Capital loss of Rs. 386 crores on OCPS sale to related entity allowed as genuine transaction

DCIT, Central Circle-3 (3), Mumbai Versus Welspun Steel Ltd

DCIT, Central Circle-3 (3), Mumbai Versus Welspun Steel Ltd - [2024] 114 ITR (Trib) 107 (ITAT [Mum]) Issues Involved:
1. Deletion of disallowance of long-term and short-term capital loss on sale of shares.
2. Disallowance under Section 14A of the Income-tax Act, 1961.

Summary:

Issue 1: Deletion of Disallowance of Long-term and Short-term Capital Loss on Sale of Shares
The Revenue appealed against the CIT(A)'s decision to delete the disallowance of capital loss arising from the sale of shares of M/s Welspun Energy Limited (WEL). The assessee, engaged in manufacturing and trading of sponge iron and steel products, had claimed a capital loss of Rs. 423 crore on the sale of shares of M/s Welspun Energy Chhattisgarh Limited (WECL) to a related entity, M/s Solarsys Infra Projects Pvt. Ltd. (SIPPL). The AO deemed this loss as artificial, created through circular movement of funds and amalgamation schemes. The AO referenced the statement of Shri Rajesh Verma, who could not explain the business rationale behind these transactions, to support the disallowance.

The CIT(A) deleted the disallowance, noting that the transactions were legitimate business activities supported by material evidence and that the loss from the merger was not claimed or carried forward. The Tribunal upheld the CIT(A)'s decision, stating that the transactions had commercial rationale and were not colorable devices. The Tribunal also noted that the valuation of the sale consideration was supported by an independent merchant banker's report, and the sale was at fair market value.

Issue 2: Disallowance Under Section 14A of the Income-tax Act, 1961
The AO disallowed Rs. 9,69,98,557/- under Section 14A, invoking Rule 8D, while the assessee had disallowed only Rs. 55/-. The CIT(A) upheld the assessee's disallowance, restricting it to the exempt income earned. The Tribunal agreed with the CIT(A), referencing the jurisdictional High Court's decision in M/s. Nirved Traders Pvt. Ltd. Vs. DCIT, which held that disallowance under Section 14A cannot exceed the exempt income earned. The Tribunal also noted that the amendment to Section 14A introduced by the Finance Act 2022 is applicable prospectively from Assessment Year 2022-23.

Regarding the addition made under Section 14A while computing book profit under Section 115JB, the Tribunal followed its earlier decision in the assessee's case, holding that Rule 8D cannot be applied while computing book profit. Thus, the Tribunal upheld the CIT(A)'s order deleting the further addition under Section 14A read with Rule 8D.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both issues. The deletion of the disallowance of capital loss and the restriction of disallowance under Section 14A to the exempt income earned were found to be justified.