TMI Blog2020 (5) TMI 89X X X X Extracts X X X X X X X X Extracts X X X X ..... at part for disallowance only . CIT(A) has deleted the disallowance in view case of CIT Vs Reliance Utilities and Power Ltd [ 2009 (1) TMI 4 - BOMBAY HIGH COURT] if there are sufficient interest-free funds available, it can be presumed that investment had been made out of from such funds and thus no disallowance for interest is required - As seen that exempt income is not only from the equity shares kept as stock-in-trade but also from interest received on bonds. The same has been invested in compliance of the Reserve Bank of India (RBI) Rules. But once exempt income is earned, then interest for corresponding borrowing would be liable for disallowance. Thus, the assessee is required to demonstrate not only investment in shares had been out of interest free funds but investment in Bonds was also made out interest free own funds. We feel it appropriate to restore this issue to the file of the learned Assessing Officer for deciding a fresh in view of our finding above and in accordance with law. The assessee shall provide all details of the investment in assets yielding exempt income as well as own funds and funds borrowed. The assessee shall also provide details of apportion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n price of the stock-in-trade can be allowed while computing business income? - HELD THAT:- There is no dispute that the assessee is at liberty to value its stock at cost or market value, whichever is lower as per consistent method of accounting, and such reduction if any , in value of the shares held as stock-in-trade will be allowed . But, if such a provision is made outside the trading account ( only while computation of income) then same may not be allowable. In the facts of the case , it is not clear whether the provision for diminution in value of stock-in-trade has been made out of the trading account or within the trading account , therefore, we feel it appropriate to restore the issue to the file of the AO for verifying the facts from the books of accounts and other records of the assessee and decide the issue in dispute afresh in accordance with law. We order accordingly. The ground of the appeal is accordingly allowed for statistical purpose. - ITA No.682/Del./2017 - - - Dated:- 1-5-2020 - Shri Bhavnesh Saini, Judicial Member And Shri O.P. Kant, Accountant Member For the Appellant : Smt. Sushma Singh, CIT(DR) For the Respondent : Ms. Sana Baqai, CA ORD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted working of disallowance which could be made under section 14A read with rule 8D of Income Tax Rules, 1962 ( in short the Rules ) , as under:- (i) direct expenditure [under rule 8D(2)(i) ]- NIL (ii) apportioned indirect interest expenses [under rule 8D(2)(ii) ]- nil- ( The assessee contended that entire interest expenses have been incurred towards: short notice money borrowing, CBLO borrowing, Repo borrowings, RBI borrowings, Overdraft borrowing, ICD borrowing. According to the assessee all the borrowings utilised for the purpose of the business and thus no disallowance is called for.) (iii) 0.5% of average investment(under rule 8D(2)(iii) : ₹ 34.5 lakhs 3.2 The Assessing Officer, however, did not accept the contention of the assessee regarding disallowance under rule 8D(2)(ii) of the rules. According to the Assessing Officer, the assessee has made investment in assets yielding exempt income out of the borrowings and therefore disallowance under rule 8D2(ii) for proportionate interest towards investment in assets yielding exempt income was justified. The Assessing Officer computed such disallowance ₹ 392.62 lakhsand after adding disallowance of & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DR submitted that the decision in the case of Hon ble Karnataka High Court, which has been relied upon by the Ld CIT(A) to hold that exempt income earned on stock-in-trade will not attract disallowance u/s 14A of the Act is no longer a valid law in view of the decision of the Hon ble Supreme Court in the case of Maxopp Investment Ltd. reported in 402 ITR 640 (SC). 3.4 On the other hand, the Learned Counsel of the assessee filed a paper book containing page 1to 162 and submitted that issue in dispute has been decided in favour of the assessee by the Tribunal in ITA No. 810/Del/2015 for assessment year 2010-11. 3.5 On the issue of own funds sufficient to make investment in assets yielding exempt income, the Learned Counsel referred to page 29 of the paper-book and submitted that total share capital and reserve and surplus was of ₹ 577.64 crores( wrongly mentioned by the Learned CIT(A) as ₹ 577. 64 lakhs) which is in excess of average investment in a stock-in-trade of ₹ 68.50 Crores, income from which was exempt of and thus no disallowance could have been made under rule 8D(2)(ii) of the Income-tax Rules. 3.6 We have heard rival submission of the parties on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so be applicable to all banks/commercial banks, to which Banking Regulation Act, 1949 applies. 38) From this, Punjab and Haryana High Court pointed out that this circular carves out a distinction between stock-in-trade and investment and provides that if the motive behind purchase and sale of shares is to earn profit, then the same would be treated as trading profit and if the object is to derive income by way of dividend then the profit would be said to have accrued from investment. To this extent, the High Court may be correct. At the same time, we do not agree with the test of dominant intention applied by the Punjab and Haryana High Court, which we have already discarded. In that event, the question is as to on what basis those cases are to be decided where the shares of other companies are purchased by the assessees as stock-in-trade and not as investment . We proceed to discuss this aspect hereinafter. 39) In those cases, where shares are held as stock-in-trade, the main purpose is to trade in those shares and earn profits therefrom. However, we are not concerned with those profits which would naturally be treated as income under the head profits and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d when such dividend income is generated that would be earned by the assessee. In contrast, where the shares are held as stock-in-trade, this may not be necessarily a situation. The main purpose is to liquidate those shares whenever the share price goes up in order to earn profits. In the result, the appeals filed by the Revenue challenging the judgment of the Punjab and Haryana High Court in State Bank of Patiala also fail, though law in this respect has been clarified hereinabove. 3.8 On the shares held as stock-in-trade , an assessee earn profit or loss on trading of the those share and additionally earn dividend also. The Hon ble Supreme Court has directed to apportion expenses towards exempt dividend income from stockin- trade as well as profit earned on trading of stock-in-trade and the expenses apportioned toward exempt income are only held as liable for disallowance. Accordingly , the Assessing Officer is required to apportion the part of expenses related to exempt dividend income and consider that part for disallowance only . 3.9 The second ground on which the Ld. CIT(A) has deleted the disallowance is that in view of decision in the case of CIT Vs Reliance Ut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness purposes. The Assessing Officer considered the amount of ₹ 31.61 lakhs as excessive interest payment for disallowance. The Ld. CIT(A) deleted the disallowance following finding of his predecessor in assessment year 2011-12 observing as under: The AO computed disallowance u/s 36(1)(iii) of the Act at ₹ 30.61 lacs on the grounds that the borrowed funds were not utilized for the purpose of business. He was of the view that payment of interest to the extent or borrowed funds utilized as investment in interest free securities, does not qualify for eligible expense as per Section 36(1)(iii) of the Act. The Ld. AR has contended that the disallowance u/s 36(1)(iii) of the Act can be made only when the borrowed capital is not utilized for business purposes. The AO has not denied that the borrowed capital is used to purchase the securities held as stock in trade by the appellant. His basic premise for disallowing the interest is that the appellant acquired securities on which it earned interest which was claimed as exempt and therefore, expenditure on interest to that extent was for non-business purpose. The company has earned total interest income of ₹ 100.39 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount of provision for diminution in market value of stock-in- trade. 5.1 The Assessing Officer has observed that the assessee made a provision for diminution in market value of the stock amounting to ₹ 6,56,24,000/-which had already been added back while computing the book profit under section 115JB of the Act. According to him it is unascertained liability and not being actual expenditure incurred, and thus need to disallowed. The Ld. CIT(A) following the finding of his predecessor, allowed the ground of the assessee observing as under: 6.3 It is noted that the issue of provision/expenditure for diminution in market value stock was adjudicated in case of the appellant for A.Y. 2003-04 and 2005-06 by the then CIT(A)-XVII and relief was allowed. Operative part of the order of the Ld. CIT(A) in A. No. 77/07-08 dated 22.09.2008 for A.Y. 2003-04 is as under: 4.2 I have carefully considered the facts of the case, order of the AO and submissions made by the ld. AR of the appellant company. From the assessment order, it is seen that the AO has disallowed the amount of ₹ 3684.92 lacs in a summary manner by holding that the same is a notional expenditure. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted . 5.2 We have heard rival submission of the parties on the issue in dispute. The core issue is whether diminution or reduction in price of the stock-in-trade can be allowed while computing business income. In our opinion, there is no dispute that the assessee is at liberty to value its stock at cost or market value, whichever is lower as per consistent method of accounting, and such reduction if any , in value of the shares held as stock-in-trade will be allowed . But, if such a provision is made outside the trading account ( only while computation of income) then same may not be allowable. In the facts of the case , it is not clear whether the provision for diminution in value of stock-in-trade has been made out of the trading account or within the trading account , therefore, we feel it appropriate to restore the issue to the file of the Assessing Officer for verifying the facts from the books of accounts and other records of the assessee and decide the issue in dispute afresh in accordance with law. We order accordingly. The ground of the appeal is accordingly allowed for statistical purpose. 6. The appeal of the Revenue is accordingly allowed for statistical purpose. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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