2018 (2) TMI 342 - AT - Income Tax

Disallowance of expenses attributable to the share trading activity - addition treating the same as speculation business as per the Explanation to section 73 - Held that - In the present case, although the assessee had maintained one set of books of accounts with common funds and common management, the activities carried on by it of rendering services and trading of shares cannot be regarded as one indivisible business and since the said activities are entirely different, the indirect common expenses such as administrative expenses are required to be allocated on some reasonable basis to work out the profit or loss of each activity as rightly held by the A.O. In the present case, the assessee company while computing the income from share trading activity had considered only the direct expenses and the indirect expenses such as administrative expenses which were partly attributable to the share trading activity, going by its nature, were not considered by it. The allocation of administrative expenses made by the A.O. to share trading activity to the extent of 29.32% on the basis of the ratio of turnover is highly excessive and unreasonable and keeping in view the nature of expenses claimed by the assessee as administrative expenses as well as the nature of activity, it would be fair and reasonable to allocate 5% of the total administrative expenses to the share trading activity to compute the profit/loss on such activity. Accordingly, set aside the impugned order of the Ld. CIT(A) on this issue and direct the A.O. to re-compute the profit/loss of the share trading activity deemed to be speculative in nature in terms of section 73 by allocating 5% of the administrative expenses - Appeal of the revenue is partly allowed.

Summary

Issues Involved:
Deletion of addition made by AO on account of disallowance of expenses attributable to share trading activity as speculation business under section 73 of the Income Tax Act, 1961.

Analysis:

Issue 1: Allocation of Administrative Expenses for Share Trading Activity
The AO allocated administrative expenses to share trading activity based on the turnover ratio, resulting in a loss treated as speculation loss. The CIT(A) deleted the addition, citing lack of apparent loss and reliance on a Mumbai ITAT decision. The Tribunal noted that the activities of consultancy services and share trading are distinct, requiring allocation of common expenses. The AO's method was deemed correct, and the administrative expenses were allocated reasonably by the Tribunal, setting aside the CIT(A)'s decision.

Issue 2: Applicability of Explanation to Section 73
The CIT(A) found the Explanation to Section 73 not applicable as the assessee showed a net profit from share trading. The Tribunal clarified that under Section 73, a company's business involving purchase and sale of shares is deemed speculative, with losses to be set off only against profits of another speculative business. The Tribunal agreed with the assessee that administrative expenses should not be allocated solely based on turnover, suggesting a fair allocation of 5% of total administrative expenses to share trading activity for profit/loss computation.

Conclusion:
The Tribunal partly allowed the revenue's appeal, emphasizing the correct allocation of administrative expenses for share trading activity and the inapplicability of the Explanation to Section 73 due to the net profit shown by the assessee. The decision highlighted the necessity of reasonable allocation of expenses and proper computation of profit/loss in activities deemed speculative under the Income Tax Act, ultimately setting aside the CIT(A)'s order on the issue.