Income Tax Appellate Tribunal - Delhi
Dcit, New Delhi vs M/S. R.J. Corp Ltd., New Delhi on 25 August, 2022
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'F', NEW DELHI
Before Dr. B. R. R. Kumar, Accountant Member
Sh. Yogesh Kumar US, Judicial Member
ITA No. 4971/Del/2015: Asstt. Year2011-12
ITA No. 4972/Del/2015 : Asstt. Year2012-13
M/s RJ Corp Ltd. Vs. ACIT,
(formerly known as M/s Arctic Drinks Central Circle-7,
Ltd.), F-2/7, Okhla Industrial Area, New Delhi
Phase-I, New Delhi-110020
(APPELLANT) (RESPONDENT)
PAN No. AAACA2573R
ITA No. 5310/Del/2015 : Asstt. Year2011-12
ITA No. 5311/Del/2015 : Asstt. Year2012-13
DCIT, Vs. M/s RJ Corp Ltd.
Central Circle-7, (formerly known as M/s Arctic Drinks
New Delhi Ltd.), F-2/7, Okhla Industrial Area,
Phase-I, New Delhi-110020
(APPELLANT) (RESPONDENT)
PAN No. AAACA2573R
Assessee by : Sh. Rajat Jain, CA&
Sh. Akshat Jain, CA
Revenue by : Sh. T. Kipgen, CIT DR
Date of Hearing:01.08.2022 Date of Pronouncement: 25.08.2022
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.
2 ITA Nos. 4971, 4972, 5310 & 5311/Del/2015RJ Corp Ltd.
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 14A of the I.T. Act, 1961.
3. On the facts and circumstances of the case, the CIT(A) has erred in ignoring the prescribed method under rule 8D for calculating the disallowance u/s 14Aof I.T. Act, 1961, once it is established that claim of the assessee is not correct.
4. On the facts and circumstances of the case, the CIT(A) has erred in ignoring the fact that section 45(2) is applicable on version of investment to stock in trade of Rs. 1,79,14,46,369/- which was on 01.04.2010 as per submission of the assessee. Thus, the ld. CIT(A) has failed to enhance that capital gain arising from conversion of capital asset into stock in trade as per section 45(2) of the Ac 1961."
ITA No. 4971/Del/2015 : A.Y. 2011-12 (Assessee Appeal)2. Following grounds have been raised by the assessee:
"1. That on the facts and in circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) has erred by not appreciating the facts that loan given to M/s Arctic International (P) Ltd., Mauritius (AE) was out of the shareholders fund and not out of any interest bearing borrowed fund.3 ITA Nos. 4971, 4972, 5310 & 5311/Del/2015
RJ Corp Ltd.
1.1 That the finding of the Commissioner of Income Tax (Appeals) on disallowance of Rs.1,83,35,019/- are self contradictory and bad in law.
2. That on the facts and in circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) has erred by not appreciating the facts of the case that the said loan was given for the direct/indirect participation, control and management of the AE's and no income accrue or arise to assessee on notional basis.
3. That on the facts and in circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) has erred in upholding the disallowance of Rs.89,32,232/- u/s 14A of the Income Tax Act read with clause (iii) Rule 8D of the Income Tax Rules, 1962 made by the Ld. Assessing Officer.
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 recording 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.
4. That on the facts and in circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) has erred by not appreciating 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."
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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 Rs.6,71,96,859/- by the ld. CIT(A) and by the assessee for upholding disallowance of Rs.89,32,232/-. The ld. DR submitted his arguments in writing which are as under:
"In t h e ab ov e c as e , it is h u m b l y su b m i t t e d t h at t h e f ol l ow in g su b m i s si on m ay k i n d l y b e c on si d e r ed wit h r eg a rd t o S e ct i on 1 4A o f I. T . A ct .
S u b m i s si on on S ect i on 1 4A a. S e ct i on 1 4A o f t h e I n c om e- t a x A ct , 1 9 6 1 ( 'A ct ') wa s in t o t h e In c om e Ta x A c t , 1 9 6 1 vid e F in an c e A ct 2 0 0 1 , wit h r et r os p ect iv e ap p li ca t i on f r om 1 .4 .1 9 6 2 . It p r o vid e s f o r d i s all ow an c e o f e xp en d it u r e in r el at i on t o in co m e n ot "i n cl u d ib l e " in t ot al in c o m e. Ov e r a p e ri od of t i m e, t h e r e h av e b e en s ev e r al c as e s d e cid ed on t h i s is su e b y va ri ou s H ig h C ou rt s.
CBD T i ss u e d a C i rcu lar n o . 5/ 2 0 1 4 o n 1 1 t h F eb ru a r y 2 0 1 4 , cla ri f yin g , in t e r alia , a s f oll o ws :5 ITA Nos. 4971, 4972, 5310 & 5311/Del/2015
RJ Corp Ltd.
"A c on t r ov e r s y h a s a ri s en in c e rt ain c as e s as t o wh et h e r d i sall o wan c e can b e m a d e b y in vo k in g s e ct i on 1 4A o f t h e A ct e v en i n t h o s e ca s e s wh er e n o in c o m e h as b e en e a rn ed b y an a s s e ss e e w h ich h a s b e en cla im ed a s ex e m p t d u ri n g t h e fin a n ci al- y ea r. "
3. It i s p e rt i n en t t o m en t i on t h at s e ct ion 1 4A o f th e A ct w as in t r o d u c e d b y t h e F in an c e A c t , 2 0 0 1 wit h r et r o sp e ct i v e ef f e ct f r om 0 1 . 0 4 .1 9 6 2 . Th e p u rp o s e f o r in t r od u ct i on o f s e ct i on 1 4A wi t h r et r osp ec t i v e ef f e ct sin c e in c ep t i on o f t h e A ct wa s cl a rif i ed vi d e Ci r cu la r No . 1 4 o f 2 0 0 1 a s u n d e r:
"C e rt ain in c om e s a r e n ot in clu d i b l e wh il e c om p u t in g t h e t ot al in c om e , a s t h e s e a r e e x e m p t u n d e r va ri ou s p r o vi si on s of t h e A ct . T h e r e h a v e b e en ca s e s wh e r e d ed u ct ion s h av e b e en cla i m e d in r e sp e ct o f su ch e x em p t in c om e . Th is in e ff e ct m ean s t h at t h e t ax in c en t i v e g iv e n b y wa y o f e x em p t i on s t o c e rt a in cat e g o r i es o f in c om e i s b ein g u s e d t o r ed u c e al s o t h e t a x p a ya b l e on t h e n on - ex e m p t i n c om e b y d eb it in g t h e exp en s e s in cu r r ed t o ea rn t h e e x em p t in c om e ag ain st t a xa b l e in c om e . Th i s i s ag ain st t h e b a sic p rin cip l es o f t a xat i o n wh er e b y onl y t h e n et in c om e , i. e. , g r o ss in c om e m in u s the e xp en d it u r e, is t a x ed . On the s am e an al og y, t h e ex e m p t ion i s al s o in r e sp e ct o f t h e n et in c o m e . Ex p en s e s in cu r r ed can b e al l ow e d on l y t o t h e e xt en t t h e y a r e r el at ab l e t o t h e ea rn in g o f t ax ab l e i n c om e ." Th u s , le g i s lat i v e in t en t i s t o al lo w on l y t h at e xp en d i t u r e w h i ch is r el at a b l e t o ea r n in g of in c om e an d it t h e r ef o r e f oll ow s t h at t h e e xp en s es wh i ch a r e r el at ab l e t o ea rn i n g o f e x em p t in c om e h a v e t o b e c on s id e r ed f o r d is al lo wan c e, i r r esp e ct i v e ' o f t h e f act wh et h e r an y su c h in c om e h a s b e en e a rn ed d u rin g t h e f in an ci al- y ea r or n ot .
4. The ab o v e p os it io n is fu rt h e r cl ari fi e d by the u s ag e of t e rm 'in clu d i b l e ' in t h e H ea d in g t o s e ct i on 1 4 A o f t h e A ct an d al s o t h e H ea d in g t o R u l e 8 D of I . T. R u l e s , 1 9 6 2 wh i ch in d i cat e s t h at it is n ot n e c e ss a ry t h at e x em p t in c om e sh ou l d n e c e s sa ril y be i n clu d e d in a p a rt i cu la r ye a r' s in c om e , f o r d i sa ll ow an c e t o b e t ri g g e r ed . A ls o , s e ct i on 1 4A of t h e A ct d o e s n ot u s e t h e w o rd " in c om e o f t h e y ea r " h u t "in c om e u n d e r t h e A ct ". T h i s a ls o in d i ca t es t h a t f o r in v ok in g d i s all ow an c e u n d e r s ec t i on 1 4A , i t i s n ot m a t er ial t h at a s s es s e e sh ou ld h av e e a rn ed su ch e x em p t in c om e d u r i n g t h e f in an cia l y ea r u n d e r c on sid e r at i o n .
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5. Th e ab o v e p o sit i on is fu rt h e r su b st an t i at ed b y t h e lan g u ag e u s ed in R u l e 8 D ( 2) ( ii) & 8 D ( 2) ( iii) o f I. T . R u l e s ...... ...... ...... ...... . .
6. Th u s, in lig h t o f ab ov e , C en t r al B oa rd o f D i r e ct T ax e s , in e x e rci s e of it s p ow e r s u n d e r s e ct i on 1 1 9 of t h e A ct h e r eb y cla ri fi e s t h at R u l e 8 D r ea d wi t h s ec t i on 1 4A of the A ct p r ov id e s fo r d i sal lo w an c e of the e xp en d i t u r e e v en w h e r e t a xp ay e r in a p art icu la r y e a r h a s n ot ea rn e d an y e x em p t in c om e . "
Th e i ssu e t h e r e f o r e , is if s e ct i on 1 4 A ( 1) w ou l d st an d at t ra ct e d e v en i f su ch in c o m e, i . e. , i n c om e n ot in clu d i b l e in t h e t otal in c om e , is n ot a ct u a lly ea rn e d , su b j ec t to e xp en d it u r e r el at ab l e t o su ch in c o m e h a vin g b e en in cu r r ed . Th e C BD T Ci r cu la r 5/ 2 0 1 4 , a ft e r ex p la in ing t h e rat i on al e o f t h e p r o vi si on o f s e ct i on 1 4A ( wit h r e f e r en c e t o Ci rcu la r 1 4 o f 2 0 0 1) , i . e ., t o cu rb t h e p ra ct i c e o f r ed u cin g t h e t a x li ab ili t y on t a xab le in c o m e ( i . e. , in c om e f o rm in g p a r t of t h e t ot al in c om e) b y cl aim ing e xp e n d it u r e in cu r r e d in e a rn in g t a x- ex e m p t in c om e ag a in st t ax ab l e in c o m e, g o e s on t o st at e t h at t h e l eg i sl at i v e in t e n t i s t h at t h e e x p en d it u r e r ela t ab l e t o ea rn in g su ch in c om e sh a ll h a ve t o b e co n s id e r ed f o r d i sal l owa n c e. In t h at ev en t i . e ., e xp en d i t u r e r e lat in g t o ea rn in g t a x- e x em p t in c om e h avin g b e en i n cu r r ed , it w ou l d b e c om e i r r el e van t if t h e ex e m p t in c om e h as a ct u ally m at e r ializ e d o r n ot , s o t h at t h e d i sall o wan c e o f t h e s aid e xp en dit u r e u / s . 1 4A w ou ld f oll ow . Th e sa m e t h e r ef o r e i s on ly a c o n t in u at i on of Ci rc u l ar 1 4 o f 2 0 0 1 , t ak in g t h e p r em i s e o f s e ct io n 1 4 A t o it s l og i ca l con c lu s io n . Th e p u rp o s e o f t h e s e Ci r cu l a rs an d t h e l eg i sl at i ve in t e n t is t o app ly t h e b asi c p rin cip l e o f t ax at i on , i. e ., t h a t it is on l y t h e n et in c om e - t a xab l e o r n o n - t ax ab l e , i. e . , n et of all e xp en d i t u r e in cu r r ed fo r ea rn in g t h e s am e , t h at c ou ld b e su b j e ct t o t a x o r , a s t h e ca s e m a y b e , e x em p t f r om t ax .
Th e l at e r Ci r cu la r , wh i ch i s in c on s on a n c e wit h t h e M em o r an d u m ex p lain in g t h e p r o vi si on s of F i n an c e Bill , 2 0 0 1 ( i n t r od u cin g s e ct i on 1 4A ) a s w ell as t h e N ot e s t o t h e Cl a u s e s p r es en t ed al on g wit h t h e sai d Bil l, h as b e en n ot e d wit h a p p r ov al b y t h e H on 'b l e S u p r em e Co u r t in C I T v . Wal f o rt S h a r e & S t o ck B ro k e rs ( P .) L t d , [ 2 0 1 0 ] 1 9 2 Ta x m an 2 1 1/ 3 2 6 I TR 1 ( S C) , h old in g as u n d e r:7 ITA Nos. 4971, 4972, 5310 & 5311/Del/2015
RJ Corp Ltd.
"Th e in s er t i on o f s e ct i on 1 4A wit h r e t r o sp e ct i v e ef f e ct i s t h e s e ri ou s at t em p t on t h e p a r t of P ar lia m en t n ot t o a ll ow d ed u ct i on in r e sp e ct o f an y e xp en d i t u r e in c u r r ed b y t h e as s e s s e e in r el at i on t o i n c om e , wh ich d o e s n ot f o rm p a rt o f t h e t ot al in c om e u n d e r t h e A ct a g ain st t h e t a xab l e in c om e ( s e e C i rcu la r N o. 1 4 of 2 0 0 1 d a t ed N o v em b er 2 2 ,2 0 0 1) . In ot h e r wo r d s , s e ct i on 1 4 A cla ri fi e s t h at ex p en s es in cu r r ed c an b e all o w ed on ly t o t h e e xt en t t h ey a r e r ela t ab l e t o t h e e a rn in g o f t a xa b le in c om e . In m an y ca s e s t h e n a t u r e of e xp en s e s i n cu r r ed b y t h e as s e ss e e m a y b e r ela t ab l e p a rt ly t o t h e ex e m p t in co m e a n d p a r t ly t o t h e t ax ab l e in c o m e. In t h e a b s en c e o f s ec t i on 1 4A , t h e e xp en d i t u r e in cu r r ed in r e sp e ct o f e x em p t in c om e wa s b ei n g cl aim e d ag ain st t a xab l e i n c o m e.
"Th e m an d a t e o f s e ct i on 1 4 A is cl e a r. It d e si r e s t o cu rb t h e p ra ct i c e t o cla im d ed u ct i on of ex p en s e s in cu r r ed in r elat io n to e x em p t in co m e ag ain st t ax ab l e in c om e an d at t h e sa m e t im e av ail of t h e t ax in c en t iv e by w ay of e x em p t i on of ex e m p t in c om e wit h ou t m ak in g an y ap p o rt i on m en t of e xp en s es in c u r r e d in r ela t i on t o ex em p t in c om e . Th e b as ic r e as on f o r in s e rt i on o f s ec t i on 1 4 A is t h at ce rt a in in c om e s ar e n ot in clu d ib l e wh il e c o m p u t in g t ot al in c o m e a s t h e s e ar e e x em p t u n d e r c e rt ain p r o vi si on s o f t h e A ct . "
Th e i s su e , t h u s , c on sid e r ed in p e rs p ec t i v e, i s n ot i f t h e in c o m e n ot f o rm in g t h e p a rt of t h e t ot al in c om e ( t h e t a x- ex em p t in c om e) i s ea r n ed o r n ot , b u t if e xp en d it u r e r e la t ab l e to su ch in c om e has b e en in c u r r ed . If su ch e xp en d i t u r e st a n d s i n cu r r ed , s e ct i on 1 4 A ( 1) b e co m e s ap p l ic ab l e.
Th e d e ci si on b y t h e A p e x C ou rt in t h e c as e o f CI T v . Wa lf o r t S h a r e & S t o ck Br o k er s ( P .) Lt d . ( s u p r a) st an d s f oll o w ed in G od r ej & B o y c e M fg . C o . Lt d . v. D y. CI T [ 2 0 1 7] 8 1 t a xm an n . c om 1 1 1 ( S C) wh er e t h e H on 'b l e S u p r e m e Co u r t , wh il e c on si d e rin g wh et h e r d e d u ct i on o f e xp end i t u r e in cu r r ed in ea rn in g d i vid en d in c om e wh i ch i s n ot i n clu d ib l e in t h e t ot al in c om e o f t h e A s s es s e e b y v ir t u e o f t h e p r ovi si on s o f S e ct i on 1 0 (3 3) of t h e In c o m e T ax A ct , 1 9 6 1 a s in f o r c e d u rin g t h e A s s e ss m en t Y ea r i.e . 2 0 0 2 - 2 0 0 3, wa s ad m i s sib l e o r o t h e r wis e , m ad e t h e f oll o win g o b se r va t i on s :
"3 2 . A b r i ef r e f e r en c e t o t h e d ec is io n o f t h i s C ou rt in Wa lf o rt S h a r e an d S t o ck B r ok e r s ( P .) Lt d . ( su p r a) m a y n ow b e m a d e, if on l y , t o m a k e t h e 8 ITA Nos. 4971, 4972, 5310 & 5311/Del/2015 RJ Corp Ltd.
d is cu s si on c om p l et e . In Wal f o rt S h ar e an d S t o ck Br ok er s ( P .) Lt d .( su p ra ) t h e i s s u e in v o lv ed wa s: " wh et h e r in a divi d en d st rip p in g t ra n s ac t i on t h e l os s on s al e o f u n it s c o u ld b e c on sid e r ed a s e xp en d it u r e in r elat io n t o e a rn i n g of d i vid en d in c o m e ex e m p t u nd e r S e ct i on 1 0 ( 3 3) , d is all ow ab l e u n d e r S e ct i on 1 4A o f t h e A ct ? "
"3 3 . Wh il e an sw e rin g t h e s aid q u e st i on t h is C ou rt c on si d e r ed t h e ob j e ct o f in s e rt i on o f S e ct i on 1 4A in t h e I n c o m e T ax A c t b y F in a n c e A ct , 2 0 0 1 , d et ail s of w h i ch h a v e al r ead y b e en n ot i c ed . N ot ic ing t h e ob j e ct s an d r ea s on s b eh in d in t r od u ct i on of S e ct i on 1 4A of t h e A ct t h i s C ou rt h e ld t h at :
" Ex p en s e s all o w ed c an on l y b e in r e sp e c t of ea rn in g o f t a xa b le in c om e . "
"In p a r ag rap h 1 7, t h is C ou rt w en t on t o ob s er v e t h at :
"Th e r e f o r e, on e n e ed s to r ead the wo r d s " ex p en d it u re in cu r r ed " in s ec t i on 1 4 A in t h e c on t e xt of t h e s ch e m e of t h e A ct an d , i f s o re ad , it i s cl ea r t h a t it d is all ow s c er t ain e xp en d it u r e in cu r r ed to ea rn ex e m p t in c om e f r o m b e in g d ed u ct e d f r om o t h e r in c o m e wh i ch is in c lu d ib l e in t h e "t ot al in c om e " f o r t h e p u rp o s e o f ch a rg ea b ilit y t o t a x. "
"Th e v i ew s e xp r e s s ed in Wa lf o rt S h a r e an d S t o ck B r ok e r s ( P .) Lt d . ( su p r a) , in ou r c on sid e r ed op in i on , y e t ag ain m il itat e a g ain s t t h e p l ea u rg ed on b eh a lf of t h e A ss e s s e e ."
Th e e xp en d it u r e i s in cu r r ed t o p r od u c e o r g en e rat e or in an t i cip a t i on o f, in c om e , wh et h e r t a xab le o r n on - t a xab l e . I n fa ct , t h e c la s si fi cat i on a s t o t ax st at u s ( i . e ., t a xab le o r n on - t a xa b le ) h a s n ot h in g t o d o wit h t h e in c om e g en e r at in g p r o c es s; an in c o m e b e in g , as a m at t e r of fi sc al in c en t i v e , b ein g g r an t ed t a x e x em p t st at u s u n d e r t h e A ct , f o r t h e t im e b ei n g . Th e fa ct o f h avin g in cu rr e d ex p en d it u r e f o r e ar n in g in c o m e - t a x- e x em p t ( o r n on - ex e m p t ) , wh i ch i s la rg el y a q u e st i on of f act , w ou ld t h u s r em ain , an d n ot u n d e rg o an y ch an g e , i r r e sp e ct i v e of wh et h e r it has r e su lt ed in an y in c o m e ( wh et h e r t a x- e x em p t o r n on - ex em p t ) . Th e p rin ci p le is w ell- s et t l ed , r ep r e s en t in g a fu n d am e n t al c on c ep t o f t a x at i on , i . e. , t h e all ow ab il it y (or o t h e rw is e ) of an e x p en d it u r e wo u ld n ot d e p en d u p on wh et h e r it h a s in fa ct r e su lt e d in an in c om e , i. e . , p o sit i v e i n c om e , wh i ch i s in an y c a s e a m at t e r su b s e q u en t , an d t h at t h e m e r e fa ct t h at e xp en d it u r e 9 ITA Nos. 4971, 4972, 5310 & 5311/Del/2015 RJ Corp Ltd.
st an d s in cu r r ed for the p u rp os e is su f fi ci en t for it s a d m i ss ib ili t y , as e xp la in ed b y t h e A p e x C ou rt in C IT v. R aj en d r a P ra sad M o od y [ 1 9 7 8] 1 1 5 I TR 5 1 9 ( S C) .
Th e A p ex C ou rt w as in t h at ca s e ex am in in g t h e t ru e i n t e rp r et at i on o f s ec t i on 5 7 ( i ii) , wh i ch e m p l o y ed t h e w o rd s 'a n y exp en d it u r e ( n ot b e in g in t h e n at u r e o f c ap it a l exp e n d it u r e) lai d ou t o r ex p en d ed f o r t h e p u rp o s e o f m ak in g o r ea rn i n g su ch i n c o m e' , t h e q u es t i on o f la w r ais e d b e f o r e it r ea d in g a s u n d e r:
"W h e t h e r, on t h e f a ct s an d in t h e ci r cu m st an c es of t h e ca s e , in t e r e st o n m on e y b or r o w ed f o r i n v e st m e n t in sh ar e s wh i ch h ad no t yi el d ed an y d ivid e n d is a d m i s sib le u n d e r s . 5 7 ( iii) ? "
Th e r e v en u e' s c on t e n t ion in t h e a b ov e c as e wa s t h at t h e m a k in g o r e ar n in g o f in c om e wa s a sin e q u a n on t o t h e a d m i ss ib ili t y of t h e e xp en d i t u r e u / s . 5 7 ( iii ) . A n d , t h e r ef o r e , wh e r e n o in c o m e r e su lt ed , n o e xp e n d it u r e w ou ld b e d ed u ct ib l e . Th e A p e x C ou rt r ej ec t ed t h e r ev en u e ' s con t e n t ion , an d h e ld t h at t o b r in g a c as e wit h in t h e s ec t i on , it is n ot n e c es s a ry t h at an y in c om e sh ou ld in fa ct h av e b ee n ea rn ed as a r e su lt o f t h e e xp en d i t u r e an d t h e r e f o r e, t h e in t er e st p aid on m on e y b o r r ow e d f or in v es t m en t in sh a r es , wh i ch h a d n ot yi eld ed an y d i vid en d , w as ad m is si b l e u n d e r s e ct i on 5 7 ( ii i) . Th e rat i o d ec id en d i o f t h e j u d g m en t o f H on ' b l e S u p re m e Co u r t in CI T v . R aj en d ra P ra sad M o od y ( su p ra) can be a p p li e d to sa y, by the sa m e an al og y, that the e xp en d i t u r e in cu r r e d to e a rn an ex e m p t in c o m e is su b j e ct t o it s ad m i s sib i lit y in ac c o rd an c e wi t h t h e p ro vi si on s o f t h e In c om e Ta x A c t , 1 9 6 1 in clu d in g t h os e o f s e ct i o n 1 4A i rr e sp e ct iv e o f wh et h e r t h e r e is a re c ei p t o r in c o m e o r n o t d u rin g t h e y e ar u n d e r c on s id e rat i on .
In su m , t h e p rin ci p le t h at it i s t h e n e t in c om e , i . e. , n et o f e xp en d it u r e r ela t ab l e t h er e t o, w h ich i s su b j e ct t o t ax an d , c o rr es p on d i n g ly , n ot lia b l e t o t ax , i. e ., wh e r e it d o e s n ot f o rm p a rt o f t h e t ot al in c o m e, is w ell e st a b li sh ed . It f ol l ow s , t h e r ef o r e , t h a t on c e an inc o m e i s liab l e ( o r n ot liab l e) t o t a x, all e xp en d i t u r e r e lat ab l e t h e r et o i s t o b e r e ck on ed , an d it m at t e r s li t t l e t h at t h e sa id e xp en d i t u re h as in d e ed r e su lt e d in a p osi t iv e in c om e . Th is p rin ci p le , i . e. , t o e x clu d e all e xp en di t u r e r el at ab l e t o t h e ea rn in g of i n c o m e n ot f o rm in g p a rt o f t h e t ot al in com e , i r r e sp e ct i v e of i t s 10 ITA Nos. 4971, 4972, 5310 & 5311/Del/2015 RJ Corp Ltd.
q u an t u m , h as al so b e en n ot e d wit h ap p r o val b y t h e Hon 'b le A p ex C ou rt in t h e ca s e o f M ax o p p In v e st m e n t L t d . re p o rt ed in [ 2 0 18 ] 9 1 t a xm an n . c om 1 5 4 h el d vi d e o rd e r d at ed 1 2 . 0 2 .2 0 1 8 H on 'b l e S u p r em e C ou rt h as o b s e r v ed in p ar a 3 an d 3 2 t h e f ol lo win g :
"3 . Th ou g h , it i s cl e ar f ro m t h e p la in la n g u ag e o f t h e a f o r e sai d p ro vi si on t h at n o d ed u ct i on i s t o b e a ll ow e d in r e sp e ct o f e xp en d i t u r e in cu r r ed b y t h e a s s es s e e in r ela t ion t o in c om e wh ic h d o e s n ot f or m p a r t of t h e t ot a l in c om e u n d e r t h e A ct , t h e e f f ec t wh e r e of i s t h a t i f c e rt ain in c om e is ea rn e d wh i ch i s n o t t o b e in c lu d ed w h ile c o m p u t in g t ot a l in c o m e, an y e xp en d i t u r e in cu r r e d t o ea rn t h a t in c om e i s al s o n ot a llo w ed a s a d ed u ct i on . I t is w el l k n o wn t h at t a x is lev iab l e on t h e n e t in c om e . N et in c om e i s a r riv e d at aft e r d e d u c t in g t h e exp en d it u re in cu rr ed in ea rn in g t h at in c o m e. Th e r e f o r e, f r o m t h e g r os s in c o m e, ex p en d it u r e in cu r r ed t o ea rn t h at in c om e i s allo w ed a s a d ed u ct i on an d t h ere af t er t ax i s l evi e d on t h e n e t in c om e . Th e p u rp o s e b eh in d S ec t i on 1 4 A of t h e A ct , b y n ot p e r m it t in g d ed u ct i o n of t h e e xp en d it u r e in cu r r ed in r elat i on t o in c om e , wh i ch d o e s n ot f o r m p a rt o f t ot a l in c o m e , i s t o en su r e t h at t h e a s s es s e e d o e s n ot g e t d ou b l e b en e fit . On c e a p a rt i cu l a r in c om e it s el f i s n ot t o b e in clu d ed in t h e t ot al in c o m e an d i s e x em p t e d f r om t ax , t h e r e is n o r ea s on a b l e b a si s f o r g iv in g b en ef it o f d e d u ct i on of t h e ex p en d it u r e in cu r r ed in e a rn in g su ch an in c om e . F o r e xa m p l e , inc o m e i n t h e f o rm of d ivid e n d ea rn e d on sh a r e s h el d in a c o m p an y i s n ot t a xab l e . I f a p e r s on t ak e s in t e r e st b ea r in g l oan fr o m t h e Ban k an d in v est s t h at l oan in sh a r e s/ st o ck s, d i vi d en d e a rn ed t h e r e f ro m is n ot t ax ab le . N o rm all y, in t e r e st p a id on t h e l oan w ou l d b e e xp en d i t u r e in cu r r ed f o r e a rn in g d ivid e n d in c om e . S u ch an i n t e r est w ou l d n ot h e all ow ed a s d ed u ct i on a s it is an e xp en d i t u r e in cu r r ed i n r elat i o n t o d iv id en d in c o m e wh i ch it s el f is s p a r ed f r o m t ax n et . Th e r e i s n o q u a r r el u p t o t hi s ext en t . "
"3 2 . In t h e f i rst in s t an c e , it n e ed s t o b e r e c og n iz ed t h at a s p e r s e ct i on 1 4A ( 1 ) o f t h e A c t , d ed u ct i on o f t h at e xp en d i t u r e is n ot t o b e all o w ed wh i ch h as b e en in c u r r ed b y t h e a s s es s e e "in re lat i on t o in c om e wh ic h d o e s n ot f o rm p a rt o f t h e t ot al in c om e u n d e r t h i s A ct ". A xi om at i cal ly , it is t h at ex p en d it u r e alo n e wh i ch h as b e en i n cu r r ed in r el at i on t o t h e in c om e wh ic h is ( n ot ) in clu d ib l e in t ot al in c om e that h as to be d is all ow e d . I f an ex p en d it u r e in cu r r e d h as n o c au s al c on n e ct i on wi t h t h e 11 ITA Nos. 4971, 4972, 5310 & 5311/Del/2015 RJ Corp Ltd.
e x em p t e d in c o m e, t h en su ch an exp e n d it u r e w ou l d ob vi ou s ly b e t r ea t e d as n ot r e lat ed t o t h e in c o m e t h at i s e x em p t ed f ro m t a x, an d su ch e xp en d i t u r e w ou ld be a ll ow e d as b u sin e s s e xp en d it u re . To put it d if f e r en t l y, su ch e x p en d it u r e w ou ld t h en b e c on s id er ed a s in cu r r ed in r e sp e ct o f ot h e r in c om e wh ich i s t o b e t r eat e d as p a rt of t h e t ot a l in c om e . "
Th e Ho n ' b l e S u p r e m e C ou rt , in t h e j u d g m en t in t h e ca s e of Ma x op p In v e st m en t Lt d . r e p o rt ed in [ 2 0 1 8] 9 1 t ax m an n . c om 15 4 ( S C) , h as al s o af fi rm ed t h e v i ew t h at t h e d o m in an t p u rp o s e fo r wh i ch in v est m en t in t o sh a r e s i s m a d e b y as s e ss e e m ay n ot b e r el e va n t as se ct io n 1 4A ap p li e s ir r e sp e ct i v e o f wh e t h e r s h a r e s ar e h el d t o g ain c ont r ol o r a s st o ck - i n - t ra d e an d fu rt h e r in t e rp r et e d t h e d om in an t p u rp o s e t es t an d u p h e ld t h e t h e o r y o f ap p o rt io n m en t , in f o ll owi n g w o rd s:
"3 3 ...... ...... . Th e en t i r e d i sp u t e i s a s t o wh at in t e rp r et at i on is t o b e g i v en t o t h e w o rd s in r el a t ion t o in t h e g iv en s ce n a ri o , viz . wh e r e t h e d iv id en d in c om e on the sh ar e s is e a rn ed , t h ou g h the d om in an t p u rp o s e for su b s cr ib in g in t h o s e sh a r e s o f t h e in v e st e e c om p an y w as n ot t o ea rn d ivid e n d . W e h a v e t wo s c en a ri os in t h e s e s et s of app e al s. In on e g r ou p o f ca s e s t h e m ain p u rp o s e f o r in v es t i n g in sh a r e s wa s t o g ain c on t r ol ov e r t h e in v e st e e c om p an y. O t h e r ca s e s a r e t h os e wh e r e t h e sh ar e s o f in v e st e e c om p an y w e r e h e ld b y t h e as s e ss e e a s st o ck - in - t r ad e ( i . e . as a b u sin e s s a ct i vit y) an d n o t as i n v e st m en t t o e ar n d iv i d en d s . In t h i s c on t e xt , it is to be e xa m in ed as to wh et h e r the e x pen d it u r e wa s in cu r r ed , i n r e sp e ct iv e s c en a ri o s , in r e lat i on t o th e d i vid e n d in c om e or n ot .
"3 4 . Ha vin g cl a ri fi e d t h e a f o r es aid p os i t ion , t h e fi r st an d f o r em o st i s su e t h at f all s f o r c on sid e rat i on is a s t o wh et h e r t h e d om in an t p u rp o s e t es t , wh i ch is p r es s ed in t o s e rv ic e by the a s s e ss e e w ou ld ap p l y wh i l e in t e r p r e t in g S e ct i on 1 4A o f t h e A ct o r w e h av e t o g o b y t h e t h e o ry o f ap p o rt i on m en t . W e a r e o f t h e op in i o n t h at t h e d om in a n t p u rp o s e f o r wh i ch t h e in v est m e n t in t o sh a r es i s m ad e b y an as s es s e e m a y n ot b e r el e van t . N o d ou b t , t h e as s e s s ee li k e Ma x op p In v est m en t Li m it ed m ay h av e m ad e t h e in v e st m en t in o rd e r t o g ain c on t r ol of t h e in v e st e e c om p an y . H ow e v e r, t h at d o e s n ot ap p e a r t o b e a r el ev an t fa ct o r in 12 ITA Nos. 4971, 4972, 5310 & 5311/Del/2015 RJ Corp Ltd.
d et e r m in in g t h e i s s u e at h an d . F a ct r e m ain s t h at such d iv id e n d in c o m e is n on - t ax ab l e . In t h is s c en a ri o , if e x p en d it u r e i s in cu r re d on ea rn in g t h e d iv id en d i n c o m e , t h a t m u ch o f t h e e xp en d i t u r e wh i ch i s at t r ib u t ab l e t o t h e d i vi d e n d in c om e h as t o b e d is a llo w ed an d c ann ot b e t r e at ed a s b u sin e s s ex p en d it u r e . K e ep in g t h i s ob j e ct i v e b eh in d S e ct i on 1 4 A o f t h e A ct in m in d , t h e s aid p r o vi si on h a s t o b e in t e rp r et ed , p a rt i cu l a rly , t h e wo r d 'in r el at i on t o t h e in c om e ' t h at d o e s n ot f o rm p a rt of t ot al in c om e . Co n si d e r ed in t h i s h u e , t h e p rin cip l e of ap p o rt i on m en t o f e xp en s e s c om e s in t o p l ay a s t h at is t h e p ri n c ip le wh i ch is en g rain ed in S e ct i on 1 4A of t h e A ct . Th i s i s s o h eld in W al f or t S h a r e & S t oc k Br o k er s ( P .) Lt d ., r el e van t p a s s ag e wh er e o f is a lr ea d y r ep r od u c ed a b o v e, fo r t h e sak e o f c on t in u it y o f d is cu s si on , w e wo u ld lik e t o q u ot e t h e f oll o win g f ew lin e s t h e r ef r o m .
"Th e n ext p h ra s e i s , " in r elat i on t o in c om e wh i ch do e s n o t f o rm p a rt o f t ot al in c o m e u n d e r t h e A c t " . It m e an s t h at i f an in c om e d o e s n ot f o rm p a rt o f t ot al in co m e , t h en t h e r e lat ed e xp en d it u r e is ou t sid e t h e am b it o f t h e a p p li ca b ili t y o f s e ct i on 1 4 A .
...... ...... ...... ...... ...... ...... ... ...... ...... ...... ...... ...... . .
Th e t h e o r y o f ap p o rt i on m en t o f e xp en d it u r e b et w e en t a x ab l e an d n on - t ax ab l e h a s , in p ri n cip l e , b e en n ow w id en ed u n d e r s ec t i on 1 4A ."
"3 5 . Th e D e lh i Hi g h C ou rt , t h e r e f o r e, c o r r e ct ly ob se rv ed t h at p ri o r t o in t r o d u c t i on of S e c t ion 1 4A o f t h e A ct , t h e la w w as t h at wh en an as s e ss e e h a d a c om p o sit e an d in d i vi sib l e b u sin e ss wh i ch h a d el em e n t s o f b ot h t a xab l e an d n on - t ax ab l e in c o m e, t h e en t i r e e xp en d it u r e in r e sp e ct o f s aid b u s in e ss w as d ed u ct ib l e an d , in su ch a c a s e, t h e p ri n c ip l e o f ap p o rt i on m en t o f t h e e xp en d it u r e r el at i n g t o t h e n on - t a xab le in c o m e d id n ot ap p ly . T h e p r i n cip l e o f ap p o rt i on m en t wa s m a d e a vail ab l e on l y wh er e t h e b u sin e ss wa s d i vi sib l e . It i s t o fin d a cu r e t o t h e af o r e sai d p r ob l em t h at t h e L eg i sl at u r e h a s n o t on l y in se r t ed S e ct i on 1 4 A b y t h e F in an c e ( A m en d m e n t ) A ct , 2 0 0 1 b u t als o m ad e it r et ro sp e ct i v e, i. e . , 1 9 6 2 wh en t h e In c om e Ta x A ct it s el f cam e in t o f o r c e. Th e af o r e sai d in t e n t w as e xp r e s s e d lo u d l y an d cl e a rl y in t h e M em ora n d u m exp lain in g t h e p r o vi si on s o f t h e F in an c e B ill , 2 0 0 1 . W e, t h u s , ag r e e wit h t h e vi e w t ak en b y t h e D elh i Hig h C ou rt , an d a r e n ot in cl in ed t o ac c e p t t h e op in i on 13 ITA Nos. 4971, 4972, 5310 & 5311/Del/2015 RJ Corp Ltd.
o f Pu n j ab & H a ry an a Hi g h C ou rt w h i ch w en t b y d om in an t p u rp o s e t h e o ry . Th e a fo r e sa id r ea s o n in g w ou ld b e ap p li cab l e in c as es w h e r e sh a r e s a r e h el d a s in v e st m en t in t h e in v es t e e c o m p an y , m ay b e f or t h e p u r p os e o f h avin g c on t r ollin g in t e r es t t h e r ein . On that r ea s onin g , ap p ea ls of Ma x op p In v es t m en t Lim it e d as w e ll a s sim il a r ca s e s wh e r e sh a r es w er e p u r ch a s ed b y t h e a s se s s e e s t o h av e co n t r oll in g in t er e st in t h e in v e st e e c om p an i e s h av e t o f ail an d a r e , t h er e f o r e , d is m i s s ed .
3 6 . Th e r e i s y et an ot h e r a sp e ct wh i ch s t ill n e e d s t o b e lo ok ed in t o . Wh at h ap p en s wh en t h e sh a r es ar e h el d as 'st o ck - in -t ra d e ' an d n ot a s 'in v est m en t ', p a rt i c u la rly , b y t h e b an k s ? On t h i s sp e ci fi c asp e ct , C BD T h as i s su ed ci r cu l a r N o. 1 8/ 2 0 1 5 d at e d N ov e m b e r 0 2 , 2 0 1 5 . 3 7 . Th is Ci r cu la r h a s alr e ad y b e en r ep r o d u c ed in P ar a 1 9 a b o v e. Th i s Ci rcu la r t a k es n o t e o f t h e j u d g m en t of t h is C ou rt in Naw a n sh ah a r c as e wh er e in it i s h eld t h at in v e st m en t s m a d e b y a b an k in g c o n c e rn a r e p a rt o f t h e b u sin e s s or b an k in g . Th e r ef o r e , t h e in c om e ar is e s f r o m su ch in v e st m en t s i s at t ri b u t ab l e t o b u sin e ss o f b an k in g fal lin g u n d e r t h e h ead 'p r of it s an d g ain s of b u sin e ss an d p r o f es si on ' . On t h at b a si s , the Ci rcu la r c on t ain s t h e d e ci si on of t h e B o ar d t h at n o ap p e al wo u ld b e f il ed on t h is g r ou n d b y t h e o ff ic e r s o f t h e D ep a rt m en t and i f t h e a p p ea ls a r e alr e ad y fil e d , t h e y s h ou l d b e wit h d r awn . A re ad in g o f t h i s ci r cu la r w ou ld m ak e it cl e a r t h at t h e is su e w as a s t o wh et h e r in c om e b y way o f in t e r e st on s e cu rit i e s sh all b e ch a rg eab l e t o in c om e t a x u n d e r t h e h e ad 'in c om e f ro m ot h er s ou rc e s ' or it i s t o f all u n d e r t h e h e ad 'p r o fit s an d g ain s of b u sin e s s an d p r of e s si on '. Th e B o a rd , g oin g b y t h e d eci si on o f t h i s C ou rt in Naw an sh ah a r ca s e , cl ar if i ed t h at it h as t o b e t re at ed a s in c om e fall in g u n d e r t h e h ea d ' p ro fit s an d g a in s o f b u sin e s s an d p r of e s si o n '. Th e B oa rd als o w en t t o t h e e x t en t of sa yin g t h at t h is w ou l d n ot b e li m it ed on ly t o c o- op e rat iv e s o ci e t ie s/ Ban k s cl aim i n g d e d u ct i on under S e ct i on 8 0 P( 2) ( a ) ( i) of the A ct but w ou l d als o be ap p l ic ab l e to all b an k s/ c om m e r ci al b an k s , t o wh i ch B an k in g R eg u lat i on A ct , 1 9 4 9 a p p li e s .
3 8 . F r om t h i s, Pu n j ab an d H a rya n a Hi g h C ou rt p o in t ed ou t t h at t h i s ci r cu la r c a rv e s out a d is t in ct i on b et w e en ' st o ck - in- t rad e ' an d 'in v est m en t ' an d p r ov id e s t h at if t h e m ot i v e b eh in d p u rc h a s e an d sa l e o f sh a r e s i s t o ea rn p r o fit , t h en t h e sa m e w ou l d b e t reat ed a s t ra d in g p r o fit an d if t h e ob j e ct i s t o d e ri v e in c om e b y w ay o f d iv i d en d t h en t h e 14 ITA Nos. 4971, 4972, 5310 & 5311/Del/2015 RJ Corp Ltd.
p r o fit w ou ld b e sa i d t o h av e ac c ru ed f ro m in v es t m ent . T o t h i s e xt en t , t h e Hig h C ou rt m a y b e c or r e ct . A t t h e sa m e t i m e, w e d o n ot ag r e e wit h t h e t e st o f d o m in an t in t en t i on ap p li ed b y t h e Pu n j ab an d Ha r yan a Hig h Co u r t , wh i ch w e h a v e al r e ad y d i s ca rd e d . In t h at e v en t , t h e q u es t i on i s as t o on wh a t b a si s t h o s e ca s e s a r e t o b e d ec id ed wh e r e t h e sh a r e s o f ot h e r c o m p a n i es a r e p u r ch a s ed b y t h e as s es s e e a s ' st o ck - in - t rad e ' an d n ot a s 'i n v e st m e n t ' . W e p r o c e ed t o d i sc u s s t h is a sp e ct h e r e in aft e r .
3 9 . In t h o s e ca s es , w h e r e s h a r e s a r e h eld as st o ck- in - t r ad e , t h e m ain p u rp o s e i s t o t rad e in t h o s e sh a r e s an d ea rn p r o fit s t h e r e fr om . H ow e v e r, w e ar e n ot c on c e rn e d wit h t h os e p r o fit s wh i ch w ou ld n a t u ral ly b e t r e at ed as ' in c o m e' under the h e ad 'p r o fit s an d g ain s from b u sin e s s an d p r o f es si on ' . Wh at h ap p en s is t h at , in t h e p r o c es s , wh en t h e s h a r e s a re h el d as ' st o ck - in - t ra d e' , c e rt ain d iv id e n d is al s o ea r n ed , t h ou g h in cid e n t al ly , wh i ch i s al s o an i n c o m e. H ow e v e r , b y vi rt u e o f S e ct i on 1 0 ( 3 4) o f t h e A ct , t h i s d i vid en d in c om e i s n ot t o b e in clu d e d in t h e t o t al in c om e a n d is e x em p t f r om t a x . Th i s t ri g g e r s t h e app li cab i li t y o f S e ct i on 1 4A of the Act w h ich i s b as e d on the theory of ap p ort i on m en t of e xp en d i t u r e b et w e e n t a xab l e an d n on - t axa b l e in c o m e a s h eld in Wa lf o rt Share & S t o ck B r ok e r s ( P .) Lt d . ca s e. Th e r ef o r e , to t h at e xt en t , d ep e n d in g u p on t h e fa ct s o f ea ch ca s e, t h e e xp en d i tu r e in cu r r ed in acq u i rin g t h o s e sh a r e s wil l h av e t o b e a p p o r t i on ed ."
H en c e, t h e H on 'b l e S u p r em e C ou rt , in t h e j u d g m en t in t h e ca s e o f M ax o p p In v e st m en t Lt d . h a s h eld a s u n d e r:
( i) On ly t h at e xp en d it u r e wh i ch i s in r ela t ion t o ea rn in g d iv i d en d s c an b e d i sa ll ow e d u n d er s e ct i on 1 4A an d ru l e 8 D .
( ii) Th e d om i n an t p u rp o s e fo r wh i ch in v e s t m en t in to sh a r e s i s m ad e b y as s e ss e e may n ot be r el ev an t as s e ct i on 1 4A ap p l i es ir r e sp e ct i v e of wh et h e r sh a r es a r e h eld t o g ai n c on t r ol o r as st o ck- in - t ra d e. H ow e v e r, wh er e sh a r e s a r e h eld as st o ck - in - t rad e , m ain p u r p os e i s t o t rad e in t h o s e sh a r e s an d ea rn p ro fit s t h e r e f ro m a n d , in p r oc e s s, c e rt ain d ivid e n d i s a ls o ea rn e d wh i ch i s t a x ex e m p t u n d e r s e ct i on 1 0 ( 3 4) ; e xp en d it u r e at t r ib u t a b l e t o e x em p t d i vid en d in c om e wil l h a v e t o b e ap p o rt i on ed t o b e d is all o w ed u n d e r s ec t i on 1 4A .15 ITA Nos. 4971, 4972, 5310 & 5311/Del/2015
RJ Corp Ltd.
( iii) R u le 8 D i s p r o sp e ct i v e in n at u r e an d cou ld n ot h a v e b e en m ad e ap p li ca b l e in r e sp e c t of a s s e ss m en t y e a r s p r i o r t o 2 0 0 7 w h en t h i s ru l e wa s in s e rt ed .
A m en d m en t s o f F in a n c e Bil l 2 0 2 2 .
Th e F in an c e Bill 2022, has in t r od u c e d an am en d m en t to cl a ri fy t h at e xp en s e d is all o wan c e u n d e r t h e said se ct i on sh al l ap p l y an d sh all b e d e e m ed t o h av e al way s ap p l i ed e v en i n a c a s e wh e r e t h e e x em p t in c om e h as n ot ac c ru ed o r ari s en o r h a s n ot b e en r e c eiv e d d u r in g a p a rt i cu la r y ea r.
Th e a m en d m en t s w h ich ar e in t r od u c ed wit h t h e u s e o f w o rd s 'f o r r em o va l o f d ou b t s ', 's h all b e d e e m ed al wa y s t o h a v e m ean t ' o r t o ex p lain an e xi st in g p r ov is io n , ar e n o r m al ly c on sid e r ed to be cla ri fi cat o r y or d e cl ar at o ry a m en d m en t s .
Th es e a m en d m en t s a r e ex p ec t ed t o p r ov id e f o r an o b vi o u s om is si on o r cl ea r u p d ou b t s in t h e in t e rp r et a t i on o f an e xi st in g l e g isl at i on . A s a g en e ra l ru l e, su ch cla ri fi ca t or y a m en d m en t s a r e c ons id e r ed t o h av e a r et r o sp e ct i v e e f f ec t . Th is ap p l i es even if su ch am en d m en t s a r e m ad e ap p li ca b l e f r om a p r o sp e ct i v e d at e in t h e F in a n c e B ill ( S e e J u st i c e GP S in g h 's P rin cip l e s o f S t a t u t o ry I n t e rp r e t at i on an d CI T v . V at ik a T own sh ip ( P) Lt d [ 2 0 1 4] 4 9 t a xm a n n . c om 2 4 9 ( S C ) ) .
In t h e c a s e o f V at ik a To wn sh ip ( P) Lt d ( su p r a) , t h e Ho n ' b l e S u p r em e C ou r t d is cu s s ed t h e g en e r al p r in c ip l e s c on c e r n in g r et r o sp e ct i v ely , an e xt ra ct of wh i ch i s a s u n d e r:
"A l eg is lat i on , b e it a st at u t o r y A ct o r a st at u t o ry ru l e o r a st at u t o ry N ot i fi cat i on , m a y p h ys ic all y c on si st s o f wo r d s p rin t e d o n p ap e r s . H ow e v e r, c on c ep t u ally it i s a g r eat d e al m o r e t h an an o rd in a r y p r o s e. Th e r e is a s p e ci al p e cu lia ri t y in the m od e of v e rb al c om m u n i cat i on b y a le g i slat ion . A l eg i s lat i on i s n o t j u st a s e ri e s o f st at e m en t s , su ch as on e fin d s in a w o r k o f fi ct i on / n on - fi ct i o n o r ev en in a j u d g m en t of a Cou rt of la w . Th e r e i s a t e ch n i qu e r e q u ir e d t o d r aft a l eg is lat i on as w ell a s t o u n d e r st an d a l e g i slat io n . F o rm e r 16 ITA Nos. 4971, 4972, 5310 & 5311/Del/2015 RJ Corp Ltd.
t e ch n i q u e i s k n o wn as l eg i sl at i v e d ra f t in g an d l at t e r on e is t o b e f ou n d in t h e va r iou s p rin cip l es o f 'In t e rp r et at i on o f S t a t u t e s' . V is- a- vi s o rd in a ry p r os e , a l e g i slat i on d i f f e r s in it s p ro v en a n c e , l ay- ou t an d f eat u r e s a s al s o in t h e im p li ca t i on as t o it s m ean in g t h at a ri s e b y p r esu m p t ion s a s t o t h e in t en t of t h e m ak e r t h e r eof . [ P a r a 3 0] O f t h e va ri ou s ru l e s g u id in g h o w a l eg i sla t i on h a s t o b e in t e rp r et e d , on e e st ab li sh ed ru l e i s t h a t u n l es s a c on t ra r y in t en t i on ap p ea r s , a leg isl at i on is p r e su m e d n ot t o b e in t e n d e d t o h av e a r et r o sp e ct i ve op e ra t i on . Th e id e a b eh in d t h e ru l e is t h a t a cu rr en t l aw sh ou ld g o v e rn cu rr e n t a ct i vit i e s . Law p a s s ed t o d a y can n ot ap p ly t o t h e e v en t s o f t h e p a st . On e p rin ci p l e of l aw is k n o wn a s l e x p r o sp i cit n on r e sp i cit : l aw l o ok s f o rw a rd n o t b a ck w a r d . A s wa s o bs e r v ed in Ph ilip s v. E y r e [ 1 8 7 0] LR 6 Q B 1 a r et r o sp e c t iv e l eg is lat i on is c on t ra r y t o the g en e r al p rin ci p le t h at l eg is lat i o n by wh ich the c on d u ct of m an k in d i s t o b e r e g u lat ed wh en in t r o d u c ed f o r t h e fi r st t i m e t o d ea l wit h fu t u r e a ct s ou g h t n ot to ch a n g e the ch a ra ct e r of p a st t ra n s ac t i on s c a r ri ed on u p on t h e fa it h o f t h e t h e n ex is t in g l aw . [ Pa ra 3 1] Th u s, l e g i slat io n s wh i ch m od ifi e d a c c ru ed ri g h t s o r wh i ch i m p os e ob l ig at i on s o r im p o s e n ew d u t i e s o r at t ach a n ew d is ab il it y h av e t o b e t r eat e d as p r o s p e ct i v e u n l e ss t h e leg isl at i v e int en t i s cl ea rl y t o g iv e t h e en a ct m en t a r et r os p ec t iv e ef f e ct ; u n l es s th e l eg i sla t i on i s f or p u r p o s e of su p p lyin g an ob vi ou s o m is si on in a f o r m e r leg i sla t i on o r t o e xp l ain a f o rm e r l eg i sla t i on . [ Pa ra 3 2] F o r t h e sak e o f co m p le t en es s , t h a t wh e r e a b en e fit i s c on f e r r ed b y a leg isl at i on , t h e ru l e ag ain st a r e t r o sp e c t iv e c on s tr u ct i on i s d if f e r en t .
If a l eg i sl at i on c o n f e rs a b en e fit on s om e p e rs on s but wit h ou t in fli ct i n g a c o r r e sp o n d in g d et ri m en t on s om e ot h e r p e rs on o r on t h e p u b li c g en e ral ly , an d wh e r e t o c on f e r su ch b en e fit a p p ea r s t o h a v e b e en t h e l e g is lat o r s ob j e ct , t h en t h e p r e su m p t i on w ou l d b e t h at su ch a le g i slat io n , g i vin g it a p u rp o siv e c on st ru ct i on , w ou l d wa r ran t it t o b e g iv en a r et r o sp e ct i v e e ff e ct . Th i s e xa ct l y i s t h e j u s t i fi cat i on t o t r ea t p r o c ed u r al p r o vi si on s a s r et r o sp ec t iv e . [ Pa r a 3 3] "
17 ITA Nos. 4971, 4972, 5310 & 5311/Del/2015RJ Corp Ltd.
H en c e, t h e ru l e i s d iff e r en t wh en it c om e s t o su b st an t i v e am en d m en t s wh i ch m od i f y e xi st i n g rig h t s , o r wh i ch im p os e n e w ob lig a t ion s o r im p o s e n e w d u t i es or at t a c h a n e w d i s ab ili t y . S u ch am en d m en t s a r e p r e su m ed t o h av e p r o sp e ct i v e ef f e ct u n l e s s t h e r e i s an e xp r e s s l eg i sl at i v e in t en t t o g iv e r et r o sp e ct i v e e ff e ct .
It i s m y h u m b l e su b m is si on t h e r ef o r e al on g wit h t h e a f o r es a id j u d g m en t s of H on 'b l e S u p r e m e C ou rt wh i ch c on s t it u t e an au t h o r it y in l aw o n t h e i s su e wh et h e r an ex p en d it u r e in cu r r ed in r elat i on to a t a x - e x em p t in c o m e at t ra ct s d i sal l ow an c e u / s 1 4 A i r r es p e ct i v e of wh et h e r s u ch t a x- e x em p t in c om e h a s b e en ea rn ed d u rin g t h e y e a r o r n ot or ea rn ed i n cid en t all y wit h b u sin e s s in c om e , t h e F in an c e Bil l 2 0 2 2 h as s ou g h t t o p u t m at t e r s at r e st b y la yin g d o wn in n o u n c e rt ain t e r m s an d in a c r ys tal cl ea r m an n e r t h e d o m in an t in t en t i on o f t h e st at u t e . T h e sa m e in t en t i on wh ic h wa s s ou g h t t o b e r ed r e s s ed b y t h e CBD T vid e Ci rcu la r n o .5/ 2 0 1 4 d at ed 1 1/ 0 2 / 2 0 1 4 . F o r t h e sak e of r ep et it i on , it is st r es s ed ag ain t h at th e in t en t io n of t h e st at u t e is t h a t e xp en s e d i s all ow an c e u n d e r t h e said s e ct i on sh all ap p ly an d sh all b e d e em e d t o h a v e al wa ys ap p li ed e v en in a c a s e wh er e t h e e x em p t in c om e h as n ot a c c ru ed o r a ri s en o r h as n ot b e en r ec ei v ed d u rin g a p a rt i cu la r y ea r . It d o e s n ot t al k a b o u t in c o m e ea rn e d d u r in g a p a rt i cu l a r y ea r b u t in c o m e ea rn ed u n d e r t h e In c om e T ax A ct . M os t im p o rt an t ly t h e cla ri fi ca t i on h a s n o t m o d if i ed a c c ru ed rig h t s o r imp o s ed ob li g at i on s o r im p o s ed n ew duties or at t a ch ed new d i sa b ilit i e s but on l y s ou g h t to r ein f o rc e t h e sp i ri t b eh in d t h e la w wh i c h wa s t h e st an d of t h e L aw m a k er s f ro m t h ed at e of in t r od u ct i on o f t h e s e ct i on 1 4A vid e F i n an c e A ct 2 0 0 1, wit h re t ro sp e ct iv e a p p li cat i on f r om 1 .4 . 1 9 6 2 .
In t h e in st an t c a s e of t h e a p p ell an t , as t h e a m en d m en t s ar e ap p li cab l e r et r o sp e ct i v ely the d is all ow an c e made by the AO d e s e rv e s to be c on f ir m ed ."
7. As the facts reveal that the assessee has earned Rs.50,000/- only as dividend, relying on the judicial pronouncements mentioned below and the settled position of law, we hold that no disallowance is called for more than the amount earned as dividend.
18 ITA Nos. 4971, 4972, 5310 & 5311/Del/2015RJ Corp Ltd.
( i) J o in t In v e st m en t s P vt . Lt d . V s . C I T ( 5 9 c om 2 9 5) - it wa s h eld t h at d is all ow an c e u / s 1 4A of t h e A c t i s t o b e r e st ri ct ed t o t h e t a x e x em p t in c om e .
( ii) D ag a G l ob al Ch em ic al s P vt . Lt d . V s. A CI T [ 2 0 1 5 - I TR V - IT A T- MU M- 1 2 3)
- h as h eld t h a t d i sal lo wan c e u / s 1 4 A r. w .R u l e 8 D c an n ot ex c e ed t h e e x em p t in c om e .
( iii) M/ s . Pin n a cl e Br o c om Pvt . L t d . V s. A C IT ( ITA N o. 6 2 4 7/ M/ 2 0 1 2) - h a s h el d t h at d i sal l owa n c e u / s 1 4A c an n ot e xc e e d t h e e x em p t i n c om e .
( iv) D C M Lt d . v. D C IT ( I TA No .4 5 6 7 / D el / 2 0 1 2 ) - h el d t h at t h e d i sal l ow an c e u / s 1 4A o f t h e A ct c an n o t e x c e ed t h e e x em p t in co m e.
8. We have gone through the submissions of the ld. DR and find that the amendment has been brought by the Finance Bill 2022 which is prospective in nature. Hence, we hold that, the amount of disallowance u/s 14A of the I.T.Act needs to be restricted to the extent of exempted income earned (Rs. 50,000/-) during the relevant assessment year. The appeal of the Revenue on this ground is dismissed and the appeal of the assessee is allowed.
Conversion of Investments:
Ground No. 4 in ITA No. 4971/Del/2015 (Assessee appeal) Ground 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 19 ITA Nos. 4971, 4972, 5310 & 5311/Del/2015 RJ Corp Ltd.
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 madeduringthefinancialyearunderconsideration.TheAOquestioned 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 held as investment and were shown accordingly in the audited balance sheet as at 31.03.2010. The appellant also submitted that the board of directors in their meeting held on 01.04.2010 decided to hold the investments in equity shares and units of mutual funds as Stock in Trade with immediate effect. The reference of the same was also given inNote no. 19 of schedule 21 of the Audited Accounts. The appellant also submitted that the entire investments held as on 01.04.2010 consisting of 64696536 Nos. of equity shares / units of Mutual Funds costing Rs.1,79,14,46,369/- were transferred to Stock in trade. The appellant vide the said reply also submitted the scrip-wise share trading chart for Financial Year 2010-11 and Financial Year 2011-12 showing the complete details of shares transferred from investment account, their cost and number of shares transferred, purchases made showing quantity and value and 20 ITA Nos. 4971, 4972, 5310 & 5311/Del/2015 RJ Corp Ltd.
the sale made showing the quantity and value and closing stock of share. The appellant also submitted that the profit made on trading in shares has been duly shown as business income in the computation of income for the assessment year 2011-12 and 2012-13.
11. The Assessing Officer has completed the assessment under section 153A read with section 143(3) by making addition of Rs.18,85,98,890/- as income from capital gain from sale of unquoted shares of sister concerns by rejecting the books of account / book results without appreciating the fact that the appellant has already considered trading profit on sale of the said unquoted shares in its profit & loss account as well as return of income and discharged tax liability as the provisions of the Income tax Act, 1961. The AO held as under:
" F r o m t h e d et ail s of sh a r e s p u r ch a s ed a n d s old , it i s s e en t h at su b s t an t i al r e c eip t s a re f r o m s al e of u n q u ot ed sh ar e s o f si st e r c on c e rn s. Ou t o f t h e t ot al sal e p ro c e ed s o f R s. 6 0 ,8 7 ,7 5, 1 1 4/ - o f s h a r e s s o l d , t h e u n q u ot ed sh a r e s of si st e r con c e rn s s old am ou n t t o R s. 5 9 ,3 9 ,2 7,5 0 0/ - . Th e b al an c e o f on ly R s. 1, 4 8 ,4 7 ,6 1 5/ - i s f r om Qu o t ed sh a r es an d Mu t u al fu n d s. Th e c on v e r si on on p ap e r h a s b e en ca r ri ed ou t on l y t o c am ou fl ag e t h e a ct u al t ra d in g r e su lt s and to av o id payment of cap it al g ain s by s et t in g off e xp en s es a g ain st t h e s al e p r oc e e d s o f s h ar e s .
In vi e w o f t h e ab o v e d i s cu ssi on t h e s al e of u n q u ot ed sh ar e s i s t ak en a s sal e o f in v e st m en t f o r t h e p u rp os e s of c ap it a l g ain s. "
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.
21 ITA Nos. 4971, 4972, 5310 & 5311/Del/2015RJ Corp Ltd.
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 co nsidere d the submissions of the AR and the assessment order. As noted earlie r at gro und Nos. 1 to 5, AO has treated the unquo ted shares he ld 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 o f P&L account (sale proceeds o f unquo ted shares) and brought to tax the same under the head capital gains after de ducting the cost of the share s.
4.5.4 It is no ted here that as pe r the appellant, the investments were converte d into stock- in- trade on 01.04.2010 i.e. during the Present Pe rvious Year itse lf. As pe r sectio n 2(47)(iv) of the Act, transfe r includes conversion of capital assets into stock- in- trade . Further, as per se ction 45(2) o f the Act the capital gains arising from conversion of capital asse t into stock-in-trade is chargeable to tax in the previous year in which such stock-in- trade has been so ld or otherwise transferred. In the pre sent case since the investments, according to the appellant, were co nverte d into stock-in-trade during the present Previous Year itse lf, it is liable to offer fo r tax, the capital gain on co nversion of such investments into stock-in- trade . The assessee has not shown any capital gain arising on such conversion. Thus even if o ne goes by the appellant's version, an 22 ITA Nos. 4971, 4972, 5310 & 5311/Del/2015 RJ Corp Ltd.
amount e qual to market value of the unquoted shares as on01.04.2010minus their cost beco mes charge able to tax during the present Pervious Year under the head capital gains. The balance amount i.e . the difference between the sale price and the price at which the co nve rsion of investment took place wouldbe chargeable unde r the he ad income from business. Since, the conversion and subsequent sale have taken place during the same previous year, the sale procee ds become taxable unde r the he ad capital gain, unless the appellant has adopted different rates fo r conversion & subsequent transfers.
4.5.5 Ho wever as pointed out by the AO from the seized documents (page 60 & 61 of anne xure A- 3 re ferred to at pages 12 to 15 of the assessment o rde r) and the statement of Sh. Rajesh Chopra Director of the company dated 27.02.2014 (referred to at page 15 of the assessment order) there is no truth in the appellant's submissio n that the inve stments we re in fact converted into stock-in-trade on 01.04.2010. F urther all these are uncoate d shares which infact are investments and not meant for e arning profit by resorting to trading in them . Mere book entry of conve rsion into stock-in-trade , in the give n circumstances, canno t result in the investments actually becoming sto ck-in-trade. It is note d here that the appellant has no t made any arguments o n the AO's findings in this regard. The refo re, there is merit in A O's actio n in bringing to tax the pro ceeds from the sale of unquote d shares unde r the head capital gains. Howe ver, he has not stated whether the capital gain is taxable as long te rm capital gain or short term capital gain and he has also not give n the inde xation be nefit to the appellant. F urther he has to ado pt the correct cost in respect o f the shares transfe rre d at each stage. He is directed to recompute the capital gain in the above manner. In the result ground is partly allo wed."23 ITA Nos. 4971, 4972, 5310 & 5311/Del/2015
RJ Corp Ltd.
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 erred in law in deleting the addition of Rs.15,74,16,144/- made by the AO on account of disallowance u/s 14A of the Income Tax Act, 1961.
2. On the facts and circumstances of the case, the ld. CIT(A) has erred in ignoring the prescribed method under rule 8D for calculating the disallowance u/s 14A of the Income Tax Act, 1961, once it is established that claim of the assessee is not correct."ITA No. 4972/Del/2015 : A.Y. 2012-13 (Assessee Appeal)
19. Following grounds have been raised by the assessee:
1. That on the facts and in circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) has erred by not accepting the revised 24 ITA Nos. 4971, 4972, 5310 & 5311/Del/2015 RJ Corp Ltd.
surrendered income of Rs. 1,75,66,829/- shown in the return of income filed in response to notice issued u/s 153A as additional interest income instead of Rs.10,00,00,000/- surrendered during post search proceedings by applying the principal of estoppel.
1.1 That the Ld. Commissioner of Income Tax (Appeals) was grossly erred in law holding that principal of estoppel apply to surrender during the search.
1.2 That Ld. Commissioner of Income Tax (Appeals) erred in law in holding that an assessee cannot revisit the surrender made during search even if there was a bonafide cause for such retrieval.
1.3 That the findings of the Commissioner of Income Tax (Appeals) on surrender are contradictory to his own findings about rejections of the books of accounts and findings on surrender are bad in law. Once books of accounts are accepted as that then revised surrender should also have been accepted.
2. That on the facts and in circumstances of the case and in law, the Ld.Commissioner of Income Tax (Appeals) has erred by not appreciating the facts that the entire investment was converted into stock in trade as on 01.04.2010 and the appellant has already considered the 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.
2.1 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. That on the facts and in circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) has erred in upholding the disallowance of Rs.97,36,816/- being done by the Ld. AO u/s 14A of 25 ITA Nos. 4971, 4972, 5310 & 5311/Del/2015 RJ Corp Ltd.
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/2015Disallowance 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 dismissed.
Addition on account of Surrendered Income:
23. During the year, the Assessing Officer mad addition under the head "income from capital gains" of Rs.5,81,46,845 and disallowance u/s 14A which amounts to Rs.15,74,16,144/-. Both 26 ITA Nos. 4971, 4972, 5310 & 5311/Del/2015 RJ Corp Ltd.
the additions have been dealt in the preceding paras of this order.
24. Further, the ld. CIT(A) held that the assessee has gone back on the surrender of Rs.10 Cr. made during the post search proceedings and the same was not completely honoured. The ld. CIT(A) held that the assessee has only surrendered Rs.1,75,66,829/- being the interest on loan given to Australian AE and taxed an amount of Rs.8,24,33,171/-. While enhancing the addition, the ld. CIT(A) held as under:
"4.1.4....................that during the search proceedings the appellant had surre ndere d Rs.10 cro re as additio nal income "on accounto f disallo wance of expenses and others". Based on its surrender, the IT Authorities had stopped the investigatio n into the affairs. Thereafter, the appellanthas gone back on its surrender. The actio n of the AO in rejecting books of account is be ing negative d for the reasons that no adve rse evidence s could be found from the books of accounts. However, the same does not mean that the appe llant's affairs are in order in all respects especially when the appellant himself had surre ndere d the income during search actio n that to to wards disallo wance of expenses. It is note d that the previous year relevant to the prese nt assessment year was about to end as on the date of search (27.03.2012). The appe llant best knows his true affairs. I t is not the case of surrendered o f undisclosed income and its immediate retraction thereafter.But the retraction has occurre d after a conside rable gap of time. Examination o f books cannot be a prope r substitute for full thronged investigation which take s place during search & post search proceedings, which was stopped due to surre nder of inco me by the appellant. The doctrine of esto ppe l operates he re. On the basis of appe llant's surre nder, the investigation was stopped. The refore, appellant is stopped from 27 ITA Nos. 4971, 4972, 5310 & 5311/Del/2015 RJ Corp Ltd.
going back o n its surre nder/ promise. It is noted here that the scheme of the act does recognize the act o f surrende r of any undisclose d incom e at the time o f search. S uch surre nder is o ne of the significant e vents o f in any search and post search pro ceedings and it greatly influe nces the post search investigation. By surre ndering the undisclose dinco me the appellant sto ps the investigating officer from continuing with investigation on that issue on the principle that a fact accepte d by the o ther party need not be prove d. He re the surrender was "on account of disallowance of expenses and others". After a long gap, it is ve ry e asy 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 seize d pape rs including third party affairs. Thus any retraction from surrendere d income, that too afte r a co nsiderable time pe rio d, only points towards lack, o f bo nafide on the party o f the appellant. This is also against the rule of estoppe l. A pe rso n who by his statement has induced another to belie ve his wo rds and act in a particular manner, cannot go back and say that what he stated was incorrect. He is estoppe d from doing so. There fore, I hold that addition be restricted to Rs. 8,24,33,171 (Rs. 10 crores- 1,75,66,829) and the balance additio n is hereby deleted. In the subsequent grounds relating to 14A disallowance- and capital gain on sale of shares I am partly confirming the AO's action. The additional income resulting from part confirmation of those gro unds would also be telesco ped into the above state d Rs. 8,24,33,171/- as the same is covered by the narration of the surre ndere d income."
25. We find that this is an ad-hoc enhancement made by the ld. CIT(A) which is not backed up by any material found and seized during the search.
28 ITA Nos. 4971, 4972, 5310 & 5311/Del/2015RJ Corp Ltd.
26. We have gone through the Circular of the CBDT with regard to surrender taken in the statement recorded u/s 132(4).
F. No. 286/2/2003-IT (Inv) GOVERNMENT OF INDIA MINISTRY OF FINANCE & COMPANY AFFAIRS DEPARTMENT OF REVENUE CENTRAL BOARD OF DIRECT TAXES Room No. 254/North Block, New Delhi, the 10th March, 2003 To All Chief Commissioners of Income Tax, (Cadre Contra) & All Directors General of Income Tax Inv.
Sir Subject: Confession of additional Income during the course of search & seizure and survey operation -regarding Instances have come to the notice of the Board where assessees have claimed that they have been forced to confess the undisclosed income during the course of the search & seizure and survey operations. Such confessions, if not based upon credible evidence, are later retracted by the concerned assessees while filing returns of income. In these circumstances, on confessions during the course of search & seizure and survey operations do not serve any useful purpose. It is, therefore, advised that there should be focus and concentration on collection of evidence of income which leads to information on what has not been disclosed or is not likely to be disclosed before the Income Tax Departments. Similarly, while recording statement during the course of search it seizures and survey operations no attempt should be made to obtain confession as to the undisclosed income. Any action on the contrary shall be viewed adversely.
29 ITA Nos. 4971, 4972, 5310 & 5311/Del/2015RJ Corp Ltd.
Further, in respect of pending assessment proceedings also, assessing officers should rely upon the evidences/materials gathered during the course of search/survey operations or thereafter while framing the relevant assessment orders.
Yours faithfully, Sd/-
Under Secretary (Inv. II)
27. Further, the Hon'ble Supreme Court in the case of CIT Vs. Mantri Share Brokers (P.) Ltd. 96 taxmann.com 280 held that "where except statement of Director of assessee company offering additional income during survey in his premises, there was no other material either in form of cash, bullion, jewellery or document in any other form to justify said statement, addition made of said income in hands of assessee under section 69B was to be deleted."
28. Since, the specific query put to the revenue authorities as to the existence of any material or any credible evidence, did not elucidate any tangible indication as to the undisclosed income determined by the ld. CIT(A), keeping in view the CBDT instruction and respectfully following the judgment of the Hon'ble Apex Court, we hereby hold that the action of the ld. CIT(A) cannot be affirmed.
29. In the result, the appeal of the assessee on this ground is allowed.
30 ITA Nos. 4971, 4972, 5310 & 5311/Del/2015RJ Corp Ltd.
30. In the result, the appeals of the assessee are partly allowed and that of the Revenue are partly allowed. Order Pronounced in the Open Court on 25/08/2022.
Sd/- Sd/-
(Yogesh Kumar US) (Dr. B. R. R. Kumar)
Judicial Member Accountant Member
Dated: 25/08/2022
*Subodh Kumar, Sr. PS*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR