2014 (9) TMI 423 - AT - Income Tax

Long term capital loss disallowed Redemption on preference shares Whether the whole transaction can be said to be sham transaction with the sole purpose of transferring funds from one company to another and generating huge long term capital loss so as to avoid the tax - Held that - The assessee had advanced huge sums from time to time to JPL - the loan was advanced at least six years before the redemption of RCPS during the year - The assessee as well as JPL both are regularly assessed to income tax and in the years in which loan was advanced, the genuineness of the loan was never doubted by the Revenue either in the case of the assessee or in the case of JPL - no significant event took place except the redemption of 2% RCPS - The AO has not brought on record an iota of evidence in holding the transaction to be a sham transaction or bogus transaction relying upon McDowell And Co. Limited Versus Commercial Tax Officer 1985 (4) TMI 64 - SUPREME Court - there is nothing on record to hold the series of the transactions as not genuine - all the transactions of the series have been accepted by the Revenue as genuine business transactions - in the year of redemption of the 2% RCPS, the transactions cannot be presumed to be sham or bogus merely because it has resulted into long term capital loss which may be adjusted against the long term capital gain, if any, arising in future to the assessee - the AO is directed to accept long term capital loss and carry forward the same Decided in favour of assessee. Exemption u/s 14A disallowed Held that - Rule 8D is applicable for and from AY 2008-09 and not for earlier years relying upon GODREJ AND BOYCE MFG. CO. LTD. Versus DEPUTY COMMISSIONER OF INCOME-TAX AND ANOTHER 2010 (8) TMI 77 - BOMBAY HIGH COURT - there is no infirmity in the order of CIT(A) holding that Rule 8D was not applicable - the AO is required to examine the assessee s claim with regard to incurring of no expenditure or with regard to the amount of expenditure claimed to have been incurred by the assessee for earning of exempt income - Such expenditure is to be determined in accordance with such method as may be prescribed - the assessee has worked out the disallowance u/s 14A - The AO did not record any satisfaction that such working is wrong - for AY 2007-08, Rule 8D was not applicable and therefore, disallowance need not be computed as per Rule 8D - The AO has not recorded any satisfaction with regard to any mistake in the working of disallowance u/s 14A by the assessee - there was no justification to interfere with the order of CIT(A) Decided against revenue.

Summary

Issues Involved:
1. Disallowance of long-term capital loss on redemption of preference shares.
2. Disallowance of set-off of brought forward long-term capital loss.
3. Disallowance of expenses attributable to exempt income under Section 14A.

Issue-wise Detailed Analysis:

1. Disallowance of Long-term Capital Loss on Redemption of Preference Shares:

The primary issue in ITA No. 729/Del/2011 is whether the Commissioner of Income-tax (Appeals) [CIT(A)] erred in confirming the Assessing Officer's (AO) action in disallowing a long-term capital loss of Rs. 41,81,03,448 arising on the redemption of preference shares of Jindal Polyfilms Limited (JPL) as not being genuine. The assessee had advanced loans to JPL, which were converted into Optionally Convertible Preference Shares (OCPS) due to JPL's financial constraints. Later, due to changes in SEBI guidelines, these OCPS were converted into 2% Redeemable Cumulative Preference Shares (RCPS). The AO disallowed the loss, alleging the transaction was a sham aimed at generating a capital loss. The assessee argued that the transactions were genuine, citing past acceptance by Revenue and lack of any evidence by the AO to prove otherwise.

Upon review, the Tribunal found that the transactions over the years were genuine and accepted by the Revenue. The Tribunal held that the AO's disallowance was based on mere suspicion without concrete evidence. The Tribunal concluded that the decision of the Hon'ble Apex Court in McDowell & Co. Ltd. was not applicable as there was no colorable device to avoid tax. The Tribunal directed the AO to accept the long-term capital loss and allow its carry forward.

2. Disallowance of Set-off of Brought Forward Long-term Capital Loss:

In ITA No. 730/Del/2011, the issue was whether the CIT(A) erred in disallowing the set-off of brought forward long-term capital loss against long-term capital gains for AY 2007-08. This issue was consequential to the decision in ITA No. 729/Del/2011. Since the Tribunal allowed the carry forward of the long-term capital loss in AY 2006-07, it directed the AO to allow the set-off of the same against long-term capital gains for AY 2007-08.

3. Disallowance of Expenses Attributable to Exempt Income under Section 14A:

In ITA No. 494/Del/2011, the Revenue challenged the CIT(A)'s deletion of an addition of Rs. 1,42,16,868 on account of disallowances attributable to exempt income under Section 14A. The AO had applied Rule 8D to compute the disallowance, while the assessee had suo motu disallowed Rs. 7,73,525. The CIT(A) deleted the additional disallowance, noting that Rule 8D was not applicable for AY 2007-08, relying on the Bombay High Court decision in Godrej & Boyce Mfg. Co. Ltd.

The Tribunal upheld the CIT(A)'s decision, stating that Rule 8D was applicable only from AY 2008-09. The Tribunal emphasized that the AO did not record any dissatisfaction with the assessee's computation of disallowance under Section 14A. Hence, the Tribunal found no justification to interfere with the CIT(A)'s order.

Conclusion:

The Tribunal allowed the assessee's appeals for AY 2006-07 and AY 2007-08, directing the AO to accept the long-term capital loss and allow its carry forward and set-off. The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s deletion of the additional disallowance under Section 14A. The decisions were pronounced in the open Court on 10.9.2014.