2012 (2) TMI 688 - AT - Income Tax

Summary

Issues Involved:
1. Treatment of loss on forfeiture of share application money.
2. Disallowance u/s 14A regarding the use of borrowed funds for business/trade purposes.

Summary:

Issue 1: Treatment of Loss on Forfeiture of Share Application Money

The assessee, a non-banking financial company (NBFC), claimed a business loss of Rs. 41,60,000/- due to the forfeiture of share application money for convertible warrants of Surya Roshni Ltd. The Assessing Officer (AO) treated this loss as a capital loss, not a business loss. The assessee argued that the shares were held as stock in trade and cited various judgments, including the Bombay High Court's ruling in Tainwala Trading & Investment Co. Ltd., to support its claim. The AO, however, relied on judgments such as CIT Vs. Mrs. Grace Collis and others to justify treating the loss as capital. The CIT(A) upheld the AO's decision, stating that the cited cases were not applicable to the assessee's situation. The Tribunal noted that the lower authorities did not adequately consider the nature of the investment as stock in trade and remanded the issue back to the AO for reconsideration, emphasizing the need to examine the facts in light of the Bombay High Court judgment.

Issue 2: Disallowance u/s 14A

The AO disallowed Rs. 19,53,603/- u/s 14A, attributing it to dividend income. The CIT(A) partially upheld this disallowance, reducing it to Rs. 9,88,191/- after excluding interest expenses related to loans specifically used for acquiring Reliance Power shares. The assessee contended that the shares generating the dividend were not purchased with borrowed funds and that the interest claimed had no nexus with the dividend income. The Tribunal found that the lower authorities did not properly examine the assessee's claim u/s 36(1)(iii) and the relationship between the borrowed funds and the dividend income. Consequently, the Tribunal remanded this issue back to the AO for a fresh decision, considering the assessee's claims and relevant legal provisions.

Conclusion:

The Tribunal allowed the assessee's appeal for statistical purposes, remanding both issues back to the AO for reconsideration and proper examination of the facts and legal arguments presented by the assessee.