binding on the authority. The Constitution Bench in the above case also approved of the decision of this court in K.P. Varghese v. ITO [1981] 131 ITR 597. There are, however, two decisions of this court which have been strongly relied upon by the respondents in the present case. The first decision is the majority judgment in State Bank of Travancore v. CIT [1986] 158 ITR 102, decided by a Bench of three judges of this court by a majority of two to one. This judgment directly deals with interest on "sticky advances" which have been debited to the customer but taken to the interest suspense account by a banking company. The majority judgment has referred to the circular of October 6, 1952, and its withdrawal by the second circular of June 20, 1978. The majority appears to have proceeded on the basis that by the second circular of June 20, 1978, the Central Board had directed that interest in the suspense account on "sticky" advances should be includible in the taxable income of the assessee and all pending cases should be disposed of keeping these instructions in view. Th....
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.... provision of the statute in certain situations by applying a beneficial interpretation to the provision in question so as to benefit the assessee and make the application of the fiscal provision, in the present case, in consonance with the concept of income and in particular, notional income as also the treatment of such notional income under accounting practice. In the premises the majority decision in the State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC), cannot be looked upon as laying down that a circular which is properly issued under section 119 of the Incometax Act for proper administration of the Act and for relieving the rigour of too literal a construction of the law for the benefit of the assessee in certain situations would not be binding on the departmental authorities. This would be contrary to the ratio laid down by the Bench of five judges in Navnit Lal (C.) Javeri v. K.K. Sen [1965] 56 ITR 198 (SC). In fact State Bank of Tranvancore v. CIT [1986] 158 ITR 102 (SC), has already been distinguished in the case of Keshavji Ravji and Co. v. CIT [1990] 183 ITR 1 (SC), by a Bench of three judges in a similar fashion. It is held only as laying down that a circular c....
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....e-tax authorities in a specific situation and, therefore, validly issued under section 119 of the Income-tax Act. As such, the circular would be binding on the Department. The other judgment on which reliance was placed by the Department was a judgment of a Bench of two judges of this court in Kerala Financial Corporation v. CIT [1994] 210 ITR 129, where this court, following the majority view in State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC), held that interest which had accrued on a "sticky" advance has to be treated as income of the assessee and taxable as such. It is said that ultimately, if the advance takes the shape of a bad debt, refund of the tax paid on the interest would become due and the same can be claimed by the assessee in accordance with law. For reasons set out above, we are not in agreement with the said judgment. The relevant circulars of the Central Board of Direct Taxes cannot be ignored. The question is not whether a circular can override or detract from the provisions of the Act; the question is whether the circular seeks to mitigate the rigour of a particular section for the benefit of the assessee in certain specified circumstances. So long as su....
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.... credit side. Assessee has also not explained how it arrived at the value of closing stock at Rs. 18,32,18,929 as per the revised computation. Ld. CIT observed that this aspect has not been verified by AO while completing the assessment u/s 143(3), which has resulted in under assessment of income to the extent of Rs. 4,86,95,344. 2. P&L account reflects receipt of dividend income to the extent of Rs. 39,51,789 which has been claimed as exempt. However, AO has failed to examine the issue of proportionate disallowance of expenditure u/s 14A. 3. While completing assessment, AO has made addition to the tune of Rs. 58,10,000 towards unaccounted interest income. However, he has failed to initiate penalty proceedings u/s 271(1)(c). 10. Pointing out the aforesaid defects and deficiencies in the assessment which according to ld. CIT has rendered the assessment order erroneous and prejudicial to the interests of revenue, he issued show cause notice to assessee. In response to show cause notice, assessee submitted his reply objecting to the initiation of proceeding u/s 263 by making following submissions: " . The company is engaged in the business of buying and selling of securities. Ther....
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....ed during the assessment proceedings. ix. The Assessing Officer in fact, called for a further note on the valuation of stock both as per annual report and revised return, which note was submitted vide letter dated 15/12/2009 (Annexure # 2). x. It is only after such verification of the submitted statements/documents, the Assessing Officer accepted the revised value of closing stock worked out by the assessee company. XI. Therefore, it can neither be said that the aspect of revised valuation of closing stock has not been explained by the assessee nor that the said aspect has not been examined by the assessing officer while passing the order u/ s 143(3). Xii. Accordingly, there is no under assessment of income to the extent of Rs. 4,86,95,344 (i.e. Rs. 23,1 9,273 - Rs. 18,32,18,929) xii. Further to the above, it was stated that the credit side of the P&L does not reflect the closing stock of Rs. 23,19,14,273. It is submitted that Income from capital market operations of Rs. 1,61,43,246 reflected in the P&L Account is arrived at after taking into account the closing stock of Rs. 23,19,14,273." 11. After considering the submissions of assessee, ld. CIT, however, was not in agreeme....
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....-2 does not apply to assessee. Similarly, AS-3, which deals with accounting for investments also does not apply to assessee. Ld. CIT referring to various judicial precedents opined that method of valuation adopted by a taxpayer should be followed regularly. He observed that assessee in the past had consistently and regularly valued closing stock of shares at cost price. However, during the previous year corresponding to AY under dispute for converting income into loss assessee changed the valuation of closing stock from cost price to cost or market price whichever is lower. He, therefore, held that intention of assessee in reducing the value of closing stock is to convert the taxable income in to loss, as assessee did not value the opening stock at cost or market price whichever is lower. Therefore, value of closing stock adopted by assessee distorts the profits. As AO has failed to examine the change in valuation of stock which otherwise, if examined, would have resulted in not allowing loss on the valuation of shares amounting to Rs. 4,86,95,344. He, therefore, directed AO to adopt the value of closing stock of shares as reflected in the financial statements at Rs. 23.19 crores a....
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....of valuation of closing stock. In this context, ld. AR specifically referred to the note submitted before AO explaining that though assessee generally adopts accepted accounting principle for valuing the stock at cost or market price whichever is lower, the value of closing stock as on 31/03/07 as per the annual report has been erroneously arrived at on the basis of weighted average cost price without taking into account the market price of the securities as on that date. Once assessee became conscious of the error committed, it revised the valuation of stock as on 31/03/07 by working out the value of closing stock on the basis of cost or market price whichever is lower. Ld. AR referring to the valuation of closing stock as per the weighted average cost price and the actual market rate of the stock as per the BSE index submitted that adopting the market price of BSE, assessee revalued the stock as per the revised closing stock statement submitted before AO. Ld. AR submitted that from the aforesaid materials submitted before AO, it becomes clear, not only assessee has submitted every detail relating to revised valuation of closing stock but AO after examining all the details and hav....
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.... submitted that only because assessee has valued the stock at the weighted average in stead of valuing it cost or market price whichever is lower, assessee revised valuation without changing accounting policy. So far as the observation by ld. CIT that AS-2 and AS-13 of ICAI does not apply to shares, debentures and other financial instruments held as stock-in-trade, ld. AR submitted that even such observation of ld. CIT is factually incorrect. In this context, ld. AR referring to AS-13 of ICAI submitted that explanatory note to clause 1 of AS-13, makes it clear that provisions of AS-13 to the extent they relate to current investments are also applicable to shares, debentures and other securities held as stock-in-trade. Ld. AR submitted that when it is patent and obvious that AO has enquired into the matter and examined the issue, assessment order cannot be revised only because it was not discussed in the assessment order. In support of such contention, he relied on the following decisions: 1. Lanco Kondapalli Power Ltd. Vs. JCIT, 33 ITR (Trib) 142 2. Spectra Shares and Scrips Pvt. Ltd., 354 ITR 35 (AP) 14. Ld. AR submitted that when the change in valuation is bonafide, assessment....
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.... not directed AO to apply Rule 8D. However, there cannot be any dispute with regard to the fact that assessee has earned exempt income during the year for which assessee certainly must have incurred some amount of expenditure. Therefore, in terms with section 14A of the Act, disallowance has to be made. 19. As far as the direction of ld. CIT for initiating proceeding u/s 271(1)(c), ld. DR submitted that, though, ld. CIT can direct AO to initiate proceeding u/s 271(1)(c) but considering the fact that similar addition made has been deleted by ITAT, the direction of ld. CIT can be modified. 20. We have considered the submissions of the parties and perused the orders of revenue authorities as well as other materials on record. We have also applied our mind to the decisions relied upon by the parties. It is evident from the show cause notice issued u/s 263 as well as the impugned order of ld. CIT that assessment order has been revised by considering it to be erroneous and prejudicial to the interests of revenue for the following three reasons: 1. AO has accepted the revised valuation of closing stock without enquiry and application of mind. 2. AO has not disallowed the expenditure u....
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....rs. Furthermore, it is evident from record, during the assessment proceeding, AO has specifically enquired into the valuation of closing stock and the note submitted by assessee during the assessment proceeding, a copy of which is at page 50 of paper book, clearly explains the situation leading to revision in valuation of closing stock. From the aforesaid facts it is established that AO has enquired into the matter and after examining the explanation/submissions of assessee along with other factual details submitted before him, he has accepted the revised valuation of closing stock. Therefore, when the AO has enquired in to the matter and after proper application of mind to the facts and materials on record has passed the assessment order, it cannot be said that assessment order passed is erroneous and prejudicial to the interests of revenue merely because there is no reference in the assessment order with regard to the stock valuation. 22. The Hon'ble AP High Court in case of Spectra Shares and Scripts Pvt. Ltd. Vs. CIT (supra) while dealing with the CIT's power u/s 263 after taking note of ratio laid down by the Hon'ble Supreme Court as well as different High Courts in the numbe....
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....tion of AS- 13 or the facts on record. In the aforesaid view of the matter, we are of the opinion that assessment order on this issue cannot be held to be erroneous and prejudicial to the interests of revenue. Accordingly, we set aside the direction of ld. CIT on this issue. 23. The next issue on which ld. CIT has revised the assessment order is, AO has failed to disallow the expenditure incurred on earning exempt income in terms with section 14A of the Act. There is no dispute to the fact that assessee during the year has shown dividend income of Rs. 39,51,789, which is claimed as exempt. As AO has not made any disallowance u/s 14A of the Act, ld. CIT directed him to examine and disallow expenditure incurred on earning the dividend income in terms with section 14A after taking note of the fact that assessee has incurred interest expenditure of Rs. 4.84 crores during the year. 24. Having heard the submissions of the parties, we are of the view that though Rule 8D cannot be applied retrospectively to the AY under dispute as it came into the statute w.e.f. 24/03/2008, however, it cannot be overlooked that the provisions contained u/s 14A of the Act were existing in the statute whic....