2013 (10) TMI 364 - AT - Income Tax

Disallowance of loss on sale of iron ore sham transaction or not - Held that - Assessee has sold 28.213.75 MTs to Trademin International Private Limited. Cuddapah on 17.01.2007 @ Rs.975 per MT which was exported by then to China in the same month. It is to be noted here that due to time gap between dates of purchase and sale and rains the FE content of iron ore dropped to 56% and Silicon content increased to 13% which drastically reduced the market value of the ore. To compound the problem. prices of iron ore declined during that period - Parties to whom the material is sold are outsiders and are not connected either to the promoters or Directors in any way. They are well reputed organizations of international standing with experience in iron ore trading - Assessing Officer s objection that there is no physical movement of stocks and it is only an accommodative transaction is incorrect as the iron ore was already mined and transported to the port for the purpose of export - Transaction is not a sham transaction. Therefore the Assessing Officer has wrongly disallowed a sum of Rs.3, 10, 49, 752/- being loss incurred by the assessee on sale of iron ore while computing the income of the assessee Decided in favor of Assessee. Disallowance u/d 14A of the Income Tax Act - Dividend income Held that - As per Mumbai High Court in Godrej Boyce Mfg. Co. Ltd. 2010 (8) TMI 77 - BOMBAY HIGH COURT it has been held that Rule 8D applies prospectively from A.Y. 2008-09 only and hence its application in A.Y. 2007-08 is incorrect Further Mumbai High court held that quantum of disallowance u/s. 14A for years prior to A.Y. 2008-09 has to be worked-out by adopting some reasonable method - Subsequently the Mumbai Tribunal amongst others in Godrej Agrovet Ltd. 2010 (9) TMI 291 - ITAT MUMBAI and Reliance Industrial Infrastructure Ltd. vs. ACIT 2013 (5) TMI 473 - ITAT MUMBAI has held that 2% of exempt income being a reasonable disallowance In the instant case assessee had not furnished the details of expenditure incidental to the earning of dividend income estimation was made on the expenditure attributable to dividend income at 2% of the gross total income - It would be reasonable and appropriate if the disallowance is restricted @ 2% of the exempt income as returned by the assessee A.O. is directed to restrict the disallowance in question @ 2% of the exempt income in hand.

Summary

Issues Involved:
1. Sham Transaction Allegation on Purchase of Iron Ore.
2. Disallowance under Section 14A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Sham Transaction Allegation on Purchase of Iron Ore:

The assessee, a company engaged in manufacturing and trading activities, filed its return for the assessment year 2007-08, declaring a net loss. The Assessing Officer (AO) questioned the genuineness of a purchase transaction of iron ore from Natco Pharma Ltd., alleging it was a sham transaction. The assessee defended the transaction, providing details about the purchase, including the market price, payment records, VAT returns, and subsequent sale of the iron ore. The AO disallowed the cost of iron ore and the resultant loss, treating the purchase as bogus.

Upon appeal, the CIT(A) upheld the AO's decision, noting the assessee had withdrawn the grounds of appeal against the disallowance. The assessee contested this, arguing they had not withdrawn any grounds. The Tribunal found that the purchase was reflected in the books of accounts and VAT returns, made at prevailing market prices, and involved genuine parties. The Tribunal concluded that the transaction was not a sham, and the disallowance by the AO was incorrect. Therefore, the appeal on this issue was allowed, reinstating the loss incurred on the sale of iron ore.

2. Disallowance under Section 14A of the Income Tax Act:

The AO disallowed Rs. 4,11,413 under Section 14A, attributing it to expenses incurred in earning dividend income, which is exempt from tax. The assessee argued that no interest or expenditure was incurred as the dividends were credited directly to their account, and the investments were made from interest-free advances. The CIT(A) upheld the AO's disallowance, noting that the investment was made out of borrowed funds, as admitted by the assessee's director.

The Tribunal referred to various judicial precedents, including the Mumbai High Court ruling in Godrej Boyce Mfg. Co. Ltd., which held that Rule 8D applies prospectively from AY 2008-09. For years prior, a reasonable method must be adopted to determine the disallowance. Following this, the Tribunal directed the AO to restrict the disallowance to 2% of the exempt income, aligning with precedents set by other High Courts and Tribunals.

Conclusion:

The Tribunal allowed the assessee's appeal regarding the sham transaction allegation, confirming the genuineness of the purchase and sale of iron ore. On the disallowance under Section 14A, the Tribunal directed a revised disallowance at 2% of the exempt income, providing a balanced resolution based on judicial precedents. The appeal was thus partly allowed.