2016 (8) TMI 728 - AT - Income Tax

Claim for setting off the loss from share trading activity - Treatment to speculation business loss - Held that - The Co-ordinate bench after detailed discussion of the issue has finally concluded that that the amendment inserted in Explanation to section 73 of the Act by Finance (No. 2) Act, 2014 w.e.f. 01.04.2015 is clarificatory in nature and would therefore operate retrospectively from 01.04.1977 from which date the Explanation to section 73 was placed on the statute. Accordingly, a company, the principal business of which is the business of trading in shares, would fall under the exception to the explanation to section 73 of the Act. Therefore, the loss incurred in share trading business by such companies, i.e. like the assessee, will not be treated as speculation business loss but normal business loss, and hence the same loss can be adjusted against other business income or income from any other sources of the year under consideration. The AO, therefore, is directed to allow the assessee s claim for setting off the loss from share trading activity and also the expenditure incurred relating to the said share trading activity against the income from business or profession for the year under consideration.- Decided in favour of assessee Disallowance u/s 14A - Held that - The strategic investment in group companies cannot be held to be for investment purposes or with the object of earning of dividend/tax exempt income, but the same, in the light of above referred to Judicial decisions can safely be said to be related to the business activity of the assessee and no disallowance, therefore, is attracted on such an income u/s 14A of the Act. Thus we direct the AO to exclude the strategic investments made by the assessee in group companies while calculating the disallowance under section 14A read with rule 8D of the Income Tax Act. Since the assessee, in the case in hand, has not earned any dividend income in respect of the investments made, hence no disallowance of expenditure u/s 14 A is attracted in relation to the investment portfolio. The disallowance made by the AO in the case of the assessee under section 14A of the Act is hereby ordered to be deleted. - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D.
2. Treatment of loss from share trading as speculation loss or business loss.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:

The assessee contested the disallowance of ?43,39,842/- under Section 14A read with Rule 8D made by the Assessing Officer (AO). The AO had calculated the disallowance based on the expenses incurred for earning tax-exempt income, which the assessee argued were not applicable as investments were made out of the company's net worth and not borrowings. The assessee maintained that no expenses were incurred for earning the exempt income. The AO, however, applied Rule 8D and calculated the disallowance at ?17,11,021/-. The CIT(A) upheld this disallowance.

The Tribunal noted that the assessee had made strategic investments in wholly-owned subsidiaries and associated companies for business purposes, not for earning exempt income. The Tribunal referenced several judicial decisions, including the Bombay High Court's ruling in "CIT vs. Reliance Utilities and Power Ltd." and "CIT vs. HDFC Bank Ltd.," which supported the view that if sufficient interest-free funds are available, no interest disallowance is warranted. Additionally, the Tribunal cited the Delhi High Court's decision in "Cheminvest Ltd vs. CIT," which held that Section 14A would not apply if no exempt income is received during the relevant year. Consequently, the Tribunal directed the AO to exclude strategic investments while calculating disallowance under Section 14A read with Rule 8D.

2. Treatment of Loss from Share Trading as Speculation Loss or Business Loss:

The assessee claimed a loss of ?1,16,65,581/- from share trading activity as a deduction against its business income. The AO treated this loss as speculation loss under the Explanation to Section 73 of the Income Tax Act, thereby disallowing the set-off against other business income. The CIT(A) upheld this disallowance.

The Tribunal, referencing the co-ordinate bench's decision in "Fiduciary Shares & Stock P. Ltd. vs. ACIT," concluded that the amendment to the Explanation to Section 73 by the Finance (No. 2) Act, 2014, which extended the exception to companies primarily engaged in trading shares, was clarificatory and retrospective. This meant that companies whose principal business is trading in shares should not have their losses treated as speculation losses. The Tribunal directed the AO to allow the assessee's claim for setting off the loss from share trading against other business income.

Conclusion:

The Tribunal allowed the appeal for A.Y. 2009-10, directing the AO to exclude strategic investments while calculating disallowance under Section 14A and to treat the loss from share trading as a normal business loss. For A.Y. 2010-11, the appeal was partly allowed based on similar grounds, with the disallowance under Section 14A being overturned and the treatment of share trading loss not pressed by the assessee.