2015 (1) TMI 301 - AT - Income Tax

Disallowance u/s 14A - disallowance made by AO was much more than the expenditure incurred by assessee in its profit and loss account - Held that - in addition to exempt income there was also other taxable income during the year in the form of profit on sale of shares of ₹ 8.64 lakhs, profit on redemption of debentures of ₹ 80.02 lakhs The year under consideration is assessment year 2007-08, whereas Rule 14A was made applicable from Assessment Year 2008-09 as as held in GODREJ AND BOYCE MFG. CO. LTD. Versus DEPUTY COMMISSIONER OF INCOME-TAX AND ANOTHER 2010 (8) TMI 77 - BOMBAY HIGH COURT - even in earlier years reasonable disallowance is required to be made - there is no reason to compute disallowance as per Rule 8D during the relevant AY 2008-09 - the AO is directed to disallow 50% of total expenditure of ₹ 4.65 lakhs in addition to disallowance of interest expenditure of ₹ 230 lakhs, attributable to earning of exempt income out of total interest expenditure of ₹ 236.73 lakhs. Redemption on debenture to be treated as capital gain or not held that - the AO has not treated the amount received on redemption as capital receipt on the plea that there was no transfer within the meaning of Section 2(47) - redemption of debenture amount to transfer within the meaning of Section 2(47), therefore, the lower authorities were not justified in not treating redemption on debenture as capital gain - the AO is directed to tax the gain under the head capital gains in place of income from other sources Decided partly in favour of assessee.

Summary

Issues:
1. Disallowance under Section 14A of the Income Tax Act.
2. Treatment of redemption of debentures as "Income From Other Sources" instead of "Long Term Capital Gains."

Issue 1: Disallowance under Section 14A of the Income Tax Act:
The appeal was filed against the order of CIT(A) directing the Assessing Officer to recomputed disallowance under Section 14A. The AO disallowed an amount under Section 14A as the assessee earned exempt dividend income. However, the AO did not calculate 0.5% of the average value of investments. The Tribunal found that Rule 8D was not applicable as per the decision of the Bombay High Court in Godrej Boyce Mfg. Ltd. The AO's disallowance was higher than the actual expenditure incurred by the assessee. The Tribunal directed the AO to disallow 50% of the total expenditure incurred by the assessee in addition to the interest expenditure disallowed under Section 14A.

Issue 2: Treatment of redemption of debentures:
The AO treated the redemption of debentures as "Income From Other Sources" instead of "Long Term Capital Gains" as claimed by the assessee. The Tribunal noted that the debentures were investments on which the assessee earned interest. The Tribunal referred to previous court decisions where excess amount received on redemption of bonds was considered a capital receipt. The Tribunal held that the redemption of debentures amounted to a transfer within the meaning of Section 2(47) of the Act, thus directing the AO to tax the gain under the head of capital gains instead of income from other sources.

In conclusion, the Tribunal allowed the appeal in part, directing the AO to make appropriate adjustments regarding the disallowance under Section 14A and the treatment of redemption of debentures to ensure compliance with the Income Tax Act provisions and relevant court decisions.