2014 (12) TMI 139 - AT - Income Tax

Disallowance u/s 14A Computation of average interest under Rule 8D @ 0.5% - Held that - The assessee is mainly engaged in the hotel business - It has made investment in the shares and mutual funds on which it has earned dividend income - surplus funds were sufficient to cover the investments - the assessee has also given the nature of utilization of loan and details of interest paid which has been incorporated - for the purpose of indirect expenses the assessee has given the calculation of expenditure from its account which can be said to be attributable for the purpose of earning of the exempt income once all these details were made available along with the entire accounts of the assessee the AO was required to record his satisfaction or satisfied himself that having regard to the accounts of the assessee the claim of the assessee in respect of expenditure debited is not correct and there could have been certain other expenditures which can be said to have been incurred in relation to the earning of exempt income. The A.O. has straight away proceeded to apply Rule 8-D for the purpose of disallowance u/s 14A without satisfying or complying with the mandatory requirement of section 14A(2) or Rule 8-D(1) - once the AO has failed to comply the statutory requirement then he cannot proceed to make the disallowance u/s 14A(1) and the disallowance made by the AO and partly sustained by the CIT(A) over and above the disallowance made by the assessee is deleted Decided in favour of assessee. Computation of book profits u/s 115JB Held that - As admitted by both the parties once the disallowance u/s 14A has been made then the same disallowance shall also form part of the computation while calculating the book profit u/s 115JB of the Act - Thus the disallowance as made by the assessee in its computation of income will be the disallowance while computing the book profit u/s 115JB Decided partly in favour of assessee. Treatment of forfeiture of share application money for equity warrants Capital receipt or revenue receipt Applicability of the SC s decision in Commissioner of Income-Tax Versus TV Sundaram Iyengar And Sons Limited 1996 (9) TMI 1 - SUPREME Court - Held that - During the FY 2007-08 the assessee company had issued equity warrants convertible into equity shares under preferential issue to the public in accordance with SEBI Guidelines 2000 - the assessee treated it as capital receipt and therefore it was not offered as income - In the case of T.V. Sundaram Iyengar secondly the assessee has not forfeited the amount and transferred to the P&L account but directly to the capital reserve under the head warrant forfeited account - The assessee is not in the business of raising money through issue of share warrant and it is not a receipt in the normal course of business - If a particular amount is not received as trading receipt or during the course of trading transaction it cannot be later on treated as arising out of trading transaction so as to hold as revenue receipt thus the amount of forfeited share application money transferred to warrant forfeiture account in the capital reserve is a capital receipt only and cannot be taxed as income of the assessee either u/s 28(iv) or u/s 41(1) Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Disallowance under Section 35D of the Income Tax Act.
3. Taxability of forfeited share application money.
4. Disallowance under Section 14A while computing book profit under Section 115JB of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The assessee challenged the disallowance of Rs. 30,98,264/- under Section 14A, being 0.5% of the average investment computed under Rule 8-D of the Income Tax Rules, 1962. The assessee argued that it had sufficient surplus funds for investments and had already disallowed Rs. 2 lacs for indirect expenses. The Assessing Officer (A.O.) held that the assessee did not prove the nexus between investments and its own funds, leading to a disallowance of Rs. 96,06,277/-. The CIT(A) directed the A.O. to re-examine the details provided by the assessee and compute the disallowance strictly as per Rule 8-D. The Tribunal found that the A.O. failed to record satisfaction as required under Section 14A(2) before applying Rule 8-D, leading to the deletion of the disallowance over and above the Rs. 2 lacs already disallowed by the assessee.

2. Disallowance under Section 35D of the Income Tax Act:
The assessee did not press the ground related to the disallowance of Rs. 94,79,290/- under Section 35D, leading to its dismissal as not pressed.

3. Taxability of Forfeited Share Application Money:
The assessee treated the forfeited share application money of Rs. 8,50,00,889/- as a capital receipt, while the A.O. treated it as taxable income. The A.O. relied on the Supreme Court's decision in T.V. Sundaram Iyengar & Sons and the Bombay High Court's decision in Solid Containers, concluding that the forfeited amount was a revenue receipt. The CIT(A) upheld this view, noting that the amount was not spent on acquiring fixed assets. However, the Tribunal held that the forfeited share application money is a capital receipt, not arising from trading transactions, and thus not taxable under Section 28(iv) or Section 41(1) of the Income Tax Act.

4. Disallowance under Section 14A while Computing Book Profit under Section 115JB:
Both the assessee and the Revenue agreed that any disallowance under Section 14A should also be considered while computing book profit under Section 115JB. The Tribunal directed that the disallowance made by the assessee in its computation of income should be used for calculating the book profit under Section 115JB.

Conclusion:
- The appeal of the assessee was partly allowed, with the disallowance under Section 14A over Rs. 2 lacs being deleted and the forfeited share application money being treated as a capital receipt.
- The appeal of the Revenue was also partly allowed, with directions to include the disallowance under Section 14A in the computation of book profit under Section 115JB.