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2016 (8) TMI 728 - ITAT MUMBAI

2016 (8) TMI 728 - ITAT MUMBAI - TMI - Claim for setting off the loss from 'share trading activity' - Treatment to speculation business loss - Held that:- The Co-ordinate bench after detailed discussion of the issue has finally concluded that 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 place .....

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The AO, therefore, is directed to allow the assessee's claim for setting off the loss from 'share trading activity' and also the expenditure incurred relating to the said share trading activity against the income from ‘business or profession’ for the year under consideration.- Decided in favour of assessee - Disallowance u/s 14A - Held that:- The strategic investment in group companies cannot be held to be for investment purposes or with the object of earning of dividend/tax exempt income .....

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in respect of the investments made, hence no disallowance of expenditure u/s 14 A is attracted in relation to the investment portfolio. The disallowance made by the AO in the case of the assessee under section 14A of the Act is hereby ordered to be deleted. - Decided in favour of assessee - ITA Nos.1349/M/2012 & 955/M/2014 - Dated:- 29-6-2016 - SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI SANJAY GARG, JUDICIAL MEMBER For The Assessee : Shri V.C. Shah, A.R. For The Revenue : Shri S. Senthil Kumar .....

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/M/2012 for A.Y 2009-10 2. The assessee in this appeal has taken the following grounds of appeal. 1. On the facts and circumstances of the case and in law the learned CIT(A) erred in confirming that disallowance u/s 14A read with rule 8D made by Assessing Officer amounting to ₹ 43,39,842/- by ignoring the fact that there were no borrowings made for the purpose of investment as investments were made out of net worth of the company and there being no borrowings relating to or for the purpose .....

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isallowance u/s 14A. 3. The learned CIT(A) erred in not deciding on the issue of treatment of loss of ₹ 30,48,919/- as to whether it is speculation loss or business loss based on facts and decisions by considering it as afterthought. 4. Your appellant craves leave to add, to amend, alter or delete any of the above grounds. 5. Your appellant prays that justice he given. Grounds No. 1 & 2: 3. The brief facts relating to above referred to grounds are that the assessee is a company carryin .....

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sessing Officer (hereinafter referred to as the AO) however made the disallowance of ₹ 1,16,65,581/- on account of loss in share trading activity by treating the same as speculation loss as per the explanation to section 73 of the Act and thereby rejected the set off of the said loss against business income of the assessee. The AO further disallowed the set off of expenditure of ₹ 2 lakhs holding the same as relating to the above stated share trading activity. 4. Being aggrieved by t .....

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f Explanation to section 73 of the Act for disallowing the assessee's claim for setting off the loss on trading of shares against other business income. He, at the outset, while placing reliance on a recent decision of the co-ordinate bench of this tribunal in the case of its wholly owned subsidiary styled as Fiduciary Shares & Stock P. Ltd. vs. ACIT (ITA No.321/mum/2013 vide order dated 13.05.2016) has submitted that the Explanation to section 73 of the Act was inserted by the Taxation .....

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ur 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 ma .....

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ch were not investment or banking companies or companies carrying on business of granting loans or advances would be treated on the same footing as a speculation business. Thus, in the case of aforesaid companies, the losses from share dealings would be set off only against profits or gains of a speculation business. Where any such loss for an assessment year is not wholly set off against profits from a speculation business, the excess would be carried forward to the following assessment year an .....

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73 of the Act would be applicable to business of purchase and sale of shares by companies other than investment companies, banking companies or finance companies as speculation business. The learned A.R. for the assessee has further contended that Explanation to section 73 of the Act created 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 exten .....

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ieve 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 companies whose princ .....

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and therefore such amendment will have to be given retrospective effect, i.e. from the year in which the Explanation was inserted. The learned A.R. thus, has stressed that in view of the amendment made to Explanation to section 73 of the Act, the loss incurred by the assessee on account of trading in shares is not a speculative loss and hence the same can be adjusted against other business income like brokerage and commission. He has strongly relied upon the observations made by the co-ordinate .....

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assessee to claim adjustment of loss from share trading against other business income of the assessee-company. 8. We have considered the rival contentions. We find that the issue is now squarely covered in favour of the assessee by the decision of the co-ordinate bench of this Tribunal in the case of Fiduciary Shares & Stock P. Ltd. (supra). The Co-ordinate bench after detailed discussion of the issue has finally concluded that that the amendment inserted in Explanation to section 73 of the .....

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s 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. The relevant part of the observation made by the co-ordinate bench of this Tribunal in its order dated 13.05.2016 in the case of Fiduciary Shares & Stock P. Ltd. (supra) is reproduced as under: 5.6.1. We have heard the rival contentions of both the parties and perused and carefully considered the material .....

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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. .....

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ion 73 of the Act. In other words, transactions prior to 01.04.1977, which were delivery based, were not treated as speculative transactions and hence the loss arising from such transactions was allowed to be adjusted against the income of the year under consideration. After the insertion of Explanation to section 73 of the Act, companies other than investment companies or finance companies carrying on business of purchase and sale of shares, then the loss from such business would be treated as .....

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ed to by business house controlling groups of companies to manipulate and reduce the taxable income of companies under their control by showing loss on purchase and sale of shares of group companies. It appears that the intention of the Legislature, from a perusal of the Wanchoo Committee Report and CBDT Circular No. 204 dated 24.07.1976, was not to treat purchase and sale of shares by companies whose main business is trading in shares as speculative business and therefore the Explanation to sec .....

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with the intention of the Legislature by placing the companies whose principal business is trading in shares as part of the exception to Explanation to section 73 of the Act, because such companies were not the companies for whom the Explanation was inserted. 5.6.3 The insertion of the amendment 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 .....

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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 43B of t .....

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Tax collected by the assessee and paid after the end of the relevant previous year but within the time allowed under the relevant Sales Tax Law should be disallowed under section 43B of the Act. The Income Tax Officer disallowed the deduction of Sales Tax collected by the assessee for the last quarter of the accounting year as the same was paid in the subsequent year. The aforesaid difficulty was cured by the insertion of the first proviso w.e.f. 01.04.1988. The Hon'ble Apex Court held that .....

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when the section was brought on the statue. 5.6.4 The Hon'ble Apex Court in the case of CIT vs. J.H. Gotla (156 ITR 323) at page 339 and 340 thereof has observed as under: - "In the case of Varghese v. ITO [1981]131 ITR 597, this court emphasised that a statutory provision must be so construed, if possible, that absurdity and mischief may be avoided. "Where the plain literal interpretation of a statutory provision produces a manifestly unjust result which could never have been inte .....

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e 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 .....

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strict literal construction. Though equity and taxation are often strangers, attempts should be made that these do not remain always so and if a construction results in equity rather than in injustice, then such construction should be preferred to the literal construction. Furthermore, in the instant case, we are dealing with an artificial liability created for counteracting the effect only of attempts by the assessee to reduce tax liability by transfer. It has also been noted how for various pu .....

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Committee and Circular NO. 204 dated July 24, 1976, makes the position clear that Explanation 4(a) to section 271(1)(c)(iii) intended to levy penalty not only in the case where after addition of concealed income, a loss returned after assessment becomes positive income, but also in a case where addition of concealed income reduces the returned loss and finally the assessed income is also a loss or a minus figure. Therefore, even during the period between April 1, 1976 and April 1, 2003, the posi .....

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effect. 5.6.7 In the case of Daga Capital Management Pvt. Ltd. (117 ITD 169) the Tribunal by majority view held that the ultimate test for considering the retrospective or prospective operation of an amendment is to consider its nature rather than going by the date on which it is stated to be applicable from. 5.6.8 In the case of Rajeev Kumar Agarwal vs. Addl.CIT ([(2014) 45 taxmann.com 555 (Agra-Trib.)], the assessee had made interest payments without discharging his obligation to withhold tax .....

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t 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 subclause (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 sect .....

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ees, in cases where assessees had tax withholding obligations from the related payments, without corresponding income inclusion by the recipient. That is the clearly discernable bigger picture, and, unmistakably, a very pragmatic and fair policy approach to the issue - howsoever belated the realization of unintended and undue hardships to the taxpayers may have been. It seems to proceed on the basis, and rightly so, that seeking tax deduction at source compliance is not an end in itself, so far .....

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ubstantially interested is prospective OR is clarificatory and therefore applicable with retrospective effect. The Tribunal answered the question in para 13.aa thereof holding that the amendment to section 68 of the Act by insertion of proviso is clarificatory and hence retrospective. 5.6.10 We have carefully perused the decision of the Hon'ble Bombay High Court in the case of Prasad Agents (P) Ltd. in 333 ITR 275 (Bom) and are of the humble opinion that the decision/finding rendered therein .....

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e treatment between losses suffered in the course of trading in shares and losses in 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) w .....

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al 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 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 'oth .....

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iance of the Ld. DR on the decision in the case of CIT vs. Intermetal Trade Ltd. [2006] 285 ITR 536 (MP) and in the case of R.P.G. Industries Ltd. vs CIT & another [2011] 338 ITR 313 (Cal) is concerned, we find that the said decisions have been rendered prior to the insertion of amendment to Explanation to section 73 of the Act by Finance (No. 2) Act, 2014, hence there was no question before the Hon ble respective High Courts regarding the retrospective or prospective operation of the said a .....

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is accordingly decided in favour of the assessee. The AO, therefore, is directed to allow the assessee's claim for setting off the loss from 'share trading activity' and also the expenditure incurred relating to the said share trading activity against the income from business or profession for the year under consideration. Ground No.3: 11. In the year under consideration, the Assessing Officer (AO) noticed that the assessee had earned tax free dividend income of ₹ 13288/- and t .....

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utilized to earn income in various forms. He, therefore, applying rule 8D of the Income Tax Rules, calculated the disallowance under section 14A of the Act at ₹ 17,11,021/- and disallowed the same on account of expenditure incurred for earning of exempt income. The Ld. CIT(A) confirmed the said disallowance. 12. At the outset, the Ld. A.R. for the assessee, before us, has stated that the assessee has maintained two portfolios in relation to share transactions i.e. one relating to the inves .....

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he business strategy of the assessee. He, therefore, has contended that while making out the disallowance under section 14A read with rule 8D of the Income Tax Rules, the strategic investments made in the group concerns should not be considered and be excluded while calculating the disallowance under rule 8D. He has further submitted that strategic investments were made out of own share capital and reserves of the assessee company. He in this respect has brought our attention to page 2 of the co .....

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ss income of the assessee. Interest expenditure, if any, incurred by the assessee was relating to the loans used for the activity of trading in government securities and that no interest amount was paid in relation to the investments made in wholly owned subsidiaries as the assessee was possessed of own funds for making such investments. He has further submitted that since no dividend income has been earned out of the investment portfolio, hence, no disallowance was attracted in the light of the .....

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has been raised and decided by the co-ordinate bench of the Tribunal in the case of Kotak Mahindra Capital Co. Ltd. vs. DCIT in ITA Nos.5748/M/2012 and 248/M/2013 for A.Ys. 2008-09 & 2009-10 respectively, decided on 21.01.2015 wherein the Tribunal has made the following observations: 3. Rival contentions have been heard and perused the records. The A.O. has made the disallowance u/s 14A r.w. Rule 8-D at 0.5% of administrative expenses. There was no disallowance on account of interest while w .....

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buting administrative expenses for making disallowance u/s 14A of the Act. The ld. A.R. has placed reliance on the following decisions:- i) HSBC Securities and Capital Markets (I) P. Ltd. - ITA No. 3186/M/08 ii) Zenstar Technologies Ltd. - ITA No. 4538/M/05 iii) Shri Bhalchandra R. Sule - ITA No. 3684/M/05 iv) EIH Associated Hotels vs. DCIT - ITA No. 1503/Mad/12 v) Interglobe Enterprises Ltd. vs. DCIT - ITA No. 1362 & 1032/De1/13 vi) JM Financial Limited vs. ACIT - ITA No. 4521/M/12 vii) CIT .....

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4. On the other hand, the ld. D.R. relied on the orders of lower authorities. 5. We have considered the rival contentions, carefully gone through the orders of authorities below. We have also deliberated upon the judicial pronouncements cited with reference to the exclusion of investment made in the companies which are strategic in nature. As per the judicial pronouncements cited above, such investments should not be taken into account for working out the disallowance u/s 14A of the Act. 14. Th .....

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the borrowed amount under section 36(1)(iii) of the Act. We, further find that recently the Hon ble Delhi High Court in the case of Eicher Goodearth Ltd. vs. CIT (2015) 60 taxman.com 268 (Del.) has held that if the expenditure is incurred for the purpose of promotion of business-more specifically to retain control or as part of his strategic investment of the assessee company, such expenses by way of interest out go would have to be treated as allowable under section 36(1)(iii) of the Act. In v .....

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o exclude the strategic investments made by the assessee in group companies while calculating the disallowance under section 14A read with rule 8D of the Income Tax Act. 15. Further, we find that the Hon ble Bombay High Court in the case of CIT vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom) has held has held that if there are funds available, both interest free and over draft and/or loans taken, then a presumption would arise that investments would be out of the interest free fun .....

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the Hon ble Delhi High Court in the case of Joint Investment Private Limited (supra) has held that section 14 of the Act or rule 8D cannot be interpreted so as to mean that the entire tax exempt income of the assessee is to be disallowed. That the window for disallowance is indicated in Section 14A, and is only to the extent of disallowing expenditure incurred by the assessee in relation to the tax exempt income. This proportion or portion of the tax exempt income surely cannot swallow the entir .....

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ng any expenditure incurred in relation to the said income. Almost identical issue has been taken by the Hon ble Allahabad High Court in the case of CIT Kanpur vs. M/s. Shivam Motors Pvt. Ltd. in ITA No.88 of 2014 vide order dated 05.05.2014; by the Hon ble Gujarat High Court in the case of CIT vs. Corrtecth Energy Pvt. Ltd. in ITA No.239 of 2014 vide order dated 24.03.2014 and by the Hon ble Bombay High Court in the case of CIT vs. M/s. Delite Enterprises in ITA No.110 of 2009 vide order dated .....

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w of disallowance u/s 14A of the Act is concerned, the Ld. A.R., in this respect, has relied upon 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 vide order dated 17.03.2015 wherein the Hon ble Bombay High Court has upheld the finding of the Tribunal holding that while making the disallowance under rule 8D, the shares held as stock in trade should not be considered; only the shares taken as investment in the account be c .....

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12 while relying upon the decision of the Hon ble Kerala High Court in the case of CIT vs. Smt. Leena Ramachandran (339 ITR 296) and further on the decision of the Hon ble High Court of Karnataka in the case of CCI Ltd. vs. JCIT 250 CTR 291 has held that disallowance under section 14A in relation to dividend received from trading shares cannot be made. The said finding of the Tribunal has been upheld by the Hon ble Jurisdictional Bombay High Court in the case of CIT vs. India Advantage Securitie .....

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