2018 (8) TMI 760 - HC - Income Tax

Disallowance u/s. 40A(2)(b) - excess remuneration to directors - disallowance u/s. 14A - valuation of closing stock - Addition on account of notional interest on delayed refund of security deposits - Held that - Looking to the increase in the profit and the business when in the subsequent year i.e. year in consideration the learned Tribunal accepted the renumeration paid to the Director as admissible, it cannot be said that the learned Tribunal has committed any error. The learned Tribunal has rightly observed that once the renumeration paid in the preceding year was accepted by the Revenue, the Assessing Officer was not justified in considering and/or comparing the renumeration paid in AY 2004-05. - No question of law. Appeal admitted on the following question of law Whether the Appellate Tribunal is right in law and on facts in holding that the assessee s profit earned on the sale fo shares shall be treated as capital gain instead of business income? Whether the Appellate Tribunal has erred in law and on facts in deleting the addition of ₹ 2,33,55,558/made u/s 145A of the Act? Whether the Appellate Tribunal was right in law and on facts in confirming the decision of the CIT(A) in deleting the addition u/s 145A of the Act, 1961? as disallowed by the AO?

Issues Involved:
1. Disallowance under Section 40A(2)(b) on account of excess remuneration to directors.
2. Disallowance under Section 14A read with Rule 8D.
3. Classification of profit from the sale of shares as capital gain or business income.
4. Addition under Section 145A related to CENVAT credit.
5. Notional interest on delayed refund of security deposits.

Detailed Analysis:

1. Disallowance under Section 40A(2)(b) on account of excess remuneration to directors:
The Assessing Officer (AO) disallowed excess remuneration paid to directors under Section 40A(2)(b) for various assessment years, citing an extraordinary increase in the remuneration. The Tribunal deleted these disallowances, reasoning that the remuneration paid in preceding years was accepted by the Revenue, and comparing it with the remuneration paid in AY 2004-05 was unjustified. The Tribunal observed that the remuneration in the preceding assessment years was accepted, and considering the increase in profit and business, the remuneration paid in the current year was admissible. The High Court agreed with the Tribunal's view, finding no substantial question of law arising from the Tribunal's decision.

2. Disallowance under Section 14A read with Rule 8D:
The AO made disallowances under Section 14A read with Rule 8D for various assessment years, attributing expenses to exempt income. The Tribunal deleted these disallowances, noting that the assessee had sufficient surplus funds and referring to precedents where similar disallowances were not upheld. The High Court upheld the Tribunal's decision, citing previous judgments that supported the Tribunal's findings.

3. Classification of profit from the sale of shares as capital gain or business income:
The AO classified the profit from the sale of shares as business income instead of capital gains. The Tribunal reversed this, holding that the profit should be treated as capital gains. The High Court admitted this issue for further consideration, recognizing it as a substantial question of law.

4. Addition under Section 145A related to CENVAT credit:
The AO made additions under Section 145A, adjusting the value of the closing stock by the amount of taxes paid on raw materials lying in the closing stock. The Tribunal deleted these additions, and the High Court admitted this issue for further consideration, identifying it as a substantial question of law.

5. Notional interest on delayed refund of security deposits:
For AY 2009-10, the AO disallowed notional interest on the delayed refund of security deposits. The Tribunal deleted this disallowance, noting that no interest was due in the year under consideration and the security amount had been received by 23.08.2007, relevant for AY 2008-09. The High Court upheld the Tribunal's decision, finding no error in the deletion of the notional interest disallowance.

Conclusion:
The High Court dismissed the appeals concerning disallowances under Section 40A(2)(b) and Section 14A read with Rule 8D, and the notional interest on delayed refund of security deposits. However, it admitted the appeals for further consideration on the issues of classification of profit from the sale of shares and additions under Section 145A. The detailed analysis provided by the Tribunal and the High Court's agreement with their findings reflect a thorough examination of the facts and applicable legal principles.

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