2016 (4) TMI 300 - AT - Income Tax

Tribunal allows appeal on capital loss & disallowances, stresses genuine transactions & legal compliance.

The Tribunal allowed the assessee's appeal, reversing the disallowance of the Long Term Capital Loss, adjustments under Section 14A, and inclusion of such ... Long Term Capital Gain - loss claimed by the assessee - Held that:- Assessee has sold shares to its group company and booked a loss of ₹ 56,76,211/- under the head 'capital gains'. The Assessing Officer found that the purpose of selling share at a price less than market value/ book value was to escape from the tax liability therefore, it was disallowed by AO. However, from the above facts, we understand that genuineness of the transaction of sale and purchase of share with assessee and buyer-company has not been doubted by AO. The ld. DR could not bring anything on record that the transaction was a colorable device to reduce the tax liability. There has to be cogent reasons for holding a transaction as colorable device to reduce the tax liability. In the instant case the transaction was with the group company and at the price less than the book value. In our view this observation of the AO does not make the transaction as colorable device to reduce the tax burden. Disallowance u/s 14A - Held that:- Special Bench of the Tribunal in the case of Cheminveste Ltd. v. CIT reported in [2009 (8) TMI 126 - ITAT DELHI-B ] had held that disallowance u/s 14A could be made even in a year in which no exempt income was earned or received by the assessee. But this decision has been overruled by Bangalore Tribunal, Hon'ble Gujarat High Court and Hon'ble Allahabad High Court as stated supra. Moreover, we also find that the Special Bench decision in Cheminvest Ltd. (supra) has been overruled by the recent decision of the Hon'ble Delhi High Court in Cheminvest Ltd. (supra) case itself and hence it is no longer good law. Hence, we hold in favour of the assessee the alternative argument of the Ld. AR that only investments yielding dividend income during the year should be considered for disallowance u/s. 14A of the Act. Respectfully following the aforesaid judicial precedents, we have no hesitation in directing the AO to delete the addition made u/s. 14A of the Act. Disallowance u/s. 14A made to book profit computed u/s.115JB - Held that:- We find lot of force in the argument of the Ld AR that computation of disallowance under Rule 8D of the IT Rules can be used only for computation of income under normal provisions of the Act and not for book profits u/s. 115JB of the Act. Unless an item is debited in the profit and loss account, the same cannot be the subject-matter of addition to book profits under clause (f) of explanation to Sec. 115JB of the Act. The disallowance made u/s 14A of the Act read with Rule 8D of the IT Rules is only artificial disallowance and obviously the same is not debited in the profit and loss account of the assessee and same cannot be imported into clause (f) of Explanation to Sec. 115JB of the Act. We have already held that no disallowance u/s. 14A of the Act would operate in the facts and circumstances of the case. Accordingly, we reverse the orders of authorities below and allow ground raised by assessee. Issues Involved:1. Disallowance of Long Term Capital Loss on Sale of Shares.2. Determination of Long Term Capital Gain on Sale of Shares.3. Disallowance under Section 14A of the Income Tax Act, 1961.4. Inclusion of Disallowance under Section 14A in Book Profits for Minimum Alternate Tax (MAT) under Section 115JB.Detailed Analysis:1. Disallowance of Long Term Capital Loss on Sale of Shares:The assessee, a Limited Company, sold 349,658 unquoted shares of Usha Breco Ltd. to Anupriya Real Estate Pvt. Ltd., resulting in a declared Long Term Capital Loss (LTCG loss) of Rs. 56,76,211 after claiming indexation benefits under Section 48 of the Income Tax Act, 1961. The Assessing Officer (AO) disallowed this loss, suspecting the transaction as a colorable device to evade tax, citing the Supreme Court decision in McDowell And Co. Ltd. v. CIT (1985) 154 ITR 148 (SC). The AO noted that the shares were sold at a price lower than their book value and that the buyer was a group company of the assessee. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, determining a Long Term Capital Gain (LTCG) of Rs. 1,03,636 instead of the loss claimed.2. Determination of Long Term Capital Gain on Sale of Shares:The CIT(A) found that the book value of the shares was higher than the sale price, resulting in a profit of Rs. 1,03,636 after indexation. The CIT(A) disregarded the assessee's claim of a loss, stating that the transaction was within the group and the ownership of the shares remained within the group. The assessee contested this decision, arguing that the transactions were genuine and within legal provisions, and thus could not be considered a colorable device. The Tribunal agreed with the assessee, noting that the genuineness of the transaction was not doubted and there was no evidence of it being a colorable device. The Tribunal relied on the jurisdictional High Court decision in CIT v. Smt. Nandini Nopany (1998) 230 ITR 679 (Cal), which held that selling shares at a value lower than the market price does not automatically imply an intention to evade tax.3. Disallowance under Section 14A of the Income Tax Act, 1961:The assessee earned dividend income of Rs. 2,55,97,302 and voluntarily disallowed Rs. 40,73,586 under Section 14A. The AO disregarded this and directly invoked Rule 8D of the Income Tax Rules, 1962, without recording any dissatisfaction with the assessee's disallowance. The AO calculated a disallowance of Rs. 8,54,02,576 under Rule 8D. The CIT(A) upheld the AO's calculation but corrected the method for determining total assets, resulting in a disallowance of Rs. 6,41,09,892. The Tribunal found that the AO had not recorded any dissatisfaction with the assessee's claim and had directly applied Rule 8D, which was not justified. The Tribunal cited the jurisdictional High Court decisions in CIT v. Ashish Jhunjhunwala and CIT v. R.E.I. Agro Ltd., which held that the AO must record dissatisfaction before invoking Rule 8D. The Tribunal also noted that investments yielding no dividend income should be excluded from the disallowance calculation and that strategic investments should not be subject to Section 14A disallowance.4. Inclusion of Disallowance under Section 14A in Book Profits for Minimum Alternate Tax (MAT) under Section 115JB:The Tribunal held that Rule 8D of the Income Tax Rules is meant for computing income under normal provisions and not for book profits under Section 115JB. The Tribunal noted that unless an item is debited in the profit and loss account, it cannot be added to book profits under clause (f) of Explanation to Section 115JB. The Tribunal found that the disallowance under Section 14A was not debited in the profit and loss account and thus could not be added to book profits. The Tribunal reversed the orders of the authorities below and allowed the assessee's appeal on this ground.Conclusion:The Tribunal allowed the assessee's appeal, reversing the disallowance of the Long Term Capital Loss, the adjustments under Section 14A, and the inclusion of such disallowances in the computation of book profits under Section 115JB. The Tribunal emphasized the need for genuine transactions to be respected and the proper application of legal provisions.