2016 (9) TMI 993 - AT - Income Tax

Tribunal allows Revenue's appeal, directs AO to reconsider disallowance under Section 14A

The Tribunal allowed the Revenue's appeal and the assessee's cross-objection for statistical purposes. It directed the AO to reconsider the disallowance ... Addition u/s 14A - Held that:- AO has to consider the assessee’s own fund i.e. capital and reserves as available on the date of investment which yields exempted income and thereafter he shall apply the Formula in Rule 8D and also exclude investments in subsidiaries as held by the above order of Co-ordinate Bench. With this observation, we remit the issue to the file of AO for fresh consideration Understatement of sales consideration - dubious or bogus or collusive transaction - whether CIT(A) erred in allowing the assessee’s claim of sale of shares belongs to its sister concern, M/s. TVS Finance and Services Limited at price of 1 paise is acceptable whereas the purchase price per share is ₹ 31.19 per share and it was purchased by the assessee company just 47 days before the date of sale of shares by the assessee company at 1 paise per share? - Held that:- It was the duty of the AO to bring on record sufficient evidences and materials to prove that the documents filed by the assessee were bogus, false or fabricated and the long term capital loss shown by the assessee is there not at all. The only material to support the conclusion of the AO is that either the purchase of shares by the assessee was at ₹ 31.19 per share or the assessee has sold the shares to the sister concern, TVS e-Access Pvt. Ltd. at a cost of Rs. one paise per share, whereas the same shares were sold to one of the Directors, Smt. Mallika Srinivasan at the rate ₹ 25 per share. However, none of the judicial pronouncements support this plea of the AO. While making this kind of addition by the AO, the burden on the AO is very heavy to establish that the assessee has actually received the excess consideration than disclosed by the assessee. We have also considered the entire background of the case and circumstances under which the assessee was forced to sale the shares at very very low price. Actually, when the companies networth is negative, it is endeavour of the every person to get rid of that liability to save from future liabilities. In other words, in this modern economy, the share price is subject to high volatile and value of shares, which may be very high on one day and due to change of circumstances it may collapse in the market on very next day and it may go even nil value, due to circumstances beyond the control of the Directors or management of the company. A person, who is dealing in shares would become a millionaire in a single day. Similarly, a person may become penniless or insolvent on very next day. It is not uncommon in the share market, happening of such events. For these things, we cannot attribute any motives and it is because of market conditions prevailing at the particular point of time or because of government policies and nobody shall be blamed. In our opinion, when the prices will go up and down, that may result in gain or loss, it cannot be said that it is colourable device adopted by the assessee. We have to see the ground realities, one who deals in shares in the open market, knows the depth of the same and not the AO. In our opinion, the reason advanced by the ld. DR to hold that it is not colourable device holds no water. Further, ccomparing Mrs. Mallika Srinivasan's sale of shares of her holding in TVSF&S @ ₹ 25 per share is also illogical and has no substance. This is because she is a shareholder, under the public category, holding a few hundred shares, which was offered by her in the exit route provided to the public under the book building process associated with the delisting of shares. Any public shareholder as a retail investor, who surrender the shares, would have got the same ₹ 25 per share which was the ‘exit price' derided as per the SEBI Regulations under the book building process. Hence, it is not correct to say that they fixed retail investor price @ ₹ 25 per share and other than retail investor price at 1 paisa per share. Further, regulations of SEBI for delisting and price ought to be offered to the public shareholder on the basis of book building process should be recognised and when so done, the sale price adopted for sale of some TVSF&S shares held by TVSM to TVSEA at 1 paisa cannot be compared because one is through delisting process price and another is arrangement of the promoters to recognise the nil value or negative value of the shares held by them in huge quantities as promoters. When they want to exit the company and plan for restructuring of the finance business, to sell the shares to a group company at a value borne in the balance sheet with negative networth and certified by the valuer is to be recognised. Issues Involved:1. Disallowance under Section 14A read with Rule 8D.2. Sale of shares at a nominal price and the resulting capital loss.Issue-wise Detailed Analysis:1. Disallowance under Section 14A read with Rule 8D:The Revenue challenged the CIT(A)'s direction to restrict the disallowance to Rs. 56,64,493/- without considering the mandatory application of Rule 8D for calculating disallowance under Section 14A(2). The assessee argued that only investments earning exempt income should be considered, suggesting a disallowance of Rs. 6,46,250/-.The facts revealed that the assessee had earned exempt dividend income and voluntarily disallowed a portion of expenses. However, the AO applied Rule 8D, resulting in a significantly higher disallowance. The CIT(A) found that the AO mechanically applied Rule 8D without considering the assessee's own funds and previous decisions, which excluded investments in subsidiaries and non-dividend earning investments from the calculation.The Tribunal agreed with the CIT(A), emphasizing that interest on borrowings for specific purposes should not be considered under Rule 8D. It cited various precedents, including the Delhi High Court's judgment in CIT Vs. Bharti Overseas Pvt. Ltd., and ITAT decisions in Farida Shoes Pvt. Ltd. and Sun TV Networks, supporting the exclusion of specific borrowings and investments in subsidiaries. The issue was remitted back to the AO for fresh consideration with these observations.2. Sale of shares at a nominal price and the resulting capital loss:The Revenue challenged the CIT(A)'s acceptance of the sale of shares at one paisa per share, resulting in a significant capital loss. The AO contended that the sale was a colorable device to evade tax, fixing the sale price at Rs. 31.19 per share.The assessee argued that the sale was in compliance with SEBI regulations and corporate practices, necessitated by the negative net worth and delisting of TVSF&S. The CIT(A) found the AO's adoption of Rs. 31.19 per share untenable, noting that the shares were acquired at different prices over the years, and the sale at one paisa per share was justified by the company's financial distress and regulatory requirements.The Tribunal upheld the CIT(A)'s decision, emphasizing that the sale was not a colorable device but a necessary step to protect the company's and the group's public image. It cited various judgments, including CIT vs. Biraj Investments Pvt Ltd., CIT vs. Oberoi Hotels (P) Ltd., and CIT vs. S S Sankaralingam, supporting the genuineness of the transaction and the lack of any statutory basis for the AO's adoption of Rs. 31.19 per share.The Tribunal concluded that the AO failed to establish any understatement of consideration or receipt of excess consideration by the assessee. The sale price was based on SEBI regulations, and the negative net worth justified the nominal sale price. The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s acceptance of the actual selling price of one paisa per share.Conclusion:The Tribunal allowed the Revenue's appeal and the assessee's cross-objection for statistical purposes, directing the AO to reconsider the disallowance under Section 14A read with Rule 8D, and upheld the CIT(A)'s decision on the sale of shares, affirming the genuineness and necessity of the transaction.