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TMI Blog2014 (12) TMI 300X X X X Extracts X X X X X X X X Extracts X X X X ..... er of the transaction - for the purpose of determining whether there has been accrual of real income or not, recourse is to be made to ascertain the nature of business and character of the transaction and the realities and peculiarities of the situations. There was no inconsistency or contradiction between the circular so issued and section 145 of the Income-tax Act - In fact, the circular clarifies the way in which these amounts are to be treated under the accounting practice followed by the lender - The circular cannot be treated as contrary to section 145 of the Income-tax Act or illegal in any form - It is meant for a uniform administration of law by all the income-tax authorities in a specific situation and, therefore, validly issued under section 119 of the Income-tax Act - the circular would be binding on the Department – the findings of CIT(A) is set aside – Decided in favour of assessee. Validity of order of revision of u/s 263 - Revised valuation of closing stock accepted by without enquiry and application of mind - Held that:- CIT was under an impression that assessee has deviated from the consistent accounting policy adopted by it while valuing the closing stock - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st or fair market price whichever is lower - The finding of ld. CIT in this regard is also not based on proper appreciation of AS- 13 or the facts on record - assessment order on the issue cannot be held to be erroneous and prejudicial to the interests of revenue – the revised order by the CIT is set aside. Expenses u/s 14A on exempted income - Whether AO has not disallowed the expenditure u/s 14A on the exempted income – Held that:- Though Rule 8D cannot be applied retrospectively to the AY as it came into the statute w.e.f. 24/03/2008, however, it cannot be overlooked that the provisions contained u/s 14A of the Act were existing in the statute which required disallowance of expenditure - CIT was correct in directing AO to examine the applicability of provisions of section 14A to the exempt income earned by assessee during the year - this issue has not at all been examined by AO while completing the assessment or at least nothing has been brought to our notice that AO during the assessment proceeding has examined this issue – in assessee’s own case also disallowance of expenditure u/s 14A at 10% of exempt income earned during the year is upheld – the order of the CIT is upheld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2006-07 confirmed the addition made. 4. The learned AR, at the outset, submitted before us that additions made for the AY 2005-06 and 2006-07, in the meanwhile have been deleted by ITAT while considering assessee s appeal in ITA Nos. 468/Hyd/09 and 1111/Hyd/2011 dated 05/09/14. Ld. DR also agreed that the issue has been decided in favour of assessee in the preceding AYs by ITAT in assessee s own case. 5. We have considered the submissions of the parties and perused the orders of the revenue authorities as well as other material on record. A perusal of the assessment order as well as order passed by ld. CIT(A) would make it clear that addition of notional interest was made on the basis of orders passed for the preceding AYs. However, when the issue was agitated before ITAT, by assessee in ITA Nos. 468/Hyd/09 and 1111/Hyd/11 for AYs 2005-06 and 2006-07, the coordinate bench of this Tribunal while deleting the additions held as under: 21. We have considered the rival submissions and perused the impugned orders of the Revenue authorities and other material on record. We have also gone through the written submissions filed and the decisions relied upon by the parties before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id down by various judicial authorities on the proposition that the income cannot be taxed on hypothetical basis, and it is only the real income that is to be brought to tax. In this behalf, we also rely, giving below summary of the ratio laid down, on the following decisionsa) CIT vs. Godhra Electricity Co. 225 ITR 746 (SC), The view expressed was that if income does not result at all, there cannot be any tax and that if an income has not materialized, then merely an entry made about a hypothetical income by following book keeping methods, the liability to tax cannot be attracted. b) Andhra bank(225 ITR 447)(SC): It was held, that there cannot be a tax if no income resulted, despite the entry in the book keeping. The case deals with s. 148. Assessee changed method of accounting from AY 1960 onwards. But during AY 1963-64, the AO objected the change and reopened assessments for AY 1960 onwards. Apex court held that this amounts to change of opinion and re-assessment is not valid. 23. Further, the learned counsel for the assessee relied on the decision of the Hon ble Supreme Court CIT vs. Excel Industries Ltd. Ors. (358 ITR 295) and submitted that going by the accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pugned order, as pointed out by the learned counsel for the assessee the Hon ble Supreme Court has reversed the view taken in that case, vide its decision in UCO Bank (237 ITR 889) wherein it has been held as follows: The question whether interest earned, on what have come to be known as sticky loans, can be considered as income or not until actual realisation, is a question which may arise before several Income-tax Officers exercising jurisdiction in different parts of the country. Under the accounting practice, interest which is transferred to the suspense account and not brought to the profit and loss account of the company is not treated as income. The question whether in a given case such accrual of interest is doubtful or not, may also be problematic. If, therefore, the Board has considered it necessary to lay down a general test for deciding what is a doubtful debt, and directed that all Income-tax Officers should treat such amounts as not forming part of the income of the assessee until realised, this direction by way of a circular cannot be considered as travelling beyond the powers of the Board under section 119 of the Income-tax Act. Such a circular is binding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar was considered as issued for the purpose of proper administration of the provisions of section 12(1B) and the court did not look upon this circular as being in conflict with section 12(1B). A similar view of the Central Board of Direct Taxes circulars has been taken in the case of K.P. Varghese v. ITO [1981] 131 ITR 597, by a Bench of two judges consisting of P.N. Bhagwati and E.S. Venkataramiah, JJ. The Bench has held that circulars of the Central Board of Direct Taxes are legally binding on the Revenue and this binding character attaches to the circulars even if they be found not in accordance with the correct interpretation of the section and they depart or deviate from such construction. Citing the decision of Navnit Lal (C.) Javeri v. K.K. Sen, AAC [1965] 56 ITR 198 (SC), this court observed that circulars issued by the Central Board of Direct Taxes under section 119 of the Act are binding on all officers and persons employed in the execution of the Act even if they deviate from the provisions of the Act. In Keshavji Ravji and Co. v. CIT [1990] 183 ITR 1, a Bench of three judges of this court has also taken the view that circulars beneficial to the assessee which tone down ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h of three judges of this court by a majority of two to one. This judgment directly deals with interest on sticky advances which have been debited to the customer but taken to the interest suspense account by a banking company. The majority judgment has referred to the circular of October 6, 1952, and its withdrawal by the second circular of June 20, 1978. The majority appears to have proceeded on the basis that by the second circular of June 20, 1978, the Central Board had directed that interest in the suspense account on sticky advances should be includible in the taxable income of the assessee and all pending cases should be disposed of keeping these instructions in view. The subsequent circular of October 9, 1984, by which, from the assessment year 1979-80 the banking companies were given the benefit of the circular of October 9, 1984, does not appear to have been pointed out to the court. What was submitted before the court was, that since such interest had been allowed to be exempted for more than half a century, the practice had transformed itself into law and this position should not have been deviated from. Negativing this contention, the court said that the question o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that a circular which is properly issued under section 119 of the Incometax Act for proper administration of the Act and for relieving the rigour of too literal a construction of the law for the benefit of the assessee in certain situations would not be binding on the departmental authorities. This would be contrary to the ratio laid down by the Bench of five judges in Navnit Lal (C.) Javeri v. K.K. Sen [1965] 56 ITR 198 (SC). In fact State Bank of Tranvancore v. CIT [1986] 158 ITR 102 (SC), has already been distinguished in the case of Keshavji Ravji and Co. v. CIT [1990] 183 ITR 1 (SC), by a Bench of three judges in a similar fashion. It is held only as laying down that a circular cannot alter the provisions of the Act. It being in the nature of a concession, could always be prospectively withdrawn. In the present case, the circulars which have been in force are meant to ensure that while assessing the income accrued by way of interest on a sticky loan, the notional interest which is transferred to a suspense account pertaining to doubtful loans would not be included in the income of the assessee, if for three years such interest is not actually received. The very fact that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticky advance has to be treated as income of the assessee and taxable as such. It is said that ultimately, if the advance takes the shape of a bad debt, refund of the tax paid on the interest would become due and the same can be claimed by the assessee in accordance with law. For reasons set out above, we are not in agreement with the said judgment. The relevant circulars of the Central Board of Direct Taxes cannot be ignored. The question is not whether a circular can override or detract from the provisions of the Act; the question is whether the circular seeks to mitigate the rigour of a particular section for the benefit of the assessee in certain specified circumstances. So long as such a circular is in force it would be binding on the departmental authorities in view of the provisions of section 119 to ensure a uniform and proper administration and application of the Income-tax Act. 27. In the light of the foregoing discussion and the case-law on the point, we delete the addition of ₹ 2,76,38,140 made by the assessing officer and sustained by the CIT(A), allowing the grounds of the assessee on this issue. 6. As facts in the present case are materially the same, f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owever, AO has failed to examine the issue of proportionate disallowance of expenditure u/s 14A. 3. While completing assessment, AO has made addition to the tune of ₹ 58,10,000 towards unaccounted interest income. However, he has failed to initiate penalty proceedings u/s 271(1)(c). 10. Pointing out the aforesaid defects and deficiencies in the assessment which according to ld. CIT has rendered the assessment order erroneous and prejudicial to the interests of revenue, he issued show cause notice to assessee. In response to show cause notice, assessee submitted his reply objecting to the initiation of proceeding u/s 263 by making following submissions: . The company is engaged in the business of buying and selling of securities. Therefore, securities held by it constitute stock in trade of the business. ii. The company follows generally accepted principle of stock valuation i.e. cost or market price whichever is lower as is evident from Schedule- B as per notes to accounts of the Annual Report. iii, The value of closing stock as on 31.3.2007 as per annual report of ₹ 23, 19,14,273 has been erroneously arrived at on the basis of weighted average cost pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee company. XI. Therefore, it can neither be said that the aspect of revised valuation of closing stock has not been explained by the assessee nor that the said aspect has not been examined by the assessing officer while passing the order u/ s 143(3). Xii. Accordingly, there is no under assessment of income to the extent of ₹ 4,86,95,344 (i.e. ₹ 23,1 9,273 - ₹ 18,32,18,929) xii. Further to the above, it was stated that the credit side of the P L does not reflect the closing stock of ₹ 23,19,14,273. It is submitted that Income from capital market operations of ₹ 1,61,43,246 reflected in the P L Account is arrived at after taking into account the closing stock of ₹ 23,19,14,273. 11. After considering the submissions of assessee, ld. CIT, however, was not in agreement with the same. He observed that assessee has valued the shares at cost and arrived at the value of closing stock of shares at ₹ 23,19,14,273, which has been reflected in the balance sheet. However, during the assessment proceeding, assessee did not inform AO that it has changed the valuation of shares from cost price to cost or market price whichever is lower. Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost price. However, during the previous year corresponding to AY under dispute for converting income into loss assessee changed the valuation of closing stock from cost price to cost or market price whichever is lower. He, therefore, held that intention of assessee in reducing the value of closing stock is to convert the taxable income in to loss, as assessee did not value the opening stock at cost or market price whichever is lower. Therefore, value of closing stock adopted by assessee distorts the profits. As AO has failed to examine the change in valuation of stock which otherwise, if examined, would have resulted in not allowing loss on the valuation of shares amounting to ₹ 4,86,95,344. He, therefore, directed AO to adopt the value of closing stock of shares as reflected in the financial statements at ₹ 23.19 crores and ignored the value of closing stock of shares as shown in the revised statement at ₹ 18.32 crores. In other words, ld. CIT directed AO to disallow loss of ₹ 4,86,95,344 as claimed in the revised return. 12. Ld. CIT also observed that assessee has earned exempt income of ₹ 39,51,789 during the year. He observed that though Rule 8D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een erroneously arrived at on the basis of weighted average cost price without taking into account the market price of the securities as on that date. Once assessee became conscious of the error committed, it revised the valuation of stock as on 31/03/07 by working out the value of closing stock on the basis of cost or market price whichever is lower. Ld. AR referring to the valuation of closing stock as per the weighted average cost price and the actual market rate of the stock as per the BSE index submitted that adopting the market price of BSE, assessee revalued the stock as per the revised closing stock statement submitted before AO. Ld. AR submitted that from the aforesaid materials submitted before AO, it becomes clear, not only assessee has submitted every detail relating to revised valuation of closing stock but AO after examining all the details and having found that the valuation made in the revised statement is as per the accepted accounting principles of valuation of closing stock at cost or market price, whichever is lower, completed the assessment. Ld. AR submitted that the allegation made by ld. CIT that assessee has not brought the change in accounting principle wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncial instruments held as stock-in-trade, ld. AR submitted that even such observation of ld. CIT is factually incorrect. In this context, ld. AR referring to AS-13 of ICAI submitted that explanatory note to clause 1 of AS-13, makes it clear that provisions of AS-13 to the extent they relate to current investments are also applicable to shares, debentures and other securities held as stock-in-trade. Ld. AR submitted that when it is patent and obvious that AO has enquired into the matter and examined the issue, assessment order cannot be revised only because it was not discussed in the assessment order. In support of such contention, he relied on the following decisions: 1. Lanco Kondapalli Power Ltd. Vs. JCIT, 33 ITR (Trib) 142 2. Spectra Shares and Scrips Pvt. Ltd., 354 ITR 35 (AP) 14. Ld. AR submitted that when the change in valuation is bonafide, assessment order cannot be held to be erroneous. In this context, he relied upon a decision in case of DCIT Vs. M/s Turner Morrison Land Ltd., ITA No. 1840/Kol/2009, dated 11/03/11. Further ld. AR submitted that even the effect of revised valuation of stock would be having no effect on revenue as it is taken care of in the subse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As far as the direction of ld. CIT for initiating proceeding u/s 271(1)(c), ld. DR submitted that, though, ld. CIT can direct AO to initiate proceeding u/s 271(1)(c) but considering the fact that similar addition made has been deleted by ITAT, the direction of ld. CIT can be modified. 20. We have considered the submissions of the parties and perused the orders of revenue authorities as well as other materials on record. We have also applied our mind to the decisions relied upon by the parties. It is evident from the show cause notice issued u/s 263 as well as the impugned order of ld. CIT that assessment order has been revised by considering it to be erroneous and prejudicial to the interests of revenue for the following three reasons: 1. AO has accepted the revised valuation of closing stock without enquiry and application of mind. 2. AO has not disallowed the expenditure u/s 14A on the exempted income. 3. AO has failed to initiate proceeding u/s 271(1)(c) on the additions made while completing the assessment. 21. So far as the first issue is concerned, on a perusal of the observations made by ld. CIT in para 6 of his order, it would be clear that ld. CIT was unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evision in valuation of closing stock. From the aforesaid facts it is established that AO has enquired into the matter and after examining the explanation/submissions of assessee along with other factual details submitted before him, he has accepted the revised valuation of closing stock. Therefore, when the AO has enquired in to the matter and after proper application of mind to the facts and materials on record has passed the assessment order, it cannot be said that assessment order passed is erroneous and prejudicial to the interests of revenue merely because there is no reference in the assessment order with regard to the stock valuation. 22. The Hon ble AP High Court in case of Spectra Shares and Scripts Pvt. Ltd. Vs. CIT (supra) while dealing with the CIT s power u/s 263 after taking note of ratio laid down by the Hon ble Supreme Court as well as different High Courts in the number of decisions on the issue held that if a query was raised during the course of assessment proceeding, which was answered to the satisfaction of AO, but, neither the query nor answer was reflected in the assessment order that itself would not lead to the conclusion that the order of AO being erro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on which ld. CIT has revised the assessment order is, AO has failed to disallow the expenditure incurred on earning exempt income in terms with section 14A of the Act. There is no dispute to the fact that assessee during the year has shown dividend income of ₹ 39,51,789, which is claimed as exempt. As AO has not made any disallowance u/s 14A of the Act, ld. CIT directed him to examine and disallow expenditure incurred on earning the dividend income in terms with section 14A after taking note of the fact that assessee has incurred interest expenditure of ₹ 4.84 crores during the year. 24. Having heard the submissions of the parties, we are of the view that though Rule 8D cannot be applied retrospectively to the AY under dispute as it came into the statute w.e.f. 24/03/2008, however, it cannot be overlooked that the provisions contained u/s 14A of the Act were existing in the statute which required disallowance of expenditure. Sub-section (3) of section 14A provides for deemed disallowance of expenditure on earning exempt income even in a case where assessee claims that he has not incurred any expenditure for earning exempt income. That being the case, we are of the vi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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