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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
This appeal by the assessee is arising out of the order of Commissioner of Income Tax (Appeals)-10, Mumbai, [in short CIT(A)] in appeal No. CIT(A)-10/DCIT-5(1)/3/2014-15 dated 11.03.2016. The Assessment was framed by the Additional Commissioner of Income Tax, Circle-5(1), Mumbai (in short Addl.CIT/ AO) for the assessment year 2010-11 order dated 24.02.2014 under section 143(3) of the Income Tax Act, 1961(hereinafter ‘the Act’).
2. The first issue in this appeal of assessee is against the order of CIT(A) confirming the disallowance of expenses relatable to exempt income disallowed by invoking the provisions of section 14A of the Act read with Rule 8D of the Income Tax Rules 1962 (hereinafter ‘the Rules’). For this assessee has raised the following ground No. 1: -
“1. The learned Assessing officer has erred in making and the learned CIT(A) has erred in confirming disallowance under section. 14A read with section Rule 8D at ₹ 73,56,506/- as against ₹ 28,13,275/- computed by the Appellant.”
3. Brief facts relating to this issue are that the assessee has earned dividend income of Rs. 1,58,90,854/- and long term capital gain of Rs. 1,62,42,661/- and claimed the same as exempt under section 10(38) of the Act. The AO noticed that the assessee has earned dividend income and also made investment in equity and mutual funds, not being stock-in- trade, amounting to Rs. 71.45 crores as on 31-03-2009 and Rs. 20.73 crores as on 31-03-2010. According to AO, the assessee has suo moto disallowed a sum of Rs. 28,13,275/- as expenditure incurred in earning this exempt income. According to AO, the working of such disallowance clearly reveals that the disallowance is not reasonable and he computed the disallowance under Rule 8D(2)(i) at Rs. 2,63,432/-, under Rule 8D(2)(ii) at Rs. 49,68,448/- and under Rule 8D(2)(iii) at Rs. 23,04,626/-. Accordingly, the AO computed the disallowance at Rs. 1,75,36,506/- and after allowing the sum already disallowed by assessee at Rs. 28,13,275/-, he restricted the disallowance at Rs. 47,23,231/-. Aggrieved, assessee preferred the appeal before CIT(A). Before CIT(A), the assessee contended that there is no issue regarding the disallowance under Rule 8D(2)(i) and 8D(2)(iii) of the Act. The only dispute before CIT(A) was regarding disallowance made by AO under Rule 8D(2)(iii) of the Act. The CIT(A) noted that the AO has computed the disallowance of interest on loan taken at Rs. 6,57,44,154/- and after applying formula under Rule 8D(2)(ii) of the Act, the disallowance comes to Rs. 49,68,448/-. The assessee before CIT(A) contended that the total interest paid reads as under: -
Total Interest Interest expenses on PCFC/ 5,64,97,902 PSFL Interest on loan taken from 67,30,620 India Infoline Finance Ltd. Total Interest (net) 6,32,28,552 Interest income (which has 25,15,631 been netted off the interest paid) Total Gross Interest Paid 6,57,44,154 4. The learned Counsel for the assessee before CIT(A) contended that the only proportionate disallowance on account of interest under Rule 8D(2)(ii) be restricted at Rs. 5,08,649/- instead of disallowance made by AO at Rs. 49,68,448/-. For this the learned Counsel for the assessee stated that the amount of interest expenditure of Rs. 5,64,97,902/- was for purpose of business and not for making investment in equities and mutual fund out of this loan was taken from PCFC/ PSFL. The learned Counsel for the assessee fairly contended that interest on loan taken from India Infoline Finance Ltd amounting to Rs. 67,30,620/- was only the expenditure which can be attributed to the investment in the tax free incomes. According to him, the proportionate disallowance on this interest can be made. The CIT(A) has considered the issue and observed that the entire interest is debited to P&L account is to be considered as disallowance being following the formula under Rule 8D(2)(ii) of the Act. Aggrieved, now assessee is in appeal before Tribunal.
Before us, the learned Counsel for the assessee filed copy of Tribunal’s order in earlier year i.e. in for AY 2009- 10, wherein the Tribunal has considered the only proportionate disallowance on the interest of Rs. 57,57,409/-, the investment made in equities and mutual funds out of borrowed funds from India Infoline Finance Ltd. The learned Counsel for the assessee drew our attention to Para 9 of the Tribunals order, wherein complete details of assessee’s interest expenditure and investment is dealt with and the same reads as under: -
”9. By the impugned order, CIT(A) directed the AO to recompute the disallowance of interest by taking interest of Rs.57,57,409/- instead of Rs.8,58,89,421/- after having the following observation:-
―During the course of appellate proceedings before me the appellant has filed the details of own funds and borrowed funds bearing interest burden and work out the interest attributable to earning of exempt income and taxable income as under:-
Own funds.
share capital and reserves 149 cr interest free loan from directors 5 cr 154cr
Secured loans
pre-shipment export credit 32
-post- shipment export credit 104 136cr
3. Investments 71.45cr
Interest expenditure
Interest attributable to exempt income 0.57 interest attributable to taxable income 8.01 8.58cr
As seen from the above, no doubt the appellant is having enough interest free funds when compared to the investments. It has also got borrowed funds but the same were utilized for specific purposes which has nothing to do with the earning of exempt income. Since a significant part of the borrowed funds have been utilized for the business of the appellant in the form of pre- shipment and postshipment export credit when compared to investment as on 31.3.09 own funds and interest free funds are quite high, relying on the decision of the jurisdictional High Court in the case of Reliance Utilities there should not be any disallowance as per limb (ii) of rule 8D. However, as the appellant has not succeeded in identifying the own funds and the borrowed funds deployed for earning of exempt income and taxable income, he has proportionately worked out the interest attributable to the earning of exempt income and earning of taxable income. The working of the interest relating to earning of exempt income being very reasonable I hereby direct the AO to rework the disallowance u/s. 14A read with rule 8D by adopting interest component as Rs. 57,57,409 in place of Rs. 8,58,89,421 adopted by him in his computation of limb (ii) of rule 8D (2). The argument of the AO that he followed the logic of the earlier years where the CIT (A) has confirmed the working of A component in limb (ii) of rule 8D (2) is not proper since as per the provisions of rule 8D the A component should be "the amount which is not directly attributable to any particular income or receipt". In the of the above discussion the ground is accordingly allowed.”
He further argued that even the assessee’s interest free funds in the shape of share capital and reserve and surplus to the extent of Rs. 235,49,56,627/- is available as against the investment of Rs. 27,73,35,924/- in the mutual funds and equities. The learned Counsel for the assessee stated that in view of the decision of Hon’ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom.) the presumption is that once the interest free funds are available with the assessee, the investment in equities and mutual funds is made out of the same. The learned Counsel for the assessee further stated that the AO has nowhere proved the nexus that the interest bearing funds have been invested in purchase of equities and mutual funds giving rise to tax free incomes. In view of these arguments the learned Counsel for the assessee stated that the disallowance should be restricted to proportionate amount. On the other hand, the learned Sr. DR heavily relied on the assessment order of CIT(A).
We have heard the rival contentions and gone through the facts and circumstances of the case. We have compared the investments earlier to this year and find in the immediate preceding year i.e. as on 31- 03-2009 investment to the tune of Rs. 71,45,14,402/-, which ultimately reduced in this year to Rs. 20,73,35,924/-. Accordingly we presume that no interest bearing loans have been invested in these investments. Further, the assessee is having interest free funds available with the assessee in the shape of shares capital and reserve surplus to the tune of Rs. 235,49,56,327/- as against the available funds at Rs. 149,41,49,811/- in the immediate preceding year. Further, we agree with the argument of the learned Counsel for the assessee that in the immediate preceding year the interest expenses paid by assessee to PCFC and PSFL amounting to Rs. 5,46,97,902/- has already been considered in earlier year and finding is given by the Tribunal in assessee’s own case that the same has been invested in the business of the assessee. In view of the above, we are of the view that only proportionate disallowance on the interest on loan taken from Infoline Finance Ltd. of Rs. 67,30,620/- can be considered for making disallowance under the formula prescribed under Rule 8D(2)(ii) of the Act. Accordingly, we direct the AO to consider the working of the assessee working out the disallowance under Rule 8D(2)(ii) as under: -
“Accordingly the learned AR has worked out the disallowance under limb(ii) as under:-
AxB/C=67,30,620x 40,09,25,163 = 5,08,649 609,91,14,814”
The AO will only verify the figures and restricted the disallowance only on proportionate interest. This issue of assessee’s appeal is decided in favour of assessee subject to above direction.
The second issue in this appeal of assessee is against the order of CIT(A) in not allowing set off of carry forward business loss from trading activity in shares by treating the same as speculation loss. For this assessee has raised the following ground No.2 :-
“The learned assessing officer and the learned CIT(A) have erred in not allowing set off of carried forward business loss from trading activity in shares treated as speculation loss in the assessment proceedings of AY 2009-10, against business income of the current assessment year i.e. AY 2010-2011.
Break-up of business loss on shares etc. treated as speculation loss in Asst. Year 2009-2010 is as under: -
Loss from the trading of shares 3,40,26,082/- 50% share in expenses (₹ 12,52,350/-) 62,63,175/- 40,02,89,257/-“
10. Alternatively, the learned Counsel for the assessee also stated that he has raised the ground i.e. without prejudice to the above that business loss from trading activity in shares treated as speculation loss in the preceding assessment order 2009-10 be set off against profit earned from trading in shares and securities as such profit from such activity for falls within the purview of explanation to section 73 of the Act. For this assessee has raised the following alternative ground: -
“Without prejudice
The business loss from trading activity in shares treated as speculation toss in the assessment proceedings of AY 2009-10 be set-off against profit earned from trading in shares and securities as profit from such activity falls within purview of the explanation to section 73.”
11. At the outset, the learned Counsel for the assessee fairly admitted that the Tribunal in immediate preceding year has considered the issue of loss incurred in share trading activity as speculation loss instead of business loss in for AY 2009-10 vide order dated 25-03-2018 vide Para 2 and 3 as under:
“2. In the appeal filed by assessee, assessee is aggrieved for treating loss incurred in share trading activity as ‘speculation loss’ instead of ‘business loss’.
At the outset, learned AR fairly conceded that the issue is covered against the assessee by the decision of Jurisdictional High Court in case of Prasad Agents (P) Ltd.,333 ITR 275. Accordingly, we dismiss the ground raised by assessee being covered against it by the decision of the Bombay High Court.”
The learned Counsel for the assessee made alternative submission that if this is speculative loss, the same should be set off against profit earned from trading in shares and securities as profit from such activity falls within the purview of explanation to section 73 of the Act in view of the decision of Hon’ble Bombay High Court in the case of CIT vs. Lokmat Newspapers P. Ltd (2010) 322 ITR 43 (Bom).
The learned Counsel for assessee specifically drew our attention to the judgment of Hon’ble Bombay High Court, wherein the loss arising out of speculative transaction is to be set off against profit and gains of any speculative business. The Hon’ble High Court held as under: -
“9. The contention of the Revenue in the present case, in essence is that the definition of the expression "speculative transaction" in Section 43(5) must be read into the provisions of Section 73, because a business cannot be a speculation business unless there is a speculative transaction and a speculative transaction is defined by the former as one, not involving an actual delivery of shares. Hence, it was submitted that a transaction which involves an actual delivery of shares would not constitute a speculative transaction and the assessee who is engaged in a business involving the actual delivery of shares, cannot be regarded as being engaged in speculation business.
The submission which has been urged on behalf of the Revenue, cannot be accepted, having regard to the plain meaning of the explanation to Section 73. The submission of the Revenue is that a loss which arises on account of a transaction of the sale and purchase of shares would constitute a loss from a speculation business for the purposes of the explanation. But, that the profit which arises from a transaction involving the actual delivery of shares would not constitute a profit for the purposes of sub-
sections (1) and (2) of Section 73 in respect of which a set off can be granted. To accept the submission of the Revenue would be to introduce a restriction into the scope and ambit of the deeming fiction which is created by the explanation to Section 73, which is not contemplated by Parliament. Once a deeming fiction is created by law, it must be given full and free effect, of course, in relation to the ambit within which it is intended to operate. The deeming fiction created by the explanation to Section 73 defines when an assessee is to be deemed to be carrying on a speculation business for the purposes of the Section. The deeming fiction is, therefore, one which arises specifically in the context of the provisions of Section 73 and is confined to that purpose alone. The explanation stipulates that where an assessee is a company whose business consists in any part of the purchase and sale of shares of other Companies, it shall be deemed to be carrying on a speculation business to the extent to which the business consists of purchase and sale of such shares. Whether or not it is a profit or loss that has resulted from carrying on such business, is a consideration which is alien to the meaning of what constitutes a speculation business by the explanation to Section 73. Once an assessee is deemed to be carrying on a speculation business for the purpose of Section 73, any loss computed in respect of that speculation business, can be set off only against the profits and gains of another speculation business. Similarly, for the purposes of sub-section (2), the loss in respect of a speculation business which has not been set off either in whole or in part, can be carried forward and can be set off against profits and gains "of any speculation business". The expression "any speculation business" means a speculation business of the assessee in respect of which profits and gains for the Assessment Year in question have arisen and there is no justification to restrict the content of that speculation business where profits have arisen by excluding a business involving actual delivery of shares. No such restriction is found in the explanation. To impose one is a legislative function. In other words, once the assessee is carrying on a speculation business and the profits and gains have arisen from that business during the course of the Assessment Year, the assessee is entitled to set off the losses carried forward from a speculation business arising out of a previous Assessment Year.
In these circumstances, the view which has been formed by the Tribunal is consistent with the provisions of Section 73. The questions of law shall stand answered accordingly. The appeal shall stand dismissed. There shall be no order as to costs.”
When this was confronted to the learned Sr. DR, he fairly stated that the issue can be remitted back to the file of the AO for verification of facts because the AO has not gone into these aspects.
After hearing both the sides and going through the facts of the case, we are of the view that the Tribunal in earlier year has treated the loss from trading activity in shares as speculation loss and that finding has neither been challenged by Revenue nor by Assessee. Once, the finding of fact is final, the only alternative left is that the loss is to be considered as speculation loss. Once the loss is considered as speculation loss, the same is to be set off against the business loss from trading activity of shares treating the same as speculation loss in view of the decision of Hon’ble Bombay High Court in the case of Lokmat Newspapers P. Ltd (supra), wherein the Hon’ble Bombay High Court has held that once the assessee is carry on a speculative business and the profit and gains after arising from that business during the course of assessment year, the assessee is entitled to set off the losses carried forward for a speculation business arising out a previous assessment year. Similar are the facts in the present case before us and respectfully following the Hon’ble Bombay High Court, we direct the AO to allow this speculation loss against the income earned form trading in shares. The AO will verify the facts and accordingly, allow the claim of the assessee. This issue of assessee’s appeal is allowed.
In the result, the appeal assessee is allowed. Order pronounced in the open court on 04-07-2018.