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2012 (8) TMI 638 - AT - Income TaxDisallowance of interest - Held that - No disallowance can be made u/s 14A of the Act out of the interest claim Assessee has received interest free dividend income which was claimed exempt u/s 10(33) - amount of Rs. 5000/- can be considered as expenditure for earning of such dividend, therefore, an amount of Rs. 5000/- is appropriate for disallowance u/s 14A - A.O. directed to make addition of Rs.5000/- only. The ground raised by assessee is partly allowed. Long term capital loss on sale of shares - A.O. was of the opinion that the transactions of sale of shares in all these related companies/persons on which loss was claimed are malafide and sham transactions Held that - Just because of assessee sold shares to daughter and sister concern, it cannot be considered that the transactions are sham transactions - A.O. has not disputed the valuation of share or sale price. There is also no dispute to the fact that these are investments and gain or loss are long term in nature - AO accepted Long term capital gain offered by assessee without any question - transactions cannot be treated as sham transactions as assessee is well within his rights to set off loss incurred on sale of shares
Issues Involved:
1. Disallowance of interest under section 14A of the Income Tax Act. 2. Claim of long-term capital loss on the sale of shares. Detailed Analysis: 1. Disallowance of Interest under Section 14A: The first issue pertains to the disallowance of interest amounting to Rs. 27,24,724/- by the Assessing Officer (A.O.) under section 14A of the Income Tax Act. The A.O. noted that the assessee had received taxable business income and had made significant investments in shares, lands, shops, garages, and flats without showing income from these activities. The A.O. concluded that loans taken by the assessee were utilized for these investments and disallowed the interest paid. The assessee argued that it had sufficient interest-free funds and that the disallowance was unwarranted. The CIT(A) provided partial relief by reducing the disallowance by Rs. 5,01,904/-, which led to cross appeals by both the assessee and the Revenue. The Tribunal examined the issue and found that the assessee had sufficient own funds to cover the investments and advances, and therefore, no disallowance under section 14A was necessary. The Tribunal also noted that the interest paid to the assessee's minor son was taxable in the assessee's hands, and the investments were not non-generating assets. Following the principles established in the case of Reliance Utilities & Power Ltd., the Tribunal concluded that the investments were made from interest-free funds available and thus no disallowance should be made. However, the Tribunal decided to disallow a nominal amount of Rs. 5000/- for earning dividend income, modifying the CIT(A)'s order accordingly. 2. Claim of Long-Term Capital Loss on Sale of Shares: The second issue involves the assessee's claim of a long-term capital loss of Rs. 1,74,59,306/- on the sale of shares. The A.O. considered the transactions as malafide and sham, intended to reduce tax liability. The CIT(A) agreed with the A.O., categorizing the transactions as a colorable device. The assessee contended that the investments and sales were genuine and that similar transactions in a group concern were upheld by the ITAT. The Tribunal reviewed the facts and found that the transactions were not sham and were part of legitimate tax planning. The Tribunal referred to the case of DCIT v. M/s Zircon Finance & Leasing P. Ltd., where similar transactions were considered genuine. The Tribunal concluded that the transactions could not be deemed sham merely because the shares were sold to related parties. The Tribunal directed the A.O. to allow the long-term capital loss as claimed by the assessee. Conclusion: The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal. The disallowance under section 14A was reduced to Rs. 5000/-, and the claim of long-term capital loss on the sale of shares was accepted. The Tribunal emphasized that the transactions were genuine and part of legitimate tax planning, not a colorable device.
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