2021 (6) TMI 395 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - no activity of purchase and sale took place during the year - as argued by assessee no satisfaction was recorded by AO before making addition - HELD THAT - As proper satisfaction is recorded by the AO inasmuch as making investment, maintaining or continuing with any investment in a particular share/mutual fund etc. and the time when to exit from one investment to another are all the activities requiring well-coordinated and well-informed management decisions, involving not only inputs from various sources but it also involves acumen of senior management functionaries. Decision to hold the shares and not to make any purchase of sales during the year could also be a conscious decision. Assessee does not maintain any separate account in respect of the purchase or sale of the shares on the connector expenditure and no such accounts are forthcoming for any assessment year. In the absence of any details furnished by the assessee, it is not possible for the learned Assessing Officer to record a detailed satisfaction with reference to the accounts of the assessee. It s not as though Assessing Officer straightaway proceeded to compute the disallowance by invoking section 14A of the Act read with Rule 8D of the Rules. By recording the reasons, the learned Assessing Officer proceeded to compute the same. Hence, we reject the contention of the assessee that no satisfaction was recorded by the learned Assessing Officer and consequently the addition is bad. Alternative submission on behalf of the assessee to limit the disallowance to the tune of dividend income received - Submission supported by the decision of Joint Investments P. Ltd. 2015 (3) TMI 155 - DELHI HIGH COURT wherein it was held that the disallowance of expenditure u/s 14A of the Act cannot exceed the amount of tax exempt income. We, therefore, accept the same and direct the assessing officer to limit the disallowance under section 14A of the Act read with Rule 8D of the Rules and delete the rest of the addition. Appeal of the assessee is allowed in part.

Issues Involved:
1. Denial of set off of carry forward speculative loss.
2. Addition under section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962.

Detailed Analysis:

1. Denial of Set Off of Carry Forward Speculative Loss:
The assessee, engaged in the business of manufacturing and trading of jewellery and dealing in shares, derivatives, and intra-day trades, filed a return declaring total income including profit from the jewellery business and speculative business. The Assessing Officer (AO) denied the set off of speculative loss brought forward from earlier years against the current year's speculative profit, stating that there was no actual purchase or sale of shares during the year, and the profits/losses were notional.

The assessee argued that the loss due to the fall in the value of stock should be treated as a business loss under the explanation to section 73 of the Act. The assessee relied on the decision in the case of Paharpur Cooling Towers vs. DCIT, which supports that loss on account of fall in value of stock is a loss of that business.

The Revenue contended that the setting off of speculative losses from shares against derivatives income in earlier years was unjustifiable, and the quantum and nature of the brought forward speculative loss were not ascertainable. The CIT(A) directed the AO to take remedial action regarding the set off of speculative losses from shares against gains from derivatives.

The Tribunal found that the assessee consistently treated the valuation of shares on a net realizable value basis, and the Revenue had accepted this in previous assessments. The Tribunal referred to the decision in Paharpur Cooling Towers, which states that the loss on valuation of closing stock of shares is an integral part of the trading loss. Consequently, the Tribunal held that the assessee is entitled to set off the carried forward speculative losses against the speculative profit for the year, and deleted the addition of ?30,75,397.

2. Addition under Section 14A Read with Rule 8D:
The AO disallowed ?5,04,602 under section 14A read with Rule 8D, related to the dividend income of ?93,018, on the grounds that the assessee did not furnish an explanation for not making any disallowance. The AO recorded that the investment in shares involved expenditure by way of cost of funds and incidental expenses.

The assessee argued that the addition was bad for non-recording of satisfaction by the AO and that the disallowance under section 14A read with Rule 8D cannot exceed the tax-exempt income. The Tribunal found that the AO had recorded proper satisfaction, noting that investment decisions involve management inputs and expenses. Therefore, the contention that no satisfaction was recorded was rejected.

However, the Tribunal accepted the alternative submission that the disallowance should be limited to the amount of tax-exempt income, supported by the jurisdictional High Court's decision in Joint Investments P. Ltd. vs. CIT. Consequently, the Tribunal directed the AO to limit the disallowance under section 14A read with Rule 8D to ?93,018 and delete the rest of the addition.

Conclusion:
The appeal was allowed in part, with the Tribunal deleting the addition related to the set off of speculative losses and limiting the disallowance under section 14A read with Rule 8D to the amount of tax-exempt income.

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