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2017 (1) TMI 1287 - AT - Income TaxDisallowance u/s. 14A r.w.s 8D computation under the normal provision of the Act and under the provision of MAT u/s 115JB - Held that - Assessing Officer is directed to restrict the disallowance under section 14A of the Act to 1% of the exempt income for normal computation of income as well under section 115JB of the Act. The disallowance under section 14A would be added in the book profit under section 115JB of the Act in terms of the clause (f) to explanation 1 of section 115JB of the Act as decided by the Hon ble Mumbai ITAT Benches in the case of DCIT Vs. Viraj Profiles Limited 2015 (11) TMI 277 - ITAT MUMBAI . Thus we direct the AO to make the addition of the amount of disallowance under section 14A of the Act read with rule 8D of Income Tax Rules 1962 to the total income of the assessee under the normal provisions and under the provisions of the MAT as specified under section 115JB of the Act Disallowance of advance written off in the year under consideration - Held that - The assessee also incurred cost on the joint venture project which was not materialized and accordingly the same was dropped. Admittedly the impugned Joint venture project was identical to the activities of the assessee and therefore it can be inferred that the project was for the expansion of the existing business of the assessee. In view of above the loss incurred by the assessee was in connection and in the course of the business and hence allowable for deduction. The ground raised by the assessee is allowed. Addition by increasing the value of closing stock - AO disallowed the valuation of closing stock on the ground that closing stock shall be valued either at the cost or market price whichever is less as on the balance sheet date i.e. 31st March 2005 - Held that - We find that the closing stock needs to be determined as per the method regularly employed by the assessee. The market price prevailing as on the date of balance sheet date should be taken into account while determining the closing stock. The future price of the closing stock cannot form the basis for the valuation of closing stock as on the balance sheet date. Accordingly we hold that the closing stock valued by the revenue is the correct valuation of the closing stock. However it is pertinent to note that the closing stock determined for the year under consideration will become the opening stock for the subsequent financial year. Accordingly the AO is directed to take appropriate measure as per law for the subsequent financial year. This ground of appeal of the assessee is dismissed in terms of above. Charging the interest under section 234B under the normal provisions and MAT provisions - Held that - At the outset we find that interest under section 234B is consequential in nature and will be levied under both normal & MAT computation of Income. However if the liability to pay the advance tax arises due to the amendment in the Act retrospectively, then there would be no interest u/s 234B & 234C of the Act. Profit arising out sale-purchase of shares treated as capital gain - Held that - The order of the Hon ble ITAT in the own case of the assessee cannot form the basis for holding the capital gain loss as business loss. We also find that basis adopted by the AO for treating the capital gain income as business income is not appropriate. We also find that the assessee claimed the capital gain income in the revised return of income which is within the provisions of the law. As such the AO has not brought any defect in the books of accounts and in the revised return. The assessee has been showing investments in the audited financial statements. The ld. DR has also not brought anything on record to controvert the findings of ld. CIT(A) and the arguments advanced by the ld. AR. Hence this ground of appeal of the Revenue is dismissed. Provision for doubtful debts and advances should not be added back in the computation of book profit - Held that - AR for the assessee fairly conceded that the issue is squarely covered in favor of Revenue and against the assessee by virtue of the amended provision of Sec. 115JB of the Act. Ld. DR for the Revenue agreed to the submission of the assessee. In the light of the amended provisions of section 115JB of the Act we reverse the order of ld. CIT(A) and this ground of appeal of Revenue is allowed. Treating the bank interest and interest on tax refund as business income - Held that - In the present case the assessee has also earned income from the interest on the margin money deposited with the bank in order to avail the bank guarantee in order to participate in tenders. There is a direct nexus between interest income and the income of the business of the undertaking. Indeed the interest income does not par take the character of a profit and gains from the activity of assessee, but it is the income which is derived in the course of the business. Hence the ground raised by the Revenue is allowed partly. Provisions for leave encashment - disallowance under the provisions of MAT u/s 115JB - Held that - The provisions for the leave encashment is ascertained liability and therefore the same cannot be disallowed under the provisions of MAT u/s 115JB of the Act. However from the order of AO we find that necessary details were not furnished at the time of assessment therefore the same was added back. We also find that the remand report was not called by the learned CIT(A) during the hearing of appellate stage. In view of above we re inclined to restore the issue to the file of AO for fresh adjudication as per law with the direction to verify whether the provision for leave encashment has been crystallized. Hence the ground of appeal of the Revenue is allowed for the statistical purposes. Addition made by AO on account of provision for Wealth Tax Act, 1952 in the book profit - Held that - From the plain reading of the section, we find that the provision does not require the addition of wealth tax. Thus we are of the view to uphold the order of ld. CIT(A). Hence the ground raised by the Revenue is dismissed.
Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961. 2. Disallowance of advances written off. 3. Valuation of closing stock. 4. Write off of lease premium as revenue expenditure. 5. Charging of interest under Section 234B. 6. Treatment of profits from sale-purchase of shares. 7. Provision for doubtful debts and advances in book profit computation. 8. Treatment of interest income from bank deposits and tax refunds. 9. Provision for leave encashment in book profit computation. 10. Provision for wealth tax in book profit computation. Detailed Analysis: 1. Disallowance under Section 14A of the Income Tax Act, 1961: The assessee earned dividend income of ?21,82,188, which is exempt under Section 10(34). The AO disallowed expenses related to this income under Section 14A, applying Rule 8D. However, Rule 8D came into effect from 24.03.2008 and is not applicable for the assessment year 2005-06. The Tribunal directed the AO to restrict the disallowance to 1% of the exempt income, following the jurisdictional High Court's decision in R.R. Sen & Brothers (Pvt.) Ltd. 2. Disallowance of advances written off: The AO disallowed ?10,13,245 written off as advances due to lack of details. The CIT(A) allowed ?4,53,908 as bad debts but disallowed ?5,60,337, considering them capital losses. The Tribunal found that advances were given in the course of business, except for ?4,41,089 related to a joint venture in Dubai, which was also allowed as business expenditure based on the principle that the loss was incurred in the course of business. 3. Valuation of closing stock: The AO increased the closing stock value by ?3,35,64,496, including estimated expenses of ?60 lakhs. The assessee valued the stock based on the subsequent sale price. The Tribunal upheld the AO's valuation, emphasizing that closing stock should be valued at cost or market price as on the balance sheet date, not future prices. The AO was directed to adjust the opening stock for the subsequent year accordingly. 4. Write off of lease premium as revenue expenditure: The assessee did not press this issue during the hearing, and it was dismissed as not pressed. 5. Charging of interest under Section 234B: Interest under Section 234B is consequential and applicable under both normal and MAT provisions. However, if the liability arises due to retrospective amendments, no interest is chargeable. The Tribunal followed the decision in Emami Limited Vs. CIT, allowing the assessee's appeal on this ground. 6. Treatment of profits from sale-purchase of shares: The AO treated the income from sale-purchase of shares as business income, following a previous ITAT order. However, the CIT(A) treated it as capital gains, noting that shares were shown as investments. The Tribunal upheld the CIT(A)'s decision, finding no basis to treat the income as business income. 7. Provision for doubtful debts and advances in book profit computation: The AO added ?24,15,907 for doubtful debts to the book profit under Section 115JB. The CIT(A) deleted this addition, following the ITAT's decision in Usha Martin Industries Ltd. The Tribunal reversed the CIT(A)'s order, citing the amended provisions of Section 115JB. 8. Treatment of interest income from bank deposits and tax refunds: The AO treated interest income from bank deposits and tax refunds as "income from other sources." The CIT(A) treated it as "business income," noting the nexus with business activities. The Tribunal partly allowed the Revenue's appeal, treating interest on tax refunds as "income from other sources" but upheld the CIT(A)'s treatment of interest on bank deposits as "business income." 9. Provision for leave encashment in book profit computation: The AO added the provision for leave encashment to the book profit, considering it an unascertained liability. The CIT(A) treated it as an ascertained liability, following a previous year's decision. The Tribunal restored the issue to the AO to verify if the provision had crystallized. 10. Provision for wealth tax in book profit computation: The AO added the provision for wealth tax to the book profit. The CIT(A) deleted this addition, and the Tribunal upheld the CIT(A)'s decision, noting that Section 115JB requires the addition of income tax, not wealth tax. Summary of Results: - Assessee’s appeal (ITA No.813/Kol/2009) is partly allowed. - Revenue’s appeals (ITA No.781/Kol/2009, 371/Kol/2012) are partly allowed. - Revenue’s appeal (ITA No.370/Kol/2012) is partly allowed for statistical purposes.
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