2010 (11) TMI 422 - AT - Income Tax

Addition - Carry forward and set off u/s 43(5),73 - Speculation Business - loss on account of trading in shares - Assessee was a company - For AY 03-04, the Assessee showed a profit of Rs.28,37,382 on sale of shares and securities held as stock-in-trade - The same was offered to tax as speculative income after setting off speculation loss of Rs.27,61,505 brought forward from AY 96-97 to 98-99 - The AO treated the income from sale of shares as normal business income and did not allow set off as claimed by the Assessee - an identical issue as arising for consideration in this appeal came up for consideration before the Hon ble Bombay High Court in the case of CIT vs. Lokmat Newspapers Pvt. Ltd. 2010 -TMI - 75654 - BOMBAY HIGH COURT - Decided in favour of assessee. Professional fees - The aforesaid fees were paid for the purpose of taking professional advise as to whether the assessee can enter into the business of real estate. In this regard the A.O. was of the view that the assessee was in the business of trading in shares and not dealing in property. Therefore, the aforesaid expenditure cannot be said to be wholly and exclusively incurred for the purpose of business of the assessee - Decided against of assessee. addition u/s.14A -In the absence of clear bifurcation of expenses for earning dividend income the Assessing Officer has made disallowance on ad hoc basis which appears to be highly excessive in view of the fact that the investments are not made out of the borrowed funds and only the administrative expenses are to be allocated and the efforts put in to achieve the turn over of 20.34 crores in share trading are more than making an investment in the mutual funds which have generated the dividend income - Hence, it will be fair and justified to restrict the disallowance to Rs.1.50 lacs and the appellant gets a relief of Rs.50,000/- Decided in favour of assessee.

Summary

Issues Involved:
1. Applicability of Explanation to Section 73 and Section 43(5) regarding speculation losses.
2. Disallowance of professional fees related to potential real estate business.
3. Disallowance under Section 14A for expenses incurred in earning tax-exempt dividend income.

Issue-wise Detailed Analysis:

1. Applicability of Explanation to Section 73 and Section 43(5) regarding speculation losses:

The assessee, a company engaged in trading shares and securities, incurred a loss of Rs.6,97,738/- from transactions where no delivery of shares occurred. The Assessing Officer (A.O.) treated these transactions as speculative under Section 43(5) and disallowed the set-off of this loss against profits from transactions involving actual delivery. The assessee contended that the entire business should be considered composite under the Explanation to Section 73, which deems the business of purchase and sale of shares by a company as speculative. The CIT(A) upheld the A.O.'s decision, stating that transactions settled without physical delivery are speculative per Section 43(5).

Upon appeal, the Tribunal referred to the Explanation to Section 73 and the judgment in CIT vs. Lokmat Newspapers Pvt. Ltd. (322 ITR 43), which held that both profits and losses from the business of purchase and sale of shares by a company must be treated as speculative. The Tribunal concluded that the segregation of income by the A.O. was incorrect and allowed the assessee's claim, deleting the addition made by the A.O.

2. Disallowance of professional fees related to potential real estate business:

The assessee claimed professional fees of Rs.3,50,000/- paid for advice on entering the real estate business. The A.O. disallowed this expense, arguing that the assessee was engaged in trading shares, not real estate. The CIT(A) upheld this disallowance, noting the lack of evidence showing the assessee's intention to enter the real estate business.

The Tribunal agreed with the CIT(A), emphasizing that the assessee failed to demonstrate any material evidence of intent to engage in real estate business beyond the isolated instance of seeking professional advice. Consequently, the Tribunal upheld the disallowance of the professional fees.

3. Disallowance under Section 14A for expenses incurred in earning tax-exempt dividend income:

The assessee received dividends from mutual funds and companies amounting to Rs.4,31,814/-. The A.O. disallowed Rs.2,00,000/- under Section 14A, attributing this amount to expenses incurred in earning the tax-exempt dividend income. The CIT(A) reduced the disallowance to Rs.1,50,000/-, considering the administrative expenses and the proportion of dividend income to the total income.

The Tribunal found the CIT(A)'s reduction reasonable, noting that the disallowance was proportionate to the administrative efforts involved in earning the dividend income. Therefore, the Tribunal upheld the CIT(A)'s order, confirming the disallowance of Rs.1,50,000/- and dismissing the assessee's grounds on this issue.

Conclusion:

In conclusion, the appeal by the assessee was partly allowed. The Tribunal accepted the assessee's claim regarding the speculative losses under Explanation to Section 73, deleted the related addition, and upheld the disallowances of professional fees and expenses under Section 14A as determined by the CIT(A).