2010 (11) TMI 612 - AT - Income Tax

Claim of loss from sale and purchase of shares / mutual fund units as expenditure - AO treated the same as speculative loss - Section 73 - fiction u/s 32(3) of UTI Act - whether UTI is a company - Held that - Since the assessee has incurred this loss of Rs. 68,91828/- in delaying in units it cannot be considered as speculative. - Held that - Explanation to Section 73 is attracted only when part of the business of the assessee company consists of purchase/sale of shares of other companies. Transactions in shares undertaken by the share brokers as its own under compulsion after client disowned part of such transactions did not constitute business of the assessee in share dealing and therefore loss incurred by the assessee in such transactions did not fall within the ambit of the section 73. Claim of bad debts - Held that - the amount receivable by the assessee, who is a share broker, from his clients against the transactions of purchase of shares on their behalf constitutes debt which is trading debt. - it satisfies the condition stipulated in section 36(2)(i) and the assessee is entitled to deduction u/s 36(1)(vii) by way of bad debts after having written of the said debts from the books of account as irrecoverable.

Issues Involved:
1. Deletion of addition made on account of speculative loss.
2. Deletion of addition made on account of expenditure towards share trading.
3. Deletion of disallowance of bad debts.
4. Deletion of amount towards expenses relating to earning of dividend income.

Issue-wise Detailed Analysis:

1. Deletion of addition made on account of speculative loss:
The primary issue raised was the deletion of an addition of Rs. 79,67,675/- made on account of speculative loss. The assessee, engaged in share broking and dealing in shares, showed a loss on trading in shares amounting to Rs. 80,04,884/- in the profit and loss account. The Assessing Officer (AO) opined that Section 73 was applicable, treating the loss as speculative and disallowed its set-off against brokerage income. The Ld. Commissioner of Income Tax (Appeals) (CIT(A)) found that the major loss of Rs. 68,91,828/- was from trading in mutual fund units, which are not deemed shares as per the Supreme Court's judgment in C.I.T. vs. Apollo Tyres Ltd., and thus, not speculative. The CIT(A) also considered the loss of Rs. 10,75,874/- due to trading errors as business loss and not speculative. The ITAT upheld the CIT(A)'s decision, agreeing that the loss on mutual funds cannot be considered speculative and the trading errors were business losses.

2. Deletion of addition made on account of expenditure towards share trading:
The AO had apportioned Rs. 20,97,364/- as expenses related to speculative business, disallowing them. The CIT(A) found that since Rs. 79,67,675/- of the total trading loss was not speculative, the related expenses should be proportionately reduced. The CIT(A) further held that the assessee had correctly allocated administrative and interest expenses, leading to the deletion of the disallowance. The ITAT upheld this finding, agreeing with the CIT(A)'s allocation and deletion of the disallowance.

3. Deletion of disallowance of bad debts:
The AO disallowed bad debts amounting to Rs. 2,79,54,100/-, claiming the conditions under Section 36(1)(vii) and Section 36(2) were not met. The CIT(A) disagreed, allowing the bad debts as they were incurred in the regular course of business. The ITAT upheld the CIT(A)'s decision, citing the Special Bench of the ITAT in DCIT vs. Shreyas S. Morakhia and other relevant case laws, which supported the allowance of bad debts for share brokers.

4. Deletion of amount towards expenses relating to earning of dividend income:
The AO disallowed Rs. 10,48,682/- as expenses related to earning dividend income under Section 14A. The CIT(A) reduced this disallowance to Rs. 1,20,466/-, based on the assessee's allocation of administrative and interest expenses. The ITAT found that Rule 8D, which the AO had relied upon, was applicable only from Assessment Year 2008-09 as per the Bombay High Court's decision in Godrej Boyce Mfg. Co. Ltd. vs. DCIT. Consequently, the ITAT remitted the matter back to the AO to verify the assessee's computation and make a fresh determination.

Conclusion:
The ITAT upheld the CIT(A)'s deletion of additions related to speculative loss, share trading expenses, and bad debts, while remitting the issue of expenses related to earning dividend income back to the AO for further verification. The appeal by the Revenue was partly allowed for statistical purposes.

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