2018 (3) TMI 1352 - AT - Income Tax

Addition u/s 14A - expenses towards exempted income - borrowed funds had been utilized for making investments - Addition u/s 94(7) - short term capital loss - Held that - The relevant assessment year under appeal is 2006-07 at which point of time, the provisions of Rule 8D was not in force and the same was made applicable only from Asst Year 2008-09 as decided in the decision of Godrej & Boyce Manufacturing 2010 (8) TMI 77 - BOMBAY HIGH COURT . However, it is not in dispute that the assessee had derived taxable income as well as tax free income and incurred expenditure for deriving both the incomes and hence disallowance is definitely warranted in terms of section 14A which is brought in the statute book with retrospective effect from 1.4.1962. Disallowance had to be made only on an estimated basis with regard to the expenditure incurred for the purpose of earning tax free income. We direct the ld AO to disallow 1% of exempt income under this issue and accordingly, the Ground No. 1 raised by the assessee is partly allowed. Addition made u/s 94(7) - AO observed that the assessee had reported short term capital loss in respect of sale of shares of SAIL among other scrips - Held that - We find that the assessee had neither purchased before three months from the record date the shares of SAIL nor sold the same within three months after the record date. Hence we hold that the transactions carried out by the assessee would be outside the ambit of provisions of section 94(7) of the Act. Hence we hold that the short term capital loss claimed by the assessee need not be reduced by the sum of ₹ 9,44,243/- . Accordingly, the Ground No. 2 raised by the assessee is allowed.

Summary

Issues:
1. Disallowance under section 14A of the Income Tax Act, 1961
2. Addition made under section 94(7) of the Income Tax Act

Issue 1: Disallowance under section 14A of the Income Tax Act, 1961:
The appeal concerns the disallowance of &8377; 91,233 under section 14A of the Act. The Assessing Officer (AO) disallowed the interest paid by the assessee as direct expenditure for earning exempt income from investments in dividend and Long Term Capital Gain (LTCG). The Commissioner of Income Tax (Appeals) upheld this disallowance, stating that borrowed funds were utilized for investments. The Tribunal noted that Rule 8D was not applicable for the relevant assessment year. Citing a judicial precedent, the Tribunal directed the AO to disallow 1% of the exempt income, partially allowing the appeal.

Issue 2: Addition made under section 94(7) of the Income Tax Act:
The second issue involves the addition made under section 94(7) of the Act concerning dividend stripping. The AO reduced the short term capital loss claimed by the assessee by the dividend income received from SAIL. The Tribunal analyzed the transactions related to SAIL shares and concluded that the provisions of section 94(7) did not apply as the purchases and sales were not within the specified time frames. Consequently, the Tribunal allowed the appeal on this ground.

In summary, the Tribunal partially allowed the appeal regarding the disallowance under section 14A of the Income Tax Act, directing the AO to disallow 1% of the exempt income. Additionally, the Tribunal allowed the appeal concerning the addition made under section 94(7) as the provisions of the Act were found not to be applicable to the transactions in question.