2016 (5) TMI 814 - AT - Income Tax

Disallowance under section 14A r.w. Rule 8D - Held that - Disallowance under section 14A r.w. Rule 8D cannot be made in respect of shares held as stock-in-trade and therefore direct the AO to delete the disallowance made under section 14A r.w. Rule 8D. See India Advantage Securities Ltd. 2015 (6) TMI 140 - BOMBAY HIGH COURT - Decided in favour of assessee Disallowance of Business Loss by invoking Explanation to section 73 - Held that - The amendment inserted in Explanation to section 73 of the Act by Finance (No. 2) Act, 2014 w.e.f. 01.04.2015 is clarificatory in nature and would therefore operate retrospectively from 01.04.1977 from which date the Explanation to section 73 was placed on the statute since this amendment to section 73 of the Act or a company the principal business of which is the business of trading in shares brings in the assessee whose principal business is trading of shares. Therefore, the loss incurred in share trading business by such companies, i.e. like the assessee will not be treated as speculation business loss but normal business loss, and hence the same loss can be adjusted against other business income or income from any other sources of the year under consideration. In this view of the matter, we direct the AO to allow the assessee s claim for setting off the loss from share trading business against other business income and income from any other sources during the year under consideration. Since we have allowed the assessee s primary contention/ground, we do not consider it necessary to adjudicate the alternative contention raised by the assessee. Disallowance of transaction charges paid to the Stock Exchange - non TDS - Held that - Respectfully following the decision of the Hon ble Apex Court in the case of Kotak Securities Ltd. 2016 (3) TMI 1026 - SUPREME COURT we hold that no TDS is deductible on payment of transaction charges paid by members to Stock Exchange under section 194J of the Act, as they are not for technical services rendered but are in the nature of payments for facilities provided by the Stock Exchange and accordingly direct the AO to delete the disallowance made on account of transaction charges paid to Stock Exchange. - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance under section 14A r.w. Rule 8D.
2. Disallowance of Business Loss by invoking Explanation to section 73.
3. Disallowance of transaction charges paid to the Stock Exchange under section 40(a)(ia).

Issue-Wise Detailed Analysis:

1. Disallowance under section 14A r.w. Rule 8D:
The AO noticed that the assessee earned tax-free dividend income of ?5,44,972/- without allocating any expenses for earning such exempt income. The AO applied Rule 8D of the I.T. Rules, computing disallowance of ?12,58,232/- under section 14A. The CIT(A) upheld this disallowance, relying on ITAT Special Bench decisions in Daga Capital Management Pvt. Ltd. and Cheminvest Ltd. The assessee contended that it had no investments and that the AO erroneously considered stock-in-trade as investments. The Tribunal, referencing the Hon'ble Bombay High Court's decision in CIT vs. India Advantage Securities Ltd., held that disallowance under section 14A r.w. Rule 8D should only apply to investments, not stock-in-trade. Consequently, the Tribunal directed the AO to delete the disallowance, allowing the assessee’s appeal on this ground.

2. Disallowance of Business Loss by invoking Explanation to section 73:
The AO disallowed the assessee’s claim to set off share trading losses against other business income, invoking Explanation to section 73, treating the loss as speculative. The CIT(A) upheld this disallowance, relying on the Hon'ble Bombay High Court decision in Prasad Agents (P) Ltd. The assessee argued that the Explanation to section 73 was intended to curb tax avoidance by business houses manipulating share dealings within group companies. The Tribunal noted that the Finance (No. 2) Act, 2014 amendment to Explanation to section 73, which excluded companies whose principal business is trading in shares from being considered as speculative, was clarificatory and retrospective. The Tribunal directed the AO to allow the assessee’s claim for setting off the share trading loss against other business income, considering the amendment retrospective from the date the Explanation was inserted.

3. Disallowance of transaction charges paid to the Stock Exchange under section 40(a)(ia):
The AO disallowed ?2,38,821/- on account of transaction charges paid to the Stock Exchange, citing non-deduction of TDS. The CIT(A) upheld the disallowance, considering the charges as fees for technical services under section 194J. The assessee argued that transaction charges were for facilities provided by the Stock Exchange, not technical services. The Tribunal referenced the Hon'ble Apex Court’s decision in CIT vs. Kotak Securities Ltd., which held that transaction charges paid to Stock Exchanges are not for technical services but for facilities provided. Consequently, the Tribunal directed the AO to delete the disallowance, allowing the assessee’s appeal on this ground.

Conclusion:
The Tribunal allowed the assessee’s appeal for A.Y. 2009-10 on all grounds, directing the AO to delete the disallowances made under sections 14A r.w. Rule 8D, Explanation to section 73, and 40(a)(ia). The judgment emphasized the retrospective application of clarificatory amendments and the correct interpretation of provisions related to exempt income and speculative transactions.