2015 (1) TMI 1281 - AT - Income Tax

Disallowance of loss in trading of shares invoking Explanation to section 73 - assessee raised a new issue that if AO treats the loss arising from shares as speculation loss the profits from derivatives is to be set off, since both the transactions are speculative in nature - Held that - In view of the alternative plea of the assessee, we are in agreement with the argument of Ld. counsel for the assessee that the income from derivatives is defined in section 43(5) of the Act and since it excludes such transactions from the nature of speculative transaction and AO treats that the transaction has not been excluded from section 73 of the Act, therefore, the assessee was entitled to claim the loss of shares against the income of derivatives. Respectfully following the decision of Hon ble Delhi High Court in the case of DLF Commercial Developers Ltd. 2013 (7) TMI 334 - DELHI HIGH COURT , we allow the alternative claim of the assessee and direct the AO to allow this loss against derivative incomes. - Decided against revenue Disallowance u/s 14A - Held that - We find that relevant assessment year involved is 2007-08 and rule 8D will not apply being prospective as held by Hon ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. vs. DCIT 2010 (8) TMI 77 - BOMBAY HIGH COURT . We find that the Tribunal is consistently estimating the net profit @1% of the exempted income and we find no infirmity in the order of the CIT(A). - Decided against revenue

Summary

Issues:
1. Interpretation of Explanation to section 73 of the IT Act.
2. Determination of principal business of the assessee.
3. Treatment of loss in trading of shares as normal business loss.
4. Disallowance under section 14A of the Act.

Issue 1: Interpretation of Explanation to section 73 of the IT Act:
The Revenue challenged the CIT(A)'s deletion of the addition made by the AO disallowing loss in trading of shares under Explanation to section 73 of the Act. The AO contended that the loss in share trading was covered under Explanation to section 73 and treated it as deemed speculation loss. The CIT(A) found that the Explanation was not applicable to the assessee as the company's principal business was granting loans and advances, supported by the funds deployment criteria. The CIT(A) referred to the legislative intent behind the Explanation and held that the AO's findings were unsustainable. The Revenue appealed to the Tribunal, where it was dismissed.

Issue 2: Determination of principal business of the assessee:
The AO determined the principal business of the assessee based on funds deployment in shares and loans/advances. The AO highlighted the significant percentage of fund deployment in shares compared to loans/advances, leading to the disallowance of the loss in share trading as speculation loss. However, the CIT(A) disagreed with the AO's assessment, emphasizing the nature of the company as a non-banking finance company primarily engaged in granting loans and advances. The CIT(A) considered the Kolkata Bench ITAT's decision regarding funds deployment criteria for determining principal business, ultimately allowing the assessee's appeal on this ground.

Issue 3: Treatment of loss in trading of shares as normal business loss:
The AO disallowed the loss in trading of shares as speculation loss under Explanation to section 73 of the Act. The CIT(A) found that the Explanation was not applicable to the assessee, as its principal business was granting loans and advances. The CIT(A) highlighted the absence of transactions aimed at tax evasion and emphasized that all share transactions were conducted at recognized stock exchanges. The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal on this issue.

Issue 4: Disallowance under section 14A of the Act:
The Revenue contested the CIT(A)'s restriction of disallowance under section 14A to a lower amount compared to the AO's disallowance. The Tribunal noted that rule 8D would not apply to the relevant assessment year as held by the Bombay High Court. The Tribunal found no error in the CIT(A)'s decision to estimate the net profit at 1% of the exempted income, leading to the dismissal of the Revenue's appeal on this issue.

In conclusion, the Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions regarding the interpretation of Explanation to section 73, determination of principal business, treatment of loss in trading of shares, and disallowance under section 14A of the Act. The Tribunal's judgment provided detailed analysis and legal reasoning for each issue, ensuring a comprehensive review of the case.