2016 (11) TMI 1469 - AT - Income Tax

Addition on account of long term capital loss on sale of Shares - Held that - As per section 108 of the Companies Act, 1956 off market transactions are permissible by Security Exchange Board of India. All the transactions entered into by the assessee are within the frame work of law and cannot be termed as a colourable device to evade tax rather it is assessee s right of tax planning which he has used to reduce his tax liability by entering into all the transactions permissible by law. We, therefore, find no reason to interfere with the order of ld. CIT(A). Accordingly this ground of Revenue is dismissed. Disallowance u/s 14A of the Act r.w.r 8D - Held that - Certainly provisions of section 14A of the Act can be applied to the assessee only if there is some expenditure incurred by assessee in relation to the income which does not form part of the total income and such expenditure have been claimed by the assessee against the taxable income. In other words if the assessee has been carrying on any business activity and has claimed certain expenditure against the revenue or has claimed expenditure under income from other sources u/s 57 of the Act then Revenue would have a case for calculating the disallowance. However, no such facts are existing in the case of assessee as assessee has not claimed any expenditure against salary income, or income from other sources as verifiable from the computation of income placed at page 10 to 14 of the paper book. We are, therefore, of the view that no disallowance is called for u/s 14A of the Act and no interference is called for in the order of ld. CIT(A). Assessee should be allowed set off of long term capital loss from sale of shares off market against the long term capital gain on sale of land as they have been entered within the permissible four corners of law and the modus operandi of the assessee is not that of tax evasion but of tax planning.

Summary

Issues Involved:
1. Deletion of addition on account of long-term capital loss on the sale of shares.
2. Deletion of disallowance under Section 14A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Long-term Capital Loss on Sale of Shares:

The Revenue challenged the deletion of an addition of ?3,85,28,505/- made by the Assessing Officer (AO) on account of long-term capital loss on the sale of shares of M. H. Mills & Industries Ltd. The AO claimed that the assessee engaged in a colorable device to evade tax by selling shares off-market to claim a set-off against long-term capital gain from the sale of land.

The Tribunal noted that the assessee had received the shares as a gift from relatives, sold them off-market at the market price, and claimed the resultant loss as a set-off against long-term capital gain from the sale of land. The AO did not challenge the genuineness of the gift or the sale price of the shares. The Tribunal referred to several judicial precedents, including the Supreme Court's judgment in McDowell & Co. vs. CIT, which held that tax planning within the framework of law is legitimate, and colorable devices cannot be part of tax planning.

The Tribunal upheld the CIT(A)'s decision, stating that all transactions entered into by the assessee were within the framework of law and could not be termed as a colorable device to evade tax. The Tribunal concluded that the assessee's actions constituted legitimate tax planning and allowed the set-off of long-term capital loss against long-term capital gain.

2. Deletion of Disallowance under Section 14A of the Income Tax Act:

The Revenue also challenged the deletion of a disallowance of ?1,15,043/- under Section 14A read with Rule 8D of the Income Tax Rules. The AO had made this disallowance by applying 0.5% on the average value of investment of ?2.30 crores.

The Tribunal observed that the assessee had not claimed any expenditure against taxable income that could be linked to the investments generating exempt income. The CIT(A) had deleted the disallowance, noting that for Section 14A to apply, there must be some expenditure incurred by the assessee in relation to the income that does not form part of the total income, and such expenditure must have been claimed by the assessee while computing the total income.

The Tribunal upheld the CIT(A)'s decision, stating that no disallowance was warranted under Section 14A as the assessee had not claimed any expenditure against salary income or income from other sources. The Tribunal found no reason to interfere with the CIT(A)'s order and dismissed the Revenue's ground.

Separate Judgments:

The Tribunal also dealt with a similar issue in the case of Smt. Kusumlataben N. Parikh, where the facts were identical to those in the case of Deepakbhai N. Parikh. The Tribunal applied the same reasoning and upheld the CIT(A)'s decision, allowing the set-off of long-term capital loss from the sale of shares off-market against long-term capital gain on the sale of land.

Conclusion:

Both appeals by the Revenue and the Cross Objections by the assessees were dismissed. The Tribunal upheld the CIT(A)'s decisions, allowing the set-off of long-term capital loss against long-term capital gain and deleting the disallowance under Section 14A. The Tribunal emphasized that the transactions were within the framework of law and constituted legitimate tax planning rather than tax evasion.