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ABR Auto Pvt. Ltd. Versus ITO, Ward 1 (2) , New Delhi.

2016 (9) TMI 642 - ITAT DELHI

Disallowance u/s 14A - Held that:- Disallowance u/s 14A was made without due deliberation and analysis by the Assessing Officer and the Ld. CIT(A) was also patently wrong in confirming the disallowance without testing the sustainability of the disallowance. Hence, we set aside the findings of the Ld. CIT (A) on this issue and restore the matter to the file of the AO for fresh adjudication after due verification of the claim of the assessee regarding no expenditure having been incurred. Needless .....

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assessee has entered into only one transaction of sale. The rights were purchased in 2005 and were sold in 2008 after retaining the rights for more than three and a half years. It is also undisputed that the assessee has been in receipt of rental income from other properties in subsequent assessment years which have been duly mentioned in the respective assessment orders. Hence, we are of the concerned opinion that the surplus resulting from the sale of rights is assessable to tax only as capit .....

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investment in properties/rights. In our considered view, the assessee has discharged its primary onus by showing that the sale of rights was not in the regular course of business or trade but rather an isolated transaction and now the onus was on the Revenue to show that the apparent was not real. No material whatsoever has been brought on record by the Revenue to show that the transaction was only a smoke screen to camouflage the trading receipts. Therefore, in absence of any material to the c .....

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against the order dated 04/02/2013 passed by the ld. CIT (Appeals)-IV, New Delhi for AY 09-10. In its appeal the assessee has assailed the action of the ld. CIT (Appeals) in upholding the addition of ₹ 407,158/- u/s 14A of the Act and had also challenged the action of the ld. CIT (Appeals) in upholding the treatment of capital gains of ₹ 9,139,000/- as business income. 2. The brief facts of the issues before us are that the assessee company had made an investment in shares of closel .....

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me is concerned, the assessee company had purchased rights of acquiring space in Paradise Mall, vide agreement dt. 10/03/05, for a sum of ₹ 49,400,000/-. It was the assessee s contention that due to some problems in the management of the Mall, the construction was delayed and the matter also went for arbitration. Since the Mall was under construction and no registered deed had been executed, the amount paid was shown under loans and advances. The assessee finally sold the said property on .....

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are held by Maruti Udyog Ltd. and the purpose of acquiring the shares of Mark Auto Ltd. was not to earn dividend but to secure the right to manage the company. The ld. AR further submitted that no continuous monitoring was required for the investment made in the above said company and that no expenditure in this regard was ever made by the assessee company. It was further submitted that no interest was paid by the assessee for any loan raised for the above said investment in shares and that the .....

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tted that the assessee intended to hold the above rights for long term investments which can be established from the following facts: i. The agreement for purchase and sale of the said space were for the purpose of commercial property and the assessee had to sell the same for its bonafide needs and requirements; ii. As per the purchase agreement the assessee had no right to sub-divide the said property; iii. The assessee held the property for more than three and a half years; iv. No subsequent m .....

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ent years 2011-12, 2012-13 and 2013-14 and drew our attention to the fact that in all the three assessment years the AO has given a finding that the assessee earned rental income. The assessee also placed reliance on the decision of the ITAT Mumbai D Bench in ITA No. 6345/Mum/2010 for AY 2006-07. 4. The ld. DR relied on the order of the ld. CIT (Appeals) and supported the order of the AO. 5. We have heard the rival submissions and perused the relevant records. As far as the issue of disallowance .....

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o application. The objective of section 14 A is not allowing to reduce tax payable on the normal exempt income by debiting the expenditure incurred to earn the exempt income. Thus, the expenses incurred to earn exempt income cannot be allowed and the expenses shall be allowed only to the extent they are related to the earning of taxable income. If there is expenditure directly or indirectly incurred in relation to exempt income, the same cannot be claimed against the income, which is taxable as .....

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ich does not form part of total income. Once such proximity relationships exist, the disallowance is to be effected. In case the assessee had claimed that no expenditure has been incurred for earning the exempt income, it is for the assessing officer to determine as to whether the assessee had incurred any expenditure in relation to income which did not form part of total income and if so, to quantify the extent of disallowance. Thus, in order to disallow the expenditure under section 14A, there .....

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e under section 14A merely because some tax exempt income is received by the assessee. 5.01 It is the assessee s claim that the impugned disallowance has been made without due deliberation. The assessee has claimed that no expenditure has been incurred in making the investments whereas the department has not considered the assessee s assertions before making the disallowance. Further, the Assessing Officer has presumed that the assessee must have incurred some expenditure but the justification f .....

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required to determine the amount of such expenditure only if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the said Act. In other words, the requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if th .....

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of sub-section (2) of Section 14A. Sub-section (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act. In other words, sub-section (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the said Act and sub-section (3) applies to cases where the assessee asserts that no expenditure .....

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h cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the said Act in accordance with the prescribed method. The prescribed method being the method stipulated in Rule 8D of the said Rules. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicat .....

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e accepted. Disallowance u/s 14A requires finding of incurring of expenditure. Where it is found that for earning exempted income, no expenditure has been incurred disallowance u/s 14A cannot stand. Mumbai J Bench of the ITAT has held in the case of Justice Sam P. Bharucha vs ACIT in I.T.A. No. 3889/Mum/2011 that no disallowance u/s 14A of the Act is called for when the assessee has not incurred and claimed any expenditure for earning the exempt income. 5.03 Therefore, on an overall consideratio .....

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the claim of the assessee regarding no expenditure having been incurred. Needless to say, the AO shall afford a proper opportunity to the assessee to present its case. This ground of appeal is accordingly allowed for statistical purposes. 5.4 As far as the second issue regarding the treatment of long term capital gains as business income is concerned the Hon ble Bombay High Court in CIT vs. V.A. Trivedi 172 ITR 95 (Bom.) has held that ordinarily where a person acquired land with a view to sellin .....

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icity of transactions afforded valuable guides in determining whether the appellant was carrying on a trading activity and whether a particular transaction should be stamped with the character of a trading adventure. 5.4.1. The Hon ble Madras High Court in V. Ramanathan vs. CIT 51 ITR 640 (Mad.) has held that the distinguishing mark which differentiates a trading adventure from ordinary transaction of purchase and sale ending in a profit is not the profit motive of the individual, is not the spe .....

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h can be applied on the facts of the case to find out whether the transactions in question are in the nature of trade or are merely for investment purposes. The principles read as under: 1. What is the intention of the appellant at the time of purchase of the shares (or any other item)? This can be found out from the treatment it gives to such purchase in its books of account. Whether it is treated as stock-inof 14 trade or investment. Whether shown in opening/closing stock or shown separately a .....

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rn profit on sale and purchase of shares. A commercial motive is an essential ingredient of trade. 4. How the value of the items has been taken in the balance sheet? If the items in question are value at cost, it would indicate that they are investments or where they are valued at cost or market value or net realizable value (whichever is less), it will indicate that items in question are treated as stock in trade. 5. How the company (appellant) is authorized in memorandum of association/article .....

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articular item is held as investment (or say, stock-in-trade) then onus would shift to Revenue to prove that apparent is not real. 7. The mere fact of credit of sale proceeds of shares (or for that matter any other item in question) in a particulars account or not so much frequency of sale and purchase will alone will not be sufficient to say that appellant was holding the shares (or the items in question) for investment. 8. One has to find out what are the legal requisites for dealing as a trad .....

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or investment provided it is maintaining separate account for each type, there are distinctive features for both and there is no intermingling of holdings in the two portfolios. 10. Not one or two factors out of above alone will be sufficient to come to a definite conclusion but the cumulative effect of several factors has to be seen. 5.4.3. Coming to the facts of the case, the assessee has not shown the rights in the property as stock-in-trade. No opening and closing stock was shown by the asse .....

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