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2013 (8) TMI 662 - AT - Income TaxUndisclosed income u/s 68 - Share application maoney - Onus of proving transaction - Held that - Assessee s company is not carrying out any business activity. This company has shown investments with others in Schedule-V but details of investment are not available. Therefore, taking into consideration, facts and circumstances and failure of assessee to comply with requirement of Assessing Officer in producing Principal Officers/Directors of share applicant companies, it failed to prove identity as well as genuineness of transaction. They have shown very nominal income. It gives an inference that such returns were filed for creating evidence to be used in future - Following decision of A. Govindarajulu Mudaliar v CIT 1958 (9) TMI 3 - SUPREME Court , CIT vs. N.R. Portfolio (P.) Ltd. 2012 (12) TMI 762 - DELHI HIGH COURT and CIT vs. M/s. Neelkanth Ispat Udhyog Pvt. Ltd 2012 (8) TMI 198 - DELHI HIGH COURT - Decided against assessee. Disallowance u/s 37 - Expenditure on employee s education (son of Directors) - Held that - there is no policy formulated by assessee company vide which it had invited applications from all employees for sponsoring their higher education - Had Employee was not son of Directors, his education expenses would have not been met by company. assessee claimed that higher education of Employee would give benefit of more than R.50,000/- per month to assessee company but who has checked credentials of Employee and what salary he would claim in open market. Without there being any material on record, how assessee can say that decision to sponsor education of Employee was not influenced by parental love and affection of Directors - Following decision of CIT vs. R.K.K.R. Steels Pvt. Ltd. 2001 (11) TMI 20 - MADRAS High Court , M. Subramanium Brothers vs. CIT 2000 (12) TMI 67 - MADRAS High Court and CIT vs. Hindustan Hosiery Ind. 1993 (9) TMI 42 - BOMBAY High Court - Decided against assessee. Disallowance u/s 14- Computation of disallowance on basis of Rule 8D - Held that - It is only if Assessing Officer is not satisfied with correctness of claim of assessee, in both cases, that Assessing Officer gets jurisdiction to determine amount of expenditure incurred in relation to such income which does not form part of total income under said Act in accordance with prescribed method. prescribed method being method stipulated in Rule 8D of said Rules. While rejecting claim of assessee with regard to expenditure or no expenditure, as case may be, in relation to exempt income, Assessing Officer would have to indicate cogent reasons for same - Matter remitted back - Following decision of Maxopp Investment Ltd. vs. CIT 2011 (11) TMI 267 - Delhi High Court - Decided in favour of assessee. Speculative transaction - Purchase and sales of shares - Section 73 - Held that - The Explanation exclude certain companies whose gross total income consist mainly of income which is chargeable under heads Interests on securities , Income from house property , Capital gains and Income from other sources or whose principal business is of banking or granting of loans. activities of assessee do not fall in ambit of nature of business provided in Explanation. main business of assessee includes sales of shares. It has shown losses on such activities. Thus, primfacie, Explanation appended to section 73 is clearly applicable on facts of assessee s case. Under Act, every year is an independent year. If assessee has shown losses in share trading activities and its case falls within mischief of deeming fiction provided in section 73, then, on basis of principle of consistency, assessee cannot plead that requirement of law should not be followed. Income from other sources u/s 56 - Cash credit u/s 68 - Held that - unexplained cash credits have to be brought to tax under section 68 and not under section 56. Both aforesaid sections operate in fields reserved for them. It cannot therefore be said that what is assessable as income u/s 68 must be assessed as income from other sources u/s 56. Set off of business loss from income u/s 68 - Held that - Section 71 permits set off of loss from one head against income from another head of income as enumerated in section 14 - income assessable u/s 68 cannot be assessed under any particular head of income including income from other sources u/s 56 - Therefore, this addition cannot be set off against business losses computed in earlier years. However, as far as expenses disallowed on account of education expenses and on account of establishment expenses are concerned, they are to be set off.
Issues Involved:
1. Sustaining addition of Rs. 2,05,00,000/- as unexplained income under Section 68. 2. Sustaining addition of Rs. 5.48 lacs for education expenses. 3. Disallowance of Rs. 19,53,402/- under Section 14A. 4. Application of Explanation to Section 73. 5. Treatment of speculation loss. 6. Allocation of expenses. 7. Set-off of additions against brought forward business losses. Detailed Analysis: 1. Sustaining Addition of Rs. 2,05,00,000/- as Unexplained Income under Section 68: The assessee received share application money amounting to Rs. 2.05 crores from 13 parties. The Assessing Officer (AO) found that some companies did not exist at the given addresses and concluded that the assessee failed to prove the identity, genuineness, and creditworthiness of the share applicants. The CIT (A) upheld this addition, emphasizing that the assessee did not produce the directors of the share applicant companies for examination. The Tribunal also upheld this addition, finding that the assessee did not discharge the onus of proving the identity and genuineness of the transactions. 2. Sustaining Addition of Rs. 5.48 Lacs for Education Expenses: The assessee claimed education expenses for Shri Dushyant Poddar, arguing it was for business purposes. The AO disallowed the expenses, considering them personal in nature. The CIT (A) and the Tribunal upheld this disallowance, noting that there was no evidence of a formal policy or necessity for such expenses within the company's business framework. 3. Disallowance of Rs. 19,53,402/- under Section 14A: The AO disallowed Rs. 19,53,402/- under Section 14A, applying Rule 8D. The CIT (A) confirmed this disallowance. The Tribunal, referencing the judgment in Maxopp Investment Ltd. vs. CIT, set aside the issue to the AO for re-adjudication, emphasizing the need for the AO to record dissatisfaction with the assessee's claim before invoking Rule 8D. 4. Application of Explanation to Section 73: The CIT (A) invoked Explanation to Section 73, treating the assessee's share trading activities as speculative business. The assessee argued that its principal business was not speculative, but the CIT (A) and the Tribunal found that the assessee's main income was from share dealings, thus falling within the ambit of speculative business as per the Explanation to Section 73. 5. Treatment of Speculation Loss: The CIT (A) computed speculation losses and included expenses related to speculative transactions. The Tribunal upheld the CIT (A)'s findings but directed the AO to re-adjudicate the allocation of establishment expenses after considering the disallowance under Section 14A. 6. Allocation of Expenses: The CIT (A) initially allocated Rs. 85,82,975/- towards establishment expenses but later corrected this to Rs. 59,54,517/-. The Tribunal directed the AO to independently determine the allocation of expenses towards day-to-day business activities, speculative business, and disallowance under Section 14A. 7. Set-off of Additions Against Brought Forward Business Losses: The Tribunal held that additions made under Section 68 cannot be set off against brought forward business losses, referencing the ITAT's decision in ITO vs. Dulari Digital Photo Service Ltd. However, the Tribunal allowed the set-off of disallowed education and establishment expenses against brought forward business losses. Conclusion: The Tribunal upheld the additions under Section 68 and disallowed education expenses, directed a re-adjudication for disallowance under Section 14A, confirmed the application of Explanation to Section 73 for treating share trading as speculative business, and allowed the set-off of specific disallowed expenses against brought forward business losses.
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