2023 (1) TMI 225 - HC - Income Tax

Disallowance u/s 14A r.w.r 8D - Necessity of recording of satisfaction by the Assessing Officer - HELD THAT - AO has not recorded his satisfaction with regard to the suo moto deduction made by the assessee. Therefore, following the authority in Hindusthan Aeronautics Ltd 2020 (12) TMI 679 - KARNATAKA HIGH COURT we are of the view that disallowance of Rs.53,367/- under Section 14A read with Rule 8D of the Rules is not sustainable. Addition u/s 45(4) - plot was purchased by one of the partners - HELD THAT - It is not in dispute that the sale deed is executed in the name of Shri. Aeranpurwala. The assets of the Firm was sold to the Private Limited Company in which the partners of the firm were the Directors. Section 45A of the IT Act is applicable where any person receives any Capital Asset from a specified entity in connection was the reconstitution of such specified entity. It is not the case of the Revenue that there was reconstitution of the Firm. On the other hand, the assets of the Firm have been sold to the Private Limited Company. It is settled that title to an immovable property worth more than Rs.100/- can be trasferred only by way of a Deed of Conveyance duly executed and registered and not by Book entry In view of the settled position, Section 45(4) of the Act has no application in this case. Consequently, the addition made by the AO under Section 45(4) of the IT Act as long term Capital gains, is not sustainable. With regard to the plot, we hold that the addition made by the Assessing Officer on the ground of short-term Capital gains is also not sustainable. We may record that the building in question is situated on the plot in respect of which the Assessing Officer had added long term Capital gains Tax. We have held that the plot belonged to the Partner Shri. Aeranpurwala. By logical corollary, the building thereon, also must belong to him. Hence, the short term Capital gains added by the Assessing Officer is not sustainable. Disallowance of premium on Insurance Policy - Assessee Firm had taken a Insurance Policy on its Partner Shri. Aeranpurwala - HELD THAT - Keyman Insurance Policy is taken to protect a Firm from a Financial loss due to the death of the insured person in charge of the affairs of the Firm. In this case, policy was taken in the name of Shri. Aeranpurwala and a premium of Rs.10 Lakhs was paid by the Firm. The assets of the Firm have been sold to the Private Limited Company and the Firm has discontinued the Policy. Whilst the Firm was doing business and Shri. Aeranpurwala was managing the affairs the Policy was taken by the Firm. Since the assets of the Firm were sold, the Firm in its wisdom has decided not to continue with the Policy. Therefore, in our view, the expenditure towards Insurance Policy cannot be disallowed because, the sale of assets is based on Commercial expediency and whenever such transactions take place, it would not be expedient for the Firm to continue the Keyman Insurance, but the Policy was necessary when the Firm was doing the business. Once the assets are sold, the Keyman policy for the Firm becomes redundant. At the same time, a portion of the Premium cannot be disallowed as expenses, because, discontinuance of the policy has occurred due to sale of assets. Therefore, in our considered view, the disallowance being 1/3 rd of the premium amount, is not sustainable. Addition of profit margin at 8% on transfer of stock - assessee has transferred the 'Stock in Trade' to M/s. Evergreen Seamless Pipes and Tubes Pvt. Ltd., under a BTA - whether the Revenue can decide the price at which the Stock-in-trade ought to have been transferred ? - HELD THAT - In this case, the assessee - Firm has transferred the Stock-in-trade to the Private Limited Company at book value. The assessee, in its reply to the Assessing Officer, has stated that the end user of the products of the firm are Public Sector Units and other Companies. If the firm offered to sell its whole stock, none of those Companies would be interested to purchase the same if there was no requirement. The firm's products cannot be sold in open market like any other consumer goods or Industrial Hardware on account of its unique usage and specifications which are to be certified by various third party inspection agencies. No dealer would be interested to purchase them as these products can be purchased directly from the manufacturers. The stock could not be sold at a price more than the cost price and therefore, it has been sold at cost price. It is not in dispute that the Stock-in-trade are pipes and tubes made of carbon and alloy steel for Refineries, Boiler industries etc. Therefore, they cannot be sold in the open market as any other consumer goods. It is also not is dispute that the partners of the firm are the promoters of the Company. In the light of these facts, the firm has taken a decision to transfer the goods at book value. As held in S.A. Builders 2006 (12) TMI 82 - SUPREME COURT the Revenue cannot substitute its opinion with a business decision of an assessee. In our considered view, the gross profit estimated by the Assessing Officer and modified by the CIT(A) are notional and not traceable to any provision in the IT Act and therefore it is imaginary and perverse. Decided in favour of the assessee.

Summary

Issues Involved:
1. Applicability of Section 45(4) in the absence of distribution or dissolution of the firm.
2. Correctness of computation of short-term capital gains.
3. Justification of deemed profit on transfer of stock.
4. Disallowance under Section 14A of the IT Act.
5. Disallowance of premium paid on Keyman Insurance Policy.

Detailed Analysis:

1. Applicability of Section 45(4):
The Tribunal's decision to apply Section 45(4) was contested, arguing there was no distribution or dissolution of the firm. The court found that the plot and building in question belonged to a partner and were erroneously not debited to the partner's account. Since the assets were sold to a Private Limited Company and not distributed among partners, Section 45(4) was deemed inapplicable. The court concluded that the addition of Rs.54,89,677/- as long-term capital gains and Rs.68,86,826/- as short-term capital gains was unsustainable.

2. Computation of Short-Term Capital Gains:
The court reiterated that since the plot and building belonged to the partner, the short-term capital gains addition on the building was also unsustainable. The building, being on the partner's plot, logically belonged to the partner, thus negating the short-term capital gains addition.

3. Deemed Profit on Transfer of Stock:
The assessee argued against the arbitrary addition of profit margin by the Assessing Officer and CIT(A). The court noted that the stock was transferred at book value due to its specific nature and limited marketability. The court emphasized that the Revenue cannot substitute its judgment for the business decisions of the assessee, referencing the SA Builders case. The court found the profit margin additions by the Assessing Officer and CIT(A) to be notional, imaginary, and without legal backing, thus unsustainable.

4. Disallowance under Section 14A:
The court highlighted that the Assessing Officer did not record satisfaction regarding the incorrectness of the assessee's suo moto disallowance before invoking Rule 8D. Citing Hindustan Aeronautics Ltd. vs. ACIT, the court held that the disallowance of Rs.53,367/- under Section 14A read with Rule 8D was unsustainable due to the lack of recorded satisfaction by the Assessing Officer.

5. Disallowance of Premium on Keyman Insurance Policy:
The court examined the disallowance of Rs.3,33,333/- related to the Keyman Insurance Policy. It was noted that the policy was taken to protect the firm against financial loss due to the partner's premature death. Given the sale of the firm's assets and the resulting redundancy of the policy, the court found the disallowance of a portion of the premium unjustified. The expenditure was deemed necessary and commercially expedient when the firm was operational, making the disallowance unsustainable.

Conclusion:
The appeal was allowed, with the questions of law answered in favor of the assessee and against the Revenue. The court found the additions and disallowances made by the Assessing Officer and upheld by the Tribunal to be unsustainable based on the detailed analysis of each issue.