2014 (10) TMI 659 - AT - Income Tax

Scope of Explanation to sec. 73 Deemed speculative loss or not - Whether delivery based share trading loss come under the ambit of Explanation to sec. 73 of the Act or not Held that - The assessee is engaged in the business of share trading which involves stock and share broking activities, purchase and sale of delivery based shares and purchase & sale of non-delivery based shares i.e., derivative trading - assessee incurred loss on delivery based purchase and sale of shares and earned profit on non-delivery based sale purchase of shares - both trading of shares and derivative transactions are not coming under the purview of Section 43(5) of the Act which provides definition of speculative transaction exclusively for purposes of section 28 to 41 of the Act - both delivery based transaction in shares and derivative transactions are non-speculative as far as section 43(5) is concerned goes to confirm that both will have same treatment as regards application of the Explanation to Section 73 is concerned, which creates a deeming fiction. Before application of the said Explanation, aggregation of the business profit/loss is to be worked out irrespective of the fact, whether it is from share delivery transaction or derivative transaction relying upon assessee s own case as decided in Commissioner of Income Tax, Kol-III Versus M/s. Baljit Securities Pvt. Ltd. 2014 (6) TMI 475 - CALCUTTA HIGH COURT - where an assessee, being the company, besides dealing in other things also deals in purchase and sale of shares of other companies, the assessee shall be deemed to be carrying on a speculation business - The assessee is a share broker, as already indicated - The assessee is also in the business of buying and selling of shares for self where actual delivery is taken and given and also in buying and selling of shares where actual delivery was not intended to be taken or given - the entire transaction carried out by the assessee was within the umbrella of speculative transaction - There was no bar in setting off the loss arising out of derivatives from the income arising out of buying and selling of shares thus, the order of the CIT(A) is upheld Decided against revenue. Invocation of section 14A Held that - A plain reading of Rule 8D(2)(ii) and (iii) can only be applied, in the situations, wherever share are held as an investment and this rule will not have any application when the shares are held as stock in trade relying upon DCIT Vs. Gulshan Investment Co. Ltd. 2013 (3) TMI 393 - ITAT KOLKATA - the provisions of Rule 8D(2)(ii) and 8D(2)(iii) of the I.T. Rules, 1962 will not be attracted to dividend earned from shares held as stock in trade - the provision of section 14A are indeed attracted whether or not the shares are held as stock in trade or as investments, even though the provisions of rule 8D2(ii) and (iii) cannot be invoked in such a case, and even though the provisions of rule 8D2(1) are much narrower in scope than the scope of section 14A simplicitor thus, the order of the CIT(A) is upheld Decided against revenue.

Summary

Issues Involved:
1. Whether delivery-based share trading loss falls under the ambit of Explanation to Section 73 of the Income-tax Act, 1961.
2. Disallowance under Section 14A of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Delivery-Based Share Trading Loss and Explanation to Section 73:

The first issue concerns whether delivery-based share trading loss should be treated as speculative loss under the Explanation to Section 73 of the Income-tax Act, 1961. The Assessing Officer (AO) treated the loss from the purchase and sale of shares as normal business loss and denied the set-off against other business incomes. The CIT(A) allowed the set-off, holding that the loss from delivery-based trading should be aggregated with the profit from derivative transactions before applying the Explanation to Section 73.

The Tribunal upheld the CIT(A)'s decision, noting that both delivery-based transactions and derivative transactions are non-speculative as per Section 43(5) of the Act. The Tribunal cited previous judgments, including the Special Bench decision in CIT v. Concord Commercial Pvt. Ltd., which held that aggregation of share trading loss and profit from derivative transactions should be done before applying the Explanation to Section 73. The Tribunal also referenced the jurisdictional High Court's decision in the assessee's own case, which supported this view.

2. Disallowance under Section 14A:

The second issue pertains to the disallowance made by the AO under Section 14A of the Act, related to expenditure incurred in earning tax-free dividend income. The AO invoked Rule 8D and disallowed Rs. 8,29,817/-. The CIT(A) reduced the disallowance to 5% of the dividend income, amounting to Rs. 1,43,883/-, plus an additional Rs. 5,055/- under Section 94(7).

The Tribunal confirmed the CIT(A)'s decision, emphasizing that Rule 8D applies to investments and not to shares held as stock in trade. The Tribunal referenced decisions from other cases, including DCIT Vs. Gulshan Investment Co. Ltd. and CCI Ltd. Vs. JCIT, which held that Rule 8D does not apply to shares held as stock in trade. The Tribunal concluded that the CIT(A)'s estimation of disallowance was fair and reasonable.

Conclusion:

The Tribunal dismissed the revenue's appeal, confirming the CIT(A)'s order on both issues. The delivery-based share trading loss was allowed to be set off against derivative profits, and the disallowance under Section 14A was restricted to a reasonable estimate, excluding the application of Rule 8D for shares held as stock in trade.