2022 (1) TMI 733 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - assessee submitted that the corporation had earned dividend income during the year and no expenditure had been incurred to earn the dividend income as the investments have been made out of own funds comprising share capital and accumulated profits - The HELD THAT - Disallowance under rule 8D(2)(ii), on examination of the financial statements for the relevant AY as well as previous FYs, we find that the assessee has sufficient own funds to make the investments on which the assessee had earned exempt income during the AY. We find that there is increase in the non-current investments and further, there is increase in the own funds, which is evident from trading and P L Account of the assessee, which is more than the investments made during the year. After considering the sale of investments and also perusing the orders of coordinate bench for AYs quoted supra wherein the coordinate bench held that the assessee had made the investments out of own funds of the assessee company, we direct the AO to delete the addition made under rule 8D(2)(ii). Disallowance under rule 8D(2)(iii) - contention of the assessee is that it has not incurred any expenditure for earning exempt income is also not tenable because for earning of income maintaining portfolio, administrative involvement and expenditure cannot be denied. We therefore remit this issue back to the file of the AO with a direction to compute the disallowance under this limb by considering the investments which yielded exempt income only during the year instead of taking average value on entire investments. The assessee is directed to substantiate its claim before the AO for true and correct calculation of the disallowance under rule 8D(2)(iii) of the Act. Profit on sale of investments - Addition u/s Capital gain - assessee submitted that the matter may be restored to the file of the AO to substantiate its claim by way of documentary evidence to enable the AO to calculate the exact capital gains - HELD THAT - We remit this issue to the file of the AO with a direction to decide the issue after examining the documentary evidence which will be put-forth by the assessee before him and in accordance with law after providing reasonable opportunity of hearing to the assessee. The assessee is directed to substantiate its claim before the AO with all the relevant evidences; at its own risk and responsibility to be followed by three effective opportunities of hearing. Accordingly, this ground is allowed for statistical purposes.

Summary

Issues:
1. Disallowance of expenditure under section 14A of the Income Tax Act, 1961
2. Taxing capital loss as capital gains

Analysis:

Issue 1: Disallowance of expenditure under section 14A of the Income Tax Act, 1961
The Assessing Officer (AO) disallowed expenditure under section 14A amounting to ?53,56,654, as the assessee had earned dividend income without incurring any expenditure. The AO relied on Rule 8D for disallowance. The CIT(A) upheld the disallowance, stating that the assessee, having earned dividend income, cannot claim that section 14A is not applicable. However, the ITAT observed that the AO made the disallowance under two limbs: ?8,17,998 under Rule 8D(2)(ii) and ?45,38,656 under Rule 8D(2)(iii). The ITAT directed the AO to delete the ?8,17,998 addition as the assessee had sufficient own funds for investments. For the ?45,38,656 disallowance, the issue was remitted back to the AO for proper computation based on investments yielding exempt income. The ITAT partly allowed this ground for statistical purposes.

Issue 2: Taxing capital loss as capital gains
The AO treated ?20,57,266 as income from capital gains, which the assessee claimed to be a loss due to indexation on sale of unlisted shares. The CIT(A) upheld the addition as the assessee failed to provide documentary evidence. The ITAT remitted this issue back to the AO for examination of documentary evidence to calculate the exact capital gains. The assessee was directed to substantiate its claim with relevant evidence. The ITAT allowed this ground for statistical purposes.

In conclusion, the ITAT partly allowed the appeal for statistical purposes, directing the AO to reexamine the disallowance under section 14A and the treatment of capital loss as capital gains based on the evidence provided by the assessee.