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2018 (5) TMI 58 - AT - Income TaxDisallowance u/s 14A r.w.s. 8D - Held that - In terms of section 14A(2) before invoking Rule 8D of the Rules, the Assessing Officer is required to dissatisfied with a claim of the assessee and then only he can resort to compute the disallowance according to the method prescribed. CIT(A) has examined the claim of use of own funds of the assessee in investments and concluded that no disallowance could be made under rule 8D(2)(i) of the Rules in absence of utilisation of borrowed funds for investment. In our opinion, the CIT(A) had duly verified that no borrowed funds have been utilised for investment in shares yielding exempt income and Ld. DR could not point out any error in the verification and finding of fact recorded by the Ld. CIT(A). In view of the above, no disallowance could be made for expenditure directly relatable to the investment in terms of Rule 8D(2)(i) of the Rules. The exempt income is only ₹ 3,30,091/- and, therefore, the disallowance under section 14A of the Act, is restricted to the extent of ₹ 3,30,091/-. Accordingly, the ground of the appeal of the Revenue is partly allowed. Protective addition - Capital addition - Held that - CIT(A) has recorded that addition made on this issue in assessment year 2006-07 has been upheld by the 1st appellate authority and the assessee has deposited the relevant taxes during financial year 2008-09 and 2009-10. CIT(A) has concluded that the capital gain has been assessed in assessment year 2006-07 in accordance with the provisions of section 45 of the Act. In our opinion, the order of the Ld. CIT(A) on the issue-in-dispute is well reasoned and we do not find any infirmity in the same. Accordingly, the ground No. 2 of the appeal of the Revenue is dismissed.
Issues Involved:
1. Deletion of disallowance under Section 14A read with Rule 8D of the Income-tax Rules. 2. Deletion of protective addition on account of capital gains. 3. General ground for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal. Issue-Wise Detailed Analysis: 1. Deletion of Disallowance under Section 14A read with Rule 8D of the Income-tax Rules: The Revenue challenged the deletion of ?1,26,91,885/- disallowed under Section 14A read with Rule 8D of the Income-tax Rules. The assessee had claimed exempt income of ?3,30,091/- but did not allocate any expenditure towards earning this exempt income. The Assessing Officer (AO) invoked Rule 8D, concluding that interest-bearing funds were used for acquiring shares yielding exempt income. The AO issued a show-cause notice and subsequently disallowed ?1,26,91,885/- under Rule 8D as follows: - Direct expenditure related to exempt income: ?16,64,176/- - Administrative expenses at 0.5% of the average value of investment: ?1,10,27,709/- Before the CIT(A), the assessee argued that the total expenditure debited was only ?24,54,315/- and that investments were made from own funds, not borrowed funds. The CIT(A) accepted these contentions and deleted the disallowance. Upon appeal, the Tribunal noted that the AO had recorded dissatisfaction with the assessee's claim of no expenditure for earning exempt income before invoking Rule 8D. However, the CIT(A) verified that no borrowed funds were used for the investments, and the disallowance under Rule 8D(2)(i) was not warranted. The Tribunal also noted a calculation error under Rule 8D(2)(iii) and restricted the disallowance to the exempt income of ?3,30,091/-, following the Delhi High Court's decision in Joint Investment Company P. Ltd. Thus, the ground was partly allowed. 2. Deletion of Protective Addition on Account of Capital Gains: The Revenue contested the deletion of a protective addition of ?32,37,20,998/-. The issue arose from the sale of shares in Escorts Heart Institute and Research Centre Ltd. (EHIRCL) during the financial year 2005-06. The assessee did not offer capital gains for tax in AY 2006-07, arguing that the sale was under dispute in the Delhi High Court. The AO, however, taxed the capital gains in AY 2006-07. During the year under consideration, the dispute was settled, and the assessee received the sale proceeds. The AO made a protective addition, arguing that the capital gains should be taxed in the year of settlement. The CIT(A) followed the decision in the case of Escorts Ltd. and held that the transfer was complete in AY 2006-07, deleting the addition. The Tribunal upheld the CIT(A)'s decision, noting that the capital gains were assessed in AY 2006-07, and the assessee had paid the relevant taxes. The Tribunal found no infirmity in the CIT(A)'s well-reasoned order and dismissed the Revenue's ground. 3. General Ground for Reserving the Right to Amend, Modify, Alter, Add or Forego Any Ground(s) of Appeal: The Tribunal dismissed this ground as infructuous, as it was general in nature and did not require adjudication. Conclusion: The appeal of the Revenue was partly allowed. The Tribunal restricted the disallowance under Section 14A to the extent of the exempt income and upheld the deletion of the protective addition on account of capital gains. The general ground was dismissed as infructuous. The decision was pronounced in the open court on 27th April 2018.
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