2025 (11) TMI 329 - AT - Income Tax

Section 14A disallowance limited to exempt income; recompute under Rule 8D; 115JB adjustment deleted; helicopter gain treated as long-term capital

ITAT upheld CIT(A)'s restriction of section 14A disallowance to the amount of exempt income and deletion of the 115JB book-profit adjustment, directed the ... Disallowance u/s. 14A - investments on which the exempt income was received - disallowance under section 14A form book profit u/s 115JB - HELD THAT:- We find that during the year under consideration, the assessee has shown exempt income to the extent of 2.17 crores. As recorded in earlier parts, the assessing officer invoked the provision of Rule 8D and made disallowance of section 14A to the extent of Rs. 49.93 crores after allowing set off of suo moto disallowance. We find that ld. CIT(A) on considering the submission of assessee restricted the disallowance to the extent of exempt income. We further find lf CIT(A) also deleted the adjustment from book profit under section 115JB. We find that order of ld. CIT(A) in deleting the addition/ disallowance u/s 14A form book profit under section 115JB is in consonance of decision of Delhi Tribunal in ACIT vs Vireet Investment Pvt. Ltd. [2017 (6) TMI 1124 - ITAT DELHI]. Therefore, we do not find any infirmity in the order passed by ld. CIT(A) to that extent. We also find that assessee has also challenged the action of CIT(A) in restricting the disallowance u/s 14A with a specific request that only investment which yielded exempt income should be considered for the purpose of disallowance under Rule 8D(iii). Thus, considering the decision of Delhi Tribunal in Vireet Investment Pvt. Ltd., we direct the assessing officer to re-compute the disallowance under Rule 14A in accordance with the decision of Vireet Investment[supra]. In the result, grounds of appeal raised by revenue in its appeal is dismissed and consequently, the grounds of appeal raised by assessee in its cross objection is allowed for statistical purpose. Characterization of gain - treating the gain on sale of helicopter as short term capital gain against the long term capital gain - period of holding - helicopter was purchased on 2005 and acquired by assessee-company in 2010 on demerger from RNRL - assessee also fairly accepted that assessee claimed depreciation on block of asset including only helicopter being a part of block of asset - HELD THAT:- Hon’ble Apex Court in case of CIT vs V. S. Dempo Co. Ltd. [2016 (10) TMI 62 - SUPREME COURT] held that assessee is eligible to claim exemption u/s 54E in respect of capital gain arising on transfer of capital asset on which depreciation has been allowed. Thus, the Hon’ble Apex Court had affirmed decision of Bombay High Court in CIT vs Ace Builders (P) Ltd. [2005 (3) TMI 36 - BOMBAY HIGH COURT] We further find that Hon’ble Bombay High Court in CIT vs Manali Investment [2013 (12) TMI 333 - BOMBAY HIGH COURT] held that short term capital gain computed on long term depreciable asset can be set off against long term capital loss. While allowing such set off of long term capital loss, the Hon’ble High Court followed its decision in CIT vs Ace Builders (P) Ltd. Further, in CIT vs Parrys (Eastern) (P) Ltd. [2016 (2) TMI 804 - BOMBAY HIGH COURT] held that when deemed short term capital gain arise on account of sale of depreciable asset that was held for a period to which long term capital gain would apply, said gain would be set off against brought forward long term capital losses and unabsorbed depreciation. In CIT vs Prasad Trading Co. (P) Ltd. [2013 (3) TMI 810 - BOMBAY HIGH COURT] also held that long term capital gain can be set off against short term capital gain calculated under section 50 on long term capital asset. Thus, in view of the aforesaid factual and legal binding precedent, the impugned asset (helicopter) is held to be a long term capital asset including for the purpose of section 74 and capital gain earned on sale of it would be set off against long term capital losses. In the result, ground of appeal raised by assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether disallowance under section 14A read with Rule 8D is correctly computed and may be restricted to the amount of exempt income earned in the year, or whether Rule 8D mandates a broader disallowance (even where exempt income is nil) and/or requires computation with reference to all investments irrespective of whether they yielded exempt income in the year. 2. Whether gain on transfer of an asset that formed part of a block of depreciable assets (helicopter) and on which depreciation was claimed must be treated as short-term capital gain for all purposes by operation of section 50, or whether the deeming fiction in section 50 is confined to computation of capital gain and does not convert the underlying asset's character for other provisions (including rate of tax and set-off against long-term capital losses). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Scope and quantum of disallowance under section 14A read with Rule 8D Legal framework: Section 14A disallows expenditure incurred in relation to exempt income. Rule 8D provides a formulaic mechanism for computing such disallowance, including apportionment based on average value of investments and interest correlations. Administrative guidance and subsequent legislative clarifications have been referred to by the parties. Precedent treatment: The Tribunal considered contrary authorities, including decisions of High Courts, Supreme Court and a Special Bench decision addressing whether disallowance under Rule 8D must be computed with reference only to investments that actually yielded exempt income in the year and whether disallowance can exceed the exempt income amount. The Court relied upon a Special Bench decision that restricted consideration to investments yielding exempt income and treated adjustment to book profit under alternate provisions as impermissible in that context. Interpretation and reasoning: The Court examined the facts - assessee reported exempt dividend income of a specific amount and had made a suo moto (self) disallowance much smaller than the AO's application of Rule 8D which produced a very large disallowance. The Tribunal found the Commissioner (Appeals) correctly limited the disallowance to the amount of exempt income, deleted the consequential addition to book profit under section 115JB, and adopted reasoning consistent with the Special Bench decision which confines Rule 8D(iii) application to investments that actually yielded exempt income. The Tribunal directed recomputation by the AO in accordance with that Special Bench view when necessary. Ratio vs. Obiter: Ratio - the Court affirms that where the facts align (exempt income is identifiable and limited), the disallowance under section 14A/Rule 8D may be restricted to the amount of exempt income and the corresponding adjustment to book profit need not follow in cases governed by the Special Bench approach. Obiter - comments on CBDT circulars and later legislative clarifications were noted but did not alter the decision in the present facts. Conclusion: Revenue's challenge to the appellate restriction of disallowance was dismissed. The AO is directed, where applicable, to recompute the disallowance in line with the Special Bench approach limiting consideration to investments which actually yielded exempt income; the deletion of the book-profit adjustment under section 115JB as effected by the Commissioner (Appeals) is sustained. Issue 1 - Ancillary sub-issue: whether disallowance under section 14A applies even when no exempt income is earned Legal framework: Debate concerned administrative circulars and a later legislative clarification addressing applicability of section 14A even when no exempt income accrues in a year. Precedent treatment & Interpretation: The parties argued on the effect of circulars and later Finance Act clarification. The Tribunal, while aware of these materials, resolved the appeal on the basis of the facts - exempt income was present - and applied the Special Bench approach; it did not rely upon or overrule the administrative/legislative clarifications in this factual matrix. Ratio vs. Obiter: Obiter - the Court did not decide the broader question of mandatory disallowance where no exempt income is earned; it confined decision to the present factual scenario where exempt income existed. Conclusion: No change to the outcome on this sub-issue; recomputation per Special Bench direction and sustainment of CIT(A)'s restriction. Issue 2 - Characterisation and tax treatment of capital gain on sale of depreciable asset that formed part of a block (helicopter) Legal framework: Section 50 contains a deeming provision prescribing computation of capital gain on transfer of depreciable assets forming part of a block of assets (resulting in computation akin to short-term capital gain). Sections defining long-term and short-term capital assets and provisions governing set-off of capital losses and rates of tax (including provisions for exemptions applicable to long-term capital gains) are integral to the question. Precedent treatment: The Tribunal examined higher court and apex court authorities holding that the deeming fiction in section 50 is confined to computation of capital gain and does not alter the character of the asset as a long-term capital asset for other statutory purposes; further precedent supports that gains computed under section 50 on long-held depreciable assets may be subject to long-term treatment for purposes such as exemptions and set-off and taxed accordingly. Interpretation and reasoning: On facts, the helicopter was held for more than the statutory long-term period, was part of a depreciable block, and depreciation had been claimed. The AO had computed gain under section 50 and treated it as short-term for all purposes, denying set-off against long-term capital losses and applying short-term treatment. The Tribunal held that the deeming fiction in section 50 applies only to the computation mechanism and its limited object (preventing multiplicity of benefits), and does not convert the underlying long-term asset into a short-term capital asset for other provisions (including set-off and rate of tax). The Tribunal relied on binding higher court and apex court reasoning affirming confinement of the fiction to section 50 and permitted set-off against long-term capital losses and application of long-term tax rates/exemption provisions where applicable. Ratio vs. Obiter: Ratio - section 50's deeming provision is limited to computation of capital gain; it does not change the legal character of the asset as a long-term capital asset for other statutory provisions (e.g., set-off under section 74, applicability of long-term rates and exemptions). Obiter - policy remarks about avoiding double benefit were noted but not dispositive beyond the cited ratio. Conclusion: The Tribunal allowed the assessee's claim. The gain on sale of the depreciable asset (helicopter) is to be regarded as arising from a long-term capital asset for purposes of set-off and rate/exemption applicability, notwithstanding that computation of the gain is governed by section 50; consequential adjustments by the AO denying set-off and long-term treatment are reversed. Final Dispositions (as relevant to issues) - Revenue's appeal on section 14A/Rule 8D disallowance: dismissed; CIT(A)'s restriction sustained and AO directed to recompute in conformity with the Special Bench approach where appropriate. - Assessee's appeal on capital gain characterisation: allowed; gain treated as arising from a long-term capital asset for purposes of set-off and applicable long-term provisions, notwithstanding computation under section 50.