2016 (4) TMI 912 - AT - Income Tax

Treatment to speculation loss as income from non-speculation business - Held that - We find that the assessee had treated the entire activity of purchase and sale of shares which comprised of both delivery based and non-delivery based trading as one composite business before the application of deeming provision contained in Explanation to Sec.73 of the Act and accordingly, claimed set off of the loss incurred in delivery based trading with profit derived from derivative trading. We hold that the transactions done by delivery as well as the transactions of derivatives are not hit by Sec.43(5) of the Act and hence the aggregation of the share trading loss and profit from derivative transactions should be done before application of the Explanation to Sec.73 of the Act. As per the definition of section 43(5) of the Act, trading of shares which is done by taking delivery does not come under the purview of the said section. Similarly, as per clause (d) of section 43(5), derivative transaction in shares is also not speculation transaction as defined in the said section. Therefore, both profit/loss from all share delivery transactions and derivative transactions have the same meaning as far as Section 43(5) of the Act is concerned. It thus follows that both will have the same treatment as far as application of the said section is concerned. Thus we hold that the claim of the assessee for set off of loss from share dealing should be allowed from the profits from F & O in share transactions, the character of the income being the same and also hold that before application of the Explanation to section 73, aggregation of the business profit or loss is to be worked out irrespective of the fact whether it is from share delivery transaction or derivative transactions. Income from share trading, brokerage, derivative and interest income on margin money should be considered as income derived from purchase and sale of shares and are therefore to be treated as to profit derived from speculative business as per the provision contained under Explanation to Sec. 73. - Decided against revenue Disallowance u/s 14A r.w.r 8D - Held that - AO has invoked the provision of Sec. 14A of the Act read with Rule 8D of the IT Rules without recording the satisfaction that the assessee s books of account are not showing the correct expenditure incurred in relation to dividend income. We find that it is only if the Assessing Officer is not satisfied with the correctness of the assessee s claim under section 14A that he can assume jurisdiction to arrive at the quantum of disallowance of expenditure in accordance with the method prescribed in rule 8D. It is not open to the Assessing Officer, when he is seized with the aspect of being satisfied with the correctness of the claim of the assessee, to use the method prescribed in rule 8D or any part thereof as a benchmark. It is only if, having regard to the accounts of the assessee, he is not satisfied with the correctness of the assessee s claim, that he will have jurisdiction of taking recourse to the method prescribed under rule 8D - Decided against revenue

Issues Involved:
1. Treatment of Speculation Loss
2. Disallowance under Section 14A of the Income Tax Act

Issue-Wise Detailed Analysis:

1. Treatment of Speculation Loss:

The primary issue raised by the Revenue concerns the treatment of a speculation loss of ?87,74,852/-. The Assessing Officer (AO) classified the loss from share trading as speculative under the Explanation to Section 73 of the Income Tax Act, which states that losses from share dealing should be treated as speculative if the income from share dealing exceeds income from other sources such as house property, capital gains, and interest. The AO opined that the loss from share trading business could only be set off against speculation profits.

The assessee, a Non-Banking Financial Company (NBFC) and member of NSE and BSE, argued that its business activities, including brokerage income, income from derivatives, and share trading, were interconnected and should be treated as a single composite business. The assessee contended that the Explanation to Section 73 did not distinguish between own account and client account transactions or between capital market and derivative segments. The assessee also cited judicial precedents to support the argument that the entire business activity should be considered as one.

The Commissioner of Income Tax (Appeals) [CIT(A)] accepted the assessee's argument, allowing the set-off of share trading loss against derivative profits, citing decisions from the Kolkata Tribunal and the Kolkata High Court. The CIT(A) held that the entire business of the assessee, including share trading and derivative transactions, should be treated as a composite business, and the set-off of losses and profits should be allowed before applying the Explanation to Section 73.

Upon appeal, the Tribunal upheld the CIT(A)’s decision, emphasizing that the assessee’s activities in shares and securities were interrelated and should be treated as a single composite business. The Tribunal referenced several judicial precedents, including decisions from the Kolkata Tribunal and the Hon’ble jurisdictional High Court, to support the view that the entire business activity should be aggregated before applying the Explanation to Section 73.

2. Disallowance under Section 14A of the Income Tax Act:

The second issue raised by the Revenue involved the disallowance of expenses under Section 14A read with Rule 8D of the Income Tax Rules. The AO disallowed ?57,08,459/- as expenses related to earning dividend income, invoking Rule 8D without recording dissatisfaction with the assessee's own disallowance of ?38,156/-.

The CIT(A) restricted the disallowance to ?38,156/-, observing that the AO did not record any dissatisfaction regarding the correctness of the assessee's claim before invoking Rule 8D. The CIT(A) relied on the judgment of the Kolkata Tribunal in the case of DCIT v. M/s Trade Apartment Ltd., which held that interest expenses cannot be disallowed under Rule 8D(2)(ii) if the AO does not record dissatisfaction with the assessee’s claim.

The Tribunal upheld the CIT(A)’s decision, emphasizing that the AO must record dissatisfaction with the assessee’s claim before invoking Rule 8D. The Tribunal cited the decision of the Kolkata Tribunal in the case of REI Agro Ltd. vs. DCIT, which held that the AO must record a satisfaction with regard to the accounts of the assessee before determining the amount of disallowance under Rule 8D.

Conclusion:

The Tribunal dismissed the Revenue’s appeal, upholding the CIT(A)’s decisions on both issues. The Tribunal ruled that the assessee’s business activities in shares and securities should be treated as a single composite business, allowing the set-off of share trading losses against derivative profits. Additionally, the Tribunal held that the AO must record dissatisfaction with the assessee’s claim before invoking Rule 8D for disallowance under Section 14A. The assessee’s Cross Objection was dismissed as infructuous since it was supportive of the CIT(A)’s order.

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