IN INCOME TAX APPELLATE TRIBUNAL BENCH, MUMBAI BEFORE SHRI MAHAVIR SINGH, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER I.T.A. No.411/Mum/2013 (Assessment Year : 2008-08) Ansh Merchand ise Private DCIT 5(2 ), Limited, 11, 2 n d F loor, Aayakar Bhavan, v. 84, App ollo House, Mumbai 400 020. Bomb ay Samachar Marg, Fort, Mumbai -4 00 02 3 PAN : AABCN8176E (Appellant) (Respondent) I.T.A. No. 398/Mum/2013 (Assessment Year : 2009-10) Ansh Merchand ise Private Addl. CIT 5(2 ), Limited, 11, 2 n d F loor, v. Aayakar Bhavan, 84, App ollo House, Mumbai 400 020. Bomb ay Samachar Marg, Fort, Mumbai -4 00 02 3 PAN : AABCN8176E (Appellant) .. (Respondent) Assessee by Shri Rahul K.Hakani Revenue by : Shri A. Ramachandran Date of Hearing : 23-6-2016 Date of Pronouncement : 19-09-2016 2 ITA 411 /Mum/2013 & 398/Mum/2013 O R D E R PER RAMIT KOCHAR, Accountant Member These two appeal, filed by assessee company, being ITA No. 411/Mum/2013 and ITA no. 398/Mum/2013, are directed against two separate appellate orders dated 09th October, 2012 and 11th September 2012 respectively passed by learned Commissioner of Income Tax (Appeals)- 9, Mumbai (hereinafter called CIT(A) ), for assessment year s 2008-09 and 2009-10 respectively, appellate proceedings before learned CIT(A) arising from separate assessment orders dated 22nd December, 2010 and 30th December 2011 respectively both passed by learned Assessing Officer (hereinafter called AO ) u/s 143(3) of Income Tax Act,1961 (Hereinafter called Act ). 2. First we shall take appeal for assessment year 2008-09 vide ITA no. 411/Mum/2013 . grounds of appeal raised by assessee company in memo of appeal filed with Income Tax Appellate Tribunal, Mumbai (hereinafter called Tribunal ) read as under:- 1. learned Commissioner of Income Tax(Appeal) had erred by upholding wrong action of learned assessing officer wrongly calculating loss amounting to Rs. 3,83,03,181/- from sale of plywood /furniture instead of profit earned by appellant company amounting to Rs. 9,213/-. 2. learned Commissioner of Income Tax(Appeal) had again erred by approving incorrect action of learned assessing officer of disallowing legitimate rebate and claim amounting to Rs.18679300/-. 3. brief facts of case are that assessee is engaged in business of trading of various goods and commodities. It was observed by AO from schedules giving details of purchases and sales that in respect of 3 ITA 411 /Mum/2013 & 398/Mum/2013 sale of plywood/furniture, assessee had incurred loss of Rs.3,71,01,964/. figures for sale/purchase as per return of income filed by assessee are as under: Plywood/Furniture Sale : Rs.3,71,01,964/- Less: Purchase : Rs. 9,09,78,075/- ------------------------ : Rs.5,38,76,111/- Less: Closing Stock : Rs.1,55,72,930/- ------------------------ Loss: : Rs.3,83,03,181/- ------------------------- It was observed by AO that in these transactions for purchase/sale of plywood/furniture, assessee has not taken physical delivery of goods but delivery was directly given to assessee s buyer and transaction was routed through assessee by which assessee was receiving purchase bill from supplier and was subsequently raising sales bill on buyer. Thus, assessee was liable only to extent of commission or difference in price of material , assessee was asked to explain that how losses were incurred by assessee. assessee in response failed to give justification for said loss claimed by it or produce any documentary evidence to show that how loss is attributable to assessee. AO observed that assessee is acting only as conduit/agent of parties concerned and book purchase only against finding of suitable buyer. Thus, assessee is entitled to extent of difference in price which amounts to commission for arranging 4 ITA 411 /Mum/2013 & 398/Mum/2013 transaction. Thus, AO held that loss shown by assessee is not real loss attributable to assessee and same was disallowed by AO vide assessment order dated 22-12-2010 passed by AO u/s. 143(3) of Act. Secondly, It was noted by AO from Profit and Loss Account that assessee has claimed rebate of Rs.1,86,79,300/-. assessee was asked to explain same and justify allowability of claim. assessee submitted that M/s Premium Paper and Board Industries Limited has purchased goods from assessee in various lots. When goods were used by said buyer, it was found that goods were not in good condition and hence claim was lodged by said buyer for rebate. assessee submitted that it surveyed and verified goods supplied by assessee and found various deficiencies in goods at end of assessee. defects noticed by assessee were as under: 1. goods were not properly stored in godowns and were soaked on water and got moisture in many lots. 2. GSM varieties were found in some lots of paper. 3. Shining/brightness got reduced after moisture of paper and became lower and inferior quality material. 4. There was some defective lot of paper and boards. Thus, it was observed that product was not in position to be sold in open market as fresh and hence assessee had to allow credit of Rs.1,86,79,300/- to M/s. Premium Paper and Board Industries Limited which is one of largest and reputed paper and board dealers of country. assessee submitted debit note supplied by M/s Premium Paper and Board Industries Limited on assessee, wherein account of 5 ITA 411 /Mum/2013 & 398/Mum/2013 assessee was debited towards inferior quality of material supplied by assessee as also credit notes were submitted by assessee wherein assessee has credited account of said party M/s Premium Paper and Board Industries Limited towards inferior quality of material supplied by assessee to said party. AO observed that assessee has not taken deliveries of these goods and in case if assessee s supplier has supplied defective material, assessee should raise debit notes in their favour since real transaction of purchase and sale of goods is between assessee s suppliers and purchaser M/s Premium Paper and Board Industries Limited and assessee is only acting as conduit and thus not responsible for defective material supplied by suppliers and hence loss suffered cannot be attributed to assessee and hence assessee s claim of rebate and claim of Rs.1,86,79,300/- was disallowed by AO and added to income of assessee vide assessment order dated 22.12.2010 passed by AO u/s 143(3) of Act. 4.Aggrieved by assessment order dated 22.12.2010 passed by AO u/s. 143(3) of Act, assessee filed first appeal with learned CIT(A) . 5. assessee submitted before learned CIT(A) that assessee is engaged in business of trading in various goods and commodities as also in investing as well as trading in shares. It was submitted that auditors of assessee company inadvertently overlapped some of traded items in audited Balance Sheet s grouping and schedule . assessee submitted that actual profit was Rs.9,213/- from traded items of plywood and furniture instead of loss of Rs.3,83,03,181/- mistakenly determined by AO. 6 ITA 411 /Mum/2013 & 398/Mum/2013 It was submitted that purchase of plywood/furniture was Rs.5,20,96,701/- instead of Rs.9,09,78,075/- as inadvertently considered by AO while assessing case of assessee. reconciliation and other details were submitted before AO but he mistakenly overlooked same , was submission of assessee before learned CIT(A). assessee submitted before learned CIT(A) that AO never issued show cause notice to assessee before making this incorrect and unjustified huge additions. It was submitted by assessee that AO never made any enquiries with suppliers of assessee u/s. 131/133(6) of Act. With respect to second issue with respect to non allowability of rebate and claim of Rs.1,86,79,300/- , it was submitted by assessee before learned CIT(A) that assessee supplied goods i.e. paper and boards to its customers in various lots. goods were found by customers to be not in good condition hence they lodged claim with assessee for rebate. When assessee surveyed and verified goods, several deficiencies were found in goods at end of assessee which are set out above in preceding para s of this order and not repeated here. assessee submitted that finding of AO that assessee is conduit of purchaser is baseless and loss is genuinely incurred by assessee. AO did not issue any show cause to assessee before making heavy and unjustified additions. submissions made by assessee were ignored and overlooked mistakenly by AO while sending remand report to learned CIT(A), was submission of assessee before learned CIT(A). It was submitted that assessee dealt within several products such as plywood, furniture , cement, glasses, paper etc and auditor of assessee overlapped certain traded items in audited Balance Sheet s grouping/schedules. It was submitted that 7 ITA 411 /Mum/2013 & 398/Mum/2013 loss determined by AO from plywood/furniture was mistakenly determined at Rs.3,83,03,181/- instead of profit of Rs.9,213/- both during assessment as well at time of sending remand report to learned CIT(A). During remand report proceedings, it was submitted that complete details of purchase , sale and reconciliation statement was submitted by assessee to AO but AO mistakenly overlooked to consider vital details in same. It was submitted that purchases being factual matter are recorded in books of accounts which no body can alter same and same can be verified. learned AO in remand report submitted to learned CIT(A) reiterated its findings as were in assessment order and also observed that assessee is now taking plea of overlapping/regrouping done by auditors which was incorrect in original audit report. rectified page of audit report submitted now by assessee vitiates authenticity of original audit report and hence AO stated in Remand Report that AO has correctly passed assessment order and evidences now submitted be rejected and appeal be decided on merits. remand report was confronted to assessee wherein assessee submitted that auditors have overlapped some of traded items in audited Balance Sheets schedule and infact purchase of plywood/furniture was Rs. 5,20,96,701/- instead of Rs.9,09,78,075/- and hence it was submitted that assessee should not suffer because of inaccuracies in audit report and in audited balance sheet and profit and loss account. learned CIT(A) rejected contentions of assessee by holding that assessee is now contending that there is mistake in audit report and audited financial statements. learned CIT(A) observed that auditors have not revised audited financial statements and audit report , nor auditors have issued any clarification with regard to any 8 ITA 411 /Mum/2013 & 398/Mum/2013 errors in audited final accounts. assessee could not contradict that it is only acting as conduit /agent of parties concerned and book purchases only against finding suitable buyer. Thus, losses belongs to principals and no evidence is on record that audit report and final accounts signed by assessee s Directors and auditors are erroneous, wholly or partly. Thus, learned CIT(A) confirmed disallowance of Rs.3,83,03,181/- towards loss claimed by assessee on trading of plywood/furniture vide appellate order dated 09-10-2012 passed by learned CIT(A). With respect to second disallowance of claim of Rs.1,86,79,300/- towards defective material, it was observed by learned CIT(A) that assessee has not brought on record any material or evidence to prove that assessee was responsible for any defect in material supplied by supplier to end users. No copy of commission agreement nor terms and conditions of purchase made by assessee and sales made by assessee have been brought on record before learned CIT(A). Thus, vide appellate order dated 09-10-2012 passed by learned CIT(A), assessee claim of Rs.1,86,79,300/- towards rebate for defective material was rejected by learned CIT(A). 6. Aggrieved by appellate orders dated 09-10-2012 passed by learned CIT(A), assessee filed second appeal with Tribunal. 7. learned counsel for assessee reiterated submissions as were made before authorities below and submitted that there was mistake which occurred by auditors in grouping/schedule with respect to reflecting purchase of plywood/furniture where in correct figure of purchase is Rs.5,20,96,701/- instead of Rs.9,09,78,075/- which is reflected in audited financial statements which was pointed out to 9 ITA 411 /Mum/2013 & 398/Mum/2013 authorities below and hence instead of loss of Rs.3,83,03,181/- as claimed in return of income filed with Revenue on trading of plywood/furniture, assessee earned profit of Rs.9,213/- . learned counsel for assessee drew our attention to orders of learned CIT(A) page 6/para 5.2 wherein it is stated that as per audited balance sheet as at 31-03- 2008, assessee earned profit of Rs.9,213/- instead of loss of Rs.3,83,03,181/- while as per schedules of purchase and sales , AO noted that assessee incurred loss of Rs.3,83,03,181/- in business of plywood/furniture. learned counsel for assessee drew our attention to page 36-39/paper book wherein attention was drawn of authorities below to error which crept in figures of purchase due to inadvertent mistake of auditors. learned counsel for assessee drew our attention to statement of fact filed before learned CIT(A) which is placed in file to reiterate its submissions. It was submitted that great prejudice has been caused to assessee due to error committed by auditors and authorities below have not considered submissions of assessee in right perspective and it was submitted that issue may be set aside to file of AO who may be directed to re- verify losses incurred by assessee of Rs.3.83 crores. ld DR on other hand relied on orders of learned CIT(A). Similarly, with respect to second issue , assessee s counsel reiterated submissions as were made before authorities below and submitted that matter be set aside to file of AO for re-examination/ re- verification of issue and authorities below rejected contentions of assessee without any verifications, enquiry and examination. ld DR relied on orders of authorities below. 8. We have considered rival consideration and perused material on record. We have observed that it is stated by assessee that due to 10 ITA 411 /Mum/2013 & 398/Mum/2013 error/mistake committed by auditors , figures of purchase was misreported in schedules/ groupings which led to claim of loss of Rs.3,83,03,181/- as against profit of Rs.9,213/- as per audited balance sheet, wherein purchases of plywood/furniture was mistakenly reported by auditors in schedule/grouping at Rs. 9,09,78,075/- instead of Rs. 5,20,96,701/- and since authorities below rejected contentions of assessee . In our considered view in interest of justice and fair play, issue needs to be set aside and restored to file of AO for re-verification and de-novo determination of issue on merits after enquiry, examination and verification as may be considered appropriate by AO. AO shall examine matter comprehensively including implication of contention of assessee that purchase were shown at higher figure of Rs.9,09,78,075/- due to inadvertent mistake instead of actual purchases being of Rs.5,20,96,701/- , and its implication thereof on taxability of differential amount as now expenditure stood reduced by amount of Rs.3,88,81,374/- due to withdrawal of claim of inflated purchases , as to that extent total taxable income will stood increased .The assessee is directed to appear before AO and produce all relevant and necessary evidences in support of its contentions in its defense which shall be admitted by AO and adjudicated on merits in accordance with law. Needless to say proper and adequate opportunity of being heard shall be provided by AO to assessee in accordance with principles of natural justice in accordance with law. We order accordingly. With respect to second issue of disallowance of claim of rebate of Rs.1,86,79,300/- by authorities below on account of defective material supplied by assessee to its customer, we after considering rival contentions and perusing material on record are again of considered view keeping in view facts and circumstances of case, that this matter 11 ITA 411 /Mum/2013 & 398/Mum/2013 also need to be set aside and restored to file of AO for de-novo determination of issue on merits after examination, enquiry and verification by AO as may be considered appropriate by AO to determining genuineness of claim and also quantification of loss allocable to assessee for defective material supplied by assessee to its suppliers in accordance with terms of supplies. assessee is directed to appear before AO and produce all relevant and necessary evidences in support of its contentions in its defense to prove genuineness of its claim of rebate for defective material , which shall be admitted by AO and adjudicated on merits in accordance with law. Needless to say proper and adequate opportunity of being heard shall be provided by AO to assessee in accordance with principles of natural justice in accordance with law. We order accordingly. 9. In result, appeal filed by assessee in ITA No. 411/Mum/2012 is allowed for statistical purposes. 10. Now, we shall take appeal for assessment year 2009-10 vide ITA no. 398/Mum/2013 . grounds of appeal raised by assessee company in memo of appeal filed with Income Tax Appellate Tribunal, Mumbai (hereinafter called Tribunal ) read as under:- Following are grounds of appeal without prejudice to one another: 1. learned Commissioner of Income Tax(Appeal) had erred by approving wrong action taken by learned assessing officer of applying wrongly Rule 8D pursuant to provisions of Section 14A to assessee company who is engaged in business of Trading in Commodities and investment in Equity Shares . 2. learned Commissioner of Income Tax(Appeal) has again erred by approving unfair and unreasonable stand taken by learned assessing of considering genuine Short Term Capital Loss on sale of 12 ITA 411 /Mum/2013 & 398/Mum/2013 Land at Hasteda (Rajasthan) amounting to Rs.11427420/- as sham transaction. 11. On verification of audited accounts and computation of income statement filed along with return of income by assessee, it was observed by AO that average investment made in shares and mutual funds were Rs.11,72,73,815/- . assessee had earned dividend income of Rs.79,975/- which was claimed as exempt income u/s. 10(34) of Act. It was observed by AO during course of assessment proceedings u/s. 143(3) read with Section 143(2) of Act upon examination of assessee s accounts that it is not possible to pinpoint expenses related to various heads of income including exempt income. All expenses were incurred out of common pool funds as well as assessee has maintained composite books of accounts for taxable as well exempt income. assessee paid interest of Rs. 5,03,805/- and assessee was asked to give computation of disallowance u/s 14A of Act read with Rule 8D of Income Tax Rules, 1962. assesssee submitted details which worked out to disallowance of Rs. Nil u/r 8D(2)(i), Rs.66,358/- u/r 8D(2)(ii) and Rs. 5,86,369/- u/r 8D(2)(iii) of Income Tax Rules, 1962, aggregating to disallowance of Rs. 6,52,727/- u/s 14A of Act read with Rule 8D of Income Tax Rules, 1962, which was in-fact disallowed by AO vide assessment order dated 30-12-2011 passed u/s 143(3) of Act. 12. Aggrieved by assessment order dated 30-12-2011 passed by AO u/s. 143(3) of Act, assessee filed first appeal before learned CIT(A). 13. Before learned CIT(A), assessee contended that assessee never bought shares with motive of earning dividend income which is exempt income. assessee submitted that in few case it got 13 ITA 411 /Mum/2013 & 398/Mum/2013 dividend which does not mean that dividend earning was motive of assessee. assessee submitted that no proximity is established between expenditure incurred and income not forming part of total income. assessee relied upon decision of Hon ble Bombay High Court in case of Godrej and Boyce Manufacturing Company Limited v. DCIT (2010) 328 ITR 81(Bom.) and Yatish Trading Company Private Limited v. ACIT (2011) 129 ITD 237(Mum.Trib.). learned CIT(A) rejected contentions of assessee as in opinion of learned CIT(A) assessee is not able to show by production of material that shares were acquired from owned funds available at assessee s hand at relevant point of time with taking benefit of loans bearing interest.The assessee was not able to give any details to work out direct nexus of interest expenditure related to exempted income which was not included in total taxable income. assessee s present case is covered by provisions of Section 14A(3) of Act because assessee has claimed that no expenditure was incurred by assessee in relation to exempted income which did not form part of total income. It was also observed by learned CIT(A) that assessee case is also covered by Section 14A(2) of Act as AO was not satisfied with correctness of claim of assessee in respect of such expenditure incurred in relation to earning of income which does not form part of taxable income. learned CIT(A) relied upon decision of Special Bench of Tribunal in case of Daga Capital Management reported in (2008) 26 SOT 603(Mum.) and held that it is value of investment that is to be considered while calculating disallowance u/r 8D(2)(ii) of Income Tax Rules, 1962 and not shares held as investment. Therefore, it was held that shares held as stock in trade shall also be considered for purposes of disallowance. Thus, learned CIT(A) confirmed disallowance of Rs.6,52,727/- made by AO u/s 14 ITA 411 /Mum/2013 & 398/Mum/2013 14A of Act read with Rule 8D of Income Tax Rules, 1962, vide appellate order dated 11.09.2012 passed by learned CIT(A). 14. Aggrieved by appellate order dated 11.09.2012 passed by learned CIT(A), assessee filed second appeal with Tribunal. 15. Before Tribunal, learned counsel for assessee contended that assesse earned dividend income of Rs.79,975/- during previous year relevant to assessment year and disallowance u/s 14A of Act read with Rule 8D of Act cannot exceed dividend income earned by assessee, while AO disallowed amount of Rs. 6,52,727/- while applying Section 14A of Act read with Rule 8D of Income Tax Rules, 1962. assessee relied on decision of Mumbai Tribunal in case of Sylvex Cables Company Private Limited v. DCIT in ITA no 8581/Mum/2011 as well on decision of Pr. CIT v. Empire Packaging Private Limited and decision of Hon ble Delhi High Court in case of Joint Investment Private Limited v. CIT (2015) 372 ITR 694(Del HC) to contend that disallowance u/s. 14A of Act cannot exceed dividend income earned by assessee. ld DR relied upon orders of learned CIT(A). 16. We have heard rival contentions and perused material on record including case laws relied upon, we have observed that assessee has earned dividend income of Rs.79,975/- which was claimed exempt u/s. 10(34) of Act. assessee submitted that assessee has not incurred any expenditure in relation to earning of income which does not form part of total income as per provisions of Act. disallowance of expenditure incurred by assessee in relation to earning of income which does not form part of total income as per provisions of Act has to be worked out in accordance with Section 14A(2) of Act having regards 15 ITA 411 /Mum/2013 & 398/Mum/2013 to accounts of assessee. assessee has claimed that no expenditure is incurred in relation to earning of income which does not form part of total income of assessee as per provisions of Act. authorities below have given finding of fact that assessee has maintained composite books of accounts and it is not possible to work out expenditure incurred in relation to earning of exempt income. assessee also did not came forward to present disallowance of expenditure incurred in relation to earning of income not forming part of total income as per provisions of Act and instead claimed that no expenditure has been incurred which can be disallowed u/s. 14A of Act.Thus, in our considered view keeping in view factual matrix of case, AO has rightly invoked provisions of Section 14A of Act read with Rule 8D of Income Tax Rules, 1962 . However, we are also of considered view that while calculating average investment held by assessee, shares/securities held as stock in trade cannot be included for computing disallowance u/s 14A of Act read with Rule 8D of Income Tax Rules, 1962 for which reference is drawn to recent decision of Mumbai Tribunal in case of Fiduciary Shares and Stock Private Limited v. ACIT in (2016) 70 taxmann.com 23(Mum. Trib.) wherein Tribunal held as under: 4.4.1 We have heard rival contentions of both parties and perused and carefully considered material on record; including judicial pronouncements cited and placed reliance upon. issue for adjudication before us is as to whether shares held by assessee- company under head 'stock-in-trade' are to be considered for making disallowance under section 14A r.w. Rule 8D. As submitted by learned A.R. for assessee we find that Hon'ble Jurisdictional Court in case of India Advantage Securities Ltd. (supra) has held that disallowance, if any, to be made under section 14A r.w. Rule 8D should 16 ITA 411 /Mum/2013 & 398/Mum/2013 only be made with regard to investments and not with regard to shares held as stock-in-trade. This decision of Hon'ble Bombay High Court (supra) has been followed by Coordinate Bench of this Tribunal in case of Devkant Synthetics (India) (P.) Ltd. (supra) wherein at para 12 and 13 thereof it has been held as under: "12. We heard parties and perused record. We notice that Hon'ble Karnataka High Court has held in case of CCI Ltd. (supra) that shares held as stock in trade should be excluded for purpose of computing disallowance u/s 14A of Act, since they cannot be said to be "investment" made for purpose of earning dividend income. In case of India Advantage Securities Ltd. (supra), Hon'ble Bombay High Court has noticed that CIT(A) took into account words of Rule and found that figures as derived by Assessing officer cannot be taken into consideration. Ld CIT(A) had observed that, one can at best disallow expenses which are incurred for earning dividend income and for that purpose, figures under head "Investment" could be taken and some charges apportioned for purpose of computing expenses. decision rendered by Tribunal in case of India Advantage Securities Ltd. (supra) was found to be neither perverse nor vitiated by any error of law apparent on face of record by Hon'ble Bombay High Court. We further notice that decision rendered in case of CCI Ltd (supra) has been followed by co-ordinate benches of Tribunal in case of India Advantage Securities Ltd (ITA No.6711/Mum/2011 and Ganjam Trading Co. Pvt Ltd (supra). 13. In case of Ganjam Trading Co. P. Ltd. (supra), Tribunal took note of decision rendered by Special 17 ITA 411 /Mum/2013 & 398/Mum/2013 Bench of Tribunal in case of ITO v. Daga Capital Management (P.) Ltd. [2009] 117 ITD 169 (Mum.)(SB) also. However, following decision of Hon'ble Karnataka High Court in case of CCI Ltd. (supra), Tribunal held that disallowance of interest in relation to dividend received from shares held as stock-in-trade cannot be made.' 4.4.2 Respectfully following decisions of Hon'ble Bombay High Court in case of India Advantage Securities Ltd. (supra), Hon'ble Karnataka High Court in case of CCI Ltd. (Supra) and Coordinate Bench of this Tribunal in case of Devkant Synthetics (India) (P.) Ltd.(supra), we hold that disallowance under section 14A r.w. Rule 8D cannot be made in respect of shares held as stock-in-trade and therefore direct AO to delete disallowance made under section 14A r.w. Rule 8D. Consequently, ground No. 1 of assessee's appeal is allowed. proposition of assessee that disallowance u/s 14A of Act cannot exceed dividend income came for adjudication before Mumbai, Tribunal in very recent appeal in case of Foods and Inns Limited v. ACIT (2016) 159 ITD 1007(Mum. Trib.) , wherein Tribunal held as under: 3.3.1 For assessment years 2009-10 and 2010-11 assessee had earned exempt dividend income of Rs. 41,126/- and Rs. 40,003/- respectively, but suo moto disallowed amount of Rs. 40,000/-as expenditure incurred for earning exempt income only in A.Y. 2010-11. AO invoking provisions of section 14A r.w. Rule 8D disallowed Rs. 18,86,195/- for A.Y. 2009-10 and Rs. 17,38,275/- for A.Y. 2010-11. On appeal, learned CIT (A) restricted disallowance under section 14A r.w. Rule 8D to Rs. 18 ITA 411 /Mum/2013 & 398/Mum/2013 1,07,754/- for A.Y. 2009-10 and to % of average investments for A.Y. 2010-11. 3.3.2 Before us, Revenue for A.Y. 2009-10 and assessee by way of COs for A.Y. 2009-10 and 2010-11 have assailed orders of learned CIT (A) in respect of his finding/decision on issue of disallowance under section 14A r.w. Rule 8D. Revenue in A.Y. 2009-10 assails orders of learned CIT (A) in restricting disallowance to % of average investment for administrative expenses. On other hand, assessee in its COs for assessment years 2009-10 and 2010-11 has challenged impugned orders of learned CIT (A) in directing AO to compute disallowance under section 14A r.w. Rule 8D @0.5% of total average investment for administrative expenses without assigning any reasons, when such disallowance ought to be made only in respect of 0.5% of average investments yielding tax free income. 3.3.3 We have heard both learned D.R. for Revenue and learned A.R. for assessee. In course of hearing, learned A.R. for assessee submitted that assessee had earned exempt dividend income of Rs. 41,216/- in A.Y. 2009-10 and Rs. 40,003/- in A.Y. 2010-11 and that while assessee had claimed that no expenditure had been incurred for earning this income in A.Y. 2009-10, Rs. 40,000/- was shown to have been incurred for earning exempt income in A.Y. 2010-11 It was contended that in light of decisions of Hon'ble Punjab & Haryana High Court in case of PR. CIT v. Empire Package (P.) Ltd. [IT Appeal No. 415 of 2015, dated 12-1-2016] and of Hon'ble Punj. & Har. High Court in case of CIT v. Deepak Mittal [2014] 361 ITR 131/[2013] 38 taxmann.com 83/219 Taxman 314 (Punj. & Har.), 19 ITA 411 /Mum/2013 & 398/Mum/2013 disallowance under section 14A r.w. Rule 9D in case on hand @ 0.5% of investment in tax free securities cannot exceed exempt income and should be restricted accordingly. 3.3.4 We have perused cited judgements. In case of Empire Package (P.) Ltd. (supra), question raised by Revenue before Hon'ble Court was: "Whether in facts and circumstances of case Hon'ble ITAT is justified in law to hold that disallowance made under section 14A read with Rule 8D cannot exceed exempt income, in absence of any such instruction being there in relevant section or rule?" Hon'ble High Court dismissed Revenue's appeal holding as under at paras 3 to 5: '3. We have heard learned counsel for appellant-revenue. 4. Tribunal has only remanded matter to Assessing Officer after considering factual position and relevant case law on point. It relied upon decision rendered by this Court in CIT v. Deepak Mittal, [2013] 38 taxmann.com 83 (Punj. & Har.) holding that disallowance under Section 14A of Act requires finding of incurring of expenditure in respect of exempted income and where it is found that for earning exempted income, no expenditure has been incurred, disallowance under section 14A of Act cannot stand. In present case, when assessee claimed that it had not made any expenditure on earning exempt income, Assessing Officer in terms of sub section (2) of Section 14A of Act was required to collect such material evidence to determine expenditure if any incurred by assessee in relation to earning of exempt income. income from dividend had been 20 ITA 411 /Mum/2013 & 398/Mum/2013 shown at Rs. 1,11,564/- whereas disallowance under Section 14A read with Rule 8D of Rules worked out by Assessing Officer came to Rs. 4,09,675/-. Thus, Assessing Officer disallowed entire tax exempt income which is not permissible as per settled position of law. Consequently, Tribunal remitted matter to Assessing Officer with direction to decide same afresh in accordance with law after affording due and reasonable opportunity of being heard to assessee. relevant finding recorded by Tribunal reads thus:- "7. In instant case, income from dividend has been shown at Rs. 1,11,564/-, disallowance under section 14A read with Rule 8 D worked out by Assessing Officer comes to Rs. 4,09,675/-. Thus, it is clear that AO has disallowed entire tax exempt income which is not permissible in view of judgment of Hon'ble Delhi High Court referred to above. Hon'ble Delhi High Court held that window for disallowance is indicated in section 14A, and is only to extent of disallowing expenditure "incurred by assessee in relation to tax exempt income". disallowance under section 14A read with Rule 8D as worked out by Assessing officer is not in accordance with law and as such working is not sustainable. 8. In view of above observations, I think it is appropriate to set aside order of learned CIT (A) on this issue and remit matter to file of AO with direction to decide issue afresh in accordance with law after affording due and reasonable opportunity of being heard to assessee." Additionally, tax effect involved is of Rs. 1,26,589/- only. 21 ITA 411 /Mum/2013 & 398/Mum/2013 5. view adopted by Tribunal being plausible view based on factual position and relevant case law on point, does not warrant any interference by this Court. Learned counsel for appellant-revenue has not been able to show any illegality or perversity in impugned order. Thus, no substantial question of law arises. Consequently, appeal stands dismissed.' 3.3.5 Respectfully following decision of Hon'ble Punjab & Haryana High Court in Empire Package (P.) Ltd. (supra) and of Hon'ble Punj. & Har. High Court in case of Deepak Mittal (supra), we are of considered view that learned CIT (A) has not given any proper basis for working out disallowance under section 14A r.w. Rule 8D; specifically when disallowance is far in excess of exempt dividend income earned in year under consideration. In this view of matter, we set aside impugned order of learned CIT (A) on this issue and restore matter to file of AO to decide issue afresh, in accordance with law in light of ratio laid down by above judicial pronouncements (supra) after affording reasonable opportunity to assessee of being heard and to file submissions/details required in this regard. Consequently, assessee's ground No. (a) in CO for 2009-10 and CO for A.Y. 2010- 11 and Revenue's ground No. 1 for A.Y. 2010-11 are treated as allowed for statistical purposes. We have perused other case laws relied upon by assessee. In instant case, there is finding recorded by authorities below that assessee is maintaining composite books both with respect to taxable and exempt income and it is not possible to work out disallowance u/s 14A of Act having regard to accounts of assessee. Thus based on 22 ITA 411 /Mum/2013 & 398/Mum/2013 facts and circumstances of instant case, we are setting aside and restoring above issue to file of learned AO for de-novo working out disallowance of expenditure u/s 14A of Act read with Rule 8D of Income Tax Rules, 1962 in accordance with our above directions and also keeping in view decisions of Hon ble Bombay High Court in case of CIT v. Reliance Utilities and Power Ltd. (2009) 313 ITR 340(Bom HC) and in case of HDFC Bank Ltd. v. DCIT (2014) 366 ITR 505(Bom HC) and decision of Hon'ble Bombay High Court in writ petition in HDFC Bank Limited v. DCIT(2016) 67 taxmann.com 42(Bom. HC) . We order accordingly. 17. Next Issue in this appeal is with respect to treatment by Revenue of short term capital loss incurred by assessee on sale of land at Hasteda(Rajasthan) amounting to Rs.1,14,27,420/- as arising out of sham transaction. On perusal of details of capital gains/losses incurred by assessee during course of assessment proceedings u/s. 143(3) read with Section 143(2) of Act, it was observed by AO that assessee had incurred loss of Rs. 1,14,27,420/-- on sale of land at Hasteda, Tal, Chomu District, Jaipur which short term capital loss was set off against other capital gains earned by assessee. AO from perusal of documents submitted in connection therewith observed that agreement to sale dated 10-03-2008 was entered into by assessee with Siyaram Exports India Private Limited and assessee wherein it is mentioned that assignor i.e. Siyaram Exports India Private Limited shall transfer and assign to assignee i.e. assessee(or its nominees) 7.33 hectare of land with their appurtenances free from encumbrances for price of Rs.1,71,50,000/- . assignee ( i.e. assessee ) had paid Rs.10,00,000/- in cash on 10-03-2008 and balance amount of Rs.1,61,50,000/- will be paid by assignee on or before 31-12-2008 to assignor. assessee also submitted two registered sale deeds dated 23 ITA 411 /Mum/2013 & 398/Mum/2013 16-01-2009 in favour of Smt Anju Yadav and secondly with Smt. Savitri Devi Yadav and Smt. Nirmala Yadav residents of Jaipur for Rs.20,40,000/- and Rs.38,00,000/- respectively. assessee submitted registration deeds of property. It was observed by AO that sale deed was executed by Mr. Rajendra Kumar Soni resident of Jaipur as power of attorney holder of assessee company on 22-01-2009.The payments for land purchase by assessee were made when land were sold after nearly ten months and resulted in loss of Rs.1,14,27,420/- . assessee was asked to explain that why said loss on sale of Hasteda land should not be disallowed. assessee submitted before AO that assessee bought said land admeasuring 7.33 hectares in March 2008 at Hasteda Tehsil, Chomu District , Jaipur with intention of earning short term capital gains , from Siyaram Exports India Private Limited for Rs.171.50 lacs , against which assessee made payment of Rs.10 lacs in March 2008 while balance payments of Rs.161.50 lacs were made in month of January 2009. It was submitted that assessee got information from reliable sources that new township would be developed by reputed builders from Jaipur at Hasteda and hence assessee took decision to buy this parcel of land.Since plan could not go through and hence assessee sold this land to Smt. Anju Yadav and to Smt. Savitri Yadav and Smt. Nirmala Yadav. sale deed was registered on 16-01-2009. It was submitted that transaction is genuine and merely because payment to Siyaram Exports Private Limited was made late , it could not be held to be bogus transaction. assessee has paid full consideration to seller party and assessee has also got full payment from buyer party. documents have been duly registered with appropriate authority i.e. Sub- registrar and stamp duty has been duly paid to Government. 24 ITA 411 /Mum/2013 & 398/Mum/2013 AO held that these are sham transaction as assessee company has accommodated both parties i.e. sellers and buyers wherein sellers got full consideration and buyer also paid full consideration being lesser amount . theory of new township is cooked up and information is not from public sources but from so called reliable sources which has no credence. transaction defies logic and balance sheet does not show any stress sign and at best assessee could have lost advance payment of Rs. 10 lacs if assessee was not able to carry forward sale transaction and complete sale by 31-12-2008 as there was no need for sale and to incur loss of Rs.1.14 crores and instead loss could have been only Rs. 10 lacs. Thus, AO held based on series of events mentioned above and also conduct of entire transaction that transaction is sham transaction and loss generated is not genuine and loss of capital Rs.1,14,27,420/- on this transaction was disallowed by AO vide assessment order dated 30-12-2011 passed by AO u/s 143(3) of Act. 18. Aggrieved by assessment order dated 30-12-2011 passed by AO u/s. 143(3) of Act, assessee filed first appeal with learned CIT(A). 19. assessee reiterated its submissions before learned CIT(A) as were submitted before AO which are not repeated. learned CIT(A) directed assessee to file proof in form of extracts from revenue records in prescribed 7/12 registers. It was observed by learned CIT(A) that it is undisputed position that impugned land at Village Hasteda is wholly and fully agricultural land. land was registered in name of Siyaram Exports Private Limited . assessee did not submit extracts from 7/12 registers. Thus, learned CIT(A) held that assessee had failed to prove bonafides in accommodating M/s Siyaram Exports Private 25 ITA 411 /Mum/2013 & 398/Mum/2013 Limited by paying higher sales consideration of Rs.171.50 lacs when same land was registered and sold for sum of Rs. 58.40 lacs. assessee as per learned CIT(A) also failed to prove bonafide in accommodating Smt Anju Yadav, Smt Savitri Yadav and Smt. Nirmala Yadav for sale consideration of Rs.58.40 lacs when assessee itself paid Rs. 171.50 lacs for said land. Further, most of payment i.e. Rs.161.50 lacs were made after land was transferred to buyers namely Smt Anju Yadav, Smt Savitri Yadav and Smt. Nirmala Yadav. Thus, as per learned CIT(A) genuineness of transaction leading to alleged capital loss of Rs.1,14,27,420/- is not proved . Accordingly appeal of assessee was dismissed by learned CIT(A) vide appellate orders dated 11.09.2012. 20. Aggrieved by appellate orders dated 11.09.2012 passed by learned CIT(A), assessee filed second appeal with Tribunal. 21. Before Tribunal, learned counsel for assessee stated that name of company was changed from New Planet Trading Company Private Limited to Ansh Merchandise Private Limited .The learned counsel for assessee submitted that assessee entered into agreement to sell dated 10-03-2008 with Siyaram Exports Private Limited to purchase 7.33 hectare of agricultural land at village hasteda, District Jaipur for Rs. 171.5 lacs with view to earn short term capital gains expecting huge increase in valuation of land within short period of time on account of development of township. assessee paid Rs. 10 lacs in cash at time of purchase agreement while rest of consideration of Rs.161.50 lacs was paid in month of January 2009 starting from 17th January 2009. said agreement is placed in paper book / page 26-28 filed with Tribunal. It was submitted that land prices did not appreciate and assessee had to fulfill obligation to pay balance sales consideration. said land was sold 26 ITA 411 /Mum/2013 & 398/Mum/2013 by assessee vide two separate sale deeds both 16-01-2009 for total consideration Rs. 58.40 lacs to Smt. Anju Yadav and secondly to Smt. Savitri Yadav and Smt. Nirmala Yadav. balance consideration of Rs. 161.50 lacs for purchase of land was paid by assessee to Siyaram Exports Private Limited after selling land on 16-01-2009 to Smt. Anju Yadav and secondly to Smt. Savitri Yadav and Smt. Nirmala Yadav. two sale deeds are placed in paper book/page 29-58.The assessee incurred loss of Rs.1,14,27,420/- in said purchase and sale of land. It was submitted that all facts were brought to knowledge of authorities below but they erred in holding that said transaction is not genuine and is sham transaction. It was submitted that by entering agreement to sale dated 10-03-2008 wherein assessee paid Rs. 10 lacs as initial consideration to Siyaram Exports India Private Limited, assessee acquired valuable rights in capital asset and assessee relied upon decision of Hon ble Bombay High Court in case of CIT v. Tata Services Limited (1980) 122 ITR 594(Bom) and CIT v. Vijay Flexible Containers (1990) 186 ITR 693(Bom) and hence observation of learned CIT(A) that assessee name does not appear in 7/12 extract is irrelevant. It was submitted that since assessee was unable to perform its obligation of paying consideration under agreement to sell , ultimate sale deed s dated 16-01-2009 had both Siyaram Exports India Private Limited and assessee as party to sale deed so that there are no defects in title. It was submitted that both parties are not related to assessee. sale is by registered sale deed and AO did not conduct any enquiry. It was submitted that as per agreement to sale dated 10-03-2008, assessee had to pay entire balance consideration together, assessee paid same in January 2009 and part of consideration was obtained by selling rights to Smt Anju Yadav and to Smt Savitri Yadav and Smt. Nirmala Yadav vide two sale deeds both dated 27 ITA 411 /Mum/2013 & 398/Mum/2013 16-01-2009. Thus , it was submitted by learned counsel for assessee that transaction is genuine and disallowance ought to be deleted. 22. ld DR relied upon orders of learned CIT(A). It is also submitted that land being agricultural land, capital gains on sale of agricultural land are not chargeable to tax as per provisions of Act and similarly capital losses arising on sale of agricultural land are not allowable to be set off against other capital gains earned by assessee. 23. We have heard rival contentions and perused material on record. We have observed that assessee had purchased agricultural land bearing Khasra no 1779, 1780 , 1779/2120, 1780/2121 , 1781 , 1785/2131 , 1782 and 1817 in aggregate 7.33 hectare ( 8 Rakba) situated at Village Hasteda , Patwar area Hasteda , Land record inspection area Hasteda , Tehsil Chomu, District Jaipur, Rajasthan from Siyaram Exports India Private Limited who were owners vide agreement to sale dated 10-03-2008 for total stated consideration of Rs.171.50 lacs against which assessee paid cash of Rs. 10 lacs on 10-03-2008. balance consideration of Rs.161.50 lacs was paid from 17-01-2009 onwards in month of January 2009 to Siyaram Exports India Private Limited. agreement to sale dated 10-03-2008 stipulated that if assessee failed to pay balance consideration of Rs.161.50 lacs on or before 31-12-2008, said amount of Rs.10 lacs paid as advance will be forfeited by sellers M/s Siyaram Exports India Private Limited. assessee had stated that land was purchased on 10-03-2008 with objective of selling it within short period of time and making capital gains as it was expected that there will be huge increase in valuation of land as there was some reliable information that some new township is being developed by some private builder in Hasted. But, no evidence is brought on record even before us to substantiate basis of so called reliable information 28 ITA 411 /Mum/2013 & 398/Mum/2013 which induced assessee to purchase land. said agreement to sale dated 10-03-2008 is placed in paper book/page 26-28 filed with Tribunal. assessee sold said land admeasuring 7.33 hectares vide two separate sale deeds both dated 16-01-2009 to Smt Anju Yadav and secondly to Smt Savitri Yadav and Smt. Nirmala Yadav for total consideration of Rs. 58.40 lacs. assessee , thereafter, made balance payment of Rs.161.50 lacs in month of January 2009 starting from 17th January 2009 to Siyaram Exports India Private Limited for completing purchase of afore-stated land which was purchased vide agreement to sale dated 10-03-2008, while two sale deeds executed by assessee in favour of Smt Anju Yadav and secondly to Smt Savitri Yadav and Smt. Nirmala Yadav are dated 16-01-2009 and that too for substantial lower amount of Rs. 58.40 lacs which defies all logic, principles of commercial expediency and rationality as huge loss is suffered by assessee vide these purchase and sale of land transactions, amounting to Rs. 1,14,00,420/- . assessee has also not been able to bring on record any justification, reasons or cogent evidences/explanation to substantiate huge fall in valuation of land from Rs 171.5 lacs in March 2008 to Rs 58.40 lacs in month of January 2009 , i.e. just in 10 months. Both sales deeds dated 16-01-2009 for total consideration of Rs. 58.40 lacs with Smt Anju Yadav and secondly with Smt Savitri Yadav and Smt. Nirmala Yadav are placed in paper book/page 29-58. assessee in its agreement to sale dated 10-03-2008 with Siyaram Exports India Private Limited for purchase of said land for Rs.171.50 lacs wherein cash advance of Rs.10 lacs was only paid by assessee on 10-03-2008 had exit clause in said agreement wherein assessee could have asked Siyaram Exports India Private Limited to forfeit advance of Rs 10 lacs paid by assessee on 10-03-2008 if assessee was not able to complete transaction of purchase of land of its own by 31-12-2008 due to any reasons whatsoever and loss would have been limited and restricted to Rs. 10 lacs only, 29 ITA 411 /Mum/2013 & 398/Mum/2013 but manner in which assessee went ahead in January 2009 and entered into two sales deed both dated 16-01-2009 for sale of aforesaid land to Smt Anju Yadav and secondly to Smt Savitri Yadav and Smt. Nirmala Yadav for meager sum of Rs. 58.40 lacs to self prejudice itself by saddling with avoidable and unwarranted capital loss of Rs 114 lacs instead of restricting said capital loss to Rs. 10 lacs as described above by asking seller Siyaram Exports India Private Limited to forfeit advance, clearly defies all logic, rationality and principles of commercial expediency known to business world which clearly indicates to irresistible as well one and only one conclusion that whole transaction for purchase and sale of afore-stated land Were accommodating in nature whereby interests of both purchaser and seller in receiving or giving sale consideration through consideration amounts recorded in books of accounts were duly looked by assessee wherein seller was accommodated with making of higher payments on record and buyers were accommodated to give lesser price on record for same parcel of land , and on touchstone of preponderance of probabilities it reflects that rest of money purportedly exchange hands as on-money which were not brought to tax on record . transactions for sale and purchase of land were entered into by assessee and once Revenue has doubted transactions as being not genuine for reasons as set out above, then onus shifts back to assessee to prove by cogent evidences and explanations that transactions for purchase and sale of land were in fact genuine which assessee in instant case failed to do so. Thus, these transactions for purchase and sale are not proved by assessee to be genuine transactions and are held by us to be sham and colorable devices and short term capital loss of Rs. 114 lacs incurred by assessee cannot be allowed under provisions of Act . We therefore confirm/sustain order of learned CIT(A) in which we donot find any infirmity. We order accordingly. 30 ITA 411 /Mum/2013 & 398/Mum/2013 24. In result, appeal filed by assessee in ITA No. 398/Mum/2012 is partly allowed as indicated above. 25. In result appeal filed by assessee in ITA no. 411/Mum/2012 for assessment year 2008-09 is allowed for statistical purposes while appeal in ITA no. 398/Mum/2012 for assessment year 2009-10 is partly allowed. Order pronounced in open court on 19th September, 2016. 19 -09-2016 Sd/- sd/- (MAHAVIR SINGH) (RAMIT KOCHAR) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated 19-09-2016 R.K., Ex. Sr. PS Copy of Order forwarded to : 1. Appellant 2. Respondent. 3. CIT(A)- concerned, Mumbai 4. CIT- Concerned, Mumbai 5. DR, ITAT, Mumbai Bench 6. Guard file. BY ORDER, //True Copy// (Dy./Asstt. Registrar) ITAT, Mumbai Ansh Merchandise Private Limited v. DCIT 5(2), Mumbai