2016 (8) TMI 684 - AT - Income Tax

Tribunal grants deduction under Section 54G and resolves Section 14A issue for assessee

The Tribunal allowed the assessee's appeal regarding denial of deduction under Section 54G of the Income-tax Act for Assessment Years 2008-09 and 2009-10. ... Denial of deduction u/s. 54G - Held that:- The capital gains have to be utilized for the claim of deduction within a specified period. Since the capital gains has to be utilized, the logical conclusion would be the capital gains arising on the date of sale, therefore, in our understanding of the law, although the transfer took place on 10.04.2006 but the capital gain arose on the date of sale of the capital asset. The capital gains so arose was utilized by the assessee for the purpose of business of industrial undertaking and, therefore, the assessee fulfils the mandatory condition. The assessee purchased the land at village Duttpura which is a non-urban area, put up the factory and purchased new plant and machinery before one year of date of transfer. The assessee has utilized the LTCG for the period from 06.08.2006 to 31.03.2008 The assessee has fulfilled the mandatory conditions making itself eligible for deduction u/s. 54G of the Act. We accordingly set aside the findings of the ld. CIT(A) and direct the A.O. to allow deduction u/s. 54G of the Act to the assessee. The common grievance in both these appeals is allowed in favour of the assessee and against the revenue. Disallowance u/s. 14A - Held that:- We find that at clause (i), the A.O has himself mentioned that the amount of expenditure directly relating to income which does not form part of total income as Nil which means that there is no element of borrowed funds. However, in clause (ii), the A.O. has computed the disallowance of expenditure by way of interest during the previous year. This stand of the A.O. is contradictory. Therefore, in our considered opinion, the element of interest taken for consideration of the disallowance for computing ₹ 2.04.538/- is uncalled for and deserves to be deleted. The balance amount remains is ₹ 37,699/-. Since, admittedly the assessee has suo motu disallowed ₹ 1,81,902/-, no further disallowance is required. We accordingly direct the A.O. to delete the addition of ₹ 60,335/-. - Decided in favour of the assessee Issues Involved:1. Denial of deduction under Section 54G of the Income-tax Act.2. Additions made under Section 14A of the Income-tax Act.Detailed Analysis:Issue 1: Denial of Deduction under Section 54G of the Income-tax ActFacts and Background:The assessee appealed against the orders of the CIT(A)-III, Baroda, which denied the deduction under Section 54G for the Assessment Years (A.Y.) 2008-09 and 2009-10. The common grievance was the denial of deduction u/s. 54G related to capital gains from the sale of factory land. The land, initially rented since 1945, was purchased in 1994 and partially converted into stock-in-trade in 2006. The assessee entered into an agreement with a developer for the converted land and sold 42 plots in A.Y. 2008-09.Assessee’s Claim:The assessee claimed that the capital gains were utilized for purchasing new plant and machinery and constructing a factory building in a rural area, fulfilling the conditions of Section 54G. The assessee argued that the transfer date should be considered as the date of sale, not the date of conversion.Revenue’s Stand:The A.O. denied the deduction, asserting that the land was converted into stock-in-trade and not used for industrial purposes. The A.O. also noted that the acquisition of new assets should be within one year before or three years after the transfer date, which the assessee allegedly did not comply with.Tribunal’s Findings:The Tribunal considered three key facts:1. Whether the impugned land was a capital asset used in the business of an industrial undertaking.2. The correct date of transfer.3. Eligibility for deduction under Section 54G.Legal Provisions:Section 54G provides for deduction if the capital gains from the transfer of a capital asset used for industrial purposes in an urban area are utilized within specified periods for shifting the industrial undertaking to a non-urban area.Key Observations:- The Tribunal noted that capital gains should be utilized within the specified period from the date of sale, not the date of conversion.- The assessee utilized the capital gains for purchasing new plant and machinery and constructing a factory building in a non-urban area, fulfilling the mandatory conditions.- The Tribunal referred to CBDT Circular No. 791, which clarifies that the period for making investments should be from the date the stock-in-trade is sold.- The Tribunal emphasized a liberal interpretation of Section 54G as a beneficial provision.Conclusion:The Tribunal concluded that the assessee fulfilled the conditions for deduction under Section 54G and directed the A.O. to allow the deduction. The appeals for both A.Y. 2008-09 and 2009-10 were allowed in favor of the assessee.Issue 2: Additions Made under Section 14A of the Income-tax ActFacts and Background:For A.Y. 2009-10, the A.O. noticed tax-exempt income and computed disallowance under Section 14A read with Rule 8D. The assessee had already disallowed a sum suo motu, but the A.O. added an additional amount.Assessee’s Claim:The assessee argued that the investments were made from own funds, not borrowed funds, and thus no interest expenses were incurred.Revenue’s Stand:The A.O. computed the disallowance, including interest expenses, and added the difference to the assessee’s income.Tribunal’s Findings:- The Tribunal noted a contradiction in the A.O.’s computation, where the A.O. acknowledged no direct expenditure relating to tax-exempt income but still included interest expenses.- The Tribunal found the additional disallowance of interest expenses uncalled for and directed the A.O. to delete the additional amount.Conclusion:The Tribunal allowed the assessee’s appeal, directing the deletion of the additional disallowance under Section 14A. The grievance for A.Y. 2009-10 was resolved in favor of the assessee.Final Order:The appeals of the assessee were allowed, and the order was pronounced in open court on 22-06-2016.