2020 (1) TMI 1633 - AT - Income Tax

Real income - Difference between the value of the shares and cost of acquisition on conversion of shares from stock-in-trade into investment - whether such conversion in the year under consideration would result into income in the hands of the assessee? - HELD THAT - We find that the Ld. CIT(A) has relied on the ratio laid down in various judgments discussed in the impugned order. We find that in the case of Kikabhai Premchand 1953 (10) TMI 5 - SUPREME COURT concluded that withdrawal of the stock-in-trade for non-business purpose does not result in income and it can be valued at cost price where assessee normally valued its stock at cost price. In the instant case there is no real income in the hands of the assessee as the shares in reference have not either sold or transferred by the assessee in the year under consideration. There is no express or specific provision during relevant period in the Act to deal with the event of conversion of stock-in-trade into investment. In absence of specific provision notional income if any cannot be taxed in the year under consideration. We find that CIT(A) has followed the ratio of the above decision of the Hon ble Supreme Court along with other decisions. In view of the binding precedents followed by the Ld. CIT(A) we do not find any error in the order of the Ld. CIT(A) on the issue in dispute and thus we uphold the same. Accordingly Grounds No. 2 2.1 of the appeal of the Revenue are dismissed. We find that the Ld. CIT(A) has given detailed reasoning for not considering the contention of the assessee that it was holding three shares as investment from very beginning - Before us the learned counsel failed to adduce any evidence other then submitted before the Ld. CIT(A) to establish that the shares were inadvertently characterized as a stock-in-trade. In view of the reasoning given by the Ld. CIT(A) we do not find any error in the order of the Ld. CIT(A) on the issue in dispute and accordingly we uphold the same. The cross objection No. 2 of the assessee is dismissed. Disallowance u/s 14A - addition of administrative expenses under rule 8D(2)(iii) - according to the assessee the disallowance under rule 8D(2)(iii) of Rules cannot exceed the amount expenditure actually incurred by the assessee - HELD THAT - We agree with the finding of the Ld. CIT(A) that no disallowance is required for indirect expenses for earning exempt income when the assessee has followed direct nexus method and already made disallowance under Rule 8D(2)(i) of the Income-tax Rules 1962. Disallowance under rule 8D(2)(iii) - As we find that in view of the decision of the Hon ble Jurisdictional High Court in the case of joint investment Private Limited 2015 (3) TMI 155 - DELHI HIGH COURT disallowance towards administrative expenses cannot be exceeded the exempted income - Thus we restrict the disallowance of administrative expenses

Summary

Issues Involved:
1. Deletion of addition on account of difference between the value of shares and cost of shares upon conversion from stock-in-trade to investment.
2. Disallowance under Section 14A of the Income Tax Act, 1961.

Detailed Analysis:

1. Deletion of Addition on Account of Difference in Share Values:

The primary issue was whether the difference between the market value of shares and their cost on conversion from stock-in-trade to investment should be treated as business income. The assessee had converted shares of three companies from stock-in-trade to investment by a book entry at their cost price. The Assessing Officer (AO) argued that this conversion was a deliberate attempt to convert taxable business profit into tax-free long-term capital gains. The AO added the difference between the market value and cost of shares as business income.

The assessee contended that there was no provision in the Income Tax Act to tax such notional income and that the shares were erroneously classified under stock-in-trade in earlier years. The CIT(A) agreed with the assessee, stating that mere conversion does not result in real income and referred to various judicial precedents, including the Supreme Court's decision in Sir Kikabhai Premchand vs. CIT, which held that withdrawal of stock-in-trade for non-business purposes does not result in income.

The Tribunal upheld the CIT(A)'s decision, emphasizing that there was no real income as the shares were neither sold nor transferred during the year. The Tribunal also noted the absence of a specific provision in the Act to tax such conversion during the relevant period.

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

The AO disallowed Rs. 3,56,96,487 under Section 14A, applying Rule 8D of the Income Tax Rules, 1962. The CIT(A) restricted this disallowance to Rs. 7,04,000, agreeing with the assessee that no disallowance was required for indirect expenses as the assessee had already disallowed Rs. 1,77,79,925 under Rule 8D(2)(i) for direct interest expenses.

The Tribunal upheld the CIT(A)'s finding that no further disallowance under Rule 8D(2)(ii) was required as the assessee had followed the direct nexus method. However, the Tribunal restricted the disallowance under Rule 8D(2)(iii) to the exempt income earned by the assessee, following the Delhi High Court's decision in Joint Investment Pvt. Ltd. vs. CIT, which held that disallowance under Section 14A should not exceed the exempt income.

Conclusion:

- The Tribunal upheld the deletion of the addition of Rs. 14,19,57,154 on account of the difference between the market value and cost of shares upon conversion from stock-in-trade to investment.
- The Tribunal restricted the disallowance under Section 14A to the exempt income earned by the assessee, i.e., Rs. 10,35,890, following the principle that disallowance should not exceed the exempt income.

Final Order:
The appeal of the Revenue and the cross-objection of the assessee were both partly allowed.