2012 (10) TMI 210 - AT - Income Tax

Dis-allowance u/s 14A - non-claim of any expenditure by assessee in relation of dividend income - assessee contended that mode of acquisition of shares was through amalgamation and no shares having been acquired either out of interest bearing funds or surplus funds - Held that - It is evident from the record that the assessee has earned dividend mainly from shares of OBC and CG which was acquired through amalgamation of two companies. Further, it is also noticed that most of the expenses are directly attributable to assessee s business as per the details furnished. Hence, it cannot be held that assessee might have incurred any kind of expenditure for earning of dividend income. Moreover, looking to the fact that assessee has itself disallowed 1% of the dividend income as an expenditure. Hence, no further disallowance is called for. Deduction of Short Term Capital Loss on sale of shares of M/s BILT - acquired vide transfer from holding company at book value (Rs 128.02 per share) as per the provisions of section 49(1)(iii)(e), when market value was ₹ 73.3 per share - dis-allowance - Held that - It is seen firstly, that transaction is between parent company and subsidiary company which cannot be treated as transfer as it is undisputed fact that assessee is a 100% subsidiary of its parent company; secondly, the shares have been transferred as per the book value and, therefore, the cost of acquisition of the asset shall be deemed to be the cost of which it has been shown in the books of the parent company i.e. previous owner. In these circumstances whether the cost of the shares was higher or lower does not make any difference. In view of clear cut provisions of S47(iv) r.w.s. 49(1)(iii)(e), deduction of short term capital loss by the AO is legally not correct - Decided in favor of assessee

Summary

Issues:
1. Disallowance u/s 14A
2. Deduction of Short Term Capital Loss

Issue 1: Disallowance u/s 14A
The appeal was filed against the order passed by CIT(A)-XXVI, Mumbai regarding the quantum of assessment under section 143(3) for the assessment year 2004-2005. The main challenges raised by the appellant were related to disallowance u/s 14A, deduction of Short Term Capital Loss, and treatment of shares transaction as speculative income. The disallowance u/s 14A was contested based on the appellant's claim that no expenditure was incurred for earning the exempt dividend income, which was received from Oriental Bank of Commerce and Crompton Greaves Ltd. The AO made a disallowance of Rs. 1,44,156/- u/s 14A, which was challenged before the CIT(A). The CIT(A) directed the AO to make the disallowance under Rule 8D, which was contested by the appellant. The ITAT held that no further disallowance was warranted as the appellant had already disallowed 1% of the dividend income, and most expenses were directly related to the business, resulting in the issue being decided in favor of the appellant.

Issue 2: Deduction of Short Term Capital Loss
The second issue pertained to the deduction of Short Term Capital Loss claimed by the appellant. The AO reduced the claimed loss from Rs. 4,72,49,239/- to Rs. 29,86,018/- on the grounds that the transaction of purchase and sale of shares was a colorable device to claim excessive loss for future set-off against income. The CIT(A) upheld the AO's decision. However, the ITAT found that the transaction between the parent company and the subsidiary company was covered under section 47(iv) and section 49(1)(iii)(e), where the cost of acquisition of the asset shall be deemed to be the cost as shown in the books of the parent company. Therefore, the deduction of Short Term Capital Loss by the AO was deemed legally incorrect, and the ground of the appellant was allowed.

In conclusion, the appeal filed by the appellant was partly allowed by the ITAT, addressing the issues of disallowance u/s 14A and deduction of Short Term Capital Loss comprehensively.