2012 (9) TMI 134 - AT - Income Tax

Diminishing in the value of assets - AO added it in arriving at the book profit as provided under section 115JB - Held that - Considering assessee s submission that this amount was not a provision of diminishing in value of the assets but a loss suffered by assessee in the valuation of stock in trade which, however, was claimed separately in the Profit & Loss A/c unable to agree with the Revenue on making adjustment of loss suffered in the valuation of closing stock. There is no dispute with reference to the fact that assessee is in the business of share trading and as part of business activity, it has offered income from shares and securities and claimed diminution in value of stock in trade. There is also no dispute with the fact that this loss was allowed in regular computation and not a provision - As rightly held by the Hon ble Supreme Court in the case of Dr T A Qureshi (2006 (12) TMI 91 - SUPREME COURT) business loss was allowable on ordinary commercial principles in computing profits. Since claim is direct loss in valuation of stock in trade and as this cannot be considered as a provision as provided under Explanation-1, the action of AO and the CIT (A) cannot be upheld - in favour of assessee. Disallowance made u/s 14A r.w.r. 8-D - Held that - As seen from the balance sheet of assessee as on 31.03.2008 there are no fixed assets and assessee has shown investment of ₹ 1,51,12,500/- at the end of the year as against Rs..5,53,62,500/- at the beginning of the year. Assessee s stock in trade were shown at ₹ 40,69,22,495/- as against nil in the last year. This indicates that most of the business activities started only during the year and the investment had come down. As against these amounts, AO in the assessment order has taken the closing investment yielding exempt income at Rs..50,20,34,995/- including the stock in trade which is not income yielding exempt income, earning business profits. There is no opening amount which was taken at NIL where as assessee had investments at the end of last year which got reduced in this year. Thus the basis for calculation by AO itself is wrong - Further out of the total amount of interest claimed which were shown interest at ₹ 2,91,38,496/-, there seems to be no examination of interest claims and to whom it is paid, thus it is required restore the matter back to the file of AO to examine the nature of interest expenditure, the amount of dividend earned and the nature on which it is earned - in favour of assessee for statistical purposes.

Issues Involved:
1. Addition of Rs. 2,43,79,210/- as diminishing in the value of assets in arriving at the book profit under section 115JB.
2. Addition of Rs. 2,42,81,004/- under section 14A read with Rule 8-D of the Act.

Issue-wise Detailed Analysis:

1. Addition of Rs. 2,43,79,210/- as diminishing in the value of assets in arriving at the book profit under section 115JB:

The assessee claimed an amount of Rs. 2,43,79,210/- as diminishing in the value of stock in trade and arrived at a net loss. The Assessing Officer (AO) disallowed this amount under section 115JB, considering it a provision for diminishing in value of assets. The CIT (A) agreed with the AO, treating it as a provision under section 115JB.

The assessee argued that this amount represented a loss due to market fluctuations in stock valuation, not a provision. The assessee referred to accounting principles, asserting that the loss was due to the valuation of closing stock at market value or cost, whichever is less. The loss was allowed in regular computation but adjusted only under section 115JB.

The Tribunal noted that the loss was not a provision but a direct loss in stock valuation. The Tribunal disagreed with the Revenue's reliance on the case of Income Tax Officer vs. TCFC Finance Ltd, where the provision for diminution in value of investment was added back for computing book profit. The Tribunal cited the Supreme Court's ruling in Dr. T.A. Qureshi's case, allowing business loss on ordinary commercial principles. The Tribunal concluded that the loss in stock valuation should not be considered a provision under Explanation-1 of section 115JB and directed the AO to delete the adjustment.

2. Addition of Rs. 2,42,81,004/- under section 14A read with Rule 8-D of the Act:

The assessee earned dividend income of Rs. 21,01,500/- and claimed exemption under section 10(34). The AO invoked section 14A and calculated the disallowance as per Rule 8D, disallowing Rs. 2,42,81,004/- in both the normal computation and under section 115JB. The CIT (A) upheld the disallowance, stating that Rule 8D must be applied once the formula is invoked.

The assessee argued that most assets were stock in trade, and the dividend was incidental to share trading. The assessee provided a revised computation, asserting that the AO's calculations were incorrect. The assessee cited several judicial decisions, including Yatish Trading Co. Ltd vs. ACIT and CIT vs. Smt. Leena Ramachandran, arguing that disallowance under section 14A should not apply to share trading.

The Tribunal noted that the AO did not examine the facts and accounts of the assessee as required under section 14A(2). The Tribunal found the AO's basis for calculation incorrect and emphasized the need to examine the nature of interest expenditure, the amount of dividend earned, and whether it was on investment or trading shares. The Tribunal restored the matter to the AO for fresh adjudication, considering the judicial principles and the assessee's working. The Tribunal clarified that any disallowed amount under section 14A should also be disallowed under section 115JB.

Conclusion:

The Tribunal allowed the assessee's appeal, directing the AO to delete the adjustment of Rs. 2,43,79,210/- under section 115JB and to re-examine the disallowance under section 14A as per the Tribunal's directions. The appeal was treated as allowed for statistical purposes.

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