2018 (8) TMI 1772 - AT - Income Tax

Tribunal Remands Disallowance, Rules Shares Gift Non-Taxable.

Nerka Chemical Private Limited, Versus Deputy Commissioner of Income tax, Central Circle-6 (3), Mumbai

The Tribunal remanded the disallowance under Section 14A to the AO for fresh consideration, citing relevant judicial precedents. It ruled that the receipt ... Disallowance under section 14A - apportionment of expenditure between taxable and non-taxable income - HELD THAT:- Hon’ble Apex Court in Maxopp Investment Ltd. Vs Commissioner of Income-tax [2018 (3) TMI 805 - SUPREME COURT OF INDIA] held that in cases, where shares are held as stock-in-trade, main purpose is to trade in those shares and earn profits therefrom, in the process, certain dividend is also earned, though incidentally, which is also an income. This triggers applicability of section 14A which is based on theory of apportionment of expenditure between taxable and non-taxable income. Therefore, to that extent, expenditure incurred in acquiring those shares will have to be apportioned. We may also refer to case of ACIT Vs. Vireet Investment Pvt. Ltd. [2017 (6) TMI 1124 - ITAT DELHI] held that computation under Clause-(f) of Explanation-1 to section 115JB(2) of the Act is to be made without resorting to computation as contemplated under section14A r.w. Rule 8D of the Act - Ground of appeal is restored to the file of AO to decide the issue afresh. Treating the receipt of shares received as a gift in treating as taxable income under the head “Business income” OR “Income from other sources” - HELD THAT:- Definition of ‘gift’ as defined in the Transfer of Property Act, 1882; that 'Gift is a transfer of certain existing moving or immovable property made voluntarily and without consideration by one person, called the donor, to another, called the donee and accepted or on behalf of the donee.' As the issue was equalization of wealth which was made in pursuance of a family arrangement, it was held that the transfer could not be called voluntary and without consideration and therefore not a valid gift. The facts of the said decision are not applicable to the present case. Further, in the said case the receipt of gift was credited to the Profit and Loss account and not to Capital Reserve. However, the gift of share in the present case is shown as Capital receipt. The transfer of property was done pursuant to a family arrangement. This decision does not lay down the proposition that a Company cannot make a gift. They only state that a company cannot be part of a family arrangement. Accordingly, the facts of the aforesaid case are not applicable to the facts of the present case. Hence, Ground No.2 of the appeal is allowed. Deduction in respect of interest expenditure - CIT(A) dismissed the ground of appeal the claim of the assessee holding that the assessee is in appeal for AY 2009-10, it could only be allowed if assessee had accepted the action of assessing officer in AY 2009-10 and not challenged the same in further appeal - HELD THAT:- In assessee’s appeal for AY 2009-10, the assessee has not raised similar ground of appeal related with the same disallowance of interest. In our considered view the assessee can raise this issue only in the year, under consideration as the assessee the corresponding interest expenditure has been offered by the assessee during the previous year related with AY 2010-11. Therefore, we find convincible force in the submission of ld. Sr. Counsel for assessee. Thus, this ground of appeal is restored to the file of assessing officer and direct the assessing officer to verify the fact and pass the order in accordance with law. In the result this ground of appeal is allowed for statistical purpose. Disallowance u/s 14A - HELD THAT:- Identical to the grounds of appeal in appeal for assessment year 2010-11, which we have restored to the file of assessing officer for deciding afresh, therefore, considering the principles of consistency these grounds of appeals are also restored to the file of assessing officer with similar direction. In the result all the grounds of appeal in these appeals are allowed for statistical purpose. Disallowance of contribution of Employees Provident Funds (EPF) - CIT(A) rejected the claim of the assessee holding that it was rightly rejected by assessing officer as the same was deposited beyond the due date as per clause (va) of sub-section(1) of section 36 - HELD THAT:- The facts related with this issue are not in dispute that the contribution of the EPF was deposited after due date; but before the filing of the return of income. The CBDT vide its circular No. 22/2015 dated 17.12.2015 clarified that the first proviso, being curative in nature, is retrospectively applicable w.e.f. 01.04.1988. It was further clarified that in case contribution of EPF is paid on or before due date of return of income under section 139(1) no disallowance can be made. Therefore, by invoking the power vested with appellate authority, we admit the additional claim of the assessee and direct the assessing officer to verify the facts and delete the disallowance under section 43B, if the contribution of EPF was deposited before filing the return of income under section 139(1). In the result this ground of appeal is allowed for statistical purpose. Issues Involved:1. Disallowance under Section 14A of the Income Tax Act.2. Taxability of receipt of shares without consideration.3. Non-consideration of claim made in the revised return of income.Detailed Analysis:1. Disallowance under Section 14A:The assessee contested the disallowance of Rs. 9,59,194/- under Section 14A, which was upheld by the Commissioner of Income-tax (Appeals) [CIT(A)]. The assessee argued that no interest expenditure was incurred for investments generating exempt income and that the investments were strategic for holding controlling stakes in group companies. The Tribunal noted that the Assessing Officer (AO) was not satisfied with the voluntary disallowance of Rs. 34,215/- and applied Rule 8D, resulting in an additional disallowance of Rs. 18,26,890/-. The Tribunal referred to the Supreme Court's decision in Maxopp Investment Ltd. and the Special Bench decision in Vireet Investment Pvt. Ltd., which clarified the basis for disallowance under Section 14A. Consequently, the issue was remanded to the AO for fresh consideration, ensuring compliance with these judicial precedents.2. Taxability of Receipt of Shares Without Consideration:The assessee received shares of United Phosphorus Ltd (UPL) and Uniphos Enterprises Ltd (UEL) as a gift, which the AO treated as taxable income under Section 28(iv) and alternatively under Section 56(1). The CIT(A) also considered it taxable as deemed dividend under Section 2(22)(a) and added the market value of shares to the book profit under Section 115JB. The Tribunal analyzed the nature of the gift and the relevant legal provisions, including the Transfer of Property Act and various judicial precedents. It concluded that the receipt of shares as a gift did not constitute taxable income under Sections 28(iv) or 56(1) and was not deemed dividend under Section 2(22)(a) since the assessee was not a shareholder of the donor company, DHPL. The Tribunal also dismissed the Revenue's application to admit additional evidence under Rule 29, finding it irrelevant to the issue at hand. Consequently, the Tribunal ruled that the receipt of shares was a non-taxable capital receipt.3. Non-Consideration of Claim Made in the Revised Return of Income:The assessee filed a revised return for AY 2010-11, excluding interest expenditure of Rs. 10,17,230/- disallowed in AY 2009-10, to avoid double taxation. The AO computed the income based on the original return, and the CIT(A) upheld this action, stating that the claim could only be allowed if the assessee had accepted the disallowance in AY 2009-10. The Tribunal noted that the assessee had not raised this issue in the appeal for AY 2009-10 and directed the AO to verify the facts and pass an order in accordance with the law, allowing the ground for statistical purposes.Additional Appeals:For AY 2011-12, the Tribunal restored the grounds of appeal related to disallowance under Section 14A to the AO for fresh consideration, following the same principles as for AY 2010-11. For AY 2009-10, the Tribunal restored the grounds related to disallowance under Section 14A and allowed the claim for deduction of EPF contributions paid before the due date of filing the return, directing the AO to verify the facts. The claim for interest expenditure of Rs. 10,17,230/- was dismissed as infructuous.Conclusion:The Tribunal's judgment provided a detailed analysis of the issues, remanding certain matters to the AO for fresh consideration and clarifying the non-taxability of the receipt of shares as a gift. The judgment emphasized compliance with judicial precedents and proper verification of facts in the assessment process.