2018 (2) TMI 730 - AT - Income Tax

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

M/s. Bennett Coleman And Co. Ltd. Versus Addl. Commissioner of Income Tax And ACIT– 1 (1), Mumbai

M/s. Bennett Coleman And Co. Ltd. Versus Addl. Commissioner of Income Tax And ACIT– 1 (1), Mumbai - TMI 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.