2016 (12) TMI 1078 - AT - Income Tax

Disallowance of expenses towards speculation business - Held that - Since there is no speculation activity in respect of this loss on sale of shares in the facts and circumstances of the case, the expenses disallowed would also become regular business expenditure and deserve to be deleted. We find that these facts were duly brought to the notice of the ld CITA who did not understand the same and simply dismissed the grounds as not pressed. We hold in the facts and circumstances that the expenses of ₹ 19,75,939/- does not attribute to speculation business. - Decided in favour of assessee Treatment of long term capital loss on sale of unquoted equity shares - Held that - We find from the details available on record, that the assessee had sold the shares of unquoted share (i.e Herbicure P Ltd) at ₹ 8.65 per share which is much more than the break up value per share of the said company (based on its balance sheet) of ₹ 1.09 per share. We find that the assessee had incurred long term capital loss thereon and short term capital gains thereon in respect of two lots of shares sold by it depending upon the period of holding. We find that the revenue having accepted the said sale price per share in the event of deriving gains ought not to have disputed the same in the event of incurring losses as stated supra. With regard to Modipan Ltd, we find that the shares of the said company are listed in BSE and the prevailing market price was ₹ 13.75 per share and the assessee had sold the share on off market basis at ₹ 14 per share . Accordingly, we hold that the long term capital loss on sale of shares of unquoted shares (Herbicure P Ltd) and sale of shares of quoted share (Modipan Ltd) which was done on off market on which STT was not suffered, would be separately eligible to be carried forward to subsequent years - Decided in favour of assessee Disallowance of interest on borrowed funds on a proportionate basis - Held that - We find that the details in the paper book vide pages 40 to 92 were not properly examined by the ld AO. Hence in the facts and circumstances of the case, we deem it fit and appropriate in the interest of justice and fair play , to set aside this issue to the file of the ld AO, to decide the same afresh, in accordance with law. Disallowance u/s 94(7) - Held that - We find that the ld AR had stated that the subject mentioned shares of Opto Circuits Ltd which were sold within a period of three months from the record date were only to the extent of 100378 shares and dividend paid thereon @ ₹ 5 per share worked out to ₹ 5,01,890/- and hence agreed for disallowance u/s 94(7) of the Act to that extent. We hereby direct the ld AO to verify the veracity of this claim based on the examination of relevant documents in that regard and decide the same afresh in accordance with law. Needless to mention that the assessee be given reasonable opportunity of being heard.

Issues Involved:
1. Disallowance of expenses towards speculation business.
2. Treatment of long-term capital loss on sale of unquoted equity shares.
3. Disallowance of interest on borrowed funds on a proportionate basis.
4. Disallowance under Section 14A of the Income Tax Act.
5. Disallowance under Section 94(7) of the Income Tax Act.

Detailed Analysis:

1. Disallowance of Expenses Towards Speculation Business:
The first issue revolves around whether the CIT(A) was justified in upholding the disallowance of ?19,75,939/- towards speculation business expenses. The assessee claimed a loss on the purchase and sale of shares as a regular business loss, which the AO initially treated as a speculation loss, leading to the disallowance of 10% of total expenses. However, the AO later accepted the loss as a regular business loss under Section 154 of the Act. The CIT(A) dismissed the grounds without considering the change in the AO's stance. The Tribunal found that since the loss was accepted as a regular business loss, the related expenses should also be treated as regular business expenses. Consequently, the Tribunal directed the deletion of the disallowance of ?19,75,939/-.

2. Treatment of Long-Term Capital Loss on Sale of Unquoted Equity Shares:
The second issue pertains to the treatment of long-term capital loss of ?41,07,607/- on the sale of unquoted equity shares. The AO disallowed the loss, alleging it was an accommodation loss due to transactions with interested persons. However, the CIT(A) adjusted the long-term capital loss against long-term capital gains exempt under Section 10(38) of the Act, leaving no loss to be carried forward. The Tribunal agreed with the assessee that the long-term capital loss on unquoted shares and off-market transactions should not be set off against exempt long-term capital gains. The Tribunal directed that the long-term capital loss be carried forward to subsequent years.

3. Disallowance of Interest on Borrowed Funds on a Proportionate Basis:
The third issue involves the disallowance of interest on borrowed funds amounting to ?69,53,088/-, which the AO alleged was used for interest-free advances to sister concerns. The assessee argued that the borrowings were used for business transactions with Religare Securities Ltd and India Bulls Securities Ltd. The Tribunal found that the details provided by the assessee were not properly examined by the AO. Therefore, the Tribunal set aside the issue to the AO for fresh examination, directing the AO to verify the utilization of borrowed funds and the availability of own funds.

4. Disallowance Under Section 14A of the Income Tax Act:
The fourth issue concerns the disallowance of ?92,54,576/- under Section 14A, attributed to the investment activities of the assessee. The AO concluded that the remaining portion of the interest paid was attributable to investment activities. The Tribunal, having already set aside the issue of borrowed funds utilization to the AO, directed the AO to verify the utilization of funds and the availability of own funds while deciding the disallowance under Section 14A afresh.

5. Disallowance Under Section 94(7) of the Income Tax Act:
The final issue is the disallowance of ?18,50,250/- under Section 94(7) for dividend stripping. The assessee argued that the disallowance should be restricted to ?5,01,890/-, as only 100,378 shares sold within three months from the record date were subject to the provision. The Tribunal directed the AO to verify the claim and decide the issue afresh based on the relevant documents.

Conclusion:
The appeal was allowed for statistical purposes, with several issues remanded to the AO for fresh examination and verification based on the evidence provided by the assessee. The Tribunal emphasized the need for a thorough and fair assessment, ensuring that the assessee is given a reasonable opportunity to present its case.

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