2019 (1) TMI 2062 - AT - Income Tax

Addition u/s 68 on account of Barter transaction - Issue of shares for consideration other than cash - HELD THAT - As decided in M/s Anand Enterprises Ltd. 2018 (9) TMI 1779 - ITAT KOLKATA this is a simple case of acquiring shares of certain companies from certain shareholders without paying any cash consideration and instead the consideration was settled through issuance of shares to the respective parties. Moreover in the balance sheet of the assessee company in the schedule to share capital it is very clearly mentioned by way of note that the fresh share capital was raised during the year for consideration other than cash. Hence we hold that provision of section 68 of the Act are not applicable in the instant case - Decided in favour of assessee. Disallowance u/s 14A r.w.r. 8D (2) (iii) taking into account those investments which yielded exempted income - We note that in the case of REI Agro Ltd. 2013 (9) TMI 156 - ITAT KOLKATA has held that it is only the investments which yields dividend during the previous year that has to be considered while adopting the average value of investments for the purpose of Rule 8D(2)(ii) (iii) of the Rules. The aforesaid view of the Tribunal has since been affirmed as correct by the Hon ble Calcutta High Court in REI. AGRO LTD. 2014 (4) TMI 713 - CALCUTTA HIGH COURT in the appeal against the order of the Tribunal in the case of REI Agro Ltd. (supra). Besides no disallowance u/s 14A when shares which yielded tax free income are held as stock in trade as held in the case of CIT Vs. GKK Capital Markets (P) Ltd. 2017 (2) TMI 628 - CALCUTTA HIGH COURT Therefore the AO is directed to compute the disallowance u/s 14 read with rule 8D as per the principles laid down. Decided against revenue.

ISSUES PRESENTED and CONSIDERED

The primary issues considered in this judgment were:

Whether the addition made under Section 68 of the Income-Tax Act, 1961, for a barter transaction involving the issuance of shares for consideration other than cash, was justified.
Whether the computation of disallowance under Section 14A read with Rule 8D(2)(iii) was correctly applied, specifically considering only those investments that yielded exempted income.

ISSUE-WISE DETAILED ANALYSIS

1. Addition under Section 68 for Barter Transactions

Relevant Legal Framework and Precedents: Section 68 of the Income-Tax Act, 1961, pertains to unexplained cash credits. The Tribunal referred to the decision in the case of ITO, W-13(1), Kolkata Vs. M/s. Anand Enterprises Ltd, which dealt with similar facts and legal questions. The Supreme Court in Shri H.H. Rama Varma vs. CIT clarified that 'any sum' in Section 68 refers to 'sum of money'.
Court's Interpretation and Reasoning: The Tribunal found that Section 68 was not applicable as there was no receipt of money; rather, it was a barter transaction where shares were issued in exchange for shares of another company. The Tribunal emphasized that Section 68 requires the receipt of a sum of money, which was absent in this case.
Key Evidence and Findings: The Tribunal noted the absence of cash transactions and the nature of the transactions as barter. The CIT(A) had previously deleted the addition, observing that the transactions did not involve cash but were instead a barter system.
Application of Law to Facts: The Tribunal applied the legal principle that Section 68 applies to cash transactions, not barter transactions, and found that the Assessing Officer (AO) had erroneously invoked Section 68.
Treatment of Competing Arguments: The Tribunal acknowledged the Departmental Representative's reliance on the AO's order but found no substantive argument against the CIT(A)'s findings or the precedent set by the Tribunal's earlier decision in M/s. Anand Enterprises Ltd.
Conclusions: The Tribunal concluded that the addition under Section 68 was unjustified and upheld the CIT(A)'s decision to delete the addition.

2. Computation of Disallowance under Section 14A

Relevant Legal Framework and Precedents: Section 14A of the Income-Tax Act deals with disallowance of expenditure incurred in relation to income not includible in total income. Rule 8D provides the method for determining such disallowance. The Tribunal referenced the decision in REI Agro Ltd. Vs. DCIT and the Calcutta High Court's affirmation of this decision.
Court's Interpretation and Reasoning: The Tribunal reiterated that only those investments that yielded dividend income during the year should be considered for disallowance under Rule 8D. The Tribunal also noted that shares held as stock in trade, which yielded tax-free income, should not be subject to disallowance under Section 14A.
Key Evidence and Findings: The Tribunal found that the AO had not applied the principles established in prior judicial decisions correctly. The CIT(A) had directed the AO to compute disallowance following these principles.
Application of Law to Facts: The Tribunal applied the principles from REI Agro Ltd. and GKK Capital Markets (P) Ltd. to affirm that the AO's computation was incorrect and upheld the CIT(A)'s directive.
Treatment of Competing Arguments: The Tribunal noted the lack of substantial argument from the Revenue to counter the CIT(A)'s findings and the established precedents.
Conclusions: The Tribunal upheld the CIT(A)'s order on the computation of disallowance under Section 14A, dismissing the Revenue's ground of appeal.

SIGNIFICANT HOLDINGS

The Tribunal held that Section 68 of the Income-Tax Act does not apply to barter transactions where no cash is involved, as the section requires the receipt of a sum of money.
The Tribunal confirmed that for disallowance under Section 14A, only those investments that yield exempt income during the relevant year should be considered, aligning with the precedent set by the REI Agro Ltd. case.
The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s order and emphasizing adherence to established judicial precedents.

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