2022 (3) TMI 1516 - AT - Income Tax

Disallowance u/s 14A r.w. Rule 8D - main contention that the CIT(A) has deleted the said disallowance u/s 14A r.w. Rule 8D by ignoring the CBDT Circular No.5/2014 dated 11.02.2014 - HELD THAT - Assessee did not claim any expenses. No deduction was claimed, therefore, there should be no disallowance expenses, hence, on this aspect also no disallowance u/s 14A r.w. Rule 8D is required. CIT(A) has also dealt with the finding of the AO. AO computed the average value of the investment which did not yield the exempt income but CIT(A) has relied upon the decision of the case titled as Rainy Investments P. Ltd in which it is 2013 (2) TMI 602 - ITAT MUMBAI specifically held that the share application money which is not capable to yield exempt income, is not required to be considered for computing the disallowance u/s 14A r.w. Rule 8D also. Accordingly, considering the case of the assessee by above said angle, the CIT(A) has disallowed the addition raised in view of the provisions u/s 14A. Circular nowhere hindered the law relied by the CIT(A). Moreover, the issue of interest has duly been adjudicated in due course of law. CIT(A) has decided the issue judiciously and correctly which is not required to be interfered with at this appellate stage. Accordingly, this issue is decided in favour of the assessee against the revenue. Addition of transfer of shares - gift receipts as liable to be considered as Sham transaction - whether the same is liable to be taxed u/s 56(1) and 28(iv)? - As argued that CIT(A) has deleted the addition without looking at the very nature of transfer of shares in substance i.e. the creation of holding company and subsidiary company was a colourable device adopted to evade taxes - HELD THAT- We are of the view that the gift is not a colourable device to avoid the tax liability if any. As receipt of share from the Private Limited Company for without or inadequate consideration whereas in the present case, the assessee is the recipient of shares of a listed company so the provisions u/s 56(2)(viia) of the Act is not liable to be applicable. As the provision Section 28(iv) and 56 in case of receipt of shares of a listed a company as gift is not applicable. Accordingly, we uphold the finding of the CIT(A) on this issue. Power of the CIT(A) u/s 251 - CIT(A) issued the direction to tax the share transaction amount in the hands of the transferor - HELD THAT - In the case of Mrs. Banoo E. Cawasji v. CIT 1981 (12) TMI 31 - MADHYA PRADESH HIGH COURT the Hon ble High Court has observed that the CIT(A) is not required to pass the order in the case of third party. Accordingly, we are of the view that the observation of the CIT(A) is not justifiable, therefore, we set aside the such direction and decide the issue nos. 1 to 4 in favour of the assessee against the revenue.

Summary

Issues Involved:
1. Deletion of disallowance made under Section 14A read with Rule 8D.
2. Deletion of addition regarding the transfer of shares of listed companies.
3. Jurisdiction of CIT(A) in giving directions affecting third parties.

Issue-wise Detailed Analysis:

ISSUE NO. 1: Deletion of disallowance made under Section 14A read with Rule 8D

The revenue challenged the deletion of disallowance made under Section 14A read with Rule 8D amounting to Rs. 1,65,85,334/-. The main contention was that the CIT(A) ignored the CBDT Circular No. 5/2014 which mandates disallowance under Section 14A irrespective of exempt income earned. However, the assessee argued that no exempt income was earned, thus no disallowance was warranted. The CIT(A) observed that the assessee did not earn any exempt income, and therefore, following the decision in Cheminvest Ltd v. CIT, no disallowance was required. The Tribunal upheld the CIT(A)'s decision, noting that the provisions of Section 14A do not apply in the absence of exempt income and thus, no disallowance was justified.

ISSUE NO. 2: Deletion of addition regarding the transfer of shares of listed companies

The revenue contended that the CIT(A) wrongly deleted the addition of Rs. 134,96,23,835/- made by the AO regarding the transfer of shares of Zee News Ltd. The AO viewed the transaction as a colorable device to evade taxes under Section 56(2)(viia). The CIT(A) held that the transaction was not taxable under Section 56(2)(viia) since it involved listed shares, which are not covered by this section. The Tribunal agreed with the CIT(A), noting that the provisions of Section 56(2)(viia) apply only to unlisted shares and the transaction in question involved listed shares. Furthermore, the Tribunal found that the provisions of Section 28(iv) were also not applicable as the benefit did not arise from business activities.

Jurisdiction of CIT(A) in giving directions affecting third parties

The assessee challenged the CIT(A)'s direction to tax the transaction in the hands of the transferor, arguing that it was beyond the CIT(A)'s jurisdiction. The Tribunal noted that the CIT(A)'s powers under Section 251 do not extend to making directions affecting third parties not involved in the appeal. Citing the Supreme Court's decision in ITO v. Muralidhar Bhagwan Das, the Tribunal held that the CIT(A) can only issue directions necessary for the disposal of the appeal and cannot affect third parties. Consequently, the Tribunal set aside the CIT(A)'s direction to tax the transferor.

Conclusion:

The Tribunal dismissed the revenue's appeal and allowed the assessee's appeal, upholding the CIT(A)'s deletion of disallowances and additions while setting aside the CIT(A)'s directions affecting third parties. The Tribunal concluded that the CIT(A) acted within legal bounds in deleting the disallowances and additions but exceeded jurisdiction in issuing directions to tax the transferor. The final order was pronounced in favor of the assessee.