2013 (12) TMI 649 - AT - Income Tax

Addition on account of short term capital gain The assessee has sold only original shares and not the bonus shares - Held that - In view of amendment bought to section 55 - The computation was made taking into consideration cost of original shares only Decided against Revenue. Disallowance u/s 14A Held that - Following Godrej & Boyce Mfg. Co. Ltd. vs. DCIT 2010 (8) TMI 77 - BOMBAY HIGH COURT - The Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record The issue set aside for fresh adjudication.

Summary

Issues:
1. Treatment of short term capital gain on sale of shares - averaging of original and bonus shares.
2. Disallowance under section 14A - applicability of Rule-8D.

Analysis:

Issue 1: Treatment of short term capital gain on sale of shares - averaging of original and bonus shares
The Revenue challenged the CIT (A)'s decision to delete the addition on account of short term capital gain, arguing that the Assessing Officer had rightly adjusted the cost proportionate to investment. The Revenue contended that invoking section 94(8) was a typographical error and the correct section was section 48. However, the CIT (A) granted relief based on the fact that only the original shares were sold, not the bonus shares. The CIT (A) held that due to the amendment to section 55(2) of the Act, averaging was invalid when both original and bonus shares were unsold. The appellant claimed short term capital loss after selling the original shares, citing the CBDT's circular on FIFO method and the definition of units under section 115AB. The CIT (A) found that the Assessing Officer erred in taking the average cost of original shares, allowing the appellant's claim of short term capital loss. The Tribunal upheld the CIT (A)'s decision, stating that the original shares were the only ones sold, and the CIT (A)'s interpretation of the law was correct.

Issue 2: Disallowance under section 14A - applicability of Rule-8D
Regarding the disallowance under section 14A, both parties agreed that the AO incorrectly applied Rule-8D for the assessment year, which was actually applicable from the following year as per the judgment in the case of Godrej & Boyce Mfg. Co. Ltd. vs. DCIT. The parties suggested remanding the issue to the AO for fresh adjudication based on a reasonable basis. The Tribunal set aside the issue for fresh adjudication, directing the AO to reject the basis adopted by the assessee and decide the disallowable sum under section 14A afresh. The AO was instructed to provide a reasonable opportunity for the assessee to be heard. Consequently, the ground raised by the Revenue was allowed for statistical purposes, and the appeal was partly allowed.

In conclusion, the Tribunal upheld the CIT (A)'s decision on the treatment of short term capital gain and remanded the issue of disallowance under section 14A for fresh adjudication, following the judgment in the Godrej & Boyce Mfg. Co. Ltd. case.