2014 (9) TMI 1029 - AT - Income Tax

Disallowance u/s 14A - Held that - Since the amount of interest debited to the Profit and Loss account was on net basis the disallowance of interest should also be made only with reference to the net interest. Before us, Revenue has not brought any contrary decision in its support for the proposition that gross interest has to be considered for the purpsoe of working out disallowance u/s 14A. Further it is a fact that for the year under consideration, the method prescribed by Rule 8D of the I.T. Rules for the working of disallowance u/s 14A is not applicable and therefore the disallowance has to be made on a reasonable basis as held by Hon ble High Court in the case of Godrej and Boyce ((2010 (8) TMI 77 - BOMBAY HIGH COURT).). In such circumstances and in view of the decision in the case of Morgan Stanley (2014 (1) TMI 1412 - ITAT MUMBAI ) and in view of the fact that CIT(A) has upheld the disallowance u/s 14A we find no reason to interfere with the order or CIT(A) and thus this ground of Revenue is dismissed. Claim of interest expenses - Held that - CIT(A) while allowing the claim of the Assessee has given a finding that the claim of Assessee was not a fresh one and hence there was no necessity of filing a revised return. CIT(A) further relying on the various decisions of High Courts has allowed the claim of the Assessee. Before us Revenue has neither brought any material on record to controvert the finding of CIT(A) nor has placed any binding contrary decision in its support. Further the case laws relied by the ld. D.R. are distinguishable on facts. In view of the aforesaid facts, we find no reason to interfere with the order of CIT(A) Taxing short term capital gain at a special rate when the appellant had loss - Held that - It is assessee s submission that Assessee also has capital loss of ₹ 86,130/- which should have been adjusted against the short term capital gain of ₹ 2,84,676/- earned by the Assessee and only the net short term capital gain should be taxed. Before us no details of the short term loss has been filed by the Assessee. Further before allowing the netting off of loss, the factual aspect needs examination and we therefore remit the issue to the file of A.O to verify the factual aspect and thereafter decide the issue in accordance with law. Assessee is also required to furnish the required details promptly before A.O.

Summary

Issues Involved:

1. Reducing the disallowance under Section 14A.
2. Allowing fresh claim of interest expenses of Rs. 11,24,065.
3. Taxation of short-term capital gain at a special rate.

Issue-wise Detailed Analysis:

1. Reducing the Disallowance under Section 14A:

During the assessment proceedings, the Assessing Officer (A.O) noticed that the Assessee earned tax-free income in the form of dividends from mutual funds and had interest expenses of Rs. 29,84,999, which were netted against interest income of Rs. 26,71,158, showing net interest expenses of Rs. 3,85,252. The Assessee calculated the disallowance under Section 14A at Rs. 1,00,576 using net interest expenses. However, the A.O argued that the disallowance should be based on gross interest expenses, calculating it at Rs. 5,93,079 as per Rule 6D of the ITAT Rules. The CIT(A) disagreed, holding that Rule 8D does not specify whether gross or net expenses should be used, and directed the A.O to use net interest expenses, reducing the disallowance to Rs. 1,00,576. The Tribunal upheld CIT(A)'s decision, noting that the net interest should be considered for disallowance under Section 14A, especially since Rule 8D was not applicable for the assessment year in question, and the disallowance should be made on a reasonable basis.

2. Allowing Fresh Claim of Interest Expenses of Rs. 11,24,065:

The A.O noticed that the Assessee had voluntarily added back interest expenses of Rs. 11,24,065 in the computation of income. The Assessee argued that this was an incorrect voluntary disallowance under Section 14A and should be reduced to Rs. 1,00,576. The A.O rejected this claim, stating that the Assessee must prove the genuineness of the expense and that allowing the claim would reduce the income below the returned income. CIT(A), however, allowed the claim, citing various High Court decisions that support the correction of disallowances even if it results in an income lower than the returned income. The Tribunal upheld CIT(A)'s decision, noting that the claim was not new and did not require a revised return, and the A.O had the jurisdiction to entertain the claim during assessment proceedings.

3. Taxation of Short-term Capital Gain at a Special Rate:

The A.O found that the Assessee had claimed exempt income, including Rs. 2,84,676 from the sale of mutual fund units, which was not eligible for exemption. The Assessee admitted the mistake, and the A.O taxed this amount as short-term capital gain. CIT(A) held that the short-term capital gain should be taxed at a special rate. The Assessee argued that a capital loss of Rs. 86,130 should be adjusted against the short-term capital gain, and only the net gain should be taxed. The Tribunal remitted the issue to the A.O for factual verification of the short-term loss and to decide the matter in accordance with the law, ensuring the Assessee is given adequate opportunity to present the necessary details.

Conclusion:

The Tribunal dismissed the Revenue's appeal and allowed the Assessee's cross-objection, directing the A.O to verify the factual aspects of the short-term capital loss and adjust it against the short-term capital gain before taxation. The order was pronounced in open court on 19-09-2014.