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2016 (5) TMI 814 - ITAT MUMBAI

2016 (5) TMI 814 - ITAT MUMBAI - TMI - Disallowance under section 14A r.w. Rule 8D - Held that:- Disallowance under section 14A r.w. Rule 8D cannot be made in respect of shares held as stock-in-trade and therefore direct the AO to delete the disallowance made under section 14A r.w. Rule 8D. See India Advantage Securities Ltd. [2015 (6) TMI 140 - BOMBAY HIGH COURT ] - Decided in favour of assessee

Disallowance of Business Loss by invoking Explanation to section 73 - Held that:- The ame .....

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e trading business by such companies, i.e. like the assessee will not be treated as speculation business loss but normal business loss, and hence the same loss can be adjusted against other business income or income from any other sources of the year under consideration. In this view of the matter, we direct the AO to allow the assessee’s claim for setting off the loss from ‘share trading business’ against ‘other business income’ and income from any other sources during the year under considerat .....

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under section 194J of the Act, as they are not for technical services rendered but are in the nature of payments for facilities provided by the Stock Exchange and accordingly direct the AO to delete the disallowance made on account of transaction charges paid to Stock Exchange. - Decided in favour of assessee - ITA No. 321/Mum/2013 - Dated:- 13-5-2016 - Shri Jason P. Boaz, Accountant Member And Shri Sandeep Gosain, Judicial Member For the Appellant : Shri B.V. Jhaveri For the Respondent : Shri .....

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Act') and the case was subsequently taken up for scrutiny. The assessment was completed under section 143(3) of the Act vide order dated 22.12.2011 wherein the income of the assessee was determined at ₹ 4,16,55,840/- in view of the following disallowances: - i. Disallowance u/s. 14A r.w. Rule 8D ₹ 12,58,232/- ii. Disallowance of loss on trading of shares as per Explanation to Section 73 ₹ 2,43,32,584/- iii. Disallowances of transaction charges ₹ 2,38,821/- 2.2 Aggriev .....

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retaining the disallowance u/s 14A of the Income Tax Act amounting to ₹ 12,58,232/- by incorrectly applying rule 8D of the Income Tax Rules, though your appellant had not incurred any expenditure for the purpose of earning any tax free income. 2. On the facts and circumstances of the case the learned CIT(A) erred in confirming that treatment given by the learned A.O. to the business loss of ₹ 2,43,32,584/- as speculation loss by incorrectly applying the provisions contained in explan .....

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e assessee had earned tax free dividend income of ₹ 5,44,972/- and that no expenses had been allocated as having been expended for earning such exempt income. On being queried in this regard, the assessee contended that it had not incurred any expenses for earning the exempt income. The AO rejected the assessee s explanation and held that a certain percentage of the expenses claimed by the assessee company would definitely be attributable to the exempt income earned as the assesseecompany .....

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cial Bench in the case of Daga Capital Management Pvt. Ltd. (117 ITD 169) and the decision of the ITAT Special Bench in the case of Cheminvest Ltd. vs. Income Tax Officer [124 TTJ 477 (Delhi) (SB)] held that the disallowance under section 14A r.w. Rule 8D of the Act made by the AO was justified and accordingly upheld the same. 4.2.1 The learned A.R. for the assessee was heard in support of the grounds raised. It was submitted that the assessee-company is carrying on business as share broker and .....

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from tax. It was further submitted that the AO had erroneously considered the stock-in-trade as investment while computing the disallowance under section 14A r.w. Rule 8D. In support of the proposition that no disallowance under section 14A of the Act can be made in respect of dividend held as stock-in-trade, the learned A.R. for the assessee placed reliance on the decision of the Hon'ble Bombay High Court in the case of CIT vs. India Advantage Securities Ltd. in ITA No. 1131 of 2013 dated .....

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High Court in the case of CCI Ltd. vs. JCIT [(2012) 20 Taxmann.com 176)]. It was submitted that as the assessee-company is dealing in shares, dividend is the incidental income whereas the income from trading from shares is taxable in the hands of the assessee-company and therefore the provisions of section 14A r.w. Rule 8D cannot be invoked in respect of shares held as stock-in-trade. It was also contended that the decision of the Hon'ble Bombay High Court in the case of Godrej & Boyce M .....

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dividend income and for earning such income the assessee would have incurred expenses which are to be disallowed. 4.4.1 We have heard the rival contentions of both the parties and perused and carefully considered the material on record; including the judicial pronouncements cited and placed reliance upon. The issue for adjudication before us is as to whether the shares held by the assesseecompany under the head stock-in-trade are to be considered for making disallowance under section 14A r.w. R .....

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case of Devkant Synthetics (India) Pvt. Ltd. in ITA No. 2663 to 2665/Mum/2015 dated 28.10.2015 wherein at para 12 and 13 thereof it has been held as under: - 12. We heard the parties and perused the record. We notice that the Hon ble Karnataka High Court has held in the case of CCI Ltd (supra) that the shares held as stock in trade should be excluded for the purpose of computing disallowance u/s 14A of the Act, since they cannot be said to be investment made for the purpose of earning dividend i .....

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computing expenses. The decision rendered by the Tribunal in the case of India Advantage Securities Ltd (supra) was found to be neither perverse nor vitiated by any error of law apparent on the face of record by Hon ble Bombay High Court. We further notice that the decision rendered in the case of CCI Ltd (supra) has been followed by the co-ordinate benches of Tribunal in the case of India Advantage Securities Ltd (ITA No.6711/Mum/2011 and Ganjam Trading Co. Pvt Ltd (supra). 13. In the case of G .....

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ble Bombay High Court in the case of India Advantage Securities Ltd. (supra), the Hon'ble Karnataka High Court in the case of CCI Ltd. (Supra) and the Coordinate Bench of this Tribunal in the case of Devkant Synthetics (India) Pvt. Ltd. (supra), we hold that the disallowance under section 14A r.w. Rule 8D cannot be made in respect of shares held as stock-in-trade and therefore direct the AO to delete the disallowance made under section 14A r.w. Rule 8D. Consequently, ground No. 1 of the asse .....

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ssment proceedings, the AO noticed that the assessee had incurred share trading loss of ₹ 2,13,23,590/- and loss on sale of shares - speculation of ₹ 11,30,494/- and had set off share trading loss on delivery based transactions against business income from nonspeculation business in the form of brokerage and commission income. The AO, invoking the provisions of Explanation to section 73 of the Act, disallowed the adjustment of loss on trading of shares against brokerage and commissio .....

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ng, holding it to be speculation loss and that therefore the same is not allowable to be set off against non-speculation business income. On appeal, the learned CIT(A) upheld this disallowance made by the AO by invoking the provisions of Explanation to section 73 of the Act and by relying on the decision of the Hon'ble Bombay High Court in the case of Prasad Agents (P) Ltd. in 333 ITR 275 (Bom). 5.3.1 The learned A.R. for the assessee was heard in support of the ground raised on this issue. .....

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extracted hereunder: - A tax avoidance device often resorted to by business houses controlling groups of companies is manipulation of results from dealings in shares of the companies controlled by them. In our opinion, such manipulation in share dealings for the purpose of tax avoidance can be checked effectively if the results of dealings in shares by such companies are treated for tax purposes in a manner analogous to speculation. No doubt, companies whose main business activities centre aroun .....

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loss computed in respect of peculation business carried on by an assessee will not be set off except against the profits and gains, if any, of another speculation business. Further, where any loss, computed in respect of a speculation business for an assessment year is not wholly set off in the above manner in the said year, the excess shall be allowed to be carried forward to the following assessment year and set off against the speculation profits, if any, in that year, and so on. The Amendin .....

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t off against profits from a speculation business, the excess will be carried forward to the following assessment year and set off against profits, if any, from any speculation business. "19.2 The object of this provision is to curb the device sometimes resorted to by business houses controlling groups of companies to manipulate and reduce the taxable income of companies under their control. "19.3 This provision will come into force with effect from 1-4-1977 and will apply in relation .....

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curred on purchase and sale of shares of group companies. It was contended that while making its recommendations, the Wanchoo Committee did not intend to treat losses incurred in purchase and sale of shares by all companies. It is for this reason that an exception was carved out of the Explanation at the time of insertion of the Explanation by providing that the provisions of section 73 of the Act will be applicable to business of purchase and sale of shares by companies other than investment co .....

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purpose for which it was inserted, namely to curb tax avoidance devices/methods resorted to by business houses controlling a group of companies manipulate the purchase and sale of shares of group companies and declare loss which was being adjusted against other income of the group companies. 5.3.4 It was further contended by the learned A.R. for the assessee that in order to achieve the real objective of curbing tax avoidance methods resorted to by business houses controlling their group compan .....

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ly such companies fall in the ambit of the Explanation to section 73 of the Act so that their losses are treated as speculation loss, which was the object to be achieved by the insertion of the Explanation to section 73 of the Act. In support of his contentions that the insertion of amendment by Finance (No. 2) Act, 2014 in the Explanation to section 73 of the Act is clarificatory in nature and therefore such amendment will have to be given retrospective effect, i.e. from the year in which the E .....

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ot a speculative loss and hence the same can be adjusted against other business income like brokerage and commission. 5.4 It was contended by the learned A.R. for the assessee, alternatively, that since brokerage and commission income being also earned by the assessee on account of purchase and sale of shares of other companies, such income should also be treated as speculative income and accordingly the loss from trading in shares may be allowed to be adjusted against such brokerage and commiss .....

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oth the parties and perused and carefully considered the material on record; including the judicial pronouncements cited. Section 73 of the Act stipulates that any loss computed in respect of speculation business shall not be set off except against profits and gains of speculation business. Section 43(5) of the Act clarifies speculative transaction to mean a transaction in which a contract for purchase or sale of any commodity including stock and shares is periodically or ultimately settled othe .....

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rted by the Taxation Laws (Amendment) Act, 1975 w.e.f. 01.04.1977. Therefore, prior to 01.04.1977, if any assessee was carrying on any speculative transactions, i.e. a contract ultimately settled otherwise than by actual delivery; which are of such a nature to constitute a business, then such speculative transactions are considered as speculation business. If the assessee incurs a loss in such speculation business, then the loss from such speculation business can be adjusted only against profits .....

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, then the loss from such business would be treated as speculation business loss. Therefore, by virtue of the insertion of Explanation to section 73 of the Act, if companies whose principal business is of purchase and sale of shares suffer losses from share trading, then such loss from share trading is to be treated as speculative business loss. The intention behind the insertion of Explanation to section 73 of the Act has been explained by the CBDT, Circular No. 204 dated 24.07.1976 (extracted .....

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eculative business and therefore the Explanation to section 73 of the Act should be read only to the extent of the purpose for which it was inserted. The subsequent amendment made by Finance (No.2) Act, 2014 in the Explanation to section 73 of the Act appears to be made in order to clarify the real intention behind the insertion thereof, by removing the obvious hardship caused to various assessees whose main business is trading in shares. The amendment has removed the anomaly and brought the amb .....

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t is applied prospectively from A.Y. 2015-16, a piquant situation would arise that an assessee who has earned profit from purchase and sale of shares in A.Y. 2015-16 would be treated as normal business profit and not speculation business profit in view of the exception carried out by the amendment in Explanation to section 73 of the Act. In these circumstances, speculation business loss incurred by trading in shares in earlier years will not be allowed to be set off against such profit from purc .....

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2003 by omitting the second proviso to section 43B of the Act w.e.f. 01.04.2004 and bringing about uniformity in the first proviso by equating tax, duty, cess and fees with contribution to welfare funds (viz. Provident Fund, etc.). The Hon'ble Apex Court held that the aforesaid amendment in section 43B of the Act by Finance Act, 2003 is curative in nature and would therefore apply retrospectively w.e.f. 01.04.1988. 5.6.3 In the case of Allied Motors Pvt. Ltd. vs. CIT (224 ITR 677), the quest .....

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w.e.f. 01.04.1988. The Hon'ble Apex Court held that when a proviso is inserted to remedy unintended consequences and to make the provision workable, the proviso which supplies an obvious omission in the section and which is to be read into the section to give it a reasonable interpretation, it could be read as retrospective in operation to give effect to the section as a whole. The Hon'ble Apex Court held that the first proviso to section 43B of the Act was curative in nature and hence r .....

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nifestly unjust result which could never have been intended by the Legislature, the court might modify the language used by the Legislature so as to achieve the intention of the Legislature and produce a rational construction. The task of interpretation of a statutory provision is an attempt to discover the intention of the Legislature from the language used. It is necessary to remember that language is at best an imperfect instrument for the expression of human intention. It is well to remember .....

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which in this case is to counteract the effect of the transfer of assets so far as computation of income of the assessee is concerned, then bearing that purpose in mind, we should find out the intention from the language used by the Legislature and if strict literal construction leads to an absurd result, i.e., a result not intended to be sub served by the object of the legislation found in the manner indicated before, then if another construction is possible apart from strict literal construct .....

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by transfer. It has also been noted how for various purposes the business from which profit is included or loss is set off is treated in various situations as the assessee's income. The scheme of the Act as worked out has been noted before." 5.6.5 The Hon'ble Apex Court in the case of CIT vs. Gold Coin Health Foods Pvt. Ltd. (304 ITR 308) while reversing the decision of the Division Bench of the Apex Court in the case of Virtual Soft Ltd. vs. CIT (289 ITR 83) observed that A combin .....

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between April 1, 1976 and April 1, 2003, the position was that penalty was leviable even in a case where addition of concealed income reduces the returned loss. 5.6.6 The Hon'ble Apex Court in the case of CIT vs. Podar Cement P. Ltd. (226 ITR 625) has held that the circumstances under which the amendment was brought in and the consequences of the amendment will have to be taken care of while deciding the issue as to whether the amendment was clarificatory or substantive in nature and whether .....

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discharging his obligation to withhold tax under section 194A and the AO therefore disallowed the interest payments under section 40(a)(ia) of the Act. On appeal, the assessee contended that in view of the insertion of second proviso to section 40(a)(ia) by Finance Act, 2012 and in view of the fact that the recipients of the interest had included the income embedded in these payments in their tax returns filed under section 139 of the Act, the disallowance under section 40(a)(ia) of the Act coul .....

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er insertion of second proviso to section 40(a)(ia), it is beyond doubt that the underlying objective of section 40(a)(ia) was to disallow deduction in respect of expenditure in a situation in which the income embedded in related payments remains untaxed due to non deduction of tax at source by the assessee. In other words, deductibility of expenditure is made contingent upon the income, if any, embedded in such expenditure being brought to tax, if applicable. In effect, thus, a deduction for ex .....

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iance is not an end in itself, so far as the scheme of this legal provision is concerned, but is only a mean of recovering due taxes on income embedded in the payments made by the assessee. 5.6.9 In the case of Subhalakshmi Vanijya Pvt. Ltd. vs. CIT [(2015) 60 taxmann.com 60 (Cal-Trib.)] an issue before the Bench was whether insertion of proviso to section 68 of the Act by Finance Act, 2012 w.e.f. 01.04.2013 empowering the AO to examine the genuineness of the share capital in the case of a compa .....

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ecision/finding rendered therein would not apply to the issue in the case on hand since the issue raised before the Hon'ble High Court was whether the loss due to valuation of stock is covered by Explanation to section 73 of the Act as it stood in 2009 and not in respect to the effect of the amendment by way of the insertion of exception in Explanation to section 73 of the Act by Finance Act (No. 2) Act, 2014 which is before us. The Hon'ble High Court in the cited case (supra) held that .....

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to 5.6.9 of this order (supra) we are of the considered opinion and hold that the amendment inserted in Explanation to section 73 of the Act by Finance (No. 2) Act, 2014 w.e.f. 01.04.2015 is clarificatory in nature and would therefore operate retrospectively from 01.04.1977 from which date the Explanation to section 73 was placed on the statute since this amendment to section 73 of the Act .... or a company the principal business of which is the business of trading in shares ..... brings in the .....

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other business income and income from any other sources during the year under consideration. Since we have allowed the assessee s primary contention/ground, we do not consider it necessary to adjudicate the alternative contention raised by the assessee. 6. Ground No. 3: Disallowance of transaction charges paid to the Stock Exchange 6.1 The AO noticed that in the year under consideration, the assessee had debited ₹ 2,38,821/- on account of transaction charges paid to the Stock Exchange. The .....

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tax at source before crediting the transaction charges to the Stock Exchange. In that view of the matter, the disallowance made was upheld. 6.2.1 The learned A.R. for the assessee was heard in support of the ground raised. It was submitted that the assessee company was incorporated on 25.04.2006 and in the first year ending 31.03.2007, the assessee had paid transaction charges of ₹ 5,25,432/- without deducting tax at source thereon as per the practice prevailing among the stock brokers at .....

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change from the previous year relevant to A.Y. 2010-11 and the assessee also accordingly following this practice, there is no disallowance under section 40(a)(ia) of the Act in the case on hand for A.Y. 2010-11 onwards. 6.2.3 In support of its plea that no TDS is required to be made on payment of transaction charges to Stock Exchanges, the learned A.R. for the assessee placed reliance on the decision of the Hon'ble Apex Court in the case of CIT vs. Kotak Securities Ltd. (in Civil Appeal No. .....

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tra, the learned D.R. for Revenue emphatically supported the orders of the authorities below. 6.4.1 We have heard the rival contentions of both the parties and perused and carefully considered the material on record, including the judicial pronouncements cited. We find the question of whether at all TDS is deductible under section 194J of the Act on payments of transaction charges made by members to Stock Exchange has been considered by the Hon'ble Apex Court in the assessee of CIT vs. Kotak .....

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vices appearing in Explanation 2 to clause (vii) to Section 9(1) of the Act is the moot question. In Commissioner of Income-Tax Vs. Bharti Cellular Ltd.1 this Court has observed as follows: Right from 1979, various judgments of the High Courts and Tribunals have taken the view that the words technical services have got to be read in the narrower sense by applying the rule of noscitur a sociis, particularly, because the words technical services in section 9(1)(vii) read with Explanation 2 comes i .....

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such services may be provided. The search for a more effective basis, therefore, must be made. 8. A reading of the very elaborate order of the Assessing Officer containing a lengthy discourse on the services made available by the Stock Exchange would go to show that apart from facilities of a faceless screen based transaction, a constant upgradation of the services made available and surveillance of the essential parameters connected with the trade including those of a particular/ single transa .....

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the making of the same available by the service provider. It is the above feature that would distinguish/identify a service provided from a facility offered. While the former is special and exclusive to the seeker of the service, the latter, even if termed as a service, is available to all and would therefore stand out in distinction to the former. The service provided by the Stock Exchange for which transaction charges are paid fails to satisfy the aforesaid test of specialized, exclusive and .....

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e Act. 9. There is yet another aspect of the matter which, in our considered view, would require a specific notice. The service made available by the Bombay Stock Exchange [BSE Online Trading (BOLT) System] for which the charges in question had been paid by the appellant - assessee are common services that every member of the Stock Exchange is necessarily required to avail of to carry out trading in securities in the Stock Exchange. The view taken by the High Court that a member of the Stock Exc .....

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es provided by the Stock Exchange would make the same a kind of a facility provided by the Stock Exchange for transacting business rather than a technical service provided to one or a section of the members of the Stock Exchange to deal with special situations faced by such a member(s) or the special needs of such member(s) in the conduct of business in the Stock Exchange. In other words, there is no exclusivity to the services rendered by the Stock Exchange and each and every member has to nece .....

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