2017 (7) TMI 428 - AT - Income Tax

Disallowance u/s 14A read with Rule 8D - securities held as stock in trade - Held that - We have observed from the perusal of audited financial statements which are placed in paper book filed with the tribunal by the assessee that the assessee has made investments in shares to the tune of 3, 78, 000/- (Previous Year 3, 78, 000/- as on 31- 03-2009) which were held as Investments in its books of accounts as on 31- 03-2010 while investments in shares and securities as on 31-03-2010 were 12, 50, 94, 940 which were held as stock-in-trade (previous year as on 31- 03-2009 of 8, 70, 06, 123/-) ref. pb/page 3-18). We have also observed that the assessee s own funds are to the tune of 7, 98, 02, 973/- (consisting of share capital reserves-miscellaneous expenditure(debit)). We have observed that the Mumbai-tribunal has decided this issue in the assessee s own case for assessment year 2012-13 wherein held that no disallowance u/s.14A r.w.r 8D of the Rules can be made for the securities held as stock in trade. The reason behind it is not difficult to understand. Income arising from the business of an assessee is taxed under the head business and profession. So all the expenses have to be considered while computing the business income. On the other hand if the securities are held as investment and an assessee earns exempt income same can be subjected to disallowance as envisaged by the provisions of section 14A. Non compliance of order u/s 144A - Disallowance of loss claimed as F & O trading loss - client code modifications undertaken in the month of March 2010 - loss stood disallowed by the AO considering the same to be sham loss being colorable device adopted by the assessee to evade taxes - as per CIT-A AO did not conducted enquiry as per directions of the Addl. CIT and disallowed the said loss merely on presumption that these transactions were sham transactions - Held that - We are afraid that this approach of learned CIT(A) disregarding the material on record and coming to certain conclusions without any material on record is completely flawed to the extent that it has made the order of learned CIT(A) enter the arena of perversity and this order of learned CIT(A) cannot be sustained in the eyes of law and is liable to be set aside. The powers of the learned CIT(A) is co-terminus with the powers of the AO including powers to enhance assessment after following due procedures as contemplated by law. We are of the considered view the appellate order of the learned CIT(A) cannot be sustain in the eyes of law as it is suffering from serious flaw and is perverse as indicated and hence we are inclined to set aside the order of learned CIT(A) and restore the matter to the file of the learned AO for fresh adjudication of the issue on merits in accordance with law and in compliance with directions issued by Addl. CIT vide orders dated 22-03-2013 passed u/s 144A of the 1961 Act.

Summary

Issues Involved:
1. Deletion of ?8,63,137/- disallowance under Section 14A made on account of expenditure incurred towards earning exempt income in the form of dividend.
2. Deletion of the addition of loss of ?3,67,85,146/- on account of client code modifications made by the assessee in March 2010.

Detailed Analysis:

Issue 1: Deletion of ?8,63,137/- disallowance under Section 14A

The Revenue challenged the deletion of ?8,63,137/- disallowed under Section 14A read with Rule 8D of the Income-tax Rules, 1962, for expenses incurred towards earning exempt income in the form of dividends. The Assessing Officer (AO) observed that the assessee had earned exempt income and claimed ?15,97,859/- as exempt dividend income. The AO rejected the assessee's claim that no expenses were incurred to earn this income, citing the lack of separate accounts for taxable and exempt income. The AO applied Rule 8D and worked out a disallowance of ?13,95,280/- under Section 14A.

The Commissioner of Income Tax (Appeals) [CIT(A)], however, partly allowed the appeal, holding that while some administrative expenses could be attributed to investment activities, the interest expenditure of ?8,76,268/- was not related to earning dividends. The CIT(A) directed the AO to delete the disallowance of ?8,63,137/- but sustained the disallowance of ?5,32,143/- as 0.5% of the average investment.

The Tribunal upheld the CIT(A)'s decision, referencing its own earlier ruling in the assessee’s case for AY 2012-13, where it was held that no disallowance under Section 14A read with Rule 8D can be made for securities held as stock-in-trade. The Tribunal noted that the assessee's shares were held as stock-in-trade, and the own funds were more than the investments, thus dismissing the Revenue's appeal on this ground.

Issue 2: Deletion of the addition of loss of ?3,67,85,146/- on account of client code modifications

The AO disallowed a loss of ?3,67,83,145/- incurred through client code modifications, suspecting these transactions to be sham and pre-planned to generate artificial losses for tax evasion. The AO cited reports indicating large-scale client code modifications in March 2010 and initiated an investigation. The AO observed that the assessee had entered into numerous transactions through three brokers, resulting in significant losses due to client code modifications.

The CIT(A) deleted the disallowance, noting that the AO did not comply with the directions from the Additional Commissioner of Income Tax (Addl. CIT) under Section 144A to verify the factual position from NSE and other sources. The CIT(A) found that the AO made the disallowance based on presumption without further investigation, and there was no action taken by SEBI or NSE against the assessee. The CIT(A) also pointed out that the client code modifications were done during normal trading hours and were as per exchange norms.

The Tribunal, however, found the CIT(A)'s approach flawed and perverse, noting that the large number of client code modifications in March 2010 and the magnitude of the transactions indicated manipulative and collusive actions for tax evasion. The Tribunal observed that the CIT(A) did not conduct any further enquiry or direct the AO to do so, despite the directions from the Addl. CIT. The Tribunal set aside the CIT(A)'s order and restored the matter to the AO for fresh adjudication, directing the AO to comply with the Addl. CIT's directions and conduct a thorough investigation.

Conclusion:

The Tribunal upheld the deletion of ?8,63,137/- disallowance under Section 14A but set aside the CIT(A)'s order regarding the deletion of the addition of loss of ?3,67,83,145/- due to client code modifications, remanding the matter back to the AO for further investigation.