2016 (6) TMI 210 - AT - Income Tax

Tribunal Decision on Tax Appeals: Capital Loss Set-Off, TDS Verification, Exempt Income Expenses Disallowed

The Assistant Commissioner of Income-tax/The Deputy Commissioner of Income-tax, Company Circle – II (2), Chennai Versus M/s. Gimpex Limited And Vice-Versa

The Tribunal dismissed the Revenue's appeal in ITA No.2023/Mds/2014, partly allowed ITA Nos. 2024 to 2026/Mds/2014 for statistical purposes, and dismissed ... Allowance of loss to be set off against the other capital gains - Held that:- The provisions of sec.94(8) provide that the loss arising out of ‘bonus stripping of units’ is to be ignored after 1.4.2005. The phraseology of sec.94(8) of the Act, itself reveals that the parliament in its wisdom restricted the scope of ‘bonus stripping’ under sec.94(8) of the Act from 1.4.2005. It may be noticed that u/s.94(8) of the Act, no disallowance to be made on account of ‘bonus stripping’ for the assessment year 2004-05 as it was came into effect on 1.4.2005 and the assessment year involved is 2004-05, there is gap in the law which appears to have been exploited by the assessee. The legislature appears to have been recognised the lacuna in this law and taken steps to rectify by introducing sec.94(8) w.e.f. 1.4.2005. Even the judgment of the Supreme Court in the case of CIT v. Walfort Share and Stock Brokers P. Ltd. (2010 (7) TMI 15 - SUPREME COURT ), also confirms that even assuming that transaction was pre-planned, there is nothing to impeach the genuineness of the transaction. Hence, loss arising in the course of dividend stripping transaction before the introduction of claim u/s.94(7) w.e.f. 1.4.2002 cannot be disallowed; dividend stripping transaction cannot be said to be “abuse of law” even if it is pre-planned. Being so, the finding of the CIT(Appeals) is based on the law, as it stood in the relevant asst. year and it cannot be said that there is any infirmity in the order of the CIT(Appeals). - Decided against revenue TDS u/s 195 - non deduction of TDS on the ‘foreign commission payments’ made to the non-resident - disallowance u/s.40(a)(i) - Held that:- In the present case, the assessee had not established that the non-resident had rendered services abroad and there was no business connection in India by producing relevant records, viz., either agreement entered into by the assessee with them or correspondence took between the parties. Without examining these details, one is not in a position to decide the nature of services rendered by the non-resident agent.Therefore, it is appropriate to remit the entire issue back to the file of the Assessing Officer with direction to the assessee to prove that it was sales commission towards procurement of orders from abroad. Addition made u/s.40(a)(i) on the payment of foreign service charges - Held that:- The above issue is identical to the issue of foreign commission payment. As such, we remit this issue is also to the file of the AO as discussed in earlier para with similar direction. Disallowance u/s 14A - estimation of expenses by the AO for earning the exemption income @ 0.5% of the average investments of the year under the step II of the Formula given in Rule 8D should be taken - Held that:- As decided in case of M/s. Marg Ltd. v. JCIT [2016 (4) TMI 1135 - ITAT CHENNAI] any expenditure incurred for earning any income which was not taxable under the Act was not an allowable expenditure. Dividend income was exempt under section 10(33) of the Act and the dividend earned by the assessee on the shares acquired by her with the borrowed funds did not constitute part of the total income in the hands of the assessee. Disallowance by applying section 14A, squarely applied to the interest paid on the borrowed funds because it was on record that the entire funds borrowed were utilised for the acquisition of shares by the assessee in the company. The assessee would be entitled to deduction of interest under section 36(1)(iii) of the Act on the borrowed funds utilised for the acquisition of shares only if shares were held as stock-intrade and that would arise only if the assessee was engaged in trading in shares. So far as the acquisition of shares was in the form of investment and the only benefit the assessee derived was the dividend income which was not assessable under the Act, the disallowance under section 14A was squarely attracted and the Assessing Officer rightly disallowed the claim - Decided against assessee Issues Involved:1. Set-off of capital loss against other capital gains.2. Disallowance under Section 40(a)(i) for non-deduction of TDS on foreign commission payments.3. Disallowance under Section 40(a)(i) for non-deduction of TDS on foreign service charges.4. Disallowance under Section 14A read with Rule 8D for expenses related to exempt income.5. Reconciliation of sales turnover discrepancies.Issue-wise Detailed Analysis:1. Set-off of Capital Loss Against Other Capital Gains:The Revenue contended that the Commissioner of Income-tax (Appeals) erred in directing the Assessing Officer to allow the loss of Rs. 10,53,12,695/- to be set off against other capital gains. The assessee had purchased units of ING Vysya Income Fund and sold them immediately after receiving bonus units, resulting in a claimed short-term capital loss. The Assessing Officer disallowed the loss, considering the transaction as intended solely for booking losses. However, the CIT(A) allowed the set-off, noting that Section 94(8) of the Income Tax Act, which disallows losses from bonus stripping, was applicable only from the assessment year 2005-06. The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court judgment in CIT v. Walfort Share and Stock Brokers P. Ltd., which confirmed that pre-planned transactions are not inherently invalid if genuine. Thus, the Revenue's appeal was dismissed.2. Disallowance Under Section 40(a)(i) for Non-Deduction of TDS on Foreign Commission Payments:The Assessing Officer disallowed foreign commission payments for the assessment years 2009-10 and 2010-11 due to non-deduction of TDS. The CIT(A) deleted the disallowance, but the Tribunal found that the nature of services rendered by the non-resident agents was not adequately detailed in the records. Referring to the Tribunal's decision in ACIT v. Euro Leder Fashions Ltd., it was noted that the burden of proof lies on the assessee to show that the services were rendered abroad by non-residents without a business connection in India. The Tribunal remitted the matter back to the Assessing Officer for further verification, allowing the Revenue's appeal for statistical purposes.3. Disallowance Under Section 40(a)(i) for Non-Deduction of TDS on Foreign Service Charges:Similar to the issue of foreign commission payments, the Assessing Officer disallowed foreign service charges for the assessment years 2008-09, 2009-10, and 2010-11 due to non-deduction of TDS. The CIT(A) deleted the disallowance, but the Tribunal remitted the issue back to the Assessing Officer for verification, as the nature of services rendered by non-residents was not clear. The Tribunal directed the assessee to prove that the payments were for services rendered abroad, allowing the Revenue's appeal for statistical purposes.4. Disallowance Under Section 14A Read with Rule 8D for Expenses Related to Exempt Income:The Assessing Officer invoked Section 14A read with Rule 8D to disallow expenses related to exempt income for the assessment years 2008-09, 2009-10, and 2010-11. The CIT(A) partially confirmed and partially deleted the disallowances. The Tribunal upheld the application of Rule 8D, referencing its earlier decisions and the judgments of the Karnataka High Court in Pradeep Kar v. ACIT and the Kerala High Court in CIT v. Smt. Leena Ramachandran. The Tribunal allowed the Revenue's appeal on this issue, confirming the disallowance under Section 14A.5. Reconciliation of Sales Turnover Discrepancies:For the assessment year 2008-09, the Revenue raised an issue regarding the difference in sales turnover shown in the tax returns and the return of income. The Tribunal remitted the issue back to the Assessing Officer to reconcile the turnover declared in the sales tax return with the turnover declared in the profit and loss account. This ground of appeal was allowed for statistical purposes.Conclusion:The Tribunal dismissed the Revenue's appeal in ITA No.2023/Mds/2014, partly allowed ITA Nos. 2024 to 2026/Mds/2014 for statistical purposes, and dismissed the cross objections of the assessee in CO Nos.100 to 103/Mds/2014. The appeal in ITA No.1530/Mds/2014 was partly allowed, and ITA Nos. 1531 & 1532/Mds/2014 were dismissed. The order was pronounced on May 4, 2016, in Chennai.