2018 (11) TMI 551 - AT - Income Tax

Treatment of business loss as speculation loss - while the assessee incurred losses in derivative segment (F&O business), it has earned profits in cash segment i.e. on account of ordinary action of purchase and sale of shares simplicitor. - Held that - Identical issue arose before the Hon ble Calcutta High Court in the case of Asian Financial Services (2016 (3) TMI 685 - CALCUTTA HIGH COURT) as held that once it is deemed to be a normal business loss on the basis of proviso appended to Section 43(5) of the Act, a question of applying Section 73 or the Explanation thereto for the purposes of refusing loss to be set off against business income is wholly incorrect. The Hon ble Calcutta High Court after taking note of the decision of Hon ble Delhi High Court in DLF Commercial (2013 (7) TMI 334 - DELHI HIGH COURT) took a distinct stand that derivatives cannot be treated at par with shares for the purposes of Explanation to Section 73 because the legislature has treated it differently. Thus, in view of the aforesaid position enunciated by the Hon ble High Court in Asian Financial Services (2016 (3) TMI 685 - CALCUTTA HIGH COURT), we find good deal of force in the case of assessee. The claim of the assessee thus requires to be allowed on this ground alone. Disallowance u/s 14A - AO has disallowed an estimated expenses pegged at ₹ 5,09,728/- as attributable to exempt income by invoking Section 14A - Held that - We observe that against the total expense of ₹ 9.63 Lakhs, the turnover of the assessee in taxable stream stands at ₹ 406.59 Crores whereas the tax free income stands a meager amount of ₹ 6.13 Lakhs. The suo moto disallowance by the assessee is prima facie sufficient to cover the possible expense attributable to tax exempt income. Needless to say, the operation of Rule 8D is not automatic. It is hedged by Rules. Likewise, Section 14A of the Act inheres in it the concept of reasonableness. It is unconceivable to say that assessee has incurred ₹ 6.44 Lakhs out of total expense of ₹ 9.63 Lakhs to earn a paltry dividend income of ₹ 6.13 Lakhs while the remaining expenditure attributes for generation of substantial revenue of taxable nature noted above. The action of the Revenue is therefore prima-facie inexplicable. Consequently, we set aside and cancel the addition of ₹ 5,09,728/- made by the AO under s.14A of the Act.

Summary

Issues:
1. Treatment of business loss as speculation loss under section 73 of the Income Tax Act.
2. Disallowance under section 14A of the Act.

Issue 1: Treatment of business loss as speculation loss under section 73 of the Income Tax Act:

The appeal was filed against the order of the Commissioner of Income Tax (Appeals) concerning the assessment year 2012-13. The Assessing Officer treated the business loss as speculation loss under section 73 of the Act. The assessee argued that losses from derivative transactions should not be considered speculative as per Section 43(5) of the Act. The CIT(A) upheld the AO's decision, stating that the Explanation to Section 73 deems certain transactions as speculative irrespective of Section 43(5). The Tribunal found in favor of the assessee, citing legal precedents that differentiate derivative transactions from shares for the purpose of Explanation to Section 73. Therefore, the Tribunal allowed the appeal, ruling that losses from derivative transactions should not be treated as speculative under Section 73.

Issue 2: Disallowance under section 14A of the Act:

The AO disallowed expenses under section 14A, attributing them to exempt income. The CIT(A) upheld this disallowance. The assessee argued that the disallowance exceeded the exempt income, and the suo moto disallowance made by the assessee was sufficient. The Tribunal observed that the disallowance under Rule 8D exceeded the tax-free income, which was unjustified given the substantial revenue generated by taxable operations. The Tribunal found the Revenue's action inexplicable and canceled the disallowance under section 14A. Consequently, the assessee received relief as claimed in Ground Nos. 2 & 3 of its appeal.

In conclusion, the Tribunal allowed the appeal of the assessee, ruling in favor of the assessee on both issues raised in the appeal. The judgment highlighted the legal distinctions between speculative and non-speculative transactions under the Income Tax Act, ultimately providing relief to the assessee on the treatment of losses and disallowance of expenses.