TaxTMI 
TaxTMI 
2023 (8) TMI 1269
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....e loss in the normal course of business activities; hence, the loss disallowed by the AO shall be deleted as well as A0's action of substituting the selling price with market price shall be quashed. 2. (i) The Commissioner of Income Tax (Appeals) - 47, Mumbai [hereinafter referred as CIT(A)] erred in upholding the action of the Deputy Commissioner of Income Tax, Central Circle -1(1) [AO] in making disallowance u/s 14A of Income Tax Act, 1961 (Act) r.w. Rule 8D of the Income Tax Rules. 1962 (Rules) without recording his dis-satisfaction with fault correctness of the claim of the Appellant having regard to its books of accounts. (ii) The CIT(A) erred in upholding the action of the A in considering all investment for the purposes of making disallowance as per rule 8D(2) of the Rules as against only those investment on which Appellant has actually earned the exempt income and excluding the investment on which no exempt income is earned during subjected year. The Appellant craves leave to add, amend, modify, substitute the above grounds of appeal. 2. Briefly stated facts of the case are that the assessee company was mainly engaged in the business of activity of trading in com....
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....ling market rate as per Multi commodity exchange (MCX) and this loss which is 1.35% of the total sales turnover, was merely incidental. The learned Assessing Officer observed that substantial number of the transactions of sale had been carried out by the assessee at the prevailing market rate, but few transactions were carried out below the prevailing market prices to regular sale parties. The Assessing Officer rejected such a loss of Rs. 4,34,79,702/-incurred in relation to transactions with two parties namely m/s 'Barabanki trading Co Ltd' and m/s 'Sharp Mint Ltd'. Before the Ld. CIT(A) the assessee submitted that books of accounts of the assessee has not been rejected by the Assessing Officer and therefore he was not justified in tempering the book results except as provided under deeming provisions 40A(2) of the Act in case of transactions with related parties. The Ld. CIT(A) rejected the contention of the assessee and case laws relied upon. He followed his finding in preceding assessment year 2012-13 wherein the trading loss on transactions of the sale of the jewelry below the market price was rejected. The Ld. CIT(A) in assessment year 2012-13 observed that assessee carried o....
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....transaction is carried out with related parties or the Assessing Officer could demonstrate with evidence any under hand transfer of the cash in the transaction. The learned counsel of the assessee relied on the decision of the Tribunal in the case of Flipkart India Private Limited in ITA No. 202/Bang/2018 for assessment year 2015-16, wherein it is held that the Assessing Officer cannot disregard the profit or loss as disclosed in the profit and loss account, unless he invokes the provision of section 145(3) of the Act and can't substitute the transaction price with the market price ignoring the real price faced as what can be tax is the only the income which accrue to the assessee as laid down in section 5 of the A588 Act. 7. The Ld. Departmental Representative on the other hand relied on the order of the lower authorities. 8. We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. The assessee transacted with two parties for sale of Mentha oil in normal course of the business and suffered loss of Rs. 4,34,79,702/-. The contention of the Assessing Officer is that those transactions have been carried out at the below the m....
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....plicable to the facts of the present case. The facts of the Assessee's case and the facts of the case decided by the Hon'ble Karnataka High Court were identical. The Hon'ble Karnataka High Court held following Hon'ble Supreme Court decision in the case of Calcutta Discount Co. Ltd., reported in 1973(91) ITR 8 (SC) that where a trader transfers his goods to another trader at a price less than the market price and the transaction is a bonafide one, the taxing authority cannot take into account the market price of those goods, ignoring the real price fetched to ascertain the profit from the transaction. The Hon'ble Court explained that the only exception was if Section 40(A)(2)(a) of the Act applies viz., where the parties to the transaction are related. Following the aforesaid decisions, we hold that the AO was not right in proceeding to ignore the books results of the Assessee and resorting to a process of estimating total income of the Assessee in the manner in which he did. We find force in the submission of the learned counsel for the Assessee that what can be taxe is only income that accrues or ITA Nos.202 & 693/B/18 arises as laid down in Sec. 5 of the Act. ....
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....tion 14A real with Rule 8D of Income-tax Rules 1962 (in short 'the Rules'). It is the contention of the assessee that while making this disallowance, the Assessing Officer has not recorded dissatisfaction with the correctness of the claim of the assessee having regard to its books of accounts. It is also contended that following the decision of the special bench in the case of Vireet investment Private Limited in ITA No. 502/Del/2012 dated 16/06/2017 for AY 2008-09, for the purpose of making disallowance under rule 8D(2) only those investment should be considered on which assessee has actually earned the exempted income and investment on which no exempt income is earned during the subject year, should be excluded. 8.3 The brief facts qua the issue in dispute are that during the year under consideration assessee received dividend income of Rs. 6,91,13,757/- on shares held in stock in trade and Rs. 1,82,000/-on preferential shares held as non-current investments. The scrip wise dividend reported by the assessee is as under: Sr. No. Name of the scrips Dividend Amount Balance on 31/03/2016 Balance on 31/03/2015 1. Edelweiss Securities Limited 1,82,000 ....
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.... assessee has not incurred any expenditure and was therefore not required to calculate any disallowance of gh, expenses u/s. 14A rwr. 8D of the act. On perusal of Capital a/c of the assessee, the A noticed that, expenses incurred includes demat charges and other such expenses which have been debited. Further, AO was also not satisfied with the contention of the assessee that, no expenditure was incurred to earn exempt income. It is a common knowledge that a person cannot make investment without due diligence and necessary analysis and the investment decisions are very complex in nature which require substantial market research, day-to-day analysis of market trends and decisions with regard to acquisition, retention and sale of shares at the most appropriate time. Therefore, being not satisfied about claim of assessee, he worked out the disallowance at Rs. 3,56,65,576/- as per rule 8D read with sec 14A of the Act @ 1% of average value of investment in assets, income from which was claimed as exempted and added back to the total income of the assessee. The assessee had argued that, it has not incurred expenses in excess of Rs.34,46,555/- towards earning exempt income during the year ....
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....to be wholly consistent with the scheme of the Act and the object/purpose of levy of tax on income. Therefore, the well entrenched principle of interpretation that where the words of the statute are clear and unambiguous recourse cannot be had to principles of interpretation other than the literal view will apply. 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 144 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" 7.6 Further, the CBDT vide Circular No. 5/2014, Dated - 11.02.2014 clarified that, "Rule 8D read with section 14A of the Act provides fo....
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....vestments must be considered for 14A disallowance as per plain and clear language of Rule 8D." 7.8 Apart from that the Chennai Bench of the Income-tax Appellate Tribunal in the case of Mr. M. A. Alagappan vide order dated 03.04.2017 has held that, even in cases where no expenditure has been incurred, the tax authority has to apply Rule 8D of the Income-tax Rules, 1962 for the disallowance of expenditure under Section 14A of the Income-tax Act. The relevant para of the said decision is as under: "6 We considered the arguments of both the sides in detail. Sec.14A(1) declares the law that the expenditure incurred by the assessee in relation to the income which does not form part of the total income under the Act shall not be allowed as a deduction in computing the taxable income of the assessee. Sec. 14A(2) provides for determining the quantum of such expenditure which shall not be allowed as a deduction. That is the machinery provision as far as sec.14A is concerned. In that provision. it has been provided that if the Assessing Officer is not satisfied with the correctness of the computations made by an assessee. he shall compute the quantum in accordance with ITA No 3290/16:6 -:....
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....the amount referred to in clause (i) and clause (i) shall not exceed the total expenditure claimed by the assessee. 7.11 The above amendment has been brought on statutory we.f. 02.06.2016which states that an amount equal to 1% of the average investments income from which does not or shall not form part of the total income and that the disallowance shall not exceed the total expenditure. The amended rule does not say that, only those assets where from exempted income is earned, should be considered. The use of the "Shall" in addition to "does not" takes within its fold those investments too, which have not yielded any exempt income during the year under consideration. 7.12 The assessee's claim that, the disallowance should have been computed only on investments from which exempted income was earned is erroneous. The provision says that "even those investments income from which shall not form part of the total income have to be considered and not only the ones from which it is earning exempted income." 7.13 The above proposition is confirmed by Hon'ble Mumbai Tribunal in the case of Apurva Natvar Parikh & Co. Pvt. Ltd. bearing IT.A. No. 1704/Mum/2020 in following words:....
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....bsence of any exempt income. 7.16 In the light of the foregoing discussion, I am convinced that, all the assets which have either yielded exempt income during the year or could have yielded exempted income will be considered for working out the disallowance under rule 8D. All contentions of the appellant in this regard deserved to be dismissed. Also the case laws relied upon by the appellant are distinguishable on facts as well as recent changes in the law. Accordingly, the disallowance of Rs. 3,56,65,576/-made by AO u/s. 14A is upheld. The grounds no. 3 is accordingly dismissed." 8.5 Before us the Ld. counsel of the assessee contested the disallowance on two grounds. Firstly, according to him before invoking Rule 8D of the Rules, the Assessing Officer was required to record dissatisfaction on the claim of the assessee having regard to its books of accounts. Secondly, following finding of Vireet Investments P. Ltd (supra), the disallowance should have been restricted to investments, which has yielded dividend income. According to the learned counsel, the Assessing Officer has not verified the expenses already disallowed by the assessee particularly in the view of the expenses de....
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....llowance u/s 14A Basis of allocation Employee Cost 36,31,97,672/- 10,00,000 Proportionate employee cost of an employee Auditor Remuneration 23,08,270 6,355.41 % of employee cost Communication 96,27,773 26,508.36 % of employee cost Computer Exp 1,94,58,253 53,574.83 % of employee cost Electricity Exp 3,49,10,427 96,119.63 % of employee cost Office Expenses 7,95,62,364 2,19,060.78 % of employee cost Printing and Stationery 28,22,308 7,770.72 % of employee cost Rent 5,34,83,120 1,47,256.23 % of employee cost Miscellaneous 10,95,530 3,016.35 % of employee cost expenses Total 1,59,662 10.1 As per the provisions of the section 14A of the Act, the Assessing Officer can invoke the rule 8D of the Rules for computing disallowance, if he's not satisfied with the correctness of the claim of the assessee in respect of expenditure for earning exempt income. We find that the Assessing Officer did not record a specific satisfaction as why the claim of the assessee of disallowance in terms of the employee cost was not correct. The Assessing Officer only recorded that assessee cannot earn exempt income without any syste....