TMI Blog2022 (8) TMI 1376X X X X Extracts X X X X X X X X Extracts X X X X ..... r to the arguments before the ld. CIT(A), after going through the entire issue, we hereby confirm the action of the ld. CIT(A). However, we find that the revenue has taken up a ground with regard to the applicability of Section 45(2) which do not emanate either from the order of the ld. CIT(A) or from the Assessment Order. Since, we have confirmed the orders of the revenue, no adjudication on the ground no. 4 is called for. - ITA No. 4971/Del/2015, ITA No. 4972/Del/2015, ITA No. 5310/Del/2015, ITA No. 5311/Del/2015 - - - Dated:- 25-8-2022 - Dr. B. R. R. Kumar, Accountant Member And Sh. Yogesh Kumar US, Judicial Member For the Assessee : Sh. Rajat Jain, CA Sh. Akshat Jain, CA. For the Revenue : Sh. T. Kipgen, CIT DR. ORDER PER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER: The cross appeals filed by the assessee and the Revenue are directed against the orders of ld. CIT(A)-24 dated 08.06.2015. ITA No. 5310/Del/2015 : A.Y. 2011-12 (Revenue Appeal) Revised grounds filed on 26.07.2022 2. On the facts and circumstances of the case, the CIT(A) has erred in law in deleting the addition of Rs. 6,71,96,845/- made by the AO on account of disallowance u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preciating the facts that the entire investment was converted into stock in trade as on 01.04.2010 and the appellant has already considered the said amount of Rs.18,85,98,890/- as trading profit on sale of the unquoted shares in its profit and loss account as well as return of income and discharged tax liability as per the provisions of the Income Tax Act. 4.1 That without prejudice, the Commissioner of Income Tax (Appeals) failed to appreciate that if the transaction on sale of shares was not to treated as trading transaction then the profit included in trading profit needs to be excluded. 3. Ground Nos. 1 2 of assessee appeal not pressed. Disallowance u/s 14A: Ground No. 2 3 of Revenue appeal and Ground No. 3 of Assessee appeal 4. During the year, the assessee has earned Rs.50,000/- of dividend income which has been reflected under the head other income in the P L account. The AO disallowed an amount of Rs.14,12,51,908/- u/s 14A of the Income Tax Act, 1961. 5. The ld. CIT(A) determined the disallowance @ 0.5% of the average investment. 6. Aggrieved, the Revenue filed appeal before us against the deletion of disallowance to the tune of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t whether any such income has been earned during the financial-year or not. 4. The above position is further clarified by the usage of term 'includible' in the Heading to section 14 A of the Act and also the Heading to Rule 8D of I.T. Rules, 1962 which indicates that it is not necessary that exempt income should necessarily be included in a particular year's income, for disallowance to be triggered. Also, section 14A of the Act does not use the word income of the year hut income under the Act . This also indicates that for invoking disallowance under section 14A, it is not material that assessee should have earned such exempt income during the financial year under consideration. 5. The above position is further substantiated by the language used in Rule 8D(2)(ii) 8D(2)(iii) of I.T. Rules .. 6. Thus, in light of above, Central Board of Direct Taxes, in exercise of its powers under section 119 of the Act hereby clarifies that Rule 8D read with section 14A of the Act provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income. The issue therefore, is if section 14A (1) would st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred in respect of exempt income was being claimed against taxable income. The mandate of section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail of the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of section 14A is that certain incomes are not includible while computing total income as these are exempt under certain provisions of the Act. The issue, thus, considered in perspective, is not if the income not forming the part of the total income (the tax-exempt income) is earned or not, but if expenditure relatable to such income has been incurred. If such expenditure stands incurred, section 14A(1) becomes applicable. The decision by the Apex Court in the case of CIT v. Walfort Share Stock Brokers (P.) Ltd. (supra) stands followed in Godrej Boyce Mfg. Co. Ltd. v. Dy. CIT [2017] 81 taxmann.com 111 (SC) where the Hon'ble Supreme Court, while considering whether deduction of expenditure incurred in earning dividend inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ability (or otherwise) of an expenditure would not depend upon whether it has in fact resulted in an income, i.e., positive income, which is in any case a matter subsequent, and that the mere fact that expenditure stands incurred for the purpose is sufficient for its admissibility, as explained by the Apex Court in CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC). The Apex Court was in that case examining the true interpretation of section 57(iii), which employed the words 'any expenditure (not being in the nature of capital expenditure) laid out or expended for the purpose of making or earning such income', the question of law raised before it reading as under: Whether, on the facts and in the circumstances of the case, interest on money borrowed for investment in shares which had not yielded any dividend is admissible under s. 57(iii)? The revenue's contention in the above case was that the making or earning of income was a sine qua non to the admissibility of the expenditure u/s. 57(iii). And, therefore, where no income resulted, no expenditure would be deductible. The Apex Court rejected the revenue's contention, and held that to bring a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation to income, which does not form part of total income, is to ensure that the assessee does not get double benefit. Once a particular income itself is not to be included in the total income and is exempted from tax, there is no reasonable basis for giving benefit of deduction of the expenditure incurred in earning such an income. For example, income in the form of dividend earned on shares held in a company is not taxable. If a person takes interest bearing loan from the Bank and invests that loan in shares/stocks, dividend earned therefrom is not taxable. Normally, interest paid on the loan would be expenditure incurred for earning dividend income. Such an interest would not he allowed as deduction as it is an expenditure incurred in relation to dividend income which itself is spared from tax net. There is no quarrel upto this extent. 32. In the first instance, it needs to be recognized that as per section 14A(1) of the Act, deduction of that expenditure is not to be allowed which has been incurred by the assessee in relation to income which does not form part of the total income under this Act . Axiomatically, it is that expenditure alone which has been incurred in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remains that such dividend income is non-taxable. In this scenario, if expenditure is incurred on earning the dividend income, that much of the expenditure which is attributable to the dividend income has to be disallowed and cannot be treated as business expenditure. Keeping this objective behind Section 14A of the Act in mind, the said provision has to be interpreted, particularly, the word 'in relation to the income' that does not form part of total income. Considered in this hue, the principle of apportionment of expenses comes into play as that is the principle which is engrained in Section 14A of the Act. This is so held in Walfort Share Stock Brokers (P.) Ltd., relevant passage whereof is already reproduced above, for the sake of continuity of discussion, we would like to quote the following few lines therefrom. The next phrase is, in relation to income which does not form part of total income under the Act . It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14A. .. The theory of apportionment of expenditure between taxable and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled, they should be withdrawn. A reading of this circular would make it clear that the issue was as to whether income by way of interest on securities shall be chargeable to income tax under the head 'income from other sources' or it is to fall under the head 'profits and gains of business and profession'. The Board, going by the decision of this Court in Nawanshahar case, clarified that it has to be treated as income falling under the head 'profits and gains of business and profession'. The Board also went to the extent of saying that this would not be limited only to co-operative societies/Banks claiming deduction under Section 80P(2)(a)(i) of the Act but would also 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 fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce Bill 2022. The Finance Bill 2022, has introduced an amendment to clarify that expense disallowance under the said section shall apply and shall be deemed to have always applied even in a case where the exempt income has not accrued or arisen or has not been received during a particular year. The amendments which are introduced with the use of words 'for removal of doubts', 'shall be deemed always to have meant or to explain an existing provision, are normally considered to be clarificatory or declaratory amendments. These amendments are expected to provide for an obvious omission or clear up doubts in the interpretation of an existing legislation. As a general rule, such clarificatory amendments are considered to have a retrospective effect. This applies even if such amendments are made applicable from a prospective date in the Finance Bill (See Justice GP Singh's Principles of Statutory Interpretation and CIT v. Vatika Township (P) Ltd [2014] 49 taxmann.com 249 (SC)). In the case of Vatika Township (P) Ltd (supra), the Hon'ble Supreme Court discussed the general principles concerning retrospectively, an extract of which is as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and where to confer such benefit appears to have been the legislators object, then the presumption would be that such a legislation, giving it a purposive construction, would warrant it to be given a retrospective effect. This exactly is the justification to treat procedural provisions as retrospective. [Para 33] Hence, the rule is different when it comes to substantive amendments which modify existing rights, or which impose new obligations or impose new duties or attach a new disability. Such amendments are presumed to have prospective effect unless there is an express legislative intent to give retrospective effect. It is my humble submission therefore alongwith the aforesaid judgments of Hon'ble Supreme Court which constitute an authority in law on the issue whether an expenditure incurred in relation to a tax-exempt income attracts disallowance u/s 14A irrespective of whether such tax-exempt income has been earned during the year or not or earned incidentally with business income, the Finance Bill 2022 has sought to put matters at rest by laying down in no uncertain terms and in a crystal clear manner the dominant intention of the statute. The same intention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d No. 4 in ITA No. 5310/Del/2015 (Revenue appeal) 9. The detailed facts pertaining to this issue are as under: The appellant company was holding investment amounting to Rs.179,14,46,369/- and Nil in shares of various companies as on 31/03/2010 and 31/03/2011 respectively. The appellant company has transferred the entire investment to Stock-in-Trade with effect from 01/04/2010. The appellant company has shown the sale of Quoted shares of Rs.18,81,966/- Unquoted shares of Rs. 59,39,27,500/- and Mutual Funds of Rs. 1,29,65,649/-under the head sales in its Profit loss account during the financial year under consideration. The appellant company shown profit on sales of unquoted shares of Rs 18,85,98,890/- in its profit loss account. 10. Before the Assessing Officer, the assessee submitted details of sales of quoted shares, unquoted shares and mutual funds made during the financial year under consideration. The AO questioned to explain why the said proceeds have been credited in the P L Account instead of being taken into consideration for capital gains. The appellant company submitted that it was engaged in investment in shares till 31.03.2010 and such shares were h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12. Thus, the AO made addition of Rs. 18,85,98,890/- on account of capital gain of sale of shares etc. which has been considered as business income. 13. Before us, the assessee submitted that the action of the AO which has been confirmed by the ld. CIT(A) is not tenable as income from capital gain from sale of unquoted shares of sister concerns has duly considered in the P L account as well as in the return of income and discharged the tax liabilities as per the provisions of Income Tax Act, 1961. 14. The ld. DR supported the order of the ld. CIT(A). 15. We have gone through the relevant portion of the order of the ld. CIT(A) in toto. 4.5.3 I have considered the submissions of the AR and the assessment order. As noted earlier at ground Nos. 1 to 5, AO has treated the unquoted shares held by the appellant as investment and brought to tax the same as capital gain. While doing so he has taken out Rs. 59,39,27,500/- from the credit side of P L account (sale proceeds of unquoted shares) and brought to tax the same under the head capital gains after deducting the cost of the shares. 4.5.4 It is noted here that as per the appellant, the investments were converted i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain or short term capital gain and he has also not given the indexation benefit to the appellant. Further he has to adopt the correct cost in respect of the shares transferred at each stage. He is directed to recompute the capital gain in the above manner. In the result ground is partly allowed. 16. Thus, we find that the ld. CIT(A) has affirmed the action of the AO in treating the amount of Rs.18,85,98,890/- as income from capital gains. Since, the arguments put forward before us are similar to the arguments before the ld. CIT(A), after going through the entire issue, we hereby confirm the action of the ld. CIT(A). However, we find that the revenue has taken up a ground with regard to the applicability of Section 45(2) which do not emanate either from the order of the ld. CIT(A) or from the Assessment Order. Since, we have confirmed the orders of the revenue, no adjudication on the ground no. 4 is called for. 17. In the result, the appeal of the assessee on this ground is dismissed. ITA No. 5311/Del/2015 : A.Y. 2012-13 (Revenue Appeal) 18. Following grounds have been raised by the revenue: 1. On the facts and circumstances of the case, the ld. CIT(A) has er ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appeals) has erred in upholding the disallowance of Rs.97,36,816/- being done by the Ld. AO u/s 14A of the Income Tax Act read with clause(iii) Rule 8D of the Income Tax Rules, 1962. 3.1 That the Ld. Commissioner of Income Tax (Appeals) grossly erred in law by not appreciating the facts that Ld. AO has applied Rule 8D straight away without recorded his satisfaction about the claim of the appellant that no expenses were incurred related to exempt income, the disallowance upheld by the Commissioner of Income Tax (Appeals) is bad in law. ITA No. 5311/Del/2015 Disallowance u/s 14A: 20. The ratio laid down in ITA No. 4971/Del/2015 and 5310/Del/2015 for the A.Y. 2011-12 in this order stands applicable. During the year, the assessee has earned dividend income of Rs. 1,00,000/- and hence the disallowance is restricted to the dividend earned. 21. As a result, the appeal of the Revenue is dismissed and Ground No. 3 of the appeal of the assessee is allowed. ITA No. 4972/Del/2015 Conversion of Investments: 22. The ratio laid down in ground No. 4 in ITA No. 4971/Del/2015 in this order stands applicable. The appeal of the assessee on this ground is di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h investigation. By surrendering the undisclosed income the appellant stops the investigating officer from continuing with investigation on that issue on the principle that a fact accepted by the other party need not be proved. Here the surrender was on account of disallowance of expenses and others . After a long gap, it is very easy to say that there are no discrepancies in the documents. The party has got ample time to set right the weaknesses, if any, in his affairs and also to take care of any deficiencies that could be linked to the contents of the seized papers including third party affairs. Thus any retraction from surrendered income, that too after a considerable time period, only points towards lack, of bonafide on the party of the appellant. This is also against the rule of estoppel. A person who by his statement has induced another to believe his words and act in a particular manner, cannot go back and say that what he stated was incorrect. He is estopped from doing so. Therefore, I hold that addition be restricted to Rs. 8,24,33,171 (Rs. 10 crores- 1,75,66,829) and the balance addition is hereby deleted. In the subsequent grounds relating to 14A disallowance-and capit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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