2017 (9) TMI 1287 - AT - Income Tax

Disallowance u/s 14A r.w.r 8D - Assessing Officer has included all the investments for calculation of disallowance under Rule 8D - admit additional ground - Held that - From a reading of the letter of the assessing officer it is apparent that the Assessing Officer has objected to the additional ground on the basis that since from the perusal of assessment record it is clear that due opportunities were provided to assessee during the assessment proceedings. The Assessing Officer has overlooked the facts of the case and mechanically given his comment, as regard the position of raising the ground during assessment proceedings. The additional issue has emerged only after the assessment proceedings which are completed vide order dated 26.12.2011; and sale consideration has been changed only on 01.02.2012 in supplementary share purchase agreement. The learned CIT (A) has erroneously rejected the claim of the assessee holding that, the request of the appellant to admit additional ground of appeal is against its own admitted position at the time of filing of return and later during the assessment proceedings, which cannot be allowed to be accepted. The aforesaid objection is fundamentally misconceived as the issue raised is a legal plea and therefore such a plea based on facts on record brought during the appellant proceedings and, confronted to the learned Assessing Officer, who not disputed on the facts in the remand report, can be raised at any stage of the proceedings include appellate proceedings. Matter is set aside to the file of AO who will verify the genuineness of ht claim of the assessee that whether the sale consideration is ₹ 10 crores or ₹ 25 lakhs and decide the issue de novo but by affording adequate opportunity of being heard to the assessee. Thus, Ground No. 1 of the assessee is allowed for statistical purposes.

Summary

Issues Involved:
1. Deletion of disallowance made under Section 14A in accordance with Rule 8D.
2. Non-admission of additional ground regarding the full value of consideration for the sale of shares.
3. Computation of disallowance under Section 14A read with Rule 8D, specifically excluding "Investment in Shares" from the value of total investment.

Detailed Analysis:

Issue 1: Deletion of Disallowance under Section 14A in Accordance with Rule 8D

The Revenue contended that the CIT(A) erred in deleting the disallowance of ?4,30,30,578 made under Section 14A in accordance with Rule 8D. The Assessing Officer (AO) observed that the appellant had earned a dividend income of ?1,95,118 and had suo moto disallowed ?50,231 in the computation of income. However, the AO did not accept this and applied Rule 8D, making a disallowance of ?4,30,80,809 after allowing ?50,231 disallowed by the appellant. The CIT(A) deleted the addition, citing the AO's failure to record satisfaction as required under Section 14A(2) and (3). The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO did not provide cogent reasons for rejecting the appellant's disallowance and applied Rule 8D mechanically. The Tribunal relied on various judicial precedents, including the Supreme Court's decision in Godrej & Boyce Manufacturing Co. Ltd. vs. DCIT and the Delhi High Court's decision in Joint Investments Pvt. Ltd. vs. CIT, which held that disallowance under Section 14A cannot exceed the exempt income and must be based on satisfaction recorded by the AO.

Issue 2: Non-Admission of Additional Ground Regarding Full Value of Consideration for Sale of Shares

The assessee argued that the CIT(A) erred in not admitting the additional ground that the full value of consideration for the sale of shares was wrongly assumed to be ?10 crores instead of ?25 lakhs. The assessee acquired shares of M/s Shivalik Land Development Limited and entered into an agreement to sell them for ?10 crores, receiving ?25 lakhs during the year under consideration. Subsequent disputes led to a settlement deed revising the sale consideration to ?25 lakhs. The CIT(A) did not admit this additional ground, stating that the issue was not raised during the assessment proceedings and that the market value of unlisted shares could not be determined based on a revised sale agreement. The Tribunal set aside this matter to the AO for verifying the genuineness of the claim regarding the sale consideration and deciding the issue de novo, citing the Supreme Court's decision in National Thermal Power Co. Ltd. v. CIT, which allows raising legal pleas at any stage of proceedings.

Issue 3: Computation of Disallowance under Section 14A Read with Rule 8D

The assessee contended that "Investment in Shares" should be excluded from the value of total investment while computing the "Average investment" as contemplated in Rule 8D. The Tribunal noted that the AO included all investments for calculating disallowance under Rule 8D, which should only consider investments yielding tax-exempt income. The Tribunal relied on judicial precedents, including the Delhi High Court's decision in ACB India Ltd. vs. ACIT, which held that only investments generating tax-exempt income should be considered for disallowance under Rule 8D. The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO's disallowance was not in accordance with law as it included investments that did not yield tax-exempt income during the year.

Conclusion:

The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal for statistical purposes. The Tribunal upheld the CIT(A)'s deletion of disallowance under Section 14A, set aside the issue of the sale consideration to the AO for verification, and confirmed that only investments yielding tax-exempt income should be considered for disallowance under Rule 8D.