2018 (1) TMI 191 - AT - Income Tax

Disallowance of depository charges related to shares held as stock in trade - Held that - FAA directed the AO to restrict the disallowance for earning exempt income to the extent of 0. 5% of average of the value of investment as per rule 8D of the Rules. However he did not decide the issue of disallowance of depository charges of Rs. 2. 20 lakhs though a specific ground was raised before him. As the ground of appeal is not arising out of the order of the FAA so we are not in a position adjudicate the same. As stated earlier the assessee had raised the issue before the FAA. So in the interest of the justice we restore back the matter to the file of the FAA. First ground of appeal is decided in favour of the assessee in part. Deduction claimed u/s. 35DD - Held that - We find that before the AO the assessee for the first time claimed that expenditure was allowable u/s. 35DD of the Act that he rejected the claim made by it. The basic issue is as to whether the expenditure is allowable u/s. 35DD of the Act or not. We are of the opinion that the matter needs further verification. So in the interest of justice we are restoring back the issue to the file of the FAA who would decide the issue after considering the judgment of Pruthvi Brokers (2012 (7) TMI 158 - BOMBAY HIGH COURT)of the Hon ble Bombay High Court. Second ground of appeal is partly allowed. Valuation loss treated as speculation loss - Held that - It was brought to our notice that identical issue had arisen in the earlier year 2017 (3) TMI 1327 - ITAT MUMBAI and that tribunal had decided the issue in favour of the assessee as held both the authorities did not consider the argument about the exception to the explanation to section 73 that the assessee had earned profit of Rs. 2 20 67 126/- that it had STCG on sale of mutual funds to the tune of Rs. 2. 68 crores. It is a fact that shares traded by the assessee were not of any of the good companies. The assessee had in the normal course of business purchased the shares. Because of the turmoil in the share market in the year under consideration the assessee suffered huge loss. It was valuing its stock on cost or market price whichever was lower and had accordingly valued the shares. The resultant loss in these circumstances cannot be considered speculative loss as held by AO and confirmed by FAA. Disallowance made u/s. 14A - Held that - Provisions of section 14A r. w. r. 8D were introduced to discourage the assessees from claiming double deductions i. e. claiming expenditure against exempt income. So expenses booked against exempt income are not be allowed. But first step is incurring of expenses. The AO/FAA has not given any details of expenses incurred by the assessee for earning exempt income. They have also not given any reason as to why the calculation made by the assessee was not acceptable. No automatic disallowance can be made u/s. 14A of the Act. Secondly the assessee has made claim about stock-in-trade. No comment has been offered by the FAA in that regard. The assessee is offering income from business of share trading so all the expenses related to the business have to allowed. Considering the peculiar facts and circumstances of the case we decide first ground of appeal in favour of the assessee. We would also like to refer the case of India Advantage Securities Ltd. (2015 (6) TMI 140 - BOMBAY HIGH COURT) wherein it has been held that no disallowance can be made u/s. 14A for the securities held as stock in trade.

Summary

Issues Involved:
1. Disallowance of depository charges related to shares held as stock in trade.
2. Deduction claimed under Section 35DD of the Income Tax Act.
3. Valuation loss treated as speculation loss under Section 73 of the Income Tax Act.
4. Disallowance under Section 14A of the Income Tax Act.

Detailed Analysis:

1. Disallowance of Depository Charges:
The first ground of appeal raised by the assessee concerns the disallowance of depository charges amounting to Rs. 2.20 lakhs related to shares held as stock in trade. During the assessment proceedings, the AO found that the assessee had claimed dividend income of Rs. 2.20 crores under Section 10(34) of the Act. The AO made a disallowance of Rs. 12.11 lakhs, including Rs. 2.20 lakhs under depository charges, Rs. 9.23 lakhs under interest expenditure, and Rs. 67,718 as 0.5% of the average value of investment. The First Appellate Authority (FAA) upheld the AO's disallowance under interest expenditure but did not decide on the depository charges. The tribunal restored the matter to the FAA to decide specifically on the depository charges, thus partially allowing the first ground of appeal in favor of the assessee.

2. Deduction Claimed Under Section 35DD:
The second ground of appeal is about the deduction claimed under Section 35DD of the Act. The AO disallowed Rs. 7.32 lakhs claimed by the assessee, stating that the expenditure was capital in nature and related to the increase in share capital. The FAA upheld the AO's decision, stating that the assessee failed to provide valid explanations or evidence. Before the tribunal, the assessee argued that the expenditure was for amalgamation and that there was an inadvertent mistake in claiming the deduction under Section 35D instead of Section 35DD. The tribunal restored the issue to the FAA for further verification, directing the FAA to consider the judgment of Pruthvi Brokers (349 ITR 336) of the Hon’ble Bombay High Court. This ground of appeal was partly allowed.

3. Valuation Loss Treated as Speculation Loss:
The third ground of appeal pertains to the valuation loss treated as speculation loss under Section 73 of the Act. The AO directed the assessee to explain why the loss should not be treated as speculation loss. The assessee argued that the loss was due to the valuation of stock and not trading, and it was a book loss due to market conditions. The FAA dismissed the appeal, citing the judgment of Lokmat Newspapers Pvt. Ltd. (332 ITR 43). The tribunal, however, found that the loss was part of the normal business conducted by the assessee and could not be considered speculative. The tribunal relied on the judgment of the Hon’ble Bombay High Court in the case of HSBC Securities and Capital Markets (P.) Ltd. and decided the third ground of appeal in favor of the assessee.

4. Disallowance Under Section 14A:
The fourth ground of appeal involves the disallowance made under Section 14A of the Act. The AO disallowed Rs. 85.83 lakhs to the total income of the assessee. The FAA deleted the interest disallowance, holding that the assessee had sufficient own funds, but upheld Rs. 16.98 lakhs as indirect expenditure at the rate of 0.5% of the average value of investment. The tribunal found that the FAA did not consider the stock in trade while computing the disallowance and that no automatic disallowance can be made under Section 14A. The tribunal referred to the case of India Advantage Securities Ltd. (380 ITR 471) and decided the first ground of appeal in favor of the assessee. The tribunal also restored the issue of deduction under Section 35DD to the FAA for fresh adjudication and allowed the third ground of appeal regarding valuation loss in favor of the assessee. The AO's appeal on deleting expenses under the head interest expenditure was dismissed, following the judgment of the Hon’ble Bombay High Court in HDFC Bank Ltd.

Conclusion:
The appeals filed by the assessee were partly allowed, and the appeal of the AO was dismissed. The tribunal directed the FAA to reconsider specific issues, ensuring justice and adherence to legal precedents.