2013 (9) TMI 608 - AT - Income Tax

Disallowance u/s 14A by invoking Rule 8D - Whether the assessee was claiming exempt income and whether any expenditure had been incurred to earn the exempt income - Held that - It cannot be said that no borrowed funds had ever been utilized by assessee for the purpose of making investment or undertaking transactions which yielded dividend income, which had been claimed as exempt - The assessee had not disputed the fact that it failed to produce any cash flow statement or any other material which could establish that borrowed funds had not been utilized for earning of exempt income. The contention of AR that no satisfaction had been recorded by AO before invoking Rule 8D, according to us, had no merits particularly when the AO at the time of making the assessment confronted the assessee in respect of investment in shares and expenses claimed and particularly when the AO asked the assessee as to why disallowance be not made u/s 14A read with Rule 8D of the Act in respect of the exempt dividend income. Revised Long Term Capital Gain Method of Charging Depreciation - Whether the assessee was justified to allocate the WDV of the Bombay Stock Exchange card to the cost of acquisition during the course of assessment proceedings and was to be allowed or not Held that - The ld. CIT(A), was not justified in not considering the revised Long Term Capital Gains on sale of shares - The said revised computation of Long Term Capital Gains filed by the assessee had to be considered to adjudicate the issue as per law - Hence, we set aside the orders of authorities below and restore this issue to the file of AO with a direction to compute Long Term Capital Gain by considering the cost of shares taking into account the WDV of the Stock Exchange card - Long Term Capital Gain in respect of the shares hae to be considered after assigning the WDV of the Bombay Stock Exchange Card to the cost of 10000 shares allocated to the assessee - It was observed that the assessee in the assessment year under consideration has sold 4562 shares, therefore, proportionate cost of said Bombay Stock Exchange card has to be assigned to the said shares while computing the Long Term Capital Gains. From section 55(2)(ab) of the Act, it was evident that on demutualization or corporatization of the Bombay Stock Exchange, in the case before us, the cost of acquisition of ownership right and trading rights have been split - The trading rights were based on deposit system and in the case of existing member its cost deemed to be nil - The entire value of Bombay Stock Exchange card, as stands in the books of account of the assessee on the date of demutualization of Bombay Stock Exchange would be assigned to the shares allocated to said members - the claim of assessee to claim depreciation on demutualization or corporatization of the stock exchange of the Bombay Stock Exchange Card was not justified and legal - Therefore, the same was rightly denied by AO in the assessment year under consideration the appeal taken by assessee were allowed for statistical purposes by restoring the issue to the file of AO with a direction to compute Long Term Capital Gains.

Issues Involved:
1. Confirmation of income assessed by the assessing officer.
2. Disallowance under Section 14A of the Income Tax Act, 1961.
3. Non-acceptance of revised long-term capital gain on the sale of shares.
4. Requirement to revise the return of income for lower long-term capital gains claim.

Detailed Analysis:

Issue 1: Confirmation of Income Assessed by the Assessing Officer
The first ground of appeal is general and does not require specific adjudication. Therefore, no detailed analysis is provided for this issue.

Issue 2: Disallowance under Section 14A of the Income Tax Act, 1961
The assessee, a registered share-broker, earned dividend income of Rs. 4,65,118/- which was claimed as exempt. The Assessing Officer (AO) noted that no disallowance was made under Section 14A of the Income Tax Act, 1961, for expenses related to earning this exempt income. The AO invoked Rule 8D and calculated a disallowance of Rs. 2,34,139/-, which was confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)].

The CIT(A) justified the AO's action, stating that the assessee had not maintained separate accounts for expenses incurred to earn exempt income. The CIT(A) referred to the decision of the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg Co Ltd Vs DCIT (2010) 328 ITR 81 (Bom), which upheld the applicability of Rule 8D from the assessment year 2008-09.

The Tribunal observed that the assessee did not make any disallowance for expenses related to exempt income and failed to produce evidence that borrowed funds were not used for earning exempt income. The Tribunal upheld the CIT(A)'s order, stating that the AO had recorded satisfaction before invoking Rule 8D and confirmed the disallowance under Section 14A.

Issue 3: Non-Acceptance of Revised Long-Term Capital Gain on Sale of Shares
The assessee acquired membership of the Mumbai Stock Exchange for Rs. 55 lakhs and claimed depreciation on the stock exchange card. Upon demutualization of the Bombay Stock Exchange, the assessee received 10,000 shares of BSE Ltd. The AO disallowed the depreciation claim, stating that the stock exchange card ceased to exist and the cost of shares should be the cost of the original membership.

During assessment proceedings, the assessee revised the long-term capital gain calculation, incorporating the Written Down Value (WDV) of the stock exchange card. The AO did not accept this revision. The CIT(A) upheld the AO's decision, citing the Hon'ble Bombay High Court's decision in Goetze (India) Ltd. V/s CIT (2006) 284 ITR 323 (SC), which requires claims to be made by revising the return of income.

Issue 4: Requirement to Revise the Return of Income for Lower Long-Term Capital Gains Claim
The Tribunal considered the facts and submissions, noting that the demutualization resulted in the extinguishment of the stock exchange card and allocation of shares. The Tribunal held that the WDV of the stock exchange card should be assigned to the cost of the shares. The Tribunal found that the CIT(A) erred in not considering the revised long-term capital gains and restored the issue to the AO to compute the gains by considering the WDV of the stock exchange card.

Conclusion:
The appeal was allowed in part for statistical purposes. The Tribunal upheld the disallowance under Section 14A but directed the AO to recompute the long-term capital gains by considering the WDV of the stock exchange card. The order was pronounced in the open court on 13th September 2013.

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