2011 (6) TMI 909 - AT - Income Tax

Issues Involved:
1. Invocation of Explanation to Section 73 of the Income Tax Act, 1961.
2. Disallowance under Section 35D of the Income Tax Act, 1961.
3. Reopening of assessment under Section 147 of the Income Tax Act, 1961.
4. Disallowance under Section 14A of the Income Tax Act, 1961.
5. Disallowance of expenditure on account of premium in respect of futures and options.
6. Revision under Section 263 of the Income Tax Act, 1961 and limitation period.

Detailed Analysis:

1. Invocation of Explanation to Section 73 of the Income Tax Act, 1961:
The revenue contended that the CIT(A) erred in not confirming the AO's action regarding the invocation of Explanation to Section 73 for treating the profit from business as speculation profit. The assessee is engaged in share broking and trading, including jobbing, futures, and options. The AO treated the loss from share trading as speculation loss under Explanation to Section 73. However, CIT(A) allowed the loss as business loss, stating that the assessee's activities do not fall under speculation business. The Tribunal upheld CIT(A)'s decision, noting that the assessee's principal business was share broking and trading, not speculation.

2. Disallowance under Section 35D of the Income Tax Act, 1961:
The revenue argued that CIT(A) wrongfully deleted the disallowance of Rs. 28,000 under Section 35D by admitting fresh evidence in violation of Rule 46A. The CIT(A) allowed the claim, stating the amount was paid to the Calcutta Stock Exchange as trading fees. The Tribunal found no fault in CIT(A)'s order and dismissed the revenue's appeal on this issue.

3. Reopening of Assessment under Section 147 of the Income Tax Act, 1961:
The assessee challenged the reopening of the assessment under Section 147, claiming all material facts were disclosed, and no new evidence justified reopening. The AO reopened the assessment based on the invocation of Explanation to Section 73. CIT(A) upheld the AO's action, referencing the Supreme Court's decision in Rajesh Jhaveri Stock Brokers Pvt. Ltd., which allows reopening if there is reason to believe income has escaped assessment. The Tribunal agreed with CIT(A), noting the AO had sufficient cause for reopening.

4. Disallowance under Section 14A of the Income Tax Act, 1961:
The AO disallowed Rs. 28,600 under Section 14A for expenses related to earning exempt dividend income. CIT(A) reduced this to Rs. 10,000. The Tribunal, referencing the Bombay High Court decision in Godrej Boycee Mfg. Co. Ltd., directed the AO to restrict the disallowance to 1% of the dividend income.

5. Disallowance of Expenditure on Account of Premium in Respect of Futures and Options:
The revenue contested CIT(A)'s deletion of the disallowance of Rs. 4,45,19,455 for premium on futures and options. The Tribunal, consistent with its earlier decision, upheld CIT(A)'s order, noting the expenditure was incurred in the course of the assessee's share trading business.

6. Revision under Section 263 of the Income Tax Act, 1961 and Limitation Period:
The assessee argued that the CIT's revision under Section 263 was barred by limitation, as the original assessment was completed on 26.05.2003, and the reassessment on 16.10.2006 was for specific reasons unrelated to the issues in the revision. The Tribunal, referencing the Supreme Court decision in Alagendran Finance Ltd., held that the limitation period starts from the original assessment date and quashed the CIT's revision order as time-barred. Additionally, on merits, the Tribunal found the expenditures in question were allowable under Section 43B, further supporting the quashing of the revision order.

Conclusion:
The Tribunal dismissed the revenue's appeals and partly allowed the assessee's cross-objections and appeal, providing a detailed rationale for each issue based on the facts and applicable legal precedents.

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