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Income Tax Appellate Tribunal, MUMBAI BENCHES “D”, MUMBAI
Before: SHRI R.C. SHARMA (AM) & SHRI RAM LAL NEGI (JM)
O R D E R PER RAM LAL NEGI, JM These are the appeal and cross objection filed by the revenue and the assessee respectively against the order dated 14.12.2016 passed by the Commissioner of Income Tax (Appeals) (for short ‘the CIT (A)’)-8, Mumbai CO No. 258/Mum/2018 Assessment Year: 2012-13 pertaining to the Assessment Year 2012-13, whereby the Ld. CIT (A) has allowed the appeal filed by the assessee against order passed u/s 143 (3) of the Income Tax Act, 1961 (for short ‘the Act’).
2. Brief facts of the case are that the assessee company engaged in the business of Cotton Ginning and Pressing and Oil Mills, export/import of cotton and as commission agent, filed its return of income for the assessment year under consideration declaring the total income of Rs. 54,25,937/-. Since, the case was selected for scrutiny, notices u/s 143 (2) and 142 (1) were issue and in response to the said notices, the Authorized Representative (AR) of the assessee attended the proceedings and filed the detail called for. It was noticed that the assessee had shown exempt income amounting to Rs. 22,82,812/- received from investment in Mutual Funds and Long Term Capital Gains of Rs. 3,67,445/-. However, no disallowance was made u/s 14A of the Act. Accordingly, the assessee was asked to explain as to why the expenditure incurred for earning the exempt income should not be disallowed u/s 14A of the Act. In response thereof the assessee submitted that the company had held the shares of M/s Dwarkadas & Co. Pvt. Ltd. of Rs. 37,500/- and M/s Dwarkadas Trading Co. Pvt. Ltd. of Rs. 31,06,402/-. These investments were made in group concerns and profit arising of sale of such shares is liable to be taxed as capital gain. These investments were made for the purpose of strategic investment and not for earning the dividend income. The assessee further contended that the assessee company has already disallowed Rs. 5,569/- being direct expenditure incurred in earning dividend by way of D-mat charges and STT paid. It has disallowed Rs. 4,73,089/- under rule 8D(3) being 0.5 of investments held in shares which includes share held in group concerns as well as shares on which no dividend was received. The assessee further contended that it had made investments in earlier years from its own funds no interest bearing funds were utilized for making investment. Hence, no interest CO No. 258/Mum/2018 Assessment Year: 2012-13 is disallowable under rule 8D(2). The assessee has paid bank interest for working capital facility which was utilized for business purpose and no such interest can be allocated for making investment. Loan taken against working capital was fully utilized against inventory and debtors. The company has also paid interest of Rs. 35,15,475/- and received interest of Rs. 37,19,688/-, which is higher than the interest paid. The total net worth of the assessee company as on 30.03.2012 was Rs. 17,64,38,338/- and the total investment as on 31.03.2012 was of Rs. 9,66,53,638/-. The AO rejected the contention of the assessee and computed the disallowance u/s 14A rule 8D at Rs. 63,12,908/- and after reducing Rs. 4,73,089/- (disallowance already made addition of Rs. 58,39,819/- to the income of the assessee).
3. It was further noticed that the assessee had debited an amount of Rs. 29,52,488/- on account of speculative loss. Accordingly, the assessee was asked as to why speculation loss claimed in the P & L account should not be disallowed. In response to the said notices, the assessee submitted that during the year relevant to the assessment year under consideration, the company carried out F & O transactions and Bombay Stock Exchange and National Stock Exchange through broker. Since, the above transactions are business in nature the assessee has claimed the loss during the year. The loss incurred is not speculative loss within the meaning of section 43 (5) of the Act as the transactions have been done through recognized stock exchanges. The assessee further submitted that explanation to section 73 does not apply to derivative transactions carried on account of F &O through any recognized stock exchange. Hence, F & O transactions are not covered by explanation section 73 particularly for the reason that the same has been excluded by way of Clause-D to section 43 (5) w.e.f. 04.04.2006 by the Finance Act, 2005. AO rejecting contention of the assessee made addition of Rs. 29,52,488/-, holding that speculative loss cannot be set off against any other income. The AO further worked out the disallowance u/s 14A at Rs. 58,39,819/- while CO No. 258/Mum/2018 Assessment Year: 2012-13 computing book profit u/s 115JB of the Act and read back the said amount in the income of the assessee u/s 115JB of the Act.
4. Aggrieved by the assessment order, the assessee challenged the assessment order before the Ld. CIT (A). The Ld. CIT (A) allowed the appeal of the assessee and deleted the aforesaid additions made by the AO. The revenue is in appeal against the said order of the Ld. CIT (A).
5. The revenue has raised the following effective grounds of appeal against the impugned order passed by the Ld. CIT (A):-
1. “Whether on the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in deleting the disallowance of Rs. 58,39,819/- u/s 14A r.w.r. 8D without appreciating the fact that the amount of disallowance u/s 14a of the I.T. Act, 1961 has to be computed as per Rule 8D of I.T. Rules, 1962 as held in the order of the Hon’ble High Court in the case of M/s Godrej & Boyce Manufacturing Co. Ltd.
2. Whether on the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in deleting the disallowance of Rs. 58,39,819/- u/s 14A r.w.r. 8D without appreciating the fact that the assessee has neither established that no part of interest bearing fund as well as expenses so claimed has found its way into the investments in Shares nor adduced any documentary evidences during the course of assessment proceedings before the Assessing Officer.
3. Whether on the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in deleting the disallowance of Rs. 58,39,819 u/s 14A r.w.r. 8D without appreciating the fact that the AO had duly recorded dissatisfaction u/s 14A(2) and in such a situation, the interest expenditure needs to be disallowed in terms of Rule 8D. 4. Whether on the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in deleting the disallowance u/s 14A to the book profit u/s 115JB of the I.T. Act, 1961 ignoring the decisions of the Hon’ble ITAT, Mumbai in the case of M/s CO No. 258/Mum/2018 Assessment Year: 2012-13 Viraj Profiles Ltd. in dated 21/10/2015-46 ITR (T) 626 (Mumbai-Trib)/[2016] and in Ferani Hotels Pvt. Ltd. in ITA No. 857/Mum/2013 dated 17/11/2014. 5. Whether on the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in holding that loss of Rs. 29,52,488/- on derivative transaction is Business Loss and not speculative loss in terms of section 43(5)(d) without appreciating that the AO had not made disallowance under section 43(5)(d) but in terms of Explanation to Section 73 wherein delivery based transactions are held to be speculative and which overrides the provisions of section 43(5)(d) of the I.T. Act, 1961.”
6. There is a delay of six days in filing of the present appeal. The Ld. departmental representative (DR) submitted that the delay has been caused in the process of completing the departmental formalities for filing appeal. The Ld. counsel for the assessee did not oppose the prayer of the Ld DR. Since, there is not an inordinate delay in filing the present appeal, we allowed the prayer of the revenue and asked the Ld. DR to argue the appeal on merits.
Ground No. 1 to 3 pertains to disallowance of Rs. 58,39,819/- made u/s 14A read with rule 8D of the Income Tax Rules. The Ld. departmental representative, DR relying on the assessment order submitted that assessee has shown investments in Mutual Funds and equities amounting to Rs. 9,66,53,638/-at the beginning of the relevant year and Rs. 17,64,87,152/- at the end of the year. Therefore, the expenditure relatable to earning of expenditure cannot be allowed as deduction in view of the provisions of section 14A read with Rule 8D of the Income Tax Rules. Since the AO has rightly worked out the disallowance u/s 14A read with Rule 8D of the Rules, the Ld. CIT(A) ought to have confirmed the same. 8. On the other hand, the Ld. counsel for the assessee submitted that this issue is identical to the issue raised by the assessee in its own appeal for the assessment year 2011-12 and the ITAT has restored this issue to the file of AO CO No. 258/Mum/2018 Assessment Year: 2012-13 for adjudicating afresh in the light of the submissions made by the assessee. The Ld. counsel submitted that since the contentions of the assessee are identical in the present case also this issue may be sent back to AO for fresh adjudication. 9. We notice that coordinate Bench of the Tribunal has set aside the identical ground of appeal
to the file of the AO for fresh adjudication. The contention of assessee before the Tribunal was that in the light of the decision of Hon’ble Bombay High Court in the case of CIT vs. HDFC Bank 366 ITR 505 and HDFC Bank Ltd. vs. CIT 383 ITR 529, no disallowance under rule 8D(2) (ii), is required to be made where the own funds of the assessee are more than the investments made during the relevant year. In respect of disallowance under rule 8D(2)(iii), the assessee relied on the decision of the Hon’ble Delhi High Court in the case of ABC India Ltd. vs. ACIT, 374 ITR 108 and Cheminvestment Ltd. vs. CIT ,378 ITR 33 and contended that only investments on which exempt income earned should be considered for arriving at average investments under the said rule. As regards mutual funds not yielding dividend income, the assessee relied on the decision of the coordinate Bench in the case of Manugraph India Ltd. vs. DCIT and the decision of the Channai Bench in the case of Sundaram Assets Management Co Ltd. vs. DCIT 145 ITD
17. The coordinate Bench after hearing the rival submissions in the light of the decisions relied upon by the assessee set aside the issue to the file of the AO for fresh adjudication. The relevant para of the decision of the coordinate Bench reads as under: “We have heard both the sides, perused the orders of the authorities below and the case relied on. On hearing both the sides, we are of the considered view that the issue of disallowance u/s 14A has to be examined afresh by the Assessing Officer w.r.t. the investments made by the Assessee in mutual funds and to find out the investments whether dividend yielding investments and non dividend yielding investments and examine various other contentions raised by the Assessee before us as these contentions CO No. 258/Mum/2018 Assessment Year: 2012-13 were not examined by the lower authorities. Thus, we restore this issue to the file of the Assessing Officer for adjudication afresh in the light of the submissions made by the Assessee before us as well as the case laws relied on by him.”
The facts and the issue involved in the present appeal are identical to the facts and issue involved in the assessee’s own appeal for the assessment year 2011-12. Since the coordinate Bench has set aside the identical issue raised by the assessee in the aforesaid appeal pertaining to the assessment year 2011-12 to the file of the assessee for fresh adjudication in the light of the submissions and the cases relied upon by the assessee, we respectfully following the view taken by the coordinate Bench set aside this ground of appeal
to the file of AO for fresh adjudication in the light of the submissions and the cases relied upon by the assessee.
11. Vide ground No 4 the revenue has challenged the action of the Ld CIT(A) in deleting the disallowance u/s 14A to book profit u/s 115JB of the Act. The Ld DR submitted before us that since, the Ld. CIT(A) has decided this issue in favour of the assessee contrary to the decisions of the Mumbai ITAT in the case of M/s Viraj Profiles Ltd. ITA 4439/Mum/2013 and in Ferani Hotles Pvt. Ltd. in ITA No 857/Mum/2013, the same is liable to be set aside.
12. On the other hand, the Ld. counsel for the assessee submitted that this issue is covered in favour of assessee by the decision of Special Bench of the Tribunal in the case of ACIT vs. Vireet Investments (P.) Ltd. [2017] 58 ITR (AT) 313 (Delhi-Trib.) (SB) wherein the Tribunal has held that no disallowance under section 14A of the Act r.w.r 8D of the Rules can be made while computing book profit under section 115JB of the Act.
13. We have heard the rival submissions and also gone through the material on record. Since this ground of appeal is covered in favour of the assessee by the decision of the special Bench of the Tribunal in the case of Vireet Investments (P.) Ltd. (supra), we respectfully following the said decision uphold the findings of the Ld. CIT(A) and dismiss this ground of appeal.
CO No. 258/Mum/2018 Assessment Year: 2012-13
Vide ground No 5 the revenue has challenged the action of the Ld. CIT(A) in holding that loss of Rs. 29,52,488/- on derivative transaction is business loss and not speculative loss in terms of section 43(5)(d). The Ld. DR submitted before us that the Ld. CIT(A) has decided this issue in favour of the assessee without appreciating that the AO had not made disallowance under section 43(5)(d) but in terms of Explanation to section 73 which contemplates that delivery based transactions are speculative transactions. Therefore, the findings of the Ld. CIT(A) are liable to be set aside.
On the other hand, the Ld. counsel for the assessee relying on the findings of the Ld. CIT(A) submitted that the AO has wrongly observed that although F & O transactions in shares were carried out on NSE, which is a recognized stock exchange, currency derivatives do not form part of MCX stock and derivative in currency does not fall within the definition of stock. The loss in derivative trading is treated as speculative transaction and treated as per the provisions of explanation to section 73 of the Act. The Ld counsel further submitted that in order to determine whether currency derivatives are speculative or not, it is important to see whether the same are eligible transaction within the meaning of section 43(5)(d) of the Act. The Ld. counsel further contended that since the findings of the Ld. CIT(A) are in accordance with the decision of the Mumbai Tribunal rendered in identical facts of the case and the CBDT Instructions No. 3/2010 dated 23.03 2010, there is no infirmity in the order of the Ld. CIT(A) to interfere with. 16. We have heard the rival submissions and also gone through the material on record including the cases relied upon by the authorities below. The Ld. CIT(A) has directed the AO to verify as to whether the transactions fulfill the criteria laid down by the ITAT, Mumbai for eligible transactions in the decision rendered in the case of IVF Advisors Pvt. Ltd. ITA No. 4798/Mum/2012 dated 13.02.2015 wherein the coordinate Bench has held as under:-
CO No. 258/Mum/2018 Assessment Year: 2012-13 “7.4 Considering the relevant provisions of the relevant Acts, discussed herein above in the light of Hon’ble Madras High Court and the answers given to frequently asked questions by the SEBI and the incorporation of exchange traded currency derivative from August, 2008, there remain no iota of doubt that the transaction of the assessee cannot be treated as speculative transaction. We have also gone through the copies of the contract notes incorporated in the paper book filed before us. A perusal of the contract note shows that the assessee has either entered into call option or put option and on the settlement day the transaction has been settled by delivery, either the assessee has paid US dollar on the settlement day or has taken delivery of US dollar 7.5. To sum up, the derivatives include foreign currency and call option/ put option, are transactions of derivative markets and cannot be termed as speculative in nature. Considering the totality of the facts and in the light of the judicial discussion herein above, we have no hesitation in setting aside the order of Ld. CIT (A). Appeal filed by the assessee is accordingly allowed.”
Since, the Ld. CIT (A) has directed the AO to verify the eligibility in the light of the findings of the coordinate Bench in the case of IVF Advisors Pvt. Ltd. (supra), we do not find any infirmity in the findings of the Ld. CIT (A) to interfere with. We accordingly uphold the findings of the Ld. CIT (A) and direct the AO to verify the transactions in terms of the directions of the Ld. CIT (A). Hence, this ground of appeal of the revenue is treated as dismissed. CO No. 258/MUM/2018 (Assessment Year: 2012-13)
The assessee has filed the cross objection against the impugned order on the following effective grounds: 1. “The Ld. CIT (A) erred in directing the Assessing Officer to verify the transactions of derivative loss whether they comply with criteria laid down of eligible transactions as given in ITAT, Bombay in relation to currency derivate without considering the fact that Ld. Assessing Officer did not dispute CO No. 258/Mum/2018 Assessment Year: 2012-13 any of the fact and merely applied Explanation to section 73 for disallowance.
Ld. CIT (A) further erred in not holding that even the derivative loss in shares is not covered under Explanation to section 73 and the assessee is entitled to set off such loss against business income.
Appellant pray that derivate loss incurred in derivate business being business loss is entitled to be set off against business income.” 2. Since, we have upheld the findings of the Ld. CIT (A) in the revenue’s appeal and directed the AO to conduct verification in terms of the findings of the Ld. CIT (A), ground No 1 of cross the objection filed by the assessee has become infructuous. Accordingly, we dismiss Ground No 1 of the cross objection filed by the assessee. 3. Vide Ground No. 2 and 3, the assessee has contended that the Ld. CIT
(A) has erred in not holding that even the derivative loss in share is not covered under explanation to section 73 and assessee is entitled to set off such loss against business income. The Ld. counsel further submitted that since the derivative loss incurred in the derivative business being business loss, the assessee is entitled to set off the said loss against business income.
The Ld. Departmental Representative (DR) opposed this ground of cross objection contending that the since the loss is of speculative nature, the assessee is not entitled to set off the speculative loss.
We have examined the issue in the light of the rival contentions of the parties. Since these issues are connected with ground No.1 of the cross objection and since we have directed the AO to verify the assessee’s claim afresh in terms of the directions of the Ld. CIT(A) in the assessee’s appeal CO No. 258/Mum/2018 Assessment Year: 2012-13 aforesaid, we set aside these issues to the file of the AO for fresh consideration after hearing the assessee.
In the result, appeal filed by the revenue as well as the Cross Objection filed by the assessee, are partly allowed for statistical purposes.