2015 (6) TMI 895 - AT - Income Tax

Period of holding for determining whether the assessee has derived long-term capital gain or short-term capital gain - shares were duly held by the assessee - Held that - The assessee has taken the loans after pledging the shares to the loan creditors. The assessee has transferred the shares from his demat account to the loan creditors merely as a security as the assessee has taken loans on pledge of the shares. Whenever the loan is taken by pledging a immovable property, the property has to remain in the possession of the persons, who advanced the loans. Giving possession of the movable property as security does not mean the ownership of the assets will also get transferred in favour of the person from whom the assessee has taken the loan. This is an undisputed fact that the shares continued to be shown in the balance-sheet of the assessee. In view of this fact, in our opinion, the ld. CIT (Appeals) has rightly held that the period of pledge cannot be excluded for determining the period of holding of shares by the assessee. Ld. D.R. even though vehemently relied on the order of the Assessing Officer but could not adduce any decision in its favour which has taken a contrary view. It is not a case where the shares were sold by the assessee to the parties from whom the assessee has taken the loan. In view of this fact, we do not find any illegality or infirmity in the order of the ld. CIT(Appeals). We accordingly confirm the order of the ld. CIT(Appeals) directing the Assessing officer to take the capital gain earned by the assessee on sale of shares as long-term capital gain as the period of holding will be more than 12 months. - Decided against revenue. Disallowance made under section 40A(2)(b) - CIT(A) deleted addition - Held that - The assessee had taken loans from 23 creditors out of which interest has been paid to two loan c reditors @ 9%. In the case of remaining 21 loan creditors, interest has been paid at the rates varying from 10% to 13%. It was also noted that in case of 19 loan creditors, the interest was paid at the rate exceeding 12%. In view of this fact, ld. CIT(Appeal s) took correct view that interest paid to the Karta at the rate of 10% cannot be held to be excessive or unreasonable. - Decided against revenue. Disallowance under Rule 8D read with section 14A - Held that - Rule 8D read with section 14A has been inserted by the Income Tax (5th Amendment) Rules, 2008 w.e.f. 24.03.2008. Hon ble Mumbai High Court in the case of Godrej Boyce Mfg. Co. Limited -vs.- DCIT reported in 2010 (8) TMI 77 - BOMBAY HIGH COURT has categorically held that Rule 8D is prospective and not retrospective in nature. No contrary decision was brought to our knowledge. In view of the decision of the Hon ble Mumbai High Court, in our view the Assessing Officer was not correct in law in making the disallowance by applying Rule 8D. We accordingly delete the disallowance - Decided in favour of assessee.

Summary

Issues involved:
1. Treatment of period of pledge of shares as holding period for determining capital gain.
2. Allowance of interest paid to Karta of the assessee.
3. Disallowance under section 40A(2)(b) of the Act.
4. Claim under section 10(36) of the Act.
5. Disallowance under Rule 8D read with section 14A of the Act.

Issue 1: Treatment of period of pledge of shares for capital gain:
The appeals and cross objections arose from the Commissioner of Income Tax (Appeals)'s order regarding the treatment of the period of pledge of shares for assessing capital gains. The Revenue contended that the period of pledge should not be considered as the holding period. However, the CIT(A) held that the shares were transferred as security and the ownership remained with the assessee, thus the period of pledge cannot be excluded for determining the holding period. The ITAT affirmed this view, stating that the shares were shown in the balance sheet, and the ownership did not transfer during the pledge period.

Issue 2: Allowance of interest paid to Karta of the assessee:
The Revenue challenged the disallowance under section 40A(2)(b) concerning interest paid to the Karta of the HUF. The Assessing Officer disallowed the interest, considering it higher than other loan creditors. However, the CIT(A) found the interest rate reasonable based on the rates paid to other creditors. The ITAT upheld the CIT(A)'s decision, stating that the interest paid to the Karta at 10% was not excessive or unreasonable.

Issue 3: Disallowance under section 40A(2)(b) of the Act:
The Assessing Officer disallowed a portion of interest paid to the Karta of the HUF under section 40A(2)(b). However, the CIT(A) found the interest rate reasonable compared to other creditors. The ITAT concurred with the CIT(A)'s decision, dismissing the Revenue's appeal on this ground.

Issue 4: Claim under section 10(36) of the Act:
The Cross Objection filed by the assessee included a claim under section 10(36) of the Act. The ITAT noted that this ground did not arise from the CIT(A)'s order under section 263/143(3) and dismissed this ground as it was not part of the appeal filed before them.

Issue 5: Disallowance under Rule 8D read with section 14A of the Act:
The Assessing Officer disallowed certain exempt income under Rule 8D read with section 14A. However, the ITAT found that Rule 8D was prospective and not retrospective, following a precedent set by the Mumbai High Court. Therefore, the disallowance under Rule 8D was deleted, and this ground of the assessee's Cross Objection was allowed.

In conclusion, the ITAT dismissed the Revenue's appeal while partly allowing the Cross Objection. The ITAT also dismissed another appeal and cross objection as infructuous.