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TMI Blog2016 (5) TMI 240X X X X Extracts X X X X X X X X Extracts X X X X ..... in the order of Ld. CIT(A) as the addition is only to be made with respect to profit earned on stock of sale outside the books of accounts. Accordingly, we confirm the order of the CIT(A) in this regard.- Decided against revenue Addition u/s 56 - purchase of shares by the assessee from Bharat Bearings Ltd. and Shankar Telecom Ltd. for ₹ 1 per share against the face value of shares of ₹ 10/- for each share - CIT(A) deleted the addition - Held that:- We find that undisputedly the transaction took place in the month of April, 2010 whereas the provisions of Section 56 (2)(viia) was made applicable w.e.f. 01.06.2010.Therefore, the provisions cannot be attracted to the present transaction. The applicability of the other provision of Section 69 and 69A was also examined by the CIT(A). Since CIT(A) has properly adjudicated the issue in the light of relevant provisions of the Act, we find no infirmity therein. Accordingly, we confirm his order.- Decided against revenue Disallowance u/s 14A - Held that:- CIT(A) has calculated the disallowance as per Rule 8D and Section 14A. Since no specific defect in the calculation of disallowances were pointed out by the Ld. DR, we find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmission of the assessee for valuing the stock of timber at actual purchase price but did not agree with the valuing the same on weighted average basis for all the source of purchase of timber. The Assessing Officer by presuming that some of the physical quantities must also be relating to timber of UPFC which carries higher valuation, pro rata bifurcated in the ratio of purchases between UPFC and private dealers as under for valuation purposes. The assessee further explained that as per accounting standard (AS) 2- valuation of inventories issued by the Chartered Accountant prescribes the cost formulas to be used while valuation of inventories by an entity. He has also placed reliance upon certain judgment in support of his contention that regularly followed method for valuing stock should not be rejected. It was further contended that assessee has been consistently following the weighted average basis for valuing the stock and same was accepted by making the assessment u/s 153A of these years. The CIT(A) reexamined the issue in the light of various judicial pronouncements and being convinced with the explanation of the assessee, he has deleted the addition. For the sake of refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n.- -For the purposes of this section, any tax, duty, cess or fee (by whatever name called) under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence to such payment: (b) interest received by an assessee on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received. 4(8) The appellant has consistently been following the method of valuing stock of timber at weighted average which is recognized method of accounting. There is no finding of the AO that this method has not been consistently followed or that a different method of valuation of stock has been notified by the Government. I find no merit in the said addition made by the Assessing Officer where the valuation of closing stock has been changed vis'-a-vis' its value and not because of any difference in the quantity of stock. The assessee was consistently following a particular method of accounting which is being accepted from year to year and in the absence of any contrary findings by the Assessing Officer; there is no merit in not adopting the method of valuation of sto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pt marble, stone and cement tiles was found short as declared in the books of accounts. Accordingly, Assessing Officer was of the view that shortage in stock was sold outside the books of account and he made the addition of ₹ 57,45,800/- for sale outside the books of accounts. The assessee preferred an appeal before the CIT(A) with the submission that the excess of stock of marble of ₹ 3,67,008/- was found, therefore, it cannot be said that it was sold out the books of accounts and for the remaining stock it was contended that the addition of the entire short of stock cannot be made. At the most profit earned thereon can be added. Finding force in the contention of the assessee, the CIT(A) has restricted the addition on the profit earned on sale of stock of ₹ 53,78,792/-outside the books of account and with regard to excess stock of marble of ₹ 3,67,008/-, the CIT(A) was of the view that since the assessee has not furnished the source of acquisition of excess stock, the addition deserves to be confirmed and he accordingly confirm the addition of ₹ 3,67,008/-. The relevant observation of the CIT(A) is extracted hereunder:- 5(6) I have examined the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons can be invoked by the AO and investment/expenditure would be treated as deemed income of the assessee. 5(8) I find that the assessee has not been able to satisfactorily explain the iidture and source of acquisition of excess stock of marble of ₹ 3,67,000/-. The excess stock is not found recorded in the books of accounts and is therefore deemed income of the appellant. Accordingly, in view of the discussions above the addition of ₹ 3,67,008/ made: by the AO is confirmed. 5(9) Now, as regards the various shortages of ₹ 53,78,792/- for which an addition has been made by the AO by treating the shortages as sales outside books of accounts, I find that the issue needs consideration from the angle of what is recorded in the books of accounts. The books of accounts of the appellant show existence of stock of ₹ 53,78,792/- of various items which is not actually available at the time at search on 11.03.2011. The normal corollary is that once the stock is recorded in books of accounts, the corresponding investment in purchase is also recorded. In other words absence of physical stock does give a finding of stock having been sold and such sales not havin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 53,78,792/- is deleted. I find that the appellant has shown gross profit rate of 10.12% in the year under consideration and profit rate of 10.62% in the immediately preceding year. Accordingly, I find it reasonable to compute the profit embedded in the sale of ₹ 53,78,792/- @11% which comes to Rs, 5,91,667/-. The addition made by the AO is therefore confirmed to the extent of ₹ 5,91,667/ . 5(12) To sum up, the additions of ₹ 57,45,800/- made by the AO is sustained to the extent of ₹ 3,67,008/- and ₹ 5,91,667/-. The appellant gets a relief of ₹ 47,87,125/-. 6. Aggrieved, the Revenue is in appeal before the Tribunal and the Ld. DR of the Revenue has simply placed reliance upon the order of the Assessing Officer whereas the Ld. counsel for the assessee has contended that in case of shortage of stock, the addition can only be made with respect to profit earned on the sale of stock outside the books of accounts. The addition of the entire shortage of stock cannot be made. 7. Having carefully examined the order of the lower authorities in the light of rival submissions. We find that the CIT(A) has confirmed the addition of ₹ 3,67,00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. cheque number 334140 of Oriental Bank of Commerce, A/c no. 042740100000170 07.04.2010 15.04.2010 Shankar Telecom Ltd. cheque number 334139 of Oriental Bank of Commerce, A/c no.042740100000170 The face value of shares issued by M/S Goel Infracon (P) Ltd was ₹ 10/- for each share whereas the total consideration paid by the appellant for acquisition of shares from the transferor was ₹ 1/- for each share. The AO therefore made an addition of ₹ 30,60,000/- (value of 3,40,000 shares at face value of ₹ 34,00,000/- less consideration paid of ₹ 3,40,000/-) under section 56(2)(viia) of the Act. 6(5) At the outset, f find that the provisions of section 56(2)(viia) of the Act are applicable with effect from 01.06.2010. In other words the applicability of the provision is to transfer of shares for consideration less than the fair market value where such transfer takes placed on or after 01.06.2010. The appellant acquired the shares on 1.S.O-).20.10 and therefore the provisions cannot be said to be applicable in the present case. The AO could not have t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here was no evidence that the assessee received consideration in excess of that shown in the agreement to sell, there was no necessity to compute the fair market value for capital gains and that the full value of the sale consideration was to be taken into account. A similar issue came up for consideration by a Division Bench of Hon'bie Madras High Court in Sundaram Industries Private Ltd. Vs CIT [1969] 741, l.T R. 243 (Mad). The facts of the case were these; The assessee-company purchased 669 shares in Southern Roadways Private Ltd. in August, 1954, for a sum of ₹ 93,660 and sold them in December, 1968, for ₹ 66,900 to three ladies. The Income-tax Officer determined the market price of the shares as on March 31, 1958, at ₹ 1,56,064 and treated the difference between the cost and the market price as capital gain liable to be taxed. The Tribunal had found as a fact that the sale was a real transaction which was given effect to and acted upon by the parties thereto and it was not made with the object of avoidance or reduction of tax liability but made for the purpose of benefiting the ladies. On these facts, the question for consideration was whether the proviso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Since the provisions of section 56(2) of the Act are not applicable to the appellant's case, the prescribed method of working out the fair market value as per Rule 11UA is also not applicable. In such a situation the fair market value is the agreed consideration of the share of the Company by the buyer and seller. 6(9) In view of discussion above I find that the addition of ₹ 30,60,0007 made by the AO is not tenable both under section 56(2) of the Act as well as under the deeming provisions of the Act. The addition of ₹ 30,60,000/- made by the AO is deleted giving relief to the appellant. 9. Aggrieved, the Revenue has preferred an appeal before the Tribunal and placed reliance upon the order of the Assessing Officer whereas Ld. counsel for the assessee has placed reliance upon the order of CIT(A) with the submission that Assessing Officer has invoked the provisions of Section 56((viia) of the Act for making an addition but the said section could not be invoked in the assessee s case as it was applicable w.e.f. 01.06.2010, therefore, no addition in the hands of assessee could be made in this regard. Moreover, the assessee has purchased the shares on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act by the Finance Act 2006, with effect from 01.04.2007. Sub section 2 of Section 14A of the Act makes it clear that the Assessing Officer shall determine the amount of expenditure with respect to the exempted income if he is not satisfied with the correctness of the claim. He shall do the same by the method prescribed after having regard to the accounts of the assessee. Sub section 3 provides that the provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act. In view of clauses 2 and 3 of Section 14A of the Act, Notification No. 45/2008, dated LM. 03. 2008 was introduced which has amended the Income-Tax Rules, 1962 and inserted a new rule i.e. Rule 8D which gives the method for determining amount of expenditure in relation to income not includible in total income, If one examines Rule 8D, one finds that the method for determining the expenditure in relation to exempt income has three components. i. Amount of expenditure directly relating to income which does not form part of the total income. ii. Exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount of expenditure in relation to exempt income. Satisfaction of the AO as to the incorrect claim made by the assessee in this regard is sine qua non for invoking the applicability of Rule 8D. Such satisfaction can be reached and recorded only when the claim of the assessee is verified. If the assessee proves before the AO that it incurred a particular-expenditure in respect of earning the exempt income and the AO gets satisfied, then there is no requirement to still proceed with the computation of amount disallowable as per Rule 8D. In the present case the AO has made disallowance of interest on presumption without any concrete finding as to the utilization of borrowed funds for making investment in shares. 7(5)(iii} Can an Assessee cairn that investments have been made entirely from Owned Funds, which are non-interest bearing and hence no disallowance under section 14A of the Act is justified? Is mere presence of Own Funds in excess of Investments on the Balance Sheet enough or does a direct nexus between investments and interest free funds needs to be proved? On whom does the onus of proof lie? The Supreme Court in Munjal Sales Corporation 298 ITR 298 held that where the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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