TMI Blog2016 (8) TMI 728X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, but the same, in the light of above referred to Judicial decisions can safely be said to be related to the business activity of the assessee and no disallowance, therefore, is attracted on such an income u/s 14A of the Act. Thus we direct the AO to 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. Since the assessee, in the case in hand, has not earned any dividend income 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 - - - D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year under consideration declaring total income of ₹ 2,74, 67,743/-. The assessee during the year earned consultancy and advisory fees income in relation to its financial services activity of ₹ 12,48,50,000. The assessee claimed loss on account of its share trading activity as deduction against the said income. The Assessing 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 the order of assessment for A.Y. 2009-10 dated 30.06.2011, the assessee preferred an appeal before the CIT(A) Mumbai agitating the above disallowances. The learned CIT(A), however, dismissed the appeal vide the impugned order dated 19.12.2011 upholding this disallowance made by the AO by invoking the provisions of Explanation to section 73 of the Act. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nst 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 and set off against profits, if any, from any speculation business. He therefore has submitted that the Explanation to section 73 of the Act was inserted to curb the methods sometimes resorted to by business houses controlling a group of companies to manipulate and reduce the taxable income of companies under their control by showing losses incurred on purchase and sale of shares of group companies. However an exception was carved out of the Explanation by providing that the provisions of section 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 spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... G. Industries Ltd. vs CIT another [2011] 338 ITR 313 (Cal) to contend that the authorities below had correctly not allowed the 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 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. Accordingly, a company, the principal business of which is the business of trading in shares, would fall under the exception to the explanation to section 73 of the Act. 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m 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 supra) was to curb the methods/devices sometimes resorted 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 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 Expl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 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 retrospective in operation, i.e. w.e.f. 01.04.1984 from 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 combined reading of the recommendations of the Wanchoo 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 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 issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 company in which the public are not substantially 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see Fiduciary Shares Stock P. Ltd. (supra) on identical facts, is fully applicable to the case of the assessee. 10. So far as the reliance 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 amendment brought vide Act of 2014. Moreover the said decisions have been rendered in different context and it was not the case of any party that their principal business was of trading in shares. Hence, the said decisions relied upon by the ld. DR can not be applied to the facts of the case in hand. Therefore, respectfully following the above decision of the Tribunal in the case of fully owned subsidiary of the assessee Fiduciary Shares Stock P. Ltd. (supra) on identical facts, this issue is accordingly decided in favour of the assessee. The AO, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in this respect has brought our attention to page 2 of the compilation to show that the assessee had own sufficient funds available to it for making such strategic investments in its subsidiaries. The learned AR has further submitted that the assessee had not earned any dividend income in relation to the investments made in subsidiary companies. The only dividend income of ₹ 13288/- earned during the year was in relation to shares held as stock in trade. The entire dividend income earned from share trading activity was offered for taxation as business 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 recent decision of the Honourable Delhi High Court in the case of M/s Cheminvest Ltd versus CIT (ITA No. 749/2014). The learned AR on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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. The Ld. A.R. of the assessee has further brought our attention to the decision of the Hon ble Bombay High Court in the case of CIT, Panaji, Goa vs. Phil Corpn. Ltd. (2011) 202 Taxman 368 wherein the Hon ble Bombay High Court has held that where the investment in shares of sister/subsidiary company is made to have control over that company and further that such an investment was accordingly part of the business of the assessee, in that event the assessee is entitled to deduction of interest paid on 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 (De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... em Investments vs. CIT (2015) 61 taxman.com 118 has held that section 14A will not apply if no exempt income is received or receivable during the relevant previous year and that the expression does not form part of the total income , in section 14A of the Act envisages that there should be an actual receipt of income which is not included in the total income during the relevant previous year for the purpose of disallowing 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 26.02.09. Since the assessee, in the case in hand, has not earned any dividend income in respect of the investments made, hence in the light of the above case laws of the higher authorities, no disallowance of expenditure u/s 14 A is attracted in relation to the invest ..... X X X X Extracts X X X X X X X X Extracts X X X X
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