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TMI Blog2023 (8) TMI 1269X X X X Extracts X X X X X X X X Extracts X X X X ..... iness affair keeping in view the best interest of the business including retaining of the customers and AO cannot doubt the business transactions merely on ground that same is below the market price, without bringing on record any malafide in transactions. We observed that sales by the assessee to Barabanki trading company and Sharp Mint Ltd which constitutes 48.31 percent of the total sales value of the Mentha oil, thus the contention of the assessee of carrying out transactions in the below market price for retaining the customer is having some basis which cannot be ignored. Respectfully, following the ratio laid down in the case of Flipkart India Private Limited [ 2018 (5) TMI 337 - ITAT BANGALORE] we hold that in case of unrelated party transactions, AO cannot substitute the transaction price with the market price unless he invokes provisions of section 145 (3) of the Act and thus, we set aside the finding of the Ld. CIT(A) on the issue in dispute and delete disallowance of loss by the Assessing Officer. The ground No. 2 of the appeal of the assessee is accordingly allowed. Disallowance u/s 14A r.w.r. 8D - mandation of recording satisfaction - contention of the assessee that wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y created loss. (ii) The CIT(A) erred in upholding the action of the AO in substituting the selling price of the commodities with the market price of the commodities. The Appellant submits that it has sold the commodities and incurred the loss in the normal course of business activities; hence, the loss disallowed by the AO shall be deleted as well as A0's action of substituting the selling price with market price shall be quashed. 2. (i) The Commissioner of Income Tax (Appeals) - 47, Mumbai [hereinafter referred as CIT(A)] erred in upholding the action of the Deputy Commissioner of Income Tax, Central Circle -1(1) [AO] in making disallowance u/s 14A of Income Tax Act, 1961 (Act) r.w. Rule 8D of the Income Tax Rules. 1962 (Rules) without recording his dis-satisfaction with fault correctness of the claim of the Appellant having regard to its books of accounts. (ii) The CIT(A) erred in upholding the action of the A in considering all investment for the purposes of making disallowance as per rule 8D(2) of the Rules as against only those investment on which Appellant has actually earned the exempt income and excluding the investment on which no exempt income is earned durin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te are that the special auditor in his report observed that assessee incurred loss on trading in 'Mentha oil' amounting to ₹ 1,39,01,126/-. The assessee explained that purchase and sale transactions were transacted at different dates and at the prevailing market rate as per Multi commodity exchange (MCX) and this loss which is 1.35% of the total sales turnover, was merely incidental. The learned Assessing Officer observed that substantial number of the transactions of sale had been carried out by the assessee at the prevailing market rate, but few transactions were carried out below the prevailing market prices to regular sale parties. The Assessing Officer rejected such a loss of Rs. 4,34,79,702/-incurred in relation to transactions with two parties namely m/s 'Barabanki trading Co Ltd' and m/s 'Sharp Mint Ltd'. Before the Ld. CIT(A) the assessee submitted that books of accounts of the assessee has not been rejected by the Assessing Officer and therefore he was not justified in tempering the book results except as provided under deeming provisions 40A(2) of the Act in case of transactions with related parties. The Ld. CIT(A) rejected the contention of the assessee and case l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Barabanki trading Co. Ltd. had made substantial purchases with the assessee and was one of the prominent customers, which the assessee never wanted to lose. He submitted that Assessing Officer cannot substitute the transacted price with the market price unless the transaction is carried out with related parties or the Assessing Officer could demonstrate with evidence any under hand transfer of the cash in the transaction. The learned counsel of the assessee relied on the decision of the Tribunal in the case of Flipkart India Private Limited in ITA No. 202/Bang/2018 for assessment year 2015-16, wherein it is held that the Assessing Officer cannot disregard the profit or loss as disclosed in the profit and loss account, unless he invokes the provision of section 145(3) of the Act and can't substitute the transaction price with the market price ignoring the real price faced as what can be tax is the only the income which accrue to the assessee as laid down in section 5 of the A588 Act. 7. The Ld. Departmental Representative on the other hand relied on the order of the lower authorities. 8. We have heard rival submission of the parties on the issue in dispute and perused the releva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of A. Raman & Co. (supra), income which has accrued or arisen can only be subject matter of total income and not income which could have been earned but not earned. The decision of the Hon'ble Karnataka High Court in the case of A. Khader Basha (supra) is squarely applicable to the facts of the present case. The facts of the Assessee's case and the facts of the case decided by the Hon'ble Karnataka High Court were identical. The Hon'ble Karnataka High Court held following Hon'ble Supreme Court decision in the case of Calcutta Discount Co. Ltd., reported in 1973(91) ITR 8 (SC) that where a trader transfers his goods to another trader at a price less than the market price and the transaction is a bonafide one, the taxing authority cannot take into account the market price of those goods, ignoring the real price fetched to ascertain the profit from the transaction. The Hon'ble Court explained that the only exception was if Section 40(A)(2)(a) of the Act applies viz., where the parties to the transaction are related. Following the aforesaid decisions, we hold that the AO was not right in proceeding to ignore the books results of the Assessee and resorting to a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thus, we set aside the finding of the Ld. CIT(A) on the issue in dispute and delete disallowance of loss by the Assessing Officer. The ground No. 2 of the appeal of the assessee is accordingly allowed. 8.2 The ground No. 1 of the appeal relates to the disallowance under section 14A real with Rule 8D of Income-tax Rules 1962 (in short 'the Rules'). It is the contention of the assessee that while making this disallowance, the Assessing Officer has not recorded dissatisfaction with the correctness of the claim of the assessee having regard to its books of accounts. It is also contended that following the decision of the special bench in the case of Vireet investment Private Limited in ITA No. 502/Del/2012 dated 16/06/2017 for AY 2008-09, for the purpose of making disallowance under rule 8D(2) only those investment should be considered on which assessee has actually earned the exempted income and investment on which no exempt income is earned during the subject year, should be excluded. 8.3 The brief facts qua the issue in dispute are that during the year under consideration assessee received dividend income of ₹ 6,91,13,757/- on shares held in stock in trade and ₹ 1,82,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure would definitely have been incurred for making and maintaining such investments. With respect to the expenses incurred for earning exempt income, the assessee submitted that, assessee has earned exempt income in the form of dividend for which assessee has not incurred any expenditure and was therefore not required to calculate any disallowance of gh, expenses u/s. 14A rwr. 8D of the act. On perusal of Capital a/c of the assessee, the A noticed that, expenses incurred includes demat charges and other such expenses which have been debited. Further, AO was also not satisfied with the contention of the assessee that, no expenditure was incurred to earn exempt income. It is a common knowledge that a person cannot make investment without due diligence and necessary analysis and the investment decisions are very complex in nature which require substantial market research, day-to-day analysis of market trends and decisions with regard to acquisition, retention and sale of shares at the most appropriate time. Therefore, being not satisfied about claim of assessee, he worked out the disallowance at Rs. 3,56,65,576/- as per rule 8D read with sec 14A of the Act @ 1% of average val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question before the Hon'ble Supreme Court that Sec. 14A would apply to dividend income on which tax is payable u/s 115-0 of the Act, it is enunciated by the Apex Court that:- "The literal meaning of Section 14A, far from giving rise to any absurdity, appears to be wholly consistent with the scheme of the Act and the object/purpose of levy of tax on income. Therefore, the well entrenched principle of interpretation that where the words of the statute are clear and unambiguous recourse cannot be had to principles of interpretation other than the literal view will apply. While answering the said question this Court considered the object of insertion of Section 14A in the Income Tax Act by Finance Act, 2001, details of which have already been noticed. Noticing the objects and reasons behind introduction of Section 14A of the Act this Court held that: "Expenses allowed can only be in respect of earning of taxable income." In paragraph 17, this Court went on to observe that: "Therefore, one needs to read the words "expenditure incurred" in section 144 in the context of the scheme of the Act and, if so read, it is clear that it disallows certain expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me' that does not form part of the total income. Considered in this hue, the principle of apportionment of expenses comes into play as that is the principle which is engrained in section 14A." "intentions of Holding Investment is irrelevant for computation of disallowance u/s 14A. The strategic investment claimed by assessee in inconsequential - all investments must be considered for 14A disallowance as per plain and clear language of Rule 8D." 7.8 Apart from that the Chennai Bench of the Income-tax Appellate Tribunal in the case of Mr. M. A. Alagappan vide order dated 03.04.2017 has held that, even in cases where no expenditure has been incurred, the tax authority has to apply Rule 8D of the Income-tax Rules, 1962 for the disallowance of expenditure under Section 14A of the Income-tax Act. The relevant para of the said decision is as under: "6 We considered the arguments of both the sides in detail. Sec.14A(1) declares the law that the expenditure incurred by the assessee in relation to the income which does not form part of the total income under the Act shall not be allowed as a deduction in computing the taxable income of the assessee. Sec. 14A(2) provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e aggregate of following amounts, namely: (i) the amount of expenditure directly relating to income which does not form part of total income; and (ii) an amount equal to one per cent of the annual average of the monthly average of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income : Provided that the amount referred to in clause (i) and clause (i) shall not exceed the total expenditure claimed by the assessee. 7.11 The above amendment has been brought on statutory we.f. 02.06.2016which states that an amount equal to 1% of the average investments income from which does not or shall not form part of the total income and that the disallowance shall not exceed the total expenditure. The amended rule does not say that, only those assets where from exempted income is earned, should be considered. The use of the "Shall" in addition to "does not" takes within its fold those investments too, which have not yielded any exempt income during the year under consideration. 7.12 The assessee's claim that, the disallowance should have been computed only on investments from which exempted i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such exempt income. This amendment has nullified several judgements as relied by the appellant wherein it was held that no disallowance u/s 14A of the Act could be made in respect of any expenditure incurred in earning any exempt income, in the absence of any exempt income. 7.16 In the light of the foregoing discussion, I am convinced that, all the assets which have either yielded exempt income during the year or could have yielded exempted income will be considered for working out the disallowance under rule 8D. All contentions of the appellant in this regard deserved to be dismissed. Also the case laws relied upon by the appellant are distinguishable on facts as well as recent changes in the law. Accordingly, the disallowance of Rs. 3,56,65,576/-made by AO u/s. 14A is upheld. The grounds no. 3 is accordingly dismissed." 8.5 Before us the Ld. counsel of the assessee contested the disallowance on two grounds. Firstly, according to him before invoking Rule 8D of the Rules, the Assessing Officer was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the parties on the issue in dispute and perused the relevant material on record. We find that against the dividend income earned of ₹ 6,92,95,757/- the assessee has made sou-moto disallowance of ₹ 15,59,662/-considering the employee cost incurred for earning exempted income. The detail of the disallowance computed by the assessee is reproduced as under: Particulars Amount debited to profit and loss account Expenses disallowance u/s 14A Basis of allocation Employee Cost 36,31,97,672/- 10,00,000 Proportionate employee cost of an employee Auditor Remuneration 23,08,270 6,355.41 % of employee cost Communication 96,27,773 26,508.36 % of employee cost Computer Exp 1,94,58,253 53,574.83 % of employee cost Electricity Exp 3,49,10,427 96,119.63 % of employee cost Office Expenses 7,95,62,364 2,19,060.78 % of employee cost Printing and Stationery 28,22,308 7,770.72 % of employee cost Rent 5,34,83,120 1,47,256.23 % of employee cost Miscellaneous 10,95,530 3,016.35 % of employee cost expenses Total 1,59,662 10.1 As per the provisions of the section 14A of the Act, the Assessing Officer can invoke the rule 8D of the Rules for computing disa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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