2022 (11) TMI 175 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - Expenditure incurred in relation to income not includible in total income - HELD THAT - Section 14A read with Rule 8D clearly mandates that if the AO is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of total income under this Act or where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act, in that situation Rule 8D will come into picture as mentioned (supra) and a formula for calculation of disallowance has been prescribed. The total disallowance calculated under section 14A read with Rule 8D is restricted to the extent of exempt income earned by the assessee. Order of the AO and findings of the Ld. CIT (A), we are of the considered view that assessee is liable for disallowance as determined by the Ld. CIT (A), we are not inclined to disturb the order of Ld. CIT(A). Hence, this ground of appeal of the assessee is dismissed. Exclude interest on any loan that is for specific purpose and only consider interest on such loans that are for general purpose for computing the disallowance while calculating disallowance u/s 14A - HELD THAT - As assessee s interest cost had been increased from Rs. Nil to Rs. 16.70 Cr. in current year and fresh investments as well as fresh borrowings have also gone up. Despite of a specific query seeking details of the source of the investments during the year, the appellant has not been able to demonstrate that no interest bearing borrowed funds were used for investments, hence, we are not inclined to disturb the factual finding given by Ld. CIT(A). In the result, this ground of appeal of assessee is dismissed. Powers of the Ld. CIT (A) to re-verify claim of Long Term Capital Loss - HELD THAT - CIT (A) can confirm, reduce, enhance or annul the assessment, but he cannot remand the matter back to the file of AO. Direction of Ld. CIT(A) in directing the AO to re-verify claim of Long Term Capital Loss will tantamount to remand of matter back to the file of AO which is not permissible in the eyes of law. If required and Ld. CIT(A) deemed it fit to confirm, reduce, enhance or annul the assessment, he may ask for a report from the AO to act. Hence, this action of Ld. CIT (A) is bad-in-law and not sustainable. Hence, this ground of appeal raised by assessee is allowed. Enhancement of income by treating loss on sale of derivatives as speculative loss (with its consequential limitation to be carried forward periods and adjustments) and not a business loss as declared by the assessee and accepted by the AO - HELD THAT - In view of the provisions of section 43(5) and decision of jurisdictional High Court discussed in Souvenir Developers (I) (P.) Ltd. 2022 (5) TMI 377 - BOMBAY HIGH COURT we are of the view that enhancement done by Ld. CIT (A) on account of loss on sale of derivatives is not sustainable, hence deleted. In the result, this ground of appeal of assessee is allowed. MAT computation - Disallowing treatment of reduction of debenture redemption reserve while computing book profit under section 115JB - HELD THAT - Revenue is not incorrect in stating that the said set aside of the profits is only an appropriation of profits, and would not amount to a provision, so as to qualify for deduction in the computation of the profit of the assessee-company. The issue, in fact, is not if it is a 'provision' against an ascertained liability or a 'reserve' per se, but whether it could be considered as deductible in computing the profit of the enterprise. The said accounting treatment, i.e., the set aside of profit, ensures capitalization of the profits, so that the debenture funds forming part of the capital structure, the same (capital) is no depleted on the redemption of the liability representing the said source of funds. In short, the liability, for the discharge of which the profits are being set aside, is in the capital field, so that neither the liability (on its assumption) nor the profit set aside (for its discharge) could be considered as a charge against the profits. This is precisely the reason that the same is not either claimed or allowed as deduction in the computation of income under the regular provisions of the Act. The adjustment made by the assessee in the computation of book profit undersection115JB gets validated. Thus we are not in agreement with the decision of Ld. CIT(A), hence, enhancement done by him is deleted. In the result, ground of appeal raised by the assessee is allowed.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Direction to exclude interest on specific purpose loans while computing disallowance under Section 14A.
3. Direction to re-verify the claim of long-term capital loss.
4. Treatment of loss on sale of derivatives as speculative loss.
5. Disallowance of reduction of debenture redemption reserve while computing book profit under Section 115JB.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The assessee appealed against the disallowance of Rs. 62,07,459/- under Section 14A. The AO applied Section 14A read with Rule 8D, resulting in a disallowance of Rs. 2,68,68,693/-. The CIT(A) reduced this to Rs. 62,07,459/-, noting that the disallowance cannot exceed the exempt income earned, which was Rs. 60,35,871/- plus Rs. 1,71,588/- from share of profit from a partnership firm. The Tribunal upheld CIT(A)'s decision, agreeing that the disallowance should be limited to the exempt income earned.

2. Direction to Exclude Interest on Specific Purpose Loans:
The CIT(A) directed the AO to exclude interest on loans taken for specific purposes while computing disallowance under Section 14A. The Tribunal agreed with this direction, noting that the assessee could not demonstrate that no interest-bearing borrowed funds were used for investments. The Tribunal upheld the CIT(A)'s factual finding.

3. Direction to Re-verify the Claim of Long-Term Capital Loss:
The CIT(A) directed the AO to re-verify the claim of a long-term capital loss of Rs. 7,82,60,511/-. The Tribunal found this direction to be beyond the powers of the CIT(A) as per Section 251 of the Income Tax Act, which allows the CIT(A) to confirm, reduce, enhance, or annul the assessment but not remand the matter back to the AO. The Tribunal held this action as bad-in-law and allowed the assessee's appeal on this ground.

4. Treatment of Loss on Sale of Derivatives as Speculative Loss:
The CIT(A) treated the loss on the sale of derivatives amounting to Rs. 9,77,79,340/- as speculative loss. The Tribunal referred to Section 43(5) and relevant case law, concluding that transactions in derivatives carried out on a recognized stock exchange are not speculative transactions. The Tribunal held that the CIT(A)'s enhancement on this account was not sustainable and deleted it, allowing the assessee's appeal.

5. Disallowance of Reduction of Debenture Redemption Reserve:
The CIT(A) disallowed the reduction of the debenture redemption reserve amounting to Rs. 18,40,00,000/- while computing book profit under Section 115JB. The Tribunal discussed the nature of debenture redemption reserves, noting they are appropriations of profit for meeting capital liabilities and not deductible in computing profit. However, the Tribunal disagreed with the CIT(A)'s decision, citing relevant case law, and deleted the enhancement, allowing the assessee's appeal.

Revenue's Appeal:
The Revenue's appeal contested the reduction of the disallowance under Section 14A from Rs. 2,68,68,693/- to Rs. 62,07,459/-. The Tribunal dismissed the Revenue's appeal, reiterating the findings from the assessee's appeal that the disallowance should not exceed the exempt income earned.

Conclusion:
The Tribunal partly allowed the assessee's appeal, specifically allowing grounds related to the re-verification of long-term capital loss, treatment of loss on derivatives, and disallowance of debenture redemption reserve. The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s reduction of the disallowance under Section 14A.