2015 (5) TMI 925 - AT - Income Tax

Tax Tribunal Decisions: Section 14A Disallowances, Share Transaction Gains, Preliminary Expenses, Doubtful Loan Provisions

The Tribunal partly allowed the Revenue's appeals for AY 2005-06 and 2006-07, partly allowing the assessee's Cross Objection. The decisions focused on ... Disallowance under section 14A - CIT(A) deleted part disallowance - Held that:- the disallowance of ₹ 5,00,000/- made by the AO was on ad hoc estimate basis, and the CIT(A) also sustained ₹ 50,000/- out of the same on ad hoc estimate basis. The DR could not bring any material before us to show that any amount more than ₹ 50,000/- was incurred by the assessee for earning of dividend income. Therefore, we do not find any good reason to interfere with the estimate made by the CIT(A). - Decided against revenue. Disallowance under section 14A at the rate 5% of the dividend income - Held that:- It shall meet ends of justice to restrict the disallowance under section 14A at the rate of 2% of the dividend income earned during the year by the assesse - Decided partly in favour of assesse. Transaction in shares - short term capital gains or business income - Held that:- No material has been brought before us to show, what was the frequency of the transaction in question. It is not the case of the Revenue that any borrowed fund was utilized for acquiring shares or units of mutual funds under consideration. In our considered view, the intention of the assessee at the time of acquiring shares of mutual fund has to be ascertained by taking into consideration all the relevant factors, like utilization of borrowed funds, frequency of transaction, volume of transaction, manner in which the acquisition is reflected in the financial statements etc. No single factor is determinative of actual nature of the transaction. In the absence of any material brought before us by the Revenue to show that same shares or the units of mutual funds were frequently purchased and sold, on which short term capital gain was claimed by the assessee, or that no borrowed funds was utilized by the assessee in acquiring the shares and units in question, we do not find any good reason to interfere with the order of the CIT(A) accepting the income shown as short term capital gains. - Decided against revenue. Disallowance of deduction of preliminary expenses under section 35D - CIT(A) allowed the claim - Held that:- In the instant case, it is not in dispute that the expenditure in respect of which the deduction was claimed by the assessee under section 35D was incurred after 31st March, 1998. Thus, in any view of the matter, the deduction is to be allowed to the assessee for five years only. The assessee has submitted that deduction has already been allowed for five years to it, and of course at the rate of 10% and not at the rate of 20%. Be that as it may, the year under consideration being 6th and 7th year, the deduction under section 35D is not allowable to the assessee in view of the proviso quoted above - Decided in favour of assesse. Addition of provision for doubtful loans while computing book profit u/s.115JB - CIT(A) deleted the addition - Held that:- Set aside the orders of the lower authorities on this issue, and remit the matter back to the file of AO for deciding the issue afresh in the light of the above cited decision of CIT Vs. Yokogawa India Ltd.[2011 (8) TMI 766 - KARNATAKA HIGH COURT ] after verifying the facts of the instant case. It is needless to mention that the AO shall allow reasonable opportunity of hearing to the assessee before deciding the issue afresh. - Decided in favour of Revenue for statistical purpose. Issues Involved:1. Disallowance under Section 14A of the Income Tax Act.2. Classification of income from sale of shares as short-term capital gains or business income.3. Deduction of preliminary expenses under Section 35D of the Income Tax Act.4. Addition of provision for doubtful loans while computing book profit under Section 115JB of the Income Tax Act.Issue-wise Detailed Analysis:1. Disallowance under Section 14A of the Income Tax Act:For the Assessment Year (AY) 2005-06, the Assessing Officer (AO) disallowed Rs. 5,00,000 on an ad hoc basis for expenses related to earning exempt dividend income. The Commissioner of Income Tax (Appeals) [CIT(A)] reduced this to Rs. 50,000. The Tribunal found that the disallowance was made on an ad hoc estimate basis and upheld the CIT(A)'s decision, dismissing the Revenue's appeal.For AY 2006-07, the AO disallowed 5% of the expenditure amounting to Rs. 6,79,897. The CIT(A) confirmed this disallowance. However, the Tribunal noted that the 5% rate was an ad hoc estimate without basis. Referring to the Madras High Court's decision in M/s. Simpson and Co. Ltd., the Tribunal directed that the disallowance be restricted to 2% of the dividend income, partly allowing the assessee's appeal.2. Classification of income from sale of shares as short-term capital gains or business income:For AY 2005-06, the AO treated the short-term capital gains of Rs. 30,65,299 as business income due to the frequent buying and selling of securities. The CIT(A) observed that the shares and mutual funds were consistently shown as investments in the balance sheet, indicating the assessee's intention to hold them as investments. The CIT(A) thus ruled in favor of the assessee, treating the gains as short-term capital gains.Similarly, for AY 2006-07, the AO treated the gains as business income due to the high volume of transactions. The CIT(A) again found that the shares and mutual funds were shown as investments and upheld the classification as short-term capital gains. The Tribunal confirmed the CIT(A)'s decision for both years, noting that the intention of the assessee and the classification in the balance sheet were crucial factors.3. Deduction of preliminary expenses under Section 35D of the Income Tax Act:The AO disallowed the deduction of Rs. 7,93,340 for ROC fees for increasing authorized capital, stating it was not allowable under Section 35D. The CIT(A) directed the AO to allow the deduction if it had been allowed in earlier years for consistency. However, the Tribunal noted that the proviso to Section 35D(1) allows the deduction for only five years if incurred after 31st March 1998. Since the year under consideration was the 6th and 7th year, the Tribunal ruled that the deduction was not allowable and allowed the Revenue's appeal on this ground.4. Addition of provision for doubtful loans while computing book profit under Section 115JB of the Income Tax Act:The AO added Rs. 11 crores to the book profit under Section 115JB, considering the provision for doubtful loans as an unascertained liability. The CIT(A) deleted this addition, stating the provision was for diminution in the value of assets, not for liability. The Tribunal referred to the Karnataka High Court's decision in CIT Vs. Yokogawa India Ltd., which held that provisions for doubtful debts do not attract clause (c) of Explanation (1) to Section 115JB if they represent diminution in asset value. The Tribunal remitted the issue back to the AO for fresh consideration in light of this decision, allowing the Revenue's appeal for statistical purposes.Conclusion:The Tribunal partly allowed the appeals of the Revenue for AY 2005-06 and 2006-07 and partly allowed the Cross Objection of the assessee. The decisions addressed the disallowances under Section 14A, classification of gains from share transactions, deduction of preliminary expenses under Section 35D, and the addition of provisions for doubtful loans under Section 115JB. The Tribunal emphasized consistency in tax treatment and adherence to legal precedents.