2017 (10) TMI 1599 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - Assessee s contention that it held the shares as stock-in-trade and dividend income was only the bye-product of the trading activity and as such there is no relation between the expenditure by way of interest and exempted income and that all the quoted shares have been shown as stock-in-trade and unquoted shares as investment because there is no ready market available for unquoted shares - HELD THAT - Hon ble High Court of Punjab Haryana in judgment cited as Pr.CIT vs. State Bank of Patiala 2017 (2) TMI 125 - PUNJAB AND HARYANA HIGH COURT set this issue at rest by holding that when assessee has not held securities to earn dividend or interest but traded in them and dividend or interest accruing thereon was only a bye-product thereon or an incidental benefit arising thereof the same would not be subjected to provisions of section 14A of the Act. In case of Cheminvest Ltd. vs. CIT 2015 (9) TMI 238 - DELHI HIGH COURT also held that to attract section 14A there should have been actual receipt of income which is not includible in total income and section 14A will not apply where no exempt income is received or receivable during the relevant previous year. Both the judgments relied upon by the assessee are applicable to the facts and circumstances of the case and the issue is required to be decided afresh by the AO by keeping in mind that there is a distinction between stock-in-trade and investment. In case motive behind sale and purchase of shares is to earn profit then the same cannot be treated as trading profit and when the object is to derive income by way of dividend then the profit would have been accrued from the investment as has been clarified by Circular No.18 dated 02.11.2015. Ground decided in favour of the assessee for statistical purposes. Unsecured cash credit claimed as unsecured loan availed - CIT (A) admitted the additional evidence filed under Rule 46A - HELD THAT - It is settled principle of law that the ld. CIT (A) has coterminus powers to conduct a discreet enquiry as to the genuineness and creditworthiness of the transactions. From the documents brought on record in the form of confirmation of account; copy of bank statement of M/s. Udgam Commercial (P) Ltd. (lender); copy of bank statement of the appellant company reflecting the transactions; copy of income tax return filed by the lender for the AY 2009-10; copy of Memorandum and Articles of Association of the lender; and copy of the audited financials of the lender for the year ended 31st March 2009 the ld. CIT (A) made himself satisfied that the assessee has duly established the creditworthiness of the creditors and genuineness of the transaction. When the assessee has brought on record all the documents necessary to establish the creditworthiness of the creditors and genuineness of the transaction and the AO has not preferred to file any comment we find no scope to interfere into the findings returned by ld. CIT (A). Moreover perusal of the assessment order also goes to prove that the AO has not even preferred to summon the parties to make complete enquiry so as to establish the creditworthiness of the creditors and genuineness of the transactions. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income-tax Act, 1961.
2. Exclusion of stock in trade from investment for disallowance calculation under Rule 8D(iii).
3. Addition of unexplained cash credits.

Detailed Analysis:

1. Disallowance under Section 14A of the Income-tax Act, 1961:
The assessee contended that the disallowance under Section 14A was illegal and without jurisdiction as the Assessing Officer (AO) did not record the required satisfaction before invoking the provisions. The assessee also argued that the expenditure related to the business of dealing in shares should not be disallowed under Section 14A, referencing the Karnataka High Court judgment in CCI Ltd. The AO disallowed an additional amount under Section 14A read with Rule 8D, taking into account the average investment and interest expenses not directly attributable to any particular income. The Tribunal noted that the AO did not record dissatisfaction with the assessee’s suo motu disallowance and relied on the judgments of the Delhi High Court in Cheminvest Ltd. vs. CIT and the Punjab & Haryana High Court in Pr.CIT vs. State Bank of Patiala. These judgments clarified that Section 14A applies only when there is actual receipt of income not includible in total income, and if the shares are held as stock-in-trade, the provisions of Section 14A do not apply. The Tribunal directed the AO to re-examine the issue, considering the distinction between stock-in-trade and investment.

2. Exclusion of stock in trade from investment for disallowance calculation under Rule 8D(iii):
The Revenue appealed against the CIT(A)’s direction to exclude stock in trade from the investment for working out the average of investments for disallowance under Rule 8D(iii). The Tribunal upheld the CIT(A)’s decision, aligning with the principle that stock-in-trade should not be included in the investment calculation for disallowance purposes under Rule 8D.

3. Addition of unexplained cash credits:
The AO made additions of Rs. 1 crore and Rs. 19.45 lakhs as unexplained cash credits, claiming the assessee failed to establish the identity of the creditors. The assessee provided additional evidence, including confirmations, bank statements, income tax returns, and financials of the creditors. The CIT(A) admitted the additional evidence under Rule 46A and found the evidence sufficient to establish the creditworthiness of the creditors and genuineness of the transactions. The Tribunal noted that the AO did not conduct a thorough inquiry or summon the parties to verify the transactions. Consequently, the Tribunal upheld the CIT(A)’s decision to delete the additions, dismissing the Revenue’s appeal.

Conclusion:
The Tribunal allowed the assessee’s appeal for statistical purposes, directing the AO to re-examine the disallowance under Section 14A, considering the nature of the shares as stock-in-trade. The Tribunal dismissed the Revenue’s appeal, affirming the CIT(A)’s decisions on excluding stock in trade from investment calculations and deleting the additions of unexplained cash credits.