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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.
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