2012 (2) TMI 589 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of disallowance of interest u/s 36(1)(iii) and Section 14A.
2. Direction to allow set off of loss against capital gain, and whether the share transaction resulting in the loss was a sham transaction.

Summary:

Issue 1: Deletion of Disallowance of Interest u/s 36(1)(iii) and Section 14A

During the assessment proceedings, the AO noted that the assessee had paid interest and received interest and finance charges. The AO issued a show cause notice regarding the disallowance of interest u/s 36(1)(iii) and Section 14A due to interest-free advances. The AO calculated the availability of funds and disallowed proportionate interest of Rs. 7,62,693 and Rs. 1,81,246 u/s 14A. The CIT(A) found that the AO had incorrectly calculated the availability of funds and determined that sufficient interest-free funds were available, thus deleting the disallowance of interest and Section 14A disallowance. The Tribunal upheld the CIT(A)'s decision, noting that the total funds available were Rs. 13,73,22,719 and interest-free funds were Rs. 9,00,57,465, which covered the interest-free advances of Rs. 8,32,34,434. Consequently, no disallowance was warranted u/s 36(1)(iii) and Section 14A, except for a reasonable expenditure of Rs. 2,000 for earning exempt income.

Issue 2: Set Off of Loss Against Capital Gain and Sham Transaction Allegation

During the assessment, the AO observed that the assessee had sold shares and booked short-term capital losses, which were set off against capital gains. The AO suspected the transactions were sham as the shares were sold to relatives of the director without proper share transfer evidence. The assessee argued that the transactions were genuine, supported by documentary evidence, and the shares were transferred as per legal norms. The CIT(A) accepted the assessee's explanation, noting that the transactions were executed in a normal business manner and were not sham. However, the CIT(A) reduced the cost of shares of Plus Channel to Rs. 58 per share, determining the loss at Rs. 1,15,00,000 instead of Rs. 2,15,00,000. The Tribunal upheld the CIT(A)'s decision, stating that the transactions were genuine and could not be considered sham merely because the shares were sold to relatives. The Tribunal also noted that the transactions were in line with tax planning, as upheld by the Supreme Court in the case of Walfort Share Brokers P. Ltd.

Conclusion:

The Tribunal partly allowed the Revenue's appeal, confirming the deletion of disallowance of interest and Section 14A disallowance, and upheld the CIT(A)'s decision regarding the genuineness of the share transactions and the resultant capital loss set off.

Order pronounced in the open Court on this day of 3/2/2012.