2025 (8) TMI 760 - AT - Income Tax

Section 14A Disallowance Overturned; No Addition Under Section 43CA Within 10% Tolerance; Foreign Currency Issue Remanded

Bennett, Coleman & Co Ltd. Versus DCIT 1 (1) (1), Mumbai

Bennett, Coleman & Co Ltd. Versus DCIT 1 (1) (1), Mumbai - TMI 1. ISSUES PRESENTED AND CONSIDERED 1. Whether the appellate authority was justified in passing an order without granting any personal hearing to the appellant. 2. Whether the disallowance made under section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962, was justified. 3. Whether the invoking of Rule 8D by the Assessing Officer without recording objective satisfaction under section 144(2) of the Act was valid. 4. Whether the appellate authority was bound to accept the appellant's working of disallowance under section 14A in light of consistent past practice and earlier Tribunal orders. 5. Whether the addition under section 43CA of the Act on account of difference between stamp duty value and actual sale consideration was justified. 6. Whether the addition of foreign currency translation difference and profit on redemption of preference shares to income was justified, considering the nature of the gain as a book entry and prior treatment of foreign exchange losses. 7. Whether the disallowance of carry forward of long-term capital loss on sale of shares on which Securities Transaction Tax (STT) was paid was justified. 8. Whether the disallowance of carry forward of long-term capital loss on the ground that section 10(38) of the Act exempts long-term capital gains and includes the term 'loss' was valid. 9. Whether the appellate authority erred in not following binding precedent of the Tribunal regarding carry forward of long-term capital loss on shares on which STT was paid. 10. Whether the appellate authority erred in upholding the initiation of penalty proceedings based on purported satisfaction recorded by the Assessing Officer. 2. ISSUE-WISE DETAILED ANALYSIS Issues 2, 3, and 4: Disallowance under Section 14A read with Rule 8D Legal Framework and Precedents: Section 14A of the Income Tax Act mandates disallowance of expenditure incurred in relation to exempt income. Rule 8D prescribes the method for computing such disallowance. The Assessing Officer must record objective satisfaction under section 14A(2) before invoking Rule 8D. The Supreme Court and various High Courts have held that the AO must first be dissatisfied with the assessee's suo motu disallowance before applying Rule 8D. Court's Interpretation and Reasoning: The Assessing Officer rejected the assessee's suo motu disallowance of Rs. 35,01,925/- and computed disallowance under Rule 8D at Rs. 2,16,68,975/-, adding a balance of Rs. 1,81,67,050/- to income. However, the AO did not record any objective satisfaction or examine the nexus between the expenditure and exempt income before invoking Rule 8D. The Tribunal relied on a Coordinate Bench decision in the assessee's own case and a Bombay High Court ruling which held that mere non-conformity with Rule 8D does not amount to satisfaction required under section 14A(2). The AO's approach was held to be 'putting the cart before the horse.' Key Evidence and Findings: The assessee had made suo motu disallowance and furnished computations. The AO's order did not refer to the assessee's accounts or expenditure to record dissatisfaction. The disallowance was computed mechanically using average investment method without objective satisfaction. Application of Law to Facts: Without recording dissatisfaction based on the assessee's accounts, invoking Rule 8D is impermissible. The AO's disallowance is therefore unsustainable. Treatment of Competing Arguments: The Revenue relied on a Gujarat High Court decision where detailed reasons were given for disallowance under section 14A. However, that case was factually distinguishable as the AO there recorded detailed satisfaction. The Tribunal preferred the Coordinate Bench decision aligned with Supreme Court precedents. Conclusion: The additional disallowance under section 14A read with Rule 8D is deleted. Grounds relating to section 14A disallowance are allowed. Issue 5: Addition under Section 43CA on Sale of Immovable Property Legal Framework and Precedents: Section 43CA applies where sale consideration received is less than the value adopted by the stamp valuation authority. However, judicial precedents allow a tolerance limit of 10% difference between stamp duty value and sale consideration without invoking section 43CA. Court's Interpretation and Reasoning: The assessee is not a real estate trader but a media company disposing of immovable properties. The difference between stamp duty value (Rs. 2.07 crores) and sale consideration (Rs. 1.90 crores) was Rs. 17,46,440/-, which is within the 10% tolerance limit. The addition under section 43CA was therefore unwarranted. Key Evidence and Findings: Tax Audit Report and Form 3CD disclosed the difference. The assessee declared the income under capital gains correctly. The difference was within permissible limits. Application of Law to Facts: The addition under section 43CA is not justified as the difference falls within the accepted tolerance. Treatment of Competing Arguments: Revenue relied on the AO and CIT(A) orders but did not effectively counter the tolerance limit argument. Conclusion: Addition under section 43CA is deleted. Ground relating to section 43CA addition is allowed. Issue 6: Addition of Foreign Currency Translation Difference and Profit on Redemption of Preference Shares Legal Framework and Accounting Standards: AS-11 requires foreign currency monetary items to be translated at year-end rates with exchange differences recorded in reserves and amortized over time. Such entries are book entries and do not represent actual income or gain unless realized. Court's Interpretation and Reasoning: The amount of Rs. 37,64,61,452/- represented unamortized foreign exchange translation differences carried as a reserve in the books of a merged subsidiary, written back upon redemption of preference shares. The profit on redemption was separately computed and reflected. The foreign exchange difference was a book entry and not consideration for capital gains. The AO and CIT(A) did not examine these facts adequately. Key Evidence and Findings: Detailed submissions and annexures showing prior treatment of exchange differences, accounting entries, and assessment orders of the merged subsidiary were submitted. The amount was not claimed as income or deduction in earlier years. Application of Law to Facts: Since the amount is a book entry under AS-11 and not actual income, it should not be added to income. The matter requires verification and opportunity to the assessee. Treatment of Competing Arguments: Revenue relied on AO and CIT(A) orders without addressing the accounting treatment. Conclusion: The matter is remitted to AO for verification after hearing the assessee. Ground relating to foreign currency translation difference is allowed for statistical purposes. Issues 7, 8, and 9: Disallowance of Carry Forward of Long-Term Capital Loss on Sale of Shares on which STT was Paid Legal Framework and Precedents: Section 10(38) exempts long-term capital gains arising from transfer of equity shares or units on which STT is paid. The question is whether this exemption extends to losses and whether such losses can be carried forward and set off against other capital gains. Tribunal precedents have held that section 10(38) excludes only income and not the computation of capital gains or losses, allowing carry forward and set off of losses. Court's Interpretation and Reasoning: The AO disallowed carry forward of loss on the ground that income is exempt under section 10(38) and thus loss cannot be carried forward. The CIT(A) upheld the AO's order, expressing concern that allowing carry forward and set off against unrelated capital gains (movable or immovable property) would hinder verification by AO in subsequent years. Key Evidence and Findings: The assessee claimed carry forward of loss on shares on which STT was paid. Tribunal precedent (Raptakos Brett & Co. Ltd.) supports carry forward and set off. However, CIT(A) emphasized practical difficulties in verification. Application of Law to Facts: The CIT(A)'s reasoning is a valid administrative concern. The Tribunal upheld the CIT(A)'s order as a reasoned decision. Treatment of Competing Arguments: The assessee relied on binding precedent allowing carry forward; the Revenue emphasized administrative difficulties. Conclusion: The disallowance of carry forward of long-term capital loss is upheld. Grounds relating to this issue are dismissed. Issue 1: Passing Order Without Personal Hearing Legal Framework: Principles of natural justice require that an appellant be given an opportunity of personal hearing before adverse orders are passed. Court's Interpretation and Reasoning: The appellate order was passed without granting any personal hearing to the appellant. The grounds raised include challenge to the validity of such order. Conclusion: The grounds relating to absence of personal hearing are allowed, implying that orders passed without hearing are not justified. Issue 10: Initiation of Penalty Proceedings Based on Purported Satisfaction Legal Framework: Penalty proceedings require proper satisfaction recorded by the Assessing Officer based on material and reasons. Court's Interpretation and Reasoning: The appellate authority upheld initiation of penalty based on satisfaction recorded by AO. No detailed analysis or findings provided in the judgment extract. Conclusion: No interference indicated; issue not elaborated, presumed upheld. Application of Decisions to Assessment Year 2016-17 All grounds raised for AY 2016-17 are identical to those for AY 2015-16. The Tribunal applied the same reasoning and conclusions mutatis mutandis to AY 2016-17 appeals. Final Disposition The appeals are partly allowed: disallowance under section 14A and addition under section 43CA are deleted; foreign currency translation difference issue remitted for verification; disallowance of carry forward of long-term capital loss upheld; absence of personal hearing ground allowed; other grounds as per above analysis.