TMI Blog2020 (1) TMI 1633X X X X Extracts X X X X X X X X Extracts X X X X ..... not be taxed in the year under consideration. We find that CIT(A) has followed the ratio of the above decision of the Hon ble Supreme Court along with other decisions. In view of the binding precedents followed by the Ld. CIT(A), we do not find any error in the order of the Ld. CIT(A) on the issue in dispute, and thus, we uphold the same. Accordingly, Grounds No. 2 2.1 of the appeal of the Revenue are dismissed. We find that the Ld. CIT(A) has given detailed reasoning for not considering the contention of the assessee that it was holding three shares as investment from very beginning - Before us, the learned counsel failed to adduce any evidence other then submitted before the Ld. CIT(A) to establish that the shares were inadvertently characterized as a stock-in-trade. In view of the reasoning given by the Ld. CIT(A), we do not find any error in the order of the Ld. CIT(A) on the issue in dispute and accordingly, we uphold the same. The cross objection No. 2 of the assessee is dismissed. Disallowance u/s 14A - addition of administrative expenses under rule 8D(2)(iii) - according to the assessee the disallowance under rule 8D(2)(iii) of Rules, cannot exceed the amount expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e at the time of hearing. 2.1 Grounds of cross objection by the assessee are reproduced as under: 1. That on facts and in law, the Learned Commissioner of Income Tax (Appeals)-VIII [Ld.CIT(A)], New Delhi has erred in upholding the addition of Rs.7,04,411 without appreciating the contention of the appellant company that disallowance of expenditure in terms of section 14A read with clause (iii) of sub-rule (2) of Rule 8D can not exceed the amount of expenditure 'incurred' by the appellant company at Rs.8,43,942 as it is against the spirit / intention of section 14A which clearly envisages the words expenditure incurred therein. 2. That on facts and in law, the Ld.CIT(A) has erred in not considering the contention of the appellant company that it was holding the shares of three companies (converted from stock-in trade to investments as on 1st April, 2007) for long term purposes and not for trading purposes as there was no trading since its acquisition in the last 6-7 years. 3. Without prejudice to the above, the Ld.CIT(A) has erred in not giving the holding that, even if the difference between the market price and cost is to be treated as business income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ck (current assets) and reflected as such in the accounts, which implied that sale of the shares would result in normal business profit, but upon being converted to investments, the profit on sale of such shares would amount to long-term capital gains, which is free from the chargeability of the Income-tax. In view of the Assessing Officer, merely by change of classification of the shares, the assessee converted its taxable business profit to tax-free long-term capital gains. On being confronted by the Assessing Officer as why the difference of market value of those shares on the date of the transfer and the cost of the shares should not be taken as business income of the assessee, it was submitted that: - there is no provision in the Act for taxing such income; - the shares of the companies were erroneously classified under stock in trade in earlier years instead of investment and now rectified. 5.2 The explanation given by the assessee was rejected by the assessing officer on the ground that separate account in respect of stock in trade as well as investment were maintained and reflected in the audited account. He also rejected the claim of the assessee that shares o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see of intention behind holding the shares in dispute as long-term investment. On the issue of treatment of difference in market price as on the date of conversion of his stock in trade into investment and the cost price, the Ld. CIT(A) discussed the ratio of following judgments: (i) Westminister Bank Ltd. Vs. Osler (Inspector of Taxes) [1993] 1 ITR 65 (HL); (ii) Royal Insurance Co. Ltd. Vs. Stephen [1928] 14 TC22 (KB) (iii) Californian Copper Syndicate Vs. Harris [1904] 5 TC 159(C. Exchq.) (iv) Raja Mohan Raja Bahadur Vs. CIT [1967] 66 ITR 378; (v) British South Africa Co. Vs. Varty (Inspector of Taxes) [1966] AC 381; (vi) Sir Kikabhai Premchand Vs. CIT, (1953) 24 ITR 506 (SC) (vii) CIT Vs. Dhanuka Sons, (1980), 124 ITR 24(Cal.) (viii) ACIT Vs. Bright Star Investment (P) Ltd. (ITAT-Mum.) (ix) CIT Vs. Bai Shirinbai K. Kooka 5.6 In view of the ratio of the judgments, the Ld. CIT(A) deleted the addition of ₹ 14,19,57,154 observing as under: 5.9 Thus, it may be seen that the view taken by the Hon ble courts in the aforementioned cases is that to bring to tax any business income there has to be a sale/transfer in com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of account and there was no transfer or sale of shares to third parties, thus there was no real income in the hands of the assessee. The Ld. counsel relied on the order of the Ld. CIT(A) and submitted that during relevant period, there was no provision in the Act to treat the notional income arising on account of conversion of stock-in-trade into investment. The Ld. Counsel referred to amendment introduced by way of insertion of subsection (via) to section 28 of the Act with effect from 01/04/2019, where income on conversion of stock-in-trade has been brought to tax. Thus, according to the learned counsel, there was no provision in the Act prior to the amendment introduced with effect from 01/04/2019, as the relevant period in the case of the assessee is previous years corresponding to assessment year 2008-09. The learned counsel also referred to explanatory notes to the Finance Act, available on page 28 of the paper-book. The counsel submitted that in the case of Bright Star Investment Private Limited, reported in 122 TTJ 498 (Mumbai), the Tribunal was of the opinion that to deal with the situation of conversion of stock-in-trade into investment, there can be two formulas for comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot result in income and it can be valued at cost price, where assessee normally valued its stock at cost price. The paragraph of the decision of the Hon ble Supreme Court (majority) is reproduced as under: 7. We are of opinion that the learned Attorney-General's second contention is unsound because, for income-tax purposes, each year is a self-contained accounting period and we can only take into consideration income, profits and gains made in that year and are not concerned with potential profits which may be made in another year any more than we are with losses which may occur in the future. 8. As regards the first contention, we are of opinion that the appellant was right in entering the cost value of the silver and shares at the date of the withdrawal, because it was not a business transaction and by that act the business made no profit or gain, nor did it sustain a loss, and the appellant derived no income from it. He may have stored up a future advantage for himself but as the transactions were not business ones and as he derived no immediate pecuniary gain the State cannot tax them, for under the IT Act the State has no power to tax a potential future advantage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is anything but fictional. 11. Consider this simple illustration. A man trades in rice and also uses rice for his family consumption. The bags are all stored in one godown and he draws upon his stock as and when he finds it necessary to do so, now for his business, now for his own use. What he keeps for his own personal use cannot be taxed however much the market rises; nor can he be taxed on what he gives away from his own personal stock, nor, so far as his shop is concerned, can he be compelled to sell at a profit. If he keeps two sets of books and enters in one all the bags which go into his personal godown and in the other the rice which is withdrawn from the godown into his shop, rice just sufficient to meet the day-to-day demands of his customers so that only a negligible quantity is left over in the shop after each day's sales, his private and personal dealings with the bags in his personal godown could not be taxed unless he sells them at profit. What he chooses to do with the rice in his godown is no concern of the IT Department provided always that he does not sell it or otherwise make a profit out of it. He can consume it, or give it away, or just let it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being valued in terms of money. In the present case, the assessee's business received nothing in exchange for the withdrawal of the assets, neither money nor money's worth, therefore the only fair way of treating the matter was to do just what the appellant did, namely to enter the price at which the assets were valued at the beginning of the year so that the entries would cancel each other out and leave the business with neither a gain nor a loss on those transactions. The learned Attorney-General contended that if that was allowed great loss would ensue to the State because all a man need do at the end of the year would be to withdraw all assets which had risen in value and leave only those which had depreciated and thus either show a loss or reduce his taxable profits. 14. This argument can only prevail on the assumption that the State can tax potential profits because, except for that, the State would neither gain nor lose in a case of this kind. Had the assets been left where they were, they would have been valued at the end of the year as they were at the beginning, at the cost price and we would still be where we are now. But the assumption that there wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer is the proper method for computing the income ? 17. Our answer to the first question is that in the circumstances of this case no income arose to the appellant as a result of the transfer of the shares and silver bars to the trustees. In view of that, the second question does not arise. 8.1 In the instant case, there is no real income in the hands of the assessee as the shares in reference have not either sold or transferred by the assessee in the year under consideration. There is no express or specific provision during relevant period in the Act to deal with the event of conversion of stock-in-trade into investment. In absence of specific provision, notional income if any, cannot be taxed in the year under consideration. We find that The Ld. CIT(A) has followed the ratio of the above decision of the Hon ble Supreme Court along with other decisions. In view of the binding precedents followed by the Ld. CIT(A), we do not find any error in the order of the Ld. CIT(A) on the issue in dispute, and thus, we uphold the same. Accordingly, Grounds No. 2 2.1 of the appeal of the Revenue are dismissed. 9. As far as Ground No. 2 of the cross objection of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lated to the disallowance under section 14A of the Act, wherein according to the assessee the disallowance under rule 8D(2)(iii) of Rules, cannot exceed the amount expenditure actually incurred by the assessee. 11.1 The brief facts qua the issue in dispute are that the assessee made disallowance under section 14A read with rule 8D of Income-tax Rules, 1962 at ₹ 1,77,79,925/-. The assessee followed direct nexus method in accordance with rule 8D(2)(i) of Income Tax Rules, 1962 and made entire disallowance under rule 8D(2)(i) only. This disallowance made by the assessee was not found to be correct by the Assessing Officer. According to the Assessing Officer, the assessee company was managing its business with the help of borrowed funds and made investment in shares of ₹ 33.80 Crores, the income from which would not form part of the taxable income, and he accordingly not being satisfied with the claim of the assessee, invoked provisions of Rule 8D of Income Tax Rules and computed the disallowance at ₹ 5,34,76,412/- and after reducing the sumo disallowance by the assessee, he made addition for ₹ 3,56,96,487/-. The disallowance computed by the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has to made according to the rules and therefore towards the disallowance under 80d(2)(iii), he computed the disallowance of ₹15,48,353/- and sustained the disallowance to the extent of the 7.04 lakhs out of the disallowance of ₹ 3,56,96,487 made by the Assessing Officer. 11.3 The learned DR relied on the order of the Assessing Officer and submitted a list of the decisions in support of the order of the Assessing Officer. The list of the decisions is reproduced as under: 1 Maxopp Investment Ltd. Vs CIT [2018] 91 taxmann.com 154 (SC) 2. Indiabulls Financial Services Ltd. Vs DCIT [2016] 76 taxmann.com 268 (Delhi) 3. Godrej Boyce Manufacturing Company Ltd. Vs DCIT [2017] 81 taxmann.com 111 (SC)/[2017] 247 Taxman 361(SC)/[2017] 394 ITR 449 (SC)/[2017] 295 CTR 121 (SC) (Copy Enclosed) 4. Punjab Tractors Ltd Vs CIT [2017-TIQL-353-HC-P H-IT] 5. Avon Cycles Ltd Vs CIT [20151 53 taxmann.com 297 (Punjab Haryana)/[2015] 228 Taxman 368 (Punjab Haryana)(MAG.) 6. Nahar Spinning Mills Ltd. Vs CIT [2017] 82 taxmann.com 154 (Punjab Haryana) 7. Dy. CIT v. Virai Profiles Ltd. 156 ITD 721 46/ ITR 626/177 TTJ 466 8. NYK Line India Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se to the aforesaid, a written reply has been filed by the Ld. Counsel for the appellant, vide his letter dated 29.04.2011 as under:- Kindly refer to our discussions held on 27th April, 2011 in connection with the captioned appeal. As desired during the course of proceedings, we wish to submit as under: 1. The investments in the case of appellant as on 1st April, 2007 (i.e. at the beginning of the year under reference) were to the tune of Rs. 28.14 Crs. (Please see Page 78 of Paper Book). The same were mainly acquired in the years ended 31st March, 2007 and 31st March, 2006. The details of acquisition and source thereof is given as under: i) Investments made in Y.E. 31.03.2007 (A.Y. 2007-08) - Optionally Convertible Debentures of - 5.00 Crs. M/s. Delta Aromatics Pvt. Ltd. - Optionally Convertible Debentures of - 10.00 Crs. M/s. Oscar Pharmaceuticals Pvt. Ltd. --------- 15.00 Crs. [The aforesaid investments were acquired directly out of 0% OCD s amounting to Rs. 40Crs. Raised from M/s. Shimal Research Laboratories Ltd. - as duly explained du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. AO be directed to kindly accept the appellant s direct nexus method of disallowance of interest cost in terms of clause (i) of sub-rule (2) of Rule 8D and the additional disallowance of interest cost amounting to Rs. 3,49,92,076/- made by the Ld. AO be deleted. 6.6 Along with the aforesaid reply, the Ld. Counsel has also filed copy of bank statement maintained with standard chartered bank evidencing the receipt of 0% OCDs raised from M/s Shimal Research Laboratory Ltd. utilized for investment in OCDs of M/s Delta Aromatics (P) Ltd. -Rs. 5 Crs. and OCDs of M/s Oscar Pharmaceuticals (P) Ltd. - Rs. 10 Crs. as also repayment of loan of Rs. 99000000/- raised for purchase of OCDs of M/s Orlando Trading Company worth Rs. 9.90 Crs. and other loan of Rs. 3.24 Crs. raised for investments in earlier years. Confirmation of M/s Shimal Research Laboratory Ltd. and copy of account of M/s Religare Securities Ltd. have also been find. 6.7 In view of the aforesaid, it may be seen that the opening investment of Rs. 281351500/- has been duly explained by the Ld. Counsel. The cash flow statement filed by the Ld .Counsel clearly establishes that out of opening investments of Rs. 28.14 C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the entire tax exempt income is ₹ 48,90,000/-, the disallowance ultimately directed works out to nearly 110% of that sum, i.e., ₹ 52,56,197/-. By no stretch of imagination can Section 14A or Rule 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in Section 14A, and is only to the extent of disallowing expenditure incurred by the assessee in relation to the tax exempt income . This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case. 12.3 In the case, the disallowance under Rule 8D(2)(iii) has been computed by the AO at Rs. 15,48,353/-. The Ld. CIT(A), however, restricted the disallowance to Rs.7.04 lakhs observing as under: 6.8 As regards, disallowance as per clause (iii) of sub-rule (2) of Rule 8D amount into Rs. 1548353/- made on account of other expenses, the grievance of the appellant is that after taking into account the disallowance of Rs. 25.72 lacs, only expenditure of Rs. 8.44 was left to be considered in terms of section 14A of the IT Act, 1961. Therefore, it is argued that the disallowance as per clause (i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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