2015 (7) TMI 111 - AT - Income Tax

Disallowance u/s.14A read with Rule 8D - CIT(A) deleted 50% disallowance - Held that - It is not the case of the assessee that the AO has applied rule 8D, while computing the disallowance under section 14A without complying with the provisions of section 14A(2), whereas the AO has complied with the provisions of section 14A(2). We are of the view that the disallowance has to be made in accordance with rule 8D. CIT(A) cannot reduce the disallowance merely on the basis that the disallowance made by the AO is on the higher side. It is not the plea of the assessee that the AO has not recorded any satisfaction by rejecting the claim of the assessee on the basis of the accounts maintained by the assessee. We, therefore, set aside the order of the CIT(A) and restore the order of the AO. - Decided in favour of revenue. Addition in respect of transactions in shares treating them by the AO as speculative transaction, as per Explanation to section 73 - CIT(A) deleted the addition - Held that - addition of ₹ 3,24,76,185/- in respect of transactions in shares treating them by the AO as speculative transaction, as per Explanation to section 73. Derivatives are assets, whose values are derived from values of underlying assets; in the present case, by all accounts the derivatives are based on stocks and shares, which fall squarely within the explanation to Section 73 (4). Therefore, it is idle to contend that derivatives do not fall within that provision, when the underlying asset itself does not qualify for the benefit, as they (derivatives - once removed from it and entirely dependent on stocks and shares, for determination of their value). See CIT-vs- DLF Commercial Developers. 2013 (7) TMI 334 - DELHI HIGH COURT . Therefore the assessee was not entitled to carry forward its losses; the question framed is answered in favour of the revenue Addition towards the notional interest - CIT(A) deleted the addition - Held that - The income under the Income Tax Act is leviable, as per the provisions of section 4 on the real income. This is not a case of the AO to disallow the interest claimed by the assessee as deduction. Until and unless the income has been received or accrued to the assessee, it cannot be regarded to be the income of the assessee. Income-tax is leviable on the real income. Onus is on the Revenue to prove that the assessee has earned the income. On the contrary, onus is on the assessee when the assessee claimed that an income is exempt from tax. It is a case where the AO has added the interest assuming as if the assessee has earned the income. Before us, the ld. DR even though vehemently relied on the order of the AO but could not adduce any evidence that any real income has been received by the assessee by way of interest on that count. We, therefore, confirm the order of the CIT(A) deleting the addition - Decided against revenue.

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D of the Income Tax Rules, 1962.
2. Classification of loss from Future & Options (F&O) transactions as speculative or non-speculative.
3. Addition of notional interest on interest-free loans/advances.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D of the Income Tax Rules, 1962:
The Revenue challenged the CIT(A)'s decision to restrict the disallowance under Section 14A to Rs. 4,86,108/- from Rs. 9,72,216/- as computed by the AO. The Tribunal noted that the AO had complied with Section 14A(2) and applied Rule 8D correctly. It was not the case of the assessee that the AO had failed to comply with the provisions of Section 14A(2). The Tribunal opined that the CIT(A) could not reduce the disallowance merely because it seemed high. Consequently, the Tribunal set aside the CIT(A)'s order and restored the AO's original disallowance. Thus, this issue was decided in favor of the Revenue.

2. Classification of Loss from Future & Options (F&O) Transactions:
The Revenue contended that the CIT(A) erred in treating the loss from F&O transactions as non-speculative. The AO had classified these transactions as speculative under the Explanation to Section 73. However, the CIT(A) found that the transactions were eligible under Section 43(5)(d), which excludes certain derivative transactions from being considered speculative. The Tribunal, after reviewing the facts and relevant legal provisions, including the decision of the Hon'ble Delhi High Court in CIT vs. DLF Commercial Developers Ltd., concluded that the definition of speculative transactions under Section 43(5) is confined to Sections 28 to 41 and does not extend to the Explanation to Section 73. Thus, the Tribunal set aside the CIT(A)'s order and restored the AO's classification of the transactions as speculative. This issue was also decided in favor of the Revenue.

3. Addition of Notional Interest on Interest-Free Loans/Advances:
The AO had added Rs. 29,50,000/- as notional interest on interest-free advances given by the assessee-company, arguing that commercial expediency was not established. The CIT(A) deleted this addition, referencing the Supreme Court's decision in S.A. Builders Ltd. v. CIT, which allows interest-free loans if given for commercial expediency. The Tribunal upheld the CIT(A)'s decision, emphasizing that income tax is levied on real income and not on notional income. The Revenue failed to prove that the assessee had actually received any interest income. Consequently, this issue was decided in favor of the assessee, and the addition was deleted.

Conclusion:
The appeal filed by the Revenue was partly allowed. The Tribunal restored the AO's disallowance under Section 14A and classification of F&O losses as speculative, but upheld the CIT(A)'s deletion of the notional interest addition.