2011 (9) TMI 1189 - AT - Income Tax

Summary

Issues Involved:
1. Deleting addition of Rs. 14,94,000/- in respect of loss claimed on forfeiture of shares.
2. Disallowance of professional fee paid to Shri S.K. Mitra.
3. Levy of tax on long-term capital gain at 20% instead of 35%.
4. Treating amount of Rs. 11,06,271/- as short-term capital gain instead of business income.
5. Addition/deletion of interest of Rs. 4.79 crores due to differential interest rates on loans.

Summary:

1. Deleting addition of Rs. 14,94,000/- in respect of loss claimed on forfeiture of shares:
The first common issue relates to the deletion of the addition of Rs. 14,94,000/- for the assessment year 2001-02 concerning the loss claimed on forfeiture of shares by the issuing company. The CIT(A) deleted the addition, observing that the loss was not speculative as it did not involve the purchase or sale of shares but was due to forfeiture of application money. The Tribunal upheld this view, stating that the assessee did not fall under Explanation to Section 73 of the Income-tax Act, 1961, and thus, the loss should be treated as a capital loss.

2. Disallowance of professional fee paid to Shri S.K. Mitra:
The next issue pertains to the disallowance of a professional fee of Rs. 40 lakhs paid to Shri S.K. Mitra. The AO disallowed the claim, citing no business requirement and the provisions of Section 14A. The CIT(A) allowed the claim, noting that Mitra's services were multifarious and related to various company activities, not just exempt income. The Tribunal modified the CIT(A)'s order for the assessment year 2001-02, directing the AO to restrict the disallowance to 10% of the payments made to Mitra u/s 14A.

3. Levy of tax on long-term capital gain at 20% instead of 35%:
The Revenue's grievance regarding the levy of tax on long-term capital gain at 20% instead of 35% was addressed. The CIT(A) directed the AO to tax the gains at 20%, treating them as long-term capital gains, which the Tribunal upheld, noting the AO's lack of reasoning for the 35% rate.

4. Treating amount of Rs. 11,06,271/- as short-term capital gain instead of business income:
For the assessment year 2002-03, the issue was whether Rs. 11,06,271/- should be treated as short-term capital gain or business income. The CIT(A) treated the gain from the redemption of mutual fund units as capital gains, which the Tribunal upheld, finding no reason to interfere with the CIT(A)'s order.

5. Addition/deletion of interest of Rs. 4.79 crores due to differential interest rates on loans:
In the assessment year 2004-05, the issue was the addition of Rs. 4.79 crores due to the differential interest rates on loans. The AO disallowed the interest, citing that loans were taken at 10.5% but given to sister concerns at 7%. The CIT(A) deleted the addition, noting the decline in interest rates and the impracticality of repaying fixed-period debentures. The Tribunal, however, set aside the CIT(A)'s order, directing the AO to re-examine the issue in light of the Supreme Court's decision in S.A. Builders, which requires examining the commercial expediency of such loans.

Conclusion:
The appeals for the assessment years 2001-02, 2004-05, and 2005-06 were allowed in part for statistical purposes, while the appeal for the assessment year 2002-03 was dismissed. The order was pronounced in the open court on 16th September 2011.