2015 (6) TMI 529 - AT - Income Tax

Disallowance of claim of set off of Long term Capital Loss on sale of shares - Security Transaction Tax ( STT ) was deducted against the Long Term Capital Gain arising on sale of land at Chennai- Held that - section 10(38) excludes in expressed terms only the income arising from transfer of Long term capital asset being equity share or equity fund which is chargeable to STT and not entire source of income from capital gains arising from transfer of shares. It does not lead to exclusion of computation of capital gain of Long term capital asset or Short term capital asset being shares. Accordingly, Long term capital loss on sale of shares would be allowed to be set off against Long term capital gain on sale of land in accordance with section 70(3). We allow the assessee s ground no.1 and direct the Assessing Officer to allow the claim of set off of Long term capital loss on sale of shares against the Long term capital gain arising on sale of land. - Decided in favour of assessee. Disallowance of expenses u/s. 14A made after applying Rule 8D - Held that - On perusal of the impugned orders, we find that the assessee had made the claim before the Assessing Officer that no expenditure can be said to be attributable in relation to the earning of dividend income. Once such a claim has been made, the Assessing Officer was required under the statute to satisfy himself having regard to the accounts of the assessee about the correctness of the claim of the assessee. There has to be some finding of the Assessing Officer that the assessee s claim is prima facie not tenable. The assessee has pointed out that entire investments have been made out of its own capital and internal accruals, therefore, no expenses can be said to be attributable. This claim of the assessee required examination by the AO having regard to the accounts of the assessee and the nature of expenditure which can be said to be attributable for earning of the exempt income. The AO while deciding this issue may consider the decision of Hon ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd. 2010 (8) TMI 77 - BOMBAY HIGH COURT . - Decided in favour of assessee for statistical purposes. Penalty u/s. 271(1)(c) levied on account of disallowance for assessee s claim for set off of loss and disallowance made u/s. 14A in the quantum appeal have no legs to stand. Accordingly, the penalty levied is deleted and the appeal is allowed. - Decided in favour of assessee

Issues Involved:

1. Set off of Long Term Capital Loss on sale of shares against Long Term Capital Gain on sale of land.
2. Disallowance of expenses under Section 14A of the Income Tax Act by applying Rule 8D.
3. Penalty proceedings under Section 271(1)(c) related to the above issues.

Issue-wise Detailed Analysis:

1. Set off of Long Term Capital Loss on sale of shares against Long Term Capital Gain on sale of land:

The assessee, a pharmaceutical company, claimed a set off of Long Term Capital Loss on the sale of shares and mutual funds against Long Term Capital Gain from the sale of land. The Assessing Officer (AO) disallowed the claim, stating that the losses from shares, where Securities Transaction Tax (STT) was deducted, are exempt under Section 10(38) and cannot be set off against taxable income. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, emphasizing that exempt losses cannot be set off against taxable income.

The assessee's counsel argued that Section 10(38) exempts only positive income and not losses, and that Sections 70 and 71 allow for the set off of Long Term Capital Loss against Long Term Capital Gain. The counsel cited the Calcutta High Court's decision in Royal Calcutta Turf Club v. CIT, which allowed the set off of losses from exempt sources against taxable income.

The Tribunal held that shares are considered capital assets and no exceptions are carved out in Section 2(14). The Tribunal concluded that Section 10(38) exempts only the income from the transfer of Long Term Capital Assets being equity shares or units of equity-oriented funds, and not the entire source of income from capital gains. Therefore, the Long Term Capital Loss on the sale of shares can be set off against Long Term Capital Gain from the sale of land.

2. Disallowance of expenses under Section 14A by applying Rule 8D:

The AO disallowed Rs. 39,80,215/- of expenses under Section 14A by applying Rule 8D, which was applicable from the Assessment Year (AY) 2008-09. The CIT(A) confirmed the disallowance based on the Mumbai Special Bench decision in ITO vs. Daga Capital Management (P.) Ltd.

The assessee argued that Rule 8D was not applicable for AY 2007-08 and that the AO did not examine the accounts to determine the correctness of the claim that no expenditure was attributable to earning exempt income. The Tribunal noted that the AO must be satisfied with the correctness of the assessee's claim before making any disallowance under Section 14A(2). Since the AO did not examine the accounts or provide satisfaction, the Tribunal remanded the matter back to the AO to re-examine the claim without applying Rule 8D.

3. Penalty proceedings under Section 271(1)(c):

The penalty was levied due to disallowances related to the set off of losses and expenses under Section 14A. Since the Tribunal allowed the assessee's appeal on the set off of losses and remanded the Section 14A disallowance for re-examination, the penalty had no basis. Consequently, the Tribunal deleted the penalty.

Conclusion:

The appeal regarding the set off of Long Term Capital Loss against Long Term Capital Gain was allowed. The disallowance under Section 14A was remanded to the AO for re-examination. The penalty under Section 271(1)(c) was deleted. The Tribunal's decision was pronounced on June 10, 2015.

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