2023 (6) TMI 401 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - suo-motu disallowance made by assessee - Necessity of recording satisfaction - HELD THAT - AO, without recording any objective satisfaction as to why said disallowance was not acceptable, straightway applied Rule 8D(2) which run contrary to statutory provisions of Sec.14A r.w.r.8D(2). Before applying the said rule, it was incumbent upon Ld. AO to record an objective satisfaction rejecting the computations made by the assessee. In the absence of such an exercise, the additional disallowance made by Ld. AO could not be sustained in law. This ground stand allowed. Treatment of Losses as Speculative Losses - adjustment of loss under arbitrage transactions - HELD THAT - One of the eligible transactions includes trading in derivatives because of systematic technological changes introduced by stock exchanges. Trading business of the assessee constitutes only profit / loss in arbitrage / jobbing which are normal business transactions for the assessee. Under Arbitrage transaction, the assessee makes riskless profit by exploiting the price differentials on the same instrument or on the similar assets by trading on different exchanges. Under these transactions, when there is loss in one market, there will be profit in another market or segment or vice versa. Hence the loss in cash market is arbitrage loss the profit in F O segment is also the very same arbitrage profit and vice-versa, which has arisen on the arbitrage / jobbing transactions carried on by the assessee. These two types of transactions, in our opinion, are the two sides of the same coin and could not be treated separately. The loss of one segment has to be allowed to be set-off against the other segment. In the case of the assessee, the entire transaction of purchase and sale of securities constitutes arbitrage jobbing transactions as a whole and hence, these transactions are outside the purview of the speculative transaction. The explanation to Sec.73 would not apply to the case of the assessee in view of specific exclusions of the arbitrage/jobbing transactions from the purview of speculative transaction u/s 43(5) - AO is directed to re-compute the income of the assessee. This ground of appeal stand allowed.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Treatment of losses as speculative losses under Section 73 of the Income Tax Act.

Summary:

1. Disallowance under Section 14A:
The assessee earned exempt dividend income of Rs. 30.20 Lacs and offered a suo-motu disallowance of Rs. 1.83 Lacs in the return of income. However, the Assessing Officer (AO) applied Rule 8D(2)(iii) and computed an additional disallowance of Rs. 3.86 Lacs, which was confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)]. The Tribunal found that the AO did not record any objective satisfaction as to why the assessee's disallowance was unacceptable before applying Rule 8D(2). This failure to record satisfaction contravened the statutory provisions of Section 14A read with Rule 8D(2). Therefore, the additional disallowance made by the AO was not sustained in law, and this ground of appeal was allowed.

2. Treatment of Losses as Speculative Losses:
The assessee reported jobbing income of Rs. 1799.10 Lacs, including a disputed loss of Rs. 385.05 Lacs from arbitrage transactions. The AO held that the assessee set-off share trading loss on equity-based transactions against income from derivative trading, which was non-speculative per Section 43(5). The AO applied the explanation to Section 73, deeming the transactions speculative, and disallowed the set-off. The CIT(A) confirmed this view.

The Tribunal found that the assessee's business involved dealing in shares and securities, and the entire income was from jobbing transactions. Since there was no overall loss, Section 73 was inapplicable. Arbitrage transactions, which involve exploiting price differentials in different markets, were considered normal business transactions. Losses in one market segment (cash market) were offset by profits in another (F&O segment). These transactions were viewed as two sides of the same coin and not speculative under Section 43(5). Consequently, the explanation to Section 73 did not apply, and the AO was directed to re-compute the income, allowing the set-off. This ground of appeal was also allowed.

Conclusion:
The appeal was allowed in favor of the assessee on both grounds.