2018 (7) TMI 64 - AT - Income Tax

Disallowance made u/s 14A - Held that - Disallowance under Rule 8D(2)(iii) by considering only those scrips which has yielded dividend. Hence considering the fact that major portion dividend income has been received from shares held as stock in trade, that too out of a single scrip, we are of the view that it may not be appropriate to apply the provisions of Rule 8D in the instant case. Accordingly we are of the view that the requirements of provisions of sec. 14A shall be met, if the disallowance is made at 5% of the dividend income earned by the assessee. Order passed by Ld CIT(A) on this issue and direct the AO to restrict the disallowance u/s 14A to 5% of the exempt income earned by the assessee. Disallowance of expenses claimed u/s 35(1)(iii) - cancellation of registration granted u/s 12AA - Held that - Genuineness of payment of donations cannot be doubted in the instant case, particular in the absence of any material to support the view taken by the AO. Hence we agree with the contentions of Ld A.R that the AO was not justified in rejecting the claim of weighted deduction. CIT(A) has placed reliance on the cancellation of registration granted u/s 12AA to M/s Bioved Research Society with retrospective effect. The registration granted u/s 12AA and the approval granted u/s 35(1)(ii) operates on different field. CIT(A) was not justified in placing reliance on the order of cancellation of registration u/s 12AA of the Act. In the instant case, it is the contention of Ld A.R that the approval was not cancelled till date. Before us, the revenue did not furnish any material to refute the contentions of Ld A.R. There is no justification in rejecting the claim of weighted deduction claimed u/s 35(1)(ii) of the Act. Addition made u/s 56(2)(viia) - Held that - Provisions of sec. 56(2)(viia) should be applicable only in cases where the receipt of shares become property in the hands of recipient and the shares shall become property of the recipient only if it is shares of any other company . In the instant case, the assessee herein has purchased its own shares under buyback scheme and the same has been extinguished by reducing the capital and hence the tests of becoming property and also shares of any other company fail in this case. The tax authorities are not justified in invoking the provisions of sec. 56(2)(viia) for buyback of own shares. Set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the addition made u/s 56(2)(viia) of the Act. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance made under Section 14A of the Income Tax Act.
2. Disallowance of expenses claimed under Section 35(1)(iii) of the Income Tax Act.
3. Addition made under Section 56(2)(viia) of the Income Tax Act.

Detailed Analysis:

1. Disallowance made under Section 14A of the Income Tax Act:

The assessee, engaged in trading shares and derivatives, received ?31,35,460 as dividend income and claimed it as exempt without disallowing any expenditure under Section 14A. The Assessing Officer (AO) computed the disallowance as per Rule 8D, resulting in a disallowance of ?43,66,781. The CIT(A) deleted the interest disallowance under Rule 8D(2)(ii) but confirmed the direct expenses disallowance under Rule 8D(2)(i) and directed the AO to compute the disallowance under Rule 8D(2)(iii) considering only those investments yielding exempt income. The Tribunal found the AO's methodology incorrect, noting that the security transaction tax should be allocated between trading operations and exempt income. The Tribunal directed the AO to restrict the disallowance to 5% of the dividend income earned by the assessee.

2. Disallowance of expenses claimed under Section 35(1)(iii) of the Income Tax Act:

The assessee claimed a weighted deduction of ?87,50,000 under Section 35(1)(iii) for a donation of ?50,00,000 to an approved research society, M/s Bioved Research Society. The AO disallowed the claim based on a report suggesting the donations were bogus. The CIT(A) confirmed the disallowance, noting the society's registration under Section 12AA was canceled retrospectively. The Tribunal, however, noted that the approval under Section 35(1)(iii) was valid when the donation was made and had not been canceled. Citing various judicial precedents, the Tribunal held that the deduction could not be denied based on subsequent events or retrospective cancellation of approval. The Tribunal directed the AO to allow the weighted deduction claimed by the assessee.

3. Addition made under Section 56(2)(viia) of the Income Tax Act:

The assessee bought back its shares from a director at ?26 per share, while the book value was ?32.80 per share. The AO invoked Section 56(2)(viia) and assessed the difference as income. The CIT(A) confirmed this addition. The Tribunal, however, noted that Section 56(2)(viia) applies to shares received as property, which did not apply to the assessee's own shares bought back and extinguished. The Tribunal held that the provisions of Section 56(2)(viia) were not applicable in this case and directed the AO to delete the addition.

Conclusion:

The Tribunal allowed the appeal filed by the assessee, directing the AO to restrict the disallowance under Section 14A to 5% of the dividend income, allow the weighted deduction claimed under Section 35(1)(iii), and delete the addition made under Section 56(2)(viia).