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Income Tax Appellate Tribunal, MUMBAI BENCH “SMC”, MUMBAI
ORDER PER GAGAN GOYAL, A.M: This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals)-13, Mumbai [hereinafter referred to as ‘the CIT (A)’] vide order dated 05.09.2019 for the Assessment Year (AY) 2010- 11. The assessee has raised the following grounds of appeal:
1. On the facts & the circumstances of the case & in law, the CIT(A) has erred in confirming: i) The disallowance made u/s.14A of the Income Tax Act at Rs.7, 06,985/- as against disallowance of Rs.2, 52,536/- as computed by the appellant. The disallowance made of Rs.4, 54,449/- may please be deleted. ii) Loss of Rs.33, 48,000/- as speculative in nature. The loss be treated as non- speculative in nature, thus, granting set off in respect of the same.
2. The appellant reserves its right to add to, alter, amend, modify or delete any of the grounds taken in this appeal.
Brief facts of the case are that the assessee-company is engaged in the business of Financial Service Sector-Non Banking Finance Companies (NBFC) filed its return of income for AY 2010-11 on 01.10.2010 declaring loss of Rs. Nil. Subsequently, case was selected for scrutiny and statutory notices were issued and duly served on the assessee.
On verification of the details filed during the course of scrutiny proceeding and after discussion total income of the assessee is computed after making disallowance under section 14A of the Act amounting to Rs. 2,52,536/- and disallowance of loss of Rs. 33,48,000/- treating the same as speculation loss.
On the issue of section 14A disallowance finding of the ld. CIT (A) is as under: “I have considered the submission made by the appellant and the reasons recorded by the AQ. It is seen that the submission made by the appellant is beyond the issues raised in the ground of appeal
. In the ground of appeal, the appellant has only challenged the action of the AO in making disallowance u/s 14A in respect of the stock in trade. The issue of making disallowance in respect of the stock in trade is covered against the appellant by the decision of honourable Supreme Court in the case of Maxopp Investment Ltd Vs CIT [2018] 91 taxmann.com 154 (SC}. Respectfully following the same, the action of the AO in considering the opening and closing value of stock in trade for the purpose of making disallowance u/s 14 A of the IT Act is upheld and this ground of appeal is dismissed.”
5. This finding of ld. CIT (A) is based on the order of Assessing Officer (AO) what he has done at para-5, page 2 of the assessment order.
6. Appellant’s submission during the appellate proceedings before the ld. CIT (A) is as under:
1. “Regarding disallowance u/s 14A of Rs.4, 40,198/- as against Rs.2, 52,536/- made by the assessee. The AO has made a further addition of Rs.1, 88,562/- to the 14A disallowance computed by the assessee. The assessee has not earned any dividend on shares. The only exempt income earned by the assessee is dividend on Mutual Funds of Rs.1, 58,998/- which is exempt from tax. In the written submission filed before your Honour at Para 4 of 20.09.2016, the exempt income earned has been inadvertently stated as 10, 10, 14,569/-, which is average value of investment. The actual exempt income earned by the assessee is stated at para 3 of the submission from which it may be seen that the only exempt income earned during the year is dividend on mutual funds of Rs.1,58,998/-.
2. The Bombay High Court in the Matter of Ballarpur Industries Limited, ITA No.: 51 of 2016 (order Dtd.13.10.2016), while deciding an issue, if disallowance u/s 14A is triggered in respect of investment in sister concerns, which have not yielded an exempt income has held that the expression “does not form part of the total income” in s.14A envisages that there should be an actual receipt of the income, which is not includible in the total income. If no exempt income is received or receivable during the relevant previous year, no disallowance u/s 14A can be made. This view stand concurred to by the Supreme Court in PCIT v. Oil Industry Development Board, 2755/2019 order dated.08.02.2019, copy enclosed. 3. The Bombay High Court decision in the matter of Nirved Traders Pvt. Ltd., order atd.23.04.2019 reported in 3 NYPCTR 411, where the Bombay High Court has decided that 14A disallowance r.w.r.8D cannot be in excess of exempt income earned by the assessee during the assessment year in question. 4. Thus, following this decision, the disallowance cannot exceed the exempted income bring dividends of Rs. 1, 58,998/- being dividend income received from Mutual Funds. xxxxx xxxxx “1.4 In so far as the investments in Mutual Funds are concerned, and considering the above facts, since there was taxable income generated during ‘the year, the opening value of these Mutual Funds could not quality for disallowance of average investments for the purposes of Rule 8D(iii). In this context, reliance is placed on the Allahabad High Court decision, in the matter of Shivam Motors
Pvt. Ltd. - 272 CTR 277. P&H High Court in the matter of Lakhani Marketing Inc. 272 CTR 268.
1.5 Further, reliance is also placed on the Kolkata Tribunal decision rendered in the matter of REI Agro Ltd. - 144 ITD 141, wherein, the Kolkata Tribunal held that -under Rule 8D(2)(iii), what is disallowable amount equal to ½% of the average value of investment the income from which does not or shall not form part of the total income. Thus, under, sub-clause (iii), what is disallowed is ½% of the numerator B in Rule 8D (2)(iii). This has to be calculated on the same lines as mentioned earlier in respect of Numerator B in rule 8D(2)(iii). Thus, not all investments become the subject-matter of consideration when computing disallowance u/s 14A r.w.r. 8D. The disallowance u/s. 14A r.w.r. 8D is to be in relation to the income which does not form part of the total income and this can be done only by taking into consideration the investment which has given rise to this income which does not form part of the total income. “In TS-6271-ITAT- 2014(MUMBAI) - ITAT deleted Sec 14A by observing that since the assessee’s majority investment was in foreign subsidiaries (the dividend income from which is not exempt), hence, provisions of Sec 14A not applicable to the extent of investment made in foreign subsidiaries”. The Delhi High Court has confirmed the above views in ACB India Ltd.- 347 ITR 108, where it is held that for the purpose of calculating disallowance u/s. 14A r.w.r.8D(2)(iii), the AO has to adopt average value of investment of which income is not part of total income and not the entire investment.
1.6 In so far as investments in stock-in-trade are concerned, the same cannot be made. In this context, reliance is placed on: a) CCI Ltd. vs. JCIT- 206 Taxman 563 (Karnataka) High Court. b) Smt. Leela Ramchandran - 339 ITR 293 (Kerala). c) K. R. Palnisamy v. Union of India 306 ITR —61 (Madras). d) Addl. CIT - 25 (3) v. Kalpesh Shah, Aathash investments - ITA No.: 5393/Mum/2011. | e) Ambit Securities Broking Pvt. Ltd. v Addl. Commissioner - ITA No. 7186/Mum/2011. f) Bakliwal Financial Services India Pvt. Ltd. - 4885, 4658/Mum/2011 & 2345/Mum/2012. g) MSA Securities Pvt. Ltd. v. ACIT and N.M.S. Consultancy Pvt. Ltd. v. DCIT - 1523/MD8/2012 & 1524/Mds/2011. h) Yatish Trading Co. Pvt. Ltd. - 129 ITD 237 i) Apoorva Patni ....... (Pune ITAT), j) Ethio Plastics Pvt. Ltd. v. DCIT (Ah’bad ITAT). k) Bombay High Court in India Advantage Securities Ltd. - 380 ITR 471. l) HDFC Bank Ltd. v. DCIT - Bom, High Court, Writ Pet. No.1753 of 2016 m) Gulshan Investments - 142 ITD 89 (Cal. Trib.).”
In this regard we have gone through the orders of AO and thereafter order passed by the Ld. CIT (A) as well as submissions made by the assessee appellant. In our opinion position of law is well settled now on this issue and claim of the assessee is based on applicable law of land as on today, i.e. disallowance u/s. 14A r.w.r. 8D can’t exceed the exempted income claimed. Decision relied upon by the revenue in the case of Maxopp Investment Ltd Vs CIT [2018] 91 taxmann.com 154 (SC} is distinguishable and not applicable on the present case.
7.1 In the light of the decision rendered by Hon’ble Jurisdictional High Court in the case of Nirved Traders (P.) Ltd. (supra), disallowance under section 14A of the IT Act cannot be more than the exempt income earned by the Assessee during the assessment year in question. In this case, there is no dispute that the dividend i.e. the exempt income earned by the Assessee during the relevant Assessment Year, was only Rs. 1,58,998/-. Accordingly, the disallowance in this case could not have exceeded Rs. 1, 58,998/-. It is only because the Assessee voluntarily offered a disallowance to the extent of Rs. 2, 52,536/-, we confirm disallowance to the extent of Rs. 2, 52,536/-. Thus, this question is required to be answered against the Revenue and in favour of the Assessee. We hereby direct the AO to delete the addition of Rs. 1, 88,562/- and accept the disallowance offered by the assessee. This ground of appeal is decided in favour of assessee.
8. As regards the second issue in appeal, the findings of the CIT(A) on disallowance of loss is based on the order of the AO the same are as under:
“I have considered the submission made by the appellant and the reasons recorded by the AO. I'm in agreement with the finding of the AO that the loss suffered by the appellant on account of intraday trading in the shares of Indusind Bank was speculative in nature because the transactions were settled without actual delivery of the shares. As explained by the appellant before the AO, the shares were sold same day to avoid further loss because share prices were falling. The transaction entered into by the appellant does not fall in the exception provided by proviso (b) to subsection (5) of section 43 of the IT Act because the intraday transaction was not carried out by the appellant to guard against loss in his holding of stocks and shares through price fluctuation. The purchase transaction entered into by the appellant on 29/03/2010 in respect of shares of Indusind Bank was an independent trading transaction and the same was settled without delivery because share prices started falling. I am also not in agreement with the contention of the appellant that all of its transactions in shares are speculative transactions by virtue of provisions of Explanation to section 73 of the IT Act. The appellant is covered by the exceptions provided in that Explanation because its entire income other than that from the activity of share trading is from long-term capital gains, dividend and interest on the FD which is substantially higher than the share trading income. Finds employed in trading activity are negligible compared to the funds employed in other activities of the appellant, Accordingly, the action of the AO in treating loss suffered by the appellant-on account of intraday trading in the shares of Indusind Bank as a speculative loss is upheld and this ground of appeal is dismissed.”
9. The AO during the assessment proceeding held as under: “6.1 during the course of assessment proceedings, the assessee was asked to explain nature of income and the expenses Incurred In the course of business. The assessee has made detailed submissions on various dates as seen in the file. In this case, assessee has made gain on share holding to the extent of Rs. 27, 47,459/-. The assessee has involved in share trading regularly as a nature of business. In this case, assessee has maintained two portfolios i.e. one for business income and one for capital gain. Units of Birla FTP, Kotak FMT etc. are treated as part of capital gain portfolios. Other than this, all the shares trading were shown to be part of business portfolio and assessee had declared as business income. Further the assessee has submitted all its trading activities happened during the assessment year 2010-11. Among that, it is important to note that, the assessee has purchased Indusind Bank shares between 07.12.2009 to 27.01.2010 @ Rs.135/- and major stakes are sold on 2.03.2010 @ Rs.159/-. In this process, the assessee has made business gain of Rs.68.23 lakhs. This transactions show pattern of business of income and none of the trades, i.e. purchase and sale, happened on the same day. It is important to understand that on 29.03.2010 the assessee has entered into purchase of Indusind Bank shares in the following manner:
Order Order Security Quantity Gross rate Gross No. Time per security Amount (Rs.) 3356508 09:11:53 Indusind Bank Ltd. 1000 179,7449 17974490 2 3359372 Indusind Bank Ltd. 1000 179,6964 17969640 0 3382202 Indusind Bank Ltd. 4000 33593720 7 Total 6000 109723850
Sale of shares Order No. Order Security Quantity Gross rate per Gross Amount Time security (Rs.) 3538289 14:58:57 Indusind Bank 1000 180.2500 1802500 Ltd. 35757091 15:01:21 Indusind Bank 1000 180.2500 1802500 Ltd. 35764903 15:02:17 Indusind Bank 1000 180.2500 1802500 Ltd. 35805866 15:06:18 Indusind Bank 1000 179.2500 1792500 Ltd. 35809674 15:06:42 Indusind Bank 1000 179.2000 1792000 Ltd. 35813810 15:07:08 Indusind Bank 1000 179.3000 1793000 Ltd. Total 6000 107850000
6.2 Thus it is very clear, the assessee has entered into massive transactions on intraday basis and incurred a loss of Rs. 33,48,000/-. Since these are intraday operations of share trading it does not reflect credential of business but reflects only the speculative nature of a transaction unlike the earlier transaction. This transaction is naturally a speculative transaction and the loss arising out of speculative transaction of Rs.33, 48,000/- should be treated as speculative loss. In this context, the assessee was asked to show cause as to why the loss should not be treated as loss from speculation business. The assessee vide letter dated 28.12.2012 submitted that: As mentioned in our letter dated 27.11.2012, we had suffered a loss of Rs. 33, 48,000/- on 29.03.2010 in the scrip of Indusind Bank Ltd. It is to submit that we had bought 10, 00,000 shares of the said scrip on the said date at a price of Rs.183.31 per share. However, the same was sold before the trading hours as the price of the said scrip was falling down. The prudent decision to exit from the same was taken to reduce our business losses as the price of the same was falling down and hence, instead of blocking our funds into the same, it was decided to acquire the same in near future at a lower price. It is to submit that the said losses were suffered in the regular course of our trading business and hence was allowable against our business income. Without prejudice, it is to submit that under Explanation to Section 73 of the Income Tax Act, any loss from securities trading cannot be treated as speculation loss when gross total income consists mainly of income from capital gain, interest on securities and income from other sources. Therefore, it is submitted that this loss has to be assessed as business loss only. 6.3 The assessee’s submissions are not acceptable. It is important to note that the assessee has bought certain number of Indusind Bank scripts on 19.03 2010 and sold it on 26.03.2010 incurred a loss of Rs. 8.46 lakhs. These transactions are not treated as speculation they are not on intraday basis and reflecting the continued business operation of the assessee. Thus while computing the profit of the share trading the loss incurred through speculation activity on 29 03.2010 is not allowed to set off with the business income derived from the share trading. In the case of V Amirtham Ammal Vs. CIT 74 ITR 739, Hon'ble High Court, Madras held that the purchase and sale of share of private company within a short period amounts to adventure in the nature of trade even if such shares are shown as investment m the books of account. It is important to note that Circular No. 4 of 2007 dated 15.06.2007 has stated that the substantial nature of transaction, the manner of maintaining books of account, the magnitude of purchase and sale, the ratio between the purchase and sale, and the holding would furnish a good guide to determine the nature of transactions. Further, the Explanation to Section 73 of the LT. Act only clarifies that in case of company, who are having composite income, that “such a company is all for the purpose of section is deemed to be carrying on speculation business to the extent for which business consist of the purchase and sale of shares” and does not talk about ‘applicability or non applicability of speculation loss. Assessee said to be exempt from treated as being in the speculation business only if it is clearly covered under the exemptions provided u/s. 43(5) of the 1.T. Act, 1961.”
Assessee’s written submission considered for the purposes of deciding the issue involved. We are in agreement with the findings of AO and Ld. CIT (A) that the loss suffered by the appellant on account of intraday trading in the shares of Indusind Bank (Without Delivery) was speculative in nature because the transactions were settled without actual delivery of the shares. As explained by the appellant BEFORE US “In this connection, the assessee specifically relies on the exception created under the proviso to section 43(5), wherein it is provided under clause (b) that “a contract in respect of stock and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations” is not to be deemed as speculative.
Relevant extract of section 43 sub-section (5) is reproduced as under: "speculative transaction" means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrip: Provided that for the purposes of this clause— (a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or (b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or (c) a contract entered into by a member of a forward market or a stock
exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member; [or] [(d) an eligible transaction in respect of trading in derivatives referred to in clause [(ac)] of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognised stock exchange; [or]] [(e) an eligible transaction in respect of trading in commodity derivatives carried out in a [recognised stock exchange] [, which is chargeable to commodities transaction tax under Chapter VII of the Finance Act, 2013 (17 of 2013),]] shall not be deemed to be a speculative transaction: [Provided further that for the purposes of clause (e) of the first proviso, in respect of trading in agricultural commodity derivatives, the requirement of chargeability of commodity transaction tax under Chapter VII of the Finance Act, 2013 (17 of 2013) shall not apply.] [Explanation 1].—For the purposes of [clause (d)], the expressions— (i) "eligible transaction" means any transaction,— (A) carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary registered under section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or the Depositories Act, 1996 (22 of 1996) and the rules, regulations or bye-laws made or directions issued under those Acts or by banks or mutual funds on a recognised stock exchange; and (B) which is supported by a time stamped contract note issued by such stock broker or sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub-clause (A) and permanent account number allotted under this Act; (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;] [Explanation 2.—For the purposes of clause (e), the expressions— (i) "commodity derivative" shall have the meaning as assigned to it in Chapter VII of the Finance Act, 2013; (ii) "eligible transaction" means any transaction,— (A) carried out electronically on screen-based systems through member or an intermediary, registered under the bye- laws, rules and regulations of the [recognised stock exchange] for trading in commodity derivative in accordance with the provisions of the Forward Contracts
(Regulation) Act, 1952 (74 of 1952) and the rules, regulations or bye-laws made or directions issued under that Act on a [recognised stock exchange]; and (B) which is supported by a time stamped contract note issued by such member or intermediary to every client indicating in the contract note, the unique client identity number allotted under the Act, rules, regulations or bye-laws referred to in sub-clause (A), unique trade number and permanent account number allotted under this Act; [(iii) "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;]] (b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations.
Clause (b) to the proviso to section 43(5), mentioned (supra) clearly indicates about the nature of transactions to be covered by it. It simply covers transactions in the nature of Future & Options (F&O) entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations.
In this case transaction entered into by the assessee does not fall in the nature of transactions discussed (supra). Hence falls in the category of speculative transaction. Discussion of section 73 is not relevant here, as first of all the nature of transaction has to be ascertained by virtue of section 43(5) and then only question of set-off/ carry forward as defined in section 73 will arise. The provisions of Section 43(5) were amended by the Finance Act, 2005. Prior to the amendment, Section 43(5) defined a 'speculative transaction' to mean a transaction in which a contract for the purchase or the sale of any commodity including stocks and shares is settled otherwise than by the actual delivery or transfer of the commodity or scrip. The impact of the amendment by the Finance Act, 2005 was that an eligible transaction on a recognised stock exchange in respect of trading in derivatives was deemed not to be a speculative transaction. With effect from 1 April 2006, trading in derivatives was by a deeming fiction not regarded as a speculative transaction when it was carried out on a recognized stock exchange. 14. It clearly indicates that the transaction mentioned in section 43(5) (supra) and delivery based trading alone can’t be treated as speculative transaction. Where as in the case of assessee neither he entered into the transaction in the nature of F&O nor delivery based trading, rather he settled his transaction without delivery by placing the order of purchase and sales. 15. The consequence is that in A.Y. 2010-2011, the loss which occurred to the assessee as a result of its activity of intraday trading in shares, without delivery (a loss arising from the business of speculation) was not eligible of being set off against the profits which it had earned against the business of futures and options/trading in shares with delivery, since the latter did not constitute profits and gains of a speculative business. [Re: Snowtex Investment Ltd. vs. PCIT [2019] 414 ITR 227 (SC)].