2017 (1) TMI 251 - AT - Income Tax

Disallowance of the loss on sale of shares - conversion of the investment into stock-in-trade disclosed under the head business - revised return of income rejected - Held that - AO was not ready to accept his personal statement which was given by Chartered Accountant before the AO. The AO for the purpose of clarification, he summoned Mr.C.L.Ravindra, Chartered Accountant. When he confirmed his report which related to his statement in the notes on account filed along with revised return of income, the AO was not ready to accept the same, when it is in favour of assessee. This kind of action of AO is not appreciable. Thirdly, the AO called for original copy of minute book of Board meeting. However, the assessee produced the copy of typed copy of minute book. He doubted the typed copy of minute book and he rejected the same. If the surrounding circumstances suggest that the assessee converted investment into stock in trade and also supported by the minutes produced by the assessee, still if he had the doubt, he should have clarified it from Board of Directors who attended the meeting. Instead of this, he rejected revised return of income itself, which is not appropriate. More so, in our opinion, the assessee could make claim even at appellate stage as held by the Supreme Court in the case of National Thermal Power Co. Ltd. in 1996 (12) TMI 7 - SUPREME Court . We find that the procedural irregularities committed by the assessee either under the Companies Act or Income Tax Act, cannot be considered as a fatal so as to disallow the claim of assessee. Accordingly, we direct the AO to consider the revised return as a valid return filed by the assessee in terms of Sec.139(5) of the Act and complete the assessment as per the revised return filed before him. This ground of assessee is allowed. Addition u/sec.40(a)(ia) - payments to two sub-contractors - Held that - This issue is squarely covered by the order of the Special Bench of the Tribunal in the case of Merilyn Shipping and Transports v. Addl. CIT 2012 (4) TMI 290 - ITAT VISAKHAPATNAM wherein held that when the expenses is not outstanding at the end of the close of the financial year, provisions of the section 40(a)(ia) of the Act cannot be applied. Being so, if the amount is already paid, the provisions of the section 40(a)(ia) cannot be applied. With this observation, we remit the issue to the file of ld. Assessing Officer for fresh consideration. Disallowance being the expenses quantified as per Rule 8D of IT Rules on the application of Sec.14A in the computation of taxable income - Held that - For assessment year 2009-10, the same issue came for consideration before this Tribunal in the case of M/s Consolidated Construction Consortium Ltd 2016 (2) TMI 230 - ITAT CHENNAI disallowance u/s.14A r.w. Rule 8D should not exceed the exempt income. The Mumbai Bench in its order in M/s Daga Global Chemicals Pvt. Ltd vs ACIT 2015 (1) TMI 1204 - ITAT MUMBAI sustained the disallowance on applicability of provisions of sec.14A r.w. Rule 8D. However, the alternative claim of the assessee was that disallowance if at all should be made, it should be restricted to exempt income earned and not beyond that. Accordingly, the AO is directed to look at this issue on this angle and decide it afresh in the light of the above decision of the Mumbai Bench of the Tribunal

Issues Involved:
1. Confirming the disallowance of the loss on sale of shares after conversion of investment into stock-in-trade.
2. Confirming the disallowance of payments to sub-contractors for want of TDS.
3. Confirming the disallowance of expenses as per Rule 8D on the application of Sec. 14A.

Issue-wise Detailed Analysis:

1. Loss on Sale of Shares after Conversion of Investment into Stock-in-Trade:

The primary issue revolves around the disallowance of the loss on the sale of shares amounting to ?10,77,83,977 after converting investments into stock-in-trade. The assessee initially claimed this loss under capital gains in the original return but revised it under business income. The Assessing Officer (AO) noted discrepancies between the original and revised returns, such as different dates on the Audit Report and changes in the accounting method. The AO also highlighted the absence of Board Meeting minutes to support the conversion of shares into stock-in-trade and deemed the conversion non-compliant with Regulation 71 of Table A (Schedule 1) of the Companies Act. Consequently, the AO disallowed the loss.

Upon appeal, the Commissioner of Income-tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the revised return, which altered the facts from the original return, was not acceptable. The CIT(A) emphasized that the original return did not mention the conversion of capital assets into stock-in-trade, thus rejecting the revised return.

The assessee argued that the revised return was filed within the permissible time under Section 139(5) of the IT Act to correct omissions or wrong statements. The assessee contended that the AO's rejection was based on clerical errors and that the conversion decision was taken in a Board Meeting on 22.4.2008. The assessee also claimed that procedural irregularities under the Companies Act should not invalidate the revised return.

The Tribunal concluded that the procedural irregularities committed by the assessee were not fatal to the claim. It directed the AO to consider the revised return as valid and complete the assessment accordingly.

2. Disallowance of Payments to Sub-Contractors for Want of TDS:

The second issue pertains to the disallowance of ?1,28,83,860 paid to sub-contractors due to non-remittance of TDS within the stipulated period, invoking Section 40(a)(ia) of the Act. The AO disallowed the payments as the assessee had not deducted TDS till the end of the financial year.

The assessee argued that the TDS amounts were remitted before the due date of filing the return under Section 139(1), invoking the proviso to Section 40(a)(ia), which allows such payments if TDS is remitted within the due date.

The Tribunal referred to the Special Bench decision in Merilyn Shipping and Transports v. Addl. CIT, which held that Section 40(a)(ia) does not apply if the expenses are not outstanding at the end of the financial year. The Tribunal remitted the issue to the AO for fresh consideration.

3. Disallowance of Expenses as per Rule 8D on the Application of Sec. 14A:

The third issue involves the disallowance of ?15,14,252 as expenses related to earning tax-free income under Section 14A read with Rule 8D. The AO disallowed the amount based on 0.5% of average investments.

The assessee relied on judicial precedents, arguing that disallowance under Section 14A requires a finding of incurred expenditure and that the AO failed to prove such expenditure.

The Tribunal noted that similar issues were previously remitted to the AO in the assessee's own case. It referred to the Delhi High Court decision in Cheminvest Ltd. v. CIT, which held that no disallowance under Section 14A can be made if no exempt income is earned. The Tribunal remitted the issue to the AO to re-examine whether any expenditure was incurred for earning exempt income and to consider the relevant judicial precedents.

Conclusion:

The Tribunal allowed the appeal of the assessee partly for statistical purposes, directing the AO to re-examine the issues based on the Tribunal's observations and relevant judicial precedents. The order was pronounced on 28th December 2016, at Chennai.

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