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2022 (4) TMI 971 - AT - Income TaxSet off of brought forward long term capital loss against the long term capital gain on sale of depreciable assets - HELD THAT - We find that the Hon ble Jurisdictional High Court in ACE Builders Pvt. Ltd. 2005 (3) TMI 36 - BOMBAY HIGH COURT while holding that section 50 of the Act is a deeming provision and the fiction created under the section is confined to computation of capital gain only and this section cannot convert long term capital asset into short term capital asset. In view of the aforesaid decision rendered by the Hon ble Jurisdictional High Court and also affirmed by the Hon ble Supreme Court V.S. DEMPO COMPANY LTD. 2016 (10) TMI 62 - SUPREME COURT we do not find any infirmity in the impugned order passed by the learned CIT(A) allowing set off of carried forward long term capital loss against long term capital gain arising during the year. As a result ground no.1 raised in Revenue s appeal is dismissed. Disallowance under section 14A r/w rule 8D - HELD THAT - We find that the Hon ble Jurisdictional High Court in HDFC Bank Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT held that where assessee s own funds and other non interest bearing funds were more than the investment in tax free securities no disallowance under section 14A of the Act can be made. We further find that recently Hon ble Supreme Court in South Indian Bank Ltd. 2021 (9) TMI 566 - SUPREME COURT held that disallowance under section 14A of the Act would not be warranted where interest free own funds exceeds the investment in tax free securities and in such a case the investment would be presumed to be made out of assessee s own funds. In another decision the Hon ble Jurisdictional High Court in Nirved Traders Pvt. Ltd. 2019 (4) TMI 1738 - BOMBAY HIGH COURT held that the disallowance of expenditure in relation to exempt income cannot exceed the exempt income earned by the assessee. We find no infirmity in the impugned order passed by the learned CIT(A) deleting the disallowance made by the Assessing Officer under section 14A r/w rule 8D of the Rules. As a result ground no.2 raised in Revenue s appeal is dismissed.
Issues Involved:
1. Set-off of Long-Term Capital Gain (LTCG) on sale of depreciable assets against brought forward long-term capital loss. 2. Disallowance under section 14A read with Rule 8D of the Income Tax Rules, 1962. Detailed Analysis: Issue 1: Set-off of LTCG on Sale of Depreciable Assets Against Brought Forward Long-Term Capital Loss The core issue pertains to whether the assessee can set off long-term capital gain (LTCG) on the sale of depreciable assets against brought forward long-term capital loss. The assessee had shown income from LTCG on the sale of assets and set it off against carried forward long-term capital loss. The Assessing Officer (AO) disallowed this set-off, treating the income from the sale of depreciable assets as short-term capital gain under section 50 of the Income Tax Act, 1961. The assessee argued that the assets were held for more than 36 months, qualifying them as long-term capital assets under section 2(29A) of the Act. The assessee relied on the decisions of the Hon'ble Jurisdictional High Court in CIT v/s ACE Builders Pvt. Ltd. and the Hon'ble Supreme Court in CIT v/s V.S. Dempo Company Ltd., which held that section 50 is a deeming provision and cannot convert long-term capital assets into short-term capital assets. The learned Commissioner of Income Tax (Appeals) [CIT(A)] agreed with the assessee, stating that the deeming provisions of section 50 do not change the nature of the asset from long-term to short-term. Therefore, the benefits available to long-term capital gains, including set-off of brought forward long-term capital loss, would continue to be available. However, the gain on the sale of an asset purchased in the financial year 2013-14 was treated as short-term capital gain and not eligible for set-off. The Tribunal upheld the CIT(A)'s decision, citing the Hon'ble Jurisdictional High Court's judgment in ACE Builders Pvt. Ltd., which confined the fiction created under section 50 to the computation of capital gains only. The Tribunal also referenced the Hon'ble Supreme Court's agreement with this view in V.S. Dempo Pvt. Ltd. Consequently, the Tribunal dismissed the Revenue's appeal on this issue. Issue 2: Disallowance Under Section 14A Read with Rule 8D The second issue concerns the disallowance of expenses under section 14A read with Rule 8D of the Income Tax Rules, related to earning exempt income. The assessee had earned exempt income of ?66,110 and suo-motu disallowed ?64,315 as expenditure for earning this income. The AO, however, made a disallowance of ?3,96,029 under section 14A read with Rule 8D. The assessee contended that it had sufficient interest-free funds to make the investments and that the disallowance could not exceed the exempt income. The CIT(A) agreed with the assessee, noting that the interest-free funds exceeded the investments and that the disallowance should not exceed the exempt income. The Tribunal upheld the CIT(A)'s decision, referencing the Hon'ble Jurisdictional High Court's judgment in CIT v/s HDFC Bank Ltd., which held that no disallowance under section 14A can be made if interest-free funds exceed the investment in tax-free securities. The Tribunal also cited the Hon'ble Supreme Court's decision in South Indian Bank Ltd. v/s CIT, which supported this view. Additionally, the Tribunal referenced the Hon'ble Jurisdictional High Court's ruling in Nirved Traders Pvt. Ltd., which held that disallowance cannot exceed the exempt income earned. Conclusion: The Tribunal dismissed the Revenue's appeal on both issues, upholding the CIT(A)'s decisions. The set-off of LTCG on the sale of depreciable assets against brought forward long-term capital loss was allowed, and the disallowance under section 14A read with Rule 8D was restricted to the exempt income earned.
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