2017 (6) TMI 520 - AT - Income Tax

Disallowance u/s. 14A - calculation of income which does not form part of the total income - Held that - CIT(A) has reduced the investment made in the partnership firm by considering that the assessee has received interest from the partnership firm and therefore, it is not a exempted income - the issue is restored back to the file of AO to examine that amount of ₹ 84,17,935/- received as interest income from the partnership firm - Restored back for statistical purposes Disallowance on carry forward of long term capital loss incurred by the appellant on winding up of its subsidiary - Disallowance of loan given for buying equity shares of said subsidiary - Held that - assessee company was holding 49% of the shares of said company - thus CIT(A) restricted the claim of capital loss attributable to investment made in only equity share of the said foreign company keeping in view 49% of the share holding - no examination was made as to for what purpose, the impugned loan was advanced by the assessee company to Mr. Khalid Kazim Mohd. Abdulla, as there is no evidence on record to examine whether the amount was actually sent to foreign country after due approval from RBI - thus matter is restored back to AO for statistical purposes Disallowance of depreciation on UPS systems and data drive @60% - Held that - Depreciation on UPS and data drive systems @ 60% is allowed if the said equipments were used for more than 180 days and @ 30% in case of their use for less than 180 days - these equipments are used along with the computers and thus, constitutes integral part of computer system - Decided in favor of assessee Disallowance of Commission paid to directors for their personal guarantee - Held that - Personal guarantee of the directors was given on the insistence of Bank - if the guarantee is not given then the assessee company would have not be able to obtain the credit limit - assessee has failed to submit the original credit facility documentations of the bank - thus the matter is restored back AO to examine from the original bank documentations/agreements/sanction letter and whether any undertaking to this effect was taken from the company or not in terms of RBI guidelines - allowed for statistical purposes Sale of shares - whether to be treated as Capital gain or business income - Held that - year the appellant has purchased and sold shares through portfolio management scheme - investments in portfolio scheme have been accepted from preceding years as investment - investment in shares is a continuous activity and same has been accepted by the Department in earlier years wherein short term and long term capital gain were declared by the appellant in the return of income - thus there is no change in facts and circumstances of the case with that of earlier years - investment was made in shares with the intention to hold the same for long term appreciation and for earning dividend - appellant has used his own funds and there are no borrowings made for investment - also because of off loading of some shares in short period his entire investments cannot be held as business transactions - Decided in favor of assessee

Issues Involved:
1. Sustenance and deletion of disallowance under section 14A of the Income-tax Act.
2. Partial benefit of carry forward capital losses.
3. Deletion of disallowance on account of excess depreciation claimed on UPS and Data Drive.
4. Deletion of disallowance under section 37(1) of the Act for guarantee commission paid to directors.
5. Treatment of profit on sale and purchase of shares - whether as business income or capital gains.

Detailed Analysis:

Issue (i): Sustenance and Deletion of Disallowance under Section 14A
- The Assessing Officer (AO) applied section 14A for calculation of income that does not form part of the total income. The assessee had already disallowed ?1,05,329, but the AO mentioned only ?971. The CIT(A) accepted the assessee's disallowance of ?1,05,329 and recalculated the disallowance under Rule 8D(2)(ii) at ?10,29,833 and Rule 8D(2)(iii) at ?4,13,397, totaling ?13,37,901.
- The Tribunal found discrepancies in the CIT(A)’s calculations and directed the AO to re-examine the interest income from the partnership firm, the correct value of average investment, and the average value of total assets. The issue was restored to the AO for fresh assessment.

Issue (ii): Partial Benefit of Carry Forward Capital Losses
- The assessee claimed a capital loss of ?41,29,932 due to the winding up of its subsidiary in Dubai, which included a loan given to Khalid Kazim Mohd. Abdullah. The AO did not address this, but the CIT(A) allowed the loss attributable to the equity shares but not the loan.
- The Tribunal found that the CIT(A) did not examine the purpose of the loan properly and restored the issue to the AO to verify the purpose and legality of the loan transfer as per RBI regulations.

Issue (iii): Deletion of Disallowance on Account of Excess Depreciation Claimed on UPS and Data Drive
- The AO allowed depreciation on UPS systems and data drives at 35% and 17.5%, but the CIT(A) allowed 60% depreciation, following jurisdictional High Court decisions.
- The Tribunal upheld the CIT(A)’s decision, noting that UPS and data drives are integral parts of computer systems and eligible for higher depreciation.

Issue (iv): Deletion of Disallowance under Section 37(1) for Guarantee Commission Paid to Directors
- The AO disallowed ?10,19,203 paid as guarantee commission to directors, citing lack of documentation and non-compliance with TDS provisions. The CIT(A) allowed the deduction, noting that the bank required personal guarantees from directors.
- The Tribunal found that the CIT(A) did not address whether the commission payment was lawful per RBI guidelines, which prohibit such payments unless under specific conditions. The issue was restored to the AO to verify compliance with RBI guidelines and determine the legality of the commission payment.

Issue (v): Treatment of Profit on Sale and Purchase of Shares
- The AO treated the capital gains declared by the assessee as business income based on transaction frequency and other criteria. The CIT(A) accepted the gains as capital gains, noting that the assessee had consistently shown investments and the department had accepted this in previous years.
- The Tribunal upheld the CIT(A)’s decision, noting that the assessee’s transactions were consistent with investment activity and supported by various court decisions. The AO’s treatment of the gains as business income was not justified.

Conclusion:
- The appeals were allowed for statistical purposes, with certain issues restored to the AO for fresh examination. The Tribunal upheld the CIT(A)’s decisions on depreciation and capital gains treatment, while directing further scrutiny on disallowance under section 14A and guarantee commission payments.

← Previous Next →