2020 (8) TMI 191 - AT - Income Tax

Loss incurred by the assessee in purchase and sale of shares - Whether a business loss or speculation loss? - HELD THAT - CIT(A) has recorded categorical finding that the assessee has earned profit from share trading activity. We further noted that although, the assessee claims to have earned profit from share trading activity, but such profit has been computed without considering direct and indirect expenses relatable to share trading activity, although the major portion of income or loss of the assessee is from share trading activity. The facts and consequent findings recorded by the Ld. AO, and the Ld.CIT(A) are contrary to each other and requires fresh verification from the Ld. AO, in light of the fact that the assessee has not considered expenditure incurred in relation to share trading activity. We are of the considered view that the assessee is hit by the provisions of Explanation to section 73 in the case of Snowtex Investments Ltd. 2019 (5) TMI 1165 - SUPREME COURT and accordingly, in case, the assessee incurred losses from share trading activity, the same needs to be considered as deemed speculative loss and cannot be allowed to be set off against profit derived from trading in derivatives. In case, the assessee has earned profit from share trading activity, then Explanation to section 73 has no application and accordingly, the said loss needs to be treated as normal business loss and allowed to be set off against any other income. Issue needs to be re-examine by the Ld. AO, in light of various facts brought out by both the parties and to recompute profit after considering relevant expenditure relatable said trading activity and then to decide applicability of Explanation to section 73. Accordingly, we set aside the issue to the file of the Ld. AO and direct him to reconsider the issue afresh in accordance with law. Disallowances of expenditure incurred in relation to exempt income u/s 14A - HELD THAT - There is no merit in the arguments of the assessee that no interest expenditure could be disallowed. Insofar as, disallowances of expenditure under Rule 8D(2)(iii) of I.T.Rules, 1962, it is a settled position that only, those investments, which has earned exempt income for the year under consideration needs to be considered for the purpose of average value of investments to determine disallowances of expenditure @ 0.5% of average value of investments. Therefore, we direct the AO to consider only those investments which yeild exempt income for the year for disallowance of expenditure. To sum up, the issue needs to go back to the file of the Ld. AO to determine disallowances of expenditure, in relation to exempt income u/s 14A, in light of our discussions given hereinabove and accordingly, we set aside the issues to the file of the Ld. AO and direct him to recompute the disallowances in accordance with in terms of our observations given hereinabove.

Summary

Issues Involved:

1. Deletion of additions made by the Assessing Officer (AO) towards deemed speculation loss by invoking Explanation to section 73 of the Income Tax Act, 1961.
2. Disallowance of expenditure incurred in relation to exempt income under section 14A of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Deletion of Additions Made by AO Towards Deemed Speculation Loss by Invoking Explanation to Section 73 of the Income Tax Act, 1961:

The revenue appealed against the order of the Commissioner of Income Tax (Appeals) [CIT(A)], which deleted the additions made by the AO towards deemed speculation loss of ?1,85,25,973/- by invoking Explanation to section 73 of the Income Tax Act, 1961. The AO had categorized the loss incurred by the assessee from trading in shares as speculative loss, which could not be set off against income from derivative trading. The AO's decision was based on the explanation that any company engaged in the purchase and sale of shares is deemed to be carrying on speculative business. However, the CIT(A) relied on the decision of ITAT, Mumbai, in Fiduciary Shares & Stock Pvt. Ltd., which held that the explanation to section 73 inserted by the Finance Act, 2014, is clarificatory and operates retrospectively from 01/04/1977. Therefore, the CIT(A) concluded that the loss incurred from trading in shares should not be treated as speculative loss.

The Tribunal, however, noted that the Supreme Court in Snowtex Investments Ltd. vs. PCIT held that the amendment to Explanation to section 73 is prospective and effective from 01/04/2015. The Tribunal found that the findings of the CIT(A) were contrary to the Supreme Court's settled position. The Tribunal also observed discrepancies between the AO's and CIT(A)'s findings regarding whether the assessee incurred losses or profits from share trading activity. Consequently, the Tribunal set aside the issue to the AO for fresh verification and recomputation of profit after considering relevant expenditure related to share trading activity.

2. Disallowance of Expenditure Incurred in Relation to Exempt Income Under Section 14A of the Income Tax Act, 1961:

The assessee challenged the disallowance of ?82,94,849/- made by the AO under section 14A read with Rule 8D of the Income Tax Rules, 1962. The assessee argued that the provisions of section 14A were not applicable, and the AO did not record any satisfaction under sub-section (2) of section 14A regarding the correctness of the voluntary disallowance made by the assessee. The CIT(A) rejected the assessee's contention that shares held as stock-in-trade should not be included in the computation of average value of investments, relying on the Supreme Court's decision in Maxopp Investments Ltd. vs. CIT.

The Tribunal upheld the CIT(A)'s view that shares held as stock-in-trade should be included in the computation of average value of investments for the purpose of disallowance under section 14A. The Tribunal also noted that the assessee's own funds were not sufficient to cover the investments in shares, including shares held as stock-in-trade. Therefore, the interest expenditure could not be excluded from the disallowance computation. The Tribunal directed the AO to recompute the disallowance by considering only those investments that yielded exempt income for the year and to determine the disallowance of expenditure in relation to exempt income under section 14A accordingly.

Conclusion:

The Tribunal set aside the issue of deemed speculation loss to the AO for fresh verification and recomputation. It also directed the AO to recompute the disallowance of expenditure under section 14A, considering only those investments that yielded exempt income for the year. The appeal filed by the revenue and the cross-objection filed by the assessee were treated as allowed for statistical purposes. The procedural aspect of the pronouncement of the order was addressed, considering the nationwide lockdown due to the COVID-19 pandemic.