TMI Blog2015 (12) TMI 38X X X X Extracts X X X X X X X X Extracts X X X X ..... unds as well as borrowed funds, a presumption can be made that the advances for non-business purposes have been made out of own funds and that the borrowed funds have not been used for this purpose.” - Decided against revenue. Disallowance u/s 14A - CIT(A) deleted disallowance - Held that:- CITA had rightly granted relief to the assessee by stating that while applying the second limb of Rule 8D , the interest that is already disallowed u/s 36(1)(iii) of the Act should be ignored for the purpose of separate disallowance u/s 14A of the Act in order to avoid double addition. - Decided against revenue. - I.T.A No. 356/Kol/2012 - - - Dated:- 6-11-2015 - Shri M. Balaganesh, Accountant Member, and Shri S.S. Viswanethra Ravi, Judicial Member For The Appellant : Shri Niloy Baran Som, JCIT, ld.DR For The Respondent : Shri Ravi Tulsiyan, FCA, ld.AR ORDER SHRI M. BALAGANESH, AM: This appeal of the revenue arises out of the order of the ld. CIT(A), Kolkata dated 13-12-2011 for the assessment year 2008-09 against the order of assessment framed u/s 143(3) of the Income Tax Act 1961 (hereinafter referred to as the Act ). 2. The first issue to be decided in this a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Learned CITA appreciated the aforesaid contentions of the assessee and held that the principal business of the assessee is of granting of loans and advances and so assessee is not hit by Explanation to section 73 of the Act. Aggrieved, the revenue is in appeal before us on the following ground:- 1. That on the facts and in the circumstances of the case, the ld.CIT(A) has erred by allowing relief to the assessee in respect to treatment of share trading loss of ₹ 1,71,52,934/- which was taken as speculation loss by the AO. 2.2. The Learned DR argued that the assessee company was earlier named as M/s Satnaliwala Investment Ltd and it changed its name to M/s Snowtex Investment Ltd on 2.1.2006 ; that the claim of the assessee that it is a NBFC but the name of the assessee does not figure in the list of NBFC uploaded by Ministry of Corporate Affairs in its website www.mca.gov.in/MCA21/dca/RegulatoryRep/pdf/Nbfc_Companies.pdf ; that similarly the website of Reserve Bank of India does not mention the assessee as a NBFC ; that in order to see whether the assessee is in money lending business, it is necessary for the assessee to be registered under the Bengal Money Lenders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment year under consideration, the assessee incurred substantial loss in its share trading business involving actual delivery of shares, but however, the assessee had earned income on its share trading business by way of derivative trading apart from other interest income and consultancy income. The Learned AR further argued that , even assuming without conceding , that the action of the Learned AO in treating the share trading loss as speculative loss of ₹ 1.71 crores is to be accepted as correct, then he ought to have adjusted the said loss with the profits earned in F O share transactions to the tune of ₹ 2.26 crores which are non delivery based and derivative transactions and hence in any case, there is no loss available with the assessee for invoking the provisions of section 70 to 74A much less section 73 read with its Explanation. 2.3.2. He further argued that the assessee company was originally known as Satnaliwala Investments Ltd and the name was subsequently changed as per fresh certificate of incorporation consequent on change of name to Snowtex Investments Ltd. The company in the original name of Satnaliwala Investments Ltd had duly registered itself as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 43(5) of the Act which provides definition of speculative transaction exclusively for purposes of section 28 to 41 of the Act. Again, the fact that both delivery based transaction in shares and derivative transactions are nonspeculative as far as section 43(5) is concerned goes to confirm that both will have same treatment as regards application of the Explanation to section 73 is concerned, which creates a deeming fiction. Now, before application of the said Explanation, aggregation of the business profit/loss is to be worked out irrespective of the fact, whether it is from share delivery transaction or derivative transaction b) [Mumbai Tribunal, Special Bench in CIT vs Concord Commercial Pvt Ltd in (2005) 95 ITD 117 (Mum) (SB)] , wherein it was held that : Before considering whether the assessee s case is hit by the deeming provision of Explanation to Section 73 of the Act, the aggregate of business profit / loss has to be worked out based on the non-speculative profits, either it is from share delivery or from share derivative. 2.7. We have heard the rival submissions and perused the materials available on record. It is pertinent to get into the Explanatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ections of the Act. 2.9 As per the definition of section 43(5) of the Act, trading of shares which is done by taking delivery does not come under the purview of the said section. Similarly, as per clause (d) of section 43(5), derivative transaction in shares is also not speculation transaction as defined in the said section. Therefore, both profit/loss from all share delivery transactions and derivative transactions have the same meaning as far as Section 43(5) of the Act is concerned. It thus follows that both will have the same treatment as far as application of the said section is concerned. 2.10 On the other hand, the Explanation to section 73 creates a deeming fiction by which an assessee, who is a company, dealing with share transaction, such transaction should be treated as speculative transaction within the meaning of sec 73 of the Act notwithstanding the fact that, according to the definition of the speculative transaction in sec 43(5) of the Act, the transaction is not of that nature as there has been actual delivery of the shares. The Explanation postulates a situation where the assessee is a company and where any part of the business of the company consists of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness of the assessee is that of granting of loans and advances, the decisive factor is the nature of the activities of the assessee and not the actual income from such activities during a particular year. Merely because the numerical value of the profit/loss in purchase and sale of shares is more than the interest income during the relevant period, does not mean that the principal business of the assessee ceases to be that of granting of loans and advances. What constitutes the principal business has not been defined anywhere in the Act. What constitutes the principal business will depend on the facts and circumstances of each case. The Memorandum and the Articles of Association of the company past history of the assessee, current and past year s deployment of the capital of the assessee, break up of the income earned during the relevant and past years and the nature of activities of the assessee will all help in determining the principal business of the assessee. If any particular year, the assessee has nominal business income and has substantial interest income, it does not imply that the assessee s principal business is of finance or granting of loans and advances. Similarly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive of Section 73-apparent from the tenor of its language is to deny speculative business 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 statue, which deals with computation of business income, derivatives are excluded from the definition of speculative transactions, only underlines that such exclusion is limited for the purpose of those provisions or sections. To borrow the Madras High Court s expression, derivatives are assets, whose values are derived from values of underlying 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 377; 5.92 crores. The balance funds are utilized for business of share trading and giving loans and advances. Therefore, the disallowance of interest is restricted to the extent of ₹ 2.02 crores/Rs.5.92 crores X ₹ 62,84,112/- = ₹ 21,44,241/- and assessee is entitled to get relief of ₹ 41,39,871/- (Rs.62,84,112/- - ₹ 21,44,241/-). Therefore, ground no.5 is partly allowed. Aggrieved, the revenue is in appeal before us on the following ground:- 2. That on the facts and in the circumstances of the case, the ld. CIT(A) has erred by deleting disallowance of interest paid of ₹ 41,39,871/- out of the disallowance of ₹ 62,84,112/- made by the AO being not incidental to the business activity of the assessee. 3.2. The Learned DR vehemently supported the order of the Learned AO. In response to this, the Learned AR argued that the Learned AO had not disputed the fact that the lending is for the purpose of business of the assessee. He supported the order of the Learned CITA by stating that the Learned CITA had rightly granted relief to the assessee to the extent of availability of own funds with the assessee and upheld the disallowance mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest should always be charged on any lending, nor there is any requirement that income must be earned by utilizing the capital borrowed with interest so as to be entitled to the deduction under section 36(1)(iii) of the Act. Merely for the reason that interest was not charged or charged at a low rate on the lending, the interest paid for borrowing cannot be disallowed. It is a matter of business prudence and entirely upto the assessee as to how he utilizes the fund in the interest of his business. The basic requirement is that the borrowed capital should be used for the purposes of business or profession. An argument may be advanced that if interest-free loan had not been given then the assessee could have reduced his debt and consequently the interest payment . 3.4. In view of the aforesaid facts and circumstances and the judicial precedents relied upon hereinabove, we find no infirmity in the order of the Learned CITA and accordingly, the ground no.2 raised by the revenue is dismissed. 4. The last issue to be decided in this appeal is as to whether disallowance u/s 14A of the Act could be made in the facts and circumstances of the case. 4.1. The brief facts of thi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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