2016 (4) TMI 1011 - AT - Income Tax

Nature of business - Treatment to part of the transactions of the business of the assessee as speculative in view of Explanation to section 73 and the other part as non-speculative, in view of u/s 43(5)(c) - Held that - We find that issue before us is no more res-integra. In the case of ITO v. Snowtex Investment Ltd. (2015 (12) TMI 38 - ITAT KOLKATA ), Hon ble Kolkata Bench has discussed the law in detail and held that in such kind of cases, aggregation of share trading transactions and derivative transactions should be done before applying explanation to section 73. Where the assessee is a dealer in shares, the entire business consists in sale purchase of shares, then, it should be treated as composite business. Similar view has been taken by Hon ble Delhi High Court in the case of CIT vs. DLF Commercial Developers Ltd. (2013 (7) TMI 334 - DELHI HIGH COURT ). In the case of CIT vs. Baljit Securities P. Ltd. (2014 (6) TMI 475 - CALCUTTA HIGH COURT), it was held that in the case of an assessee who was a share broker dealing and buying shares for himself and also dealing in derivatives, the assessee shall be deemed to be carrying on speculative business and therefore, entire transactions carried out by the said assessee were within the umbrella of speculation transactions, and there was no bar in setting off the losses arising out of derivatives from the income arising out of buying and selling of shares. Similar view has been taken by another Coordinate Bench of the Tribunal in the case of Majestic Exports (2015 (7) TMI 936 - ITAT CHENNAI ). It is further noted by us that the assessee s stand of treating the whole business as composite business has always been accepted by the revenue in earlier as well as subsequent years. Thus, keeping in view clear position of law as discussed above and history of the case, we find that for the purpose of setting off of losses, the whole business should be treated as one business. Both the parties agreed before us that the provisions of explanation to section 73 are applicable and therefore, it is directed that AO shall treat the entire business as speculative and shall assess the income as income from speculative business and shall grant the benefit of set off and carry forward of losses accordingly. Disallowance made u/s 14A - Held that - Similar issue came up in appeal before the Tribunal in assessee s own case for A.Y. 2007-08 wherein Hon ble Tribunal decided the issue in its favour as held that no disallowance is called for when no actual expenditure has been incurred by the assessee for earning dividend income.

Summary

Issues Involved:
1. Treatment of share trading loss as speculative loss under Explanation to Section 73.
2. Segregation of Arbitrage Business into Capital Market and Futures & Options segments.
3. Apportionment of direct and indirect expenses to Capital Market Segment.
4. Disallowance under Section 14A.
5. Application of Rule 8D for computing disallowance under Section 14A.

Issue-wise Analysis:

1. Treatment of Share Trading Loss as Speculative Loss:
The Assessee contested the application of Explanation to Section 73 by the Assessing Officer (AO), which treated a loss of Rs. 56,94,166/- from share trading as speculative loss, not allowed to be set off against business income. The AO invoked Explanation to Section 73, arguing that the transactions not covered under Section 43(5) should be treated as speculative. The CIT(A) upheld this view, leading to the Assessee's appeal to the Tribunal. The Tribunal, referencing various judgments, concluded that the entire business should be treated as one composite business. Consequently, the AO was directed to treat the entire business as speculative, allowing the set-off and carry forward of losses accordingly.

2. Segregation of Arbitrage Business:
The AO segregated the Assessee's Arbitrage Business into Capital Market and Futures & Options segments, applying Explanation to Section 73 only to the Capital Market segment. The Assessee argued that these segments were part of a single composite business and should not be treated separately. The Tribunal agreed with the Assessee, referencing judgments that supported the view of treating the entire business as a composite one. Therefore, the Tribunal directed that the entire business be treated as speculative for the purpose of setting off losses.

3. Apportionment of Expenses:
The Assessee challenged the apportionment of Rs. 12 Lakhs as direct expenses and Rs. 2 Lakhs as indirect expenses to the Capital Market Segment by the AO, which enhanced the loss from this segment. However, this ground was not pressed by the Assessee's counsel during the hearing and was thus dismissed by the Tribunal.

4. Disallowance under Section 14A:
The Assessee contested the disallowance under Section 14A, arguing that no expenditure was incurred specifically for earning exempt income. The Tribunal noted that in a previous year (A.Y. 2007-08), a similar issue was decided in favor of the Assessee. The Tribunal reiterated that when no actual expenditure is incurred for earning exempt income, no disallowance under Section 14A is warranted. Consequently, the disallowance made by the AO was directed to be deleted.

5. Application of Rule 8D:
The Assessee argued against the mandatory application of Rule 8D for computing disallowance under Section 14A, suggesting that disallowance, if any, should be made in a reasonable manner. The Tribunal, consistent with its finding on the disallowance under Section 14A, directed that no disallowance was warranted as no actual expenditure was incurred for earning exempt income.

Conclusion:
The Tribunal partly allowed the Assessee's appeal, directing the AO to treat the entire business as speculative for the purpose of setting off losses and deleting the disallowance under Section 14A. The ground regarding the apportionment of expenses was dismissed as it was not pressed. The Tribunal's decision emphasized treating the business as a composite entity and ensuring that disallowance under Section 14A is only applicable when actual expenditure is incurred for earning exempt income.