2012 (10) TMI 529 - AT - Income Tax

Tax Appeal Decisions: Disallowance Challenges Dismissed, Capital Loss Setoff Denied, Legal Fees Allowed

The revenue's appeals challenging the disallowance under Section 14A of the Income Tax Act for the assessment years 2004-05 and 2006-07 were dismissed. ... Disallowance u/s 14A of the Act - Held that:- The section only permits the Assessing Officer, in an indivisible business consisting partly of taxable activities and partly of tax-free activities, to identify expenditure, if any, incurred in relation to the earning of non-taxable income and disallow it. The section cannot be taken beyond this to attribute, by some yardstick, every item of expenditure which has no apparent connection or nexus with the earning of tax free, to the earning of tax-free income - appeals of the revenue are dismissed. Loss on Sale of Shares -short term capital loss to be set off against the long term capital gain - Held that:- Loss on sale of shares of Lanco Net Ltd. are not in accordance with the business activities of the assessee and hence not allowable as capital loss and same cannot be adjusted against capital gains - Order of the CIT(A) is confirmed - Ground of appeal of the assessee is dismissed. Disallowance of legal and professional fees - deduction u/s 80IA. - The assessee contended that he had computed profits of the undertaking and has also filed certificate of the auditor in respect of the eligible undertaking and has maintained proper Books of A/c as required to compute profits - set aside this issue to the file of the Assessing Officer for reconsidering the profitability of the eligible undertaking on the basis of the workings furnished by the assessee, after giving reasonable opportunity to the assessee to put forward its case - appeal of the assessee is treated as allowed for statistical purposes. Issues Involved:1. Disallowance under Section 14A of the Income Tax Act.2. Non-setting off of capital loss on sale of shares against capital gains.3. Disallowance of legal and professional fees under Section 80IA.Issue-wise Detailed Analysis:1. Disallowance under Section 14A of the Income Tax Act:The revenue appealed against the CIT(A)'s order for the assessment years 2004-05 and 2006-07, challenging the deletion of disallowance made by the AO under Section 14A. The AO had disallowed Rs. 1,07,68,545/- as interest paid to Lanco Kondapally Power Pvt. Ltd. for loans taken by the assessee, which was claimed as exempt dividend income. However, since the assessment was already completed under Section 143(3) with the entire interest expenses disallowed, no separate addition was made in the assessment order. The CIT(A) deleted the disallowance, and the Tribunal upheld this decision, referencing a similar decision in the assessee's own case for AY 2003-04. The Tribunal emphasized that only actual expenditure incurred in relation to earning tax-free income can be disallowed under Section 14A, and not deemed or assumed expenditures. Consequently, the appeals of the revenue were dismissed.2. Non-setting off of capital loss on sale of shares against capital gains:The assessee's appeal for AY 2003-04 revolved around the non-setting off of capital loss on the sale of shares in Lanco Net Ltd. against capital gains. The AO had determined the total business loss and income from long-term capital gains (LTCG) without allowing the set-off of short-term capital loss of Rs. 6,15,06,000/- against LTCG. The CIT(A) upheld the AO's decision, noting that the issue had already been decided by appellate authorities. The Tribunal agreed with the CIT(A), referencing its earlier decision in the assessee's own case for AY 2003-04, which concluded that the sale price of shares at 10 paise per share was arbitrary and unsupported by evidence. Therefore, the claimed short-term capital loss was not allowable, and the appeal of the assessee was dismissed.3. Disallowance of legal and professional fees under Section 80IA:For AY 2004-05, the assessee's appeal concerned the disallowance of legal and professional fees related to the claim of deduction under Section 80IA. The AO disallowed the deduction, stating that the balance sheet and P&L account submitted by the assessee were not properly maintained and appeared to be manipulated for claiming the exemption. The CIT(A) upheld the AO's decision, noting that the assessee did not maintain proper accounts as required under Rule 18BBB, and failed to provide necessary permissions or agreements for the eligible project. The Tribunal, however, set aside the issue to the AO for reconsideration, instructing the AO to reassess the profitability of the eligible undertaking based on the workings furnished by the assessee, after providing a reasonable opportunity for the assessee to present its case.Conclusion:- ITA Nos. 60 & 61/Hyd/2010 (Revenue's appeals for AY 2004-05 & 2006-07): Dismissed.- ITA No. 87/Hyd/2010 (Assessee's appeal for AY 2003-04): Dismissed.- ITA No. 88/Hyd/2010 (Assessee's appeal for AY 2004-05): Allowed for statistical purposes.Overall Result:- The revenue's appeals were dismissed.- The assessee's appeal regarding capital loss was dismissed.- The assessee's appeal concerning the disallowance under Section 80IA was allowed for statistical purposes.