2017 (9) TMI 647 - AT - Income Tax

Addition u/s 14A - provisions of Rule 8D2(iii) applicability in respect of shares held as stock in trade - Held that - We note that the Ld. CIT(A) by following the order of this Tribunal has held that percentage of the average value of investment prescribed under Rule 8D(2)(iii) of the Rules shall be computed on the dividend bearing scrips. The Hon ble Calcutta High Court in CIT Vs. M/s. G K K Capital Markets (P) Ltd. 2017 (2) TMI 628 - CALCUTTA HIGH COURT wherein their Lordships upheld the Tribunal decision that once the assessee has kept the shares as stock in trade, the Rule 8D of the Rules will not apply. Therefore, we reiterate the view taken by the coordinate bench in REI Agro Industries Ltd. Vs. DCIT 2013 (9) TMI 156 - ITAT KOLKATA and so, we do not find any merit in the ground of appeal raised by the revenue and hence, it stands dismissed. Addition u/s. 41(1) - remission of liability - Held that - In the present case, there is nothing on record to suggest that there was remission or cessation of liability in the AY 2010-11. On the contrary, as per the statement of the Director of M/s. MCL recorded by AO on that u/s. 131 of the Act suggests that when he joined as a Director only in 2003 the same balance was lying with no movement which suggests that the remission of ₹ 33,98,930/- has taken place between 01.04.2002 and 31.03.2003 and not in this assessment year. In such a scenario, section 41(1) of the Act has no application in this assessment year and, therefore, we direct deletion and allow assessee s appeal.

Summary

Issues:
1. Applicability of Rule 8D(2)(iii) on shares held as stock in trade.
2. Disallowance under section 41(1) of the Income Tax Act.

Issue 1: Applicability of Rule 8D(2)(iii) on shares held as stock in trade

The case involved cross-appeals by the revenue and the assessee against the order of the Ld. CIT(A) for AY 2010-11. The revenue contended that Rule 8D(2)(iii) should apply to disallow expenses for earning exempt income, citing a recent ITAT, Mumbai Bench decision. The AO computed expenses under Rule 8D, which the Ld. CIT(A) partially allowed based on the absence of borrowed funds for acquiring shares. The Tribunal upheld the decision, stating that Rule 8D does not apply when shares are held as stock in trade, citing a High Court judgment. The revenue's appeal was dismissed.

Issue 2: Disallowance under section 41(1) of the Income Tax Act

The AO added a principal amount and interest under sections 28(iv) and 41(1) after finding discrepancies in unsecured loans. The Ld. CIT(A) reduced the addition, but both the revenue and the assessee appealed. The Tribunal noted the history of loans and their transfer to M/s. MCL due to amalgamation. The assessee did not pay interest post-merger due to disputes, and the loan creditor confirmed the receivables. The Director of M/s. MCL expressed hope for recovering the amount partially. The Tribunal observed that there was no remission or cessation of liability in the AY 2010-11, as confirmed by the Director's statement. Therefore, the Tribunal directed the deletion of the amount under section 41(1), allowing the assessee's appeal and dismissing the revenue's appeal.

In conclusion, the Tribunal dismissed the revenue's appeal regarding Rule 8D(2)(iii) and allowed the assessee's appeal on the disallowance under section 41(1) of the Income Tax Act for AY 2010-11.