2016 (10) TMI 427 - AT - Income Tax

Addition on account of capital loss - whether the share warrant which is optional convertible into shares are capital asset as per Sec. 2(14) of the Act - Held that - There was a binding contract between assessee and WCPM with the option to the assessee to acquire the equity share. The assessee, in the instant case, has paid only 10% of the total consideration and the balance was to be paid by assessee within the specified time. However, the market value of the share of WCPM came down drastically and assessee decided not to make further payment for the purchase of share warrant. As a result of non-payment of balance amount for the purchase of share warrant, the company forfeited the amount. In the instant case, share warrant is a capital asset within the meaning of Sec. 2(14) of the Act. From a bare reading of Sec. 2(14) of the Act and we find that share warrant is a capital asset. So the loss generated from the forfeiture of share warrant is nothing but a capital loss and chargeable under the head capital gain . In view of the above, the loss acquired from the forfeiture of share warrants is nothing but STCL. Hence, this loss should be allowed in favour of assessee. Therefore, we find no reason to interfere into the order of Ld. CIT(A). Adjustment of STCL based on STT paid transactions with Short Term Capital Gain (STCG for short) where Securities Transaction Tax (STT for short) was not paid - whether the transactions on which the provision of Sec. 111A of the Act is attracted is to be treated separately from other transactions of capital gains where no STT has been paid? - Held that - We find that assessee in the instant case has incurred loss from STCL on the sale-purchase of share on which STT was paid but AO observed that there is a special rate of tax u/s 111A of the Act for charging tax in case of sale-purchase of share on which STT has been paid. Therefore, such loss was disallowed by AO to adjust the income under the same head i.e., capital gains against the income of share sales & purchase on which no STT was paid. From a plain reading of said Section 70(2) we find that said Act does not make any distinction between the income under the head capital gain on which STT was paid or STT was not paid. We further find that loss under the same head then set off from one source to another source is allowed if it is computed under the similar computation made for the relevant year. The word similar computation connotes that income should have been computed within the relevant Chapter i.e. Sec. 45 to 55A of the Act. - Decided in favour of assessee Section 14A disallowance - Held that - We find the investments which are not capable of yielding the dividend income needs to be excluded and accordingly several courts have decided this issue in favour of assessee

Issues Involved:
1. Deletion of disallowance of ?55,00,010/- as capital loss.
2. Allowing set-off of capital loss with Long Term Capital Gain (LTCG).
3. Allowing adjustment of Short Term Capital Loss (STCL) of ?27,19,888/- with Short Term Capital Gain (STCG) where STT was not paid.
4. Allowing adjustment of STCL where STT was paid with STCG where STT was not paid, in violation of Sec. 111A of the IT Act.
5. Deletion of addition made by AO u/s 14A read with Rule 8D amounting to ?8,31,749/- for earning exempted income.
6. Restriction of disallowance u/s 14A to ?3,41,720/- in violation of Rule 8D of the IT Act.

Detailed Analysis:

1. Deletion of Disallowance of ?55,00,010/- as Capital Loss:
The assessee, a Limited Company, did not convert its share warrants into equity shares, resulting in the forfeiture of ?55.00 lakh. The AO disallowed this as a capital loss, arguing that share warrants are not capital assets under Sec. 2(14) of the Act. The CIT(A) reversed this, stating that the forfeiture of share warrants constitutes a "transfer" under Sec. 2(47) of the Act and thus qualifies as a capital loss. The Tribunal upheld the CIT(A)'s view, referencing several case laws that support the classification of share warrants as capital assets and their forfeiture as a transfer, thereby allowing the capital loss.

2. Allowing Set-off of Capital Loss with LTCG:
The Tribunal addressed this issue by reiterating the CIT(A)'s findings that the forfeiture of share warrants, which are capital assets, results in a capital loss. The Tribunal confirmed that the loss from the forfeiture of share warrants is a short-term capital loss (STCL) and thus can be set off against capital gains.

3. Allowing Adjustment of STCL of ?27,19,888/- with STCG where STT was not Paid:
The assessee set off STCL from STT-paid transactions against STCG from non-STT transactions. The AO disallowed this set-off, citing Sec. 111A's special tax treatment for STT-paid STCG. The CIT(A) allowed the set-off, stating that Sec. 70(2) of the Act permits the set-off of STCL against STCG without distinguishing between STT-paid and non-STT-paid transactions. The Tribunal upheld the CIT(A)'s decision, referencing case laws that support the non-distinction between STT-paid and non-STT-paid transactions for the purpose of set-off.

4. Allowing Adjustment of STCL where STT was Paid with STCG where STT was not Paid:
The Tribunal confirmed that Sec. 70(2) does not differentiate between STT-paid and non-STT-paid transactions for set-off purposes. The Tribunal referenced multiple case laws that support the CIT(A)'s decision to allow the set-off of STCL from STT-paid transactions against STCG from non-STT transactions.

5. Deletion of Addition made by AO u/s 14A read with Rule 8D amounting to ?8,31,749/-:
The AO disallowed ?8,31,749/- under Sec. 14A r.w. Rule 8D(2)(iii), while the assessee had already disallowed ?37,113/-. The CIT(A) reduced the disallowance to ?3,41,720/-, excluding investments not capable of yielding dividend income. The Tribunal upheld the CIT(A)'s decision, referencing the Delhi High Court's ruling in ACB India Ltd. vs. ACIT, which supports the exclusion of non-dividend-yielding investments from the disallowance calculation.

6. Restriction of Disallowance u/s 14A to ?3,41,720/-:
The Tribunal agreed with the CIT(A)'s approach to exclude investments not capable of yielding dividend income from the disallowance calculation under Sec. 14A. The Tribunal upheld the CIT(A)'s restriction of the disallowance to ?3,41,720/-, providing relief to the assessee.

Conclusion:
The Tribunal upheld the CIT(A)'s decisions on all grounds, dismissing the Revenue's appeal. The judgments emphasized the proper interpretation of capital assets, the set-off of capital losses, and the calculation of disallowances under Sec. 14A, aligning with established case laws.

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