2018 (2) TMI 730 - AT - Income Tax

Tribunal rules in favor of assessee on disallowance under section 14A and software expenses

The Tribunal allowed the assessee's appeal regarding the disallowance under section 14A and the taxability of the transfer of Planet M division, directing ... Disallowance under section 14A - application of Rule 8D for allocation of expenditure under section 14A - objective satisfaction before invoking Rule 8D - presumption that investments are out of interest-free funds where such funds suffice - proximate cause test for disallowance - distinction between slump sale and exchange; definition of 'slump sale' under section 2(42C) - charging section and computation provisions as an integrated code (B.C. Srinivasa Shetty principle) - substance over form in characterising transactionsDisallowance under section 14A - application of Rule 8D for allocation of expenditure under section 14A - objective satisfaction before invoking Rule 8D - presumption that investments are out of interest-free funds where such funds suffice - Whether disallowance under section 14A read with Rule 8D could be sustained against the assessee for AY 2008-09 - HELD THAT: - The Tribunal found that the assessee had placed before the AO audited accounts and a detailed working showing its own interest free funds were sufficient to cover the investments yielding exempt income. The AO had not recorded the required objective satisfaction before invoking Rule 8D and had not rebutted the assessee's evidence that borrowings were used for business requirements while investments were made from surplus own funds. Applying the principle that where interest free funds sufficient to meet investments are available a presumption arises that investments were from those funds, and having regard to precedents requiring objective satisfaction before applying Rule 8D, the Tribunal held that no disallowance under section 14A was warranted and directed deletion of the addition. [Paras 6, 7]Disallowance under section 14A read with Rule 8D deleted; addition set asideDistinction between slump sale and exchange; definition of 'slump sale' under section 2(42C) - charging section and computation provisions as an integrated code (B.C. Srinivasa Shetty principle) - substance over form in characterising transactions - Whether transfer of Planet M division for allotment of shares and debentures was taxable under section 50B as a slump sale or was a slump exchange not taxable as capital gain - HELD THAT: - The Tribunal analysed the statutory definition of 'slump sale' and authorities including the Supreme Court decisions in Motor & General Stores and B.C. Srinivasa Shetty and relevant High Court decisions. On the undisputed facts the Planet M division was transferred on a going concern basis for consideration discharged by allotment of equity and debentures. The Tribunal accepted the assessee's case that the transfer was a slump exchange where values could not be assigned to individual assets, that the computation provisions for capital gains could not be applied, and that therefore the charging provisions did not operate. Relying on the integrated code principle and authorities holding that where computation provisions cannot be applied the charging section does not attract tax, the Tribunal held section 50B inapplicable and directed deletion of the capital gain assessed. [Paras 21, 22]Amount treated as long term capital gain under section 50B deleted; transfer held to be slump exchange not taxable under capital gains provisionsSubstance over form in characterising transactions - Whether software/website portal expenses disallowed as capital expenditure should be treated as revenue expenditure - HELD THAT: - The Tribunal noted that the CIT(A) followed an earlier appellate order for AY 2007 08 which had attained finality and, on merits, agreed that the impugned software application expenses were of revenue nature and not capital. Having reviewed the facts and precedent treatment, the Tribunal found no infirmity in the appellate authority's order and upheld deletion of the disallowance. [Paras 25, 26]Disallowance of website/software expenses deleted; expenses held to be revenue in natureFinal Conclusion: For AY 2008-09 the Tribunal (i) deleted the section 14A/Rule 8D disallowance and set aside the addition, finding absence of objective satisfaction by the AO and sufficiency of interest free funds; (ii) held the Planet M division transfer to be a slump exchange, not chargeable under section 50B/section 45, and directed deletion of the assessed capital gain; and (iii) dismissed the Revenue's appeal on software expenditure, treating it as revenue expenditure. Issues Involved:1. Disallowance under section 14A of the Income Tax Act.2. Taxability of transfer of Planet M division under section 50B of the Income Tax Act.3. Disallowance of software expenses as capital expenditure.Detailed Analysis:1. Disallowance under Section 14A of the Income Tax Act:The assessee, a company of the 'Times Group', earned exempt dividend income of Rs. 15.68 crores and long-term capital gains of Rs. 51.22 crores during the assessment year 2008-09. The Assessing Officer (AO) disallowed Rs. 16,68,88,790/- under section 14A, attributing it to interest expenditure related to investments in tax-free securities. The AO applied Rule 8D for the calculation of disallowance, which was confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)].The assessee contended that it had sufficient interest-free funds to cover the investments in tax-free securities and that the AO did not record any objective satisfaction before invoking Rule 8D. The assessee relied on the decisions of 'CIT vs. Reliance Utilities and Power Ltd.' (2009) and 'CIT vs. HDFC Bank' (2014).The Tribunal found merit in the assessee's contention, noting that the assessee had sufficient own funds to cover the investments. The Tribunal also observed that the AO did not record objective satisfaction before invoking Rule 8D, as required by the decision in 'Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT' (2010). Consequently, the Tribunal directed the AO to delete the disallowance made under section 14A.2. Taxability of Transfer of Planet M Division under Section 50B of the Income Tax Act:The assessee transferred the Planet M division to Planet M Retail Ltd. for a consideration of Rs. 125.95 crores, comprising equity shares and 6% redeemable unsecured debentures. The AO treated this transfer as a slump sale under section 50B and taxed the resulting capital gain of Rs. 84,26,04,286/-. The CIT(A) upheld the AO's decision.The assessee argued that the transaction was an exchange, not a sale, and thus did not fall under the definition of 'slump sale' as per section 2(42C). The assessee relied on the Supreme Court decision in 'CIT vs. B.C. Srinivasa Setty' (1981), which held that when computation provisions cannot apply, the charging provisions of section 45 fail.The Tribunal agreed with the assessee, noting that the consideration was in the form of shares and debentures, making it an exchange rather than a sale. The Tribunal cited the Supreme Court decision in 'CIT vs. Motor & General Stores (P) Ltd.' (1967) and the Bombay High Court decision in 'CIT vs. Bharat Bijlee Ltd.' (2014), which supported the assessee's position. The Tribunal concluded that the provisions of section 50B were not applicable and directed the AO to exclude the capital gain from the computation of income.3. Disallowance of Software Expenses as Capital Expenditure:The AO disallowed Rs. 50,64,781/- out of the total software expenses of Rs. 74,73,026/- incurred by the assessee, treating it as capital expenditure. The CIT(A) allowed the appeal of the assessee, following the decision for the assessment year 2007-08, which had attained finality.The Tribunal upheld the CIT(A)'s decision, noting that the expenses were of a revenue nature and the issue had been correctly decided in the earlier assessment year. The Tribunal dismissed the Revenue's appeal on this issue.Conclusion:The Tribunal allowed the assessee's appeal regarding the disallowance under section 14A and the taxability of the transfer of Planet M division, directing the AO to delete the disallowance and exclude the capital gain from the computation of income. The Tribunal dismissed the Revenue's appeal on the disallowance of software expenses, upholding the CIT(A)'s decision that the expenses were of a revenue nature.