2020 (7) TMI 333 - AT - Income Tax

Disallowance u/s 14A read with Rule 8D - HELD THAT - Assessee has received dividend income of ₹ 1,80,717/- only. The Hon ble Delhi High Court in the case of Joint Investment Pvt. Ltd. 2015 (3) TMI 155 - DELHI HIGH COURT held that the disallowance u/s 14A cannot be more than to that of the exempt income. Since in the present case the dividend income earned by assessee is of ₹ 1,80,717/- which is claimed exempt under section 10(34) therefore, disallowance under section 14A read with Rule 8D should not exceed the exempt income. We, therefore, set aside the Orders of the authorities below and restrict the addition. Addition on account of loss in trading of stock option - AO confronted the Order of the SEBI to the assessee in which it was alleged that assessee had made losses in indulging in suspicious trades including reversal trades - HELD THAT - In the present case, the A.O. / Ld. CIT(A) have not gone into the facts and material evidence on record and merely referring to the interim order of the SEBI and subsequent order have decided the issue against the assessee. Since in the case of Rakhi Trading Pvt. Ltd. 2018 (2) TMI 580 - SUPREME COURT the issue under Income Tax Act was also not adjudicated upon, therefore, in our humble opinion the decision in the case of Rakhi Trading Pvt. Ltd., (supra), would not support the case of Revenue. In the absence of any investigation carried-out by the authorities below, we are of the view that assessee has been able to establish that assessee company has suffered genuine business loss as had also been suffered in earlier years, therefore, authorities below should not have disallowed the same against the assessee. In view of the above findings, we set aside the Orders of the authorities below and delete the entire addition. In the result, Ground No.1 of the appeal of Assessee is allowed.

Summary

Issues Involved:
1. Disallowance of loss on sale of stock option.
2. Disallowance under section 14A read with Rule 8D(2).

Issue-wise Detailed Analysis:

1. Disallowance of Loss on Sale of Stock Option:
The assessee challenged the disallowance of ? 15,28,20,110/- claimed as a loss in trading of stock options. The Assessing Officer (A.O.) noted that the assessee's name appeared in a Securities and Exchange Board of India (SEBI) order, which alleged that the assessee engaged in non-genuine, fraudulent trades to generate fictitious profits/losses for tax evasion. The SEBI order highlighted that the assessee's trades were consistently loss-making and involved reversal trades with the same counter-parties. The A.O. confronted the assessee with this SEBI order and requested detailed explanations on the trades.

The assessee provided a comprehensive response, detailing its business activities, the nature of intrinsic value in trading, and the independent nature of its trades. The assessee argued that all transactions were conducted through recognized stock exchanges, with proper documentation and payment of securities transaction tax (STT). The assessee also highlighted that the SEBI order was interim and the trades were within the permitted price range.

The A.O. rejected the assessee's explanations, citing the high frequency of loss-making trades and the significant difference between buy and sale prices. The A.O. also noted that the assessee was the main investor in over 90% of the contracts traded, indicating potential market manipulation.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the A.O.'s decision, referencing SEBI's findings and various judicial precedents. The CIT(A) emphasized that the losses claimed were non-genuine transactions and no separate investigation was required by the A.O. to disallow the losses.

Upon appeal, the Tribunal noted that the SEBI's interim order, which was the basis for the A.O.'s decision, had been vacated. The Tribunal highlighted that the assessee provided substantial documentary evidence, including contract notes, bank statements, and compliance with SEBI guidelines. The Tribunal observed that the authorities did not conduct any independent investigation and relied solely on the interim SEBI order. The Tribunal concluded that the assessee had established genuine business losses and set aside the orders of the authorities below, allowing the deduction of the claimed loss.

2. Disallowance under Section 14A read with Rule 8D(2):
The assessee challenged the disallowance of ? 4,28,556/- under section 14A of the Income Tax Act, 1961. The A.O. noted that the assessee had received dividend income of ? 1,80,717/- which was claimed as exempt under section 10(34) of the Act. The A.O. applied the provisions of Section 14A read with Rule 8D(2) and disallowed ? 4,28,556/-.

The assessee argued that the disallowance should be restricted to the amount of dividend income earned. The Tribunal referred to the Delhi High Court's decision in the case of Joint Investment Pvt. Ltd., which held that the disallowance under section 14A cannot exceed the exempt income. The Tribunal, therefore, restricted the disallowance to ? 1,80,717/- and partly allowed the assessee's appeal on this ground.

Conclusion:
The Tribunal allowed the appeal of the assessee on the first issue, recognizing the genuine business loss and deleting the addition made by the authorities. On the second issue, the Tribunal restricted the disallowance under section 14A to the amount of exempt dividend income, partly allowing the assessee's appeal. The overall appeal of the assessee was partly allowed.