2016 (9) TMI 905 - AT - Income Tax

Disallowance under Sec. 14A Rule 8D - Held that - We have considered the business activities, financial statements and judicial decisions, there seems to be a realistic approach on acquisition of shares by the assessee company and the above expenditure was incurred purely on the investment strategies of the Business. Therefore, the ld. Assessing Officer should have considered the expenditure from the assessee business objects and activities and the calculate the disallowance under Sec. 14A Rule 8D. We, therefore are of the opinion that the disputed issue has to be re-examined in line with the investment activity by the ld. Assessing Officer and we set aside the order of the Commissioner of Income Tax (Appeals) to the file of the ld. Assessing Officer for examination and the assessee shall be provided adequate opportunity of hearing before passing the orders on merits and the ground of the assessee is allowed for statistical purpose. Short Term Capital Loss on claim of forfeiture of warrants - Held that - All documents or transactions have to be given effect to even though they resulted in reduction of tax liability, provided that they are genuine and bona fide and it cannot be called as colourable device. In case, a transaction took place with the sole intention to defraud Revenue and that resulted in deduction of tax liability, it can be called as a dubious method followed by the assessee, as the parties involved therein have no right to indulge any tax evasion and it cannot be taken away by any judgment of the Court. This has to be considered and in fairness, it should be appreciated that all transactions, which resulted in evasion of tax liability, can be considered as a device or subterfuge or colourable transaction. We found on perusal of the share warrant certificate and the financial statements and the assessment order, the ld. Assessing Officer in his order is silent on this transaction of financial statement of Shriram City Union Finance Limited and accounting system. Therefore, we set aside order of the Commissioner of Income Tax (Appeals) order and remit the disputed issue to the file of ld. Assessing Officer for re-examination based on the information submitted on warrants and financial statement of Shriram City Union Finance Limited and the Assessing Officer shall pass the order on merits after providing opportunity of being heard in accordance with law. The ground of the assessee is allowed for statistical purpose. Exclude addition u/sec. 14A for calculating of Book profit u/s.115JB of the Act and allow the appeal of the assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D.
2. Non-allowability of Short Term Capital Gains on forfeiture of warrants.
3. Disallowance under Section 14A while computing Book profit under Section 115JB of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:
The primary issue was whether the disallowance made under Section 14A read with Rule 8D was appropriate. The assessee had received dividend income of ?3,34,37,502, which was claimed as exempt. The Assessing Officer (AO) found that the assessee had incurred expenses related to earning this dividend income, including fees paid to DSP Merrill Lynch Limited and Standard Chartered Bank. The AO disallowed these expenses, arguing that they were related to the acquisition of shares that yielded exempt dividend income. The Commissioner of Income Tax (Appeals) upheld this disallowance. The Tribunal, however, found that the expenditure was related to the assessee's business activities and should be re-examined by the AO to determine if they were indeed business expenses. The Tribunal set aside the order and remitted the issue back to the AO for further examination.

2. Non-allowability of Short Term Capital Gains on forfeiture of warrants:
The second issue was the assessee’s claim of Short Term Capital Loss of ?14,00,00,000 due to the forfeiture of warrants. The AO disallowed this claim, stating that there was no sale consideration received, and thus, no capital loss could be computed under Section 45 read with Section 48. The Commissioner of Income Tax (Appeals) upheld this decision, relying on the ITAT Ahmedabad Bench's decision in the case of Ajay C. Mehta vs. DCIT. The Tribunal, however, noted that the assessee had relinquished its rights to buy shares due to liquidity issues and considered the judicial decisions cited by the assessee. The Tribunal remitted the issue back to the AO for re-examination, considering the financial statements and the nature of the transaction.

3. Disallowance under Section 14A while computing Book profit under Section 115JB:
The final issue was whether the disallowance under Section 14A should be added back while computing the Book profit under Section 115JB. The AO had added the disallowance of ?1,42,83,969 to the Book profit. The Commissioner of Income Tax (Appeals) confirmed this addition. However, the Tribunal referred to the decision of the Bangalore Bench of the Tribunal in the case of Manipal Technologies Ltd. vs. DCIT, which held that the provisions of Section 14A cannot be imported into the computation of Book profit under Section 115JB. The Tribunal directed the AO to exclude the disallowance under Section 14A while calculating the Book profit under Section 115JB and allowed the appeal of the assessee.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, remitting the issues back to the AO for re-examination and re-calculation, ensuring that the assessee is provided adequate opportunity for a hearing before passing the final orders.