DCIT 13(3)(1), MUMBAI vs. M/S WALL STREET FINANCE LTD , MUMBAI

In this appeal, the Revenue has raised following grounds: –

At the outset, we find that the present appeal by the Revenue is delayed by 2 days. Shri Hoshang B. Irani, the learned Departmental Representative (“learned D.R.”) submitted that the delay of 2 days may be condoned in the interest of justice. On the other hand, Shri Madhur Agarwal, learned Counsel appearing for the assessee did not object to condonation of delay in filing the present appeal and submitted that the issues raised in Revenue’s appeal are covered in favour of assessee by decisions of Hon’ble Jurisdictional High Court. In view of the above, we condone the delay of 2 days in filing the present appeal and we hear the appeal on merits.

The assessee is engaged in the business of Consultancy Services and Forex Dealers. During the year under consideration, the assessee has shown income from business and profession, income from long term capital gain and income from other sources. The assessee e–filed its return of income for the year under consideration on 29.11.2014, declaring total income at Rs.Nil.

The issue arising in ground no.1, raised in Revenue’s appeal is with regard to set–off of brought forward long term capital loss against the long term capital gain on sale of depreciable assets.

The brief facts of the case pertaining to this issue as emanating from the record are: During the year under consideration, the assessee, inter- alia, earned income from long term capital gain on sale of assets. This capital gain was set–off against carried forward long term capital loss. During the course of assessment proceedings, it was noticed from the computation of income of the assessee that it has shown income from long term capital gain of Rs.2,66,47,393. It was further observed from the table of fixed assets submitted by the assessee that the assessee has treated the assets / buildings as a depreciable asset. The assessee was asked to show cause as to why the set–off of carried forward long term capital loss against capital gain on sale of depreciable assets be not disallowed, as, such capital gain is in the nature of short term capital gain under section 50 of the Act. In reply, the assessee submitted that the assets / buildings transferred during the year were held for more than 36 months and, therefore, qualify as long term capital assets within the meaning of section 2(29A) of the Act and thus, gain arising on such transfer is a long term capital gain under section 2(29B) of the Act. The assessee further submitted that section 50 of the Act is an exception and provides a deeming fiction. The assessee relied upon the decision of the Hon'ble Jurisdictional High Court in CIT v/s ACE Builders Pvt. Ltd., [2006] 281 ITR

In appeal before the learned CIT(A), the assessee submitted that during the year under consideration buildings forming part of block of assets on which depreciation was claimed were sold for a total consideration of Rs.3 crores. Out of these buildings, the assessee purchased one building during the year under consideration, which was also sold as part of the block of assets, and thus the same qualifies as short term capital asset and the gain on sale of that building would only be the short term capital gain, whereas, on sale of remaining depreciable assets forming part of block of assets, capital gain is in the nature of long term capital gain as those assets were held for more than 36 months. Accordingly, the tax benefit available to long term capital asset under section 54E, 54EA, 54F of the Act and set–off of unabsorbed long term

Being aggrieved, the Revenue is in appeal before us. During the course of hearing, learned D.R. vehemently relied upon the order passed by the Assessing Officer.

On the other hand, the learned Counsel appearing for the assessee submitted that the issue has been decided in favour of the tax payer by the Hon'ble Jurisdictional High Court, which has been rightly followed by the learned CIT(A).

We have considered the rival submissions and perused the material available on record. We find that the Hon'ble Jurisdictional High Court in ACE Builders Pvt. Ltd. (supra), while holding that section 50 of the Act is a deeming provision and the fiction created under the section is confined to computation of capital gain only and this section cannot convert long term capital asset into short term capital asset, observed as under:– “25. In our opinion, the assessee cannot be denied exemption under section 54E, because, firstly, there is nothing in section 50 to suggest that the fiction created in section 50 is not only restricted to sections 48 and 49 but also applies to other provisions. On the contrary, section 50 makes it explicitly clear that the deemed fiction created in sub- sections (1) and (2) of section 50 is restricted only to the mode of computation of capital gains contained in sections 48 and 49. Secondly, it is well established in law that a fiction created by the Legislature has to be confined to the purpose for which it is created. In this connection, we may refer to the decision of the Apex Court in the case of State Bank of India v. D. Hanumantha Rao [1998] 6 SCC 183. In that case, the Service Rules framed by the bank provided for granting extension of service to those appointed prior to 19-7-1969. The respondent therein who had joined the bank on 1-7-1972 claimed extension of service because he was deemed to be appointed in the bank with effect from 26-10-1965 for the purpose of seniority, pay and pension on account of his past service in the army as Short Service Commissioned Officer. In that context, the Apex Court has held that the legal fiction created for the limited purpose of seniority, pay and pension cannot be extended for other purposes. Applying the ratio of the said Judgment, we are of the opinion, that the fiction created under section 50 is confined to the computation of capital gains only and cannot be extended beyond that………”

We further find that the Hon'ble Supreme Court in V.S. Dempo Pvt. Ltd. (supra) has agreed with the view expressed by the Hon'ble Jurisdictional High Court in the aforesaid case.

In another decision, the Hon'ble Jurisdictional High Court in CIT v/s Manali Investment, [2013] 219 Taxman 113 (Bom.) dismissed Revenue’s appeal on the following question of law, as proposed for the consideration of the Hon’ble Court: - "Whether on the facts and in the circumstances of the case and in law, the Tribunal was correct in holding that the assessee is entitled to set- off under Section 74 in respect of capital gain arising on transfer of capital assets on which depreciation has been allowed in the first year itself and which is deemed as short term capital gain under Section 50 of the Income Tax Act relying upon the judgment of this Court in the case of CIT V/s. Ace Builders (P.) Limited (281 TTR 210) even though the said decision was rendered in the context of eligibility of deduction under Section 54E?”

Thus, in view of the aforesaid decision rendered by the Hon'ble Jurisdictional High Court and also affirmed by the Hon'ble Supreme Court, we do not find any infirmity in the impugned order passed by the learned CIT(A) allowing set–off of carried forward long term capital loss against long term capital gain arising during the year. As a result, ground no.1, raised in Revenue’s appeal is dismissed.

The issue arising in ground no.2, raised in Revenue’s appeal is with regard to disallowance under section 14A r/w rule 8D of the I.T. Rules, 1962 (“the Rules”).

The brief facts of the case pertaining to this issue as emanating from the record are: During the year under consideration, the assessee earned income of Rs.66,110, which was claimed as exempt under the Act. The assessee also suo–motu disallowed expenditure to an extent of Rs.64,315, for earning the exempt income. During the course of assessment proceedings, the assessee was asked to furnish the details of exempt income as well as the details of expenditure incurred or attributable for earning the same. In reply, the assessee submitted the working of suo– motu disallowance under section 14A of the Act at Rs.64,315. The Assessing Officer vide order dated 28.12.2016, did not agree with the submissions of the assessee and made disallowance of Rs.3,96,029, under section 14A r/w rule 8D of the Rules for earning of exempt income.

In appeal before the learned CIT(A), the assessee submitted that during the year under consideration, it has interest free funds aggregating to Rs.14.93 crores, which were utilized for making investments aggregating to Rs.1.46 crores which resulted in tax free income and, therefore, no disallowance under section 14A r/w rule 8D can be made. The assessee further contended that the amount of disallowance cannot exceed the exempt income of Rs.66,110. In support of its submissions, the assessee relied upon various judicial precedents. The learned CIT(A) vide impugned order dated 28.12.2018, allowed the appeal filed by the assessee on this issue by agreeing with the submissions filed by the assessee and also following the decisions passed by various Courts including the Hon'ble

During the course of hearing, the learned D.R. vehemently relied on the order passed by the Assessing Officer.

On the other hand, the learned Counsel submitted that this issue has been decided in favour of the tax payer by the Hon'ble Jurisdictional High Court in CIT v/s HDFC Bank Ltd., [2014] 366 ITR 505 (Bom.) and Nirved Traders Pvt. Ltd. v/s DCIT, [2020] 421 ITR 142 (Bom.).

We have considered the rival submissions and perused the material available on record. We find that the Hon'ble Jurisdictional High Court in HDFC Bank Ltd. (supra) held that where assessee’s own funds and other non–interest bearing funds were more than the investment in tax free securities, no disallowance under section 14A of the Act can be made. We further find that recently Hon'ble Supreme Court in South Indian Bank Ltd. v/s CIT, [2021] 438 ITR 001 (SC) held that disallowance under section 14A of the Act would not be warranted where interest free own funds exceeds the investment in tax free securities and in such a case the investment would be presumed to be made out of assessee’s own funds.

In another decision, the Hon'ble Jurisdictional High Court in Nirved Traders Pvt. Ltd. (supra) held that the disallowance of expenditure in relation to exempt income cannot exceed the exempt income earned by the assessee.

Thus, in view of the aforesaid decisions, we find no infirmity in the impugned order passed by the learned CIT(A) deleting the disallowance made by the Assessing Officer under section 14A r/w rule 8D of the Rules. As a result, ground no.2, raised in Revenue’s appeal is dismissed.

Ground no.3, raised in Revenue’s appeal is general in nature and is also dismissed in view of our findings given above.

In the result, appeal by the Revenue is dismissed. Order pronounced in the open court on 19/4/2022