2018 (1) TMI 84 - AT - Income Tax

Disallowance u/s 14A - Held that - No infirmity in the order of ld. CIT(A) sustaining disallowance at ₹ 46,494/- by observing that assessee main object is to derive income from trading in shares and not for earning exempt income by way of investment in shares and securities. Disallowance of interest - assessee has incurred the said interest for non-business purpose - Held that - No reason to interfere in the findings of ld. CIT(A) and deleting the impugned addition on account of disallowance of interest when appellant able to establish direct nexus of advances so granted out of interest free fund as evidenced from bank account and also said advance was related to F.Y. 08-09 (A.Y. 09-10) duly confirmed by M/s Isha Investment and no new advance were given during previous year, then disallowance of interest from the claim of interest for impugned previous year is neither justified nor sustainable. The A.O. is directed to delete the addition so made Addition on account of under valuation of closing stock - Held that - When the matter came up before the ld.CIT(A), assessee succeeded in getting this addition deleted as ld.CIT(A) observed that assessee being in the business of trading shares and securities, calculates the closing stock on the basis of value of shares and securities as on the last date of last settlement, which in this case was 29.03.2010. 18. We find substance in the findings of ld.CIT(A), as the books of accounts of assessee are audited u/s.44AB, method of closing stock is consistent with the preceding year and there is no variation. Further we also find that the last date of settlement was 29.03.2010 and the assessee has calculated the valuation of closing stock at ₹ 6,20,62,436/- by adopting the valuation method of cost or market value which were is less for each script held as on 29.03.2010. The detailed working of closing stock also forms parts of the order of ld. CIT(A). We therefore, in the given facts and circumstances as well the factual material of the issue raised in this ground fail to differ with the view taken by ld.CIT(A) deleting the addition.

Summary

Issues Involved:
1. Deletion of disallowance under Section 14A.
2. Deletion of disallowance of interest.
3. Deletion of addition on account of undervaluation of closing stock.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance under Section 14A:
The first ground of appeal raised by the Assessing Officer (AO) concerns the deletion of disallowance of ?22,75,481/- under Section 14A. The AO argued that the assessee, engaged in the business of trading shares and securities, earned exempt dividend income and claimed it as exempt. The AO applied Section 14A and calculated the disallowance at ?23,21,975/-. However, the Commissioner of Income Tax (Appeals) [CIT(A)] sustained only ?46,494/- as disallowance, recognizing that the assessee’s primary business was trading in shares and not earning exempt income. The Tribunal upheld the CIT(A)’s decision, noting that the assessee’s earning of exempt income was incidental to its business activity. The Tribunal cited the Karnataka High Court’s decision in CCI Ltd. vs. Joint Commissioner of Income Tax, which held that Section 14A does not apply to assessees engaged in share trading. Thus, the Tribunal found no infirmity in the CIT(A)’s order and dismissed the revenue’s appeal on this ground.

2. Deletion of Disallowance of Interest:
The second ground of appeal pertained to the deletion of disallowance of ?6,00,000/- interest. The AO disallowed this interest, claiming it was incurred for non-business purposes, specifically for an interest-free advance to M/s. Isha Investment. The CIT(A) deleted the addition, noting that the interest-free loan was given in the financial year 2008-09, with no new advances in the assessment year in question. The Tribunal found that the assessee provided complete transaction details and confirmations from M/s. Isha Investment, which were verified by the AO. Since there was no disallowance in the preceding assessment year when the loan was advanced, the Tribunal upheld the CIT(A)’s decision, finding no reason to interfere with the deletion of the ?6,00,000/- disallowance.

3. Deletion of Addition on Account of Undervaluation of Closing Stock:
The third ground of appeal involved the deletion of an addition of ?58,85,251/- for undervaluation of closing stock. The AO recalculated the valuation of closing stock based on the market price as of 31.03.2010, instead of the assessee’s valuation date of 29.03.2010. The CIT(A) deleted the addition, noting that the assessee’s method of valuing closing stock on the last date of the last settlement (29.03.2010) was consistent with previous years and audited under Section 44AB. The Tribunal agreed with the CIT(A), emphasizing that the consistent method of valuation was in line with the tax audit report and Section 145A of the Act. The Tribunal found the AO’s adoption of figures from 31.03.2010 incorrect and upheld the CIT(A)’s deletion of the ?58,85,251/- addition.

Conclusion:
In conclusion, the Tribunal dismissed the revenue’s appeal on all three grounds, upholding the CIT(A)’s decisions on the deletion of disallowance under Section 14A, the deletion of disallowance of interest, and the deletion of addition on account of undervaluation of closing stock. The Tribunal found no infirmity in the CIT(A)’s findings and provided relief to the assessee on all contested issues. The order was pronounced in the Court on 28.12.2017 at Ahmedabad.