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Income Tax Appellate Tribunal, “B”, BENCH MUMBAI
Before: SHRI R.C.SHARMA, AM & SHRI RAM LAL NEGI, JM
O R D E R PER R.C.SHARMA (A.M.) : These are the cross appeals filed by the assessee and revenue against the order of CIT(A), Mumbai, for the assessment year 2008-09. 2. The assessee in its appeal (i.e. has taken the following grounds :-
2 & 3255/12 1. That the learned CIT (A) has erred in law and on facts in confirming the profit on sale of future & option transactions as non-speculative transactions (instead of speculative transaction) for the purpose of section 73 and thus, not allowing set off of speculation loss against speculative income arising from such transactions.
That the learned CIT (A) has erred in law and on facts in considering the sale amount of future & option transactions as profit without giving the benefit of expenses incurred thereto.
That the learned CIT (A) erred in not considering the ground related to initiation of penalty proceeding u/s 271 (1)(c) as the assessee had neither concealed the particulars of income nor submitted any inaccurate particulars of income. The revenue in its appeal (i.e. ITA No.3425/Mum/2012) has raised the following grounds :-
1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the expenses of Rs.4,54,12,400/- on account of disallowance u/s.14A of the I.T. Act.
2. On the facts and in the circumstances of the case and in law, the Impugned order of the Ld. CIT(A) is contrary to law to be set aside and that of the Assessing Officer be restored.”
3. Rival contentions have been heard and record perused. Facts in brief are that the assessee is engaged in business of dealing in shares and securities at exchange. The assessee filed its return of income declaring total income of Rs.58,88,720/-. The AO framed the assessment after disallowing set off of income earned from the sale of options of Rs.90,86,660/- against loss incurred on purchases and sale of shares treating the same as business income, and also made disallowance of Rs.4.54 crores u/s.14A of the Act.
4. By the impugned order, the CIT(A) deleted the disallowance made u/s.14A. However, he has confirmed the action of AO for invoking provisions of Explanation to Section 73, by not allowing setting off loss on 3 & 3255/12 sale of shares against income from sale of option. Against this order of CIT(A), both assessee and revenue are in appeal before us.
5. We have considered rival contentions and deliberated on judicial pronouncements referred by lower authorities in their respective orders as well as cited by ld. AR and DR before us.
It was argued by ld. AR that issue with regard to application of Explanation to Section 73 in case assessee engaged in business of share-trading is covered in favour of assessee by the decision of ITAT Kolkata bench in the case of Baljit Securities (P) Ltd., 68 SOT 82, wherein it was held that in case of assessee engaged in the business of share trading, the activity of purchase and sale of delivery based shares and purchase and sale of non-delivery based shares i.e. derivatives. And incurred loss on delivery based purchase and sale of shares and earned profit on non delivery based sale and purchase of shares, the entire transaction carried out by the assessee is within the umbrella of speculation transaction and, therefore, there was no bar in setting off loss arose out of derivative, from income arose out of buying and selling of shares. The I.T Act, 1961 has been amended by Finance Act, 2005 w.e.f 1.4.2005 and by inserting clause ‘d’ below Proviso of sub-Section 5 of Section 43 it has been provided that trading in derivative carried out in the recognized stock exchange should not be considered as speculative business. The ITAT Kolkata Bench in the case of ITO vs. Arena Textiles & Industries Ltd. in ITA no. 1019/Kol/2011 dated 29.12.2011 has held that the transaction done by delivery as well as the transaction of derivative of 4 & 3255/12 shares profit / loss is not hit by Section 43(5) and therefore held that the aggregation of share trading loss and profit from derivative transactions should be done before the application of the explanation to section 73. The ITAT Kolkata Bench has taken the same view in the case of ITO vs. Rajanigandha Properties Ltd. in ITA no. 1011/Kol/2011 and also in Arion Commercial Pvt. Ltd. Kolkata in ITA no. 1010/Kol/2011 and held that the transaction done by delivery as well as the transaction of derivative of shares, profit/loss is not hit by Section 43(5) and therefore the aggregation of share trading loss and profit from derivative transactions should be done before the application of the Explanation to Section 73.
In view of the above judicial pronouncements the assessee is entitled to set off of the share trading loss with the profit earned from derivative transactions. In the instant case before us, we found that assessee is engaged in purchase and sale of shares and securities, following the judicial pronouncements as discussed above, we direct the AO to allow set off loss on purchases and sale of shares against profit from business income, before invoking Explanation to Section 73 of IT Act. We direct accordingly.
The grievance of the revenue in its appeal relates to deleting disallowance of expenditure incurred in earning tax free income. The AO found that the assessee had earned dividend income which is not liable to tax. He further found that the assessee has incurred interest expenditure of Rs.5,74,23,200/-. Since the disallowance offered by the assessee under section 14A was not as per rule 8D, by applying the provisions of 5 & 3255/12 Rule 8D, the AO worked out the proportionate disallowance by taking average amount of the investment and average amount of total assets appearing in the balance sheet of the assessee on the first date and last date of the previous year. The AO has also worked out 1/2% of the average value of the investment for disallowance under Rule 8D(2)(iii). Accordingly total disallowance u/s.14A read with rule 8D was worked out to Rs.4,54,46,710/-. After giving credit of the amount offered by the assessee for disallowance u/s.14A amounting to Rs.34,310/-, the AO made the addition, which was deleted by CIT(A) in entirety.
Ld. AR placed on record order of the Tribunal in case of Baljit Securities (P) Ltd. (supra), in support of the proposition that since assessee was engaged in trading of shares, the shares held as stock-in- trade cannot be taken into account while computing disallowance of expenditure incurred for earning exempt income. As per ld. AR since the assessee was fully engaged in purchase and sale of shares, the shares were held as stock-in-trade, therefore, no disallowance should have been made u/s.14A in terms of decision of Hon’ble Kolkata High Court in the case of Baljit Securities (P) Ltd., 368 ITR 470.
On the other hand, ld. DR relied on the order of lower authorities.
We have considered rival contentions and found that the assessee had not offered the disallowance u/s.14A as per rule 8D, therefore, the AO had recomputed the disallowance as per Rule 8D. However, as per the decision in the case of Baljit Securities (P) Ltd (supra), the shares held as stock-in-trade should not be taken into account while working the 6 & 3255/12 disallowance of expenses incurred on earning the tax free income. The Hon’ble Kokata High Court in the case of Baljit Securities (P) Ltd., 368 ITR 470, had also held as under :- “6.It would, thus, appear that where an assessee, being the company, besides dealing in other things also deals in purchase and sale of shares of other companies, the assessee shall be deemed to be carrying on a speculation business. The assessee, in the present case, principally is a share broker, as already indicated. The assessee is also in the business of buying and selling of shares for self where actual delivery is taken and given and also in buying and selling of shares where actual delivery was not intended to be taken or given. Therefore, the entire transaction carried out by the assessee, indicated above, was within the umbrella of speculative transaction. There was, as such, no bar in setting off the loss arising out of derivatives from the income arising out of buying and selling of shares. This is what the learned Tribunal has done." In the case of Baljit Securities, decided by Kolkata Bench of the Tribunal, assessee was holding entire shares as stock-in-trade. However, in the instant case before us, the assessee has incurred interest expenditure for earning exempt income. As per the balance sheet placed on record, the assessee was holding shares as stock-in-trade as well as investments. While working out disallowance u/s.14A the AO had worked out disallowance under rule 8D taking into account entire shares held by assessee treating the same as investments. In the interest of justice, we restore this issue back to the file of AO for recomputing the disallowance to be made under Rule 8D by excluding the shares held as stock-in-trade while working out the average investment. Thus, no disallowance can be made in respect of funds involved in shares and securities held as stock- in-trade. We direct accordingly.