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Income Tax Officer, Ward-8 (1) , Kolkata Versus M/s Asian Financial Services Ltd.

2015 (7) TMI 111 - ITAT KOLKATA

Disallowance u/s.14A read with Rule 8D - CIT(A) deleted 50% disallowance - Held that:- It is not the case of the assessee that the AO has applied rule 8D, while computing the disallowance under section 14A without complying with the provisions of section 14A(2), whereas the AO has complied with the provisions of section 14A(2). We are of the view that the disallowance has to be made in accordance with rule 8D. CIT(A) cannot reduce the disallowance merely on the basis that the disallowance made b .....

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d that:- addition of ₹ 3,24,76,185/- in respect of transactions in shares treating them by the AO as speculative transaction, as per Explanation to section 73. Derivatives are assets, whose values are derived from values of underlying assets; in the present case, by all accounts the derivatives are based on stocks and shares, which fall squarely within the explanation to Section 73 (4). Therefore, it is idle to contend that derivatives do not fall within that provision, when the underlying .....

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Tax Act is leviable, as per the provisions of section 4 on the real income. This is not a case of the AO to disallow the interest claimed by the assessee as deduction. Until and unless the income has been received or accrued to the assessee, it cannot be regarded to be the income of the assessee. Income-tax is leviable on the real income. Onus is on the Revenue to prove that the assessee has earned the income. On the contrary, onus is on the assessee when the assessee claimed that an income is e .....

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the Appellant : Shri Dilip Kr Mitra, Sr DR, JCIT For the Respondent : Shri R S Ray, FCA ORDER Per: P K Bansal: This appeal has been filed by the Revenue against the order of the CIT(A)-VIII, Kolkata dated 12.07.2012 for the assessment year 2009-10 by taking the following effective grounds of appeal. "1. That, on the facts and in circumstances of the case and in law, the CIT(Appeals) has erred in restricting the disallowance made by the A.O. u/s.14A read with Rule 8D of the Income tax Rules .....

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Rule 8D of the Income Tax Rule, 1962, in calculating disallowance u/s.14A of the Income Tax Act, 1961. 3. That, on the facts and in circumstances of the case and in law, the CIT(Appeals) has erred in holding that the loss of the assessee-company from Future & Option (F&O) transactions as non-speculative loss, without having regard to the fact that derivative transactions are not delivery based transactions to be expressly covered by the provisions of Section 43(5) of the Income Tax Act, .....

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he nature of speculative loss. 5. That, on the facts and in circumstances of the case and in law, the CIT(Appeals) has erred in deleting the addition of ₹ 29,50,000/- made by the A.O. as notional interest on account of interest-free loans/advances given by the assessee-company without having regard to the fact that commercial expediency or the business purpose of such advances was not established by the assessee-company." 2. Ground nos.1 and 2 relate to the restriction of disallowance .....

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ction 14A(2). We are of the view that the disallowance has to be made in accordance with rule 8D. the CIT(A) cannot reduce the disallowance merely on the basis that the disallowance made by the AO is on the higher side. It is not the plea of the assessee that the AO has not recorded any satisfaction by rejecting the claim of the assessee on the basis of the accounts maintained by the assessee. We, therefore, set aside the order of the CIT(A) and restore the order of the AO. Thus, this issue take .....

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loss from the speculative business with the normal business income. In the opinion of the assessee, the loss set off by the assessee fell under the deeming provisions of Explanation to Section 73. Therefore, he applied the Explanation to Section 73 and did not allow the loss to the assessee. The assessee went in appeal before the CIT(A). The CIT(A) deleted the disallowance by observing as under: "I have carefully considered the facts of the case and the submissions advanced on behalf of th .....

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of ₹ 3,24,185/- during the financial year under consideration. The relevant documents in regard with the transactions are also produced during the assessment proceedings. The Assessing Officer has delved upon his finding on the Explanation to Section 73 and decided that the transactions are nothing but speculative by virtue to Section 73 of the Income Tax Act, 1961. On the other hand, from the material placed on record, I find that the transactions in shares and securities carried out by t .....

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006. (ii) The basic principle of the legislation was to avoid litigations and to remove anomalies in the interpretation of the Income Tax Act, 1961. (iii) The Assessing Officer failed to read correctly the contract notes as because the contract notes of the delivery based transactions and future and option transactions are similar in the nature, wherein in the future and option, it is specifically mentioned that the transactions are of Future and option. It is also found that in a similar case, .....

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trading in derivative was not speculative. In the light of the above discussion and observation and on the facts and circumstances of the case, I am of the opinion that the Assessing Officer was not justified in holding the transactions as speculative transactions as per Explanation to the section 73, whereas the transactions in question are not to be treated as speculative in view of express provisions of section 43(5) of the Act. Therefore, the Assessing Officer is directed to treat the loss a .....

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ounts Explanation to Section 73 in the case of the assessee. The AO has applied the Explanation to section 73. The CIT(A), by applying the provisions of section 43(5), took the view that since the transactions carried out by the assessee are not speculative transactions, as per the definition given under section 43(5), therefore, the Explanation to section 73 will not apply. Our aforesaid view is duly supported by the decision of the Hon'ble Delhi High Court in the case of CIT-vs- DLF Commer .....

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ares is deemed to ITA 94/2013 Page 8 be speculation business. However, certain companies are excluded from this Explanation which are: (i) a company whose gross total income consists mainly of income which is chargeable under the heads 'Interest on securities', 'Income from house property', 'Capital gains' and 'Income from other sources'. (ii) a company, the principal business of which is the business of banking or the granting of loans and advances. 8. Section 43 .....

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tc. The assessee is no doubt correct in contending that the only definition of derivatives is to be found in Section 43 (5); yet the Court cannot ignore or overlook that the definition - to the extent it excludes such transactions from the mischief of the expression "speculative transactions" is confined in its application. Parliamentary intendment that such transactions are also excluded from the mischief of Explanation to Section 73 (4), however, is not borne out. 9. In this context, .....

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iral that can lead to a corporate melt down...." The High Court then, after examining the nature and characteristics of derivatives transactions, observed that: "5. What are these 'derivatives' which have gained such a great deal of notoriety? In simple terms, derivatives are financial instruments whose values depend on the value of other underlying financial instruments. The International Accounting Standard (IAS) 39, defines "derivatives" as follows: A derivative is .....

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e. Actually, derivatives are assets, whose values are derived from values of underlying assets. These underlying assets can be commodities, metals, energy resources, and financial assets such as shares, bonds, and foreign currencies. 10. It is no doubt, tempting to hold that since the expression "derivatives" is defined only in Section 43 (5) and since it excludes such transactions from the odium of speculative transactions, and further that since that has not been excluded from Sectio .....

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rdless of whether standard exclusionary terms (such as "unless the context otherwise requires") are used. In The Vanguard Fire & General Insurance Co. Ltd., Madras v. M/S. Fraser And Ross & Anr AIR 1960 SC 971 it was held that: "It is well settled that all statutory definitions or abbreviations must be read subject to the qualification variously expressed in the definition clauses which created them and it may be that even where the definition is exhaustive inasmuch as the .....

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he Act, the meaning to be ordinarily given to it is that given in the definition clause. But this is not inflexible and there may be sections in the Act where the meaning may have to be departed from on account of the subject or context in which the word has been used and that will be giving effect to the opening sentence in the definition section, namely, unless there is anything repugnant in the subject or context. In view of this qualification, the court has not only to look at the words but .....

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text in which a particular word is used..........." 11. The stated objective of Section 73- apparent from the tenor of its language is to deny speculative businesses the benefit of carry forward of losses. Explanation to Section 73 (4) has been enacted to clarify beyond any shadow of doubt that share business of certain types or classes of companies are deemed to be speculative. That in another part of the statute, which deals with ITA 94/2013 Page 12 computation of business income, derivat .....

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fall within that provision, when the underlying asset itself does not qualify for the benefit, as they (derivatives - once removed from it and entirely dependent on stocks and shares, for determination of their value). 12. In the light of the above discussion, it is held that the Tribunal erred in law in holding that the assessee was entitled to carry forward its losses; the question framed is answered in favour of the revenue and against the assessee. The appeal is, therefore, allowed; there s .....

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wards the notional interest. Brief facts relating to this ground are that the assessee company advanced a sum of ₹ 13,50,00,000/- to one M/s. Aarhat Investments for the purchase of bonds and shares, which firm failed to execute the purchase. The AO calculated the notional interest of ₹ 29,50,000/- and added the same in the income of the assessee. When the matter went before the CIT(A), the CIT(A) deleted the addition by observing as under: "I have perused the records and gone th .....

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may not have been incurred under any legal obligation, but it is allowable as business expenditure if it was incurred on grounds of commercial expediency. "For the purpose of business" includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. That the borrowed amount is not utilized by the assessee in its own business but had been advanced as interest free loan to its sister concern is not relevant. Conversely, th .....

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