Income additions made by AO discarding capital loss of assessee set aside, ITAT

Facts in Brief:

1. Assessee is deriving its income from shares, dealing in futures and options and investments.

2. The assessee has declared business income of Rs. 69,462/- and claimed speculative business loss of Rs. 50,529/- and short term capital loss of Rs. 44,45,967/-.

3. AO observed, assessee has received a sum of Rs.1,0915000/ on different dates from its group Company, M/s. Jet Age Finance Pvt. Ltd ( In short M/s. JAFPL).

4. As per AO, the total income of the assessee is Rs.3.59 crores and out of which interest income is only Rs.66 lakhs, which is not even 20% of the total income.

5. Based on this, he concluded from the income criterion, that lending is not substantial part of business of the lending company, M/s. JAFPL.

6. AO observed that M/s. JAFPL despite making good profits has not chosen to declare dividend for so many years.

7. Further, AO observed that in this scenario granting of loans to the assessee being shareholder without declaring dividends need to be construed as deemed dividend u/s. 2(22)(e) (of Income Tax Act, 1961) going by the real intention of the said provision.

8. On appeal, CIT(A) deleted the addition as made by AO.

On appeal ITAT held,

9. We find that no satisfaction was recorded by the ld.AO in terms of Rule 8D(1) (of Income Tax Rules, 1962), which is mandatory as in the instant case, the assessee had disallowed a sum of Rs.15,451/- voluntarily in the return of income u/s. 14A (of Income Tax Act, 1961) and without giving a categorical finding how the said figure is incorrect having regard to the accounts of the assessee, the ld.AO cannot resort to directly adopt the Rule 8D(2) (of Income Tax Rules, 1962) and make disallowance thereon.

10. We find that both the ld. AO as well as the ld. CIT(A) had not addressed this aspect, which is crucial and it goes to the root of the matter. We hold that without recording satisfaction in terms of rule 8D(1) (of Income Tax Rules, 1962), the ld.AO cannot directly apply the Rule 8D(2) of the I.T Rules 1962.

11. We draw support from the following decision of the Hon'ble Jurisdictional Calcutta High Court in the case of CIT, Central II Vs. REI Agro Ltd in GA No.3022 of 2013 ITAT 161 of 2013 dated 23.12.2013, wherein it has been held as under:-

"The Court : The Assessing Officer disallowed the contribution made by the assessee towards provident fund to the extent off a sum of Rs.1,92,913/- on the ground that the deposit was made beyond the stipulated time.

12. The Assessing Officer also disallowed the expenditure under section l4A of the Income Tax Act, 1961 without first recording that he was not satisfied with the correctness of the claim as regards the claim that "no expenditure" was made by the assessee.

13. The contribution towards provident fund, even if deposited beyond the stipulated period, is allowable by virtue of the amendment and the disallowance under section l4A of the Income Tax Act, 1961 is ITA No.21//K/2013-A-AM M/s.Avro Commercial Co.Ltd plainly contrary to the provisions of the statute.

14. The CIT, in the circumstances, allowed the appeal of the assessee and the Tribunal did not interfere.

15. Challenging the order of the tribunal, the present appeal has been filed.

16. We have heard Mr. Bhowmik and are of the opinion that no point of law has been raised. Therefore, this appeal is dismissed. "

17. Respectfully following the decision of the Hon'ble Jurisdictional Calcutta High Court (supra), we have no hesitation in directing the ld. AO to delete the addition made on this count u/s. 14A (of Income Tax Act, 1961). This ground of revenue's appeal is dismissed and cross objection of the assessee is allowed.

18. In the result, the appeal of the revenue is dismissed and cross objection of the assessee is allowed as stated above. 

Case Referene-Avro Commercial Company ... vs Department Of Income Tax