2018 (8) TMI 913 - AT - Income Tax

Disallowance made under section 14A on account of interest - assessee suo moto disallowed a certain sum - AO observed that, claim of the assessee of having earned the substantial income by way of dividend by incurring a nominal expenditure was not correct. - Held that - for the purpose of applying Rule 8D(2)(ii) prior to its amendment with effect from 02.06.2016, what would be considered as amount of expenditure by way of interest would be the interest paid by the assessee on the borrowings minus the interest income earned during the financial year. The benefit of netting of interest thus has been allowed by the Hon ble Gujarat High Court without emphasising on the need of having any inextricable link between the interest earned and interest paid. - Decided against the revenue. Disallwance of long term capital loss - shares had been sold off market to a group company showing a loss - AO treated the said transactions as a colorable devise mainly because it resulted in a substantial long term capital loss on the ground that the said transactions were entered into by the assessee company with its group companies off market. - Held that - In the present case, the transactions of sale of shares were duly supported by the required documentary evidence and the fact that delivery instructions were also issued by the assessee company to the depository participant on the date of sale itself clearly shows that the same were followed by actual delivery of shares. Moreover, the relevant share transactions were affected at the same price as was quoted on the stock exchange on the same date. Ld. CIT(A) was fully justified in deleting the disallowance made by the AO on account of assessee s claim for long term capital loss by relying on the said decision 2010 (4) TMI 293 - PUNJAB & HARYANA HIGH COURT - Decided against the revenue.

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D.
2. Disallowance of long-term capital loss on off-market sale of shares.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:

The revenue contested the Ld. CIT(A)'s decision to restrict the disallowance made by the AO under Section 14A read with Rule 8D from ?1,27,34,577/- to ?36,39,744/-. The AO argued that the assessee, a finance and investment company, incurred substantial market research and analysis expenses which were not accurately reflected in the nominal expenditure claimed by the assessee. The AO applied Rule 8D to compute the disallowance at ?1,27,34,577/-.

The Ld. CIT(A) reduced this disallowance, noting that the assessee's net interest income was positive, and thus, no disallowance should be made under Rule 8D(2)(ii). The Ld. CIT(A) also followed the jurisdictional tribunal's decision in REI Agro Ltd. vs. DCIT, which held that only investments yielding exempt income should be considered under Rule 8D(2)(iii).

The Tribunal upheld the Ld. CIT(A)'s decision, agreeing that the netting of interest was justified as per the assessee's own case in A.Y. 2008-09 and the Gujarat High Court's decision in Principal CIT vs. Nirma Credit & Capital Pvt. Ltd. The Tribunal dismissed the revenue's appeal on this ground.

2. Disallowance of long-term capital loss on off-market sale of shares:

The revenue also challenged the deletion of the disallowance of ?8,00,31,083/- made by the AO on account of the assessee's claim for long-term capital loss. The AO had disallowed the loss on the grounds that the off-market transactions with group companies were a colorable device to reduce tax liability, relying on the Supreme Court's decision in Mc. Dowell & Co. Ltd.

The Ld. CIT(A) deleted the disallowance, noting that the transactions were supported by documentary evidence, conducted at market prices, and reflected in the demat accounts. The Ld. CIT(A) emphasized that tax planning within the legal framework is permissible and that the AO failed to provide substantial evidence to prove the transactions were a colorable device.

The Tribunal upheld the Ld. CIT(A)'s decision, agreeing that the transactions were genuine and legally supported. It referenced the Punjab & Haryana High Court's decision in CIT vs. Pivete Finance Ltd., which held that genuine transactions cannot be treated as colorable devices merely due to underlying tax benefits. The Tribunal dismissed the revenue's appeal on this ground as well.

Conclusion:

The Tribunal dismissed the revenue's appeal, upholding the Ld. CIT(A)'s decisions on both issues. The disallowance under Section 14A read with Rule 8D was correctly restricted, and the long-term capital loss on off-market transactions was rightly allowed, as the transactions were genuine and legally supported.