Section 14A and share transactions: strategic investments stay included, while genuine sale and buy-back routes were not treated as colourable devices.

Strategic investments are not excluded when computing disallowance under section 14A read with Rule 8D, so the disallowance was revised to that extent, while the directions on surplus funds remained unchanged. A share sale in a promoter-exit context was not treated as a colourable device because the higher benchmark sale price was not shown to reflect the actual consideration, and the addition was deleted. A buy-back of shares carried out under the applicable corporate restructuring and valuation framework was likewise not regarded as a colourable device, so the related capital loss disallowance was not sustained.

---

---

Issues: (i) Whether strategic investments were to be excluded while computing disallowance under section 14A read with Rule 8D; (ii) whether the sale of shares of TFSL could be treated as a colourable device by substituting a higher sale price; (iii) whether the long-term capital loss on buy-back of shares of HTSL could be disallowed as a colourable device.

Issue (i): Whether strategic investments were to be excluded while computing disallowance under section 14A read with Rule 8D.

Analysis: The assessee had earned exempt dividend income and the disallowance was computed by applying Rule 8D. The appellate authority had directed exclusion of strategic investments and had also directed consideration of availability of surplus funds. The governing principle applied was that Rule 8D does not permit exclusion of strategic investments for the purpose of computing disallowance under section 14A.

Conclusion: Exclusion of strategic investments was held to be incorrect, and the disallowance under section 14A was modified to that extent. The other directions regarding surplus funds were left undisturbed. The issue was partly in favour of Revenue.

Issue (ii): Whether the sale of shares of TFSL could be treated as a colourable device by substituting a higher sale price.

Analysis: The sale by the assessee was contrasted with a sale by a public category shareholder in a delisting process. The assessee's sale was found to be part of a promoter exit in circumstances where the shares reflected negative value, and the higher benchmark adopted by the Assessing Officer was not shown to establish understatement of consideration. The transaction was held to be covered by the earlier binding decision on the same issue.

Conclusion: The addition made by adopting a higher sale price was not sustained. The issue was decided in favour of the assessee and against Revenue.

Issue (iii): Whether the long-term capital loss on buy-back of shares of HTSL could be disallowed as a colourable device.

Analysis: The shares were bought back pursuant to a restructuring exercise and at a valuation made in accordance with the applicable corporate law and buy-back framework. The buy-back route was treated as a legally permissible mechanism, and the transaction was held not to be a colourable device to evade tax.

Conclusion: The disallowance was not justified and the deletion of the addition was upheld. The issue was decided in favour of the assessee and against Revenue.

Final Conclusion: The appellate order was sustained on the share-transaction issues, while the section 14A computation was modified by rejecting exclusion of strategic investments, resulting in only partial relief to Revenue.

Ratio Decidendi: Strategic investments are not to be excluded from the computation of disallowance under section 14A read with Rule 8D, and a buy-back or genuine share sale carried out under the applicable corporate framework cannot be disallowed as a colourable device absent proof of understatement or tax evasion.

---