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TMI Blog2015 (6) TMI 529X X X X Extracts X X X X X X X X Extracts X X X X ..... essee. Disallowance of expenses u/s. 14A made after applying Rule 8D - Held that:- On perusal of the impugned orders, we find that the assessee had made the claim before the Assessing Officer that no expenditure can be said to be attributable in relation to the earning of dividend income. Once such a claim has been made, the Assessing Officer was required under the statute to satisfy himself having regard to the accounts of the assessee about the correctness of the claim of the assessee. There has to be some finding of the Assessing Officer that the assessee s claim is prima facie not tenable. The assessee has pointed out that entire investments have been made out of its own capital and internal accruals, therefore, no expenses can be said to be attributable. This claim of the assessee required examination by the AO having regard to the accounts of the assessee and the nature of expenditure which can be said to be attributable for earning of the exempt income. The AO while deciding this issue may consider the decision of Hon ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd. [ 2010 (8) TMI 77 - BOMBAY HIGH COURT ]. - Decided in favour of assessee for statistical purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee is a pharmaceutical company, engaged in manufacturing and sale of pharmaceuticals, formulations, dietetic specialities and animal husbandry. The assessee in the computation of income had shown Long term capital loss on sale of shares amounting to ₹ 57,32,835/- and loss on sale of mutual funds units amounting to ₹ 2,61,655/-. The said Long term capital loss has been set off against the Long term capital gains of ₹ 94,12,00,000/- arising from sale of land at Chennai. The Assessing Officer held that the losses claimed cannot be allowed since the income from Long term capital gain on sale of shares and mutual funds are exempt u/s. 10(38). That apart, of the Long term capital loss in respect of shares where securities transaction tax has been deducted, would have been exempt from Long term capital gain had there been profits, therefore, Long term capital loss from sale of shares cannot be set off against the Long term capital gain arising out of the sale of land. 4. The learned CIT(A) too has confirmed the action of the Assessing Officer on the ground that exempt profit or loss construes separate species of income or loss and such exempt species of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the operation of the Act. The losses suffered by the assessee in respect of livestock, breeding were held to be admissible for deduction and were allowed to be set off against other business income. He drew our attention to the various observations and findings of the Hon ble High Court and also the reliance placed by their Lordships to various decisions of Hon ble Supreme Court, especially in the case of CIT vs. Karamchand Premchand Ltd. (1960) 40 ITR 106. He also referred to various observations of Hon ble Supreme Court from the said decision. Thus, he submitted that the losses on account of sale of shares should be allowed to be set off against Long term capital gain on sale of land. In his fairness, he also pointed out before us that there is a decision of Hon ble Gujarat High Court in the case of Kishorebhai Bhikhabhai Virani vs. Asst. CIT (2014) 367 ITR 261 (Guj), which has decided this issue against the assessee. However, he submitted that in the said decision, the decision of Hon ble Calcutta High Court has not been referred at all. Therefore, this decision does not have precedence value as compared to the Calcutta High Court decision, which is based on Supreme Court d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of capital gain. 8. From the conjoint reading and plain understanding of all these sections it can be seen that, firstly, shares in the company are treated as capital asset and no exception has been carved out in section 2(14), for excluding the equity shares and unit of equity oriented funds that they are not treated as capital asset. Secondly, any gains arising from transfer of Long term capital asset is treated as capital gain which is chargeable u/s. 45; thirdly, section 47 does not enlist any such exception that transfer of long term equity shares/funds are not treated as transfer for the purpose of section 45 and section 48 provides for computation of capital gain, which is arrived at after deducting cost of acquisition i.e. cost of any improvement and expenditure incurred in connection with transfer of capital asset, even for arriving of gain in transfer of equity shares; lastly, section 70 71 elaborates the mechanism for set off of capital gain. Nowhere, any exception has been made/ carved out with regard to Long term capital gain arising on sale of equity shares. The whole genre of income under the head capital gain on transfer of shares is a source, which is taxable unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance, if the assessee has income from Short term capital gain on sale of shares; Long term capital gain on debt funds; and Long term capital gain from sale of equity shares, then while computing the taxable income, the whole of income would be computed in the total income and only the portion of Long term capital gain on sale of equity shares would be removed from the taxable income as the same is exempt u/s 10(38). This precise issue had come up for consideration before the Hon ble Calcutta High Court in Royal Turf Club, wherein the Hon ble High Court observed that under the Income tax Act 1961 there are certain incomes which do not enter into the computation of the total income at all. In computing the total income of a resident assessee, certain incomes are not included under s.10 of the Act. It depends on the particular case; where the Act is made inapplicable to income from a certain source under the scheme of the Act, the profit and loss resulting from such a source will not enter into the computation at all. But there are other sources which, for certain economic reasons, are not included or excluded by the will of the Legislature. In such a case, one must look to the specif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, the profit and loss resulting from such a source do not enter into the computation at all. But there are other sources which for certain economic reasons are not included or excluded by the will of the Legislature. In such a case we must look to the specific exclusion that has been made. The question is in this case whether s. 10(27) is a source which does not enter into the computation at all or is a source the income in respect of which is excluded in the computation of total income. How this question will have to be viewed, has been looked into by the Supreme Court in several decisions to some of which our attention was drawn. After discussing the various decisions of the Hon ble Supreme Court specifically the decision of in the case of Karamchand Premchand (supra), the Hon ble High Court came to the following conclusion: cl.(27) of s.10 excludes in express terms only any income derived from a business of live-stock breeding or poultry or dairy farming. It does not exclude the business of livestock breeding or poultry or dairy farming from the operation of the Act. Therefore, the losses suffered by the assessee in the broodmares account and in the pig account were admissib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ff against the profits and gains, if any, of the subsequent year. Set off implies that the tax is exigible and the assessee wants to adjust the loss against profit to reduce the tax demand. It follows that if such setoff is not permissible or possible owing to the income or profits of the subsequent year being from a non-taxable source, there would be no point in allowing the loss to be carried forward . Conversely, if the loss arising in the previous year was under a head not chargeable to tax, it could not be allowed to be carried forward and absorbed against income in a subsequent year from a taxable source. The ratio and the principle laid down by the Hon ble Apex Court would not apply here in this case, because the concept of income includes loss will apply only when entire source is exempt or is not liable to tax and not in the case where only one of the income falling within such source is treated as exempt. The Hon ble Apex Court on the other hand, itself has stated that if loss from the source or head of income is not liable for tax or congenitally exempt from income tax, then it need not be computed or shown in the return and Assessing Officer also need not assess it. Thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of Hon ble Supreme Court and have reached to a conclusion as discussed above, and, therefore, we are respectfully following the ratio of the decision of the Calcutta High Court. Further the said decision have not been referred or distinguished by the Hon ble Gujarat High Court. Accordingly, we allow the assessee s ground no.1 and direct the Assessing Officer to allow the claim of set off of Long term capital loss on sale of shares against the Long term capital gain arising on sale of land. 11. The next ground relates to disallowance of expenses of ₹ 39,80,215/- u/s. 14A which has been made after applying Rule 8D. During the year the assessee had shown dividend income of ₹ 5,15,28,242/- which was claimed as exempt u/s. 10(34). In response to the show cause notice, the assessee submitted that investments have been made out of its own capital and internal accruals and, therefore, no disallowance u/s. 14A is called for. However, the learned Assessing Officer without examining the assessee s claim and the accounts of the assessee, proceeded to apply Rule 8D thereby making the disallowance of ₹ 39,80,215/- even though such Rule has been made applicable w.e.f. 01.04.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icable in this year. Otherwise also he submitted that once the statute is provided the determination of amount of expenditure in terms of subsection (2), then even if Rule 8D has been brought w.e.f. 24.03.2008, then it has to be implied that same rule is applicable in this year also and, accordingly, disallowance can be determined in accordance with Rule 8D. 14. We have heard the rival submissions and also perused the material placed on record. On perusal of the impugned orders, we find that the assessee had made the claim before the Assessing Officer that no expenditure can be said to be attributable in relation to the earning of dividend income. Once such a claim has been made, the Assessing Officer was required under the statute to satisfy himself having regard to the accounts of the assessee about the correctness of the claim of the assessee. This has been specifically provided under sub section (2) which provides for determination and quantification of the amount of disallowance of expenditure under 14A. If such a condition mentioned in subsection (2) of section 14A is not fulfilled then, needless to say, that the Assessing Officer cannot proceed to disallow the expenditure. T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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