2016 (7) TMI 685 - AT - Income Tax

Disallowance under section 14A made in respect of expenditure incurred for earning exempt income - Held that - From the record, we found that the Assessing Officer has correctly computed the disallowance as per rule 8D, in so far as the relevant assessment year under consideration is the assessment year 2008-09. Accordingly, we direct the Assessing Officer to reduce the disallowance by the amount of ₹ 14,03,562 being disallowance of expenses already offered by the assessee in the return of income. Rebate under section 88E - In the computation of income, the assessee has restricted its claim of rebate under section 88E in respect of the securities transaction tax to ₹ 1,95,40,847 as against the actual payment of the securities transaction tax of ₹ 4,38,91,830 - Held that - However, the Assistant Commissioner of Income-tax has applied the average rate of Income-tax to only direct income from the taxable securities transaction of ₹ 5,12,87,746 instead of the taxable income on the taxable securities transaction under the head Profits and gains of business or profession which is ₹ 5,74,89,989. Further, while computing the average rate of tax, the Assistant Commissioner of Income-tax has divided the total income- tax by the gross total income whereas the assessee claims that for the purpose of section 88E, the average rate of tax should be computed by dividing the tax on income under head Profits and gains of business or profession by income under the head Profits and gains of business or profession . We found that applying the same principle, the average rate of Income-tax should be applied to ₹ 5,74,89,989 while computing the maximum ceiling on the amount of rebate under section 88E in respect of the securities transaction tax. It is also a matter of record that a similar claim of the assessee was accepted by the Commissioner of Income-tax (Appeals) in the assessment year 2007-08, against which the Revenue is not in appeal before us. No merit in the action of the lower authorities for reducing the assessee s claim of deduction under section 88E as done by the Assessing Officer.

Summary

Issues:
1. Disallowance under section 14A for expenditure incurred in earning exempt income.
2. Reduction of rebate under section 88E for income from share trading activity.

Issue 1 - Disallowance under section 14A:
The appeal was filed against the Commissioner of Income-tax (Appeals) order for the assessment year 2008-09 regarding the disallowance under section 14A for expenditure incurred in earning exempt income amounting to ?28,97,483. The Assessing Officer correctly computed the disallowance as per rule 8D for the assessment year 2008-09. The Appellate Tribunal directed the Assessing Officer to reduce the disallowance by ?14,03,562, which was the expenses already offered by the assessee in the return of income.

Issue 2 - Reduction of rebate under section 88E:
The second ground of appeal concerned the reduction of rebate under section 88E for income from share trading activity. The assessee earned ?5,12,87,746 from share trading and paid securities transaction tax of ?4,38,91,830. The assessee claimed a rebate under section 88E based on an average tax rate of 33.3%, but the Assessing Officer restricted it to ?1,15,39,743 based on a 22.5% tax rate. The Appellate Tribunal noted that the securities transaction tax paid on taxable securities transactions is not deductible from business income. The Tribunal upheld the assessee's claim for a higher rebate amount based on the total taxable income under the head "Profits and gains of business or profession" at a rate of 33.99%, leading to a rebate of ?1,95,40,847. The Tribunal rejected the lower authorities' decision to reduce the deduction under section 88E, emphasizing that the average tax rate should be applied to the total taxable income from the business activity.

In conclusion, the appeal was allowed in part, and the Tribunal pronounced the order on April 27, 2016, in favor of the assessee.