TMI Blog2014 (9) TMI 423X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions of the series have been accepted by the Revenue as genuine business transactions - in the year of redemption of the 2% RCPS, the transactions cannot be presumed to be sham or bogus merely because it has resulted into long term capital loss which may be adjusted against the long term capital gain, if any, arising in future to the assessee - the AO is directed to accept long term capital loss and carry forward the same – Decided in favour of assessee. Exemption u/s 14A disallowed – Held that:- Rule 8D is applicable for and from AY 2008-09 and not for earlier years – relying upon GODREJ AND BOYCE MFG. CO. LTD. Versus DEPUTY COMMISSIONER OF INCOME-TAX AND ANOTHER [2010 (8) TMI 77 - BOMBAY HIGH COURT] - there is no infirmity in the order of CIT(A) holding that Rule 8D was not applicable - the AO is required to examine the assessee's claim with regard to incurring of no expenditure or with regard to the amount of expenditure claimed to have been incurred by the assessee for earning of exempt income - Such expenditure is to be determined in accordance with such method as may be prescribed - the assessee has worked out the disallowance u/s 14A - The AO did not record any satisfac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f preference shares into equity shares became unviable as it was legally not permissible. Therefore, JPL proposed modification in the terms of 0% OCPS by which the OCPS were converted into 2% Redeemable Cumulative Preference Shares (RCPS). That out of 6,60,00,000 OCPS allotted to the assessee, 1,60,00,000 OCPS were sold on 9th March, 2002 at the rate of ₹ 7/- per OCPS. That loss arising from such sale was claimed in the return of income for AY 2002-03 and was accepted by the Revenue. That during the accounting year relevant to the assessment year under consideration, the assessee redeemed remaining 5,00,00,000 RCPS and realized ₹ 50 crores. That after applying the indexation, the assessee worked out the long term capital loss of ₹ 41,81,03,448/-. Since there was no long term capital gain which could be adjusted against the said long term capital loss, the assessee claimed for the carry forward of long term capital loss of ₹ 41,81,03,448/-. However, the Assessing Officer disallowed the loss by alleging that the whole transaction was a sham transaction which was entered into with the sole purpose of transferring funds from one company to another and in the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue. Thereafter, OCPS was converted into RCPS which was also accepted by the Revenue. During the year under consideration, there was only redemption of such RCPS. Therefore, by no stretch of imagination, such redemption of RCPS can be said to be device so as to avoid the payment of tax. He, therefore, submitted that the order of the Assessing Officer is without any basis and justification. The same should be reversed and the Assessing Officer should be directed to carry forward the long term capital loss. In support of his contention, he relied upon the following decisions wherein the decision of Hon'ble Apex Court in the case of McDowell and Co.Ltd. has been considered :- (i) CWT-II, Ahmedabad Vs. Arvind Narottam [1988] 173 ITR 479 (SC). (ii) Union of India and Another Vs. Azadi Bachao Andolan and Another [2003] 263 ITR 706 (SC). (iii) CIT Vs. Walfort Share and Stock Brokers P.Ltd. [2010] 326 ITR 1 . (iv) Vodafone International Holdings B.V. Vs. Union of India and Another [2012] 341 ITR 1 (SC). 5. Learned DR, on the other hand, relied upon the orders of authorities below and she stated that it is a clear case where the transaction was between two rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ward because such loss was not adjusted against any other capital gain during the year under consideration. The Assessing Officer disallowed the assessee's claim of long term capital loss and its carry forward with the following finding:- The information u/s 133(6) was also called from M/s Jindal Polyfilms Ltd. on this issue. As per the details gathered it transpires that the assessee during the FY 00-01 the co. purchased 6,60,00,000 shares (OCPS) of M/s Jindal Polyfilms Ltd. at ₹ 10/- each at a premium of ₹ 5/- per share aggregating to ₹ 99 cr. against which ₹ 66 cr. was paid on a/c of OCP share capital and ₹ 33 cr. on a/c of premium. With effect from 03.03.04, these 0% OCPS were changed and renamed to 2% RCPS. During the FY 05-06, these 2% RCPS were redeemed by the company at face value of ₹ 10/- each. The share premium amount was forfeited which resulted in loss and after indexation, a sum of ₹ 418103448/- has been claimed as long term capital loss to be carried forward. During the course of asstt. proceedings, the assessee was specifically asked to justify this loss. Query was also given to M/s Jindal Polyfilms Ltd. to provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The loan was converted into OCPS on 30th October, 2000 and in the assessment of the assessee as well as JPL for AY 2001-02, such conversion of loan into OCPS was not held to be bogus or sham transaction. Part of the OCPS was sold by the assessee on 9th March, 2002 and in the return of income for AY 2002-03, loss arising from such sale was claimed. In this year also, the Revenue has not held the transaction of conversion of loan into OCPS and the sale of OCPS as bogus or sham transaction. On 24.01.2004, 0% OCPS was converted into 2% RCPS and in the assessment for 2004- 05, the transaction of conversion of 0% OCPS to 2% RCPS was not held to be not genuine or bogus. During the accounting year relevant to the assessment year under consideration, the assessee received the sum of ₹ 50 crores on redemption of RCPS and suddenly, the Assessing Officer held the whole transaction as a sham transaction which is completely bogus. We are unable to accept this contention of the Revenue because there are a series of transactions in a number of years and in all the earlier years in the case of the assessee as well JPL, the genuineness of the transactions was accepted. In the year under consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax and whether the transaction is such that the judicial process may accord its approval to it. It is neither fair nor desirable to expect the Legislature to intervene and take care of every device and scheme to avoid taxation. It is up to the court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and to expose the device for what they are really are and to refuse to give judicial benediction. 9. From the above, it is evident that the above decision would be applicable only when the assessee has indulged into a colorable device to avoid the tax. In the case under appeal before us, there is no colorable device with the intention of tax avoidance. On the other hand, it is a case of a transaction of a loan which was given by the assessee to its associate concern long back and since the associate concern was not able to make the payment of the loan, the same was restructured in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lted into long term capital loss which may be adjusted against the long term capital gain, if any, arising in future to the assessee. In view of the above, respectfully following the decisions of Hon'ble Supreme Court in the case of Arvind Narottam (supra), Azadi Bachao Andolan and Another (supra) and Walfort Share and Stock Brokers P.Ltd. (supra), we direct the Assessing Officer to accept long term capital loss of ₹ 41,81,03,448/- and carry forward the same in accordance with law. ITA No.730/Del/2011 Assessee's appeal for AY 2007-08 :- 10. The only ground raised in this appeal by the assessee reads as under:- That the Commissioner of Income-tax (Appeals) erred on facts and in law in disallowing set off of brought forward long term capital loss to the extent of ₹ 56,12,985, arising in respect of redemption of preference shares of Jindal Polyfilms Limited in the assessment year 2006-07, against long term capital gains (without payment of Securities Transaction Tax) earned during the relevant previous year while following the assessment order and own order in appeal for the assessment year 2006-07. 11. At the time of hearing before us, both the par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred in relation to exempt income. The disallowance has been made by applying Rule 8D in the light of the decision of Daga Capital Management (P) Ltd., supra. However, the said decision of Hon'ble Special Bench of the ITAT has been overruled by Hon'ble Bombay High Court in the case of Godrej Boyce Mfg.Co.Ltd. vs. DCIT ITA No.626 of 2010 and W.P. No.758 of 2010 wherein it has been held that the provisions of Rule 8D of the Income Tax Rules which have been notified with effect from 24th March, 2008 shall apply with effect from Assessment year 2008-09. In the present appeal, the assessment year involved is 2007- 08. Respectfully following the decision of Hon'ble Mumbai High Court, the disallowance worked out by the Assessing Officer by application of Rule 8D is directed to be deleted. The appellant has raised other objections/arguments also. However, since the disallowance worked out as per rule 8D is directed to be deleted, the other objections become only of academic nature and do not call for specific comments. These grounds of appeal are, therefore, treated as allowed. 14. The Revenue, aggrieved with the order of learned CIT(A), is in appeal before us. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n relation to exempt income is essential so as to invoke the provisions of Section 14A(1) by the Assessing Officer. As per sub-section (2) of Section 14A, the Assessing Officer is empowered to determine the expenditure incurred in relation to exempt income provided he is not satisfied with the correctness of the claim of the assessee in relation to the incurring of expenditure for earning of exempt income. As per sub-section (3), the Assessing Officer is empowered to determine the expenditure even when the assessee claims that no expenditure has been incurred by him in relation to earning of exempt income provided the Assessing Officer is not satisfied with the correctness of the claim of the assessee. From a combined reading of sub-section (2) (3) of Section 14A, it is evident that first the assessee has to state whether any expenditure was incurred by him for earning of exempt income, if yes, then, he has to specify the expenditure which was incurred for earning of exempt income. Thereafter, the Assessing Officer is required to examine the assessee's claim with regard to incurring of no expenditure or with regard to the amount of expenditure claimed to have been incurred by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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