TMI Blog2018 (1) TMI 191X X X X Extracts X X X X X X X X Extracts X X X X ..... Act or not. We are of the opinion that the matter needs further verification. So, in the interest of justice we are restoring back the issue to the file of the FAA, who would decide the issue after considering the judgment of Pruthvi Brokers (2012 (7) TMI 158 - BOMBAY HIGH COURT)of the Hon’ble Bombay High Court. Second ground of appeal is partly allowed. Valuation loss treated as speculation loss - Held that:- It was brought to our notice that identical issue had arisen in the earlier year [2017 (3) TMI 1327 - ITAT MUMBAI] and that tribunal had decided the issue in favour of the assessee as held both the authorities did not consider the argument about the exception to the explanation to section 73, that the assessee had earned profit of ₹ 2, 20, 67, 126/-, that it had STCG on sale of mutual funds to the tune of ₹ 2. 68 crores. It is a fact that shares traded by the assessee were not of any of the good companies. The assessee had in the normal course of business purchased the shares. Because of the turmoil in the share market in the year under consideration the assessee suffered huge loss. It was valuing its stock on cost or market price whichever was lower and had ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 81,01, 51, 079/- 30. 11.2011 (-) ₹ 80, 82,06,669/- 10-11 21. 09.2010 ₹ 48, 14,034/- 11. 02. 2013 ₹ 49,72,360/- ITA/6532/Mum/2015-AY. 2009-10. 2. First ground of appeal, raised by the assessee, is about upholding disallowance of depository charges of ₹ 2. 20 lakhs related to shares held as stock in trade. During the assessment proceedings, the AO found that the assessee had claimed dividend income of ₹ 2. 20 crores, u/s. 10(34) of the Act. He directed the assessee to furnish the details of expenditure incurred for earning exempt income and also to show cause as to why the expenses incurred in claiming exempt income should not be disallowed as per the provisions of section 14A read with rule 8D of the Income Tax Rules, 1962 (Rules). After considering submission of the assessee, he made a disallowance of ₹ 12. 11 lakhs (Rs. 2. 20 lakhs under the head depository charges + ₹ 9. 23 lakhs under the head interest expenditure + ₹ 67, 718-0. 5% of average value of investment). 2.1. Aggrieved by the orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cally mentio-ned that it pertained to share issue expenses, that subsequent -ly it was claimed that the expenditure pertained to amalgamation expenses, that for the year under consideration the share capital of the assessee had increased, that expenditure incurred by it was to increase the share capital, that it was a capital expenditure. Finally, he made a disallowance of ₹ 7. 32 lakhs. 3.1. Before the FAA, the assessee made detailed submissions. After considering the available material, he held that the assessee had failed produce any valid explanation/evidences in support of its contention, that the expenditure was incurred in relation to increase the share capital, that the expenditure was capital in nature, that the AO was completely justified in rejecting the claim of the assessee. Finally upheld the order of the AO. 3.2. Before us, the Authorised Representative (AR)contended that all the necessary details were available on record, that there was an inadvertent mistake in claiming the deduction, that expenditure was incurred for amalgamation, that in the subsequent year expenditure was claimed u/s. 35DD of the Act, that if the matter was restored back the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uation of inventories, that the trading loss incurred by it comprised of actual profit/loss and mark to market losses, that the assessee had realised profit of ₹ 22. 35 lakhs on sale/purchase of shares, that the loss was on account of valuation, that it had purchased equity shares when the sharemarket was all-time high, that subsequently due to global turmoil and recession market were falling when the shares were valued at lower of cost or market price at the balance sheet date as per the consistent accounting policy followed by it, that there was a book loss, that the loss on account of valuation of stock had been reversed in the subsequent years in valuation or sales when market improved. After considering the submission of the assessee, the AO held that as per Explanation 1 to section 73 loss on sale of shares had to be treated as speculation loss, that explanation was deeming fiction. Referring to the case of Eastern Aviation Industries Ltd. (208/1023), the AO held that the loss suffered by the assessee during the previous year of ₹ 34. 26 crores was to be treated as loss of speculative business. 3. Aggrieved by the order of AO the assessee preferred a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was lower and had accordingly valued the shares. The resultant loss, in these circumstances, cannot be considered speculative loss as held by AO and confirmed by FAA. In our opinion facts of Lokmat case are applicable to the facts of present case. We would like to reproduce the substantial question of law raised by the Hon'ble Bombay High Court in the case of HSBC Securities and Capital Markets (P. ) Ltd. (supra). First we are reproducing the question raised before the Hon‟ble Court and it reads as under: Whether on the facts and in the circumstances of the case and in law the Hon'ble I. T. A. T. was justified in holding the trading loss of ₹ 84, 51, 000/- as Ordinary Business Loss as against Speculation Loss as held by the Assessing Officer by relying on the decision of the ITAT Delhi bench in the case of Aman Portfolio Pvt. Ltd. 93 ITD 324ignoring the decision of the Divisional Bench of ITAT Delhi in the case of Frontline Capital Services Ltd. 96 TTJ 201 and also the decision of the ITAT Delhi Bench in the case of Rohini Capital Services Ltd. 92 ITD 317while deciding that the Explanation to Sec. 73 of the Income-Tax Act, 1961 cannot be invoked in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red 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 : 6. The explanation to Section 73 introduces a deeming fiction. The deeming fiction stipulates that where any part of the business of a company consists in the purchase and sale of shares of other companies, such company shall, for the purposes of the section be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sales of such shares. The deeming fiction applies only to a company and the provision makes it clear that the deeming fixation (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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meaning of the explanation, sub-section (1) of Section 73 is applied in the first instance. This would in our view not be permissible as a matter of statutory interpretation, because the explanation is designed to define a situation where a company is deemed to carry on speculation 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 speculation business. In order to determine whether the exception that is carved out by the explanation applies, the legislature has first mandated a computation of the gross total income of the Company. The words consists mainly are indicative of the fact that the legislature had in its contemplation that the gross total income consists predominantly of income from the four heads that are referred to therein. Obviousl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e FAA deleted the disallowance to the extent of ₹ 69. 83 lakhs made by the AO as per clause 8D (2) (ii) of the Rules. He referred to the case of HDFC Bank Ltd. and held that no disallowance under the head interest expenditure could be made. Relying upon the case of Maxopp Investments Ltd. (347ITR 272), he held that the AO was justified in disallowing indirect expenditure at the rate of 0. 5% of the average value of investment. He confirmed a disallowance of ₹ 16. 98 lakhs made by the AO under rule 8D(2)(iii)of the Rules. 5.2. Before us, the AR referred to page 9 of the PB and stated that the FAA had not taken into account the stock in trade while computing the disallowance, that expenditure incurred by an assessee for its business has to be allowed as per the provisions of section 37 of the Act, that it had made suo-motu disallowance that were sufficient to take care of disallowance to be made as per rule 8D (2)(iii). The DR supported the order of the FAA. 5. 3. We have heard the rival submissions and perused the material before us. We find that the FAA had given part relief the assessee, that the AO and the assessee both have agitated the issue of sustaining/dele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the interest-free funds available with the assessee. Though the decision of this court in RELIANCE UTILITIES AND POWER LTD. was rendered in the context of section 36(1)(iii) of the Income-tax Act, 1961, it was consciously applied by the court while interpreting section 14A of the Act in HDFC BANK LTD. [2014] 366 ITR 505 (Bom). It is clear that for the first time in the case of HDFC BANK LTD. the court took a view that the presumption laid down in RELIANCE UTILITIES AND POWER LTD. with regard to investment in tax-free securities coming out of the assessee's own funds in case they are in excess of the investments made in the securities (notwithstanding the fact that the assessee concerned may also have taken some funds on interest) applies, when applying section 14A of the Act. Thus, the decision of the court in HDFC BANK LTD. for the first time settled the issue holding that the test of presumption as held by the court in RELIANCE UTILITIES AND POWER LTD. while considering section 36(1)(iii) of the Act would apply while considering the application of section 14A of the Act. The decision of this court in HDFC BANK LTD. has also been accepted by the Revenue. The decision of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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