2018 (2) TMI 730 - AT - Income Tax

Disallowance u/s 14A - sufficiency of own funds - Held that - If there are funds available both interest-free and over draft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption is established. As relying on CIT vs. Reliance Utilities and Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT we direct the AO to delete the disallowance as made u.s 14A - Decided in favour of assessee Slump sale - transfer of Planet M. division in consideration of equity shares and 6% redeemable unsecured debentures - whether an exchange of the said division and not sale as contemplated under the provision of section 50B - Held that - Planet M Division transferred by the assessee as on a going concern basis where no cost of acquisition is possible to be attributed individual assets in that undertaking and therefore the charging of provisions of section 45 are not attracted. We further hold that the provisions of section 50B are not applicable to this case as it is a case of slump exchange and not a slump sale. Accordingly we set aside the order of CIT(A) and direct the AO not to tax the amount of capital gain - Decided in favour of assessee Disallowing software expenses relating to website portal - nature of expenditure - revenue or capital - Held that - We find that the Ld. CIT(A) allowed the appeal of the assessee by following the earlier order for A.Y. 2007-08 which has attained finality. We have observed that order of Ld. CIT(A) is correct and does not suffer from any infirmity as it has been passed after considering the facts of the case in the light of the similar issue decided in A.Y. 2007-08 which attained finality. Also on merit the issue has been correctly decided as the expense are of revenue nature and therefore we are inclined to uphold the same.- Decided in favour of assessee

Issues Involved:
1. Disallowance under section 14A of the Income Tax Act.
2. Taxability of transfer of Planet M division under section 50B of the Income Tax Act.
3. Disallowance of software expenses as capital expenditure.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The assessee, a company of the 'Times Group', earned exempt dividend income of ?15.68 crores and long-term capital gains of ?51.22 crores during the assessment year 2008-09. The Assessing Officer (AO) disallowed ?16,68,88,790/- under section 14A, attributing it to interest expenditure related to investments in tax-free securities. The AO applied Rule 8D for the calculation of disallowance, which was confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)].

The assessee contended that it had sufficient interest-free funds to cover the investments in tax-free securities and that the AO did not record any objective satisfaction before invoking Rule 8D. The assessee relied on the decisions of "CIT vs. Reliance Utilities and Power Ltd." (2009) and "CIT vs. HDFC Bank" (2014).

The Tribunal found merit in the assessee's contention, noting that the assessee had sufficient own funds to cover the investments. The Tribunal also observed that the AO did not record objective satisfaction before invoking Rule 8D, as required by the decision in "Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT" (2010). Consequently, the Tribunal directed the AO to delete the disallowance made under section 14A.

2. Taxability of Transfer of Planet M Division under Section 50B of the Income Tax Act:
The assessee transferred the Planet M division to Planet M Retail Ltd. for a consideration of ?125.95 crores, comprising equity shares and 6% redeemable unsecured debentures. The AO treated this transfer as a slump sale under section 50B and taxed the resulting capital gain of ?84,26,04,286/-. The CIT(A) upheld the AO's decision.

The assessee argued that the transaction was an exchange, not a sale, and thus did not fall under the definition of "slump sale" as per section 2(42C). The assessee relied on the Supreme Court decision in "CIT vs. B.C. Srinivasa Setty" (1981), which held that when computation provisions cannot apply, the charging provisions of section 45 fail.

The Tribunal agreed with the assessee, noting that the consideration was in the form of shares and debentures, making it an exchange rather than a sale. The Tribunal cited the Supreme Court decision in "CIT vs. Motor & General Stores (P) Ltd." (1967) and the Bombay High Court decision in "CIT vs. Bharat Bijlee Ltd." (2014), which supported the assessee's position. The Tribunal concluded that the provisions of section 50B were not applicable and directed the AO to exclude the capital gain from the computation of income.

3. Disallowance of Software Expenses as Capital Expenditure:
The AO disallowed ?50,64,781/- out of the total software expenses of ?74,73,026/- incurred by the assessee, treating it as capital expenditure. The CIT(A) allowed the appeal of the assessee, following the decision for the assessment year 2007-08, which had attained finality.

The Tribunal upheld the CIT(A)'s decision, noting that the expenses were of a revenue nature and the issue had been correctly decided in the earlier assessment year. The Tribunal dismissed the Revenue's appeal on this issue.

Conclusion:
The Tribunal allowed the assessee's appeal regarding the disallowance under section 14A and the taxability of the transfer of Planet M division, directing the AO to delete the disallowance and exclude the capital gain from the computation of income. The Tribunal dismissed the Revenue's appeal on the disallowance of software expenses, upholding the CIT(A)'s decision that the expenses were of a revenue nature.

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