2020 (3) TMI 447 - AT - Income Tax

Disallowance u/s 14A r.w. Rule 8D(2)(iii) - assessee made suo-motu disallowance - HELD THAT - Assessee demonstrated that own interest free funds of the assessee were sufficient to cover the investment made. The CIT(A) deleted the disallowance made u/r 8D(2)(ii) by following the decision of Hon ble Jurisdictional High Court in the case of CIT vs. HDFC Bank Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT . The Revenue in ground No.1 of the appeal has impugned the findings of CIT(A) in deleting the disallowance made un Rule 8D(2)(ii) in respect of interest expenditure. No material has been placed on record by the Revenue to controvert the findings of CIT(A) . We do not find any infirmity in the findings of CIT(A) in deleting the disallowance made under Rule 8D(2)(ii). The ground No.1 raised by the Revenue is devoid of any merit. The Special Bench of the Tribunal in the case of M/s. Vireet Investment Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI has held that while computing disallowance under section 14A r.w. Rule 8D(2)(iii) only those investments that yield exempt income should be considered for computing average value of investments The second contention of the assessee that disallowance under section 14A of the Act should be restricted to the extent of exempt income earned is supported by the judgmen of PCIT vs. State Bank of Patiala 2018 (11) TMI 1565 - SC ORDER . Thus, in the light of aforesaid decisions we deem it fit and proper to restore this issue to the file of Assessing Officer for the limited purpose of recomputation of disallowance under Rule 8D(2)(iii) in line with the principles laid down in the case of PCIT vs. State Bank of Patiala and ACIT vs. Vireet Investment Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI Disallowance of mark to market loss - provision for mark to market loss is an unascertained liability, it is a provision for loss, which may or may not occur at the time of settlement of the contract at future date and hence, disallowed the same in entirety - HELD THAT - Co-ordinate Bench of the Tribunal in assessee s own case for assessment year 2011- 12 2017 (5) TMI 1719 - ITAT MUMBAI has considered this issue and has held that mark to market loss claimed by the assessee is allowable. We find no infirmity in the impugned order in accepting assessee s claim in line with the order of Tribunal . Respectfully following the decision of Tribunal in assessee s own case, we dismiss Ground No.2 of the appeal by the Revenue. Disallowance of discount on buy back of debentures - Assessee has treated the receipts on buy back of debentures as capital in nature - AO held that the receipts are on revenue account and thus, made addition - CIT(A) reversed the findings of AO and upheld the assessee s contention that receipts on redemption of debenture are capital in nature - HELD THAT - We concur with the findings of CIT(A) that the amount received by the assessee on redumption of debentures is not a source of income to the assessee. The buyback of debentures at a lower a mount simply reduces the loan liability of assessee , which is capital in nature. It is not a trading liability and hence, any reduction in such liability cannot be on revenue account. Thus, in view of the facts of case and decision discussed above, we find no reason to interfere with the reasoned findings of CIT(A) on this issue.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961 read with Rule 8D(2)(iii) of the Income Tax Rules, 1962.
2. Disallowance of mark to market loss on index options.
3. Disallowance on account of discount on buyback of debentures.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act, 1961 read with Rule 8D(2)(iii) of the Income Tax Rules, 1962:
The assessee contested the disallowance made under Section 14A of the Act r.w. Rule 8D(2)(iii). The assessee earned a dividend income of ?3,83,579/- and made a suo-motu disallowance of ?11,90,846/-. However, the Assessing Officer computed a disallowance of ?7,04,83,104/-. The CIT(A) deleted the disallowance on interest expenditure by following precedents from the Hon'ble Bombay High Court. The Tribunal upheld the CIT(A)'s decision, noting that the disallowance under Section 14A cannot exceed the exempt income earned and only investments yielding exempt income should be considered. The Tribunal restored the issue to the Assessing Officer for recomputation in line with the principles laid down in relevant case laws.

2. Disallowance of mark to market loss on index options:
The Revenue challenged the CIT(A)'s deletion of a disallowance of ?20,52,47,434/- for mark to market loss on index options, arguing that such loss is notional and contingent. The Tribunal noted that this issue had been previously decided in favor of the assessee in its own case for the preceding assessment year, where it was held that the mark to market loss claimed by the assessee is allowable. Consequently, the Tribunal found no infirmity in the CIT(A)'s order and dismissed this ground of the Revenue's appeal.

3. Disallowance on account of discount on buyback of debentures:
The Revenue also contested the CIT(A)'s deletion of a disallowance of ?18,97,915/- related to the discount on buyback of debentures. The Assessing Officer had treated the difference between the face value and the buyback price as business income, whereas the CIT(A) considered it capital in nature. The Tribunal upheld the CIT(A)'s decision, referencing the Karnataka High Court's ruling in CIT vs. Industrial Credit & Development Syndicate Ltd., which established that such receipts are capital in nature and not income. The Tribunal found no reason to interfere with the CIT(A)'s conclusion that the amount received on redemption of debentures reduces the loan liability, which is capital in nature.

Conclusion:
The Tribunal partly allowed the assessee's appeal for statistical purposes and dismissed the Revenue's appeal, thereby upholding the CIT(A)'s findings on all contested issues. The order was pronounced in the open court on February 17, 2020.