2013 (9) TMI 194 - AT - Income Tax

Tribunal validates reassessment, allows capital loss claim, confirms IVF income taxability.

Scope (P.) Ltd. Versus Deputy Commissioner of Income-tax, Central Circle-34, Mumbai

The Tribunal upheld the validity of reassessment proceedings under Section 153A, deleted the disallowance under Section 14A, allowed the assessee's claim ... Validity of reassessment u/s 153A - The issue before us is relating to the reassessment proceedings u/s 153A in respect of Assessment Year 2005-06 only and not for all the six Assessment Years - There was no incriminating material found during the course of search and seizure action; therefore, the initiation of proceedings u/s 153A is unwarranted - Assessee has not challenged the validity of reassessment u/s 153A for the other five years – Held that:- The legislature though has clearly identified two types of situation; first when the assessment of any Assessment Year falling within six Assessment Years is pending on the date of initiation of search u/s 132 or making of requisition u/s 132(A) as the case may be, shall abate. Therefore, the assessment u/s 53A in respect of those Assessment Years which stand abated because of the reason of pending on the date of initiation of search or requisition shall be the original/first assessment. In the second category, where the assessment or reassessment has already been completed on the date of initiation of search or making of requisition as the case may be the assessment u/s 153A would be in the nature of reassessment. Thus, the legislature has carved out the nature of assessment u/s 153A as assessment or reassessment in the respective situation. Since the assessment was completed vide assessment order dated 7.11.2007 prior to the date of initiation of search on 15.11.2007. Therefore, this case falls under the category of reassessment u/s 153A. - following the decision in Pratibha Industries Ltd (2012 (12) TMI 760 - ITAT MUMBAI) - Decided against the assessee. Disallowance u/s 14A of the Income Tax Act – Held that:- Rule 8D is not applicable for the Assessment Year under consideration in view of the decision of the Hon'ble jurisdictional High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010 (8) TMI 77 - BOMBAY HIGH COURT] - Therefore, the disallowance made by the Assessing Officer in the reassessment proceedings u/s 153A by applying rule 8D without detecting any material or record to show that the assessee had incurred any expenditure for earning of the exempt income is not justified – Decided in favor of Assessee. Disallowance of short term capital loss and restricting deletion of addition u/s 115U of the IT Act - Held that:- section 115U mandates that the nature of income which is received by the VCC or VCF from the Venture Capital undertaking and further distributed to the investor shall be taxable in the hands of the investor by treating the same nature of income like long term capital gain, short term capital gains, dividend or other income such as interest etc., and accordingly be taxed as per the provisions as applicable under different heads of the income. Hence, section 115U prescribes the principle of pass through by treating the VCC or VCF as a pass through vehicle and further, grants some concession in the shape of non-applicability of provisions of Chapter XIV-D, XII E or XVII B; but does not provide that the income received by the investor from VCC or VCF is exempt - Even otherwise, if the objective of introduction of sec. 115U is to exempt the income received by investor from VCC or VCF, then the provisions should have found place u/s 10 in a similar manner as provided under clause 23FB of section 10. Adjustment of short term capital loss against short term capital gains - Held that:- The income received by the assessee from IVF is taxable in the manner as prescribed u/s 115U – Since the Assessing Officer has assessed the income as short term capital gain; therefore, the claim of the assessee as short term capital loss has to be allowed - There is merit and substance in the alternative plea of the ld AR regarding the claim of short term capital loss against the short term capital gains. - Decided in favor of Assessee. Issues Involved:1. Validity of reassessment proceedings under Section 153A.2. Disallowance under Section 14A.3. Disallowance of short-term capital loss.4. Restriction of deletion of addition under Section 115U.Issue-wise Detailed Analysis:1. Validity of Reassessment Proceedings under Section 153A:The primary issue was whether the reassessment proceedings initiated under Section 153A were valid. The search conducted on the Apar Group on 15.11.2007 led to the initiation of proceedings under Section 153A. The assessee argued that since the original assessment under Section 143(3) was completed before the search, the reassessment was invalid without incriminating material found during the search. The Tribunal referred to the decision of the Hon'ble Delhi High Court in the case of Anil Kumar Bhatia, which clarified that the Assessing Officer is empowered to assess or reassess the total income for six assessment years preceding the year of the search. The Tribunal concluded that the initiation of proceedings under Section 153A was mandatory and valid, even if no incriminating material was found, as the assessment for some years was pending and thus abated due to the search. The Tribunal upheld the validity of the reassessment proceedings under Section 153A.2. Disallowance under Section 14A:The Assessing Officer disallowed Rs. 3,77,803/- under Section 14A by applying Rule 8D, attributing expenses to the earning of exempt income (dividend). The assessee contended that no expenses were claimed for earning the exempt income. The Tribunal noted that Rule 8D was not applicable for the assessment year under consideration, as per the decision of the Hon'ble jurisdictional High Court in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT. The Tribunal found that the disallowance made by the Assessing Officer without detecting any material to show that the assessee incurred expenses for earning exempt income was not justified and deleted the disallowance.3. Disallowance of Short-term Capital Loss:The Assessing Officer disallowed a short-term capital loss of Rs. 54,41,911/- related to investments in India Value Fund (IVF). The assessee argued that the loss was incurred by IVF on the sale of Biocon shares and should be allowed. The Commissioner of Income Tax (Appeals) partially upheld the disallowance, directing the Assessing Officer to restrict the addition to Rs. 54,41,911/- and delete the balance addition of Rs. 1,03,17,477/-. The Tribunal examined the provisions of Section 115U and concluded that the income received by the assessee from IVF should be treated as if the investment was made directly in the venture capital undertaking. The Tribunal allowed the assessee's claim for short-term capital loss against the short-term capital gains, as per Section 115U.4. Restriction of Deletion of Addition under Section 115U:The revenue contended that the Commissioner of Income Tax (Appeals) erred in deleting the addition of Rs. 1,57,59,388/- by treating the distribution of Biocon shares as a reimbursement of capital. The Tribunal held that the income received by the assessee from IVF, including the transfer of Biocon shares, should be taxed in the same manner as if the investment was made directly in the venture capital undertaking. The Tribunal allowed the assessee's claim for short-term capital loss and partially upheld the revenue's appeal, confirming the taxability of the income received from IVF under Section 115U.Conclusion:The Tribunal upheld the validity of reassessment proceedings under Section 153A, deleted the disallowance under Section 14A, allowed the assessee's claim for short-term capital loss, and confirmed the taxability of income received from IVF under Section 115U. Both the assessee's and the revenue's appeals were partly allowed.