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2016 (5) TMI 49 - AT - Income TaxDisallowance u/s 14A - Held that - We find that the assessee had not claimed any expenditure in its books of accounts for earning tax free income, that it had not earned exempt income during the year under consideration, that the investment was made in purchasing shares of one of the group concerns and of a cooperative bank, that such investments were made long back. In our opinion if the assessee had not claimed any expenditure, no disallowance can be made u/s. 14 A read with rule 8D of the rules. - Decided in favour of assessee Applicability of the provisions of section 41(1) / 28 - waiver of loan - Held that - The nature of the loan is the touchstone on which the waiver is to be examined. In other words, if a loan was taken for acquiring a capital asset, waiver thereof would not amount to any income exigible to tax. On the other hand, if the loan was for trading purpose and was treated as such from the very beginning in the books of account the waiver thereof may result in income more so when it was transferred to the profit and loss account. We find that in the case under consideration, this very basic aspect has not been looked into by the AO or the FAA. Before the AO the assessee had stated that there was no reduction of liability and that it was a capital restructuring exercise. The assessee had not produced the documents with regard to sanction or waiver of the loan and the AO had not called for such details. The FAA also did not deliberate upon the issue as to whether the loan was in the field of capital asset or was trading liability. Nomenclature given by the assessee/AO do not decide the real nature of any transaction until and unless the relevant documents are examined and looked into. It is true that cases relied upon by the AO/FAA laid down certain principles. But, how those principles were applicable to the facts of the case under consideration has not been discussed either by the AO/FAA. We are of the opinion, that provisions of section 28 are not applicable to the facts of the case. But, same cannot be held for the provisions of section 41(1)of the Act, as proper investigation about the real nature of the waived amounts have not been carried out. Considering the peculiar facts and circumstances of the case, we are of the opinion that the matter needs further verification . Therefore, in the interest of justice, matter is being restored back to the file of the AO to decide the issue afresh after considering the loan sanctioning and the loan waiver documents.
Issues Involved:
1. Deleting the disallowance u/s. 14A of the Income Tax Act. 2. Applicability of the provisions of section 41(1)/28 of the Income Tax Act regarding waiver of loan amounts. Issue-wise Detailed Analysis: 1. Deleting the Disallowance u/s. 14A of the Income Tax Act: During the assessment proceedings, the Assessing Officer (AO) observed that the assessee had investments in shares, the income from which was exempt from tax. The AO noted that the assessee claimed expenditure on account of interest and asked for details of expenses incurred concerning the investments. The AO invoked the provisions of Rule 8D of the Income Tax Rules, 1962, and made a disallowance of ?59,373/-. The assessee appealed, arguing that the investments were made long back from its profits and not from borrowed funds, and no expenditure was incurred for earning exempt income. The First Appellate Authority (FAA) observed that the investments were made out of the assessee's own funds and not borrowed funds, and no exempt income was received during the year. The FAA directed the AO to restrict the disallowance to 0.5% of the value of investments. The Tribunal found that the assessee had not claimed any expenditure for earning tax-free income and had not earned exempt income during the year. It held that if no expenditure was claimed, no disallowance could be made under section 14A read with Rule 8D. The Tribunal cited the Delhi High Court's judgment in Cheminvest Ltd. (378 ITR 33), which stated that section 14A would not apply if no exempt income was received or receivable during the relevant previous year. Thus, the Tribunal decided the first ground of appeal against the AO. 2. Applicability of the Provisions of Section 41(1)/28 of the Income Tax Act: The AO found that the assessee derived a benefit from the waiver of principal amounts of loans taken from State Bank of Hyderabad and Unit Trust of India, totaling ?7.45 crores. The AO added this amount to the assessee's total income, considering it as a taxable receipt. The assessee argued that the waiver was a capital restructuring exercise and not a taxable receipt. The FAA referred to sections 41(1) and 28(iv) of the Act and held that there had been no allowance or deduction in the preceding years, and thus, these sections were not applicable. The FAA relied on the Bombay High Court's judgment in Mahindra and Mahindra Ltd. (128 Taxmann 394), which held that the waiver of the principal amount of debentures was a capital receipt. The Tribunal noted that the nature of the loan (capital asset or trading liability) is crucial in determining the applicability of section 41(1). It referred to the judgments in Mahindra and Mahindra Ltd. and Solid Containers Ltd. and held that if the loan waived relates to a capital asset, it would not result in a revenue receipt. However, if the loan was for trading purposes, the waiver might result in income. The Tribunal found that neither the AO nor the FAA had examined the nature of the loan. Therefore, the Tribunal restored the matter back to the AO for further verification, directing the AO to decide the issue afresh after considering the loan sanctioning and waiver documents. Additional Appeals and Cross Objections: The Tribunal noted that the grounds raised in ITA/1858/Mum/13 and C.O. 107/Mum/2014 were identical to those in ITA/1859/Mum/2013 and C.O. 106/Mum/2014, except for the amounts involved. Following the earlier orders, the Tribunal decided Ground No. 1 against the AO and partly allowed Ground No. 2, directing further verification by the AO. In ITA/1857/Mum/2013, the AO raised only one ground of appeal regarding the waiver of loan amount and applicability of section 41(1)/28. The Tribunal restored the issue back to the AO for fresh adjudication. Conclusion: The appeals filed by the AOs were partly allowed, and the cross objections by the assessee were treated as infructuous. The Tribunal emphasized the need for further verification of the nature of the loans to determine the applicability of section 41(1).
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