2012 (4) TMI 584 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance u/s 14A
2. Treatment of Interest Income as Income from Other Sources
3. Allocation of Expenses between Speculative and Non-Speculative Business
4. Applicability of Explanation to Section 73(1)

Summary:

1. Disallowance u/s 14A:
The assessee challenged the disallowance of Rs. 74,898 u/s 14A, arguing that Rule 8D was not applicable for the year under appeal as it is not retrospective, citing the case of Godrej & Boyce Mfg. Co. Ltd (328 ITR 81) (Bom.). The Tribunal noted that the CIT(A) confirmed the disallowance based on reasonableness without addressing the applicability of the cited case law. The Tribunal, considering the smallness of the amount and the absence of direct expenditure, reduced the disallowance to Rs. 37,500, deeming it reasonable for half-year investment.

2. Treatment of Interest Income as Income from Other Sources:
The assessee contended that the interest income of Rs. 5,46,854 should be treated as business income. The CIT(A) upheld the AO's treatment of the interest income as income from other sources, noting that the assessee was not engaged in money lending and failed to demonstrate the business connection of the lending. The Tribunal found no infirmity in the CIT(A)'s order and rejected this ground of appeal.

3. Allocation of Expenses between Speculative and Non-Speculative Business:
The AO allocated Rs. 5,50,798 to speculative loss out of total common expenses of Rs. 13,76,995. The assessee argued against the allocation, claiming the business was composite and indivisible. The Tribunal, referencing the judgment of Hon'ble Allahabad High Court in Makhanlal Ram Swarup Vs CIT 61 ITR 214, upheld the need for allocation but adjusted the ratio to include all three activities (purchase and sale of shares, speculative loss in commodity, and income from derivative transactions). The revised allocation was Rs. 20,655 to speculative business, Rs. 13,08,145 to purchase and sale of shares, and Rs. 48,195 to derivative transactions.

4. Applicability of Explanation to Section 73(1):
The assessee argued that the loss in share trading should not be considered speculative under Explanation to Section 73(1). The Tribunal, relying on the judgment of Hon'ble Bombay High Court in CIT Vs Darshan Securities Pvt. Ltd., concluded that the gross total income mainly consisted of income from other sources, making Explanation to Section 73(1) inapplicable. Thus, the loss of Rs. 15,66,518 from share trading was not considered speculative, while the loss of Rs. 21,60,668 from commodity transactions was treated as speculative.

Conclusion:
The appeal was partly allowed, with adjustments made to the disallowance u/s 14A and the allocation of expenses, while the treatment of interest income and the applicability of Explanation to Section 73(1) were upheld as per the CIT(A)'s findings.