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Issues Involved:
1. Whether sum of Rs. 2,37,17,593/- should be treated as long term capital gain and not profit from speculation business. 2. Whether loss on sale of debenture amounting to Rs. 35,84,558/- is outside the purview of explanation to section 73. 3. Whether expenditure of Rs. 17,49,754/- on interest can be disallowed u/s 14A. Summary: Issue No. 1: Treatment of Rs. 2,37,17,593/- as Long Term Capital Gain or Speculation Business Profit The assessee declared long term capital gains from listed securities at Rs. 2,37,17,593/-, claiming it exempt u/s 10(36) of the Act. The AO treated this sum as speculative profit by invoking the explanation to section 73. The CIT(A) allowed the assessee's claim, stating that the explanation to section 73 applies only where the assessee suffers a loss in the sale and purchase of shares, and that the shares were held as investments, not as stock-in-trade. The Tribunal upheld the CIT(A)'s decision, emphasizing that the explanation to section 73 applies only to traders in shares, not investors. The Tribunal referenced the decision in CIT vs. Lokmat Newspapers (P) Ltd. (2010) 322 ITR 43 (Bom) and other relevant cases to support this view. Issue No. 2: Applicability of Explanation to Section 73 to Loss on Sale of Debentures The AO treated the long term loss on sale of debentures amounting to Rs. 35,84,558/- as speculation loss. The CIT(A) allowed the assessee's claim, referencing the Supreme Court decision in Apollo Tyres Ltd. vs. CIT (2002) 255 ITR 273 (SC), which held that debentures are not equivalent to shares. The Tribunal agreed with the CIT(A), stating that debentures are debt instruments and not shares, and thus, the explanation to section 73 does not apply. The Tribunal also noted that the assessee held the debentures as investments, not as stock-in-trade. Issue No. 3: Disallowance of Interest Expenditure u/s 14A The AO disallowed interest expenditure of Rs. 17,49,754/- u/s 14A, relating it to the dividend income from mutual funds and shares, which is exempt from tax. The CIT(A) allowed the assessee's claim, noting that the assessee had substantial interest-free funds and that the borrowings had decreased. The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court decision in Munjal Sales Corporation vs. CIT (2008) 298 ITR 298 (SC) and the Bombay High Court decision in CIT vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom), which established that if sufficient interest-free funds are available, it is presumed that investments are made from these funds. Conclusion: The appeal filed by the Revenue was dismissed, and the Tribunal upheld the CIT(A)'s decisions on all three issues. The order was pronounced in open Court on 17.06.2011.
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