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2016 (8) TMI 258 - ITAT MUMBAI

2016 (8) TMI 258 - ITAT MUMBAI - TMI - Treating the loss as Speculation Loss under Explanation to Section 73 - Held that:- The loss 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 t .....

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ded u/s 14A(2) of the Act keeping in view Rule 8D(2)(iii) of the Income Tax Rules, 1962.We are therefore inclined to 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) .....

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012 - 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 , is directed against appellate order dated 17-10-2012 passed by learned Commissioner of Income Tax (Appeals)- 8, Mumbai (hereinafter called the CIT(A) ), for the assessment year 2009-10 , the appellate proceedi .....

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ellate Tribunal, Mumbai (hereinafter called the Tribunal ) in ITA no. 7068/Mum/2012 for the assessment year 2009-10 reads as under:- (1). The learned Assessing Officer has not given reasonable opportunity of being heard to the appellant. The learned AO has erred in disallowing expenditure of ₹ 41,515/- on ad-hoc basis on the grounds that the same is relating to speculation business. (2) The learned assessing officer has erred in disallowing ₹ 3,38,556/- u/s 14A. (3) The learned AO ha .....

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hese additional grounds raised by the assessee company be admitted as the grounds raised are legal and goes to the root of the matter . It was submitted that these additional grounds could not be raised earlier inadvertently and unintentionally. The additional grounds raised by the assessee company are: 5.1 The Income tax officer-4(2)(2) , Mumbai [ the AO ] erred in treating the loss of ₹ 37,31,368/- as Speculation Loss under Explanation to Section 73 of the Income Tax Act,1961[ the Act ] .....

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nd 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 , th .....

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Act. The AO also observed that the assessee company has in the revised computation of income not worked out expenses attributable to speculation loss incurred by the assessee company. The assessee company was asked by the AO to give the working of the expenses for speculation , the assessee company submitted that the assessee company is engaged in business of broking activity as well share trading in the name of its clients and also in its own name. The total turnover of the assessee company fo .....

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isallowed proportionate expenses relating to the assessee company s own turnover but in appeals it was allowed. The assessee company gave details of proportionate expenses as under: (i) Salary ₹ 25,000.00 (ii) Telephone ₹ 8,720.00 (iii) Postage ₹ 194.00 (iv) Stock Exchange Exp. ₹ 1,431.00 (v) General Expenses ₹ 1,089.00 (vi) STT Paid ₹ 1,716.00 (vii) Transaction Charges ₹ 739.00 (viii) Electricity Charges ₹ 2,626.00 - ₹ 41,515.00 The AO treat .....

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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 in .....

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can be called for in respect of administration cost attributable to earning of such tax free income. The AO rejected the contentions of the assessee company and held that as per Section 14A of the Act no deduction shall be allowed in respect of expenditure incurred by the assessee company in relation to the income which does not form part of the total income under the Act. The AO invoked provisions of Section 14A(2) of the Act and held that if the AO is not satisfied with the correctness of the .....

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cated for the purposes of calculation of expenditure u/s 14A of the Act. The disallowed ₹ 3,38,556/- u/s 14A read with Rule 8D of Income Tax Rules, 1962, whereby disallowance under Rule 8D(2)(ii) was made of ₹ 2,28,105/- and ₹ 1,10,451/- was made under Rule 8D(2)(iii) of Income Tax Rules,1962, vide assessment orders dated 22.12.2011 passed by the AO u/s 143(3) of the Act. 5. Aggrieved by the assessment orders dated 22.12.2011 passed by the AO u/s 143(3) of the Act, the assessee .....

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xpenses attributable to speculation expenses, aggregating to ₹ 41,515/- and hence the contentions of the assessee company were rejected by the learned CIT(A) vide appellate orders dated 17/10/2012 whereby the assessment orders dated 22.12.2011 passed by the AO u/s 143(3) of the Act was upheld. The assessee company did not contest before the learned CIT(A) the treatment of loss of ₹ 37,31,368/- as speculation loss under explanation to Section 73 of the Act. The learned CIT(A) also con .....

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any 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 bu .....

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effect. The learned counsel for the assessee company relied on the decision of Hon ble Delhi High Court in the case of CIT v. Ansal Land Mark Township Private Limited (2015) 377 ITR 635(Del. HC) whereby Hon ble Delhi High Court has held that second proviso to Section 40(a)(ia) of the Act is declaratory and curative and has retrospective effect with effect from 01-04-2005 when the Section 40(a)(ia) of the Act was brought into the Statute. The learned counsel submitted that there was undue hardsh .....

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38,556/- u/s 14A of the Act. It was submitted that the assessee company has received ₹ 2,81,541/- as dividend income , while disallowance of ₹ 3,38,556/- has been made u/s 14A of the Act read with Rule 8D of Income Tax Rules, 1962.It was submitted that the assessee company has share capital and reserves of ₹ 3.39 crores as at 31-03-2009 , while the investments are to the tune of ₹ 3.19 crores.It was submitted that net owned funds are more than the investments made and hen .....

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the interest income 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 .....

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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 the assessee company rightly did not offer any disallowance and the entire disallowance made by the AO needs to be deleted. Ground No 3 & 4 -It was submitted that the assessee company did not wish to persue ground n .....

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the Act. The ld. DR submitted that matter with respect to disallowance of expenditure under Section 14A of the Act read with Rule 8D of Income Tax Rules, 1962 can be set aside to the file of AO for examination and verification of the claim of the assessee company. The learned DR relied upon the orders of the learned CIT(A) on other issues. 9. We have considered the rival contentions and perused the material on record including the case laws relied upon by the rival parties. We have observed that .....

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the revised computation of income filed with the AO during assessment proceedings u/s 143(2) read with Section 143(3) of the Act as the same was hit by explanation to Section 73 of the Act. The AO treated the said loss as speculation loss and allowed it to be carried forward . The assessee company did not contested the same before the learned CIT(A) . The assessee company relied upon decision of CIT v. HSBC Securities and Capital Markets Private Limited(supra) . We have observed that the assess .....

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laimed 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 p .....

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as the only chargeable income, as the respondent had suffered a business loss otherwise. In that view of the matter, the judgment of the Division Bench of this Court in the case of Darshan Securities (P.) Ltd. (supra) supports the respondent's case. In that case, during the relevant assessment year, the assessee had a loss of about ₹ 2.33 crores in the share trading and had dividend income of about ₹ 4.80 lacs. The Division Bench held in paragraphs 6, 7, 8 and 9 as under :- " .....

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on (sic) extends only for the purposes of the section. The bracketed portion of the explanation, however carves out an exception. The exception is that the provision of the explanation shall not apply to a company whose gross total income consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources" or a company whose principal business is of banking or .....

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rofits and gains of business or profession. 8. In our view, the submission which has been urged on behalf of the Revenue cannot be accepted. Leaving aside for a moment, the exception, which is carved out by the explanation to Section 73, the explanation creates a 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 sit .....

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wever 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 car .....

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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 speculation business would reverse the order of application. That would be impermissible, nor, is it contemplated by Parliament. For, the ambit of Sub-Section (1) of Section 73 is only to prohibit the setting off of a loss which has resulted from a speculation business, save and accept against the profits and gains of another specul .....

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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 referred to in the explanation. 9. Consequently, in the present case the gross total income of the assessee was required to be computed inter alia by computing the income under the head of profits and gains of business or profession as well. Both the income from service charges in the amount of ₹ 2.25 crores a .....

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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 .....

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tion open. We order accordingly. Ground No 2 pertains to the disallowance u/s 14A of the Act read with Rule 8D of Income Tax Rules, 1962 of ₹ 3,38,556/-. The assessee company has received ₹ 2,81,541/- as dividend income. We have observed that the assessee company has share capital and reserves of ₹ 3.39 crores as at 31- 03-2009 , while the investments are to the tune of ₹ 3.19 crores. It was submitted before us that the net owned funds are more than the investments made a .....

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case of Reliance Utilities and Power Limited (supra) , CIT v. HDFC Bank Limited in ITA no 330 of 2012 (366 ITR 505(Bom. HC) ) and CIT v. HDFC Bank Limited(WP no. 1753 of 2016)((2016) 67 taxmann.com 42(Bom.HC), the disallowance u/s 14A of the Act read with Rule 8D(2)(ii) of Income Tax Rules, 1962 is not warranted and we order deletion of the disallowance under Rule 8D(2)(ii) of Income Tax Rules, 1962 to the tune of disallowance of interest expenditure of ₹ 2,28,105/- made by the AO and as s .....

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axable interest income cannot be included for computing the disallowance of expenditure u/s 14A of the Act read with Rule 8D(2)(iii) of Income Tax Rules, 1962 . We are also agreeable with the proposition of the assessee company that shares held as stock in trade are not to be included for the purposes of disallowance u/s 14A of the Act read with Rule 8D of Income Tax Rules, 1962 while computing investments for computing disallowance u/s 14A of the Act, we have observed that the AO did not includ .....

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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 f .....

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decision of Tribunal , Mumbai in the case of Uma Polymers Limited v. ACIT in ITA No 5366/Mum/2013 for the assessment year 2009-10, which was authored by one of us(Accountant Member) whereby Tribunal held as under: 12. We have considered the rival submissions and perused the material on record and case laws relied upon by the assesee company. We find that Section 14A of the Act read with Rule 8D(2)(iii) of the Income Tax Rules,1962 is applicable from the assessment year 2008-09 as held by the Ho .....

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to mention that under normal circumstances strategic investment are made for the purposes of doing business with a long term horizon and in that case no doubt that the objective is to earn profits/returns from the investment but normally the said profit / returns will come by way of dividend(s) when the companies come into profit and declare dividend to the shareholders . Such dividends in the hands of shareholders shall be exempt from tax. No doubt , the returns can also come by way of divestme .....

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ubstantial market research, day-to-day analysis of market trends and decisions with regard 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. Ther .....

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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 deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income (see Circular No. 14 of 2001 dated 22-11 .....

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deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of section 14A is that certain incomes are not includible while computing total income as these are exempt under certain provisions of the Act. In the past, there have been cases in which deduction has been sought in re .....

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section 14A. Insection 14A, the first phrase is "for the purposes of computing the total income under this Chapter" which makes it clear that various heads of income as prescribed under Chapter IV would fall within section 14A. The next phrase is, "in relation to income which does not form part of total income under the Act". It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14A. F .....

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d 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 jux .....

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is that one can earn substantial dividend income without incurring any expenses whatsoever including management or administrative expenses. By same logic, it is equally difficult to accept that the only expenses involved in earning the dividend income are those incurred on collection of dividend or on encashing a few dividend warrants. A company cannot earn dividend without its existence and management. Investment decisions are very complex in nature. They require substantial market research, da .....

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can be earned by incurring no or nominal expenditure. This aspect of the matter has also received careful attention of Chennai Bench of this Tribunal in Southern Petro Chemical Industries v. Dy. CIT (2005) 3 SOT 157 (Chennai- Trib). After comprehensive consideration of all the relevant aspects of the case including the provisions of law, the Chennai Bench has held that investment decisions are very strategic decisions in which top management is involved and therefore proportionate management exp .....

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a Bench of this Tribunal has laid down two propositions: one, in view of section 14A inserted in the Income Tax Act with retrospective effect from 1-4-1962, pro rata expenses on account of interest relatable to investment in shares for earning exempt income from dividend are to be disallowed against taxable income and 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 .....

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d 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 .....

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perused the records of the case. Admittedly, these investments in shares were made during the course of the carrying on of business and as is evident from the records, substantial investments had been made by the assessee in earlier years, and during the current year as well the assessee made an investment of ₹ 19 crores. Whether to invest or not to invest and whether to retain the investments or to liquidate the same are very strategic decisions which the management is called upon to take .....

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eme Court in the case of United General Trust Ltd. (supra), applying the decision oi Hon'ble Supreme Court in the case of Distributors (Baroda) (P) Ltd. v. Union of India (1985) 47 CTR (SC) 349: (1985) 155 ITR 120 (SC), reversed the decision of the Hon'ble Bombay High Court in CIT v. United General Trust (P) Ltd. (supra), wherein the question was as under: "Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in applying the decision of t .....

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es 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 .....

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rically held that even strategic investment in group concerns for the purpose of control and not for earning dividend attract disallowance u/s 14A of the Act read with rule 8D of the Income Tax Rules, 1962. Since the assessee company had claimed that no expenditure was incurred, the assessing authorities were correct to estimate the incurring of such expenditure under section 14A of the Act read with Rule 8D(2)(iii) of Income Tax Rules,1962. The assessing officer has disallowed by computing the .....

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in the orders of the authorities below. We order accordingly. Respectfully following the above decision of the Co-ordinate Benches of Mumbai ITAT in the case of Uma Polymers Limited in ITA no.5366/Mum/2012 dated 30-09-2015, and also of the decision of Kolkatta Tribunal Coal India Limited v. ACIT 2015 Tax Pub(DT)2496 in ITA No 1032/Kol/2012 pronounced on 13th May 2015 whereby Kolkatta Tribunal has categorically held that even strategic investment in group concerns for the purpose of control and n .....

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