TMI Blog2016 (5) TMI 814X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. Disallowance of transaction charges paid to the Stock Exchange - non TDS - Held that:- Respectfully following the decision of the Hon'ble Apex Court in the case of Kotak Securities Ltd. [2016 (3) TMI 1026 - SUPREME COURT] we hold that no TDS is deductible on payment of transaction charges paid by members to Stock Exchange 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 - - - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cumstances of the case the learned CIT(A) erred in confirming the disallowance of ₹ 2.38,821/- made by the Assessing Officer being the transaction charges paid to the exchange authorities. 4. Your appellant craves leave to add to, amend, alter or delete any of the above grounds as may be advised. 4. Ground No. 1: Disallowance under section 14A 4.2. Rule 8D 4.1 In the year under consideration, the Assessing Officer (AO) noticed that the 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 had a common pool of human and financial resources which were being utilized to earn income in various forms. In this view of the matter, the AO applying the provisions of Rule 8D of the I.T. Rules computed disallowance of expenses under Rul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 Manufacturing Co. Ltd. vs. DCIT (328 ITR 81), referred to by the AO, is not applicable to the assessee in the case on hand as it did not deal with the issue of whether the disallowance under section 14A can be made when dividend income is incidental to the trading in shares. 4.3 Per contra, the learned D.R. placed strong reliance on the decision of the learned CIT(A) to contend that the disallowance under section 14A of the Act applying Rule 8D is correct as the assessee-company has earned exempt 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) also. However, following the decision of Hon ble Karnataka High Court in the case of CCI Ltd (supra), the Tribunal held that the disallowance of interest in relation to dividend received from shares held as stock-in-trade cannot be made. 4.4.2 Respectfully following the decisions of the Hon'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 assessee s appeal is allowed. 5. Ground No. 2: Disallowance of Business Loss by invoking Explanation to section 73 5.1 During the year under consideration, the assessee had reported operating income earned as under: - Brokerage and Commission ₹ 5,50,41,964.56 Profit/(Loss) on sale of shares - speculation (-)(Rs. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 around investment in shares will have to be left out. Accordingly, we recommend that the results of dealings in shares by companies, other than investment, banking and finance companies, should be treated in a manner analogous to speculation business. 5.3.2 The learned A.R. for the assessee also referred to CBDT circular No. 204 dated 27.07.1976 (110 ITR St. 21) explaining the scope and effect of the Explanation to section 73 of the Act, which reads as under: - 19.1 Section 73 provides that any 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eated a fiction to the effect that where any part of the business of a company consists of purchase and of share of other companies, such company shall be deemed to be carrying on speculation business to the extent to which business consists of purchase and sale of such shares. It is submitted that this fiction had overlooked the 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 companies, the Legislature by inserting an amendment to Explanation to section 73 of the Act by Finance (No. 2) Act, 2014, has extended the exception carved out in the Explanation by putting all the companies, the principal business of which is the business of trading in shares into the exception. Thus, it is submitted by the learned A.R. for the assessee that the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 otherwise than by actual delivery. Explanation 2 to section 28 of the Act stipulates that where speculative transactions carried on by an assessee are of such a nature so as to constitute a business, the speculation business shall be deemed to be distinct and separate from other business. The sections 73, 43(5) and Explanation 2 to section 28 of the Act are on the statute since 01.04.1962. 5.6.2 Pursuant to the Wanchoo Committee Report of December, 1971, Explanation to section 73 of the Act was inserted 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 speculati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt in the Explanation to section 73 of the Act by the Finance (No. 2) Act, 2014, in our view, is curative and classificatory in nature. If the amendment 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 purchase and sale of shares to such companies in A.Y. 2015-16. For this reason also, the amendment inserted to Explanation to section 73 of the Act by Finance (No. 2) Act, 2014 is to be applied retrospectively from the date of the insertion to Explanation to section 73 of the Act. In coming to this view, we draw support from the decision of the Hon'ble Apex Court in the case of CIT vs. Alom Extrusions Ltd. (319 ITR 306) wherein their Lordships were considering the amendment made by Finance Act, 2003 by omitting the second proviso to section 43 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expression of human intention. It is well to remember the warning administered by judge Learned Hand that one should not make a fortress out of the dictionary but remember that statutes always have some purpose or object to accomplish and sympathetic and imaginative discovery is the surest guide to their meaning. We have noted the object of s. 16(3) of the Act which has to be read in conjunction with s. 24(2) in this case for the present purpose. If the purpose of a particular provision is easily discernible from the whole scheme of the Act, 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 construction, then that construction should be preferred to the strict literal construction. Though equity and taxation are often strangers, attempts s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithhold 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 could not be invoked. It was also contended that even though this second proviso is stated to be w.e.f. 01.04.2013, since the amendment is declaratory and curative in nature, it should be given retrospective effect from 01.04.2005, i.e. the date from which sub-clause (ia) of 40(a) was inserted in the statute by way of Finance (No.2) Act, 2004. At para 7 thereof the Tribunal held as under: - 7. When we look at the overall scheme of the section as it exists now and the bigger picture as it emerges after 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 rela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms of book value of stock-in-trade, even if there was no trading in the course of financial year as the Explanation to section 73 of the Act would cover both shares which are stock-in-trade and shares which are traded for the purpose of considering the profit and loss for the year. 5.6.11 In our humble view, drawing support from the judicial pronouncements cited at paras 5.6.3 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 assessee whose principal business is trading of shares. Therefore, the loss incurred in share 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .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. 3141 of 2016 dated 29.03.2016) contending that in this decision the Hon'ble Apex Court has reversed the view of the Hon'ble Bombay High Court in the same case reported in 340 ITR 333 to hold that the transaction charges paid to Stock Exchange by its members are not for technical services rendered but are really in the nature of payments made for facilities provided by Stock Exchange. Hence, no TDS on such payments would, therefore, be deductible under section 194J of the Act. 6.3 Per contra, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial, exclusive or customised service that is rendered by the Stock Exchange. Technical services like Managerial and Consultancy service would denote seeking of services to cater to the special needs of the consumer/user as may be felt necessary and 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 individual requirement of the user or consumer who may approach the service provider for such assistance/service. It is only service of the above kind that, according to us, should come within the ambit of the expression technical services appearing in Explanation 2 of Section 9(1)(vii) of the Act. In the absence of the above distinguishing feature, service, though rendered, would be mere in the nature of a facility offered or available which ..... X X X X Extracts X X X X X X X X Extracts X X X X
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