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2022 (2) TMI 31 - AT - Income TaxDisallowance u/s 14A r.w Rule 8D (2)(i) - Suo moto disallowance made by assessee - as per assessee no objective satisfaction has been recorded by Ld. AO before proceeding to compute disallowance as per Rule 8D which is against the statutory mandate - HELD THAT - We find that Ld. AO has failed to record any objective satisfaction as to why the assessee s stand was not acceptable having regards to the accounts of the assessee as per the mandate of Sec.14A. This jurisdictional requirement was not satisfied by Ld. AO in the present case and Ld.AO straightway proceeded to compute disallowance as per Rule 8D. The application of Rule 8D, in our considered opinion, was not mechanical or automatic. AO has mechanically applied the provisions of Rule 8D while making the aforesaid disallowance without establishing any nexus of expenditure claimed by the assessee with that of exempt income earned during the year. Nowhere a finding has been recorded by Ld. AO as to why the suo-moto disallowance as offered by the assessee was not acceptable. In the absence of such recorded satisfaction, the additional disallowance as made in assessment order could not be sustained in the eyes of law. Accordingly, we are inclined to delete the disallowance as made by Ld. AO while computing income under normal provisions as well as while computing Book Profits u/s 115JB. This ground stand allowed Disallowance of Short-Term Capital Loss on forfeiture of Share Warrants - AO rejected the assessee s claim on the ground that there was no transfer of capital asset - HELD THAT - The definition of capital asset is wide enough to cover property of any king held by the assessee. The right acquired by the assessee through share warrants, in our considered opinion, was a valuable right and covered within the meaning of capital asset as defined in Sec. 2(14). Proceeding further, transfer as defined in Sec. 2(47) would include sale, exchange or relinquishment of the asset or extinguishment of any rights therein. Clearly, upon forfeiture of share warrants, the assessee s right in acquiring the warrants as well as resultant shares was extinguished and the assessee was deprived of a right in capital asset. Thus, the amount lost on forfeiture of share warrant, in our considered opinion, would give rise to capital loss in the hands of the assessee. It would be wholly immaterial as to how the recipient had accounted for such income in its computation of income. In the decision of CIT V/s Chand Ratan Bagri 2010 (1) TMI 123 - DELHI HIGH COURT it was held that the forfeiture of convertible warrant would result into extinguishment of the right of the assessee to obtain a share. A share in a company is nothing but share in the ownership of the company. While the right of the assessee to share in the ownership of the company stand extinguished on account of forfeiture, the company, with all its assets, continues to exist. The forfeiture only results in one less shareholder. Therefore, the loss thus suffered by the assessee would be a capital loss. Thus we would hold that loss suffered by the assessee on account of forfeiture of share warrant would be deductible Short-Term Capital Loss. The observation of Ld. CIT(A) that such transactions are to be treated as sham transaction are mere allegations and bereft of any merits. No cogent material to substantiate this allegation is on record. Accordingly, Ld. AO is directed to allow the claim of the assessee.
Issues Involved:
1. Disallowance under Section 14A read with Rule 8D. 2. Disallowance of Short-Term Capital Loss on forfeiture of share warrants. Detailed Analysis: 1. Disallowance under Section 14A read with Rule 8D: The assessee, a corporate entity engaged in dealing with shares and stocks, claimed that its investments in Shriram Group entities were made out of commercial expediency. The assessee earned exempt dividend income of ?334.37 Lacs and offered a suo-moto disallowance of ?51,220/- under Section 14A. However, the Assessing Officer (AO) rejected this and made a disallowance of ?135.48 Lacs under Rule 8D(2)(i), including advisory fees, lead management fees, and escrow management fees. An additional disallowance of ?6.84 Lacs was made under Rule 8D(2)(iii). During appellate proceedings, the assessee argued that the disallowance was not warranted as the investments were related to its business of investment promotion. The CIT(A), relying on the Supreme Court's decision in Maxopp Investments Ltd., upheld the AO’s action, stating that disallowance applies even to strategic investments in sister concerns. The Tribunal noted that the AO failed to record an objective satisfaction regarding the disallowance, as mandated by Section 14A r.w.r. 8D. The Supreme Court in Godrej & Boyce Manufacturing Co. Ltd. v/s DCIT emphasized that the application of Rule 8D is not automatic and requires the AO's satisfaction regarding the correctness of the assessee's claim. The Tribunal found that the AO mechanically applied Rule 8D without establishing a nexus between the expenditure and the exempt income. Consequently, the Tribunal deleted the disallowance of ?142.32 Lacs made by the AO. 2. Disallowance of Short-Term Capital Loss on forfeiture of share warrants: The assessee was issued 35 Lacs share warrants by Shriram City Union Finance Ltd. (SCUFL), paying ?1400 Lacs upon allotment. The warrants were forfeited as the assessee could not pay the remaining amount, leading to a claimed Short-Term Capital Loss. The AO rejected the claim, stating there was no transfer of a capital asset, citing the decision in CIT v/s R. Chidambaranatha Mudaliar. The assessee relied on the Delhi High Court's decision in CIT v/s Chand Ratan Bagri and the Karnataka High Court's decision in DCIT v/s BPL Sanyo Finance Limited, which recognized forfeiture of convertible warrants as deductible Short-Term Capital Loss. The CIT(A) dismissed this, alleging the transaction was not at arm's length and was a sham. The Tribunal found that the right acquired through share warrants constituted a capital asset under Section 2(14). The forfeiture of these warrants led to the extinguishment of the assessee’s rights, thus resulting in a capital loss. The Tribunal referenced the Bombay High Court's decision in Pr. CIT v/s Kanaiyalal M. Sheth, which supported the assessee's claim. The Tribunal held that the loss on forfeiture of share warrants was a deductible Short-Term Capital Loss and directed the AO to allow the claim. Conclusion: The appeal was allowed, with the Tribunal deleting the disallowance under Section 14A and recognizing the Short-Term Capital Loss on forfeiture of share warrants. The order was pronounced on 17th January 2022.
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