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Asst. Commissioner of Income Tax, Circle – 11 (2) , Pune Versus Alka C. Gadgil and Vica-Versa

2016 (4) TMI 866 - ITAT PUNE

Disallowance made u/s. 14A r.w. Rule 8D - Held that:- The Hon'ble Karnataka High Court in the case of CCI Ltd. Vs. Joint Commissioner of Income Tax (2012 (4) TMI 282 - KARNATAKA HIGH COURT ) has held that when no expenditure is incurred by the assessee in earning the dividend income no notional expenditure could be deducted from the said income. The Hon'ble High Court further held that when the assessee has not retained shares with the intention of earning dividend and the dividend income is inc .....

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9-10 and 2010-11. Both the impugned orders are dated 31-10-2013. The assessee has filed cross objections being CO Nos. 26 & 27/PN/2015 assailing the same orders of Commissioner of Income Tax (Appeals) for respective assessment years. Since, the issues involved in both the assessment years are identical, these appeals of the Revenue and the cross objections by the assessee are taken up together for adjudication. 2. The brief facts of the case as emanating from the records are: The assessee is .....

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ome from all sources. During the impugned orders the assessee valued the closing stock of shares at cost or market price , whichever is less. In the past, the assessee was valuing closing stock of shares at cost . The assessee changed the method of valuation of stock in the period relevant to the assessment year 2008-09. During the course of scrutiny assessment proceedings the Assessing Officer made addition on account of understatement of closing stock of shares. The Assessing Officer held that .....

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607/-. However, no expenses were claimed by the assessee against the aforesaid income exempt from tax. The Assessing Officer invoked the provisions of section 14A r.w. Rule 8D and made disallowance of ₹ 22,738/- in the assessment year 2009-10 and ₹ 1,20,750/- in assessment year 2010-11. Aggrieved by the assessment orders, the assessee preferred appeals before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) by following the order of his predecessor i .....

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bjection against the disallowance made u/s. 14A r.w. Rule 8D of the Act. 3. Shri Nikhil Pathak appearing on behalf of the assessee submitted at the outset that the method of valuation of stock of shares was changed by the assessee in the financial year 2007-08. Earlier, the assessee was valuing the closing stock at cost. Thereafter, the assessee changed the method of valuation of closing stock to cost or market price , whichever is less. The assessee has changed the method of valuation to bring .....

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avour of the assessee and rejected the appeal of the Department. The ld. AR placed on record a copy of the order of the Co-ordinate Bench in ITA No. 1673/PN/2012 (supra). 3.1 The ld. AR further submitted that in cross objection, the assessee has assailed the findings of Commissioner of Income Tax (Appeals) in confirming the disallowance made u/s. 14A r.w. Rule 8D. It is an undisputed fact that the assessee is trading in shares. A perusal of the balance sheet for the impugned assessment years wou .....

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it cannot be said that the expenditure incurred in acquiring the shares has to be apportioned to the extent of dividend income and that should be disallowed from the deduction. In recent decision by the Pune Bench of the Tribunal in the case of Gopalchand Pruthviraj Malu Vs. Joint Commissioner of Income Tax reported as 44 CCH 137 (Pune-Trib.) it has been held that disallowance u/s. 14A cannot be made where the shares were not held as investment and dividend was received by the assessee on the s .....

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In so far as the issue raised in the appeal by the Department, the ld. DR agreed that the similar issue was raised by the Revenue in assessment year 2008- 09. The Tribunal decided the issue in favour of the assessee and dismissed the appeal of the Department. 5. We have heard the submissions made by the representatives of rival sides and have perused the orders of the authorities below. We have also considered the decisions on which the ld. AR of the assessee has placed reliance in support of h .....

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alf of assessee and having considered the same, the CIT(A) allowed the assessee s claim. The same has been opposed before us on behalf of revenue, inter alia submitted that the CIT(A) has erred in deleting the disallowance on account of understatement of closing stock of shares by change in method of valuation. The CIT(A) has erred in not considering the fact that accounting standard AS-2 is silent as far as valuation of shares and securities is concerned and the assessee should have followed th .....

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The Assessing Officer erred in not appreciating that the method of valuing stock at cost or market value whichever is lower is more appropriate and universally adopted as against valuation of stock / inventory at cost, Accounting Standard (AS-2) valuation of inventories also mandatorily provides that cost or market price whichever is lower is the correct method for valuing inventories. The assessee is entitled to make a bonafide change in method of valuation of stock and department should not r .....

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deration with regard to addition in question. The assessee has claimed that the Assessing Officer without verifying the fact has formed his opinion for rejection of the valuation adopted by the assessee. It was contended that the activity of trade in shares and securities started in immediately preceding assessment year. The closing stock in the same year was valued at "cost" but after realizing that the proper and most accepted method of valuing the closing stock is to value it at &qu .....

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ide manner and the changed method is being followed regularly. The CIT(A) found it undisputed that the method adopted by the assessee in the assessment under consideration has been universally acknowledged to be a more prudent and reasonable method of valuation of closing stock and even the Assessing Officer has not stated in the assessment order that the changed method is not a proper method. The rejection of the change is primarily based on the assumption that the same has not been driven by b .....

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there was a crash in the stock market. The stock market is subject to fluctuations and always depends on market conditions. Hence the crash cannot be considered as unusual or a once in many years phenomenon. The Assessing Officer was not justified in holding that the assessee has been following the old method consistently for many years because the activity of trade in shares and securities started only in A.Y. 2007-08. The same was immediately changed in the subsequent year on realizing that t .....

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changes to this method have only been rejected in cases where it was found that the purpose was other than to arrive at the proper method of accounting. The losses were incurred even in the subsequent years after the change of accounting. So far as the change of account is concerned, it is a settled fact that section 145 of I.T. Act deals with method of accounting and this section has been substituted by the Finance Act, 1995 w.e.f. 01.04.1997 and thereafter sec. 145(1) mandates that the income .....

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Chartered Accountants, has only advisory status of a technical body. So far as its application vis-a-vis Income tax provisions are concerned, the method of valuation by a particular method is based on commercial consideration. Any method which can give a proper computation of income for the previous year as per I.T. Law is a good method. The method of valuing the stock at "cost or market price whichever is less" has been accepted by different judicial forums and such change can be reje .....

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ssing Officer on the claim of assessee. This reasoned factual finding of CIT(A) needs no interference from our side. We uphold the same. Since, the ld. DR has not been able to controvert the findings of the Co-ordinate Bench of the Tribunal, we do not find any reason to take a different view. Accordingly, the appeals of the Revenue are dismissed being devoid of any merit. 6. In cross objections, the assessee has assailed the findings of Commissioner of Income Tax (Appeals) in confirming the disa .....

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e earned by the assessee is incidental to the business of trading in shares by the assessee. The Hon'ble Bombay High Court in the case of CIT Vs. India Advantage Securities Ltd. in Income Tax Appeal No. 1131 of 2013, decided on 13-04-2015 has upheld the order of Tribunal wherein it was held that no disallowance u/s. 14A r.w. Rule 8D can be made on shares held as stock-in-trade. 7. The Hon'ble Karnataka High Court in the case of CCI Ltd. Vs. Joint Commissioner of Income Tax (supra) has he .....

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ruthviraj Malu Vs. Joint Commissioner of Income Tax (supra). The relevant extract of the findings of the Tribunal are as under: 8. We have heard the submissions made by the representatives of both the sides and have perused the orders of the authorities below. We have also considered the decisions on which the Ld. AR has placed reliance. The common issue in both the appeals is addition u/s. 14A r.w. Rule 8D in respect of dividend income received by the assessee. The assessee has received dividen .....

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