2021 (2) TMI 1204 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - As per AO allow only that expenditure which is relatable to earning of income and therefore expenses which are relatable to earning of exempt income have to be considered for disallowance irrespective of the fact whether any such income has been earned during the financial-year or not - HELD THAT - As AR submitted that the assessee has received only Rs. 1, 79, 466/- as the dividend income and contended that the disallowance u/s. 14A of the Act even if made cannot exceed Rs. 1, 79, 466/-. In the light of the aforesaid discussion and the facts taken note by the AO we note that even if the computation is made by applying Rule 8D the disallowance cannot exceed the dividend income as held by the Hon ble High Courts. In such a scenario we are restricting the disallowance at Rs. 1, 79, 466/- in place of Rs. 9, 37, 263/- as made by the AO. This ground of Revenue appeal is partly allowed. Derivative loss v/s business loss - setting off of share trading loss which is deemed speculative loss with derivative income and other business income - AO denying the assessee s claim of set off of the said loss from income of business of dealing in shares - HELD THAT - In this case on hand there is no doubt that the assessee is a company and is in the business of purchase and sale of shares of other companies. And the deeming provision u/s. 73 of the Act is attracted since in this case there is net loss of assessee s business of purchase and sale of shares of other companies - since the assessee transacted in sale purchase of shares of other companies by delivery as well as non-delivery (transactions of derivatives) are not hit by Sec.43(5) of the Act and hence the aggregation of the brokerage share trading profit and loss from derivative transactions should be done before application of the Explanation to Sec.73. The assessee had treated the entire activity of brokerage purchase and sale of shares which comprised of both delivery based and non-delivery based trading as one composite business before the application of deeming provision contained in Explanation to Sec.73 of the Act and accordingly claimed set off of the loss incurred in non-delivery based trading (derivative) with profit derived from delivery based share trading and brokerage which is legally valid. Therefore we confirm the action of the Ld. CIT(A) and dismiss this ground of appeal of the revenue. Addition u/s. 36(1)(va) read with section 2(24)(x) - employees contribution to Provident Fund deposit beyond the due date prescribed under the PF Act - HELD THAT - We note that the assessee has deposited the employees contribution to Provident Fund before filing of return of income which fact has not been assailed by the revenue before us. Since the assessee has deposited the contribution amount to the Provident Fund before filing of return of income the Ld. CIT(A) relying on the decision of the Hon ble jurisdictional High court in the case of CIT Vs. Vijayshree Ltd. 2011 (9) TMI 30 - CALCUTTA HIGH COURT has allowed the appeal of the assessee which decision is binding on this Tribunal and at the time of hearing before us no other order of the Hon ble Supreme Court has been cited reversing this view of the Hon ble High Court. Therefore we confirm the order of the Ld. CIT(A) and dismiss this ground of appeal of the revenue.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Treatment of derivative loss as speculation loss under Section 73.
3. Disallowance of employees' contribution to Provident Fund under Section 36(1)(va).

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act, 1961:
The first issue relates to the disallowance of Rs. 9,37,263/- under Section 14A of the Income Tax Act, 1961, read with Rule 8D. The Assessing Officer (AO) noted that the assessee earned tax-exempt dividend income and failed to provide satisfactory details of expenses incurred on such investments. Consequently, the AO applied Rule 8D to compute the disallowance. However, the Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, stating that the shares and mutual funds were held as stock-in-trade, not investments, and thus Section 14A was not applicable. The Income Tax Appellate Tribunal (ITAT) partially agreed with the CIT(A), limiting the disallowance to the amount of dividend income received, i.e., Rs. 1,79,466/-, as the disallowance cannot exceed the exempt income earned.

2. Treatment of Derivative Loss as Speculation Loss under Section 73:
The second issue concerns the treatment of a derivative loss of Rs. 3,72,08,053/- as speculation loss under Section 73. The assessee argued that its business of brokerage and share trading was composite, and the derivative transactions were not speculative as per Section 43(5). The AO, however, treated the loss as speculative and disallowed it. The CIT(A) sided with the assessee, citing previous Tribunal and High Court rulings in the assessee's favor, which held that derivative transactions are not speculative post-amendment effective from AY 2006-07. The ITAT upheld the CIT(A)'s decision, confirming that the derivative loss could be set off against the business income, dismissing the AO's application of Section 73.

3. Disallowance of Employees' Contribution to Provident Fund under Section 36(1)(va):
The third issue involves the disallowance of Rs. 4,74,350/- for delayed deposit of employees' contribution to the Provident Fund. The AO disallowed the amount as it was deposited beyond the due date prescribed under the PF Act. The CIT(A) deleted the addition, relying on the jurisdictional High Court's decision in CIT vs. Vijayshree Ltd., which held that contributions deposited before the due date of filing the return cannot be disallowed under Section 36(1)(va) read with Section 2(24)(x) due to the provisions of Section 43B. The ITAT confirmed the CIT(A)'s decision, noting that the contributions were deposited before the return filing date and no contrary Supreme Court ruling was presented.

Conclusion:
The ITAT partly allowed the revenue's appeal by restricting the disallowance under Section 14A to the amount of exempt income earned. The other grounds of appeal concerning the treatment of derivative loss and the disallowance of employees' PF contributions were dismissed, upholding the CIT(A)'s decisions. The order was pronounced on 24th February 2021.