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Income Tax Appellate Tribunal, “D”, BENCH MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI G. MANJUNATHA&
Date of Hearing 22/01/2020 Date of Pronouncement 12/06/2020 आदेश आदेश / O R D E R आदेश आदेश PER G.MANJUNATHA, Accountant Member:
Co.No.206/Mum/2019 Mili Consultants and Investments Pvt.Ltd.
This appeal filed by the revenue and cross objection filed by the assesee is directed against order of the Ld. Commissioner of Income tax (Appeals)-9, Mumbai, dated 12/06/2018 and it pertains to Asst.Year 2011-12. Since, facts are identical and issues are interconnected, for the sake of convenience, the appeal filed by the revenue and cross objection filed by the assessee were heard together and are disposed-off by this consolidated order.
The revenue has raised the following grounds of appeal: 1. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that the loss incurred by the assessee in purchase and sale of shares is a business loss without appreciating the fact that by virtue of explanation u/s 73 of I.T.Act, such loss incurred by the assessee is in the nature of speculation loss."
2. The appellant craves leave to amend or alter any ground or add new ground which may be necessary."
3. The assessee has raised following grounds of cross objections:-
1. The Ld. Commissioner of Income Tax (Appeals)- 9, Mumbai [hereinafter referred to as "Ld. CIT(A)"] erred in passing the order dated 12.06.2018 upholding the action of the Ld. A.O. in making disallowance under Section 14A by invoking the provisions of Rule 8D amounting to Rs.75,12,025/- without appreciating the fact that provisions of section 14A are not at all attracted to the facts of the impugned case. The Respondent, therefore, prays that the disallowance of Rs.75,12,025/- by invoking the provisions of Section 14A read with Rule 8D is not at all justified and hence, the same may be deleted.
2. The Ld. CIT(A) further erred in upholding the action of the Ld. A.O. in making disallowance under section 14A by invoking Rule 8D without appreciating that while making the disallowance the Ld. A.O. has not recorded any satisfaction under sub section (2) of section 14A with respect to correctness of the voluntary allocation of expenses amounting to Rs.72,359/- made by the Respondent for earning the exempt income. Hence, disallowance of Rs.75,12,025/- under section 14A is unjustified and the same may be deleted.
3. The Ld. CIT(A) further erred in disallowing the entire dividend income amounting to Rs.75,12,025/- invoking the provisions of section Co.No.206/Mum/2019 Mili Consultants and Investments Pvt.Ltd.
14A of the Act without appreciating that the entire dividend income cannot be allocated for earning the same. Hence, the disallowance of entire dividend income amounting to Rs.75,12,025/- under section 14A is unjustified and the same may be deleted.
4. The Ld. CIT(A) further erred in making disallowance of Rs.75,12,025/- invoking the provisions of section 14A without appreciating that the dividend was received on the shares /securities held as stock in trade. Thus, the provisions of section 14A would not apply to the same. The Respondent, therefore, prays that the disallowance of Rs.75,12,025/- under section 14A is unjustified and the same may be deleted.
At the time of hearing, the Ld. AR for the assesse submitted that there is a delay of 22 days in filing cross objection, for which necessary petition for condonation of delay along with affidavit explaining the reasons for delay in filing cross objection has been filed. The Ld. AR, further submitted that the Director of the assessee company Shri Manak Chand Daga, was out of town on pre-occupied business purpose due to this, he could not have signed, the cross objection to be filed before the Tribunal, although the tax consultant has finalized the grounds of cross objection . Therefore, there is a delay of 22 days, which is beyond the control of the assessee and hence, the delay may be condoned and cross objection may be heard on merits. The Ld. DR, although opposed condonation of delay in filing cross objection, but fairly accepted that the delay may be condoned keeping in view reasons given by the assesse in its affidavit. Having considered arguments of both the sides, we find that reasons given by the assessee for not filing cross objection within the time allowed under the Act, is comes under the reasonable cause and hence, the delay in filing cross objection has been condoned and admitted for adjudication on merits.
The brief facts of the case are that the assessee company is engaged in the business of stock broking, trading & investment in Co.No.206/Mum/2019 Mili Consultants and Investments Pvt.Ltd.
shares, securities, commodities & currencies like arbitrage etc, filed its return of income for AY 2011-12 on 27/09/2011, declaring total loss of Rs.4,14,03,602/-. The case was selected for scrutiny and the assessment has been completed u/s 143(3) of the I.T.Act, 1961 on 22/03/2014 determining the total income at Rs.1,45,82,780/-, where the Ld. AO has disallowed deemed speculation loss of Rs.1,85,25,973/-, but allowed the same to be carry forward and set off against speculation income of future years, on the ground that the loss incurred by the assessee from trading in shares is in the nature of speculation loss and in view of Explanation to section 73 of the I.T.Act, 1961 said loss cannot be allowed to be set off against income earned from trading in futures and options being derivative transactions. The ld. AO has also, made additions towards disallowances of expenditure in relation to exempt income u/s 14A r.w.Rule 8D of I.T.Rules, 1962, amounting to Rs.82,94,849/-, on the ground that although, the assessee has earned dividend income, but made a suo-moto disallowances of Rs.72,359/-, which is contrary to the prescribed procedure provided under Rue 8D of I.T.Rules, 1962, for determination of disallowances of expenditure in relation to exempt income u/s 14A of the I.T.Act, 1961.
Being aggrieved by the assessment order, the assessee has filed an appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assessee has challenged additions made by the Ld. AO towards disallowances of speculation loss, in light of certain judicial precedents, including the decision of ITAT, Mumbai in the case of Fiduciary Shares & Stock Pvt.Ltd vs ACIT in and argued that explanation inserted to section 73 of the Act, by Finance Act, 2014 w.e.f 01/04/2015 is clarificatory in nature and Co.No.206/Mum/2019 Mili Consultants and Investments Pvt.Ltd.
would therefore, operate retrospectively from 01/04/1977, from which date the Explanation to section 73 was placed on the statute. The assessee has also, challenged additions made by the ld. AO towards disallowances u/s 14A of the Act, in light of certain judicial precedents, including the decision of Hon’ble Bombay High Court, in the case of HDFC Bank Ld. Vs DCIT (supra) and CIT vs Reliance Utilities & Power Ltd. 313 ITR 340 and argued that in case own funds is more than the value of investments in shares, then no disallowances could be made towards interest expenditure. The assesee has also, challenged the findings of the Ld. AO in computing average value of investments by including shares held as stock in trade in light of decision of Hon’ble Bombay High Court, in the case of DCIT vs India Advantage Securities Limited (supra). The Ld.CIT(A) after considering relevant submissions of the assesse and also, by relied upon the decision of ITAT, in the case of Fiduciary Shares & Stock Pvt.Ltd. (supra), has deleted additions made by the Ld. AO towards deemed speculation loss by holding that when, the main activities of the assesee is trading in shares and securities, the Explanation to section 73 has no application. He, further, observed that the amendment inserted in Explanation to section 73 of the Act, by Finance Act, 2004 w.e.f. 01/04/2015 is clarificatory in nature and would therefore operate retrospectively from 01/04/1977 and accordingly, loss incurred by the assessee from trading in shares cannot be disallowed by invoking Explanation to section 73 of the I.T.Act, 1961. As regards, disallowances u/s 14A r.w.Rule 8D of the I.T.Rules, 1962, the Ld.CIT(A) has rejected the contentions of the assessee that shares held as stock in trade cannot be included for the purpose of computation of average value of investments by following the decision of Hon’ble Supreme Court in the case of Co.No.206/Mum/2019 Mili Consultants and Investments Pvt.Ltd.
Maxopp Investments Limited vs CIT 91 taxmann.154. However, he has accepted the contentions of the assessee, insofar as netting off, of interest expenditure by following the decision of Hon’ble Gujarath High Court, in the case of PCIT vs Nirma Credit & Capital Pvt.Ltd. (supra) and directed the Ld. AO to net off interest paid against interest income earned by the assesee and then, compute disallowances as per Rule 8D(2)(ii) of I.T.Rules, 1962. Finally, the Ld.CIT(A) has determined disallowances of Rs.75,12,025/-, as against total disallowances quantified by the Ld. AO at Rs.82,94,849/-. Aggrieved by the Ld.CIT(A) order , the revenue is in appeal before us and the assessee has filed cross objection.
The first issue that came up for our consideration from revenue appeal is deletion of additions made by the Ld. AO towards deemed speculation loss of Rs.1,85,25,973/- by invoking Explanation to section 73 of the I.T.Act, 1961. The facts with regard to the impugned disputes are that the assesee is engaged in the business of stock broker and trading in shares has incurred loss of Rs.4,32,65,063/- for the year under consideration. According to the Ld. AO, the major portion of income of the assessee is from share trading activity and accordingly, as per section 73 of the I.T.Act, 1961, when any part of business of a company consist of purchase and sale of shares of other companies, such company shall for the purpose of the section deemed to be carrying on speculation business to the extent, which business consist of purchase and sale of shares. Therefore, the Ld. AO called upon the assesse to explain as to why, loss claimed under the head income from business being loss from share trading cannot be considered as speculative loss in view of Eplanation to section 73 of the I.T.Act, 1961. In response,
Co.No.206/Mum/2019 Mili Consultants and Investments Pvt.Ltd. the assessee submitted that the main activity of the assessee is trading in shares and accordingly, as per newly inserted proviso to section 73 of the I.T.Act, 1961, by the Finance Act, 2014 w.e.f. 01/04/2015, when the main activity of the assessee is to purchase and sale of shares, then consequent loss from such activity cannot be considered as speculation loss. The Ld. AO was not convinced with the explanation filed by the assesee and according to him, the assesse has incurred loss of Rs.1,85,25,973/- from share trading activity and accordingly, by invoking Explanation to section 73 of the I.T.Act, 1961, a sum of Rs.1,85,25,973/- has been treated as deemed speculation loss and is allowed to be carried forward to subsequent years. On an appeal before the Ld.CIT(A), the Ld.CIT(A), by following the decision of ITAT in the case of Fiduciary Shares & Stock Pvt.Ltd (supra), deleted additions made by the Ld. AO.
The Ld. DR submitted that the Ld.CIT(A) was erred in holding that loss incurred by the assessee from the acitivity of purchase and sale of shares is a business loss, without appreciating the fact that by virtue of Explanation to section 73 of the I.T.Act, 1961, such loss incurred by the assessee is in the nature of speculation loss and cannot be allowed to be set off against profit from derivative trading. In this regard, he relied upon the decision of Hon’ble Supreme Court, in the case of Snowtex Investments Limited vs PCIT (2019) 414 TR 227 (SC).
The Ld. AR for the assessee, on the other hand supporting order of the Ld.CIT(A) submitted that when, main activity of the assessee is purchase and sale of shares, then consequent loss
Co.No.206/Mum/2019 Mili Consultants and Investments Pvt.Ltd. cannot be treated as speculative loss. The Ld. AR, further submitted that although, the assesee has declared loss from business, but a stand-alone results of purchase and sale of shares resulted in profit of Rs.2,37,59,943/- and hence, once there is profit from share trading activity, the provisions of Explanation to section 73 has no application. The Ld.CIT(A) after considering relevant facts has rightly deleted additions made by the ld. AO and his order should be upheld.
We have heard both the parties, perused the material available on record and gone through orders of the authorities below. As per the provisions of section 73 and explanation provided thereto, where any part of the business of the company ( [other than a company whose gross total income consist mainly of income, which is chargeable under the heads interest on security, income from house property, capital gains and income from other sources] or a company the principle business of which is the business of trading in shares or banking or the granting of loans and advances ) consists in the purchase and sale of shares of other companies, such company shall, for the purpose of this section, be deemed to be carrying on speculative business to the extent to which, the business consists of purchase and sale of such shares. From the above, it is very clear that if a part of a business of a company is purchase and sale of shares, then such transactions shall be deemed to be considered as speculative transactions and profit on such activity shall be deemed to be speculative loss and cannot be allowed to be set off against any other income, including profit from derivative trading. The provisions of section 73 and explanation provided thereto has been amended by insertion of the principle
Co.No.206/Mum/2019 Mili Consultants and Investments Pvt.Ltd. business of which is the business of trading in shares or banking by the Finance Act, 2014. w.e.f 01/04/2015. The said amendment has been interpreted by the Hon’ble Supreme Court, in the case of Snowtex Investments Ltd. vs PCIT (supra), where it has been held that amendment to Explanation to section 73 by the Finance Act, 2014 is prospective and effective from 01/04/2015 and cannot be given retrospective effect. From the above, it is very clear that the findings recorded by the Ld.CIT(A), in light of decision of ITAT, Mumbai, in the case of Fiduciary Shares & Stock Pvt.Ltd is contrary to the settled position of law as per the decision of Hon’ble Supreme Court and accordingly, the same deserves to be reversed.
Insofar as, the findings of the Ld.CIT(A) regarding profit from trading in shares and securities, we find that the ld. AO has recorded a categorical finding that the assessee has incurred losses from shares trading activity, whereas, the Ld.CIT(A) has recorded categorical finding that the assessee has earned profit from share trading activity. We further noted that although, the assessee claims to have earned profit from share trading activity, but such profit has been computed without considering direct and indirect expenses relatable to share trading activity, although the major portion of income or loss of the assessee is from share trading activity. The facts and consequent findings recorded by the Ld. AO, and the Ld.CIT(A) are contrary to each other and requires fresh verification from the Ld. AO, in light of the fact that the assessee has not considered expenditure incurred in relation to share trading activity. Therefore, considering the facts and circumstances of this case, we are of the considered view that the assessee is hit by the provisions of Explanation to section 73 of the I.T.Act, 1961, in view of the Co.No.206/Mum/2019 Mili Consultants and Investments Pvt.Ltd.
decision of Hon’ble Supreme Court, in the case of Snowtex Investments Ltd. (supra) and accordingly, in case, the assessee incurred losses from share trading activity, the same needs to be considered as deemed speculative loss and cannot be allowed to be set off against profit derived from trading in derivatives. In case, the assessee has earned profit from share trading activity, then Explanation to section 73 has no application and accordingly, the said loss needs to be treated as normal business loss and allowed to be set off against any other income. Therefore, we are of the considered view that the issue needs to be re-examine by the Ld. AO, in light of various facts brought out by both the parties and to recompute profit after considering relevant expenditure relatable said trading activity and then to decide applicability of Explanation to section 73 of the I.T.Act, 1961. Accordingly, we set aside the issue to the file of the Ld. AO and direct him to reconsider the issue afresh in accordance with law.
The next issue that came up for our consideration from cross objection filed by the assessee is disallowances of expenditure incurred in relation to exempt income u/s 14A of the I.T.Act, 1961. The Ld. AO has determined disallowances of Rs.82,94,849/-, by invoking Rule 8D(2) of I.T.Rules, 1962. The facts with regard to the impugned disputes are that the assesse has earned dividend income of Rs.75,12,025/-, which does not form part of total income. The assesee has also, computed suo-moto disallowances of Rs.72,359/- u/s 14A of the I.T.Act, 1961.During the course of assessment proceedings, the Ld. AO called upon the assessee to explain as to why, disallowances contemplated u/s 14A shall not be computed in accordance with prescribed method provided under Rule 8D of Co.No.206/Mum/2019 Mili Consultants and Investments Pvt.Ltd.
I.T.Rules, 1962. In response, the assessee submitted that disallowances computed u/s 14A of the Act, is in accordance with law and in conformity with tax free income earned for the year. The assessee, further contended that for the purpose of computation of average value of investments shares held as stock in trade cannot be included, because the assesse main activities is purchase and sale of shares, the shares held as stock in trade at the end of the year is in the nature of inventory and therefore, the same cannot be part of investments to compute disallowances of expenditure, in relation to exempt income u/s 14A of the I.T.Act, 1961. The Ld. AO was not satisfied with explanation furnished by the assessee and according to him, disallowances contemplated u/s 14A of the Act, shall be determined in accordance with provisions of Rule 8D of I.T.Rules, 1962 and accordingly, determined total disallowances of Rs.83,67,208/- and after reducing suo-moto disallowances made by the assessee of Rs.72,359/-, he has made further disallowances of Rs.82,94,849/-.
The Ld. AR for the assessee has submitted that the Ld. AO has erred in making disallowances u/s 14A, by invoking provisions of Rule 8D, without appreciating the fact that provisions of section 14A are not at all attracted to the facts of the assessee case. The Ld. AR further submitted that the ld. AO has erred in invoking Rule 8D without appreciating the fact that while, making the disallowances the Ld. AO has to record satisfaction as required under sub-section (2) of section 14A with respect to correctness of voluntary disallowances made by the assessee and in absence of any satisfaction, he cannot invoke method provided under Rule 8D(2) of I.T.Rules, 1962. The Ld. AR, further submitted that the Ld. CIT(A)
Co.No.206/Mum/2019 Mili Consultants and Investments Pvt.Ltd. has erred in not appreciating the fact that when, mixed funds are more than the amount of investment in shares, then a general presumption is that investments in shares is out of own funds, then no interest expenditure could be disallowed u/s 14A of the I.T.Act, 1961.
The Ld. DR, on the other hand strongly supporting order of the Ld.CIT(A) submitted that the Ld.CIT(A) has rightly appraised the fact in light of decision of Hon’ble Supreme Court, in the case of Maxopp Investments Limited vs CIT (supra), where the issue has been settled and accordingly, for the purpose of computation of expenses relatable to exempt income u/s 14A of the Act, even shares held as stock in trade needs to be considered.
We have heard both the parties, perused the material available on record and gone through orders of the authorities below. There is no doubt with regard to the fact of applicability of provisions of section 14A r.w.Rule 8D of I.T.Rules, 1962. In fact, the assessee has computed suo-moto disallowances of Rs.72,359/- by invoking provisions of Rule 8D of I.T.Rules, 1962. However, when computing disallowances, the assessee has not considered interest expenditure, on the ground that interest expenditure has no relation to exempt income, and for this purpose, the assessee has relied upon the decision of Hon’ble Bombay High Court, in the case of CIT vs HDFC Bank Ltd and argued that when, mixed funds are used for investment in shares, a general presumption goes in favor of the assesse that investments in shares is out of own funds and consequently, no disallowances could be made. The assessee has also not considered shares held as stock in trade for the purpose of Co.No.206/Mum/2019 Mili Consultants and Investments Pvt.Ltd.
computation of average value of investments. Insofar as, the first arguments of assessee that the Ld. AO has not recorded satisfaction as required under section 14A(2) of the act, we find that the Ld. AO has recorded clear satisfaction having regard to the suo- moto disallowances made by the assesee and amount of exempt income earned for the year under consideration and came to the conclusion that suo-moto disallowances made by the assessee is not in accordance with prescribed procedure laid down u/s 14A r.w.Rule 8D of Rules, 1962 and accordingly, we are of the considered view that there is no merit in arguments of the Ld. AR for the assessee that the Ld. AO has not recorded satisfaction as required u/s 14A(2) of the I.T.Act, 1961.
As regards, the claim of the assessee that shares held as stock in trade cannot be forms part of average value of investments , we find that the Hon’ble Supreme Court, in the case of Maxopp Investment Ltd. vs CIT has settled the controversy and held that the moment certain dividend is earned, though incidentally from shares held as stock in trade by virtue of section 10(34) of the Act, the said dividend income is not to be included in the total income and is exempt from tax, this triggers the applicability of section 14A of the Act, which is based on the theory of apportionment of expenditure between taxable and non taxable income. From the above, it is very clear that even, share held as stock in trade needs to be included for the purpose of computation of average value of investments and accordingly, we reject the arguments of the ld. AR for the assessee that shares held as stock in trade cannot be form part of average value of investments. As regards, interest expenditure, we find that the assesee main business activity is purchase and sale of shares.
Co.No.206/Mum/2019 Mili Consultants and Investments Pvt.Ltd.
In the process, the assessee has borrowed secured loans from banks and financial institutions against security of shares and incurred huge finance expenditure. We further noted that own capital of the assesse, including reserves and surplus is lower than the amount of investments in shares, if shares held as stock in trade is considered as investments for the purpose of average value of investments. Therefore, we are of the considered view that there is no merit in the arguments of the assesse that when, own funds is in excess of investments in shares, then no interest expenditure should be disallowed, because as admitted by the assesee before the Ld. AO, investments in shares, including shares held as stock in trade is more than the own capital, including reserves and surplus. Therefore, we are of the considered view that there is no merit in the arguments of the assessee that no interest expenditure could be disallowed. Insofar as, disallowances of expenditure under Rule 8D(2)(iii) of I.T.Rules, 1962, it is a settled position that only, those investments, which has earned exempt income for the year under consideration needs to be considered for the purpose of average value of investments to determine disallowances of expenditure @ 0.5% of average value of investments. Therefore, we direct the AO to consider only those investments which yeild exempt income for the year for disallowance of expenditure. To sum up, the issue needs to go back to the file of the Ld. AO to determine disallowances of expenditure, in relation to exempt income u/s 14A, in light of our discussions given hereinabove and accordingly, we set aside the issues to the file of the Ld. AO and direct him to recompute the disallowances in accordance with in terms of our observations given hereinabove.
Co.No.206/Mum/2019 Mili Consultants and Investments Pvt.Ltd.
In the result, appeal filed by the revenue and cross objection filed by the assesse is treated as allowed for statistical purpose.
Before parting, we shall deal with procedural aspect of prouncement of order as prescribed under rule 34(4) of Income Tax (Appellate Tribunal) Rules 1963. As per rule 34(4), no order shall be pronounced after expiry of 90 days from the date of hearing. This appeal was heard on 22/01/2020 and ordinarily, the order shall be pronounced on or before 20/04/2020. But, this order could not be pronounced on or before 20/04/2020, due to the fact that the Govt. of India has imposed nationwide lockdown from 25/03/2020 and the same has been extended timt to time up to 31/05/2020 and because of this the office was closed up to 21/05/2020. Further, if the above lockdown period is exclued for the purpose of limitation, then the order can be pronounced on or before 17/06/2020. Further, whether lockdown period can be excluded or not has been exhastively dealt by the co-ordinate bench of ITAT, Mumbai, in the case of DCIT vs JSW Limited, in dated 14/05/2020, where it was held that due to corona virus pandamic, the period of limitation automatically gets extends till such period the lockdown is in force. We, therefore, are of the opinion that considering the prevailing situation and also, by respectfully following the decision of co- ordinate bench in the case of DCIT vs. JSW Limited (Supra), the order is pronounced well within the time allowed under rule 34(4) of Income Tax (Appellate Tribunal) Rules 1963.
Order pronounced as per Rule 34(4) through noticed board 12/06/2020
Co.No.206/Mum/2019 Mili Consultants and Investments Pvt.Ltd.