TaxTMI 
TaxTMI 
2022 (8) TMI 1376
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....ee is not correct. 4. On the facts and circumstances of the case, the CIT(A) has erred in ignoring the fact that section 45(2) is applicable on version of investment to stock in trade of Rs. 1,79,14,46,369/- which was on 01.04.2010 as per submission of the assessee. Thus, the ld. CIT(A) has failed to enhance that capital gain arising from conversion of capital asset into stock in trade as per section 45(2) of the Ac 1961." ITA No. 4971/Del/2015 : A.Y. 2011-12 (Assessee Appeal) 2. Following grounds have been raised by the assessee: "1. That on the facts and in circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) has erred by not appreciating the facts that loan given to M/s Arctic International (P) Ltd., Mauritius (AE) was out of the shareholders fund and not out of any interest bearing borrowed fund. 1.1 That the finding of the Commissioner of Income Tax (Appeals) on disallowance of Rs.1,83,35,019/- are self contradictory and bad in law. 2. That on the facts and in circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) has erred by not appreciating the facts of the case that the said loan was given for the dire....
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.... Submission on Section 14A a. Section 14A of the Income-tax Act, 1961 ('Act') was into the Income Tax Act, 1961 vide Finance Act 2001, with retrospective application from 1.4.1962. It provides for disallowance of expenditure in relation to income not "includible" in total income. Over a period of time, there have been several cases decided on this issue by various High Courts. CBDT issued a Circular no. 5/2014 on 11th February 2014, clarifying, inter alia, as follows: "A controversy has arisen in certain cases as to whether disallowance can be made by invoking section 14A of the Act even in those cases where no income has been earned by an assessee which has been claimed as exempt during the financial-year." 3. It is pertinent to mention that section 14A of the Act was introduced by the Finance Act, 2001 with retrospective effect from 01.04.1962. The purpose for introduction of section 14A with retrospective effect since inception of the Act was clarified vide Circular No. 14 of 2001 as under: "Certain incomes are not includible while computing the total income, as these are exempt under various provisions of the Act. There have been cases where deductions have b....
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....practice of reducing the tax liability on taxable income (i.e., income forming part of the total income) by claiming expenditure incurred in earning tax-exempt income against taxable income, goes on to state that the legislative intent is that the expenditure relatable to earning such income shall have to be considered for disallowance. In that event i.e., expenditure relating to earning tax-exempt income having been incurred, it would become irrelevant if the exempt income has actually materialized or not, so that the disallowance of the said expenditure u/s. 14A would follow. The same therefore is only a continuation of Circular 14 of 2001, taking the premise of section 14A to its logical conclusion. The purpose of these Circulars and the legislative intent is to apply the basic principle of taxation, i.e., that it is only the net income - taxable or non-taxable, i.e., net of all expenditure incurred for earning the same, that could be subject to tax or, as the case may be, exempt from tax. The later Circular, which is in consonance with the Memorandum explaining the provisions of Finance Bill, 2001 (introducing section 14A) as well as the Notes to the Clauses presented along ....
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....ers (P.) Ltd. (supra) may now be made, if only, to make the discussion complete. In Walfort Share and Stock Brokers (P.) Ltd.(supra) the issue involved was: "whether in a dividend stripping transaction the loss on sale of units could be considered as expenditure in relation to earning of dividend income exempt under Section 10(33), disallowable under Section 14A of the Act?" "33. While answering the said question this Court considered the object of insertion of Section 14A in the Income Tax Act by Finance Act, 2001, details of which have already been noticed. Noticing the objects and reasons behind introduction of Section 14A of the Act this Court held that: "Expenses allowed can only be in respect of earning of taxable income." "In paragraph 17, this Court went on to observe that: "Therefore, one needs to read the words "expenditure incurred" in section 14A in the context of the scheme of the Act and, if so read, it is clear that it disallows certain expenditure incurred to earn exempt income from being deducted from other income which is includible in the "total income" for the purpose of chargeability to tax." "The views expressed in Walfort Share and Stock Broker....
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.... (supra) can be applied to say, by the same analogy, that the expenditure incurred to earn an exempt income is subject to its admissibility in accordance with the provisions of the Income Tax Act, 1961 including those of section 14A irrespective of whether there is a receipt or income or not during the year under consideration. In sum, the principle that it is the net income, i.e., net of expenditure relatable thereto, which is subject to tax and, correspondingly, not liable to tax, i.e., where it does not form part of the total income, is well established. It follows, therefore, that once an income is liable (or not liable) to tax, all expenditure relatable thereto is to be reckoned, and it matters little that the said expenditure has indeed resulted in a positive income. This principle, i.e., to exclude all expenditure relatable to the earning of income not forming part of the total income, irrespective of its quantum, has also been noted with approval by the Hon'ble Apex Court in the case of Maxopp Investment Ltd. reported in [2018] 91 taxmann.com 154 held vide order dated 12.02.2018 Hon'ble Supreme Court has observed in para 3 and 32 the following: "3. Though, it ....
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....ould then be considered as incurred in respect of other income which is to be treated as part of the total income." The Hon'ble Supreme Court, in the judgment in the case of Maxopp Investment Ltd. reported in [2018] 91 taxmann.com 154 (SC), has also affirmed the view that the dominant purpose for which investment into shares is made by assessee may not be relevant as section 14A applies irrespective of whether shares are held to gain control or as stock-in-trade and further interpreted the dominant purpose test and upheld the theory of apportionment, in following words: "33.............The entire dispute is as to what interpretation is to be given to the words in relation to in the given scenario, viz. where the dividend income on the shares is earned, though the dominant purpose for subscribing in those shares of the investee company was not to earn dividend. We have two scenarios in these sets of appeals. In one group of cases the main purpose for investing in shares was to gain control over the investee company. Other cases are those where the shares of investee company were held by the assessee as stock-in-trade (i.e. as a business activity) and not as investment to e....
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....pect of said business was deductible and, in such a case, the principle of apportionment of the expenditure relating to the non-taxable income did not apply. The principle of apportionment was made available only where the business was divisible. It is to find a cure to the aforesaid problem that the Legislature has not only inserted Section 14A by the Finance (Amendment) Act, 2001 but also made it retrospective, i.e., 1962 when the Income Tax Act itself came into force. The aforesaid intent was expressed loudly and clearly in the Memorandum explaining the provisions of the Finance Bill, 2001. We, thus, agree with the view taken by the Delhi High Court, and are not inclined to accept the opinion of Punjab & Haryana High Court which went by dominant purpose theory. The aforesaid reasoning would be applicable in cases where shares are held as investment in the investee company, may be for the purpose of having controlling interest therein. On that reasoning, appeals of Maxopp Investment Limited as well as similar cases where shares were purchased by the assessees to have controlling interest in the investee companies have to fail and are, therefore, dismissed. 36. There is yet ano....
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.... as 'stock-in-trade' and not as 'investment'. We proceed to discuss this aspect hereinafter. 39. In those cases, where shares are held as stock-in-trade, the main purpose is to trade in those shares and earn profits therefrom. However, we are not concerned with those profits which would naturally be treated as 'income' under the head 'profits and gains from business and profession'. What happens is that, in the process, when the shares are held as 'stock-in-trade', certain dividend is also earned, though incidentally, which is also an income. However, by virtue of Section 10 (34) of the Act, this dividend income is not to be included in the total income and is exempt from tax. This triggers the applicability of Section 14A of the Act which is based on the theory of apportionment of expenditure between taxable and non-taxable income as held in Walfort Share & Stock Brokers (P.) Ltd. case. Therefore, to that extent, depending upon the facts of each case, the expenditure incurred in acquiring those shares will have to be apportioned." Hence, the Hon'ble Supreme Court, in the judgment in the case of Maxopp Investment Ltd. has held as under:....
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....n/non-fiction or even in a judgment of a Court of law. There is a technique required to draft a legislation as well as to understand a legislation. Former technique is known as legislative drafting and latter one is to be found in the various principles of 'Interpretation of Statutes'. Vis-a-vis ordinary prose, a legislation differs in its provenance, lay-out and features as also in the implication as to its meaning that arise by presumptions as to the intent of the maker thereof. [Para 30] * Of the various rules guiding how a legislation has to be interpreted, one established rule is that unless a contrary intention appears, a legislation is presumed not to be intended to have a retrospective operation. The idea behind the rule is that a current law should govern current activities. Law passed today cannot apply to the events of the past. One principle of law is known as lex prospicit non respicit: law looks forward not backward. As was observed in Philips v. Eyre [1870] LR 6 QB 1 a retrospective legislation is contrary to the general principle that legislation by which the conduct of mankind is to be regulated when introduced for the first time to deal with futur....
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.... does not talk about income earned during a particular year but income earned under the Income Tax Act. Most importantly the clarification has not modified accrued rights or imposed obligations or imposed new duties or attached new disabilities but only sought to reinforce the spirit behind the law which was the stand of the Law makers from the date of introduction of the section 14A vide Finance Act 2001, with retrospective application from 1.4.1962. In the instant case of the appellant, as the amendments are applicable retrospectively the disallowance made by the AO deserves to be confirmed." 7. As the facts reveal that the assessee has earned Rs.50,000/- only as dividend, relying on the judicial pronouncements mentioned below and the settled position of law, we hold that no disallowance is called for more than the amount earned as dividend. (i) Joint Investments Pvt. Ltd. Vs. CIT (59 com 295) - it was held that disallowance u/s 14A of the Act is to be restricted to the tax exempt income. (ii) Daga Global Chemicals Pvt. Ltd. Vs. ACIT [2015-ITRV-ITAT-MUM-123) - has held that disallowance u/s 14A r.w.Rule 8D cannot exceed the exempt income. (iii) M/s. Pinnacle Brocom Pv....
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....tire investments held as on 01.04.2010 consisting of 64696536 Nos. of equity shares / units of Mutual Funds costing Rs.1,79,14,46,369/- were transferred to Stock in trade. The appellant vide the said reply also submitted the scrip-wise share trading chart for Financial Year 2010-11 and Financial Year 2011-12 showing the complete details of shares transferred from investment account, their cost and number of shares transferred, purchases made showing quantity and value and the sale made showing the quantity and value and closing stock of share. The appellant also submitted that the profit made on trading in shares has been duly shown as business income in the computation of income for the assessment year 2011-12 and 2012-13. 11. The Assessing Officer has completed the assessment under section 153A read with section 143(3) by making addition of Rs.18,85,98,890/- as income from capital gain from sale of unquoted shares of sister concerns by rejecting the books of account / book results without appreciating the fact that the appellant has already considered trading profit on sale of the said unquoted shares in its profit & loss account as well as return of income and discharged tax li....
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....s, according to the appellant, were converted into stock-in-trade during the present Previous Year itself, it is liable to offer for tax, the capital gain on conversion of such investments into stock-in-trade. The assessee has not shown any capital gain arising on such conversion. Thus even if one goes by the appellant's version, an amount equal to market value of the unquoted shares as on 01.04.2010 minus their cost becomes chargeable to tax during the present Pervious Year under the head capital gains. The balance amount i.e. the difference between the sale price and the price at which the conversion of investment took place would be chargeable under the head income from business. Since, the conversion and subsequent sale have taken place during the same previous year, the sale proceeds become taxable under the head capital gain, unless the appellant has adopted different rates for conversion & subsequent transfers. 4.5.5 However as pointed out by the AO from the seized documents (page 60 & 61 of annexure A-3 referred to at pages 12 to 15 of the assessment order) and the statement of Sh. Rajesh Chopra Director of the company dated 27.02.2014 (referred to at page 15 of the asse....
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....s have been raised by the assessee: 1. That on the facts and in circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) has erred by not accepting the revised surrendered income of Rs. 1,75,66,829/- shown in the return of income filed in response to notice issued u/s 153A as additional interest income instead of Rs.10,00,00,000/- surrendered during post search proceedings by applying the principal of estoppel. 1.1 That the Ld. Commissioner of Income Tax (Appeals) was grossly erred in law holding that principal of estoppel apply to surrender during the search. 1.2 That Ld. Commissioner of Income Tax (Appeals) erred in law in holding that an assessee cannot revisit the surrender made during search even if there was a bona fide cause for such retrieval. 1.3 That the findings of the Commissioner of Income Tax (Appeals) on surrender are contradictory to his own findings about rejections of the books of accounts and findings on surrender are bad in law. Once books of accounts are accepted as that then revised surrender should also have been accepted. 2. That on the facts and in circumstances of the case and in law, the Ld. Commissioner of Income T....
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....ndered Rs.1,75,66,829/- being the interest on loan given to Australian AE and taxed an amount of Rs.8,24,33,171/-. While enhancing the addition, the ld. CIT(A) held as under: "4.1.4....................that during the search proceedings the appellant had surrendered Rs.10 crore as additional income "on account of disallowance of expenses and others". Based on its surrender, the IT Authorities had stopped the investigation into the affairs. Thereafter, the appellant has gone back on its surrender. The action of the AO in rejecting books of account is being negatived for the reasons that no adverse evidences could be found from the books of accounts. However, the same does not mean that the appellant's affairs are in order in all respects especially when the appellant himself had surrendered the income during search action that to towards disallowance of expenses. It is noted that the previous year relevant to the present assessment year was about to end as on the date of search (27.03.2012). The appellant best knows his true affairs. It is not the case of surrendered of undisclosed income and its immediate retraction thereafter. But the retraction has occurred after a considerable ....
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..... F. No. 286/2/2003-IT (Inv) GOVERNMENT OF INDIA MINISTRY OF FINANCE & COMPANY AFFAIRS DEPARTMENT OF REVENUE CENTRAL BOARD OF DIRECT TAXES Room No. 254/North Block, New Delhi, the 10th March, 2003 To All Chief Commissioners of Income Tax, (Cadre Contra) & All Directors General of Income Tax Inv. Sir Subject: Confession of additional Income during the course of search & seizure and survey operation -regarding Instances have come to the notice of the Board where assessees have claimed that they have been forced to confess the undisclosed income during the course of the search & seizure and survey operations. Such confessions, if not based upon credible evidence, are later retracted by the concerned assessees while filing returns of income. In these circumstances, on confessions during the course of search & seizure and survey operations do not serve any useful purpose. It is, therefore, advised that there should be focus and concentration on collection of evidence of income which leads to information on what has not been disclosed or is not likely to be disclosed before the Income Tax Departments. Similarly, while recording statement during the course of sea....