2021 (6) TMI 838 - AT - Income Tax

Disallowance of finance brokerage paid - CIT(A) allowed the deduction under section 37 (1) admitting additional evidences - HELD THAT - Revenue is in appeal with the ground that assessing officer was not given proper opportunity to examine the document submitted by the assessee as per rule 46(A)(3) - we notice that assessee filed detailed chart with the bifurcations of brokerage paid to different brokers. These details are part of Ledger account of brokerage expenses which was already submitted before AO. AO treated the above expenses as capital in nature and never bothered to verify the same. The assessee has filed the details of brokerage expenses which was paid along with details of TDS deduction and other details. Moreover, these documents were never filed as additional evidence but submitted as further details for the expenses claimed. Therefore in our considered view there is no violation of rule 46A in this case. Accordingly ground No.1 raised by the revenue is dismissed. Deduction for a stamp duty expenses - CIT(A) allowed the ground raised by the assessee - HELD THAT - Aggrieved with the above order, revenue is in appeal before us raising the ground that there is violation of rule 46 of Income Tax Rules. We notice that the assessee has substantiated the claim of the expenditure by filing Ledger accounts of this expenditure. From the Ledger copy, Ld CIT(A) observed that the assessee has actually incurred the expenditure for the purpose of business. Again the above said Ledger was not filed before Ld CIT(A) as additional evidence but substantiated for the expenditure incurred. CIT(A) accepted the above evidences. There is no violation of rule 46 in this case. Accordingly the ground raised by the revenue is dismissed. Addition u/s 14A - Assessee has earned exempt income from dividend income and share of profit from partnership firm respectively - HELD THAT - AO calculated the 14A disallowance as per rule 8D. While calculating average investment in earning the exempt income he calculated average investment in equity, average investment in closing stock of shares and average investment in partnership firm. AO included as average investment in the firm. While adjudicating this issue, CIT(A) observed that credit balances with the firm are actually liability of the partner accordingly the appellant has shown the said balances under the head current liabilities of the balance-sheet. Before us, both the parties have not brought to our notice the financial statement which was submitted before tax authorities. In our considered view when an exempt income is earned, the disallowance under section 14A should be calculated based on the relevant expenditure incurred to earn the above said exempt income. The disallowance under rule 8D, the investments in the assets through which exempt income is earned should include only those investments which has actually earned exempt income. In the given case, assessee has earned exempt income from dividend earned out of investment in shares held for stock as well as investment. Similarly, assessee also earned exempt income of share of profit from the partnership firm. There s no dispute that assessee has earned exempt income through partnership firm. The portion of investment made by the assessee in the partnership firm should also be part of investment in earning the exempt income. Since no financial statements were submitted before us, we are not in a position to appreciate the findings of Ld CIT(A). In our view, partnership firm is separate entity and the investment made by the assessee in the firm should be part of the assets of the statement of affairs of the assessee. CIT(A) observed that the credit balances disclosed by the assessee in the liability side is liability to the assessee. We are in agreement with the findings but it is also fact that assessee must have invested capital in the partnership firm or the assessee should submit the document before the tax authorities that assessee has not invested anything in the firm but sharing only share of profit without investment. Partnership firm is separate entity, the balance sheet of the firm should be evaluated to determine the actual investment in the firm. Therefore, in our considered view, we are remitting this issue back to the file of AO to determine the actual investment made by the assessee in the partnership firm to earn the exempt income should be considered for the calculation of disallowance under rule 8D. With regard to submissions of the Ld AR and relying on various case law, in our view the facts in those cases are distinguishable. Accordingly ground raised by the revenue is allowed for statistical purpose. Addition u/s 43(5)(d) for trading in derivatives and not for trading in shares - HELD THAT - We notice that assessee has declared loss from its share trading business in the consolidated format which included loss from speculative transactions as well as cash transaction involving actual delivery of shares. From the record we notice that AO disallowed the loss of speculative transactions based on the financial statement without actually calling for the details. Assessee has submitted detailed submission on the loss incurred by the assessee from both segments based on delivery and non-delivery of the securities. The loss incurred by the assessee based on delivery can never be part of speculative transactions as per the provisions of section 43(5)(d).

Summary

Issues Involved:
1. Disallowance of finance brokerage and stamp duty expenses
2. Disallowance under Section 14A of the Income Tax Act
3. Treatment of credit balances with firms in disallowance calculation
4. Disallowance of derivatives loss under Section 43(5)(d)

Issue 1: Disallowance of Finance Brokerage and Stamp Duty Expenses:
The assessing officer disallowed finance brokerage and stamp duty expenses as capital in nature under Section 37(1) of the Income Tax Act. The Commissioner of Income Tax (Appeals) (CIT(A)) allowed the deduction under Section 37(1) based on detailed evidence submitted by the assessee, showing that the expenses were incurred for the purpose of share and derivative trading business. The Appellate Tribunal upheld the CIT(A)'s decision, stating that the assessing officer had access to the details submitted earlier and there was no violation of Rule 46(A)(3).

Issue 2: Disallowance under Section 14A of the Income Tax Act:
The assessing officer disallowed certain expenses under Section 14A, which was challenged by the assessee before the CIT(A). The CIT(A) directed the AO to exclude certain credit balances with firms from the disallowance calculation, as they were liabilities of the partner and not investments. The Appellate Tribunal remitted the issue back to the AO to determine the actual investment made by the assessee in the partnership firm for the calculation of disallowance under Rule 8D.

Issue 3: Treatment of Credit Balances with Firms in Disallowance Calculation:
The AO included credit balances with firms as part of investments in the disallowance calculation under Section 14A. The CIT(A) observed that these balances were liabilities of the partner and not investments, directing the AO to exclude them. The Appellate Tribunal agreed with the CIT(A) but remitted the issue back to determine the actual investment in the partnership firm for the disallowance calculation.

Issue 4: Disallowance of Derivatives Loss under Section 43(5)(d):
The AO disallowed derivatives loss under Section 43(5)(d), which was challenged by the assessee before the CIT(A). The CIT(A allowed the loss related to actual delivery of shares, stating that the provision of Section 43(5)(d) applies only to derivative trading, not actual delivery of share trading. The Appellate Tribunal upheld the CIT(A)'s decision, noting that the loss from actual delivery of shares cannot be part of speculative transactions.

In conclusion, the Appellate Tribunal partly allowed the revenue's appeal for statistical purposes, dismissing various grounds raised by the revenue related to disallowances and treatment of expenses and losses under the Income Tax Act.