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TMI Blog2011 (11) TMI 454X X X X Extracts X X X X X X X X Extracts X X X X ..... ds Insurance Premium was not relatable to earning of income not chargeable to tax. Also, Keyman Insurance Policy are fully taxable u/s 28(vi), therefore, the expenditure relating to the same cannot come within the ambit of section 14A - Decided in favor of assessee. Proportionate dis-allowance u/s 14A in respect of management fee paid - Held that:- It is not disputed that fund management fees paid had no nexus with the earning of dividend but was calculated and paid with reference to appreciation achieved in the investment during the defined period. Therefore, the dis-allowance u/s 14A was not warranted - Decided in favor of assessee Set off of Short Term Capital loss (STT paid) against Short Term Capital Gain (without STT) - Held That:- There is no prohibition nor the Act compels the assessee to first set off short term capital gain with STT against short term capital loss with STT and then allows set off against short term capital gain without STT. In absence of any such specific mode of set off prescribed in the Act, the assessee was entitled to exercise his option with regard to the chronology of set off which was most beneficial to him - Decided in favor of assessee. - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital asset" as defined under section 2 sub-section (14) of the Income Tax Act. (ii) The derivative contracts are not in the nature of contract for purchase and sale of any commodity. The derivative contracts only grant options to the parties and do not involve purchase and sale of commodity which is a condition precedent for Section 43(5) of the Act. (iii) ITAT, Mumbai Bench vide its order dated 25.09.2007 in ITA No.3182/Mum/2004 has held that Section 43(5) has no application to derivative transactions. 7. Ld. Departmental Representative submitted that in derivative transaction, the contract is to set off the difference in price without taking any delivery. Therefore, it is to be treated as speculative transaction. He further submitted that the Special Bench in the case of Shree Capital Services Ltd. v. Asstt. CIT [2009] 121 ITD 498 (Kol.) has held that insertion of clause(d) to Section 43(5) by the Finance Act, 2005 w.e.f 1-4-2006 is prospective in operation and, therefore, Special Bench decision is of no help to the assessee for the assessment year 2005-06. 8. Ld. Counsel appearing on behalf of the assessee submitted that Ld. CIT(A) allowed the assessee's appeal on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actions. Before we proceed to consider these two issues, we may observe that in view of the decision of Special Bench in the case of Shree Capital Services Ltd. (supra), it can not be disputed that in the relevant assessment year under consideration, the derivative transaction was to be treated as speculative loss under section 43(5) of the Act. However, in the present appeal, contention of the assessee is entirely different. The assessee contends that it carried on derivative transaction as investor and, therefore, loss incurred by it from these investments was short term capital loss and, therefore, the provisions of Section 43(5)(d) had no application as the said loss was not to be computed under the head "profits or gains of business or profession". The said loss as per assessee, is to be computed under the head "capital gains". As far as first issue is concerned, in view of the definition of 'Derivative' in Securities Contract Regulation Act, 1956, noted in para 8 above, it is to be held that 'Derivative' is a Capital Asset as it has been treated as 'Security'. Now, in order to decide the second issue, we have to keep in mind the basic difference between 'Investment' and 'Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mputation of total income claimed the same as "short term capital loss". Therefore, in our opinion, Assessing Officer had rightly treated the derivative transaction loss as being covered under the head "profit and gains of business or profession" and not under the head "capital gains". In view of above discussion, this ground of appeal of the Department is allowed. 10. Ground No.2 reads as under :- In the facts and under the circumstances of the case the Ld. CIT(A) has erred in law while in giving relief to the assessee by holding that tax at source was not deductible on payment of brokerage paid to an agency for facilitating derivatives trade. This was found to he defeating the spirit of sec. 194H. 11. Brief facts apropos this issue are that Assessing Officer noticed that assessee had paid brokerage amounting to Rs.73,935/- to M/s. Kotak Securities Limited on derivative transactions. However, no TDS had been deducted. He, therefore, disallowed assessee's claim u/s 40(a)(ia) of the Act. Ld. CIT(A) allowed the assessee's claim, inter alia, observing that Section 194H was not applicable to brokerage paid to stock brokers. 12. Ld. Departmental Representative referred to pages ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t fee paid amounting to Rs. 12,98,906/- and the same was deducted from the income/loss under the head "short term capital gain". He noticed that the management fees was paid and related to all the transactions in shares from which either dividend was received or in connection with earning short term/long term capital gains/loss with STT or without STT. He further noticed that assessee had shown dividend income of Rs. 53,34,694/- and long term capital gain suffering STT of Rs. 20,05,599/, which were exempt under section 10(34) 10(38) of the Act respectively. After considering the details of expenditure, Assessing Officer disallowed Rs. 1,21,677/- on account of proportionate management expenses Rs. 2,80,864/- out of business expenses being 10% of total expenditure of Rs. 28,08,638/- under section 14A of the Act. Before Ld. CIT(A), it was, inter alia, that submitted that expenditure of Rs. 28,08,638/-, inter alia, included Rs. 20,00,000/- being insurance premium paid under Keyman Insurance Policy. It was further submitted that as per Section 2(24) read with Section 28(vi) of the Act, any receipt under Keyman Insurance Policy is taxable as business income. Therefore, sum of Rs. 20. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of dividend income. It is not disputed that fund management fees paid had no nexus with the earning of dividend but was calculated and paid with reference to appreciation achieved in the investment during the defined period. Therefore, the disallowance under section 14A was not warranted. 20. In the result, ground Nos.3 4 are dismissed. 21. Ground No.5 reads as under :- In the facts and under the circumstances of the case the CIT(A) has erred in law while giving relief to the assessee on account of adjustment of short term capital loss (STT paid) with short term capital gain (without STT), whereas no such adjustment was made against short term capital gain (STT paid). The Ld. CIT(A) erred in holding that there is no need to maintain any chronology in such adjustment. He has tried in deciding so, since there were different tax rates for STCG, based on payment ) of STT. 22. Brief facts apropos this issue are that Assessing Officer computed short term capital gain and short term capital loss suffered by assessee separately for the periods 01.04.2004 to 30.09.2004 01.10.2004 to 31.03.2005. He allowed the set off of the short term capital loss against short term capital gai ..... X X X X Extracts X X X X X X X X Extracts X X X X
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