2022 (1) TMI 226 - AT - Income Tax

Disallowance u/s 14A r.w.r.8D - expenditure incurred by the assessee in relation to the tax exempt income - HELD THAT - We find that in the case of Joint Investments Pvt. Ltd. 2015 (3) TMI 155 - DELHI HIGH COURT has held that Section 14A r.w. Rule 8D of the IT Rules 1962 cannot be interpreted so as to mean that the entire tax exempt income is to be disallowed. It is further held that the window for disallowance is indicated in Section 14A, and was only to the extent of disallowing expenditure incurred by the assessee in relation to the tax exempt income . The portion of the tax exempt income cannot swallow the entire amount considering the facts of the present case in line with the aforesaid decision of Hon ble Delhi High Court. No interference with the order of CIT(A) is called on this aspect. Disallowance of indirect expenses - CIT(A) after considering the details of the expense has come to a finding that the entire operating expenses shown by the assessee cannot be considered to have been incurred for earning exempt income as there were certain expenses in the nature of rent or its remuneration etc which was assessee was required to incur whether it had earned any income from dividend or not. Before us, no fallacy has been pointed out by the Learned DR in the aforesaid findings of CIT(A). In such a situation, we find no reason to interfere with the order of CIT(A) and thus the ground of Revenue is dismissed. Correct head of income - sale consideration received by the assessee from redemption of preference shares including the premium- capital income or income from other sources - CIT-A deleted the addition - HELD THAT - CIT(A) has given a finding that the investment in redemption of preference shares was clearly based on the condition that the assessee was entitled to receive redemption fair market value of shares apart from premium amount and therefore the receipt of premium was part of full value of consideration received on redemption of shares. Before us, no fallacy in the findings of CIT(A) has been pointed by the Revenue. We further find that Hon ble Apex Court in the case of Anarkali Sarabhai 1997 (1) TMI 5 - SUPREME COURT after considering and distinguishing the decision of Vania Silk Millls Ltd . 1991 (8) TMI 2 - SUPREME COURT which has been relied upon by the AO, has held that redemption of preference shares is a sale and is also a transfer by relinquishment of asset by shareholder and accordingly the same is to be subject to tax under the head capital gains. Before us, no contrary binding decision has been placed by the Revenue to support its case. We therefore find no reason to interfere with the order of CIT(A). Thus the ground of Revenue is dismissed.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Treatment of share redemption premium as capital gains or income from other sources.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The Revenue challenged the CIT(A)'s decision to restrict the disallowance under Section 14A by excluding debt-oriented growth funds from investments and directing the disallowance only to certain expenditures in the ratio of exempt income to total receipts. The Assessee had received exempt dividend income but had not disallowed any expenditure under Section 14A. The AO, using Rule 8D, worked out a disallowance, which was contested by the Assessee on the grounds that the investments were made from internal accruals and no expenses were incurred to earn such income. The CIT(A) upheld the AO's invocation of Rule 8D but noted that no financial cost was incurred by the Assessee for making investments in Mutual Funds. The CIT(A) excluded investments in growth options of Mutual Funds from the disallowance calculation, as they result in taxable capital gains rather than exempt dividend income. The CIT(A) also identified specific expenses attributable to earning taxable income and restricted the disallowance accordingly. The Tribunal found no error in CIT(A)'s findings, noting that the Delhi High Court had held that Section 14A r.w. Rule 8D cannot mean the entire exempt income is disallowed. Thus, the Tribunal upheld the CIT(A)'s order, dismissing the Revenue's appeal on this ground.

2. Treatment of Share Redemption Premium:
The AO treated the premium received on the redemption of preference shares as "income from other sources," not as part of the capital gains. The Assessee had invested in preference shares and received a premium on redemption, which was included in the capital gains. The AO argued that the premium was predetermined and should be taxed separately. The CIT(A) disagreed, holding that the premium was part of the full value received on redemption and should be treated as capital gains. The Tribunal supported CIT(A)'s view, referencing the Supreme Court's decision in Anarkali Sarabhai vs. CIT, which held that redemption of preference shares constitutes a transfer and should be taxed under capital gains. The Tribunal found no basis to interfere with CIT(A)'s decision, dismissing the Revenue's appeal on this ground as well.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both the disallowance under Section 14A and the treatment of share redemption premium as capital gains. The Tribunal found the CIT(A)'s approach consistent with legal precedents and factual findings.