2019 (1) TMI 258 - AT - Income Tax

Disallowance made u/s 14A - Held that - Referring to ISG TRADERS LTD. VERSUS COMMISSIONER OF INCOME-TAX, WEST BENGAL-III, KOLKATA. 2011 (9) TMI 58 - CALCUTTA HIGH COURT that interest relatable to earning of exempted dividend by working out the percentage of dividend vis a vis total turnover during the year we hold that the expenditure to be disallowed u/s 14A of the Act is to be worked out in the similar fashion - Accordingly we hold that the disallowance u/s 14A of the Act should be restricted to ₹ 2,74,633/- in the facts and circumstances of the instant case - decided partly in favour of assessee Addition u/s 68 - unexplained cash credit and unexplained expenditure towards alleged commission - Held that - We find that the assessee had clarified before the ld AO more than once in writing that it had not claimed any long term capital gains as exempt or claimed any short term capital loss in the return of income.Since the lower authorities had proceeded on an erroneous assumption that the assessee had claimed bogus long term capital gains as exempt or incurred short term capital loss with a view to evade tax, the entire findings given by them in their respective orders becomes totally irrelevant. The profits from sale of shares of Tuni Textile Mills Ltd is to be taxed as income from business as offered by the assessee and not u/s 68 of the Act under the head income from other sources , the provisions of section 115BBE of the Act cannot be made applicable in the instant case - lower authorities had erred in making and confirming the addition being gains on sale of shares of Tuni Textile Mills Ltd as bogus and consequentially adding as unexplained expenditure towards commission. Both the additions directed to be deleted - decided in favour of assessee Revisionary jurisdiction u/ 263 - disallowance u/s 14A of the Act was not made by the ld AO by applying the computation mechanism provided in Rule 8D - Held that - Provisions of section 14A of the Act are applicable even if the shares are held as stock in trade as decided in the case of Maxopp Investments 2018 (3) TMI 805 - SUPREME COURT OF INDIA . We find that we have already held elsewhere in this order that the disallowance u/s 14A should be restricted to ₹ 2,74,633/- in the facts and circumstances of the instant case in the light of ISG Traders Ltd vs CIT 2011 (9) TMI 58 - CALCUTTA HIGH COURT - As we have held that the disallowance u/s 14A of the Act cannot be made by applying the computation mechanism provided in Rule 8D of the Rules in the facts and circumstances of the instant case, we have no hesitation in quashing the revision proceedings u/s 263 - decided in favour of assessee

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Addition of unexplained cash credit and unexplained expenditure towards alleged commission.
3. Justification of invoking revisionary jurisdiction under Section 263 of the Income Tax Act.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The primary issue was whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in upholding the disallowance made under Section 14A of the Income Tax Act. The assessee, a partnership firm engaged in trading securities and derivatives, had declared a total loss and offered a sum for disallowance under Section 14A as expenses incurred for earning exempt income. The Assessing Officer (AO) applied Rule 8D(2) of the Income Tax Rules and made a disallowance. The CIT(A) upheld this disallowance, stating that the assessee failed to demonstrate that investments were made from own funds and to show one-to-one correlation between funds available and funds deployed. The Tribunal found that since the shares were held as stock in trade and not investments, Rule 8D was not applicable. The disallowance should be based on the accounts of the assessee, and the Tribunal restricted the disallowance to ?2,74,633, following the decision of the Jurisdictional High Court in the case of ISG Traders Ltd vs CIT.

2. Addition of Unexplained Cash Credit and Unexplained Expenditure Towards Alleged Commission:
The next issue was whether the CIT(A) was justified in confirming the addition of ?2,09,85,684 as unexplained cash credit and ?2,55,273 as unexplained expenditure towards alleged commission. The AO had treated the gains from the sale of shares of M/s Tuni Textile Mills Ltd as bogus and added the amount as unexplained cash credit under Section 68, along with corresponding commission expenditure. The Tribunal found that the lower authorities had erroneously assumed that the assessee had claimed bogus long-term capital gains or short-term capital loss. The assessee had actually declared the profit from share trading as business income. The Tribunal noted that the transactions were genuine and supported by documentation such as ledger accounts, demat statements, and bank statements. The Tribunal referred to the case of Smt. Savita Bhura vs DCIT, where similar additions were deleted, and directed the deletion of the additions totaling ?2,12,40,957.

3. Justification of Invoking Revisionary Jurisdiction under Section 263 of the Income Tax Act:
The final issue was whether the CIT was justified in invoking revisionary jurisdiction under Section 263. The CIT held that the AO's order was erroneous and prejudicial to the interests of the revenue because the disallowance under Section 14A was not made by applying Rule 8D. The assessee argued that the shares were held as stock in trade, and Rule 8D talks about shares held as investments. The Tribunal noted that the AO had already made a disallowance under Section 14A, which was upheld by the CIT(A). The Tribunal found that the CIT's action was not warranted as the same issue had been elaborately dealt with by the AO and CIT(A). The Tribunal quashed the revision proceedings under Section 263, stating that the disallowance under Section 14A should be restricted to ?2,74,633, as previously held.

Conclusion:
The appeal of the assessee in ITA No. 846/Kol/2017 was partly allowed, and the appeal in ITA No. 637/Kol/2018 was allowed. The Tribunal directed the deletion of additions totaling ?2,12,40,957 and quashed the revision proceedings under Section 263.