2013 (2) TMI 602 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - assessee-company engaged in the business of investment in shares and securities - assessee contested the disallowance exceeding the amount of income earned - Held that - Finding force in the assessee s argument that share application money , to the extent it is actually so, so that it only represents amount/s paid by way of application for allotment of shares, the same cannot be regarded as an investment in shares, or an asset (or asset class) yielding tax-free income, and neither is it capable of yielding any tax-free income. The same would, therefore, have to be excluded in working out the disallowance u/r. 8D. Thus the exclusion of share application money is not in the least for the reason that it did not yield any tax-free income for the relevant year, but for the reason that it is incapable of any such income. The same is only in the nature of application (offer) money, which would though, on allotment, get adjusted against the cost of the said shares, and only whereupon any rights in the investee company inure to the allottee. No rights, not even inchoate, in the share capital of the issuing company arise on the payment of the share application money, irrespective of the time period for which it may outstand. The same may at best yield interest income (for which a special procedure though has to be followed by the company concerned), which is in any case taxable, so that there is no scope for application of sec. 14A thereon. As such, upon verification of the assessee s claim with regard to the share application money as on 31.03.2007 and 31.03.2008, as appearing in its balance-sheet/books of account, so that no shares had actually been allotted in its respect as at the relevant dates, the same shall be excluded by the AO from the qualifying amount in reckoning the average investment in working out the disallowance under rules 8D (ii) and 8D(iii). The A.O. will decide the matter per a speaking order, allowing the assessee a reasonable opportunity to present its case before him.

Summary

Issues:
1. Application of section 14A r/w rule 8D for disallowance of expenses related to tax-exempt income.
2. Inclusion of 'share application money' in the calculation of disallowance under rule 8D.
3. Examination of 'share application money' as an investment yielding tax-free income.
4. Verification of the claim regarding 'share application money' for exclusion in working out the disallowance.
5. Restriction of disallowance under section 14A to the determined amount.

Analysis:
1. The appeal was against the Commissioner of Income Tax (Appeals) order partly allowing the assessee's appeal regarding assessment for the assessment year 2008-09 under section 143(3) of the Income Tax Act, 1961. The assessee, engaged in the business of investment in shares and securities, had returned income with dividend income claimed as exempt. The Assessing Officer made a disallowance under section 14A r/w rule 8D, which was confirmed by the CIT(A), leading to the appeal.

2. The main contention was the application of rule 8D, with the assessee arguing that the disallowance exceeded the income earned, especially due to the inclusion of 'share application money' in the calculation. The assessee claimed that 'share application money' should not be considered as an investment yielding tax-free income. The Revenue, however, supported the application of rule 8D, stating it was mandatory.

3. The Tribunal found merit in the assessee's argument regarding 'share application money.' It ruled that 'share application money' should be excluded from the calculation of disallowance under rule 8D as it does not yield tax-free income and is not an investment in shares. The Tribunal directed the Assessing Officer to verify the claim regarding 'share application money' and exclude it from the calculation.

4. The Tribunal emphasized that 'share application money' is only application money for shares and does not generate tax-free income. It instructed the Assessing Officer to exclude 'share application money' from the qualifying amount for calculating the disallowance under rules 8D (ii) and 8D(iii) after verifying the claim. The Tribunal accepted the assessee's contention, subject to verification, and directed the Assessing Officer to restrict the disallowance under section 14A accordingly.

5. The Tribunal allowed the assessee's appeal for statistical purposes, highlighting the importance of verifying and excluding 'share application money' from the disallowance calculation under section 14A r/w rule 8D. The decision provided clarity on the treatment of 'share application money' in determining expenses related to tax-exempt income.