M/s TATA AUTOCOMP SYSTEMS LTD v ACIT IT (TP)A No.7596/Mum/2012) Mumbai ITAT Background: During the year under consideration, the assessee received dividend income of Rs. 16,83,27,131 which was claimed to be exempt from tax. A disallowance of Rs. 1,34,95,120 was made u/s 14-A of the Act on account of expenses attributable to the said exempt income. The said disallowance comprises of interest at Rs. 1,28,72,969/- being 35% of the total interest which, according to the assessee, was the ratio between the investment fetching tax free income and total investment. The balance disallowance of Rs. 6,22,151/- was made on account of salary paid to a treasury person who, according to the assessee, was looking after the activity of earning tax free income.
Disallowance u/s 14A
DCIT v Gulshan Investment Co Ltd. (I.T.A. No.: 666/ Kol. / 2012 dtd March 11, 2013) (Kolkata ITAT) The assessee is engaged in the business of share trading. During the course of assessment proceedings, the AO noticed that while the assesse has earned dividend income of Rs 18,91,556, the assessee has not made any disallowance under section 14A in respect of “expenses relatable to the above exempt income”. The AO also noticed that the assessee had paid interest of Rs 10,34,315. The assessee contended that disallowance under section 14A of the Income Tax Act, read with rule 8D of the Income Tax Rules, is not applicable in the case of the assessee since the shares were kept as stock in trade. However, the AO did not accept the contentions of the assessee and computed the disallowance under Rule 8D by applying 0.5% of the average stock-in-trade.
14A is applicable to shares held as stock-in-trade; but Rule 8D cannot be applied – ...
Justice Sam Bharucha v Addln CIT [ITA No. 3889/Mum/2011 dtd 25/07/2012] (Mum ITAT) Background: During the year (AY 2006-07), the assessee has earned dividend of Rs 30,43,306 from mutual funds and Rs 6,71,468 from shares besides interest on RBI ta-free bonds of Rs 13,73,750 which are exempt income. The AO disallowed a sum of Rs2,26,581 under section 14A by applying RUle 8D by following decision of Mumbai ITAT in the case of Daga Capital Management Pvt Ltd. On appeal, the CIT(A) confirmed the disallowance made by the AO.
If no expense incurred in relation to exempt income, no 14A disallowance – Mum ITAT
Sonata Information Technology Ltd. v DCIT [ITA NO. 1507 (MUM.) OF 2012 dated 7.9.2012] (Mum ITAT) Background: The assessee is a company engaged in the business of purchase and sale of software. Assessee made a payment of Rs. 199,79,11,595/- for purchase of software from persons who are resident in India. The Assessee did not deduct tax at source while making payment towards such purchases. According to the AO, the payment is in the nature of Royalty because it was for a right to use software and therefore the Assessee ought to have deducted tax at source and since the Assessee had not so deducted tax at source, the sum in question was not allowed as deduction under the provisions of Section 40(a)(ia) of the Act. The CIT(A) also confirmed the addition.
Amendment in definition of royalty does not extend to disallowance u/s 40(a) – Mum ITAT
Ganjam Trading Co. (P.) Ltd. v DCIT ITA No: 3724 (MUM.) OF 2005, 932 (MUM.) OF 2006 and 1384 & 289 (MUM.) OF 2007] (Mum ITAT) Background: The assessee, in the business of trading and investment in goods, securities, etc., had declared income from interest, dividend and profit/loss from trading of shares. In the years under consideration, the assessee had declared huge losses from trading in shares which were treated by the Assessing Officer as speculation loss under the provisions of Explanation to section 73 of the Act. The assessee had also paid huge interest on borrowings. The Assessing Officer disallowed the interest relating to the investment made in shares under section 14A of the Income Tax Act, 1961 (for short “the Act”) and also disallowed interest on borrowings under section 36(1)(iii) of the Act holding that borrowings to that extent had not been utilised for the purpose of business. AO observed that the assessee had made huge borrowings on which substantial interest running into crores had been paid in all the years under consideration. The assessee had advanced the borrowed funds for allotment of shares of group companies. The assessee had also advanced Rs. 25 crores to Panther Invest-trade Ltd. for acquisition of equity shares of companies. The AO made disallowance u/s 36(1)(iii) by computing interest @ 15%. CIT(A) confirmed the disallowance of interest under section 36(1)(iii) for assessment years 2001-02 and 2002-03. In assessment year 2003-04, the CIT(A) observed that the assessee had substantial interest free funds amounting to Rs. 169.09 crores. He held that the disallowance of interest has to be worked out on proportionate basis after taking into account the total interest free funds and interest bearing funds and investments made.
Interest on borrowings for investment in group company cannot allowed u/s 36(1)(iii) – Mum ITAT
Apoorva Patni v ACIT IT APPEAL NOS. 192, 193, 239 & 273 TO 276 (PN) OF 2011 (Pune ITAT) Background: The assessee filed her return of income for the assessment year 2006-07 declaring a total income of Rs 13,95,40,653/- under various heads of income, viz. income from house property, business income, capital gains and income from other sources. The income declared under the head capital gains included short term as well as long term capital gain on investments made through the PMS providers. Besides, the assessee has also declared capital gains, both long term and short term, from direct dealing in mutual funds, investments also. Apart from the aforesaid dealings in shares and securities, the assessee also had a portfolio wherein income from share and securities transactions was declared as business income. In this factual background, the Assessing Officer treated the short term as well as long term capital gain earned through the investments made through PMS providers amounting to Rs 3,86,38,849 as income which was liable to be assessed as ‘business income’ and not under the head ‘Capital gains’. The Commissioner of Income-tax (Appeals) has, however, upheld the contentions of the assessee that the gain from investments made through the PMS provider was assessable under the head capital gains.
Income from PMS is capital gains and not business income – Pune ITAT
Shri Vishnu Anant Mahajan v ACIT ITA No.3002/Ahd/2009 (Ahmedabad Special Bench) Background and facts of the case The assessee is an individual and derives income by way of share of profit from the firm of M/s.Mahajan & Amar Doshi, capital gains, interest, dividend and house property. The assessee derives 76% of professional income as share from the firm and the balance amount by way of remuneration and interest income from the firm. The AO allocated the expenses to the income not includible under Section 10(2A). Thus, the business income by way of remuneration and interest from the firm has been taxed in the hands of the assessee under section 28(v) after allowing 24% of the expenditure. Thus, 76% of the expenditure has been disallowed.
14A Disallowance on Partner’s share of profit & Depreciation not an expenditure for 14A – ...
ACIT vs. SIL Investment Ltd (ITAT Delhi) Delhi ITAT has provided detailed findings and observations on applicability of section 14A where Rule 8D has been applied arbitrarily without application of mind. Facts: For AY 2006-07, the assessee earned dividend of Rs. 17 lakhs and LTCG of Rs. 12 crores. The assessee claimed that it had incurred no expense to earn the tax-free income and so no s. 14A disallowance was permissible. However, the AO disallowed Rs. 2 crores under Rule 8D towards interest and admin expenditure. The CIT (A) accepted that no interest was incurred and deleted that disallowance. He also reduced the admin expenditure disallowance. On appeal to the Tribunal, HELD: