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2016 (7) TMI 1130 - ITAT DELHI

2016 (7) TMI 1130 - ITAT DELHI - TMI - Undisclosed investment in stock under the head ‘income from other sources - Held that:- Commissioner of Income-tax(Appeals) has accepted the trading result of the assessee without surrendered stock, which is a loss and thus even if the surrendered excess stock as directed by the learned Commissioner of Income-tax (Appeals) is assessed under the head ‘income from other sources’ , the net result will be the same as loss under the head profit and gains of busi .....

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of the learned Commissioner of Income-tax (Appeals) in assessing the surrendered stock under the head income from other sources is not justified and accordingly, we direct to assess the same under the head profit and gains of business and give benefit to allow carry forward this stock as opening stock of the succeeding year. - Addition under the head other sources - Held that:- We find that without the excessive stock of ₹ 3,81,13,064/-, the trading result of the assessee was a loss o .....

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ed by the learned Commissioner of Incometax (Appeals). Accordingly, we direct to delete the addition of ₹ 64,41,401/- Decided in favour of assessee. - Disallowance under section 14A read with Rule 8D Held that:- We find that there is no dispute on the fact that no exempt income was earned by the assessee during the year. Thus,the disallowance made by the Assessing Officer and sustained by the learned Commissioner of Income-tax(Appeals) is directed to be deleted. - Decided in favour of .....

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ssly erred in law & on facts in upholding the order passed by the Ld. Income Tax Officer [ ITO ] under Section 143 (3) of the Income Tax Act,1961 [ Act ] is bad in law. 2. That on the facts and circumstances of the case & in law, the Ld. CIT (A) grossly erred in holding that amount of ₹ 3,81,13,064/- being the amount surrendered on account of undisclosed investment in stock found during the course of search under the head income from other source as against the income from business .....

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d. AO to take into consideration the amount so surrendered as part of closing stock and allowed to carried forward to succeeding year as opening stock in view of the decision in the case of Mahendra Mills Ltd. vs P. B. Desai Appellate Assistant Commissioner, [1975] 99 ITR 135 (SC). 3. That on the facts and circumstances of the case & in law, the Ld. CIT (A) grossly erred in confirming the addition by the Ld. AO of ₹ 64,41,401/-(3,81,13,064/- 3,16,71,663/-), when the amount of ₹ 3 .....

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t such expenditure is to be disallowed even when there is actually no exempt income during the previous year. That the above grounds of appeal are without prejudice to each other. That the appellant reserves its right to add, alter, amend or withdraw any ground of appeal either before or at the time of hearing of this appeal. 2. The facts in brief are that a search and seizure action under section 132 of the Income-tax Act, 1961 (in short the Act ) was carried out at the premises of the assessee .....

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the Assessing Officer observed that the assessee had declared net profit of ₹ 3,16,71,663/- on the sales turnover of ₹ 45,90,85,748/- including the amount of income of ₹ 3,81,13,064/-, declared by the assessee during survey proceedings. According to the Assessing Officer, if the income surrendered during survey of ₹ 3,81,13,064/- is reduced out of the net profit of ₹ 3,16,71,663/-, the net result of the year under consideration was a loss of ₹ 64,41,401/- as a .....

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,000/- in assets which could have earned exempt income, however, no income had been earned during the year from such assets and the assessee also not made any disallowance under section 14A in respect of the investment eligible for earning exempt income. According to the Assessing Officer, Rule 8D of the Income Tax Rules was applicable over the facts of the assessee, and thus he disallowed amount of ₹ 69,02,691/- under section 14A of the Act read with Rule 8D of the Income Tax Rules. Aggri .....

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ules. Aggrieved, the assessee is in appeal before the Tribunal raising the grounds reproduced above. 3. The ground no. 1 being general in nature, not required to adjudicate upon by us. 4. In grounds no. 2 to 2.2, the assessee has challenged the direction of the learned Commissioner of Income-tax (Appeals) to assess the surrendered undisclosed investment in stock under the head income from other sources and submitted that the Commissioner of Income Tax (Appeals) ought to have directed to consider .....

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en further, the surrendered stock of ₹ 3,81,13,064/- was added, making a total closing stock to ₹ 11,11,01,041.33/-, which was appearing in trading account for the year on page 79 of the assessee s paper book. Thus, according to the learned Authorised Representative, there was no justification in the direction of the learned Commissioner of Income-tax (Appeals) to assess the surrendered stock separately as income falling under the head income from other sources . 4.2 On the other han .....

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ssessee and accordingly, the assessee also recorded the same as part of closing stock in its books of accounts. By declaring this excess stock as part of closing stock, the assessee offered the same as part of the profit for taxation and thus we find no basis in the direction of the learned Commissioner of Income-tax(Appeals) to treat the excessive stock declared by the assessee as income under the head income from other sources . The learned Commissioner of Income-tax(Appeals) has accepted the .....

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ntioned as why the excess stock declared by the assessee should be assessed under the head income from other sources. In our opinion the excess stock was as a result of business activity of the assessee and there was nothing wrong in adding the same with the closing stock of the business and therefore the direction of the learned Commissioner of Income-tax (Appeals) in assessing the surrendered stock under the head income from other sources is not justified and accordingly, we direct to assess t .....

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s part of the trading addition. He further submitted that on one side the learned Commissioner of Income-tax (Appeals) has accepted the trading results of the assessee, however, retained the addition of ₹ 64,41,401/-, which was part of the trading addition and, therefore, confirming of the addition by the learned Commissioner of Income-tax(Appeals) was not justified. 5.2 On the other hand, learned Sr. Departmental Representative relied on the finding of the learned Commissioner of Income-t .....

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r, directed to delete the addition of ₹ 20,65,885/-. In our opinion, once the trading results of the assessee have been accepted, the entire addition of ₹ 85,07,286/- was required to be deleted by the learned Commissioner of Incometax (Appeals). Accordingly, we direct to delete the addition of ₹ 64,41,401/-. The grounds no. 3 & 4 of the appeal are thus allowed. 6. In ground No. 5, the assessee has challenged disallowance under section 14A read with Rule 8D of the Income Tax .....

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nder section 14A of the Act. 6.2 On the other hand, the learned Sr. Departmental Representative relied on the authorities below. 6.3 We have heard the rival submissions and perused the material on record. We find that in the assessment year 2009-10, identical disallowance was made which has been deleted by the Tribunal with following observations: 8. We have heard both the sides and perused the material on record. In the present case it is an admitted fact that the assessee had not earned any di .....

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oes not form part of the total income under this Act. From a bare perusal of the section it is clear that before making the disallowance the following conditions are to exist as noted by co-ordinate Bench in M/s Kee Pharma Ltd. ITA NO 5108/Del/2012: (i) There must be income taxable under the Act; (ii) The said income must not form part of the total income under the Act; (iii) There must be an expenditure incurred by the assessee; and (iv) The said expenditure must have a relation to the income w .....

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no income from the investment in question which was taxable under the Act, therefore, the AO wrongly invoked the provisions of section 14A of the Act. On a similar issue, their lordships of the Hon ble Punjab High Court in the case of CIT Vs M/s Lakhani Marketing Incl. in ITA No.970/2008 vide order dated 02.04.2014 observed at paras 9 to 11 as under:- 9. The CIT(A) vide order dated 24.6.2004, Annexure A.II recorded as under:- 7.2 Keeping in view the above facts and circumstances of the case it .....

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peal by the revenue while upholding the finding recorded by the CIT(A) noticed as under:- We have heard rival submissions and have perused the material on record. From the reading of section 14A of the Act, it is clear that before making any disallowance the following conditions are to exist:- a) That there must be income taxable under the Act, and b) That this income must not form part of the total income under the Act, and c) That there must be an expenditure incurred by the assessee, and d) T .....

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us, the Assessing Officer has erred in invoking Section 14A of the Act, to disallow various interest payments on capital account, security deposits and unsecured loans. This conclusion of ours finds support in the decision of Bombay Bench of the Tribunal in the case of Joint Commissioner of Income Tax v. Holland Equipment Co. B. V. reported in (2005) 3 SOT 810 (Mumbai) and the relevant portion of the order of the Bombay Bench of the Tribunals reproduced below:- Regarding application of Section 1 .....

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in the present case, the entire income is found to be taxable, no disallowance can be made under section 14A of the Act. 10. Moreover, the AO has not established the nexus between invested funds and the interest bearing funds, since the investments in shares are in the years 1995-96, 1998-99 9 ITA Nos.1150 & 1151/Del./2013 and 1999-2000 and the interest disallowance is for the assessment years 2000-01 and 2001-02. On the contrary perusal of the balance sheet for the year ending 31.3.1995, 3 .....

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the revenue cannot be accepted. Further, this Court in Hero Cycles Limited s case (supra) recorded as under:- 5. In view of finding reproduced above, it is clear that the expenditure on interest was set off against the income from interest and the investments in the share and funds were out of the dividend proceeds. In view of this finding of fact, disallowance under section 14A was not sustainable. Whether, in a given situation, any expenditure was incurred which was to be disallowed, is a que .....

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section 14A cannot stand. In the present case finding on this aspect, against the revenue, is not shown to be perverse. Consequently, disallowance is not permissible. We have taken this view earlier also in IT Appeal No.504 of 2008, CIT vs. Winsome Textile Industries Limited, decided on 25th August, 2009 wherein it was observed as under:- 6. The contention raised on behalf of the revenue is that even if the assessee had made investment in shares out of its own funds, the assessee had taken loan .....

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, without interest. It was held that deduction for interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business. Observations made therein have to be read in that context. In the present case, admittedly, the assessee did not make any claim for exemption. In such a situation, section 14A could have no application. Similarly, the Hon ble Jurisdictional High Court in the case of CIT Vs Holcim India (P) Ltd .....

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s. The Punjab and Haryana High Court in Commissioner of Income Tax, Faridabad Vs. M/s. Lakhani Marketing Incl., ITA No. 970/2008, decided on 02.04.2014, made reference to two earlier decisions of the same Court in CIT Vs. Hero Cycles Limited, [2010] 323 ITR 518 and CIT Vs. Winsome Textile Industries Limited, [2009] 319 ITR 204 to hold that Section 14A cannot be invoked when no exempt income was earned. The second decision is of the Gujarat High Court in Commissioner of Income Tax-I Vs. Corrtech .....

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income 11 ITA Nos.1150 & 1151/Del./2013 which does not form part of the total income under the Act. Hence, what Section 14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. For the year in question, the finding of fact is that the assessee had not earned any tax free income. Hence, in the absence of any tax free income, the corresponding expenditure could not .....

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