TMI Blog2017 (3) TMI 185X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act and other evidences/explanations in its defense and also to enable A.O. to make the disallowance of expenditure incurred in relation to earning of exempt income in accordance with mandate of Section 14A of the Act . Marked to market loss - Held that:- The eligible transactions are carved out of speculative transactions vide insertion of clause (d) to Section 43(5) of the Act by Finance Act, 2005 w.e.f. 01-04-2006. Hence, the matter needs to be set aside to the file of the A.O. for the denovo determination of the issue on merits for verifying whether the said transactions carried out by the assessee falls within the mandate of Section 43(5)(d) of the Act read with explanation 1 to be covered as business loss vis-à-vis speculative loss and the assessee is directed to produce all relevant cogent evidences and explanations to support its contention. The assessee is in business of trading in shares and stocks. The marked to market loss arising out of derivative contract entered into by the assessee shall be allowed arising due to adverse movement of share prices on the last date of previous year. The AO is also directed to verify that the said marked to market losses so allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8/Mum/2013 for assessment year 2007-08 by the assessee in memo of the appeals filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called the tribunal ) read as under:- I. The Commissioner of Income-tax (Appeals) - 5, Mumbai (hereinafter referred to as the CIT(A)) erred in upholding the action of the Deputy Commissioner of Income-tax - 2(2), Mumbai (hereinafter referred to as the Assessing Officer) in disallowing a sum of ₹ 2,94,880 on account of expenses incurred for earning dividend income by invoking the provisions of section l4A of the Act. The appellants contend that on the facts and in the circumstances of the case and in law, the CIT(A) ought not to have upheld the action of the Assessing Officer in disallowing the aforesaid amount of ₹ 2,94,880 as there is no expenditure incurred in relation to earning dividend income and as such, no disallowance can be made under section 14A. Without prejudice, the appellants contend that the calculation of proportionate expenses allocated to the earning of exempt income is not in consonance with the provisions of Rule 8D and hence, needs to be calculated as per law. 2. The CIT(A) erred in upholding t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure was incurred in relation to earning of dividend income by the assessee and hence, no disallowance can be made u/s 14A of the Act. The ld. CIT(A) observed that the A.O. has made disallowance u/s 14A of the Act by invoking the provisions of Rule 8D(2)(iii) of Income-tax Rules, 1962 , the disallowance was upheld by ld. CIT(A). The ld. CIT(A) relied on the following case laws while upholding the assessment order dated 27-10-2009 passed by the AO u/s 143(3) of the Act , vide appellate order dated 23-11-2012:- i) Southern Petro Chemical Industries v. DCIT (2005) 93 TTJ (Chennai) 161. Held, Expenditure attributable to earning of dividends which are exempt under s.10(33)-Whether to invest or not to invest and whether to retain the investments or to liquidate the same are very strategic decisions in which top management is involved-Said decision making process is very complicated and requires very careful analysis Thus, proportionate management expenses are required to be deducted while computing the dividend income. ii) DCIT v. S. G. Investments and Industries Ltd (2004) 89 ITD 44 (Cal), Held, expenditure incurred by the assessee in relation to income which does not fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observed that since the provision is a mere notional loss, the same is not allowable , hence learned CIT(A) dismissed the appeal of the assessee by affirming the addition made in the assessment order dated 27.10.2009 passed by the AO u/s 143(3) of the Act, vide appellate order dated 23.11.2012 passed by learned CIT(A). 5. Aggrieved by the appellate order dated 23.11.2012 passed by the ld. CIT(A), the assessee is in appeal before the tribunal. 6. None appeared on behalf of the assessee, hence, we proceed to dispose of the appeal after hearing ld. D.R. . We have observed that this appeal has been fixed from time to time since April 2014. The counsels who were appointed by the assessee to argue this appeal are all qualified Chartered Accountants namely CA Rajiv Khandelwal, CA Neelkanth Khandelwal and CA. Hetal Panchal . The said Chartered Accountants were appointed by the assessee company vide Power of Attorney dated 18th March, 2014 executed in favour of these Chartered Accountants, which is placed in file . The said Chartered Accountants duly accepted the appointment on 18-03-2014 itself to attend to this appeal before the tribunal. We have observed that said counsels have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppearances and compliances before the tribunal in a very lax and casual manner which is not expected from the Senior counsels who are qualified professionals. We are pained to write these lax and casual approach on the part of the counsel of the assessee but at the same time we sincerely hope and believe that the assessee as well as the counsels will take this matter of non-appearances before the tribunal in a true and right spirit so that there could be early and quick dispensation of justice which is mandate of the tribunal. The said frequent adjournments on frivolous grounds or nonappearances of the assessee or its counsels cost time and resources of the country. If counsels after accepting appointment does not want to represent the assessee before the tribunal due to any reason whatsoever, then as per established standards and procedures, they should make a request before the tribunal to withdraw their Power of Attorney with copy to assessee instead of continuing with such appeals . We hope that our comments will be taken in true spirit by learned counsels and they will ensure due compliance at the time of hearing before the tribunal and help in quick disposal of the appeals by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is directed to produce all necessary details of expenses incurred for earning dividend income u/s 10(34) of the Act and other evidences/explanations in its defense and also to enable A.O. to make the disallowance of expenditure incurred in relation to earning of exempt income in accordance with mandate of Section 14A of the Act . The assessee is engaged in business of dealing in shares and stocks. We shall also clarify that the investment will not include stock-in-trade, while computing disallowance of expenditure u/s 14A of the Act.We order accordingly. 9. With respect to the second issue, the ld. D.R. submitted that the assessee has claimed loss on open position in futures and options to the tune of ₹ 15,71,714/- being marked to market loss. It is submitted that these are notional losses which cannot be allowed. It was also stated that apart from business losses , the assessee also had earned speculation profits to the tune of ₹ 18.68 lacs . The ld. D.R. further relied upon the order of the ld. CIT(A). 10. We have heard ld. D.R. and perused the orders of authorities below and material on record. We have observed that the assessee has entered into futures and opt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) recognised stock exchange means a recognised stock exchange as referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfils such conditions as may be prescribed and notified by the Central Government for this purpose;] Thus, the eligible transactions are carved out of speculative transactions vide insertion of clause (d) to Section 43(5) of the Act by Finance Act, 2005 w.e.f. 01-04-2006. Hence, the matter needs to be set aside to the file of the A.O. for the denovo determination of the issue on merits for verifying whether the said transactions carried out by the assessee falls within the mandate of Section 43(5)(d) of the Act read with explanation 1 to be covered as business loss vis- -vis speculative loss and the assessee is directed to produce all relevant cogent evidences and explanations to support its contention. The assessee is in business of trading in shares and stocks. The marked to market loss arising out of derivative contract entered into by the assessee shall be allowed arising due to adverse movement of share prices on the last date of previous year. Reference may be drawn to the decision of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the date of financial statement as at 31st March 2009 arising due to adverse movement in exchange rate between United States Dollars vis-a-vis in relation to Indian Rupee as on the date of Balance Sheet as at 31st March 2009 is not a notional or contingent loss rather it is a ascertained liability which has crystallized on the date of Balance Sheet as at 31st March 2009 and can be computed with reasonable certainty and accuracy, hence allowable as non-speculation loss. We order accordingly . The AO is also directed to verify that the said marked to market losses so allowed to the assessee are duly factored / reflected by way of reduction in the opening stock of derivative contract valuation for the succeeding year so that there is no duplicity in claiming the said loss by the assessee in the immediately succeeding year when the said derivative contracts are finally concluded/completed. In the result, appeal of the assessee is allowed for statistical purposes. We order accordingly. 11. In the result, appeals of the assessee in ITA No. 538/Mum/2013 for assessment year 2008-09 is allowed for statistical purposes as indicated above. Now, we shall take up assessee s appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the time prescribed by section 139(1) of the Act. The appellants further, contend that the CIT(A) ought not to have upheld the action of the Assessing Officer in charging interest under sections 234A and 234B inasmuch as - (a) the Assessing Officer has not given an opportunity to the appellants before charging the said interest as required by the principles of nature justice, (b) the charging of interest is not in accordance with law. 13. It was observed by the A.O. that the assessee has earned dividend income of ₹ 16,07,123/- which was claimed exempt u/s 10(34) of the Act. The assessee did not disallowed any amount of expenses for earning of the dividend income as contemplated u/s 14A of the Act. The assessee was asked by the AO to furnish working of the disallowance u/s 14A of the Act read with Rule 8D of Rules of 1962. In reply, the assessee submitted detailed explanation stating that there were no direct or indirect or common expenses debited to the P L account related to earning of dividend income. It was also submitted by the assessee that for the purpose of calculation of disallowance under Rule 8D(2) of Rules of 1962, the investment will not include stock ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me amounting to ₹ 46,491/- is clearly disallowable u/s 14A r.w.r. 8D(2)(i). The disallowance of ₹ 46,491/- is therefore upheld. (b ) In r/o of disallowance of ₹ 82,42,536/- u/s 14A r.w.r. 8D(ii) The financial results are as under: 31-03-2008 31-03-2007 Unsecured loans 821,088,103 214,862,723 Investment 170,838,962 16,289,526 Total share holder funds 77,232,291 85,3057,709 The details of unsecured loans on which interest is paid is as under: Indiabulls Services Ltd. Rs.492,551,415 Esquire Pvt. Ltd., ₹ 27,730,413 A perusal of the aforesaid facts clearly reveals that though the investment have increased from ₹ 1.62 crs to ₹ 17.08 crs, the share holders funds have decreased from ₹ 8.5 crs to ₹ 7.72 crs. On the other hand, unsecured loans carrying interest have increased. The appellant was asked that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of Sec.14A of Income-tax Act,1961 ). . iv) ITO Vs. Daga Capital Management (P) Ltd 119 TTJ (Mum) SB:- Held, there is no iota of doubt that the intention behind with the expression in relation to' in S.14A is to encompass not only the direct but also indirect expenditure which has any relation to the exempt income. The relation has to be seen between the exemptincome and the expenditure incurred in relation to it and not vice - versa. In order to escape tax applicability of S.14A, onus is on the assessee to prove that expenditure was incurred for earning taxable income. 3.2 In the light of the ratio laid down in aforesaid cases, the disallowance of expenses of ₹ 4,67,821/- is as per sec. 14A r.w. Rule 8D(2)(iii). The disallowance made by the A.O. is upheld. 3.3 This ground of appeal is therefore dismissed. 16. With respect to second issue as to the treatment of short term capital gains of ₹ 67,27,044/- as business income, the learned CIT(A) observed that the total amount of scrips sold are of value ₹ 13,38,36,535.62 while scrip bought are to the tune of ₹ 12,71,09,491.62 resulting in a profit of ₹ 67,27,044/- during the year. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as mandated u/s 14A(2) of the Act of 1961. The assessee has also not come forward with the details of expenditure incurred in relation to earning of income which does not form part of the total income . Thus, in our considered view , the first issue concerning disallowance u/s 14A of the Act of expenditure of ₹ 87,56,848/- being incurred in relation to earning of income which does not form part of total income as disallowed by AO by invoking Rule 8D of rules of 1962 need to be set aside to the file of the AO for de-novo determination of the issue on merits in accordance with law as per mandate of Section 14A of the Act having regards to the accounts of the assessee as stipulated u/s 14A(2) of the Act. We would like to clarify that shares and securities held as stock-in-trade and shall not be included for making disallowance of expenditure u/s 14A of the Act. Needless to say that the AO shall grant sufficient and reasonable opportunity of being heard to the assessee in accordance with principle of natural justice in accordance with law and the assessee shall be allowed to submit relevant evidences/explanations in its defense by the AO. We order accordingly. With respect to ..... 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