TMI Blog2020 (8) TMI 191X X X X Extracts X X X X X X X X Extracts X X X X ..... are trading activity, the same needs to be considered as deemed speculative loss and cannot be allowed to be set off against profit derived from trading in derivatives. In case, the assessee has earned profit from share trading activity, then Explanation to section 73 has no application and accordingly, the said loss needs to be treated as normal business loss and allowed to be set off against any other income. Issue needs to be re-examine by the Ld. AO, in light of various facts brought out by both the parties and to recompute profit after considering relevant expenditure relatable said trading activity and then to decide applicability of Explanation to section 73. Accordingly, we set aside the issue to the file of the Ld. AO and direct him to reconsider the issue afresh in accordance with law. Disallowances of expenditure incurred in relation to exempt income u/s 14A - HELD THAT:- There is no merit in the arguments of the assessee that no interest expenditure could be disallowed. Insofar as, disallowances of expenditure under Rule 8D(2)(iii) of I.T.Rules, 1962, it is a settled position that only, those investments, which has earned exempt income for the year under conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attracted to the facts of the impugned case. The Respondent, therefore, prays that the disallowance of ₹ 75,12,025/- by invoking the provisions of Section 14A read with Rule 8D is not at all justified and hence, the same may be deleted. 2. The Ld. CIT(A) further erred in upholding the action of the Ld. A.O. in making disallowance under section 14A by invoking Rule 8D without appreciating that while making the disallowance the Ld. A.O. has not recorded any satisfaction under sub section (2) of section 14A with respect to correctness of the voluntary allocation of expenses amounting to ₹ 72,359/- made by the Respondent for earning the exempt income. Hence, disallowance of ₹ 75,12,025/- under section 14A is unjustified and the same may be deleted. 3. The Ld. CIT(A) further erred in disallowing the entire dividend income amounting to ₹ 75,12,025/- invoking the provisions of section 14A of the Act without appreciating that the entire dividend income cannot be allocated for earning the same. Hence, the disallowance of entire dividend income amounting to ₹ 75,12,025/- under section 14A is unjustified and the same may be deleted. 4. The Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the nature of speculation loss and in view of Explanation to section 73 of the I.T.Act, 1961 said loss cannot be allowed to be set off against income earned from trading in futures and options being derivative transactions. The ld. AO has also, made additions towards disallowances of expenditure in relation to exempt income u/s 14A r.w.Rule 8D of I.T.Rules, 1962, amounting to ₹ 82,94,849/-, on the ground that although, the assessee has earned dividend income, but made a suo-moto disallowances of ₹ 72,359/-, which is contrary to the prescribed procedure provided under Rue 8D of I.T.Rules, 1962, for determination of disallowances of expenditure in relation to exempt income u/s 14A of the I.T.Act, 1961. 6. Being aggrieved by the assessment order, the assessee has filed an appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assessee has challenged additions made by the Ld. AO towards disallowances of speculation loss, in light of certain judicial precedents, including the decision of ITAT, Mumbai in the case of Fiduciary Shares Stock Pvt.Ltd vs ACIT in ITA No.321/Mum/2013 and argued that explanation inserted to section 73 of the Act, by Finance Act, 2014 w.e.f 01 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Finally, the Ld.CIT(A) has determined disallowances of ₹ 75,12,025/-, as against total disallowances quantified by the Ld. AO at ₹ 82,94,849/-. Aggrieved by the Ld.CIT(A) order , the revenue is in appeal before us and the assessee has filed cross objection. 7. The first issue that came up for our consideration from revenue appeal is deletion of additions made by the Ld. AO towards deemed speculation loss of ₹ 1,85,25,973/- by invoking Explanation to section 73 of the I.T.Act, 1961. The facts with regard to the impugned disputes are that the assesee is engaged in the business of stock broker and trading in shares has incurred loss of ₹ 4,32,65,063/- for the year under consideration. According to the Ld. AO, the major portion of income of the assessee is from share trading activity and accordingly, as per section 73 of the I.T.Act, 1961, when any part of business of a company consist of purchase and sale of shares of other companies, such company shall for the purpose of the section deemed to be carrying on speculation business to the extent, which business consist of purchase and sale of shares. Therefore, the Ld. AO called upon the assesse to explain as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, perused the material available on record and gone through orders of the authorities below. As per the provisions of section 73 and explanation provided thereto, where any part of the business of the company ( [other than a company whose gross total income consist mainly of income, which is chargeable under the heads interest on security, income from house property, capital gains and income from other sources] or a company the principle business of which is the business of trading in shares or banking or the granting of loans and advances ) consists in the purchase and sale of shares of other companies, such company shall, for the purpose of this section, be deemed to be carrying on speculative business to the extent to which, the business consists of purchase and sale of such shares. From the above, it is very clear that if a part of a business of a company is purchase and sale of shares, then such transactions shall be deemed to be considered as speculative transactions and profit on such activity shall be deemed to be speculative loss and cannot be allowed to be set off against any other income, including profit from derivative trading. The provisions of section 73 and explan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeds to be treated as normal business loss and allowed to be set off against any other income. Therefore, we are of the considered view that the issue needs to be re-examine by the Ld. AO, in light of various facts brought out by both the parties and to recompute profit after considering relevant expenditure relatable said trading activity and then to decide applicability of Explanation to section 73 of the I.T.Act, 1961. Accordingly, we set aside the issue to the file of the Ld. AO and direct him to reconsider the issue afresh in accordance with law. 12. The next issue that came up for our consideration from cross objection filed by the assessee is disallowances of expenditure incurred in relation to exempt income u/s 14A of the I.T.Act, 1961. The Ld. AO has determined disallowances of ₹ 82,94,849/-, by invoking Rule 8D(2) of I.T.Rules, 1962. The facts with regard to the impugned disputes are that the assesse has earned dividend income of ₹ 75,12,025/-, which does not form part of total income. The assesee has also, computed suo-moto disallowances of ₹ 72,359/- u/s 14A of the I.T.Act, 1961.During the course of assessment proceedings, the Ld. AO called upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court, in the case of Maxopp Investments Limited vs CIT (supra), where the issue has been settled and accordingly, for the purpose of computation of expenses relatable to exempt income u/s 14A of the Act, even shares held as stock in trade needs to be considered. 15. We have heard both the parties, perused the material available on record and gone through orders of the authorities below. There is no doubt with regard to the fact of applicability of provisions of section 14A r.w.Rule 8D of I.T.Rules, 1962. In fact, the assessee has computed suo-moto disallowances of ₹ 72,359/- by invoking provisions of Rule 8D of I.T.Rules, 1962. However, when computing disallowances, the assessee has not considered interest expenditure, on the ground that interest expenditure has no relation to exempt income, and for this purpose, the assessee has relied upon the decision of Hon ble Bombay High Court, in the case of CIT vs HDFC Bank Ltd and argued that when, mixed funds are used for investment in shares, a general presumption goes in favor of the assesse that investments in shares is out of own funds and consequently, no disallowances could be made. The assessee has also not consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n excess of investments in shares, then no interest expenditure should be disallowed, because as admitted by the assesee before the Ld. AO, investments in shares, including shares held as stock in trade is more than the own capital, including reserves and surplus. Therefore, we are of the considered view that there is no merit in the arguments of the assessee that no interest expenditure could be disallowed. Insofar as, disallowances of expenditure under Rule 8D(2)(iii) of I.T.Rules, 1962, it is a settled position that only, those investments, which has earned exempt income for the year under consideration needs to be considered for the purpose of average value of investments to determine disallowances of expenditure @ 0.5% of average value of investments. Therefore, we direct the AO to consider only those investments which yeild exempt income for the year for disallowance of expenditure. To sum up, the issue needs to go back to the file of the Ld. AO to determine disallowances of expenditure, in relation to exempt income u/s 14A, in light of our discussions given hereinabove and accordingly, we set aside the issues to the file of the Ld. AO and direct him to recompute the disal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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