TaxTMI 
TaxTMI 
2020 (1) TMI 1633
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....rade to investment. 2.1 The Ld. CIT(A) ignored the finding recorded by the AO and the act that the value of the shares was calculated by AO at the prevailing rates of the shares in the share market on the day of conversion. 3. On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in restricting the disallowance u/s 14A of the Act to Rs.7,04,000/- as against Rs.3,56,96,487/- made by the AO. 3.1 The Ld. CIT(A) ignored the finding recorded by the AO and the act that the disallowance was correctly calculated by the AO in accordance with the provisions of Rule 8D of the IT Rules, 1962. 4. The appellant craves leave to add, to alter, or amend any grounds of the appeal raised above at the time of hearing. 2.1 Grounds of cross objection by the assessee are reproduced as under: 1. That on facts and in law, the Learned Commissioner of Income Tax (Appeals)-VIII [Ld.CIT(A)], New Delhi has erred in upholding the addition of Rs.7,04,411 without appreciating the contention of the appellant company that disallowance of expenditure in terms of section 14A read with clause (iii) of sub-rule (2) of Rule 8D can not exceed....
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.... of addition related to conversion of stock in trade into investment. 5.1 The facts qua the issue in dispute are that the assessee company was holding shares of M/s Oscar Investment Ltd.; M/s Ranbaxy Laboratories Ltd. and M/s Fortis Financial Services Ltd. During the year under consideration on 04/01/2007, by way of a book entry the assessee changed the classification of shares of three companies (quoted) held by it from "stock in trade" (i.e. current assets) to the "investments". The book entry had been passed at the amount equal to the cost of the shares, at which those shares were acquired by the assessee in earlier years as a stock in trade. According to the Assessing Officer, those shares were treated by the assessee as its trading stock (current assets) and reflected as such in the accounts, which implied that sale of the shares would result in normal business profit, but upon being converted to investments, the profit on sale of such shares would amount to long-term capital gains, which is free from the chargeability of the Income-tax. In view of the Assessing Officer, merely by change of classification of the shares, the assessee converted its taxable business profit to ....
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....the date of conversion of stock-in-trade to investment as against declared value of Rs. 4,27,21,016/- on the basis of market price as on 30 01/03/2007, and this balance amount of Rs. 14,19,57,154/- was added to the business income of the assessee. 5.5 On further appeal, the Ld. CIT(A) rejected the contention of the assessee of intention behind holding the shares in dispute as long-term investment. On the issue of treatment of difference in market price as on the date of conversion of his stock in trade into investment and the cost price, the Ld. CIT(A) discussed the ratio of following judgments: (i) Westminister Bank Ltd. Vs. Osler (Inspector of Taxes) [1993] 1 ITR 65 (HL); (ii) Royal Insurance Co. Ltd. Vs. Stephen [1928] 14 TC22 (KB) (iii) Californian Copper Syndicate Vs. Harris [1904] 5 TC 159(C. Exchq.) (iv) Raja Mohan Raja Bahadur Vs. CIT [1967] 66 ITR 378; (v) British South Africa Co. Vs. Varty (Inspector of Taxes) [1966] AC 381; (vi) Sir Kikabhai Premchand Vs. CIT, (1953) 24 ITR 506 (SC) (vii) CIT Vs. Dhanuka & Sons, (1980), 124 ITR 24(Cal.) (viii) ACIT Vs. Bright Star Investment (P) Ltd. (ITAT-Mum.) ....
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.... conversion of shares held at the stock in trade into investment in the year under consideration. 7. On the contrary, the Ld. counsel of the assessee filed a paper-book in two volumes from pages 1 to 21 and from 22 to 108. It was submitted by the ld counsel that during the year shares were converted from stock-in trade to investment in its books of account and there was no transfer or sale of shares to third parties, thus there was no real income in the hands of the assessee. The Ld. counsel relied on the order of the Ld. CIT(A) and submitted that during relevant period, there was no provision in the Act to treat the notional income arising on account of conversion of stock-in-trade into investment. The Ld. Counsel referred to amendment introduced by way of insertion of subsection (via) to section 28 of the Act with effect from 01/04/2019, where income on conversion of stock-in-trade has been brought to tax. Thus, according to the learned counsel, there was no provision in the Act prior to the amendment introduced with effect from 01/04/2019, as the relevant period in the case of the assessee is previous years corresponding to assessment year 2008-09. The learned counsel also re....
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....ear under consideration would result into income in the hands of the assessee. We find that the Ld. CIT(A) has relied on the ratio laid down in various judgments discussed in the impugned order. We find that Hon'ble Supreme Court in the case of Kikabhai Premchand (supra) concluded that withdrawal of the stock-in-trade for non-business purpose does not result in income and it can be valued at cost price, where assessee normally valued its stock at cost price. The paragraph of the decision of the Hon'ble Supreme Court (majority) is reproduced as under: 7. We are of opinion that the learned Attorney-General's second contention is unsound because, for income-tax purposes, each year is a self-contained accounting period and we can only take into consideration income, profits and gains made in that year and are not concerned with potential profits which may be made in another year any more than we are with losses which may occur in the future. 8. As regards the first contention, we are of opinion that the appellant was right in entering the cost value of the silver and shares at the date of the withdrawal, because it was not a business transaction and by that act th....
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....l canons of mercantile and IT law. And worse. He may keep it and not show a profit. He may sell it to another at a loss and cannot be taxed because he cannot be compelled to sell at a profit. But in this purely fictional sale to himself he is compelled to sell at a fictional profit when the market rises in order that he may be compelled to pay to Government a tax which is anything but fictional. 11. Consider this simple illustration. A man trades in rice and also uses rice for his family consumption. The bags are all stored in one godown and he draws upon his stock as and when he finds it necessary to do so, now for his business, now for his own use. What he keeps for his own personal use cannot be taxed however much the market rises; nor can he be taxed on what he gives away from his own personal stock, nor, so far as his shop is concerned, can he be compelled to sell at a profit. If he keeps two sets of books and enters in one all the bags which go into his personal godown and in the other the rice which is withdrawn from the godown into his shop, rice just sufficient to meet the day-to-day demands of his customers so that only a negligible quantity is left over in the s....
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....ion Trust Limited vs. Humphrey (H.M. Inspector of Taxes) (1949) 30 Tax Cases 209 (HL) : (1949) 17 ITR Suppl 19 (HL), but there the assessee received a new and valuable asset in exchange for another in the ordinary course of his trade. It was held that he was bound to account for the receipt at a fair market valuation, for though the receipt was not money it was capable of being valued in terms of money. In the present case, the assessee's business received nothing in exchange for the withdrawal of the assets, neither money nor money's worth, therefore the only fair way of treating the matter was to do just what the appellant did, namely to enter the price at which the assets were valued at the beginning of the year so that the entries would cancel each other out and leave the business with neither a gain nor a loss on those transactions. The learned Attorney-General contended that if that was allowed great loss would ensue to the State because all a man need do at the end of the year would be to withdraw all assets which had risen in value and leave only those which had depreciated and thus either show a loss or reduce his taxable profits. 14. This argumen....
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....site here. 16. The questions referred were : "(1) Whether, in the circumstances of the case, any income arose to the assessee as a result of the transfer of shares and silver bars to the trustee ? (2) If the answer to question (1) is in the affirmative, whether the method employed by the AAC and upheld by the Tribunal in computing the assessee's income from the transfer is the proper method for computing the income ?" 17. Our answer to the first question is that in the circumstances of this case no income arose to the appellant as a result of the transfer of the shares and silver bars to the trustees. In view of that, the second question does not arise. 8.1 In the instant case, there is no real income in the hands of the assessee as the shares in reference have not either sold or transferred by the assessee in the year under consideration. There is no express or specific provision during relevant period in the Act to deal with the event of conversion of stock-in-trade into investment. In absence of specific provision, notional income if any, cannot be taxed in the year under consideration. We find that The Ld. CIT(A) has followed the ratio....
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....y allowed the ground in favour of the assessee. Accordingly, the cross objection No. 3 of the assessee is dismissed. 11. The ground No. 3 and 3.1 of the appeal relates to disallowance of Rs. 3,56,96,487/-under section 14A of the Act made by Assessing Officer, which has been restricted by the Ld. CIT(A) to Rs. 7,04,000/-. The Ground No. 1 of the cross objection of the assessee is also related to the disallowance under section 14A of the Act, wherein according to the assessee the disallowance under rule 8D(2)(iii) of Rules, cannot exceed the amount expenditure actually incurred by the assessee. 11.1 The brief facts qua the issue in dispute are that the assessee made disallowance under section 14A read with rule 8D of Income-tax Rules, 1962 at Rs. 1,77,79,925/-. The assessee followed direct nexus method in accordance with rule 8D(2)(i) of Income Tax Rules, 1962 and made entire disallowance under rule 8D(2)(i) only. This disallowance made by the assessee was not found to be correct by the Assessing Officer. According to the Assessing Officer, the assessee company was managing its business with the help of borrowed funds and made investment in shares of Rs. 33.80 Crores, the incom....
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....ing to the Ld. CIT(A), once the rule 8D has been invoked, the disallowance has to made according to the rules and therefore towards the disallowance under 80d(2)(iii), he computed the disallowance of Rs.15,48,353/- and sustained the disallowance to the extent of the 7.04 lakhs out of the disallowance of Rs. 3,56,96,487 made by the Assessing Officer. 11.3 The learned DR relied on the order of the Assessing Officer and submitted a list of the decisions in support of the order of the Assessing Officer. The list of the decisions is reproduced as under: 1 Maxopp Investment Ltd. Vs CIT [2018] 91 taxmann.com 154 (SC) 2. Indiabulls Financial Services Ltd. Vs DCIT [2016] 76 taxmann.com 268 (Delhi) 3. Godrej & Boyce Manufacturing Company Ltd. Vs DCIT [2017] 81 taxmann.com 111 (SC)/[2017] 247 Taxman 361(SC)/[2017] 394 ITR 449 (SC)/[2017] 295 CTR 121 (SC) (Copy Enclosed) 4. Punjab Tractors Ltd Vs CIT [2017-TIQL-353-HC-P&H-IT] 5. Avon Cycles Ltd Vs CIT [20151 53 taxmann.com 297 (Punjab & Haryana)/[2015] 228 Taxman 368 (Punjab & Haryana)(MAG.) 6. Nahar Spinning Mills Ltd. Vs CIT [2017] 82 taxmann.com 154 (Punjab & Haryana) 7. Dy. ....
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....ubmit the breakup of the aforesaid investment along with immediate sources thereof. In response to the aforesaid, a written reply has been filed by the Ld. Counsel for the appellant, vide his letter dated 29.04.2011 as under:- Kindly refer to our discussions held on 27th April, 2011 in connection with the captioned appeal. As desired during the course of proceedings, we wish to submit as under: 1. The investments in the case of appellant as on 1st April, 2007 (i.e. at the beginning of the year under reference) were to the tune of Rs. 28.14 Crs. (Please see Page 78 of Paper Book). The same were mainly acquired in the years ended 31st March, 2007 and 31st March, 2006. The details of acquisition and source thereof is given as under: i) Investments made in Y.E. 31.03.2007 (A.Y. 2007-08) - Optionally Convertible Debentures of - 5.00 Crs. M/s. Delta Aromatics Pvt. Ltd. - Optionally Convertible Debentures of &nb....
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....p; - 28.14 Crs. 2. On perusal of the year-wise details as above, your honors would kindly observe that the opening investments (i.e. on 1st April, 2007) were ostensibly without the burden of interest cost as the appellant had either acquired them directly out of 0% OCD's of Rs. 40 Crs. raised in February/March, 2007 or had utilized the 0% OCD's amount of Rs. 40 Crs. For repayment of loans taken earlier for making such investments. However, as discussed, the disallowance of direct interest cost on investments made during the year under consideration out of borrowings made, was duly made in the Statement of Taxable Income in terms of clause (i) of sub-rule (2) of Rule 8D (Please refer Page 42 of Paper Book). 3. In view of the above, it is respectfully submitted that since the appellant had suo moto worked out the disallowance of interest cost as per direct nexus method, as consistently followed in the past and as duly accepted by the department in the scrutiny assessments (copies of Orders enclosed at Page 30 & 31 of Paper Book), the question of applicability of clause (ii) of sub-rule (2) of Rule 8D should not arise. We thus humbl....
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....expenses for earning exempt income, when the assessee has followed direct nexus method and already made disallowance of Rs.1,77,79,925/- under Rule 8D(2)(i) of the Income-tax Rules, 1962. 12.2 As regard to the disallowance under rule 8D(2)(iii) of the Income Tax Rules, 1962 is concerned, we find that in view of the decision of the Hon'ble Jurisdictional High Court in the case of joint investment Private Limited (supra), disallowance towards administrative expenses cannot be exceeded the exempted income. The relevant paragraph of the decision is reproduced as under: "9. In the present case, the AO has not firstly disclosed why the appellant/assessee's claim for attributing Rs. 2,97,440/- as a disallowance under Section 14A had to be rejected. Taikisha says that the jurisdiction to proceed further and determine amounts is derived after examination of the accounts and rejection if any of the assessee's claim or explanation. The second aspect is there appears to have been no scrutiny of the accounts by the AO - an aspect which is completely unnoticed by the CIT (A) and the ITAT. The third, and in the opinion of this court, important anomaly which we cannot be unmind....