2017 (6) TMI 61 - AT - Income Tax

Revision u/s 263 - Bank Guarantee commission to be considered as interest for disallowance u/s 14A - Held that - Bank guarantee commission cannot be considered as interest on borrowing. The board notification no. 56/2012 dated 31.12.2012 had clearly held that bank guarantee commission paid to a bank need not suffer deduction of tax at source under Chapter XV of the I T Act. AO in the course of assessment proceedings has called for details of bank guarantee commission paid. The assessee in its reply dated 9.2.2015 had submitted the details called for by the Assessing Officer and on examination of the same no disallowance was made. It also to be noted that the Assessing Officer, in the assessment had made disallowance by invoking provision u/s 14A of the Act. Therefore, according to us, the Assessing Officer has taken a conscious decision not disallow bank guarantee commission paid by the assessee by invoking section 14A of the Act. Bank guarantee commission paid by the assessee is not in the nature of interest expenditure warranting disallowance u/s 14A r.w.r 8D(2)(ii). Investment written off during the year not considered for arriving at disallowance u/r 8D - Held that - The rule requires the value of investment, the income from which is exempt from tax alone to be considered for the disallowance. The sum of ₹ 8,94,800/- written off during the year is in respect of joint venture in Dubai in Peninsular Middle East DMCC. The Income from this investment is not exempt from tax and hence the same need not be considered for disallowance u/s 14A r.w.r 8D. Therefore, it cannot be said that there is error in the assessment order. Provision for leave encashment - Held that - The assessee in the statement of total income had mentioned in the footnote that no disallowance was made towards leave encashment, following the decision of the jurisdictional Kerala High Court in the case of Hindustan Latex Ltd. 2012 (6) TMI 713 - KERALA HIGH COURT The Assessing Officer has accepted the same while completing the assessment. There is no error in the assessment since the Assessing Officer has followed the judgment of the jurisdictional High Court. Loss on trading in shares not considered as loss from speculation business as required under explanation to section 73 - Held that - Assessee, in the assessment proceedings, vide its reply dated 9.2.2015 has answered in detail the loss in trading, scrip wise profit and loss etc., (details are furnished from pages 38 to 47 of the paper book filed by the assessee). The AO during the course of assessment proceedings had examined the evidence furnished and had concluded the assessment. On examination of record, it is clear that loss on trading in shares amounting to ₹ 21,30,564/- cannot be from speculative business and there is no error in the Assessment order to the above extent. Appeal decided in favour of assessee.

Summary

Issues Involved:
1. Bank Guarantee Commission as Interest for Disallowance under Section 14A
2. Investment Written Off and Disallowance under Rule 8D(iii)
3. Provision for Leave Encashment
4. Loss on Trading in Shares and Speculative Business under Explanation to Section 73

Issue-wise Detailed Analysis:

1. Bank Guarantee Commission as Interest for Disallowance under Section 14A:
The Principal Commissioner of Income Tax (CIT) concluded that the Assessing Officer (AO) had not properly examined the issue of whether the bank guarantee commission should be considered as interest for disallowance under Section 14A. However, the Tribunal found that a bank guarantee is merely a facility extended by the bank and not a borrowing or debt incurred. Therefore, the bank guarantee commission cannot be classified as interest. The AO had already reviewed the details of the bank guarantee commission and consciously decided not to disallow it under Section 14A. Thus, the Tribunal determined that there was no error in the assessment order regarding this point.

2. Investment Written Off and Disallowance under Rule 8D(iii):
The CIT argued that the investment written off amounting to ?8,94,800 was not considered for disallowance under Rule 8D(iii). However, the Tribunal clarified that Rule 8D(iii) requires only the value of investments, the income from which is exempt from tax, to be considered for disallowance. Since the investment written off pertained to a joint venture in Dubai and its income was not exempt from tax, it did not need to be considered for disallowance under Section 14A read with Rule 8D. Therefore, the Tribunal found no error in the assessment order on this issue.

3. Provision for Leave Encashment:
The CIT noted that the AO did not disallow the provision for leave encashment amounting to ?83,670, following the Kerala High Court decision in the case of Hindustan Latex Ltd. The Tribunal observed that the AO had accepted the assessee's footnote in the statement of total income, which mentioned that no disallowance was made towards leave encashment based on the jurisdictional High Court's decision. Since the AO followed the jurisdictional High Court's ruling, there was no error in the assessment order.

4. Loss on Trading in Shares and Speculative Business under Explanation to Section 73:
The CIT contended that the AO did not consider the loss on trading in shares amounting to ?21,30,564 as a loss from speculative business as required under the explanation to Section 73. The Tribunal reviewed the facts and found that the assessee was engaged in trading shares on its own account, derivative transactions, and share broking activity. The AO treated the loss as a normal business loss to be set off against other business income, in line with the amended IT Act, 1961, which states that trading in derivatives on recognized stock exchanges should not be considered speculative business. The AO had examined the details of the loss during the assessment proceedings and concluded accordingly. Therefore, the Tribunal found no error in the assessment order regarding this issue.

Conclusion:
The Tribunal concluded that the CIT's order under Section 263, which set aside the assessment order dated 9.3.2015, was not justified. The Tribunal found no error in the assessment order that warranted the CIT's interference. Therefore, the appeal filed by the assessee was allowed, and the CIT's order was quashed. The Tribunal emphasized that Section 263 is applicable only if the assessment order is both erroneous and prejudicial to the interest of the revenue, and in this case, neither condition was satisfied.