D.C.I.T CIR - 3,KOLKATA, KOLKATA vs. M/S JAROLI VINCOM PVT LTD, KOLKATA

Both appeals filed by Revenue and Cross Objection (CO) filed by assessee are arising out of order of Commissioner of Income Tax (Appeals)-I, -878/Kol/2013 & CO.61/Kol/13 A.Y. 06-07 & 08-09 DCIT Cir-3 Kol. vs. M/s Jaroli Vincom Pvt. Ltd. Page 2 Kolkata in appeals No.196, 334/CIT(A)-I/3(2)-3/08-09/10-11 dated 24.01.2013. Assessments were framed by ITO Ward-3(2) and DCIT Circle-3, Kolkata u/s 143(3) r.w.s.115JB of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide their orders dated 05.12.2008 and 27.12.2010 for assessment years 2006-07 & 2008-09 respectively.

Briefly stated facts are that assessee is a Private Limited Company and is registered with Reserve Bank of India as Non-Banking Finance Company (NBFC for short). The assessee’s income comprises of trading in shares and derivatives, interest on loan and debentures, dividend and capital gains. During the year, assessee has incurred loss at ₹2,73,14,421/- on account of sale-purchase of derivatives and break-up of the loss from its derivative business stands as under :- a) loss on sale of derivatives from 01.04.2005 to 24.1.2005 at ₹1,47,47,937/-; b) loss of sale of derivatives from 25.01.2006 to 31-3-2006 at ₹1,25,66,484/-; The Assessing Officer sought clarification from assessee by issuing notice stating that why loss incurred on sale/purchase of derivative prior to 25.01.2006 should not be treated as speculation loss. Assessee submitted that as per section 43(5)(d) of the Act, trading in derivatives is not a speculative business. The relevant sub-clause (d) in Sec. 43(5) of the Act was inserted by Finance Act, 2005 which is effective from 01.04.2006 clarifying that the trade in derivatives shall not amount speculation business if it is carried out in the recognized exchange. However, claim of assessee was disregarded by AO relying on the Notification No. 2/2006 dated 25.01.2006, & CO.61/Kol/13 A.Y. 06-07 & 08-09 DCIT Cir-3 Kol. vs. M/s Jaroli Vincom Pvt. Ltd. Page 3 wherein Bombay Stock Exchange Ltd., Mumbai and National Stock Exchange of India Ltd., Mumbai were notified as recognized Stock Exchange for the purpose of clause (d) of the proviso of Sec. 43(5) of the Act. Hence, it is implied that an eligible transaction in respect of trading in derivative carried out on these Stock Exchanges w.e.f. 25.01.2006 shall alone be treated as non speculative transaction. Therefore, loss of ₹1,47,47,937/- on sale of derivative prior to 25.01.2006 was treated as speculation loss and accordingly it was not allowed to be set off with non-speculation income.

Aggrieved, assessee preferred appeal before Ld. CIT(A) who held that the transaction in question was not a speculation transaction by observing as below:- “The Finance Act, 2005 clearly excludes the trading on Derivatives from the definition of Speculation transactions w.e.f. assessment year 2006- 07. A subsequent notification, in fact not even the notification but an inference drawn from the notification cannot override the Act itself. In Shree Capital Services Ltd. vs. Asstt. CIT it was held by the Special Bench of ITAT, Kolkata that it is evident that the transaction in derivatives is exempted from the purview of speculative transaction under section 43(5) because of recent systemic and technological changes introduced by stock exchange. The intention of the legislature is also clear from the fact that all the transactions in derivatives have not been exempted from the ambit of speculative transaction under section 43(5) but only the eligible transactions of trading in derivatives carried out in a recognized stock exchange are exempt. By way of explanation, the legislature has also defined the term eligible transaction and recognized stock exchange.’

We have heard rival contentions of both the parties and perused the materials available on record. Ld. DR vehemently relied on the order of Assessing Officer whereas Ld. AR also relied on the order of Ld. CIT(A). Ld. AR submitted various case laws in support of his claim. From the aforesaid discussion we find that AO has treated the loss incurred by assessee on account of derivative transaction up-to 25.01.2006 as speculation loss in terms of Notification No. 2/2006 issue on dated 25.1.2006 and explanatory memorandum in notification number SO. 89(E), and the loss during the period from 25.1.2006 to 31.3.2006 as business loss. The AO treated the loss up-to 25-1-2006 as speculative as the notification was issued on dated 25.1.2006 for recognizing the stock exchanges. As per the amended section 43(5)(d), the trading of derivates if carried out in recognized stock exchange then it will not treated as speculative business. The relevant notification was issued on dated 25.1.2006 for recognizing the stock exchange so the loss from the speculative transactions up-to 25-1-2006 is speculation loss. However, we find that Hon’ble Delhi High Court in the case of CIT v. Nasa Finlease P. Ltd. Appeal No.647/2012 (Delhi High Court) dt.06.09.2013 has decided in favour of the assessee. The relevant extract of the order is reproduced below : -878/Kol/2013 & CO.61/Kol/13 A.Y. 06-07 & 08-09 DCIT Cir-3 Kol. vs. M/s Jaroli Vincom Pvt. Ltd. Page 5 “7. The factual position is not in dispute. Notification No.2/2006 dated 25th January, 2006, issued by the Central Board of Direct Taxes does not specify any particular date and simply notifies the National Stock Exchange India Ltd., and Bombay Stock Exchange, Mumbai under proviso (d) to clause (5) to Section 43 of the Act. The said proviso had become applicable with effect from 1st April, 2006. Issue of notification obviously had to take some time as it involved processing and examination of applications etc. This was a matter relating to procedure and the delay in issue of notification or even framing of the Rules was due to administrative constrains. We agree with the Tribunal that the delay occasioned, as procedure and formalities have to be complied with, should not disentitle and deprive an assessee, specially, when the transactions were carried through a notified stock exchange. The aforesaid delay is not attributable to the assessee. The notification, therefore, merits acceptance and should be given retrospective effect. Notification was procedural and necessary adjunct to the Section enforced with effect from 1st April, 2006. The rule and notification issued in the present case effectuate the statutory and the legislative mandate. There is no good ground or reason why the notification in question should not be given effect from 1st April, 2006. No reason or ground is alleged or argued to contend that National Stock Exchange India Ltd. could not and should not have been notified from 1st April, 2006. ”

Next ground raised by Revenue is regarding that the Ld. CIT(A) erred in allowing relief of interest payment for ₹78,191/- relying loss on trading of derivatives prior to 25.01.2006 as non-speculation business.

During the year under consideration, AO disallowed the interest paid by assessee up-to 25.01.2006 on the ground that it pertains to speculation business. Therefore, it should not be allowed. However, we find that Ld. CIT(A) has allowed the claim of interest expense by treating the loss from the derivative transactions as non- speculative business. We find that this ground relates to the first ground of Revenue’s appeal regarding treating the transaction of derivative as speculative business up to 25.01.2006. In the first ground of appeal, we have held the business of the assessee as non- speculative. Accordingly, the interest disallowed by AO is allowable expense against the non-speculative business of the assessee. In our considered view, this ground of Revenue’s appeal is dismissed.

Aggrieved, assessee preferred appeal before Ld. CIT(A) who partly allowed the appeal by observing as under:- “… Assessee relied upon Mumbai High Court in Godrej 7 Boyce vs. DCIT on 12th August 2010 also holds that the Rule 8D of the Income Tax Rules was effective from 24.03.2008. The tax free dividend received was Rs.6,45,787/-. The expenses of Rs.3,854/- as demat charges are directly relatable to earning of dividend income. The interest debited in profit and loss account of Rs.6,91,194/- paid to M/s Fortis Securities Ltd. is not relating to the dividend income as the total sales credited in the P&L A/c were for Rs.41.72 crores and interest income was to the extent of Rs.23 lacs and assessee has substantial interest free funds for Rs.13.77 crores and share worth Rs.5.76 crores were held as stock-in-trade. Keeping in view these facts and circumstances no interest is attributable to earning tax-free income and the administrative expenses in relation to tax-free income may be taken as 1% of the total exempt income of Rs.25,14,872/- (LTCG plus dividend) and amount disallowable u/s. 14A is quantified at [(Rs.25,148/- plus demat charges for Rs.3,854/-) = Rs.29,002/-]. Therefore this ground is partly allowed.”

We have heard rival contentions and perused the materials available on record. Before us Ld. AR submitted that disallowance u/s. 14A of the Act can be made if AO, after having regard to the accounts of the assessee is not satisfied with the correctness of the claim of the assessee in respect of such & CO.61/Kol/13 A.Y. 06-07 & 08-09 DCIT Cir-3 Kol. vs. M/s Jaroli Vincom Pvt. Ltd. Page 9 expenditure in relation to income which does form part of total income under this act. The AO in his order has not recorded the charge of dissatisfaction. Besides this the ld. AR submitted that the provision inserted under Rule 8D of IT Rule came into effect on 24.03.2008 and relevant year under appeal i.e. AY 2006-07. Hence the rule 8D does not apply to the assessee. The ld. AR also submitted that interest expenses incurred is not related to the dividend income. Ld AR finally prayed not to make any disallowance u/s. 14A r.w.s Rule 8D of IT Rules. On the contrary, Ld. DR vehemently relied on the order of AO. From the aforesaid discussion, we find that though the Rule 8D of IT Rule is applicable w.e.f 24.03.2008, however, Sec. 14A is applicable since the beginning of income tax Act, 1961. Therefore, the disallowance u/s. 14A was very much applicable even for the A.Y i.e. 2006-07, however, we find force from the submission made before us by Ld. AR that there was sufficient fund available for an amount of ₹13.77 crores and investment made in the shares held as stock-in-trade for an amount of ₹5.76 crores. Therefore, we infer that assessee has made investment in share held as stock-in-trade out of its own fund. Therefore, the disallowance of interest as specified under Rule 8D of IT Rules is not applicable in the present case. However, several courts have decided to disallow the expense @ 1% of the total exempt income prior to insertion of Rule 8D of the IT Rule w.e.f. 01.04.2008. Here, we are relying in the order of Hon’ble jurisdictional High Court in the case of CIT Vs. R.R. Sen & Brothers Pvt. Ltd. G.A. No. 3019 of 2012, ITAT No. 243 of 2012 wherein the issue was decided in favour of assessee and against the Revenue and relevant extract is reproduced below:- “The court:- The assessee did not show any expenditure incurred by him for the purpose of earning the money which is exempted under the income tax. The Tribunal has computed expenditure at 1 per cent of such dividend income which, according to them, is the thumb rule applied consistently. We find no reason to interfere.”

During the course of assessment proceeding, AO found that assessee has claimed an expenditure of Rs.7,38,99,101/- under the head “Administrative Expenses”. From the breakup of “Administrative Expenses” the AO found that the assessee has claimed an expense for an amount of ₹39,20,360/- towards the ‘transaction, Demat and share transfer charges’. The AO called upon the assessee to explain the expenses and found that these expenses are the payment of STT. The AO disallowed the expenses of STT by virtue of section 40(a)(ib) of the Act. The expense incurred on STT is not allowable expense, therefore, AO disallowed STT expense and added it to the income of assessee.

Aggrieved, assessee preferred appeal before Ld. CIT(A) who deleted the addition made by AO on account of STT by observing as under:- “Next ground no.3 relates to addition of Rs.39,20,360/- on account of STT. Assessee has debited expenditure of Rs.39,61,222/- on account of transaction, demat and share transfer stamp charges in the P&L a/c. The demat charges of Rs.40,862/- were considered by the AO in relation to earning of dividend income as above grounds. The balance expense of Rs.39,20,360/- were in nature of transaction charges paid to the stock exchange broker. Assessee had paid Rs.1,93,73,008/- as STT on derivatives, speculative transactions and share transactions shown under the head business income as per Form no. 10DB furnished (33 forms). It is pertinent to mention that this STT was not debited in the P&L a/c and was shown as part of schedule – 7 of the Balance Sheet under the head current assets. Keeping in view the above facts and circumstances addition of Rs.39,20,360/- made by AO is deleted as the & CO.61/Kol/13 A.Y. 06-07 & 08-09 DCIT Cir-3 Kol. vs. M/s Jaroli Vincom Pvt. Ltd. Page 11 AO misconstrued the nature of the transaction. Therefore, this ground of appeal is allowed.”

We have heard rival contentions of both the parties and perused the materials available on record. Ld. DR vehemently relied on the order of AO where as Ld. AR supported the order of Ld. CIT(A). Ld. AR submitted the computation of total income and audited balance sheet running at pages from 1 to 14 for the year under consideration and drew our attention on page-5 of the balance sheet, wherein the STT was duly shown under the head ‘current asset’ in Schedule-7 for an amount of ₹1,38,26,870/-. Ld. AR further drew our attention on page 7 of the financial statement, wherein ‘transaction, Demat & share transfer stamp charges’ under the head of “Administrative charges” were written. Hence the ld. AR claimed that no expense for STT has been debited in the profit and loss account of the assessee. From the aforesaid discussion, we find that assessee has not debited any amount of STT in its profit and loss account in the year under consideration but AO misunderstood from the financial statement submitted by assessee, where transaction/demat and share transfer stamp charges were debited. Therefore we do not find any reason to interfere in the order of Ld. CIT(A) and this ground raised by Revenue is dismissed.

Next ground raised by Revenue is regarding that the Ld. CIT(A) has erred in allowing relief by adjusting the tax under MAT provision against the STT.

During the course of assessment proceeding AO found that assessee claimed rebate u/s 88E of the STT paid while working out the tax under the provisions of Minimum Alternate Tax (MAT) as specified u/s 115JB of the Act. The AO found that there is no scope of applying the average rate of tax on the income for the adjusting the tax under the provisions of MAT under section & CO.61/Kol/13 A.Y. 06-07 & 08-09 DCIT Cir-3 Kol. vs. M/s Jaroli Vincom Pvt. Ltd. Page 12 88E(2). So there is a clear cut violation of sub-section 2 of 88E of the Act. Hence, the AO disallowed the rebate claimed by assessee of STT paid under section 88E of the Act.

Aggrieved, assessee preferred appeal before Ld. CIT(A) who deleted the disallowance made by AO by observing as under:- “Next ground nos. 4&5 are relates to deduction u/s. 8E. The AO allowed rebate u/s. 88E to the extent of Rs.39,20,360/- on account of STT paid while calculating the tax on the normal computation as per IT Act and did not allow the rebate while computing the MAT liability u/s 115JB. It was contended by the assessee that total STT paid as per Form 10DB was Rs.1,93,73,008/- on derivatives, speculative transactions and shares transactions on account of business and the receipt on account of above heads was duly credited in P&L a/c for the financial year. The A/R further relied upon the judgment of ITAT Kolkata in Ganeshan Securities Pvt. Ltd. dated 30.12.2011 to support is contention that the assessee is entitled to a deduction of STT paid by him in respect of taxable securities transaction entered into in the course of business during the financial year while computing total income u/s. 115JB of the IT Act. Keeping in view the above facts and circumstances the AO is directed to allow rebate in the manner as per section 88E(2) for STT paid by the assessee while computing the tax liability u/s.115JB of the IT Act to extent of tax liability so determined as STT is non-refundable rebate u/s. 88E. Therefore, ground nos. 4 & 5 are allowed.”

We have heard rival contentions and gone through the facts and circumstances of the case. We find that the assessee claimed the rebate of tax worked out under the provision of MAT as provided under section 88E of the Act. But the AO disallowed the same on the ground that the condition specified under section 88E(2) for applying the average rate of income tax while calculating the rebate has not been fulfilled. We find that the issue of rebate/deduction u/s.88E of the Act in respect to credit for STT while computing income being MAT provisions of Sec. 115JB of the Act, the issue is squarely covered in favour of assessee and against Revenue by the decision -878/Kol/2013 & CO.61/Kol/13 A.Y. 06-07 & 08-09 DCIT Cir-3 Kol. vs. M/s Jaroli Vincom Pvt. Ltd. Page 13 of Bangalore Bench in the case of M/s Horizon Capital Ltd (supra), wherein the Tribunal vide para 6 has held as under:- “6. Having heard both the parties and having considered the rival contentions, we find that the only dispute is whether the rebate of STT paid by the assessee is allowable from the income tax computed against the total income computed under section 115JB of the Income Tax Act, 1961. The term ‘total income’ has been defined under the Income Tax Act, 1961 as “the total amount of income referred to in section 5, computed in the manner laid down in this Act.” Section 5 of the Income Tax Act, 1961 defines the scope of the total income of a resident or a non-resident person. The total income of the assessee has to be computed under the regular provisions of the Income Tax Act, 1961 and in the case of a company it can be arrived at both under the regular provisions of the Income Tax Act and under the deeming provision under section 115JB of the Act. It has been provided that where the income tax payable by the assessee on the total income computed under regular provisions of the Act is less than 7½% of the book profit prepared in accordance with the Companies Act, the higher of the tax i.e. the book profit shall be deemed to be the total income of the assessee and tax payable by the assessee shall be the amount of income tax at the specified rate. When we look at the provisions of section 77 of the Income Tax Act, 1961, we find that the rebate is to be granted from the amount of income tax chargeable on the total income of the assessee. The income tax is computed after arriving at the total income of the assessee and section 87 of the Income Tax Act, 1961 does not differentiate between the total income computed under the regular provisions of the Act or under section 115JB starts with the non- abstante clause, “Notwithstanding anything contained in any other provision of this Act”, we find that it is only for the computation of the total income and the sub-section (5) of section 115JB provides for a saving clause that the rest of the provisions of the Income Tax Act relating to deductions, rebate, etc., the other provisions of the Income Tax Act shall apply. Therefore it is clear that the provision of sections 87 and 88A to 88E also apply after the total income is computed under section 115JB of the Income Tax Act, 1961 and since the assessee’s total income includes the income from the taxable Securities Transactions, the assessee is entitled to a deduction of the amount equal to the STT paid by him in respect of the taxable Securities Transactions entered into in the course of business during the previous year. The assessee’s appeal is thus allowed and the Assessing Officer is directed to give rebate under section 88E for the STT paid by the assessee.” -878/Kol/2013 & CO.61/Kol/13 A.Y. 06-07 & 08-09 DCIT Cir-3 Kol. vs. M/s Jaroli Vincom Pvt. Ltd. Page 14 In view of the above decision, rebate u/s88E of the Act was to be allowed from the tax computed as per provisions of Sec.115JB of the Act to find out whether after set off of rebate u/s.88E of the Act, any tax liability remained or not. Admittedly, the tax liability as per MAT provisions was less and rebate admissible u/s.88E of the Act was more. Therefore, rebate u/s 88E had to be allowed even when total income is computed u/s. 115JB of the Act. Resultantly, the ground taken by Revenue is dismissed.