2014 (12) TMI 1384 - AT - Income Tax

Disallowance u/s 14A - As per DR assessee to prove that a particular item of expenditure was incurred for earning taxable income and hence should not be disallowed u/s 14A - HELD THAT - The assessee claims that the expenditure on interest is incurred for the purpose of earning interest income but no evidence is lead by the assessee to prove this claim. Similarly on the issue of other expenses no evidence is lead to demonstrate that a particular expense cannot be said to have been incurred in relation to earning the income which is not part of total income. Under these circumstances we are unable to accept the plea of the assessee. Assessee argued that the AO has not recorded satisfaction that the computation of disallowance u/s 14A by the assessee is wrong. We find that the satisfaction is discernible from para 2 of the assessment order where the AO has not agreed with the manner in which the assessee applied Rule 8D and has computed the disallowance in his own way. This was after considering the detailed reply given by the assessee on 28.12.2011. Hence these arguments of the Ld.Counsel is dismissed as devoid of merit. CIT(A) has restricted the net disallowance u/s 14A. We are of the view that the disallowance has to be recomputed under Rule 8D (2)(ii). Thus for this limited purpose we set aside the matter to the file of the AO for computing the disallowance. Disallowance of claim of short term capital loss - assessee has submitted that right to obtain shares is an asset and forfeiture of the same is extinguishing of a right and hence covered u/s 2(47)(ii) of the Act - HELD THAT - As decided in SHRI CHAND RATAN BAGRI 2010 (1) TMI 123 - DELHI HIGH COURT held that forfeiture of the convertible warrant amounted to a transfer within the meaning of s.2(47) - A share in a company is nothing but a share in the ownership of the company. While the right of the assessee to share in the ownership of the company Stands extinguished on account of the forfeiture the company with all its assets continues to exist. The forfeiture only results in one less shareholder. It is not as if the asset in which a share was being claimed was also extinguished - Decided against revenue.

Summary

Issues Involved:
1. Disallowance of expenditure under Section 14A of the Income Tax Act.
2. Disallowance of short-term capital loss due to forfeiture of share warrants.

Issue-wise Detailed Analysis:

1. Disallowance of expenditure under Section 14A of the Income Tax Act:

The assessee filed a return of income declaring 'nil' income and claimed exemption under Section 10(34) of the Act for dividend income of Rs. 2,76,64,986/-. The assessee had suo moto disallowed Rs. 7,84,976/- under Section 14A read with Rule 8D. The Assessing Officer (AO) computed the disallowance under Rule 8D at Rs. 71,40,115/-, leading to a total taxable income of Rs. 4,93,79,371/-. The assessee appealed, arguing that the AO did not record satisfaction as to why the method adopted by the assessee was wrong. The AO's satisfaction was deemed discernible from the assessment order, where the AO disagreed with the assessee's computation and applied Rule 8D independently.

The Tribunal observed that the assessee's income composition showed significant dividend income. The expenditure incurred was Rs. 62,33,964/-, with the assessee claiming that the interest expenditure was for earning interest income of Rs. 43.5 lakhs. However, no evidence was provided to substantiate this claim. The Tribunal found that the assessee failed to demonstrate that certain expenses were not incurred in relation to earning exempt income. Consequently, the Tribunal upheld the AO's approach but remanded the matter to the AO for recomputing the disallowance under Rule 8D(2)(ii).

2. Disallowance of short-term capital loss due to forfeiture of share warrants:

The assessee claimed a short-term capital loss of Rs. 4,18,50,000/- due to the forfeiture of warrants convertible into equity shares. The AO rejected this claim, stating that the amount paid for the application could not be considered a capital asset, and thus, its forfeiture could not be a short-term capital loss. The First Appellate Authority partially granted relief, but the assessee further appealed.

The Tribunal referred to the Delhi High Court's judgment in CIT vs. Chand Ratan Bagri, which held that the forfeiture of convertible warrants resulting in the extinguishment of the right to obtain shares amounted to a transfer under Section 2(47)(ii) of the Act. Following this precedent, the Tribunal allowed the assessee's claim for short-term capital loss due to the forfeiture of share warrants.

Conclusion:

The Tribunal allowed the appeal in part. The disallowance under Section 14A was remanded to the AO for recomputation, while the claim for short-term capital loss due to the forfeiture of share warrants was allowed. The order was pronounced in the Open Court on 10th December 2014.