2018 (9) TMI 948 - AT - Income Tax

Disallowance of expenses relatable to exempt income invoking the provisions of section 14A r.w.r. 8D - Held that - As compared the investments earlier to this year and find in the immediate preceding year i.e. as on 31-03-2009 investment to the tune of ₹ 71,45,14,402/-, which ultimately reduced in this year to ₹ 20,73,35,924/-. Accordingly we presume that no interest bearing loans have been invested in these investments. The assessee is having interest free funds available with the assessee in the shape of shares capital and reserve surplus to the tune of ₹ 235,49,56,327/- as against the available funds at ₹ 149,41,49,811/- in the immediate preceding year. We agree with the argument of the assessee that in the immediate preceding year the interest expenses paid by assessee to PCFC and PSFL amounting to ₹ 5,46,97,902/- has already been considered in earlier year and finding is given by the Tribunal in assessee s own case that the same has been invested in the business of the assessee. In view of the above, we are of the view that only proportionate disallowance on the interest on loan taken from Infoline Finance Ltd. of ₹ 67,30,620/- can be considered for making disallowance under the formula prescribed under Rule 8D(2)(ii) of the Act. AO will only verify the figures and restricted the disallowance only on proportionate interest. This issue of assessee s appeal is decided in favour of assessee subject to above direction. Disallowing set off of carry forward business loss from trading activity in shares by treating the same as speculation loss - Held that - Tribunal in earlier year has treated the loss from trading activity in shares as speculation loss and that finding has neither been challenged by Revenue nor by Assessee. Once, the finding of fact is final, the only alternative left is that the loss is to be considered as speculation loss. Once the loss is considered as speculation loss, the same is to be set off against the business loss from trading activity of shares treating the same as speculation loss in view of the decision in the case of Lokmat Newspapers P. Ltd 2010 (2) TMI 94 - BOMBAY HIGH COURT as held that once the assessee is carry on a speculative business and the profit and gains after arising from that business during the course of assessment year, the assessee is entitled to set off the losses carried forward for a speculation business arising out a previous assessment year - direct the AO to allow this speculation loss against the income earned form trading in shares. - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance of expenses related to exempt income under Section 14A read with Rule 8D.
2. Non-allowance of set off of carry forward business loss from trading activity in shares treated as speculation loss.

Issue 1: Disallowance of Expenses Related to Exempt Income under Section 14A Read with Rule 8D

The first issue concerns the disallowance of expenses related to exempt income under Section 14A of the Income Tax Act, 1961, read with Rule 8D of the Income Tax Rules, 1962. The assessee had earned dividend income and long-term capital gains, claiming these as exempt under Section 10(38) of the Act. The Assessing Officer (AO) noticed that the assessee had made significant investments in equities and mutual funds and had suo moto disallowed a sum of ?28,13,275/- as expenditure incurred in earning this exempt income. However, the AO found this disallowance unreasonable and computed the disallowance under Rule 8D, resulting in a total disallowance of ?1,75,36,506/-. After accounting for the amount already disallowed by the assessee, the AO restricted the disallowance to ?47,23,231/-. The CIT(A) upheld this disallowance.

The assessee contended that the interest expenditure of ?5,64,97,902/- was for business purposes and not for making investments in equities and mutual funds. The CIT(A) noted that the entire interest debited to the Profit & Loss account should be considered for disallowance under Rule 8D(2)(ii). The Tribunal, however, directed the AO to consider only the proportionate disallowance on the interest of ?67,30,620/- related to the loan from India Infoline Finance Ltd., following the formula under Rule 8D(2)(ii). The Tribunal referenced its earlier order for AY 2009-10 and the decision of the Hon'ble Bombay High Court in CIT vs. HDFC Bank Ltd., which presumes that investments in equities and mutual funds are made from interest-free funds if such funds are available. The Tribunal directed the AO to verify the figures and restrict the disallowance accordingly.

Issue 2: Non-Allowance of Set Off of Carry Forward Business Loss from Trading Activity in Shares Treated as Speculation Loss

The second issue pertains to the non-allowance of set off of carry forward business loss from trading activity in shares, which was treated as speculation loss in the assessment proceedings of AY 2009-10. The assessee argued that this loss should be set off against the business income of the current assessment year. Alternatively, the assessee contended that the business loss from trading activity in shares treated as speculation loss should be set off against profit earned from trading in shares and securities, as such profit falls within the purview of the explanation to Section 73 of the Act.

The Tribunal noted that in the immediate preceding year, the loss incurred in share trading activity was treated as speculation loss based on the Jurisdictional High Court's decision in Prasad Agents (P) Ltd. The Tribunal agreed with the assessee's alternative submission, referencing the Hon'ble Bombay High Court's decision in CIT vs. Lokmat Newspapers P. Ltd., which allows the set off of speculation loss against profits from speculative business. The Tribunal directed the AO to verify the facts and allow the set off of the speculation loss against the income earned from trading in shares.

Conclusion

The appeal was allowed in favor of the assessee, with directions to the AO to:
1. Recompute the disallowance under Section 14A read with Rule 8D, considering only the proportionate interest on the loan from India Infoline Finance Ltd.
2. Allow the set off of speculation loss against the income earned from trading in shares, following the decision of the Hon'ble Bombay High Court in Lokmat Newspapers P. Ltd.

Order Pronounced:
The order was pronounced in the open court on 04-07-2018.