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2015 (10) TMI 2373 - ITAT PUNE

2015 (10) TMI 2373 - ITAT PUNE - TMI - Loss in share business claimed as business loss - treated as speculative loss in terms of Explanation to section 73 by the Revenue - Held that:- From the perusal of the CIT Vs. Darshan Securities (P.) Ltd. [2012 (2) TMI 117 - BOMBAY HIGH COURT] it is evident that Explanation to section 73 cannot be invoked only for the reason that the assessee is engaged in the share trading activity and does not fall within the exceptions laid down therein. Before applying .....

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d the TDS certificate have also been issued in the assessment year 2009-10 - Held that:- The assessee is following mercantile system of accounting and recognizing the revenue on accrual basis. Since, the interest has accrued to the assessee in the period relevant to assessment year 2008-09, the same has to be taxed in the relevant assessment year. However, we find force in the submissions of the assessee that once income has been offered to tax in assessment year 2009-10 and the tax has been pai .....

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egedly diverted by the assessee for non-business purposes disallowed u/s. 36(1)(iii) - contention of the assessee is that the assessee has diverted borrowed interest bearing funds for non-business purposes - Held that:- Although, the ld. AR has argued that the assessee has sufficient own funds but at the same time has also conceded that proportionate disallowance can be made by considering the availability of own funds. We remit, this issue back to the file of the Assessing Officer to decide thi .....

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ent is not taxable. Since, the income accrued to the overseas non-resident concern is not taxable, there is no question of deduction of tax at source on the said payments. Our view is supported by the judgment of the Hon'ble Madras High Court in the case of CIT Vs. Faizan Shoes Pvt. Ltd. reported as (2014 (8) TMI 170 - MADRAS HIGH COURT). We remit this issue back to the Assessing Officer for re-examination. In case the assessee is able to show that the payments were made through proper banking c .....

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d the shares for earning dividend income. Dividend income is incidental to the share trading business of the assessee. Thus, no disallowance u/s. 14A is warranted on dividend earned on shares held as stock-in-trade. Our view is fortified by the decision of Mumbai Bench of the Tribunal in the case of DCIT Vs. M/s. India Advantage Securities Ltd. [2012 (11) TMI 458 - ITAT, MUMBAI]. Also see CCI Ltd. Versus Joint Commissioner of Income-tax [2012 (4) TMI 282 - KARNATAKA HIGH COURT] - Decided in favo .....

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mobile handsets, PCOs and RCVS of Reliance Communication Infrastructure Ltd. and set top box of Tata Sky etc. Apart from above, the assessee is also trading in shares and is a dealer of FIBC plastic bags. The assessee filed its return of income for the assessment year 2008-09 on 30-09-2008 declaring total loss of ₹ 32,11,919/-. The case of the assessee was selected for scrutiny and notice u/s. 143(2) was issued to the assessee on 20-08-2009. The assessee had suffered loss of ₹ 1,22, .....

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u/s. 14A r.w. Rule 8D, disallowance of payment of commission to M/s. Eagle King Investments Development Ltd., Singapore for non-deduction of TDS, etc. Aggrieved by the assessment order dated 10-12-2010, the assessee filed an appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) vide impugned order upheld the findings of Assessing Officer and dismissed the appeal of the assessee. Against the order of Commissioner of Income Tax (Appeals), the assessee is .....

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e impugned assessment year, the assessee suffered huge loss in share business. The assessee claimed the loss from share trading business. The Revenue authorities in an arbitrary and unjustified manner have denied the same by taking the shelter of Explanation to section 73 of the Act. The ld. AR submitted that Explanation to section 73 has been amended by Finance Act (No. 2), 2014. With this amendment the companies which have principal business of trading in shares have also been excluded from th .....

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as to prevent industrial and other mega business houses and companies from setting off losses in purchase and sale of shares of related or associate companies against the business profits. However, with introduction of said Explanation even genuine transaction in shares carried on through stock exchanges by means of on-line trading platforms, were regarded as speculative even where actual deliveries were taken and given. Thus, the legislature recognized that if the transactions are carried on th .....

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ond ground in appeal, the ld. AR submitted that the Commissioner of Income Tax (Appeals) has erred in confirming addition of ₹ 3,81,863/-. The said amount was received as interest from M/s. Yash Developers. On the interest amount received from M/s. Yash Developers had deducted tax in the assessment year 2009-10. The assessee accordingly offered the income for tax in the assessment year 2009-10. However, the Assessing Officer insisted that the amount should be assessed to tax in the impugne .....

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of interest paid on borrowed funds and diverted for non-business purposes. The ld. AR submitted that the assessee had sufficient own funds. However, the ld. AR conceded that the proportionate relief may be granted to the assessee to the extent of availability of own funds of the assessee. 3.4 In respect of payments made to M/s. Eagle King Investments Development Ltd., Singapore, the ld. AR submitted that the payment were made to company as commission charges for the services rendered abroad and .....

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x as business income. Moreover, no disallowance is to be made u/s. 14A on the shares held as stock-in-trade. He further submitted that disallowance cannot exceed the quantum of dividend income. In support of his submissions, the ld. AR placed reliance on the judgment of Hon'ble Bombay High Court in the case of CIT Vs. India Advantage Securities Ltd. in Income Tax Appeal No. 1131 of 2013, decided on 13-04-2015. 4. On the other hand Shri A.K. Modi and Shri Manish Kumar Singh representing the D .....

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gard to interest received from M/s. Yash Developers, the ld. DR submitted that the assessee had not filed any document to show the interest was earned by the assessee in assessment year 2009-10. The ld. DR defending the disallowance made u/s. 14A submitted that irrespect of the fact whether the assessee has held the shares as investment or stock-intrade disallowance u/s. 14A has to be made. The assessee has earned tax free income. The Assessing Officer is bound to make disallowance u/s. 14A r.w. .....

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ds in its appeal. The same are summarized as under: i. Loss in share business claimed as business loss, treated as speculative loss in terms of Explanation to section 73 of the Act by the Revenue. ii. Interest of ₹ 3,81,863/- held to be taxable in impugned assessment year. Whereas, the assessee has claimed the same in assessment year 2009-10 and the TDS certificate have also been issued in the assessment year 2009-10. iii. The interest of ₹ 3,41,955/- on borrowed funds allegedly dive .....

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assessment years, the assessee has been reckoning income from share trading business as business income and the Revenue has not raised any objection to the income from share trading activity. It is only in the impugned assessment year when the assessee has suffered loss in share trading activity and the assessee has claimed set off of the same from other business income, the Revenue has raised objection and treated the same as speculative loss by invoking Explanation to section 73 of the Act. It .....

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le proceeds of ₹ 12,15,35,268.36. The revenue generated from sale of shares is to the tune of ₹ 12,12,30,860.36, whereas, income from sale of other commodities is only ₹ 3,04,408/-. It is an undisputed fact that the assessee is engaged in trading of shares and shares held by the assessee are in the nature of stock-in-trade and not investment. 6.1 Before the income from trading of share is held to be speculative , let us first examine, whether the assessee is engaged in speculat .....

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person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or (b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or (c) a contract entered into by a member of a forward market or a stock exchange in the c .....

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In the present case, it has not been alleged by the Revenue that the assessee is engaged in speculative transactions. The authorities below have merely invoked the Explanation to section 73 to hold that the assessee s income from share trading activity is speculative income. Explanation to section 73 creates a deeming fiction. The deeming provisions have to be construed strictly. The Hon'ble Bombay High Court in the case of CIT Vs. HSBC Securities & Capital Markets India (P.) Ltd. (supra .....

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urt was; whether on the facts and in the circumstances of the case and in law the ITAT was justified in holding that the case of the respondent is not covered by explanation to section 73 as it falls within the first limb of exception to the explanation and therefore the assessee s loss should not be treated as speculative loss? In order to appreciate the judgment of the Hon'ble Bombay High Court in the case of CIT Vs. Darshan Securities (P.) Ltd. (supra) it would be essential to know the fa .....

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e for the purpose of the explanation to Section 73, the income from service charges had to be adjusted against the loss in share trading. This contention of the assessee has found acceptance by the Commissioner (Appeals) and the Tribunal. The provision of the explanation to Section 73 falls for determination in the Appeal. 5. Under Section 28, income which is chargeable to income tax under the head of profits and gains of business or profession includes the profits and gains of any business or p .....

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ve transaction in sub section (5). That expression is defined to mean a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled, otherwise than by the actual delivery or transfer of the commodity or scrips. Consequently, where a contract for purchase or sale of shares is settled by actual delivery, it does not fall within the definition of the expression. Section 70(1) provides for a setting off of loss from on .....

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e provision of Sub Section (1) of Section 73, a bar is introduced against the setting off of a loss which has arisen in respect of speculation business carried on by the assessee save and accept against the profits and gains of another speculation business. The explanation to Section 73 provides as follows : Where any part of the business of a company ([other than a company whose gross total income consists mainly of income which is chargeable under the heads Interest on securities , Income from .....

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fiction stipulates that where any part of the business of a company consists in the purchase and sale of shares of other companies, such company shall, for the purposes of the section be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sales of such shares. The deeming fiction applies only to a company and the provision makes it clear that the deeming fixation extends only for the purposes of the section. The bracketed portion of t .....

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oss total income for the purpose of the explanation to Section 73, income under the heads of profits and gains of business or profession must be ignored. Alternatively, it has been urged that where the income from business includes a loss in the trading of shares, such a loss should not be allowed to be set off against the income from any other source under the head of profits and gains of business or profession. 8. In our view, the submission which has been urged on behalf of the Revenue cannot .....

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rities , Income from house property , Capital gains and Income from other sources . Now, ordinarily income which arises from one source which falls under the head of profits and gains of business or profession can be set off against the loss which arises from another source under the same head. Sub Section (1) of Section 73 however sets up a bar to the setting off of a loss which arises in respect of speculation business against the profits and gains of any other business. Consequently, a loss w .....

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arrying on a speculation business within the meaning of the explanation, sub section (1) of Section 73 is applied in the first instance. This would in our view not be permissible as a matter of statutory interpretation, because the explanation is designed to define a situation where a company is deemed to carry on speculation business. It is only thereafter that sub section (1) of section 73 can apply. Applying the provisions of Section 73(1) to determine whether a company is carrying on specula .....

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l income of the Company. The words consists mainly are indicative of the fact that the legislature had in its contemplation that the gross total income consists predominantly of income from the four heads that are referred to therein. Obviously, in computing the gross total income the normal provisions of the Act must be applied and it is only thereafter, that it has to be determined as to whether the gross total income so computed consists mainly of income which is chargeable under the heads re .....

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e head. The assessee had a dividend income of ₹ 4.7 lacs (income from other sources). The Tribunal was justified, in coming to the conclusion that the assessee fell within the purview of the exception carved out in the explanation to Section 73 and that consequently the assessee would not be deemed to be carrying on a speculation business for the purpose of Sec. 73(1). 10. The view, which we have taken, also accords with the judgments of this Court in C.I.T. V/s. M/s. Hero Textiles and Tra .....

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ding that even otherwise on merits, the issue was covered by the decision rendered by the Division Bench in Hero Textiles and Trading Ltd. 11. For the aforesaid reasons, we answer the question of law in the affirmative. The Appeal is accordingly disposed of. There shall be no orders as to costs. 6.4 Thus, from the perusal of the aforesaid judgment, it is evident that Explanation to section 73 cannot be invoked only for the reason that the assessee is engaged in the share trading activity and doe .....

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ssee has offered the amount to tax in assessment year 2009-10. The assessee had received interest income. Tax at source has been deducted thereon in the assessment year 2009-10. The assessee has not disputed that the amount in fact has accrued in assessment year 2008-09. The only reason given by the assessee to offer interest income to tax in assessment year 2009-10 is that TDS certificates were issued for assessment year 2009-10. There would be mismatch of TDS in case the interest income is off .....

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twice. The addition of ₹ 3,81,863/- with regard to the interest income received by the assessee in the impugned assessment year is sustained. The Assessing Officer is directed to delete the interest income that has been added in assessment year 2008-09 from the income of assessee in assessment year 2009-10. This ground of appeal of the assessee is partly accepted. 8. The third ground raised in the appeal by the assessee is with regard to disallowance of ₹ 3,41,955/-. The contention .....

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loans for non-business purposes. 9. The fourth ground raised in the appeal by the assessee is with regard to disallowance of commission of ₹ 6,95,691/-. The case of the assessee is that the amount has been paid by the assessee to M/s. Eagle King Investments Development Ltd., Singapore as commission in respect of services rendered abroad. However, nothing has been brought on record to show the nature of services provided by the overseas concern. It is a well settled law that if the payment .....

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re-examination. In case the assessee is able to show that the payments were made through proper banking channel for the services rendered abroad, the payments were in the nature of commission and the overseas concern has no PE in India, the Assessing Officer shall allow the same. This ground of appeal of the assessee is allowed for the statistical purpose. 10. The fifth ground raised in the appeal by the assessee is with respect to disallowance made u/s. 14A r.w. Rule 8D on shares held as stock- .....

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by the assessee as stock-in-trade. The assessee has earned dividend income on such shares. The assessee has not held the shares for earning dividend income. Dividend income is incidental to the share trading business of the assessee. Thus, no disallowance u/s. 14A is warranted on dividend earned on shares held as stock-in-trade. Our view is fortified by the decision of Mumbai Bench of the Tribunal in ITA No. 6711/Mum/2011 in the case of DCIT Vs. M/s. India Advantage Securities Ltd. for the asses .....

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