2018 (10) TMI 1115 - AT - Income Tax

Disallowance u/s 35D - deduction on account of preliminary expenses - Held that - The income from freight having been received by the assessee-company from its operation for the first time in the financial year 1995-96, the business had commenced in that year and the assessee was entitled for deduction on account of preliminary expenses to the extent of 1/10th in each of the ten successive years. It is, however, observed that the similar claim made by the assessee of having commenced the business of transportation in the financial year 1995-96 was rejected by the Assessing Officer on the ground that there was no evidence produced by the assessee to support and substantiate the same. CIT(Appeals), on the other hand, confirmed the said disallowance made by the Assessing Officer by referring to Clause (ii) of sub-section (1) of section 35D, whereas the claim of the assessee, as submitted by the ld. Counsel for the assessee, is made as per Clause (i) of sub-section (1) of section 35D. Restore this issue to the file of the Assessing Officer for deciding the same in accordance with Clause (i) of sub-section (1) of section 35D after verifying the claim of the assessee of having commenced the business of transportation in the financial year 1995-96. Disallowance of assessee s claim for set off of speculation loss against the profit earned by the assessee from delivery based transactions - Held that - The gross total income of the assessee would not consist mainly of income, which is chargeable under the head capital gains as its business income could be more than income from capital gains and the profit from the purchase and sale of shares could be deemed to be a speculation profit as per Explanation to section 73. Consequently the assessee would be entitled to set off this speculation loss from the said profit as per section 73 as rightly claimed by it. Therefore, allow the claim of the assessee for such set off and allow assessee s appeal Disallowance u/s 14A r.w.r. 8D - sufficiency of own funds - Held that - As clearly evident from the relevant balance-sheet of the assessee-company showing that sufficient own funds were available with the assessee-company to make the investment in shares at the relevant time, find merit in the contention of the ld. Counsel for the assessee that the disallowance on account of interest under section 14A as made by the Assessing Officer by applying Rule 8D and confirmed by the ld. CIT(Appeals) is not warranted. The disallowance under section 14A read with Rule 8D thus works out to ₹ 4,03,050/- as against ₹ 15,23,813/- worked out by the Assessing Officer. I accordingly direct the Assessing Officer to re-compute the disallowance to be made under section 14A read with Rule 8D and allow partly the appeal of the assessee for A.Y. 2010-11.

Summary

Issues Involved:
1. Disallowance under section 35D for A.Y. 2005-06.
2. Set off of speculation loss against share trading profit under section 73 for A.Y. 2005-06.
3. Disallowance under section 14A read with Rule 8D for A.Y. 2010-11.

Issue-wise Detailed Analysis:

1. Disallowance under section 35D for A.Y. 2005-06:
The assessee, a company engaged in transportation, lease financing, and trading & investment in shares and securities, claimed a deduction of ?3,23,969/- under section 35D for public issue expenses and preliminary expenses written off. The Assessing Officer disallowed the claim, arguing that the company was not an industrial company and the expenses were capital in nature. The Commissioner of Income Tax (Appeals) upheld this disallowance, noting that the company was over ten years old and the expenses were for raising money, not for setting up or expanding an industrial unit. The Tribunal restored the issue to the Assessing Officer to verify the commencement of the business in the financial year 1995-96 and decide in accordance with Clause (i) of sub-section (1) of section 35D.

2. Set off of speculation loss against share trading profit under section 73 for A.Y. 2005-06:
The assessee incurred a speculation loss of ?6,49,330/- and sought to set it off against a share trading profit of ?28,90,809/-. The Assessing Officer disallowed this set off, treating the profit from delivery-based transactions as non-speculative. The Commissioner of Income Tax (Appeals) confirmed this disallowance, stating that the assessee's income from capital gains was higher than its business income, thus not falling under the explanation to section 73. The Tribunal, however, allowed the set off, citing the principle that losses represent negative income and should be considered in the same manner as profits for the purpose of Explanation to Section 73.

3. Disallowance under section 14A read with Rule 8D for A.Y. 2010-11:
The assessee earned exempt dividend income of ?10,02,821/- and offered a disallowance of ?3,77,450/- under section 14A. The Assessing Officer, applying Rule 8D, computed the disallowance at ?15,23,813/-, leading to an additional disallowance of ?11,46,363/-. The Commissioner of Income Tax (Appeals) upheld this, rejecting the assessee's argument to exclude interest on vehicle loans from the disallowance calculation. The Tribunal found merit in the assessee's contention that sufficient own funds were available to make the investments, thus no disallowance on account of interest was warranted. The Tribunal directed the Assessing Officer to re-compute the disallowance, reducing it to ?4,03,050/-.

Conclusion:
The Tribunal allowed the appeal for A.Y. 2005-06, restoring the issue under section 35D to the Assessing Officer for verification and allowing the set off of speculation loss. For A.Y. 2010-11, the Tribunal partly allowed the appeal, directing a re-computation of the disallowance under section 14A read with Rule 8D.