2015 (10) TMI 182 - AT - Income Tax

Disallowance of expenses u/s 14A with Rule 8D of the IT Act - Held that - We have considered rival contentions and found that relevant assessment year under consideration are 2005-06 to 2007-08 in which rule 8D is not applicable, however, reasonable disallowance is warranted. The Tribunal in assessee s own case for the assessment year 1997-98 & 2000-01 & 2001-02 has decided the similar issue and restricted the disallowance to the extent of 5% of the dividend income. As the facts and circumstances of the case are same, we direct the AO to restrict the disallowance to 5% of the dividend income. - Decided partly in favour of assessee. Taxing interest income as income from other sources - Held that - Major portion of the interest income was received by the assessee through ICD and not from securities as is stated u/s.56 of the I.T.Act. In case of M/s Chennai Properties & Investment Ltd. (2015 (5) TMI 46 - SUPREME COURT), the Hon ble Supreme Court held that where the main object of the company is letting out of the property, rental income received from such letting out, is assessable as business income and not under the head of income from house property. In this case also one of the main objections of the assessee company was lending money on interest. Accordingly, we restore this issue to the file of the AO for deciding afresh the nature of income received - Decided partly in favour of assessee. Receipt of share from Venture Capital Company - Held that - In the instant case before us what has been distributed by the Venture Capital Company to assessee is the surplus in the account of assessee with the Venture Capital Company. The distribution of the surplus is definitely chargeable to tax. In the present case a doubt has arisen only because this distribution has been done not in terms of money but in terms of kind, shareholding in a corporate entity. However, the nature of distribution of surplus can neither decide nor govern the taxability of income in the hands of assessee. Income has definitely been earned in terms of kind. In the present facts the income has really been earned in terms of kind as shares of the corporate entity. Nevertheless the nature of receipts in the hands of assessee is income being surplus in its account held with the Venture Capital Company distributed to assessee at the time of squaring up the account of assessee with the Venture Capital Company. Accordingly, we do not find any infirmity in the order of lower authorities for taxing the amount distributed by Venture Capital Company to the assessee. - Decided against assessee.

Issues Involved:
1. Breach of the principles of natural justice.
2. Disallowance under Section 14A of the Income Tax Act.
3. Classification of interest income under the head "Income from Other Sources" versus "Business Income."
4. Taxation of income on account of receipt of shares from a Venture Capital Company.
5. Benefit of indexation while computing long-term capital gains.
6. Disallowance of loss on redemption of units.

Detailed Analysis:

1. Breach of the Principles of Natural Justice:
The assessee contended that the Commissioner of Income-tax (Appeals) framed the appellate orders without affording a reasonable and fair opportunity of being heard, thus breaching the principles of natural justice. The Tribunal recognized the common grounds raised across the assessment years 2005-06, 2006-07, and 2007-08 and decided to address them collectively.

2. Disallowance under Section 14A:
For the assessment year 2005-06, the Assessing Officer (AO) disallowed Rs. 9.43 lakhs under Rule 8D, relying on the decision of the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. The CIT(A) confirmed this disallowance. Upon review, the Tribunal noted that Rule 8D was not applicable for the relevant assessment years (2005-06 to 2007-08), yet a reasonable disallowance was warranted. Referring to its decisions in the assessee's own case for earlier years, the Tribunal directed the AO to restrict the disallowance to 5% of the dividend income.

3. Classification of Interest Income:
The AO classified the interest income received by the assessee as "Income from Other Sources" instead of "Business Income." The Tribunal considered the assessee's argument that lending money was one of its main business objectives, with 90% of the interest income derived from Inter-Corporate Deposits (ICD). The Tribunal referenced the Hon'ble Supreme Court's decision in the case of M/s Chennai Properties & Investment Ltd., which held that rental income from property let out by a company, whose main business was property letting, should be assessed as business income. Consequently, the Tribunal restored the issue to the AO for a fresh decision, considering the Supreme Court's proposition.

4. Taxation of Income on Account of Receipt of Shares:
For the assessment year 2005-06, the AO taxed Rs. 41,75,980/- received from a Venture Capital Company as income. The assessee argued that this amount, reflected in Form No. 64 as unrealized capital gain, should not be taxed until the sale of the shares. The Tribunal upheld the lower authorities' decision, stating that the distribution of surplus by the Venture Capital Company, even in kind (shares), constituted taxable income. The Tribunal found no infirmity in the order taxing the distributed amount.

5. Benefit of Indexation:
The assessee claimed entitlement to the benefit of indexation while computing long-term capital gains. The Tribunal dismissed this ground as consequential to the decision on the taxation of income from shares received from the Venture Capital Company.

6. Disallowance of Loss on Redemption of Units:
The AO disallowed a loss of Rs. 11,35,990/- on the redemption of units. The Tribunal restored this issue to the file of the CIT(A) for a fresh decision on merits.

Conclusion:
The Tribunal allowed the appeals of the assessee in part, directing specific actions for the AO and CIT(A) as detailed above. The order was pronounced in the open court on 26.6.2015.

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