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TaxTMI 
TaxTMI 
TaxTMI 
2026 (4) TMI 106
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....he case in ITA No. 682/Del/2027 are that the assessee filed return of income on 20.09.2012 declaring income of Rs. 25,77,78,259/-. The return of income was processed u/s 143(1) of the Act. The case was selected for scrutiny under CASS. Notice u/s 143(2) was issued. Sana Baqai CA, Authorized Representative appeared in assessment proceedings and filed details. Assessee is a NBFC. During the assessment proceedings, various claims made by the assessee were examined and various replies and explanation filed by the assessee were considered. The assessee was issued to show cause dated 09.12 2014. Assessee filed reply dated 29.12.2014. On completion of proceedings, Ld. AO vide order dated 02.03.2015 made additions of Rs. 4,26,85,000/- Rs. 30,61,000/- and Rs. 6,56,24,000/. Against order dated 02.032015 of Ld. AO, the assessee filed appeal before Ld. CIT(A) which was partly allowed vide order dated 25.11.2016. The disallowance of Rs. 34.25 lacs was sustained and balance disallowance of Rs. 3,92,60,000/- deleted and additions of Rs. 30,61,000/- and Rs. 6,56,24,000/- were deleted. 4. Being aggrieved, appellant Department of Revenue preferred present appeal on following grounds: "1.....
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....ree Bonds Rs. 4,15,80,043/- Total Tax-free income Rs. 4,20,58,292/- 6.3 In response to the queries of the AO regarding the disallowance of expense u/s 14A of the Act, the Assessee submitted the shares and bonds on which the exempt income has been earned are not investments' but the same are held as stock-in-trade and hence earning of tax free income is incidental to the normal course of procurement of stock-in-trade, and no additional expenditure can be said to be incurred, therefore, no disallowance has been made in return of income filed. The Assessee also submitted that there is no nexus between the expenditure incurred and the tax-free income earned by the Appellant. 6.4. It was asserted that the borrowings done by Assessee had to be mandatorily invested as per the RBI guidelines and no exempt income was earned thereon, and hence the interest expenditure which has direct nexus with other investments, cannot be taken into consideration for computing disallowance under Rule. 8D(2)(ii). The Assessee submitted that in the assessments for A.Y. 2007-08, 2008-09 and 2009-10, the AO has accepted this contention of the Assessee and has not made a....
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....-trade and dividend income arises incidentally in the course of business, disallowance under section 14A is not sustainable. 6.6. The issue under consideration also stands covered by Assessee own case DCIT v. PNB Gilts Ltd. [ITA No. 810/DEL/2015 (A.Y 2010-11)). 6.7. CIT(A) granted relief to Assessee on the premise that Assessee had interest free funds by way of share capital and reserve and surplus of Rs. 577.64 crores whereas the average value of stock in trade from which exempt income was earned is at Rs. 6850.45 lacs and therefore, placing reliance on Hon'ble Bombay High Court's decision in the cases of CIT v. Reliance Utilities & Power Ltd. [2009] 313 ITR 340 (Bombay) and CIT-2, Mumbai v. HDFC Bank Ltd. [2014] 366 ITR 505 (Bombay), it held that when there is sufficient interest free fund available with the Assessee, it would have to be presumed that the investment is made out of the interest free funds available with the Assessee and no disallowance of interest under Rule 8D(2)(ii) is called for. 6.8 It is respectfully submitted that no disallowance under Section 14A could have been made in the absence of a valid and reasoned satisfaction reco....
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....e of Rs. 12567.26 lakhs, resulting in a net surplus of Rs. 4960.94 lakhs. In such circumstances, no interest disallowance can be sustained. Investments yielding exempt income constitute only 13.22% of the total interest-free funds available. Even while invoking Rule 8D, the Assessing Officer failed to provide cogent reasons for rejecting the factual submissions made. The alternate plea raised during assessment for limited disallowance under Rule 8D(2)(iii) cannot operate as estoppel against law. It is trite that there is no estoppel against statute, as held by the Hon'ble Supreme Court in CIT v. C. Parakh & Co. (India) Ltd. [1956] 29 ITR 661 (SC) and by the Division Bench in CIT v. Bharat General Reinsurance Co. Ltd. [1971] 81 ITR 303 (Delhi). Tax can be levied only in accordance with law, as mandated by Article 265 of the Constitution. RE: DISALLOWANCE UNDER SECTION 36(1) (iii) OF THE ACT 6.11 The AD also disallowed an amount of Rs. 30.61 lacs under Section 36(1)(iii) of the Act holding that the Assessee has earned substantial tax-free interest income and therefore, use of funds to earn tax free income cannot be allowed. The AO also failed to take into accoun....
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....ion in market value of the stock amounting to Rs. 6,56,24,000/-. In this regard, it was submitted by the Assessee that the said provision is created at the end of the year and immediately reversed in the next year and it is in the normal course of business as per the regular accounting policies followed by the Appellant. Following the accounting standards and regular accounting policies followed by the Appellant, the stock in trade is valued at cost or market value whichever is lower, as also accepted under section 145A of the Act. Any change in the value at the end of the year is reversed in the immediately succeeding year to bring it back to the book value. 6.14 The assessee company has been granted a license by the Reserve Bank of India (RBI) to carry on the activities of a Primary Dealer. The company is engaged in trading in the Government Securities market and is registered as a Non-Banking Financial Company (NBFC) with RBI. All securities in which the company deals are treated as stock-in-trade in the ordinary course of its business. Since the securities are held as stock-in-trade, the same are valued in accordance with the well-established principle of accounting, n....
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....nting principles. The settled law is that closing stock may be valued either at cost or market value whichever is lower, and the method of accounting consistently followed by the assessee cannot be disregarded merely because the Revenue prefers another method. 6.18 In accordance with this consistent practice, the assessee determines whether there is any loss in respect of securities by comparing the market value with the cost price. Where the market value at the end of the year is lower than the cost, the difference is recognized as diminution in the value of stock-in-trade, which represents a legitimate business loss. It is also clarified that such diminution is computed on the actual market value as on the balance sheet date. 6.19. The allowability of such diminution in value of securities held as stock-in-trade stands settled by judicial precedents, including the decision of the Hon'ble Supreme Court in United Commercial Bank v. CIT [1999] 240 ITR 355 (SC), wherein it has been held that banks are entitled to value their stock-in-trade at cost or market value whichever is lower, and the resultant diminution represents an allowable deduction. 6.20 Ac....
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....essing Officer must, having regard to the accounts of the assessee, record dissatisfaction with the correctness of the claim made. In the present case, no such objective examination of accounts has been undertaken. 7.4. Even otherwise, no disallowance of interest under Section 14A read with Rule 8D(2)(ii) can be made as the Appellant had sufficient interest-free funds. The share capital and reserves amounting to Rs. 577.64 crores far exceed the average value of securities held as stock-in-trade yielding exempt income, being Rs. 65.80 crores (approx.). In view of the law laid down by the Hon'ble Supreme Court in CIT v. Reliance Industries Ltd. Civil Appeal No. 10 of 2019] and the Hon'ble Bombay High Court in Pr. CIT v. Ashok Apparels (P.) Ltd. [2020] 423 ITR 412 (Bombay), where sufficient interest-free funds are available, a presumption arises that investments are made out of such funds and no interest disallowance can be made. 7.5. The expenditure incurred would have remained the same even if no dividend had been earned, and therefore no proportionate allocation can be made. In fact, the Appellant had net positive interest income, as interest/discount income of Rs. 17....