2017 (3) TMI 185 - AT - Income Tax

Addition u/s 14A - Held that - The assessee as well A.O. has not undertaken any exercise to work out the disallowance having regard to the accounts of the assessee and the AO merely applied Rule 8D of Income-tax Rules 1962 in an mechanical manner which Rule 8D of Rules of 1962 cannot be applied for the assessment year 2007-08 and earlier years in view of decision in the case of Godrej and Boyce Manufacturing Company Limited (2010 (8) TMI 77 - BOMBAY HIGH COURT). The assessee has not submitted any details of the expenses incurred in relation to earning of dividend income and instead claimed that no expenditure has been incurred which could be attributable to the earning of exempt income. In our considered view keeping in view facts and circumstances of the case the matter needs to be set aside and restored to the file of the A.O. for deciding this issue de-novo on merits in accordance with mandate of Section 14A of the Act. The assessee is directed to produce all necessary details of expenses incurred for earning dividend income u/s 10(34) of the Act and other evidences/explanations in its defense and also to enable A.O. to make the disallowance of expenditure incurred in relation to earning of exempt income in accordance with mandate of Section 14A of the Act . Marked to market loss - Held that - The eligible transactions are carved out of speculative transactions vide insertion of clause (d) to Section 43(5) of the Act by Finance Act 2005 w.e.f. 01-04-2006. Hence the matter needs to be set aside to the file of the A.O. for the denovo determination of the issue on merits for verifying whether the said transactions carried out by the assessee falls within the mandate of Section 43(5)(d) of the Act read with explanation 1 to be covered as business loss vis- -vis speculative loss and the assessee is directed to produce all relevant cogent evidences and explanations to support its contention. The assessee is in business of trading in shares and stocks. The marked to market loss arising out of derivative contract entered into by the assessee shall be allowed arising due to adverse movement of share prices on the last date of previous year. The AO is also directed to verify that the said marked to market losses so allowed to the assessee are duly factored / reflected by way of reduction in the opening stock of derivative contract valuation for the succeeding year so that there is no duplicity in claiming the said loss by the assessee in the immediately succeeding year when the said derivative contracts are finally concluded/completed. In the result appeal of the assessee is allowed for statistical purposes. Transaction of shares - determination of income - capital gain or business income - Held that - As observed that the assessee is in business of trading in shares. The assessee has sold shares of Rs. 13, 38, 36, 535.62 against scrips bought of Rs. 12, 71, 09, 491.62 the ld. CIT(A) held that the holding period was not very large and in many cases it varies from 28 to 84 days. It was also observed by the authorities below that huge amount of interest bearing funds were raised by the assessee which increased from Rs. 21 crores to Rs. 82 crores during instant assessment year. We do not find any infirmity in the well reasoned order of the ld. CIT(A) treating the profit of Rs. 67, 27, 044 /- shown by the assessee as business income and not short term capital gain keeping in view the factual matrix of the case and more-so the assessee is engaged in the business of trading in shares and stocks. Thus we are not inclined to interfere with the well reasoned order of learned CIT(A) which we confirms/sustain

Summary

Issues Involved:
1. Disallowance of expenses incurred for earning dividend income under Section 14A of the Income-tax Act, 1961.
2. Disallowance of provision for loss - ESF Account.
3. Treatment of short-term capital gains as business income.
4. Levy of interest under Sections 234A and 234B of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of Expenses Incurred for Earning Dividend Income under Section 14A:

For the assessment year 2007-08, the AO disallowed Rs. 2,94,880 under Section 14A read with Rule 8D, despite the assessee's claim that no expenditure was incurred for earning dividend income. The CIT(A) upheld this disallowance, relying on various case laws that supported the allocation of proportionate management expenses for earning exempt income. However, the Tribunal noted that for the assessment year 2007-08, Rule 8D could not be applied as per the Bombay High Court's decision in Godrej & Boyce Mfg. Co. Ltd. v. DCIT. The Tribunal remanded the issue back to the AO for a fresh determination in accordance with Section 14A, excluding stock-in-trade from the disallowance computation.

For the assessment year 2008-09, the AO disallowed Rs. 87,56,848 under Section 14A read with Rule 8D. The CIT(A) upheld this disallowance, noting that the assessee failed to demonstrate that interest-free funds were used for investments. The Tribunal set aside this issue to the AO for a de-novo determination, emphasizing that Rule 8D should not be applied mechanically and should consider the accounts of the assessee.

2. Disallowance of Provision for Loss - ESF Account:

For the assessment year 2007-08, the AO disallowed Rs. 15,71,714 as a provision for loss on open positions in futures and options, considering it a notional loss. The CIT(A) upheld this disallowance based on CBDT Instruction No. 3 of 23.03.2010. The Tribunal remanded the issue back to the AO to verify if the transactions fall within the scope of Section 43(5)(d) and to ensure that the marked-to-market losses are reflected in the opening stock valuation for the succeeding year.

For the assessment year 2008-09, the AO disallowed Rs. 56,916 on similar grounds. The Tribunal's decision on this issue mirrored its decision for the assessment year 2007-08, remanding it back to the AO for verification and proper accounting.

3. Treatment of Short-term Capital Gains as Business Income:

For the assessment year 2008-09, the AO treated short-term capital gains of Rs. 67,27,044 as business income, noting that the assessee engaged in frequent trading of shares with substantial interest-bearing funds. The CIT(A) upheld this treatment, citing the short holding period and the increase in interest-bearing loans. The Tribunal affirmed the CIT(A)'s decision, recognizing the assessee's business activities in trading shares and stocks.

4. Levy of Interest under Sections 234A and 234B:

The AO levied interest under Sections 234A and 234B, which the CIT(A) upheld. The Tribunal noted that the issue was not adjudicated by the CIT(A) and restored it to the AO for a fresh determination, ensuring that the assessee is given an opportunity to present relevant evidence and explanations.

Conclusion:

The Tribunal allowed the appeals for the assessment year 2007-08 for statistical purposes, remanding the issues back to the AO for re-evaluation. For the assessment year 2008-09, the Tribunal partly allowed the appeals for statistical purposes, remanding the issues related to Section 14A disallowance and the levy of interest under Sections 234A and 234B back to the AO for a de-novo determination. The Tribunal affirmed the CIT(A)'s decision on treating short-term capital gains as business income.