Astt. Commissioner of Income Tax, Lucknow V. Sitaram Computech Pvt. Ltd., Lucknow

ITA 716/LKW/2015

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 4631 (ITAT-LUCKNOW)
• Duration Of Justice: 3 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-03-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 02-03-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 02-12-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Business income; Earning of tax free income; Deemed to accrue or arise in india; Fair market value; Onus to prove
• Section: 69C; 56(2); 153A; 14A; 69; 56; 2

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW BENCH A, LUCKNOW BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI A.K. GARODIA, ACCOUNTANT MEMBER ITA NO.716/LKW/2015 ASSESSMENT YEAR 2011-12 SITARAM COMPUTECH PVT. LTD. OPP. KAMTA CHECK POST, FAIZABAD ROAD, LUCKNOW PAN AAECS 7800 F VS. ACIT, CENTRAL CIRCLE-II, LUCKNOW (RESPONDENT) (APPELLANT) SHRI A.K. SINGH, CIT D.R. APPELLANT BY SHRI RAKESH GARG, ADVOCATE RESPONDENT BY 02 /0 3 /2016 DATE OF HEARING 21/03/2016 DATE OF PRONOUNCEMENT O R D E R PER SUNIL KUMAR YADAV, JM. 1. THIS APPEAL IS PREFERRED BY THE REVENUE AGAINST THE ORDER OF THE LD. CIT(A)-III, LUCKNOW, INTERALIA ON FOLLOWING GROUNDS :- . 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, LD. CIT (A) HAS ERRED IN DELETING THE ADDITION OF RS.10 ,15,162/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF UNDERVA LUATION OF STOCK. 2. HAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, LD. CIT (A) - HAS ERRED IN DELETING THE ADDITION OF RS.57,4 5,800/- MADE BY THE AO ON ACCOUNT OF SHORTAGE IN STOCK OF P LY BOARD, MICA, GRANITE, CONCEPT MARBLE, STONE AND CEMENT TIL ES WITHOUT APPRECIATING THE FACT THAT THE ADDITION WAS MADE BY THE AO ON THE BASIS OF THE STOCK DISCREPANCY FOUND DURING THE SEARCH. 3. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, LD, CIT (A) HAS ERRED IN DELETING THE ADDITION OF RS.30 ,60,000/- 2 MADE BY THE ASSESSING OFFICER ON ACCOUNT OF UNEXPLA INED INVESTMENT AS DIFFERENCE BETWEEN COST OF SHARES SHO WN BY THE ASSESSEE AND MARKET VALUE OF THE SHARES OF M/S GOEL INFRACON PVT. LTD.. 4. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, LD. CIT (A) HAS ERRED IN DELETING THE ADDITION OF RS.2, 01,675,/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF DISALLO WANCE U/S 14A OF THE ACT. 5. THAT THE ORDER OF LD. CIT (A) DESERVES TO BE SET ASIDE AND THE ASSESSMENT ORDER PASSED BY THE A.O. BE RESTORED. 6. THAT THE APPELLANT CRAVES TO ADD, MODIFY , REVIS E OR AMEND ANY ONE OR MORE OF THE GROUNDS OF THE APPEAL AS STA TED ABOVE AS AND WHEN NEED FOR DOING SO MAY ARISE. 2. APROPOS GROUND NO.1, IT IS NOTICED THAT DURING T HE COURSE OF ASSESSMENT PROCEEDINGS, ASSESSING OFFICER HAS NOTICED FROM THE DETAILS OF PURCHASES OF TIMBER OF DIFFERENT GRADES AND VARIETIES AND HAVING NOTED THE DIFFERENCE IN VALUATION OF DIFFERENT VARIETIES OF TIMBER, THE ASS ESSING OFFICER HAS MADE AN ADDITION OF RS.10,15,162/- ON ACCOUNT OF UNDER VALU ATION OF STOCK. THE ASSESSEE HAS PREFERRED AN APPEAL BEFORE THE CIT(A) WITH THE SUBMISSION THAT THOUGH THE ASSESSING OFFICER HAS ACCEPTED THE SUBMISSION OF TH E ASSESSEE FOR VALUING THE STOCK OF TIMBER AT ACTUAL PURCHASE PRICE BUT DID NO T AGREE WITH THE VALUING THE SAME ON WEIGHTED AVERAGE BASIS FOR ALL THE SOURCE OF PURCHASE OF TIMBER. THE ASSESSING OFFICER BY PRESUMING THAT SOME OF THE PHY SICAL QUANTITIES MUST ALSO BE RELATING TO TIMBER OF UPFC WHICH CARRIES HIGHER VAL UATION, PRO RATA BIFURCATED IN THE RATIO OF PURCHASES BETWEEN UPFC AND PRIVATE DEA LERS AS UNDER FOR VALUATION PURPOSES. THE ASSESSEE FURTHER EXPLAINED THAT AS PE R ACCOUNTING STANDARD (AS) 2- VALUATION OF INVENTORIES ISSUED BY THE CHARTERED ACCOUNTANT PRESCRIBES THE COST FORMULAS TO BE USED WHILE VALUATION OF INVENTO RIES BY AN ENTITY. HE HAS ALSO PLACED RELIANCE UPON CERTAIN JUDGMENT IN SUPPORT OF HIS CONTENTION THAT REGULARLY FOLLOWED METHOD FOR VALUING STOCK SHOULD NOT BE REJ ECTED. IT WAS FURTHER CONTENDED THAT ASSESSEE HAS BEEN CONSISTENTLY FOLLO WING THE WEIGHTED AVERAGE 3 BASIS FOR VALUING THE STOCK AND SAME WAS ACCEPTED B Y MAKING THE ASSESSMENT U/S 153A OF THESE YEARS. THE CIT(A) REEXAMINED THE ISSUE IN THE LIGHT OF VARIOUS JUDICIAL PRONOUNCEMENTS AND BEING CONVINCED WITH T HE EXPLANATION OF THE ASSESSEE, HE HAS DELETED THE ADDITION. FOR THE SAKE OF REFERENCE, THE RELEVANT OBSERVATION OF THE CIT(A) IS EXTRACTED HEREUNDER :- 4(6) I HAVE EXAMINED THE FACTS AND CIRCUMSTANCES OF THE CASE. I HAVE CONSIDERED THE FINDINGS OF THE ASSESSING OFFICER IN THE ASSESSMENT ORDER AND THE SUBMISSIONS OF THE APPELLANT. I HAVE ALSO CONSIDERED THE REMAND REPORT SUBMITTED BY THE AO AND THE COMME NTS OF THE APPELLANT THEREON. THE ISSUE INVOLVED IS AN ADDITIO N OF RS.10,15,162/- ON ACCOUNT OF VALUATION OF STOCK. THE APPELLANT HAS BEEN CONSISTENTLY VALUING THE STOCK OF TIMBER AS PER WEIGHTED AVERAGE METHOD. THE OPENING AND CLOSING STOCK HAVE BEEN CONSISTENTLY BE EN VALUED OVER THE YEARS AT WEIGHTED AVERAGE RATE. THE AO BIFURCAT ED THE STOCK FOUND DURING THE COURSE OF SEARCH ON 11.03.2011 IN THE RATIO OF STOCK PERTAINING TO 'FOREST CORPORATION' AND 'PRIVATE DEA LERS' AS AGAINST THE 'WEIGHTED AVERAGE RATES' APPLIED BY THE ASSESSEE. T HE DIFFERENCE IN VALUATION OF STOCK AS PER METHOD ADOPTED BY THE AO WAS WORKED OUT AT RS. 10,15,162/- FOR WHICH AN ADDITION WAS. MADE TO THE INCOME OF THE ASSESSEE. 4(7) I FIND THAT IN MAKING THE ADDITION AFORESAID T HE AO HAS NOT DISTURBED THE OPENING STOCK AS ON 01.042010 OR THE CLOSING STOCK AS ON 31.03.2011, WHICH HAVE BEEN VALUED BY THE ASSESS OR ON WEIGHTED AVERAGE RATE. THERE IS NO FINDING OF THE AO THAT TH E QUANTITATIVE DETAILS OF STOCK OF TIMBER AT THE TIME OF SEARCH ON 11.03.2011 AS PER ACTUAL INVENTORY DIFFERED FROM THE STOCK AS PER BOO KS OF ACCOUNTS. THE AO HAS ONLY ADOPTED A NEW METHOD OF VALUING THE STOCK ON PRO- RATA BASIS OF STOCK OF TIMBER IN THE RATIO OF PURCH ASES FROM FOREST CORPORATION AND PRIVATE PARTIES. THE AO HAS ALSO FA ILED TO TAKE NOTE OF PROVISIONS OF SECTION VISA OF THE ACT APPLICABLE FROM ASSESSMENT YEAR 2010-2011 WHICH LAY DOWN AS UNDER- 145A. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONT AINED IN SECTION 145, (A) THE VALUATION OF PURCHASE AND SALE OF GOODS AND INVENTORY FOR THE PURPOSES OF DETERMINING THE INCOME CHARGEAB LE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSI ON' SHALL BE 4 (I) IN ACCORDANCE WITH THE METHOD OF ACCOUNTING REG ULARLY EMPLOYED BY THE ASSESSEE; AND (II) FURTHER ADJUSTED TO INCLUDE THE AMOUNT OF ANY TAX, DUTY, CESS OR FEE (BY WHATEVER NAME CALLED) ACTUALLY PAID OR INCURRED BY THE ASSESSEE TO BRING THE GOODS TO THE PLACE OF ITS LOCATION AND CONDITION AS ON THE DATE OF VALUATION. EXPLANAT ION.- -FOR THE PURPOSES OF THIS SECTION, ANY TAX, DUTY, CESS O R FEE (BY WHATEVER NAME CALLED) UNDER ANY LAW FOR THE TIME BE ING IN FORCE, SHALL INCLUDE ALL SUCH PAYMENT NOTWITHSTANDI NG ANY RIGHT ARISING AS A CONSEQUENCE TO SUCH PAYMENT: (B) INTEREST RECEIVED BY AN ASSESSEE ON COMPENSATIO N OR ON ENHANCED COMPENSATION, AS THE CASE MAY BE, SHALL BE DEEMED TO BE THE INCOME OF THE YEAR IN WHICH IT IS RECEIVE D. ' 4(8) THE APPELLANT HAS CONSISTENTLY BEEN FOLLOWING THE METHOD OF VALUING STOCK OF TIMBER AT WEIGHTED AVERAGE WHICH I S RECOGNIZED METHOD OF ACCOUNTING. THERE IS NO FINDING OF THE AO THAT THIS METHOD HAS NOT BEEN CONSISTENTLY FOLLOWED OR THAT A DIFFER ENT METHOD OF VALUATION OF STOCK HAS BEEN NOTIFIED BY THE GOVERNM ENT. I FIND NO MERIT IN THE SAID ADDITION MADE BY THE ASSESSING OF FICER WHERE THE VALUATION OF CLOSING STOCK HAS BEEN CHANGED VIS'-A- VIS' ITS VALUE AND NOT BECAUSE OF ANY DIFFERENCE IN THE QUANTITY OF ST OCK. THE ASSESSEE WAS CONSISTENTLY FOLLOWING A PARTICULAR METHOD OF A CCOUNTING WHICH IS BEING ACCEPTED FROM YEAR TO YEAR AND IN THE ABSENCE OF ANY CONTRARY FINDINGS BY THE ASSESSING OFFICER; THERE IS NO MERI T IN NOT ADOPTING THE METHOD OF VALUATION OF STOCK BEING CONSISTENTLY FOLLOWED BY THE ASSESSEE. FURTHER I FIND SUPPORT FROM THE RATIO LAI D DOWN BY THE HON'BLE SUPREME COURT IN CHAINRUP SAMPAT RAM VS. C IT (24 ITR 481) WHEREIN IT HAS BEEN HELD THAT THE VALUE OF STO CK CANNOT BE APPRECIATED HIGHER THAN THE COST BECAUSE THE CLOSIN G STOCK IS NOT THE SOURCE OF PROFIT FOR THE ASSESSEE. IN CASE THE VALU ATION OF STOCK ON 11.03.2011 WAS DISTURBED, THE VALUE OF OPENING STOC K AND CLOSING STOCK SHOULD CORRESPONDINGLY BE ADJUSTED AND IN THE PRESENT CASE, THE ASSESSING OFFICER HAD CHANGED THE VALUE OF STOC K ON A PARTICULDI DATE BUT NOT THAT OF OPENING STOCK AND CLOSING STOC K. RELIANCE IS PLACED ON THE DECISION OT HON'BLE ITAT, CHANDIGARH IN THE CASE OF DOT, AMBALA VS SHRI VIPIN AGARWAL IN 1TA NO. 450/CH D/2010 DATED 23.07.2010. 4(9) IN VIEW OF THE DISCUSSIONS ABOVE THE ADDITION OF RS. 10,15,162/- MADE BY THE AO IS DELETED GIVING CORRESPONDING RELI EF TO THE APPELLANT. 5 3. NOW, THE REVENUE IS IN APPEAL BEFORE THE TRIBUNA L AND PLACED THE RELIANCE UPON THE ASSESSMENT ORDER. DURING THE COURSE OF HEA RING, LD. DR OF THE REVENUE COULD NOT POINT OUT ANY SPECIFIC DEFECT IN THE ORDE R OF THE CIT(A) WHEREAS LD. COUNSEL FOR THE ASSESSEE HAS CONTENDED THAT THE ASS ESSEE HAS BEEN FOLLOWING CONSISTENTLY WEIGHTED AVERAGE RATE METHODS FOR VALU ING THE STOCK AND THE SAME WAS ACCEPTED BY THE REVENUE IN EARLIER YEARS THEREF ORE, THERE IS NO JUSTIFICATION TO DISPUTE METHOD OF VALUATION BY THE ASSESSING OFF ICER. 4. HAVING CAREFULLY EXAMINED THE ORDER OF THE LOWER AUTHORITIES IN THE LIGHT OF THE RIVAL SUBMISSION, WE FIND THAT UNDISPUTEDLY THE ASSESSEE HAS BEEN FOLLOWING THE WEIGHTED AVERAGE RATES METHOD IN VALUING THE ST OCK AND SAME WAS ACCEPTED BY THE REVENUE IN EARLIER YEARS. THEREFORE, THERE I S NO JUSTIFICATION IN REJECTING THE METHOD OF VALUATION MADE BY THE ASSESSING OFFIC ER. MOREOVER, THE ASSESSING OFFICER HAS NOT FURNISHED THE REASONABLE EXPLANATIO N OF THE REASONS FOR REJECTING MODE OF VALUATION ADOPTED BY THE ASSESSEE. WE HAVE CAREFULLY EXAMINED THE ORDER OF THE CIT(A) AND FIND THAT THE CIT(A) HAS AD JUDICATED THE ISSUE IN A RIGHT PERCEPTIVE. SINCE NO INFIRMITY IN THE ORDER OF THE CIT(A) HAS BEEN POINTED OUT BY THE LD. DR, WE CONFIRM HIS ORDER. 5. APROPOS GROUND NO.2, DURING THE COURSE OF ASSESS MENT PROCEEDING, ASSESSING OFFICER HAS NOTED THAT ON PHYSICAL VERIFI CATION, THE STOCK OF PLY BOARD, MICA, GRANITE, CONCEPT MARBLE, STONE AND CEMENT TIL ES WAS FOUND SHORT AS DECLARED IN THE BOOKS OF ACCOUNTS. ACCORDINGLY, ASS ESSING OFFICER WAS OF THE VIEW THAT SHORTAGE IN STOCK WAS SOLD OUTSIDE THE BOOKS O F ACCOUNT AND HE MADE THE ADDITION OF RS.57,45,800/- FOR SALE OUTSIDE THE BOO KS OF ACCOUNTS. THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) WITH THE SUBM ISSION THAT THE EXCESS OF STOCK OF MARBLE OF RS.3,67,008/- WAS FOUND, THEREFO RE, IT CANNOT BE SAID THAT IT WAS SOLD OUT THE BOOKS OF ACCOUNTS AND FOR THE REMA INING STOCK IT WAS CONTENDED THAT THE ADDITION OF THE ENTIRE SHORT OF STOCK CANN OT BE MADE. AT THE MOST PROFIT 6 EARNED THEREON CAN BE ADDED . FINDING FORCE IN THE CONTENTION OF THE ASSESSEE, THE CIT(A) HAS RESTRICTED THE ADDITION ON THE PROFI T EARNED ON SALE OF STOCK OF RS.53,78,792/-OUTSIDE THE BOOKS OF ACCOUNT AND WITH REGARD TO EXCESS STOCK OF MARBLE OF RS.3,67,008/-, THE CIT(A) WAS OF THE VIEW THAT SINCE THE ASSESSEE HAS NOT FURNISHED THE SOURCE OF ACQUISITION OF EXCESS S TOCK, THE ADDITION DESERVES TO BE CONFIRMED AND HE ACCORDINGLY CONFIRM THE ADDITIO N OF RS.3,67,008/-. THE RELEVANT OBSERVATION OF THE CIT(A) IS EXTRACTED HER EUNDER:- 5(6) I HAVE EXAMINED THE FACTS AND CIRCUMSTANCES OF THE CASE. 1 HAVE CONSIDERED THE FINDING', OF THE ASSESSING OFFICER I N THE ASSESSMENT ORDER AND THE SUBMISSIONS OF THE APPELLANT. I HAVE ALSO CONSIDERED THE REMAND REPORT SUBMITTED BY THE AO AND THE COMMENTS OF THE APPELLANT THEREON. THE AO FOUND SHORTAGE IN STOCK O F PLY BOARD, MICA, GRANITE, CONCEPT MARBLE, STONE AND CEMENT TILES ON THE BASIS OF INVENTORY PREPARED AT THE TIME OF SEARCH ON 11.03.2 011 OF RS, 53,78,792/- AND EXCESS STOCK OF MARBLE OF KS. 3,67, 008/-. THE AO THEREFORE MADE AN ADDITION OF RS. 57,45,800/- FOR S ALE OUTSIDE BOOKS OF ACCOUNTS. 5(7) I WILL FIRST DEAL WITH THE ISSUE OF EXCESS STO CK OF MARBLE OF RS. 3,67,008/- FOUND DURING THE COURSE OF SEARCH ON 11. 03.2011. I FAIL TO UNDERSTAND HOW THE AO CAN TREAT THE EXCESS STOCK AV AILABLE WITH THE ASSESSEE AS SALES OUTSIDE BOOKS OF ACCOUNTS. A SALE MATERIALIZES WHEN THERE IS REDUCTION IN STOCK AND NOT WHERE THERE IS ACCRETION IN STOCK. NEVERTHELESS, IF I CLOSELY EXAMINE THE ISSUE I FIND THAT FOR INVOKING PROVISIONS OF SECTIONS 69 OF THE ACT TO SECTION 69C OF THE ACT TWO CONDITIONS ARE REQUIRED TO BE SATISFIED. THEY ARE (I) INVESTMENT/EXPENDITURE ARE NOT RECORDED IN THE BOOKS OF ACCOUNT OF ASSESSEE & (II) THE NATURE AND SOURCE OF ACQUISITION OF ASSETS OR EXPENDITURE' ARE NOT EXPLAINED OR NOT EXPLAINED SATISFACTORILY THE EXPRESSION 'NATURE AND SOURCE' USED IN THIS SEC TION SHOULD BE UNDERSTOOD TO MEAN REQUIREMENT OF IDENTIFICATION OF SOURCE AND ITS GENUINENESS. TO EXPLAIN 'NATURE' IT WOULD REQUIRE T HE ASSESSEE TO EXPLAIN WHAT IS DESCRIPTION OF INVESTMENT OR EXPEND ITURE, PERIOD AND THE MANNER IN WHICH IT WAS DONE. TO EXPLAIN THE SOU RCE IT WOULD 7 REQUIRE THE ASSESSEE TO EXPLAIN THE CORPUS OR FUND FROM WHERE INVESTMENT OR EXPENDITURE HAS BEEN MET AND ALSO THE HEAD UNDER WHICH THE INVESTMENT OR EXPENDITURE WOULD FALL SUCH JS WHETHER INVESTMENT/EXPENDITURE PERTAINS TO BUSINESS OR RELA TES TO ACQUISITION OF CAPITAL ASSET OR TO OTHER SOURCE OR TO AGRICULTU RE. WHERE THE ASSESSEE IS ABLE TO EXPLAIN NATURE AND SOURCE OF INVESTMENT/EXPENDITURE AND ALSO IF THEY ARE RECORDE D IN THE BOOKS OF ACCOUNT THEN SUCH INVESTMENT/EXPENDITURE WILL NOT B E TREATED AS DEEMED INCOME BUT WHERE INVESTMENT /EXPENDITURE IS NOT RECORDED IN THE BOOKS OF ACCOUNT AND/OR THEIR NATURE AND SOURCE IS NOT EXPLAINED OR NOT SATISFACTORY EXPLAINED, DEEMING PROVISION UN DER THESE FOUR SECTIONS CAN BE INVOKED BY THE AO AND INVESTMENT/EX PENDITURE WOULD BE TREATED AS DEEMED INCOME OF THE ASSESSEE. 5(8) I FIND THAT THE ASSESSEE HAS NOT BEEN ABLE TO SATISFACTORILY EXPLAIN THE IIDTURE AND SOURCE OF ACQUISITION OF EXCESS STO CK OF MARBLE OF RS. 3,67,000/-. THE EXCESS STOCK IS NOT FOUND RECORDED IN THE BOOKS OF ACCOUNTS AND IS THEREFORE DEEMED INCOME OF THE APPE LLANT. ACCORDINGLY, IN VIEW OF THE DISCUSSIONS ABOVE THE A DDITION OF RS. 3,67,008/ MADE: BY THE AO IS CONFIRMED. 5(9) NOW, AS REGARDS THE VARIOUS SHORTAGES OF RS. 5 3,78,792/- FOR WHICH AN ADDITION HAS BEEN MADE BY THE AO BY TREATI NG THE SHORTAGES AS SALES OUTSIDE BOOKS OF ACCOUNTS, I FIND THAT THE ISSUE NEEDS CONSIDERATION FROM THE ANGLE OF WHAT IS RECORDED IN THE BOOKS OF ACCOUNTS. THE BOOKS OF ACCOUNTS OF THE APPELLANT SH OW EXISTENCE OF STOCK OF RS. 53,78,792/- OF VARIOUS ITEMS WHICH IS NOT ACTUALLY AVAILABLE AT THE TIME AT SEARCH ON 11.03.2011. THE NORMAL COROLLARY IS THAT ONCE THE STOCK IS RECORDED IN BOOKS OF ACCOUNT S, THE CORRESPONDING INVESTMENT IN PURCHASE IS ALSO RECORD ED. IN OTHER WORDS ABSENCE OF PHYSICAL STOCK DOES GIVE A FINDING OF STOCK HAVING BEEN SOLD AND SUCH SALES NOT HAVING BEEN RECORDED I N THE BOOKS OF ACCOUNTS, BUT SINCE THE STOCK WAS RECORDED IN THE B OOKS OF ACCOUNTS, IT MEANS THAT THE ADDITION TO BE MADE IS FOR THE PR OFIT ON SALES AND NOT SALES PER SE. THE CONSEQUENT ADJUSTMENTS IN BOO KS OF ACCOUNTS WILL INVOLVE REDUCTION IN STOCK OF RS.53,78,792/- A ND ADDITION TO SALES OF RS.53,78,792/-. THE TWO ARE CONTRA ENTRIES AND T HEREFORE ADDITION IF ANY WHICH COULD BE SUSTAINED IS THE PROFIT ON SALES OUTSIDE BOOKS OF ACCOUNTS OF RS. 53,78,792/-, 5(10) HON'BLE ITAT, KOLKATA IN THE CASE OF ITO VS S UBHAS BROTHERS JEWELLERS (P) LTD IN ITA.NO.1736/KOL/2009 DATED 05. 06.2014 HELD THAT- 8 WE FIND THAT THE ABOVE SHORTAGES CAN AT BEST BE TRE ATED AS UNDISCLOSED SOLES. IN SUCH CIRCUMSTANCES THE ENTIRE AMOUNT CANNOT BE ADDED. IN OUR CONSIDERED OPINION, AN ESTI MATED ADDITION OF 10% PROFIT ON THE ABOVE SALES WOULD BE SUFFICIENT AND WOULD SERVE THE ENDS OF JUSTICE. ACCORDINGLY WE CONFIRM THE ORDER OF THE CIT(A) WITH ONLY MODIFICATION THAT 10% PROFIT MAY BE ADDED FOR THE ITEMS MENTIONED ABOVE. SIMILARLY, HON'BLE ITAT, AHEMEDABAD BENCH SURAT IN THE CASE OF HI- TECH SWEET WATER TECHNOLOGY (P) LTD VS. ACIT IN ITA NO.980AHD/2008 DATED 02.07.2010 HELD THAT - WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIAL ON RECORD. IN OUR CONSIDERED VIEW WHEN ASS ESSEE IS FOUND TO HAVE SHORTAGE IN STOCK AND WHICH ARE TREAT ED AS SALES OUTSIDE THE BOOKS THEN THE BOOKS CANNOT BE RELIED U PON AND CAN BE REJECTED AND PROFIT CAN BE ESTIMATED UNDER S ECTION 145(3). IN VIEW OF THIS, TOTAL SALES OF THE ASSESSE E 4 SHOULD BE WORKED OUT AND PROFIT THEREON SHOULD BE ESTIMATED. THE SHORTAGE IN STOCK WOULD ODD TO THE SALES AND REASON ABLE GP RATE SHOULD BE APPLIED TO WORK OUT THE PROFITS. AGAIN, HON'BLE ITAT, INDORE IN THE CASE OF ACIT VS SURAJBHAN AGRAWAL IN ITA NO. 352/LND/2013 DATED 26.8.2013 HELD THAT- WE ARE ALSO IN AGREEMENT WITH THE FINDING OF THE LE ARNED CIT(A) THAT SO FAR AS THE SHORTAGE IN GOLD ORNAMENT S IS CONCERNED, ONLY PROFIT EMBEDDED IN THE SALE CAN BE TAKEN AS INCOME OF THE ASSESSEE. 5(11) IN VIEW OF DISCUSSION ABOVE I FIND THAT THE E NTIRE SHORTAGE OF STOCK OF RS. 53,78,792/-CANNOT BE TREATED AS INCOME OF THE ASSESSEE BY MAKING AN ADDITION FOR SALES OUTSIDE BOOKS OF AC COUNTS. ONLY PROFIT EMBEDDED IN THE SALE CAN BE TAKEN AS INCOME OF THE ASSESSEE. ACCORDINGLY, THE ADDITION OF RS.53,78,792/- IS DELE TED. I FIND THAT THE APPELLANT HAS SHOWN GROSS PROFIT RATE OF 10.12% IN THE YEAR UNDER CONSIDERATION AND PROFIT RATE OF 10.62% IN THE IMME DIATELY PRECEDING YEAR. ACCORDINGLY, I FIND IT REASONABLE TO COMPUTE THE PROFIT EMBEDDED IN THE SALE OF RS. 53,78,792/- @11% WHICH COMES TO RS, 5,91,667/-. THE ADDITION MADE BY THE AO IS THEREFORE CONFIRMED TO THE EXTENT OF RS. 5,91,667/ . 5(12) TO SUM UP, THE ADDITIONS OF RS. 57,45,800/- M ADE BY THE AO IS SUSTAINED TO THE EXTENT OF RS. 3,67,008/- AND RS.5, 91,667/-. THE APPELLANT GETS A RELIEF OF RS.47,87,125/-. 9 6. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE THE T RIBUNAL AND THE LD. DR OF THE REVENUE HAS SIMPLY PLACED RELIANCE UPON THE ORD ER OF THE ASSESSING OFFICER WHEREAS THE LD. COUNSEL FOR THE ASSESSEE HAS CONTEN DED THAT IN CASE OF SHORTAGE OF STOCK, THE ADDITION CAN ONLY BE MADE WITH RESPEC T TO PROFIT EARNED ON THE SALE OF STOCK OUTSIDE THE BOOKS OF ACCOUNTS. THE ADDITIO N OF THE ENTIRE SHORTAGE OF STOCK CANNOT BE MADE. 7. HAVING CAREFULLY EXAMINED THE ORDER OF THE LOWER AUTHORITIES IN THE LIGHT OF RIVAL SUBMISSIONS. WE FIND THAT THE CIT(A) HAS CONF IRMED THE ADDITION OF RS.3,67,008/- MADE ON ACCOUNT OF UNEXPLAINED INVEST MENT IN ACQUISITION OF EXCESS STOCK OF MARBLE. SINCE ASSESSEE HAS NOT CHAL LENGED THIS ORDER OF THE CIT(A), IT ATTAINS THE FINALITY. SO FAR AS THE ADDI TION OF RS.53,78,792/- IS CONCERNED, THE CIT(A) HAS RESTRICTED THE ADDITION T O THE PROFIT EARNED ON THE SALE OF STOCK OUTSIDE THE BOOKS OF ACCOUNT AT 11%, RESUL TING INTO ADDITION OF RS.5,91,667/-. SINCE WE DO NOT FIND ANY INFIRMITY I N THE ORDER OF LD. CIT(A) AS THE ADDITION IS ONLY TO BE MADE WITH RESPECT TO PRO FIT EARNED ON STOCK OF SALE OUTSIDE THE BOOKS OF ACCOUNTS. ACCORDINGLY, WE CONF IRM THE ORDER OF THE CIT(A) IN THIS REGARD. 8. APROPOS GROUND NO.3, IT IS NOTICED THAT DURING T HE COURSE OF ASSESSMENT PROCEEDING, THE ASSESSING OFFICER HAS MADE THE ADDI TION OF RS.30,60,000/- HAVING INVOKED THE PROVISIONS OF SECTION 56(2)(VIII ) OF THE ACT FOR THE PURCHASE OF SHARES BY THE ASSESSEE FROM BHARAT BEARINGS LTD. A ND SHANKAR TELECOM LTD. FOR RS.1 PER SHARE AGAINST THE FACE VALUE OF SHARES OF RS.10/- FOR EACH SHARE. THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) WITH THE SUBMISSION THAT PROVISIONS OF SECTION 56(2)(VII) CANNOT BE INVOKED AS IT WAS APPLICABLE W.E.F. 01.06.2010 AND SHARES WERE ACQUIRED BY MAKING PAYME NT ON 07.04.2010 AND THE DATE OF SHARE TRANSFER WAS ALSO ON 15.04.2010. BESIDES, IT WAS ALSO CONTENDED THAT THE PROVISIONS OF SECTION 69 AND SEC TION 69A OF THE ACT ARE ALSO NOT ATTRACTED AS THERE WAS PROPER RECORDING BOOKS O F ACCOUNTS WITH REGARD TO 10 INVESTMENT IN HIS SHARE. THE CIT(A) REEXAMINED THE ISSUE IN THE LIGHT OF VARIOUS JUDICIAL PRONOUNCEMENT AND BEING CONVINCED WITH IT HE DELETED THE ADDITION. THE RELEVANT OBSERVATION OF THE CIT(A) IS EXTRACTED HER EUNDER FOR THE SAKE OF REFERENCE:- 6(4) I HAVE EXAMINED THE FACTS AND CIRCUMSTANCES O F THE CASE. I HAVE CONSIDERED THE FINDINGS OF THE ASSESSING OFFICER IN THE ASSESSMENT ORDER AND THE SUBMISSIONS OF THE APPELLANT. I HAVE ALSO CONSIDERED THE REMAND REPORT SUBMITTED BY THE AO AND THE COMMENTS OF THE APPELLANT THEREON. THE APPELLANT PURCHASED 3,40,000 SHARES OF M/S GOEL INFRACON (P) LTD (EARLIER KNOWN AS M/S SURAJ A MUSEMENT PARKS LTD.) AS PER DETAILS BELOW DATE OF PAYMENT DATE OF SHARE TRANSFER TRANSFEROR MODE OF PAYMENT 07.04.2010 15.04.2010 BHARAT BEARINGS LTD. CHEQUE NUMBER 334140 OF ORIENTAL BANK OF COMMERCE, A/C NO. 042740100000170 07.04.2010 15.04.2010 SHANKAR TELECOM LTD. CHEQUE NUMBER 334139 OF ORIENTAL BANK OF COMMERCE, A/C NO.042740100000170 THE FACE VALUE OF SHARES ISSUED BY M/S GOEL INFRACO N (P) LTD WAS RS. 10/- FOR EACH SHARE WHEREAS THE TOTAL CONSIDERATION PAID BY THE APPELLANT FOR ACQUISITION OF SHARES FROM THE TRANSF EROR WAS RS. 1/- FOR EACH SHARE. THE AO THEREFORE MADE AN ADDITION OF RS . 30,60,000/- (VALUE OF 3,40,000 SHARES AT FACE VALUE OF RS. 34,0 0,000/- LESS CONSIDERATION PAID OF RS. 3,40,000/-) UNDER SECTION 56(2)(VIIA) OF THE ACT. 6(5) AT THE OUTSET, F FIND THAT THE PROVISIONS OF S ECTION 56(2)(VIIA) OF THE ACT ARE APPLICABLE WITH EFFECT FROM 01.06.2010. IN OTHER WORDS THE APPLICABILITY OF THE PROVISION IS TO TRANSFER OF SH ARES FOR CONSIDERATION LESS THAN THE FAIR MARKET VALUE WHERE SUCH TRANSFER TAKES PLACED ON OR AFTER 01.06.2010. THE APPELLANT ACQUIRED THE SHARES ON 1.S.O-).20.10 AND THEREFORE THE PROVISIONS CANNOT BE SAID TO BE A PPLICABLE IN THE PRESENT CASE. THE AO COULD NOT HAVE THEREFORE MADE THE IMPUGNED 11 ADDITION UNDER SECTION 56(2)(VIIA} OF THE ACT AS TH E PROVISIONS COME INTO STATUTE AT A DATE WHICH IS LATER THAN THE DATE OF WHICH THE SHARES WERE ACQUIRED BY THE APPELLANT. 6(6) NOW IT NEEDS TO BE EXAMINED WHETHER THE IMPUGN ED ADDITION COULD HAVE BEEN MADE UNDER THE DEEMING PROVISIONS O F THE ACT. I FIND THAT THE INVESTMENT MADE BY THE APPELLANT IS RECORD ED IN THE BOOKS OF ACCOUNTS MAINTAINED BY THE APPELLANT AND THEREFORE PROVISIONS OF SECTION 69 AND SECTION 69A OF THE ACT ARE NOT ATTRA CTED. NOW, THI; ADDITION MADE BY THE AO FOR THE DIFFERENCE IN FACE VALUE AND SALE CONSIDERATION PRESUPPOSES THAT THE SHARES OF A COMP ANY CANNOT TRADE FOR LESS THAN THE FACE VALUE. IN OTHER WORD-,, THE FACE VALUE OF THE SHARE IS DIFFERENT FROM THE FAIR MARKET VALUE OF TH E SHARE. THE AO HAS NOT BROUGHT ANY MATERIAL ON RECORD TO SHOW THAT THE RE WAS ANY CONSIDERATION PAID ON MAKING THE INVESTMENT IN SHAR ES BY THE APPELLANT OVER AND ABOVE THAT WHICH IS RECORDED BY THE APPELLANT IN ITS BOOKS OF ACCOUNTS. IN 'K.P. VERGHESE V. ITG', 131 I TR 597(SC), IT WAS HELD THAT THE BURDEN TO PROVE THAT THE CONSIDERATIO N FOR THE TRANSFER OF A CAPITAL ASSET HAS BEEN UNDERSTATED BY THE ASSESSE E, OR THAT THE FULL VALUE OF THE CONSIDERATION IN RESPECT OF THE TRANSF ER HAS BEEN SHOWN AT A LESSER FIGURE THAN THAT ACTUALLY RECEIVED BY THE ASSESSEE, IS ON THE DEPARTMENT. 6(7) ALTHOUGH RENDERED IN THE CONTEXT OF CAPITAL GA INS, THE FOLLOWING CASE AUTHORITIES NEED CONSIDERATION. IN CIT V, GULS HAN KUMAR 257 ITR 703 (DEL), IT WAS HELD THAT V-,HERE THE ASSESSEE HA D SOLD SHARES OF EMPLOYEES, DEALERS AND CLOSE RELATIVES AT COST PRIC E ND THERE WAS NO EVIDENCE THAT THE ASSESSEE HAD RECEIVED MORE THAN T HE DECLARED VALUE, DIRECTLY OR INDIRECTLY, SECTION 52 OF THE ACT, DEAL ING WITH CONSIDERATION FOR TRANSFER IN CASE OF UNDERSTATEMENT, WAS NOT APP LICABLE AND THAT THE ASSESSMENT OF DEEMED CAPITAL GAIN WAS NOT VALID. IN CIT V. SMT. NILOFER I. SINGH 309 ITR 233 (DEL), IT HAS BEEN HEL D, INTER ALIA, THAT FULL VALUE OF CONSIDERATION DOES NOT REFER TO MARKET VAL UE BUT ONLY TO CONSIDERATION SPECIFIED IN THE SALE DEED. IN THE PR ESENT CASE, EVEN OTHERWISE, THE DEPARTMENT HAS NOT BEEN ABLE TO SHOW ANY PURCHASE PRICE OVER AND ABOVE THAT STATED IN THE REGISTERED SALE DEED, AS HAVING BEEN PAID BY THE ASSESSEE. IN DEV KUMAR JAM V. ITO & ANOTHER 309 ITR 240 (DEL), IT WAS HELD THAT WHERE THERE WAS NO EVIDENCE THAT THE ASSESSEE RECEIVED CONSIDERATION IN EXCESS OF THAT S HOWN IN THE AGREEMENT TO SELL, THERE WAS NO NECESSITY TO COMPUT E THE FAIR MARKET VALUE FOR CAPITAL GAINS AND THAT THE FULL V ALUE OF THE SALE CONSIDERATION WAS TO BE TAKEN INTO ACCOUNT. A SIMIL AR ISSUE CAME UP FOR CONSIDERATION BY A DIVISION BENCH OF HON'BIE MADRAS HIGH COURT IN SUNDARAM INDUSTRIES PRIVATE LTD. VS CIT [1969] 741, L.T R. 243 (MAD). 12 THE FACTS OF THE CASE WERE THESE; THE ASSESSEE-COMP ANY PURCHASED 669 SHARES IN SOUTHERN ROADWAYS PRIVATE LTD. IN AUG UST, 1954, FOR A SUM OF RS. 93,660 AND SOLD THEM IN DECEMBER, 1968, FOR RS. 66,900 TO THREE LADIES. THE INCOME-TAX OFFICER DETERMINED THE MARKET PRICE OF THE SHARES AS ON MARCH 31, 1958, AT RS. 1,56,064 AN D TREATED THE DIFFERENCE BETWEEN THE COST AND THE MARKET PRICE AS CAPITAL GAIN LIABLE TO BE TAXED. THE TRIBUNAL HAD FOUND AS A FACT THAT THE SALE WAS A REAL TRANSACTION WHICH WAS GIVEN EFFECT TO AND ACTED UPO N BY THE PARTIES THERETO AND IT WAS NOT MADE WITH THE OBJECT OF AVOI DANCE OR REDUCTION OF TAX LIABILITY BUT MADE FOR THE PURPOSE OF BENEFI TING THE LADIES. ON THESE FACTS, THE QUESTION FOR CONSIDERATIO N WAS WHETHER THE PROVISO TO SECTION 12B(2) OF THE ACT COULD BE INVO KED. THE LEARNED JUDGES HELD: ' WHAT THE PROVISO GETS AT FOR CHARGE IS THE ACTUAL CAPITAL GAIN WHICH THE VENDOR SHOULD, IN THE CIRCUMSTANCES, HAVE MADE, BUT IS MODE TO APPEAR THAT THE GAIN AS SHOWN BY THE CONSID ERATION FOR THE TRANSACTION TO BE MUCH LESS OR NIL. WE ARE NOT PER SUADED TO THINK THAT THE PROVISO DISCOURAGES OR AVOIDS HONEST TRANSACTIO NS MADE OUT OF LOVE AND AFFECTION OR FOR OTHER CONCEIVABLE REASONS ON P AIN OF BEING ON AN ASSUMPTION, HAULED UP, IF WE MAY USE THE EXPRESSION , FOR HAVING ATTEMPTED TO AVOID OR REDUCE THE TAX LIABILITY AND ON THAT BASIS MADE LIABLE TO TAX ON THE DIFFERENCE BETWEEN THE CONSIDE RATION FOR THE TRANSACTION AND THE FAIR MARKET, VALUE. THAT SIMPLY , AS WE READ THF PROVISO, IS NOT ITS PURPOSE. IT DOES NOT TREAT WHAT IS NOT AN ACTUAL CAPITAL GAIN AS A DEEMED CAPITAL GAIN, IN FACT, OCC URRING AS IT DOES, AS THE FIRST PROVISO TO SUB-SECTION (2) DEALING WITH T HE PROCEDURAL ASPECT OF COMPUTATION, IT SHOULD, WE THINK, BE INTERPRETED AS LIMITED 'O ESCAPED CAPITAL GAIN, WHICH IS SO IN TRUTH AND IN F ACT, AND NOT INTENDED TO BRING ABOUT FICTIONAL GAIN ON AN ASSUMPTION AND CHARGE THE SAME. ' 6(8) IN VIEW OF THE DISCUSSION ABOVE AND APPLYING T HE DECISIONS CITED SUPRA TO THE FACTS OF THE PRESENT CASE I FIND THAT SINCE SECTION 69B OF THE ACT ENVISAGES ONLY VALUE OF INVESTMENT NOT FULL Y RECORDED IN THE BOOKS OF ACCOUNT TO BE DEEMED TO BE THE ASSESSEE'S INCOME, WHERE THERE IS NO FINDING THAT THE INVESTMENT MADE BY THE ASSESSEE DOES NOT STAND FULLY RECORDED IN THE BOOKS OF ACCOUNT, OBVIO USLY, THE VALUE OF SUCH INVESTMENT WOULD NOT REQUIRE 'O BE ESTIMATED, AS SUCH VALUE CANNOT BE DEEMED TO BE THE INCOME OF THE ASSESSEE A ND IT IS, THEREFORE, THAT THE PROVISIONS OF SECTION 69 TO SEC TION 69B OF THE ACT CANNOT BE INVOKED IN SUCH A CASE PARTICULARLY BECAU SE THE FACE VALUE OF SHARES CANNOT BE SUBSTITUTED FOR THE FAIR MARKET VA LUE OF SHARES. FACE VALUE OF SHARE REFERS TO THE VALUE AT WHICH THE COM PANY ISSUES ITS SHARES TO INITIAL SUBSCRIBERS AND IN CASE OF COMPAN IES LIMITED BY SHARES, FACE VALUE IS THE MAXIMUM LIABILITY ON A SH ARE HELD BY A 13 SHAREHOLDER. WHEREAS THE FAIR MARKET VALUE OF SHARE IS THE PRICE AT WHICH THE SHARE WOULD CHANGE HANDS BETWEEN A WILLIN G BUYER AND A WILLING SELLER, NEITHER BEING UNDER ANY COMPULSION TO BUY OR TO SELL AND BOTH HAVING REASONABLE KNOWLEDGE OF RELEVANT FACTS. SINCE THE PROVISIONS OF SECTION 56(2) OF THE ACT ARE NOT APPL ICABLE TO THE APPELLANT'S CASE, THE PRESCRIBED METHOD OF WORKING OUT THE FAIR MARKET VALUE AS PER RULE 11UA IS ALSO NOT APPLICABLE. IN S UCH A SITUATION THE FAIR MARKET VALUE IS THE AGREED CONSIDERATION OF TH E SHARE OF THE COMPANY BY THE BUYER AND SELLER. 6(9) IN VIEW OF DISCUSSION ABOVE I FIND THAT THE AD DITION OF RS. 30,60,0007 MADE BY THE AO IS NOT TENABLE BOTH UNDER SECTION 56(2) OF THE ACT AS WELL AS UNDER THE DEEMING PROVISIONS OF THE ACT. THE ADDITION OF RS. 30,60,000/- MADE BY THE AO IS DELET ED GIVING RELIEF TO THE APPELLANT. 9. AGGRIEVED, THE REVENUE HAS PREFERRED AN APPEAL B EFORE THE TRIBUNAL AND PLACED RELIANCE UPON THE ORDER OF THE ASSESSING OFF ICER WHEREAS LD. COUNSEL FOR THE ASSESSEE HAS PLACED RELIANCE UPON THE ORDER OF CIT(A) WITH THE SUBMISSION THAT ASSESSING OFFICER HAS INVOKED THE PROVISIONS O F SECTION 56((VIIA) OF THE ACT FOR MAKING AN ADDITION BUT THE SAID SECTION COULD N OT BE INVOKED IN THE ASSESSEES CASE AS IT WAS APPLICABLE W.E.F. 01.06.2 010, THEREFORE, NO ADDITION IN THE HANDS OF ASSESSEE COULD BE MADE IN THIS REGARD. MOREOVER, THE ASSESSEE HAS PURCHASED THE SHARES ON THE BASIS OF ITS FACE VALUE . 10. HAVING CAREFULLY EXAMINED THE ORDER OF LOWER AU THORITIES IN THE LIGHT OF RIVAL SUBMISSION, WE FIND THAT UNDISPUTEDLY THE TRANSACTI ON TOOK PLACE IN THE MONTH OF APRIL, 2010 WHEREAS THE PROVISIONS OF SECTION 56 (2 )(VIIA) WAS MADE APPLICABLE W.E.F. 01.06.2010.THEREFORE, THE PROVISIONS CANNOT BE ATTRACTED TO THE PRESENT TRANSACTION. THE APPLICABILITY OF THE OTHER PROVISI ON OF SECTION 69 AND 69A WAS ALSO EXAMINED BY THE CIT(A). SINCE CIT(A) HAS PROP ERLY ADJUDICATED THE ISSUE IN THE LIGHT OF RELEVANT PROVISIONS OF THE ACT, WE FIN D NO INFIRMITY THEREIN. ACCORDINGLY, WE CONFIRM HIS ORDER. 11. APROPOS GROUND NO.4, IT IS NOTICED THAT THE ASS ESSING OFFICER HAS MADE THE ADDITION OF RS.2,26,752/- HAVING INVOKED THE PROVIS IONS OF SECTION 14A OF THE ACT 14 AGAINST WHICH AN APPEAL WAS FILED BEFORE THE CIT( A). THE CIT(A) HAS EXAMINED THE PROVISIONS OF SECTION 14A OF RULE 8D OF THE RUL ES AND RECALCULATE THE DISALLOWANCE AND RESTRICT THE SAME RS.25,077/-. THE RELEVANT OBSERVATION OF THE CIT(A) IS EXTRACTED HEREUNDER FOR THE SAKE OF REFER ENCE :- 7(3) I HAVE EXAMINED THE FACTS AND CIRCUMSTANCES OF THE CASE. I HAVE CONSIDERED THE FINDINGS OF THE ASSESSING OFFICER IN THE ASSESSMENT ORDER AND THE SUBMISSIONS OF THE APPELLANT. ! HAVE ALSO C ONSIDERED THE REMAND REPORT SUBMITTED BY THE AO AND THE COMMENTS OF THE APPELLANT THEREON. SECTION 14A OF THE ACT HAS BEEN INTRODUCED BY THE FINANCE ACT OF 2001 IN CHAPTER IV AND HAS EFFECT FROM 01.04.196 2. THE SAID SECTION PROVIDES FOR DISALLOWANCE OF EXPENDITURE INCURRED I N RELATION TO INCOME WHICH IS NOT INCLUDED M THE TOTAL INCOME OF THE ASS ESSEE (I.E. EXEMPT INCOME FOR EXAMPLE AGRICULTURAL INCOME}. IN OTHER W ORDS, SECTION 14A OF THE ACT DEALS WITH EXPENSES INCURRED BY AN ASSES SEE TO EARN ON EXEMPT INCOME. SUCH EXPENSES ARE NOT DEDUCTIBLE FRO M ONE'S GROSS TOTAL INCOME AND ARE DISALLOWED. AS PER SECTION 14A OF THE ACT, EXPENDITURE WHICH HAS A BEARING ON EXEMPT INCOME SH OULD NOT BE CONSIDERED IN THE COMPUTATION OF TOTAL INCOME AS OT HERWISE THIS WOULD RESULT IN DOUBLE ADVANTAGE TO THE ASSESSEE. THE ASS ESSEE HAS SHOWN DIVIDEND INCOME OF RS. 17,000/- AND THEREFORE THE A O IS JUSTIFIED IN TAKING RECOURSE TO SECTION 14 A OF THE ACT. 7(4) HAVING SAID THAT THE ISSUE NOW IS THE AMOUNT O F DISALLOWANCE TO BE MADE UNDER SECTION 14A OF THE ACT. SUB-SECTIONS (2) AND (3) WERE INSERTED IN SECTION 14A OF THE ACT BY THE FINANCE A CT 2006, WITH EFFECT FROM 01.04.2007. SUB SECTION 2 OF SECTION 14A OF TH E ACT MAKES IT CLEAR THAT THE ASSESSING OFFICER SHALL DETERMINE THE AMOU NT OF EXPENDITURE WITH RESPECT TO THE EXEMPTED INCOME IF HE IS NOT SA TISFIED WITH THE CORRECTNESS OF THE CLAIM. HE SHALL DO THE SAME BY T HE METHOD PRESCRIBED AFTER HAVING REGARD TO THE ACCOUNTS OF T HE ASSESSEE. SUB SECTION 3 PROVIDES THAT THE PROVISIONS OF SUB-SECTI ON (2) SHALL ALSO APPLY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DO ES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. IN VIEW OF CLAUSES 2 AND 3 OF SECTION 14A OF THE ACT, NOTIFICATION NO. 45/2008, DATED LM. 03. 2008 WAS INTRODUCED WHICH HAS AMENDED THE INCOME-TAX RULES, 1962 AND INSERTED A NEW RULE I.E. RULE 8D WHICH GIVES THE ME THOD FOR DETERMINING AMOUNT OF EXPENDITURE IN RELATION TO IN COME NOT INCLUDIBLE IN TOTAL INCOME, IF ONE EXAMINES RULE 8D, ONE FINDS THAT THE METHOD FOR DETERMINING THE EXPENDITURE IN RELATION TO EXEMPT I NCOME HAS THREE COMPONENTS. 15 I. AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME W HICH DOES NOT FORM PART OF THE TOTAL INCOME. II. EXPENDITURE COMPUTED ON THE BASIS OF THE FO RMULA GIVEN THEREIN IN A CASE WHERE ; THE ASSESSEE INCURS EXPENDITURE BY WAY OF INTEREST WHICH IS NOT DIREC TLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. III. AN ARTIFICIAL FIGURE - HALF PERCENT OF TH E AVERAGE VALUE OF THE INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME. THE AGGREGATE OF THESE THREE COMPONENTS WHICH WOULD CONSTITUTE THE EXPENDITURE M RELATION TO EXEMPT INC OME AND IT IS THIS AMOUNT OF EXPENDITURE WHICH WOULD BE DISALL OWED UNDER SECTION 14A OF THE ACT. 7(5)(I) NOW COMING TO THE DISALLOWANCE MADE BY THE AO I FIND THAT NEITHER THE ASSESSEE HAS CLAIMED NOR THE AO HAS DIS ALLOWED ANY AMOUNT OF EXPENDITURE DIRECTLY RELATING 10 INCOME W HICH DOES NOT FORM PART OF THE TOTAL INCOME. I THEREFORE DO NOT O FFER MY COMMENTS THEREON. THE AO HAS DISALLOWED INTEREST OF RS. 2,01 ,675/- AS PER SECOND COMPONENT OF RULE 8D. I FIND THAT THE AO HAS PROCEEDED AT PARAGRAPH 9FVII) ON PAGE 25 OF THE ASSESSMENT ORDER ON THE PRESUMPTION OF UTILIZATION OF FUNDS FOR NON-BUSINES S PURPOSES OUT OF COMPOSITE FUNDS OF BORROWINGS AND OWN FUNDS. THE AO THEREFORE PRESUMED THAT INCOME FROM SUCH SHARES IS EXEMPT FRO M TAXATION AND THEREFORE EXPENDITURE UNDER THE.- INTEREST HEAD HAD BEEN INCURRED PARTLY FOR EARNING TAX FREE INCOME. THIS PRESUMPTIO N WAS PRECEDED BY THE CLAIM OF INTEREST EXPENSES OF RS. 25,60,521/ -, WHICH THE APPELLANT CLAIMS WAS INCURRED IN RELATION TO THE FU ND BORROWED FOR WORKING CAPITAL/INVENTORIES AND INVESTMENT WAS MADE OUT OF PROFITS EARNED BY THE COMPANY. THE APPELLANT CLAIMS THAT U HAD OWN FUNDS (SHARE CAPITAL AND RESERVES) AMOUNTING TO RS. 304.3 6 LAKHS AS ON 31 03.2010 AND RS.387.38 LAKHS AS ON 31.03.201 1 FOR MAKING THE INVESTMENTS IN SHARES AND NO PART OF BORROW ED FUNDS WAS UTILIZED IN MAKING INVESTMENTS. 7(5)(II) THE AO CANNOT STRAIGHT AWAY RESORT TO RULE 8D. SUB-SECTION 2 OF SECTION 14A OF THE ACT AND RULE 8D(1), BOTH REQU IRE THE AO TO FIRST CONSIDER THE BOOKS OF ACCOUNTS OF THE ASSESSEE BEFO RE RESORTING TO RULE 80. THE AO MUST ARRIVE AT AN OBJECTIVE SATISFA CTION THAT THE ASSESSEE'S CLAIM IS INCORRECT. IN THE CASE OF AUCHT EI PRODUCTS LTD IT WAS HELD BY THE TRIBUNAL IN PARA IS THAT DISALLOWAN CE UNDER SECTION 14A OF THE ACT IS CALLED FOR WHEN THE AO IS NOT SAT ISFIED WITH THE ASSESSEE'S CLAIM OF HAVING INCURRED NO EXPENDITURE OR SOME AMOUNT 16 OF EXPENDITURE IN RELATION TO EXEMPT INCOME. SATISF ACTION OF THE AO AS TO THE INCORRECT CLAIM MADE BY THE ASSESSEE IN T HIS REGARD IS SINE QUA NON FOR INVOKING THE APPLICABILITY OF RULE 8D. SUCH SATISFACTION CAN BE REACHED AND RECORDED ONLY WHEN THE CLAIM OF THE ASSESSEE IS VERIFIED. IF THE ASSESSEE PROVES BEFORE THE AO THAT IT INCURRED A PARTICULAR-EXPENDITURE IN RESPECT OF EARNING THE EX EMPT INCOME AND THE AO GETS SATISFIED, THEN THERE IS NO REQUIREMENT TO STILL PROCEED WITH THE COMPUTATION OF AMOUNT DISALLOWABLE AS PER RULE 8D. IN THE PRESENT CASE THE AO HAS MADE DISALLOWANCE OF INTERE ST ON PRESUMPTION WITHOUT ANY CONCRETE FINDING AS TO THE UTILIZATION OF BORROWED FUNDS FOR MAKING INVESTMENT IN SHARES. 7(5)(III} CAN AN ASSESSEE CAIRN THAT INVESTMENTS HA VE BEEN MADE ENTIRELY FROM OWNED FUNDS, WHICH ARE NON-INTEREST B EARING AND HENCE NO DISALLOWANCE UNDER SECTION 14A OF THE ACT IS JUSTIFIED? IS MERE PRESENCE OF OWN FUNDS IN EXCESS OF INVESTMENTS ON THE BALANCE SHEET ENOUGH OR DOES A DIRECT NEXUS BETWEEN INVESTMENTS AND INTEREST FREE FUNDS NEEDS TO BE PROVED? ON WHOM DOES THE ONUS OF PROOF LIE? THE SUPREME COURT IN MUNJAL SALES COR PORATION 298 ITR 298 HELD THAT WHERE THE OPENING BALANCE OF PROFITS OF THE FIRM EXCEEDS THE LOANS GIVEN TO SISTER CONCERNS, THEN IT IS PRESUMED THAT THE SAID LOANS ARE GIVEN OUT OF ITS OWN FUNDS. THE MADRAS HIGH COURT IN HOTEL SAVERA VS. CIT 239 ITR 796 (MAD), HELD THA T WHERE SUFFICIENT OWN FUNDS OF THE ASSESSEE WERE AVAILABLE FOR MAKING INVESTMENT, IT CANNOT BE ASSUMED THAT ANY PART OF I NVESTMENT PRODUCING THE TAX FREE INCOME MUST HAVE BEEN FROM B OR-OWED FUNDS UNLESS THERE IS EVIDENCE TO SHOW THAT ANY SPECIFIC INVESTMENT HAS BEEN MADE FROM BORROWED FUNDS. THE BOMBAY HIGH COUR T IN RELIANCE UTILITIES AND POWER LTD. 313 ITK 340 HELD THAT IF I NTEREST FREE FUNDS ARE AVAILABLE TO AN ASSESSEE SUFFICIENT TO MEET ITS INVESTMENTS AND AT THE SAME TIME THE ASSESSEE HAD RAISED A LOAN IT CAN BE PRESUMED THAI THE INVESTMENTS WERE FROM THE INTEREST FREE FU NDS AVAILABLE. SIMILAR VIEW WAS TAKEN IN MARUTI UDYOG LTD 92 ITD 1 19 , GODREJ INDUSTRIES LTD. (ITA NO. 1090 /MUM / 09) HERO CYCLE S LTD. 323 ITR 518, FAZE THREE EXPORTS LTD. V. ADD. CIT (ITA NO. 7 701/MUM/20(M, BUNGE AGRIBUSINESS (INDIA) (P) LTD. V. DY. CIT (201 1) 64 DTR 201 BRITANNIA INDUSTRIES 280 ITR 525, GODREJ AGROVET LT D. (ITA NO. 1629/MUM/09), ULTRAMARINE & PIGMENTS UD [TS-786-ITA T- 2011(MUM}] 7(5)(IV) IN VIEW OF THE ABOVE, THE AO HAVING FAILED TO RECORD SATISFACTION THAT BORROWED FUNDS WERE UTILIZED IN M AKING INVESTMENT IN SHARES, DISALLOWANCE OF RS. 2,01,675/- OUT OF IN TEREST IS NOT JUSTIFIED. THE DISALLOWANCE OF HALF PERCENT OF THE AVERAGE VALUE OF THE 17 INVESTMENT AT RS. 25,077/- HAS BEEN MADE IN ACCORDA NCE WITH THE RULE- 8D AND IS CONFIRMED. 12. AGGRIEVED, REVENUE HAS PREFERRED AN APPEAL BEFO RE THE TRIBUNAL AND PLACED HEAVY RELIANCE UPON THE ORDER OF THE ASSESSI NG OFFICER. NO SPECIFIC DEFECT IN CALCULATION IN THE ORDER OF THE CIT(A) WAS POIN TED OUT BY THE LD. DR WHEREAS LD. COUNSEL FOR THE ASSESSEE HAS CONTENDED THAT THE CIT(A) HAS EXAMINED THE ISSUE IN THE LIGHT OF PROVISIONS OF SECTION 14A REA D WITH RULE 8D OF THE I.T. RULES, THEREFORE, NO INTERFERENCE IS CALLED FOR IN THE ORDER OF THE CIT(A). 13. HAVING CAREFULLY EXAMINED THE ORDERS OF THE LOW ER AUTHORITIES IN THE LIGHT OF RIVAL SUBMISSIONS, WE FIND THAT CIT(A) HAS CALCU LATED THE DISALLOWANCE AS PER RULE 8D AND SECTION 14A. SINCE NO SPECIFIC DEFECT IN THE CALCULATION OF DISALLOWANCES WERE POINTED OUT BY THE LD. DR, WE FI ND NO INFIRMITY IN THE ORDER OF THE CIT(A). ACCORDINGLY, WE CONFIRM THE SAME. 14. IN THE RESULT, APPEAL OF THE REVENUE STANDS DIS MISSED. SD/- SD/- [A. K. GARODIA] [SUNIL KUMAR YADAV] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED 21/03/2016 AKS COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR ASSISTANT REGISTRAR