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2020 (7) TMI 465 - AT - Income Tax


Issues Involved:
1. Disallowance under Section 14A read with Rule 8D.
2. Non-consideration of interest-free funds in relation to investments.
3. Incorrect taxation of Long-Term Capital Gains (LTCG) on Securities Transaction Tax (STT) paid shares.
4. Failure of the CIT(A) to address specific grounds raised by the assessee.

Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:
The assessee, a company engaged in NBFC activities, declared a total income of ?93,19,810/- and claimed an exempt dividend income of ?17,54,046/-. The AO, not satisfied with the assessee's suomoto disallowance of ?86,351/- towards administrative expenses, determined a disallowance of ?12,35,075/- under Section 14A read with Rule 8D. CIT(A) upheld this disallowance. The Tribunal noted that the AO did not record any satisfaction regarding the accounts of the assessee, which is a prerequisite for making a disallowance under Section 14A. Referring to the Supreme Court's decision in Maxopp Investment Ltd. vs. CIT, it was held that without such satisfaction, no disallowance can be made. Consequently, the Tribunal allowed the assessee's appeal on this ground.

2. Non-consideration of Interest-Free Funds in Relation to Investments:
The assessee argued that it had more than sufficient interest-free funds to cover its investments. The Tribunal agreed, citing the balance sheet which showed shareholder funds exceeding the investments at both the beginning and end of the year. The Tribunal referred to the decisions of the Bombay High Court in HDFC Bank Limited and the Supreme Court in Reliance Industries Limited, which held that no disallowance of interest expenses can be made when interest-free funds are sufficient to cover the investments. Therefore, the Tribunal concluded that no disallowance of interest under Rule 8D(2)(ii) was warranted.

3. Incorrect Taxation of LTCG on STT Paid Shares:
The assessee contended that LTCG of ?70,97,681/- on STT paid shares, which is exempt under Section 10(38) of the Act, was wrongly taxed by the AO without any discussion in the assessment order. The Tribunal found merit in the assessee's argument and noted that the CIT(A) had not adjudicated this specific ground. The Tribunal restored the issue to the AO for fresh adjudication, directing the AO to grant the assessee an opportunity to substantiate its claim.

4. Failure of the CIT(A) to Address Specific Grounds Raised by the Assessee:
The Tribunal observed that the CIT(A) failed to address the assessee's specific ground regarding the addition of ?70,97,681/- under the head "income from capital gain." The Tribunal restored this issue to the AO for fresh adjudication, ensuring the assessee is given an opportunity to present its case.

Conclusion:
The Tribunal allowed the assessee's appeals partly for statistical purposes, directing the AO to re-examine the issues related to LTCG and ensuring compliance with the principles laid down by higher judicial authorities regarding disallowance under Section 14A. The Tribunal emphasized the necessity of recording satisfaction by the AO before making disallowances and acknowledged the sufficiency of interest-free funds to cover the investments.

 

 

 

 

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