2016 (12) TMI 621 - AT - Income Tax

Disallowance under section 14A r/w rule 8D - Held that - Undisputedly, the total exempt income earned by the assessee during the relevant previous year is ₹ 31,232. Therefore, the expenditure relatable to such exempt income cannot exceed the quantum of exempt income. Moreover, the disallowance to be made under section 14A r/w rule 8D(2) should be of a reasonable amount, therefore, considering the facts and circumstances of the case, we are of the view that 5% of the dividend income earned should be considered for disallowance under section 14A. Amount received from FirstRand Bank Ltd., South Africa - capital or revenue receipt - Held that - the entire issue has to be examined afresh by the Assessing Officer. The assessee has to demonstrate that there was a contract between the assessee and the bank, either in the capacity of a preferred partner or otherwise and in pursuance to such contract, the assessee has complied to the conditions imposed by terminating all his business professional / engagements in the field of investment banking or not accepting any offer relating to business / professional commitment in the field of investment bank from any other entity. If the assessee is able to establish these facts certainly the amount received by the assessee from FirstRand Bank Ltd., South Africa, can be treated as compensation received for financial loss suffered due to cancellation / termination of the contract, thereby, rendering it as a capital receipt, hence, not taxable. In view of the aforesaid, we are inclined to set aside the impugned order of the learned Commissioner (Appeals).

Issues Involved:
1. Deletion of ?56,872 disallowed under section 14A computed as per Rule 8D.
2. Deletion of addition of ?2,84,65,000 received as compensation from FirstRand Bank, South Africa.

Issue-Wise Detailed Analysis:

1. Deletion of ?56,872 disallowed under section 14A computed as per Rule 8D:

The assessee filed a return of income declaring a total income of ?40,01,528 for the assessment year 2009-10. During the assessment, the Assessing Officer (AO) noticed that the assessee earned exempt income by way of dividends amounting to ?31,232. The AO disallowed ?56,872 under Rule 8D(2)(iii) read with section 14A, arguing that the assessee claimed ?19.36 lakhs under "Administrative and Other Expenditure," which are indirect expenses incurred for earning income.

The Commissioner (Appeals) deleted the disallowance, observing that the AO did not conclusively establish that any part of the expenditure directly or indirectly related to earning dividend income. The Departmental Representative argued that the AO's disallowance was justified as the assessee did not voluntarily disallow any expenditure under section 14A despite earning exempt income.

The Tribunal considered the submissions and observed that while the assessee did not incur direct or interest expenditure for earning the dividend income, administrative/indirect expenses must be disallowed under section 14A(3), regardless of whether the assessee actually incurred any expenditure. However, the disallowance should not exceed the quantum of exempt income. Therefore, the Tribunal concluded that 5% of the dividend income earned should be considered for disallowance under section 14A.

2. Deletion of addition of ?2,84,65,000 received as compensation from FirstRand Bank, South Africa:

The AO noticed that the assessee received ?2,48,65,000 from FirstRand Bank Ltd., South Africa, but did not offer it as income, claiming it as a capital receipt. The assessee argued that the compensation was for terminating his business/professional engagement in investment banking to exclusively work for the bank, which subsequently decided not to establish an investment banking division in India. The AO rejected the claim, noting that the assessee had never been employed in banking activities before or after the agreement and continued to earn income from professional activities. The AO treated the compensation as income under "Other Sources."

The Commissioner (Appeals) held that the compensation was for the loss of existing business or competition, relying on judicial precedents to treat it as a capital receipt, hence not taxable. The Departmental Representative contended that the assessee did not establish any financial loss due to the bank's conditions, as the assessee was never into investment banking.

The Tribunal noted that for the compensation to be considered a capital receipt, the assessee needed to demonstrate acceptance of the bank's offer and compliance with the conditions, such as terminating all business engagements in investment banking. The Tribunal found no documentary evidence to support these claims and observed that the Commissioner (Appeals) did not examine these factual aspects thoroughly.

The Tribunal concluded that the entire issue needed a fresh examination by the AO. The assessee must demonstrate that there was a binding contract and compliance with the conditions imposed by the bank. If established, the compensation could be treated as a capital receipt, hence not taxable. The Tribunal set aside the Commissioner (Appeals)'s order and remanded the case to the AO for a fresh examination, providing the assessee an opportunity to establish his case.

Conclusion:

The appeal was allowed for statistical purposes, with the Tribunal directing a fresh examination of the compensation issue by the AO and a partial disallowance of 5% of the dividend income under section 14A.

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