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2018 (3) TMI 1513 - AT - Income TaxRejection of loss by treating the same as speculative loss - Held that - Both trading of shares and derivative transactions are not coming under the purview of section 43(5) of the Act which provides definition of speculative transaction exclusively for purposes of section 28 to 41 of the Act. Again, the fact that both delivery based transaction and derivative transactions are non-speculative as far as section 43(5) is concerned goes to confirm that both will have same treatment as regards application of the Explanation to section 73 is concerned, which creates a deeming fiction. Now before application of the said Explanation, aggregation of the business profit/loss is to be worked out irrespective of the fact, whether it is from share delivery transaction or derivative transaction. We remit the issue to the file of the Assessing Officer to bifurcate speculative loss and normal business loss as indicated above. In the case of Baljit Securities Pvt. Ltd. 2014 (6) TMI 475 - CALCUTTA HIGH COURT , the issue stands covered in favour of the assessee.This ground of appeal of the assessee is partly allowed for statistical purposes. Disallowance made u/s. 14A - Held that - Rule 8D was inserted in Income Tax Rules with effect from 24/03/2008 by Income Tax (5th Amendment) Rules, 2008. Being so, Rule 8D cannot be applied for the assessment year 2007-08. However, there is every chance to incur certain administrative expenditure. Accordingly, we direct the AO to disallow 2% of the exempt income as expenditure incurred for the purpose of earning exempt income. This ground of appeal of the assessee is partly allowed Treatment of income as income from other sources OR busniss income - interest received on cancellation of the plots - Held that - the plot allotted to the assessee is the business asset of the assessee. However, interest received on cancellation of the plots is a step removed from the business activities of the assessee. The derivation of interest from GIDA cannot be said that it is emanating from the business activities carried out by the assessee. On the other hand, it was emanating from the amount paid by the assessee and not directly from the business activities of the assessee. Therefore, in our opinion, that interest cannot be considered as business income of the assessee. It should be treated as income from other sources. - Decided against assessee Treatment of interest income earned on margin money paid by GIDA - nature of income - Held that - Interest derived from deposits in Bank which was given for getting bank guarantee cannot be treated as capital receipt or business income and it is to be treated as interest income to be assessed under the head income from other sources in view of the judgment of the Supreme Court in the case of Pandian Chemicals Ltd. vs. CIT (2003 (4) TMI 3 - SUPREME Court). Accordingly, this ground raised by the Revenue is allowed.
Issues Involved:
1. Disallowance under Section 40(a)(ia) of the Income Tax Act. 2. Treatment of loss from share transactions as speculative loss. 3. Disallowance under Section 14A of the Income Tax Act. 4. Treatment of interest received from Goshree Island Development Authority (GIDA) as income from other sources. 5. Treatment of interest income earned on margin money paid by GIDA. Detailed Analysis: 1. Disallowance under Section 40(a)(ia) of the Income Tax Act: The first ground in ITA No. 150/Coch/2014 concerned the disallowance of ?5,40,500 under Section 40(a)(ia) of the Act. This ground was not pressed by the assessee's representative and was accordingly dismissed as not pressed. 2. Treatment of Loss from Share Transactions as Speculative Loss: The primary issue in ITA No. 150/Coch/2014 was the rejection of a loss of ?8.03 crores by treating it as speculative loss. The assessee, a property developer, also engaged in speculative share transactions. The Assessing Officer treated the entire loss of ?8.03 crores as speculative and disallowed it from being set off against other business income. The CIT(A) upheld this decision. The assessee argued that the loss consisted of ?519.82 lakhs from futures and options and ?283.21 lakhs from cash market transactions. According to Section 43(5)(d), transactions in derivatives carried out in a recognized stock exchange are not deemed speculative. The assessee cited multiple ITAT decisions supporting this view, arguing that the derivative transactions should not be treated as speculative. The Revenue, relying on the judgment of the Delhi High Court in DLF Commercial Developers Ltd., contended that derivative transactions should be treated as speculative for the purpose of Section 73. The Tribunal, referencing the Special Bench decision in Concorde Commercial Pvt. Ltd. and the Calcutta High Court in Baljit Securities Pvt. Ltd., concluded that both share trading and derivative transactions are non-speculative under Section 43(5). The issue was remitted to the Assessing Officer to bifurcate speculative and normal business loss. This ground was partly allowed for statistical purposes. 3. Disallowance under Section 14A of the Income Tax Act: The next ground in ITA No. 150/Coch/2014 involved a disallowance of ?8,40,000 under Section 14A. The Tribunal noted that Rule 8D, applicable from 24/03/2008, could not be applied for the assessment year 2007-08. However, acknowledging the likelihood of administrative expenditure, the Tribunal directed the AO to disallow 2% of the exempt income as expenditure incurred for earning exempt income. This ground was partly allowed. 4. Treatment of Interest Received from Goshree Island Development Authority (GIDA) as Income from Other Sources: In ITA No. 151/Coch/2014, the issue was the treatment of ?4,04,11,610 received as interest from GIDA on cancellation of auctioned plots. The Assessing Officer treated this as income from other sources, a decision upheld by the CIT(A), who cited Supreme Court judgments emphasizing specific heads of income. The assessee argued that the interest should be treated as business income, as the interest was on funds used in business activities. The Tribunal, however, held that the interest received on cancellation of plots was a step removed from the business activities and should be treated as income from other sources. This ground was rejected, and the appeal was dismissed. 5. Treatment of Interest Income Earned on Margin Money Paid by GIDA: In ITA No. 219/Coch/2014, the Revenue contended the treatment of interest income of ?52,38,137 earned on margin money paid by GIDA. The CIT(A) had directed the AO to treat this as business income. The Tribunal, referencing the Supreme Court judgment in Pandian Chemicals Ltd. vs. CIT, held that interest on bank deposits for bank guarantees should be treated as income from other sources. This ground was allowed. Conclusion: The appeals filed by the assessee in ITA No. 150/Coch/2014 were partly allowed for statistical purposes, the appeal in ITA No. 151/Coch/2014 was dismissed, and the appeal filed by the Revenue in ITA No. 219/Coch/2014 was allowed. The order was pronounced in open court on 19th March 2018.
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