TMI Blog2016 (8) TMI 258X X X X Extracts X X X X X X X X Extracts X X X X ..... set aside the matter to the file of the AO for de-novo determination and quantification of disallowance u/s 14A of the Act of the indirect expenses incurred by the assessee company in relation to such income which does not form part of the total income having regards to the accounts of the assessee company as provided u/s 14A(2) of the Act and also keeping in view Rule 8D(2)(iii) of Income Tax Rules, 1962. n the case of Cheminvest Limited (2015 (9) TMI 238 - DELHI HIGH COURT ) while in the said case the Hon’ble Delhi High Court has laid down that there can be no disallowance u/s 14A of the Act if there is no exempt income received or receivable by the tax-payer. In the instant appeal, the assessee company did received the exempt income vide dividend income from shares of ₹ 2,81,541/- . This disposes off ground no 2 of the assessee company. - I.T.A. No. 7068/ Mum/ 2012 - - - Dated:- 3-8-2016 - Shri Saktijit Dey, Judicial Member And Shri Ramit Kochar, Accountant Member Assessee by Shri Nishit Gandhi Revenue by : Dr. Suman Ratnam Darsi (D.R.) ORDER Per Ramit Kochar, Accountant Member This appeal, filed by the assessee company, being ITA No. 7068/Mum/2012 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es to be reversed. The Learned DR objected to the admission of the additional ground as the same was not raised originally while filing memo of appeal by the assessee company with the Tribunal. We have considered rival contentions and perused the material on record. In our considered view, the additional ground deserves to be admitted as it is purely an legal ground and are hereby directed to be admitted in accordance with the judgment of Hon ble Supreme Court in the case of NTPC v. CIT (1998) 229 ITR 383(SC). 3. The brief facts of the case are that the assessee company is member of Bombay Stock Exchange Limited. During the previous year relevant to the assessment year, the assessee company carried out the business of dealing in Equity Shares and Securities. 4. During the course of assessment proceedings u/s 143(3) read with Section143(2) of the Act , the assessee company submitted revised computation of income showing business income at ₹ 11,26,763/- and speculation loss of ₹ 37,31,368/- . In the original return of income filed with the Revenue, the assessee company has not shown the speculation loss of ₹ 37,31,368/-. The AO treated the speculation los ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee company has earned dividend income from shares of ₹ 2,81,541/- and claimed the same as exempt u/s 10(34) of the Act . However, the expenses attributable for earning of such tax-free income is to be disallowed as per Section 14A of the Act read with Rule 8D of Income Tax Rules, 1962. The assessee company submitted that if the income arises under any head of income from many items which are exempt from tax , entire permissible expenditure in earning such income under this head is deductible and if the tax-payer carries on the business into various ventures , some are having taxable income and other do not and if business is one and indivisible , the entire expenditure of such business would be allowed as deduction . It was also submitted by the assessee company that if substantial investment is made in shares and securities which yielded dividend, disallowance u/s 14A of the Act cannot be made in respect of the fact that the books of accounts are not separately made for by bifurcating taxable and non taxable income. Thus, it was submitted that in absence of any precise formula for proportionate disallowance , no disallowance can be called for in respect of administr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder explanation to Section 73 of the Act. The learned CIT(A) also confirmed the assessment orders u/s 143(3) of the Act dated 22.12.2011 passed by the AO with respect to additions of ₹ 3,38,556/- being made u/s 14A of the Act read with Rule 8D of Income Tax Rules,1962, vide appellate orders dated 17/10/2012 passed by the learned CIT(A). 7. Aggrieved by the appellate orders dated 17/10/2012 passed by the learned CIT(A), the assessee company filed second appeal with the Tribunal. 8. The learned Counsel for the assessee company contended that the assessee company did not claimed in return of income speculation loss but the said claim was made during the assessment proceedings. The assessee company submitted that loss of ₹ 37,31,368/- was treated as speculation loss in view of explanation to Section 73 of the Act. The assessee company relied upon decision of Hon ble Bombay High Court in the case of CIT v. HSBC Securities and Capital Market India Private Limited, (2012) 208 taxman 439(Bombay) to contend that the loss shall be allowed as normal business loss. The assessee company submitted that the assessee company is broker in shares. It is submitted that Section 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was earned of ₹ 36.51 lacs while the assessee paid interest of ₹ 3.72 lacs to contend that the interest on net basis is infact earned by the assessee company and no disallowance is warranted. The audited financial statements are placed in the paper book filed with the Tribunal. It is also contended that the dividend income is earned on the shares held as stock in trade and the income on sale and purchase of shares held as stock in trade are to be excluded for the purposes of computing disallowance u/s 14A of the Act.It is contended that the investment as reflected in audited financial statement in Schedule E comprises of shares held by the assessee in Bombay Stock Exchange (BSE) of ₹ 1.22 crores and FDR held by the assessee company was ₹ 1.97 crores as at 31-03-2009. It was submitted that the FDR is yielding taxable interest income and the same shall be excluded while computing disallowance u/s 14A of the Act .It was submitted that investment in BSE is strategic investment held by the assessee company and the same should be excluded while computing disallowance. The assessee company also relied upon decision of Hon ble Delhi High Court in the case of Che ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income from business of ₹ 11,26,763/- from non- speculation business , while income from trading from shares on its own account is loss of ₹ 37,31,368/- and hence on net basis there is a loss under the head Income from business or profession , while there is dividend income of ₹ 2,81,545/- earned by the assessee company under the head income from other sources which is claimed exempt and hence the assessee company will fall within the purview of exception carved out in the explanation to Section 73 of the Act and consequently the assessee company would not be deemed to be carrying on speculation business for the purpose of Section 73(1) of the Act . The relevant extracts of the decision of Hon ble Bombay High Court in the case of CIT v. HSBC Securities and Capital Market India Private Limited, (2012) 208 Taxman 439(Bom. HC.) is reproduced hereunder: 8. In the present case, section 73 would not apply in view of the fact that the explanation thereto, does not operate in respect of a company whose gross total income consists mainly of income which is chargeable under the heads of interest on securities , income from housing property , capital gains and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deeming fiction by which a company is deemed to be carrying on a speculation business where any part of its business consists in the purchase and sale of shares of other companies. Now, the exception which is carved out applies to a situation where the gross total income of a company consists mainly of income which is chargeable under the heads Interest on securities , 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 which has arisen on account of speculation business can be set off only against the profits and gains of another speculation business. However, for Sub-Section (1) of Section 73 to apply the loss must arise in relation to a speculation business. The explanation provides a deeming definition of when a company is deemed to be carry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 73 and that consequently the assessee would not be deemed to be carrying on a speculation business for the purpose of Sec. 73(1). 9. In the circumstances, the appeal is dismissed but with no order as to costs. Respectfully following the above decision of the Hon ble jurisdictional High Court , we hold that the loss of ₹ 37,31,368/- incurred by the assessee company on share trading carried on by it on its own behalf shall not be hit by the deeming fiction of explanation to Section 73 of the Act and shall be treated as normal business loss to be set aside against the other non- speculative business income and other income as per provisions of the Act. This disposes of the ground no 1 raised by the assesee company as well additional ground raised by the assessee company. We would like to clarify that in view of our above decision, we have refrained from answering the question of law raised by the assessee with respect to retrospectivity of amendment brought in by Section 73 of the Act which was amended by Finance Act,2014 w.e.f 01-04-2015 and has left the said question open. We order accordingly. Ground No 2 pertains to the disallowance u/s 14A of the Act read w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lude the shares held as stock in trade while computing disallowance u/s 14A of the Act read with Rule 8D(2)(iii) of Income Tax Rules, 1962 and no prejudice is caused to the assessee company It was submitted that investment in BSE is strategic investment held by the assessee company and the same should be excluded while computing disallowance. The assessee company also relied upon decision of Hon ble Delhi High Court in the case of Cheminvest Limited(2015) 94 CCH 0002(Del.HC). It was submitted that rightly the assessee did not offer any disallowance and the entire disallowance made by the AO needs to be deleted. We are not inclined to agree with the assessee company that investment made by the assessee company in BSE as strategic investment is to be excluded while computing disallowance u/s 14A of the Act read with Rule 8D(2)(iii) of Income Tax Rules, 1962. We have observed that there are divergent view of the Tribunal on this issue and matter purely being factual is to be decided on the facts of the case keeping in view the mandate of Section 14A of the Act whereby the AO shall determine the amount of expenditure incurred in relation to such income which does not form part of the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to acquisition, retention and sale of shares at the most appropriate time. They require huge investment in shares and consequential blocking of funds. Besides, investment decisions are generally taken in the meetings of the Board of Directors / Shareholders for which administrative and management expenses are incurred and in some businesses regulatory approvals are required before setting up the same. There will be regular monitoring of these investments which also may require participation in the meetings of committees, Board of Director and Shareholder meetings. There will definitely be an expenditure incurred towards administrative and management cost etc. towards planning, executing and maintaining these investments . Our view is fortified by the following decisions : 1. The observation made by Hon'ble Supreme Court in the case of CIT v. Walfort Share Stock Brokers Pvt. Ltd. (2010) 326 ITR 1(SC) defining the scope of Section 14A of the Act incorporated retrospectively wef 1st April 1962. The relevant observations are reproduced as under: The insertion of section 14A with retrospective effect is the serious attempt on the part of the Parliament not to allow de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting income for the purpose of chargeability to tax under those heads. Sections 15 to 59quantify the total income chargeable to tax. The permissible deductions enumerated in sections 15 to 59 are now to be allowed only with reference to income which is brought under one of the above heads and is chargeable to tax. If an income like dividend income is not a part of the total income, the expenditure/deduction though of the nature specified in sections 15 to 59 but related to the income not forming part of total income could not be allowed against other income includible in the total income for the purpose of chargeability to tax. The theory of apportionment of expenditures between taxable and non-taxable has, in principle, been now widened under section 14A. Reading section 14 in juxtaposition with sections 15 to 59, it is clear that the words expenditure incurred in section 14A refers to expenditure on rent, taxes, salaries, interest, etc. in respect of which allowances are provided for (see sections 30 to 37). 2. The ITAT,Mumbai in the case of ACIT v. Citicorp Finance (India ) Limited (2007)108 ITD 457 has negated the contention of the assessee that it had incurred no expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd only the net dividend income is to be allowed exemption after deducting the expenses; and two, the expression expenditure incurred by the assessee in relation to income which does not form part of the total income in section 14A has to be given a wider meaning and would include both direct and indirect relationship between expenditure and exempt income. Following the decision of the Hon'ble Supreme Court in CIT v. United General Trust Ltd. (1993) 200 ITR 488 (SC), the Calcutta Bench of the Tribunal has also held that the interest paid by the assessee being attributable to the money borrowed for the purpose of making the investment which yielded the dividend and other expenses incurred in connection with or for making or earning the dividend income can be regarded as expenditure incurred in relation to dividend income. In Everplus Securities Finance Ltd. v. Dy. CIT (2006) 101 ITD 151 (Del), the Delhi Bench of this Tribunal has held that merely because the assessee did not earn the dividend out of investment in certain shares does not imply that the provisions of section 14A would not apply to that extent. In Asstt.CIT v. Premier Consolidated Capital Trust (I). Ltd. (2004) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bay High Court has been reversed, the proportionate management expenses are required to be deducted while computing the dividend income. In the decision of the Hon'ble Calcutta High Court, relied upon by the learned counsel for the assessee, Mr. Dastur, in the case of CIT v. United Collieries Ltd. (supra), it has been held that if the facts of a particular case so warrant, the allocation can be made towards expenses. In view of the aforementioned discussion and keeping in view the submissions of the learned Departmental Representative, we restore this matter to the assessing officer to verify the quantum of deduction claimed by the assessee in earlier years under section 57(i) from the dividend income (when it was taxable) and make a pro rata adjustment on the basis of subsequent investments made, inflation, etc. This ground is, accordingly, allowed for statistical purposes 4. The ITAT, Kolkatta Bench in recent reported judgment in Coal India Limited v. ACIT 2015 Tax Pub(DT)2496 in ITA No 1032/Kol/2012 pronounced recently on 13th May 2015 has categorically held that even strategic investment in group concerns for the purpose of control and not for earning dividend attract ..... X X X X Extracts X X X X X X X X Extracts X X X X
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