2018 (10) TMI 931 - AT - Income Tax

Disallowance u/s 14A - Held that - Disallowance under section 14A cannot be made where the dominant object of the investment is controlling interest. However the Hon‟ble Supreme Court in case of Maxxopp investments Ltd Vs. Commissioner of income tax (2018 (3) TMI 805 - SUPREME COURT OF INDIA) has held that the dominant purpose in making investment in shares is not relevant for the purpose of disallowance to be made under section 14 A of the act. We reverse the finding of CIT appeal and restore the order of the assessing officer so far as disallowance under section 14 A of the act is concerned. However the learned assessing officer is further directed to give the credit of the disallowance already offered by the assessee of ₹ 3 05815/ under section 14 A of the Act which is already offered by the assessee. If the above amount has already been added by the assessee in its computation of total income or during the course of assessment proceedings and is already taxed, the learned assessing officer is required to reduce the disallowance of ₹ 665592/ by the sum of ₹ 305815/ . Accordingly, ground No. 1 of the appeal of the revenue is partly allowed. Changed the method of valuation of the closing stock of shares from at cost to at cost or market value, whichever is less - Held that - The valuation of the closing stock at cost or market value whichever is less is the most prudent method as it does not recognize the revenue which has not been earned by the assessee. Further it was not shown by the revenue that how the change in the method of the valuation of the closing stock is not bona fides. The decision in UCO BANK 1991 (7) TMI 5 - CALCUTTA HIGH COURT relied upon by the ld AO supports the case of the assessee as assessee was following valuation method of At cost which is changed to At cost or market value whichever is less‟ is more prudent. No infirmity in the order of the learned Commissioner of income tax appeals. Accordingly, ground of the appeal of the revenue is dismissed

Summary

Issues:
1. Disallowance under section 14A of the Income Tax Act.
2. Addition on account of change in the valuation of closing stock.

Analysis:

Issue 1: Disallowance under section 14A of the Income Tax Act
The appeal involved the deletion of an addition made under Rule 8D of the Act by the Commissioner of Income Tax (Appeals) (CIT(A)) for Assessment Year 2011-12. The Assessing Officer (AO) questioned the disallowance under section 14A due to the assessee's dividend income and investments. The AO computed a disallowance of ?6,65,592 under section 14A as the assessee did not include unquoted equity shares in the calculation. The CIT(A) deleted this disallowance, stating that unquoted shares should not be considered for disallowance under Rule 8D. However, the Tribunal reversed this decision, citing that the dominant purpose of investment is not relevant for disallowance under section 14A, as per the Supreme Court's ruling in Maxxopp Investments Ltd vs. CIT. The Tribunal directed the AO to credit the disallowance already offered by the assessee and partly allowed the revenue's appeal.

Issue 2: Addition on account of change in the valuation of closing stock
The second ground of the appeal concerned the change in the method of valuation of closing stock of shares by the assessee. The AO disallowed ?40,62,8975 due to a change from "cost" to "cost or net realizable value whichever is lower" for valuing shares. The CIT(A) upheld the assessee's valuation method, stating it was in line with Accounting Standard-2 and consistently followed. The Tribunal agreed with the CIT(A), noting that the change in valuation method was prudent and consistent with the principle of prudence in accounting. The Tribunal found no infirmity in the CIT(A)'s order and dismissed the revenue's appeal on this issue.

In conclusion, the Tribunal partly allowed the revenue's appeal concerning the disallowance under section 14A but dismissed the appeal regarding the addition on account of the change in the valuation of closing stock.