2019 (7) TMI 695 - HC - Income Tax

Set off of the loss incurred by trading in F O against business income - contention on behalf of the assessee that Explanation to Section 73 cannot apply to loss arising from derivative transactions which are categorically excluded from being regarded as speculative business as defined under S.43(5) - HELD THAT - As decided in ASIAN FINANCIAL SERVICES LTD. VERSUS COMMISSIONER OF INCOME TAX-3 KOLKATA 2016 (3) TMI 685 - CALCUTTA HIGH COURT once it is deemed to be a normal business loss on the basis of proviso appended to Section 43(5) a question of applying Section 73 of the Act or the Explanation thereto for the purposes of refusing loss to be set off against business income is wholly incorrect. The Hon ble Calcutta High Court after taking note of the decision of Hon ble Delhi High Court in DLF Commercial 2013 (7) TMI 334 - DELHI HIGH COURT took a distinct stand that derivatives cannot be treated at par with shares for the purposes of Explanation to Section 73 because the legislature has treated it differently. Thus, in view of the aforesaid position enunciated by the Hon ble High Court in Asian Financial Services (supra), we find good deal of force in the case of assessee. The claim of the assessee thus requires to be allowed on this ground alone. Disallowance u/s 14A read with Rule 8D - suo mota disallowance by the assessee - HELD THAT - The suo mota disallowance by the assessee is prima facie sufficient to cover the possible expense attributable to tax exempt income. Needless to say, the operation of Rule 8D is not automatic. It is hedged by Rules. Likewise, Section l4A of the Act inheres in it the concept of reasonableness. It is unconceivable to say that assessee has incurred ₹ 6.44 Lakhs out of total expense of ₹ 9.63 Lakhs to earn a paltry dividend income of ₹ 6.l3 Lakhs while the remaining expenditure attributes for generation of substantial revenue of taxable nature noted above. The action of the Revenue is therefore prima facie inexplicable. Consequently, we set aside and cancel the addition made by the AO u/s 14A. - Revenue appeal dismissed.

Summary

Issues:
1. Set off of loss incurred by trading in F & O against business income.
2. Deletion of disallowance made under Section 14A of the Income Tax Act.

Analysis:

Issue 1: Set off of loss incurred by trading in F & O against business income
The Tribunal considered whether loss incurred in derivative transactions can be regarded as speculative loss for set off under Explanation to Section 73 of the Income Tax Act. The assessee sought set off of losses from derivative transactions as non-speculative business loss, while the Revenue labeled it as speculative loss, denying set off from regular income. The Tribunal referred to the Calcutta High Court's decision in Asian Financial Services case, which held that derivatives cannot be treated at par with shares for Explanation to Section 73. The Tribunal agreed with this position, stating that once deemed a normal business loss under Section 43(5), applying Section 73 for denying set off is incorrect. Consequently, the Tribunal allowed the assessee's claim for set off based on this legal position.

Issue 2: Deletion of disallowance made under Section 14A of the Income Tax Act
Regarding the disallowance made under Section 14A, the Tribunal observed that the assessee's suo motu disallowance was sufficient to cover expenses attributable to tax-exempt income. The Tribunal noted the turnover and tax-free income figures, finding the Revenue's action inexplicable as the remaining expenditure was for generating substantial taxable revenue. The Tribunal emphasized that Rule 8D is not automatic and that Section 14A includes the concept of reasonableness. Consequently, the Tribunal set aside and canceled the addition made by the AO under Section 14A. The High Court upheld the Tribunal's findings, stating that no error of law was committed, and no substantial question of law was found in the appeal, leading to its dismissal.