TMI Blog2012 (9) TMI 134X X X X Extracts X X X X X X X X Extracts X X X X ..... as a ‘provision’ as provided under Explanation-1, the action of AO and the CIT (A) cannot be upheld - in favour of assessee. Disallowance made u/s 14A r.w.r. 8-D - Held that:- As seen from the balance sheet of assessee as on 31.03.2008 there are no fixed assets and assessee has shown investment of ₹ 1,51,12,500/- at the end of the year as against Rs..5,53,62,500/- at the beginning of the year. Assessee’s stock in trade were shown at ₹ 40,69,22,495/- as against nil in the last year. This indicates that most of the business activities started only during the year and the investment had come down. As against these amounts, AO in the assessment order has taken the closing investment yielding exempt income at Rs..50,20,34,995/- including the stock in trade which is not income yielding exempt income, earning business profits. There is no opening amount which was taken at NIL where as assessee had investments at the end of last year which got reduced in this year. Thus the basis for calculation by AO itself is wrong - Further out of the total amount of interest claimed which were shown interest at ₹ 2,91,38,496/-, there seems to be no examination of interest claims an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the net loss of ₹ 2,75,61,648/-. Assessee has shown income from shares and securities at ₹ 2,52,00,687/- and interests received on advances at ₹ 29,85,407/-. Assessee also claimed a dividend at ₹ 21,01,500/- and claimed exemption under section 10(34). In the course of the assessment AO disallowed diminishing value of stock in trade and added back to the loss under section 115JB. In addition to the above amount AO also disallowed an amount of ₹ 2,42,81,001/- under section 14A out of the interest claim of ₹ 2,91,38,496/-. The issue of addition under section 115JB was raised in Ground Nos.1 2 and the issue of addition under section 14A was contested in Ground Nos. 3 4. 3. We have heard the learned Counsel and the learned DR in detail and perused the paper book placed on record. The issues were decided as under: 4. Ground Nos. 1 2 pertain to the issue of diminishing in value of assets. As briefly stated above, assessee claimed an amount of ₹ 2,43,79,210/- as diminishing in the value of stock in trade. Since assessee suffered loss in the business, no adjustments were made and no computation under section 115JB was filed in the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility 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 provision is made for diminution in value of assets the same has to be added for computing book profit regardless of the fact whether or not there is any balance value of the asset. It was his submission that since assessee has claimed diminution in value of stock in trade which is a current asset, the provisions are attracted. 7. We have considered the issue. We are unable to agree with the Revenue on making adjustment of loss suffered in the valuation of closing stock. There is no dispute with reference to the fact that assessee is in the business of share trading and as part of business activity, it has offered income from shares and securities and claimed diminution in value of stock in trade. There is also no dispute with the fact that this loss was allowed in regular computation and not a provision. 8. The Explanation-1 under section 115JB relied on by the Revenue is as under: Explanation [1].-For the purposes of this section, book profit means the net profit as shown in the profit and loss account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 considered that the provision made for diminution in value of any assets has to be added back for computing the book profit. The principles laid down in the above case do not apply to the present case as assessee has not claimed any provision for diminution in the value of investment, but a loss to the value of the closing stock. Since the factual matter in which the above decision is rendered is entirely different from the facts of assessee case, we are of the opinion that the principles laid down in the above decision does not apply to assessee at all. As rightly held by the Hon'ble Supreme Court in the case of Dr T A Qureshi 287 ITR 547 (SC) business loss was allowable on ordinary commercial principles in computing profits. Since claim is direct loss in valuation of stock in trade and as this cannot be considered as a provision as provided under Explanation-1, the action of AO and the CIT (A) cannot be upheld. There is no need for any adjustment of loss incurred by ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 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. It was his submission that the calculations made by AO was not correct and he has given the revised computation as under: Head of Assets/Liabilities: Investment in shares-unquoted 15,112,500 Stock in trade 486,922,495 Sundry Debtors 24,698 Loans and Advances 38,563,949 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of section 14A. He supported the orders of AO and the CIT (A). 14. We have considered the issue and examined the evidences placed on record and rival contentions. It is true that expenditure is incurred in relation to income not 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l to the trading activity or investment activity. If the dividend income is incidental to trading activity, following the principles laid down by the Hon'ble Karnataka High Court in the case of CCI Ltd vs. JCIT 206 Taxman 563, the expenditure incurred in acquiring 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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