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TMI Blog2020 (1) TMI 1633X X X X Extracts X X X X X X X X Extracts X X X X ..... inding recorded by the AO and the act that the value of the shares was calculated by AO at the prevailing rates of the shares in the share market on the day of conversion. 3. On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in restricting the disallowance u/s 14A of the Act to Rs.7,04,000/- as against Rs.3,56,96,487/- made by the AO. 3.1 The Ld. CIT(A) ignored the finding recorded by the AO and the act that the disallowance was correctly calculated by the AO in accordance with the provisions of Rule 8D of the IT Rules, 1962. 4. The appellant craves leave to add, to alter, or amend any grounds of the appeal raised above at the time of hearing. 2.1 Grounds of cross objection by the assessee are reproduced as under: 1. That on facts and in law, the Learned Commissioner of Income Tax (Appeals)-VIII [Ld.CIT(A)], New Delhi has erred in upholding the addition of Rs.7,04,411 without appreciating the contention of the appellant company that disallowance of expenditure in terms of section 14A read with clause (iii) of sub-rule (2) of Rule 8D can not exceed the amount of expenditure 'incurred' by the appellant company at Rs.8,43,942 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that the assessee company was holding shares of M/s Oscar Investment Ltd.; M/s Ranbaxy Laboratories Ltd. and M/s Fortis Financial Services Ltd. During the year under consideration on 04/01/2007, by way of a book entry the assessee changed the classification of shares of three companies (quoted) held by it from "stock in trade" (i.e. current assets) to the "investments". The book entry had been passed at the amount equal to the cost of the shares, at which those shares were acquired by the assessee in earlier years as a stock in trade. According to the Assessing Officer, those shares were treated by the assessee as its trading stock (current assets) and reflected as such in the accounts, which implied that sale of the shares would result in normal business profit, but upon being converted to investments, the profit on sale of such shares would amount to long-term capital gains, which is free from the chargeability of the Income-tax. In view of the Assessing Officer, merely by change of classification of the shares, the assessee converted its taxable business profit to tax-free long-term capital gains. On being confronted by the Assessing Officer as why the difference of market val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s added to the business income of the assessee. 5.5 On further appeal, the Ld. CIT(A) rejected the contention of the assessee of intention behind holding the shares in dispute as long-term investment. On the issue of treatment of difference in market price as on the date of conversion of his stock in trade into investment and the cost price, the Ld. CIT(A) discussed the ratio of following judgments: (i) Westminister Bank Ltd. Vs. Osler (Inspector of Taxes) [1993] 1 ITR 65 (HL); (ii) Royal Insurance Co. Ltd. Vs. Stephen [1928] 14 TC22 (KB) (iii) Californian Copper Syndicate Vs. Harris [1904] 5 TC 159(C. Exchq.) (iv) Raja Mohan Raja Bahadur Vs. CIT [1967] 66 ITR 378; (v) British South Africa Co. Vs. Varty (Inspector of Taxes) [1966] AC 381; (vi) Sir Kikabhai Premchand Vs. CIT, (1953) 24 ITR 506 (SC) (vii) CIT Vs. Dhanuka & Sons, (1980), 124 ITR 24(Cal.) (viii) ACIT Vs. Bright Star Investment (P) Ltd. (ITAT-Mum.) (ix) CIT Vs. Bai Shirinbai K. Kooka 5.6 In view of the ratio of the judgments, the Ld. CIT(A) deleted the addition of Rs. 14,19,57,154 observing as under: "5.9 Thus, it may be seen that the view taken by the Hon'ble courts in the aforementioned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring the year shares were converted from stock-in trade to investment in its books of account and there was no transfer or sale of shares to third parties, thus there was no real income in the hands of the assessee. The Ld. counsel relied on the order of the Ld. CIT(A) and submitted that during relevant period, there was no provision in the Act to treat the notional income arising on account of conversion of stock-in-trade into investment. The Ld. Counsel referred to amendment introduced by way of insertion of subsection (via) to section 28 of the Act with effect from 01/04/2019, where income on conversion of stock-in-trade has been brought to tax. Thus, according to the learned counsel, there was no provision in the Act prior to the amendment introduced with effect from 01/04/2019, as the relevant period in the case of the assessee is previous years corresponding to assessment year 2008-09. The learned counsel also referred to explanatory notes to the Finance Act, available on page 28 of the paper-book. The counsel submitted that in the case of Bright Star Investment Private Limited, reported in 122 TTJ 498 (Mumbai), the Tribunal was of the opinion that to deal with the situation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concluded that withdrawal of the stock-in-trade for non-business purpose does not result in income and it can be valued at cost price, where assessee normally valued its stock at cost price. The paragraph of the decision of the Hon'ble Supreme Court (majority) is reproduced as under: 7. We are of opinion that the learned Attorney-General's second contention is unsound because, for income-tax purposes, each year is a self-contained accounting period and we can only take into consideration income, profits and gains made in that year and are not concerned with potential profits which may be made in another year any more than we are with losses which may occur in the future. 8. As regards the first contention, we are of opinion that the appellant was right in entering the cost value of the silver and shares at the date of the withdrawal, because it was not a business transaction and by that act the business made no profit or gain, nor did it sustain a loss, and the appellant derived no income from it. He may have stored up a future advantage for himself but as the transactions were not business ones and as he derived no immediate pecuniary gain the State cannot tax them, for u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rises in order that he may be compelled to pay to Government a tax which is anything but fictional. 11. Consider this simple illustration. A man trades in rice and also uses rice for his family consumption. The bags are all stored in one godown and he draws upon his stock as and when he finds it necessary to do so, now for his business, now for his own use. What he keeps for his own personal use cannot be taxed however much the market rises; nor can he be taxed on what he gives away from his own personal stock, nor, so far as his shop is concerned, can he be compelled to sell at a profit. If he keeps two sets of books and enters in one all the bags which go into his personal godown and in the other the rice which is withdrawn from the godown into his shop, rice just sufficient to meet the day-to-day demands of his customers so that only a negligible quantity is left over in the shop after each day's sales, his private and personal dealings with the bags in his personal godown could not be taxed unless he sells them at profit. What he chooses to do with the rice in his godown is no concern of the IT Department provided always that he does not sell it or otherwise make a prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, for though the receipt was not money it was capable of being valued in terms of money. In the present case, the assessee's business received nothing in exchange for the withdrawal of the assets, neither money nor money's worth, therefore the only fair way of treating the matter was to do just what the appellant did, namely to enter the price at which the assets were valued at the beginning of the year so that the entries would cancel each other out and leave the business with neither a gain nor a loss on those transactions. The learned Attorney-General contended that if that was allowed great loss would ensue to the State because all a man need do at the end of the year would be to withdraw all assets which had risen in value and leave only those which had depreciated and thus either show a loss or reduce his taxable profits. 14. This argument can only prevail on the assumption that the State can tax potential profits because, except for that, the State would neither gain nor lose in a case of this kind. Had the assets been left where they were, they would have been valued at the end of the year as they were at the beginning, at the cost price and we would still b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the assessee's income from the transfer is the proper method for computing the income ?" 17. Our answer to the first question is that in the circumstances of this case no income arose to the appellant as a result of the transfer of the shares and silver bars to the trustees. In view of that, the second question does not arise. 8.1 In the instant case, there is no real income in the hands of the assessee as the shares in reference have not either sold or transferred by the assessee in the year under consideration. There is no express or specific provision during relevant period in the Act to deal with the event of conversion of stock-in-trade into investment. In absence of specific provision, notional income if any, cannot be taxed in the year under consideration. We find that The Ld. CIT(A) has followed the ratio of the above decision of the Hon'ble Supreme Court along with other decisions. In view of the binding precedents followed by the Ld. CIT(A), we do not find any error in the order of the Ld. CIT(A) on the issue in dispute, and thus, we uphold the same. Accordingly, Grounds No. 2 & 2.1 of the appeal of the Revenue are dismissed. 9. As far as Ground No. 2 of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee is also related to the disallowance under section 14A of the Act, wherein according to the assessee the disallowance under rule 8D(2)(iii) of Rules, cannot exceed the amount expenditure actually incurred by the assessee. 11.1 The brief facts qua the issue in dispute are that the assessee made disallowance under section 14A read with rule 8D of Income-tax Rules, 1962 at Rs. 1,77,79,925/-. The assessee followed direct nexus method in accordance with rule 8D(2)(i) of Income Tax Rules, 1962 and made entire disallowance under rule 8D(2)(i) only. This disallowance made by the assessee was not found to be correct by the Assessing Officer. According to the Assessing Officer, the assessee company was managing its business with the help of borrowed funds and made investment in shares of Rs. 33.80 Crores, the income from which would not form part of the taxable income, and he accordingly not being satisfied with the claim of the assessee, invoked provisions of Rule 8D of Income Tax Rules and computed the disallowance at Rs. 5,34,76,412/- and after reducing the sumo disallowance by the assessee, he made addition for Rs. 3,56,96,487/-. The disallowance computed by the Assessing Officer is r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upport of the order of the Assessing Officer. The list of the decisions is reproduced as under: 1 Maxopp Investment Ltd. Vs CIT [2018] 91 taxmann.com 154 (SC) 2. Indiabulls Financial Services Ltd. Vs DCIT [2016] 76 taxmann.com 268 (Delhi) 3. Godrej & Boyce Manufacturing Company Ltd. Vs DCIT [2017] 81 taxmann.com 111 (SC)/[2017] 247 Taxman 361(SC)/[2017] 394 ITR 449 (SC)/[2017] 295 CTR 121 (SC) (Copy Enclosed) 4. Punjab Tractors Ltd Vs CIT [2017-TIQL-353-HC-P&H-IT] 5. Avon Cycles Ltd Vs CIT [20151 53 taxmann.com 297 (Punjab & Haryana)/[2015] 228 Taxman 368 (Punjab & Haryana)(MAG.) 6. Nahar Spinning Mills Ltd. Vs CIT [2017] 82 taxmann.com 154 (Punjab & Haryana) 7. Dy. CIT v. Virai Profiles Ltd. 156 ITD 721 46/ ITR 626/177 TTJ 466 8. NYK Line India Ltd. v. ACIT [175 TTJ 180/132 DTR 7] 9. Super Auto Forge (P.) Ltd. Vs. ACIT (157 JTD 467) 10. Vipin Malik Vs. ACIT (45 ITR 589) 11.4 The learned counsel of the assessee, on the other hand, relied on the submission made before the Ld. CIT(A) and submitted that disallowance under rule 8D(2)(iii) of the Income Tax Rules, 1962, for administrative expenses cannot exceed the total expenses claimed in the profit and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tune of Rs. 28.14 Crs. (Please see Page 78 of Paper Book). The same were mainly acquired in the years ended 31st March, 2007 and 31st March, 2006. The details of acquisition and source thereof is given as under: i) Investments made in Y.E. 31.03.2007 (A.Y. 2007-08) - Optionally Convertible Debentures of - 5.00 Crs. M/s. Delta Aromatics Pvt. Ltd. - Optionally Convertible Debentures of - 10.00 Crs. M/s. Oscar Pharmaceuticals Pvt. Ltd. --------- 15.00 Crs. [The aforesaid investments were acquired directly out of 0% OCD's amounting to Rs. 40Crs. Raised from M/s. Shimal Research Laboratories Ltd. - as duly explaine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Statement of Taxable Income in terms of clause (i) of sub-rule (2) of Rule 8D (Please refer Page 42 of Paper Book). 3. In view of the above, it is respectfully submitted that since the appellant had suo moto worked out the disallowance of interest cost as per direct nexus method, as consistently followed in the past and as duly accepted by the department in the scrutiny assessments (copies of Orders enclosed at Page 30 & 31 of Paper Book), the question of applicability of clause (ii) of sub-rule (2) of Rule 8D should not arise. We thus humbly submit that the Ld. AO be directed to kindly accept the appellant's direct nexus method of disallowance of interest cost in terms of clause (i) of sub-rule (2) of Rule 8D and the additional disallowance of interest cost amounting to Rs. 3,49,92,076/- made by the Ld. AO be deleted. 6.6 Along with the aforesaid reply, the Ld. Counsel has also filed copy of bank statement maintained with standard chartered bank evidencing the receipt of 0% OCDs raised from M/s Shimal Research Laboratory Ltd. utilized for investment in OCDs of M/s Delta Aromatics (P) Ltd. -Rs. 5 Crs. and OCDs of M/s Oscar Pharmaceuticals (P) Ltd. - Rs. 10 Crs. as also rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;s claim for attributing Rs. 2,97,440/- as a disallowance under Section 14A had to be rejected. Taikisha says that the jurisdiction to proceed further and determine amounts is derived after examination of the accounts and rejection if any of the assessee's claim or explanation. The second aspect is there appears to have been no scrutiny of the accounts by the AO - an aspect which is completely unnoticed by the CIT (A) and the ITAT. The third, and in the opinion of this court, important anomaly which we cannot be unmindful is that whereas the entire tax exempt income is Rs. 48,90,000/-, the disallowance ultimately directed works out to nearly 110% of that sum, i.e., Rs. 52,56,197/-. By no stretch of imagination can Section 14A or Rule 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in Section 14A, and is only to the extent of disallowing expenditure "incurred by the assessee in relation to the tax exempt income". This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case." 12.3 In the case, the disallowance under Rule 8D(2)(iii) has b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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