2020 (6) TMI 535 - AT - Income Tax

Loss incurred by the assessee on F O (Future and Options) derivative transactions - speculative loss or not - disallowing the set off of the said loss against other business income - whether the ld. CIT(A) was justified in observing that the F O transactions carried out by the assessee were not genuine? - HELD THAT - Assessee had earned profit from F O transactions in A.Y.2010-11 which was duly taxed by the ld. AO as regular business income. During the year, there is no change in the facts or there is no emergence of any fresh development in the case of the assessee company, enabling the ld AO to take a divergent view. Hence, revenue is not justified in taking a divergent view for the year under consideration alone. Following the principle of consistency as decided in the case of Radhasaomi Satsan 1991 (11) TMI 2 - SUPREME COURT the loss incurred by the assessee on derivative transactions deserves to be allowed as regular business loss during the year under consideration and consequently eligible to be set off against other income as per law. Disallowance of apportioning of expenditure on loss from derivatives, we find that the ld. AO had apportioned the employee cost and administration expenses in proportion of the loss of derivatives to the total receipts and arrived at the figure as part of speculation loss. Loss incurred on derivative transactions is not speculative loss and rather need to be treated as regular business loss, we direct the ld. AO to delete the disallowance towards apportionment of expenditure. Accordingly, the ground No. I raised by the assessee is allowed. Disallowance of expenditure u/s.14A - HELD THAT - From the perusal of the various documentary evidences placed on record, we hold that the interest payment was paid by the assessee company as per the directions of the Maharashtra State Consumer Disputes Reddressal Commission for delayed delivery of flat to one of the buyers and the said payment of interest has got absolutely nothing to do with the investment activity carried out by the assessee. Hence, there cannot be any proportionate disallowance of interest in terms of second limb of Rule 8D(2) of the rules.Disallowance of interest in the sum in Rule 8D(2)(ii) is hereby directed to be deleted. With regard to disallowance of administrative expenses under third limb of Rule 8D(2) of the Rules, the ld. AR was not able to make any substantial argument in support of his claim. We find that assessee had indeed earned exempt income in the form of dividend and had not made any disallowance of expenses incurred for the purpose of earning such income in the return of income. The entire expenditure has been debited for composite business carried out by the assessee. The basic purpose for introduction of provisions of Section 14A in the statute is to address this grievance of the revenue. For want of any plausible evidence, we hereby confirm the disallowance made in the sum under third limb of Rule 8D(2) of the Rules by the lower authorities. Accordingly, the ground No.II raised by the assessee is partly allowed.

Issues Involved:
1. Disallowance of loss in F&O transactions.
2. Disallowance of expenditure under Section 14A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Loss in F&O Transactions:

The primary issue was whether the loss of ?63,47,155 incurred by the assessee on F&O derivative transactions should be treated as "speculative loss" under the Explanation to Section 73 of the Income Tax Act, 1961, and consequently disallowed for set-off against other business income. The Assessing Officer (AO) treated the derivative transaction loss as speculative and disallowed it, a decision upheld by the Commissioner of Income Tax (Appeals) [CIT(A)].

The Tribunal examined the sources of income of the assessee, noting that the gross total income mainly consisted of income from house property, capital gains, and other sources, collectively representing 69% of the gross total income. This fact placed the assessee within the first exception provided in the Explanation to Section 73 of the Act, which excludes companies whose gross total income mainly consists of income chargeable under the heads "Interest on securities," "Income from house property," "Capital gains," and "Income from other sources."

The Tribunal concluded that the loss on derivative transactions should be treated as regular business loss, eligible for set-off against other income. This conclusion was supported by precedents from the Hon’ble Jurisdictional High Court in CIT vs. Darshan Securities (P) Ltd. and CIT vs. HSBC Securities and Capital Markets India (P) Ltd.

The Tribunal also considered the argument from the Departmental Representative (DR) that no documentary evidence was provided for the derivative loss. The Tribunal found that the Director of the assessee company had submitted various documents, including contract files for F&O transactions, Demat accounts, and global statements from brokers, to both the AO and CIT(A). The Tribunal found no justifiable reason for CIT(A)'s conclusion that the F&O transactions were not genuine.

Additionally, the Tribunal noted that similar losses were allowed in previous assessment years (A.Y. 2009-10 and 2012-13) and profits from F&O transactions were taxed as regular business income in A.Y. 2010-11. Applying the principle of consistency from the Hon’ble Supreme Court in Radhasaomi Satsang, the Tribunal directed that the loss of ?63,47,155 be allowed as regular business loss.

Regarding the disallowance of ?16,55,463 as apportionment of expenditure, the Tribunal directed the AO to delete this disallowance, as the loss on derivative transactions was not speculative.

2. Disallowance of Expenditure Under Section 14A:

The second issue concerned the disallowance of expenditure under Section 14A of the Act, relating to the earning of exempt income (dividend income of ?16,33,798). The AO had disallowed ?4,28,713 by applying Rule 8D(2) of the Income Tax Rules, which was upheld by CIT(A).

The Tribunal found that the interest expense of ?5,31,274 claimed by the assessee was related to a payment directed by the Maharashtra State Consumer Disputes Redressal Commission for delayed delivery of a flat, and not related to investments in mutual funds or shares. Therefore, the interest expense could not be disallowed under Rule 8D(2)(ii). The Tribunal directed the deletion of ?2,42,158 disallowed under this rule.

However, for the administrative expenses disallowed under Rule 8D(2)(iii), the Tribunal found no substantial argument from the assessee. Given that the assessee had earned exempt income and not disallowed any expenses for earning such income, the Tribunal confirmed the disallowance of ?1,86,555 under Rule 8D(2)(iii).

Conclusion:

The appeal was partly allowed. The Tribunal directed the deletion of disallowances related to the loss on F&O transactions and the interest expense under Section 14A, while confirming the disallowance of administrative expenses under Section 14A.

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