2016 (10) TMI 491 - AT - Income Tax

Disallowance u/s 14A - Held that - Assessee voluntarily disallowed the employee welfare expenses in sum of ₹ 10,709,710/- and interest expenses to the tune of ₹ 2,510,473/-. Now the expenses remains to the tune of ₹ 325,000/- on account of legal and professional expenses and an amount of ₹ 65,629/- on account of miscellaneous expenses. Disallowance is not required to be made more than the expenditure. The expenditure remains ₹ 325,000/- ₹ 65,629/- 390,629/-. These expenses have shown on different head but finding no justifiable piece of evidence, we are of the view that ₹ 25,000/- can also be disallowed as expenditure to earn the exempt income. Therefore, in view of the said circumstances the finding of the CIT(A) on this issue is hereby ordered to be set aside and Assessing Officer is directed to assess the income of the assessee in view of the observations made above. Accordingly this issue is decided in favour of the assessee against the revenue. Disallowance of diminution of value of shares - Held that - This matter of controversy has already been adjudicated by the Hon ble Supreme Court in case of United Commercial Bank 1999 (9) TMI 4 - SUPREME Court wherein this controversy has been decided in favour of the assessee against the revenue wherein held that preparation of the balance-sheet in accordance with the statutory provision would not disentitle the assessee in submitting the income-tax return on the real taxable income in accordance with the method of accounting adopted by the assessee consistently and regularly. That cannot be discarded by the departmental authorities on the ground that the assessee was maintaining the balance-sheet in the statutory form on the basis of the cost of the investments. In such cases, there is no question of following two different methods for valuing its stock-in-trade (investments) because the bank was required to prepare the balance sheet in the prescribed form and it had not option to change it. For the purpose of income-tax as stated earlier, that is to be taxed is the real income which is to be deducted on the basis of the accounting system regularly maintained by the assessee and that was done by the assessee in the present case Long Term Capital Loss on account of IL & FS during the year by determining cost of acquisition u/s.45(2A) of the Act read with Circular No.768 dated 24.06.1998 - Held that - No distinguishable facts have been placed on record by the revenue to which it can be assume that the CIT(A) has passed the order wrongly and illegally. The specific directions has been given by the CIT(A) to determine the cost of acquisition u/s.45(2A) of the Act read with Circular No.768 dated 24.06.1998. Nothing seems unjustifiable. Since the matter of controversy has rightly been adjudicated by the CIT(A), therefore, we nowhere found any ground to interfere with this order, therefore we uphold this issue in favour of the assessee and against the revenue. Accordingly, this issue is decided in favour of the assessee and against the revenue.

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Diminution in the value of shares.
3. Levy of interest under Sections 234B and 234C.
4. Computation of Long Term Capital Loss.

Issue-wise Detailed Analysis:

Issue 1: Disallowance under Section 14A
The assessee contested the disallowance of ?1,35,25,433/- under Section 14A of the Income Tax Act. The assessee received a dividend income of ?7,33,91,985 and had already disallowed interest expenses of ?25,10,473/- under Section 14A. The assessee argued that only the expenditure incurred to earn exempt income should be considered under Section 14A read with Rule 8D. The Tribunal noted that the assessee voluntarily disallowed employee welfare expenses of ?1,07,09,710/- and interest expenses of ?25,10,473/-. The remaining expenses were ?3,25,000/- for legal and professional expenses and ?65,629/- for miscellaneous expenses. The Tribunal decided that an additional ?25,000/- could be disallowed as expenditure to earn exempt income, setting aside the CIT(A)'s finding and directing the Assessing Officer to reassess the income accordingly. This issue was decided in favor of the assessee.

Issue 2: Diminution in the Value of Shares
The assessee challenged the disallowance of ?52,31,313/- for the diminution in the value of shares. The assessee treated the investment as stock-in-trade and valued it at market value or cost, whichever was lower, as per accounting standards. The Assessing Officer and CIT(A) disallowed this, stating that notional profit or loss could not be assessed as the stock was not sold. The Tribunal referred to the Supreme Court's decision in United Commercial Bank (240 ITR 355), which allowed such diminution as business loss. The Tribunal found that the CIT(A) did not consider this precedent and set aside the CIT(A)'s order, allowing the diminution in the value of shares. This issue was decided in favor of the assessee.

Issue 3: Levy of Interest under Sections 234B and 234C
The assessee challenged the interest levied under Sections 234B (?14,12,268/-) and 234C (?64,299/-). Since Issue 2 was decided in favor of the assessee, the consequential result was that the interest levied under these sections was also set aside. This issue was decided in favor of the assessee.

Issue 4: Computation of Long Term Capital Loss
The revenue challenged the CIT(A)'s direction to compute the Long Term Capital Loss on the sale/transfer of shares of IL & FS by determining the cost of acquisition under Section 45(2A) of the Act, read with Circular No.768. The Assessing Officer had disallowed the Long Term Capital Loss of ?7,50,92,618/-, adopting the average cost method. The CIT(A) directed the Assessing Officer to follow Section 45(2A) and Circular No.768, which prescribes the FIFO method for determining the cost of acquisition and period of holding. The Tribunal upheld the CIT(A)'s order, finding no unjustifiable grounds to interfere. This issue was decided in favor of the assessee and against the revenue.

Conclusion:
The appeal of the assessee was allowed, and the appeal of the revenue was dismissed. The Tribunal's order was pronounced in the open court on 26th August 2016.

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