TaxTMI 
TaxTMI 
2022 (8) TMI 1376
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...., 1961, once it is established that claim of the assessee 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 ....
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....ase, it is humbly submitted that the following submission may kindly be considered with regard to Section 14A of I.T. Act. 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 in....
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....to such income having been incurred. The CBDT Circular 5/2014, after explaining the rationale of the provision of section 14A (with reference to Circular 14 of 2001), i.e., to curb the 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. ....
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.... Act, 1961 as in force during the Assessment Year i.e. 2002-2003, was admissible or otherwise, made the following observations: "32. A brief reference to the decision of this Court in Walfort Share and Stock Brokers (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 tha....
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....a result of the expenditure and therefore, the interest paid on money borrowed for investment in shares, which had not yielded any dividend, was admissible under section 57(iii). The ratio decidendi of the judgment of Hon'ble Supreme Court in CIT v. Rajendra Prasad Moody (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, irrespecti....
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....d. If an expenditure incurred has no causal connection with the exempted income, then such an expenditure would obviously be treated as not related to the income that is exempted from tax, and such expenditure would be allowed as business expenditure. To put it differently, such expenditure would 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 ....
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.... in principle, been now widened under section 14A." "35. The Delhi High Court, therefore, correctly observed that prior to introduction of Section 14A of the Act, the law was that when an assessee had a composite and indivisible business which had elements of both taxable and non-taxable income, the entire expenditure in respect 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 i....
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....nvestment. To this extent, the High Court may be correct. At the same time, we do not agree with the test of dominant intention applied by the Punjab and Haryana High Court, which we have already discarded. In that event, the question is as to on what basis those cases are to be decided where the shares of other companies are purchased by the assessee 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 expenditu....
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....ract of which is as under: • "A legislation, be it a statutory Act or a statutory rule or a statutory Notification, may physically consists of words printed on papers. However, conceptually it is a great deal more than an ordinary prose. There is a special peculiarity in the mode of verbal communication by a legislation. A legislation is not just a series of statements, such as one finds in a work of fiction/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 c....
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....lear manner the dominant intention of the statute. The same intention which was sought to be redressed by the CBDT vide Circular no.5/2014 dated 11/02/2014. For the sake of repetition, it is stressed again that the intention of the statute is that expense disallowance under the said section shall apply and shall be deemed to have always applied even in a case where the exempt income has not accrued or arisen or has not been received during a particular year. It 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 ....
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....t was engaged in investment in shares till 31.03.2010 and such shares were held as investment and were shown accordingly in the audited balance sheet as at 31.03.2010. The appellant also submitted that the board of directors in their meeting held on 01.04.2010 decided to hold the investments in equity shares and units of mutual funds as Stock in Trade with immediate effect. The reference of the same was also given in Note no. 19 of schedule 21 of the Audited Accounts. The appellant also submitted that the entire 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 incom....
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..... 4.5.4 It is noted here that as per the appellant, the investments were converted into stock-in-trade on 01.04.2010 i.e. during the Present Pervious Year itself. As per section 2(47)(iv) of the Act, transfer includes conversion of capital assets into stock- in-trade. Further, as per section 45(2) of the Act the capital gains arising from conversion of capital asset into stock-in-trade is chargeable to tax in the previous year in which such stock-in-trade has been sold or otherwise transferred. In the present case since the investments, 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 chargea....
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.... by the revenue: "1. On the facts and circumstances of the case, the ld. CIT(A) has erred in law in deleting the addition of Rs.15,74,16,144/- made by the AO on account of disallowance u/s 14A of the Income Tax Act, 1961. 2. On the facts and circumstances of the case, the ld. CIT(A) has erred in ignoring the prescribed method under rule 8D for calculating the disallowance u/s 14A of the Income Tax Act, 1961, once it is established that claim of the assessee is not correct." ITA No. 4972/Del/2015 : A.Y. 2012-13 (Assessee Appeal) 19. 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 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.....
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....TA No. 4971/Del/2015 in this order stands applicable. The appeal of the assessee on this ground is dismissed. Addition on account of Surrendered Income: 23. During the year, the Assessing Officer mad addition under the head "income from capital gains" of Rs.5,81,46,845 and disallowance u/s 14A which amounts to Rs.15,74,16,144/-. Both the additions have been dealt in the preceding paras of this order. 24. Further, the ld. CIT(A) held that the assessee has gone back on the surrender of Rs.10 Cr. made during the post search proceedings and the same was not completely honoured. The ld. CIT(A) held that the assessee has only surrendered 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 accou....
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....829) and the balance addition is hereby deleted. In the subsequent grounds relating to 14A disallowance-and capital gain on sale of shares I am partly confirming the AO's action. The additional income resulting from part confirmation of those grounds would also be telescoped into the above stated Rs. 8,24,33,171/- as the same is covered by the narration of the surrendered income." 25. We find that this is an ad-hoc enhancement made by the ld. CIT(A) which is not backed up by any material found and seized during the search. 26. We have gone through the Circular of the CBDT with regard to surrender taken in the statement recorded u/s 132(4). 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 assessee....