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TMI Blog2012 (9) TMI 134X X X X Extracts X X X X X X X X Extracts X X X X ..... umstances of the case, the CIT (A) has erred in confirming the additions of Rs..2,42,81,004/- being the disallowance made under section 14A read with Rule 8-D of the Act, in terms of Explanation 1, Clause (f) to the provisions of section 115JB of the Act. 4. On the facts and circumstances of the case, the CIT (A) has erred in confirming the additions of Rs..2,42,81,004/- under section 14-A read with Rule 8-D of the Act, though the exempted income was only Rs..21,01,500/- and the nature of business comprises of earning of taxable as well as exempt income". 2. Briefly stated, the issues in this appeal are on the addition made being the diminishing in the value of assets in arriving at the book profits and addition on account of sec.14A both u/s 115JB as well. Assessee is a share trader and there is no dispute with reference to the nature of the business being share trading as stated by AO in the body of the assessment order itself. While arriving at the profits for the year assessee claimed diminishing in value of stock in trade at Rs. 2,43,79,210/- and arrived at the net loss of Rs. 2,75,61,648/-. Assessee has shown income from shares and securities at Rs. 2,52,00,687/- and intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing in the value of assets. He then referred to the accounting principles and stated that assessee is entitled to adopt the closing stock value of shares traded in and the value of closing stock is taken at market value or cost value whichever is less and accordingly the loss was claimed in the Profit & Loss A/c. He referred to the schedule under item A(8) with reference to the particulars of opening stock, purchases, sales and closing stock to submit that this is not a provision for diminishing in the value of assets but a loss suffered in the business activity which is not covered by the provisions of section 115JB. He further submitted that this loss claim was allowed in regular computation but made adjustment only u/s 115JB. 6. In reply the learned DR however, relied on the Coordinate Bench decision in the case of Income Tax Officer vs. TCFC Finance Ltd, 131 ITD 103 (Mum) (11 ITR (Trib.) 153 (Mum) to submit that whether the reflection of amount of provision for diminution in value of investment separately or liability side of the balance sheet or by way of reduction from figure of investment on asset side of the balance sheet is totally alien for computing book profit and once ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Income Tax Officer vs. TCFC Finance Ltd (131 ITD 103 (Mum). The facts of the case are as under: "Assessee had made investment in quoted shares of a company, which was shown as 'investment' in earlier year's balance sheet'. As said company discontinued the operation, assessee filed an application before CLB alleging that the affairs of that company was mismanaged. In that view of the matter assessee entertained a view that the amount was irrecoverable and, hence, certain amount was written off as provision for diminution in value of investment. AO, however, held that said amount was required to be added to book profit under section 115JB. On appeal, the Commissioner (Appeals) deleted the addition. In the instant appeal assessee stated that it had reduced the amount o such provision for diminution in the value of investment from the gross value of investment and resultantly only the net sum was shown in the balance sheet and as such no figure of provision was appearing in the liability side. Thus, it was contended by assessee that it was writing off of bad debt, which could not be added to the book profit". 10. In those factual circumstances, the Coordinate Bench has consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computation of income and also computation under section 115JB. Because of adjustment of Rs..2,42,81,004/- under section 14A and also adjustment of Rs..2,43,79,210/- as the provision for diminution in value of stock, the computation has resulted in book profit of Rs..1,89,97,066/- as against net loss of Rs..2,75,61,648/- arrived in the Profit & Loss A/c . The CIT (A) considering the explanation of assessee upheld the disallowance on the reason that Rule 8D is to be applied and once formula is invoked, the method has to be followed and accordingly AO was correct in arriving at the disallowance. However, to the extent of inclusion of accumulated loss in calculation of average total assets, he directed AO to give necessary relief. Assessee is contesting the same. 12. Referring to the balance sheet placed on record, it was the submission of the learned Counsel that most of the assets shown in the balance sheet to the extent of Rs.. 48.69 crores is stock in trade whereas the investment in shares was only 1.51 crores. It was his submission that dividend earned was Rs..21,01,500/- and mostly on the stocks in stock in trade which was incidental to assessee business of share trading ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... included in total income cannot be allowed while computing the total income for the purpose of levy of income tax. The basic principle of taxation is to tax the net income and on the same analogy exemption is also allowed in respect of the net exempt income. The Hon'ble Supreme Court in the case of CIT vs. Walfort Share & Stock Brokers (P) Ltd, 326 ITR 1 held that there must be a proximate relationship between the expenditure and the income which does not form part of total income. Once such a proximate relationship exists, the disallowance has to be affected. Further as held by the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT (323 ITR 81) (Bom), even if assessee had claimed that he has not incurred any expenditure in earning the exempt income "dividend", the applicability of provisions of section 14A could not be ruled out. However, it was for AO to determine as to whether assessee had incurred any expenditure in relation to the income which did not form part of the total income and if so to quantify the extent of disallowance. Provisions of section 14A (3) entitles AO to invoke sub-section (2) in a case where assessee claims that no expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring shares cannot be apportioned to the dividend for making disallowance under section 14A. As held by the Hon'ble High Court of Kerala in the case of CIT vs. Smt. Leena Chandran 339 ITR 296 (Ker.) interest paid on funds borrowed for acquisition of shares in the form of investment would only attract disallowance under section 14A. Since the very basis for AO's working of disallowance is not correct and since he has not examined the accounts of assessee as required under section 14A(2), we in the interest of justice, restore the matter to the file of AO to examine the nature of interest expenditure, the amount of dividend earned and the nature on which it is earned i.e. whether on investment shown in the books or on trading shares incidental to the business activity and also to examine whether any expenditure can be attributed to the earning of exempt income. AO is also directed to keep in mind the judicial principles available on the issue while arriving at the disallowance under section 14A consistent with facts and law. Needless to state that assessee should be given an opportunity to explain. Since assessee also gave some working before us which was extracted above in order ..... X X X X Extracts X X X X X X X X Extracts X X X X
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