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TMI Blog2016 (8) TMI 728X X X X Extracts X X X X X X X X Extracts X X X X ..... that there were no borrowings made for the purpose of investment as investments were made out of net worth of the company and there being no borrowings relating to or for the purpose of making investments and hence no disal lowance u/s 14A were attracted as no expenditure has been incurred by your appellant in relation to its activity of investment though he has issued directions to recompute the quantum of disallowance by applying rule 8D by ignoring the claim of your appellant. 2. The learned CIT(A) erred in not giving specific appropriate directions in report of disallowance u/s 14A which was done by adopting incorrect amount of quantum of interest to be considered for disallowance u/s 14A. 3. The learned CIT(A) erred in not deciding on the issue of treatment of loss of Rs. 30,48,919/- as to whether it is speculation loss or business loss based on facts and decisions by considering it as afterthought. 4. Your appellant craves leave to add, to amend, alter or delete any of the above grounds. 5. Your appellant prays that justice he given." Grounds No. 1 & 2: 3. The brief facts relating to above referred to grounds are that the assessee is a company carrying on business as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dealings in shares of the companies controlled by them. In our opinion, such manipulation in share dealings for the purpose of tax avoidance can be checked effectively if the results of dealings in shares by such companies are treated for tax purposes in a manner analogous to speculation. No doubt, companies whose main business activities centre around investment in shares will have to be left out. Accordingly, we recommend that the results of dealings in shares by companies, other than investment, banking and finance companies, should be treated in a manner analogous to speculation business." 6. The Ld. AR has further referred to the CBDT circular No. 204 dated 27.07.1976 contending that the object of the said provision was to curb the device sometimes resorted to by business houses controlling groups of companies to manipulate and reduce the taxable income of companies under their control. Thus the scope and effect of the Explanation to section 73 of the Act was to provide that the business of purchase and sale of shares by companies which were not investment or banking companies or companies carrying on business of granting loans or advances would be treated on the same footing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in shares and they have purchased and sold shares and incurred losses, only such companies fall in the ambit of the Explanation to section 73 of the Act so that their losses are treated as speculation loss, which was the object to be achieved by the insertion of the Explanation to section 73 of the Act. He has thus contended that insertion of amendment by Finance (No. 2) Act, 2014 in the Explanation to section 73 of the Act is clarificatory in nature and therefore such amendment will have to be given retrospective effect, i.e. from the year in which the Explanation was inserted. The learned A.R. thus, has stressed that in view of the amendment made to Explanation to section 73 of the Act, the loss incurred by the assessee on account of trading in shares is not a speculative loss and hence the same can be adjusted against other business income like brokerage and commission. He has strongly relied upon the observations made by the co-ordinate bench of this Tribunal in its order dated 13.05.2016 in the case of " Fiduciary Shares & Stock P. Ltd." (supra). 7. On the other hand, the learned D.R. for Revenue has strongly supported the decision of the learned CIT(A) on this issue and pla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peculation business shall be deemed to be distinct and separate from other business. The sections 73, 43(5) and Explanation 2 to section 28 of the Act are on the statute since 01.04.1962. 5.6.2 Pursuant to the Wanchoo Committee Report of December, 1971, Explanation to section 73 of the Act was inserted by the Taxation Laws (Amendment) Act, 1975 w.e.f. 01.04.1977. Therefore, prior to 01.04.1977, if any assessee was carrying on any speculative transactions, i.e. a contract ultimately settled otherwise than by actual delivery; which are of such a nature to constitute a business, then such speculative transactions are considered as speculation business. If the assessee incurs a loss in such speculation business, then the loss from such speculation business can be adjusted only against profits of another speculation business as provided under section 73 of the Act. In other words, transactions prior to 01.04.1977, which were delivery based, were not treated as speculative transactions and hence the loss arising from such transactions was allowed to be adjusted against the income of the year under consideration. After the insertion of Explanation to section 73 of the Act, companies othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Explanation to section 73 of the Act. In these circumstances, speculation business loss incurred by trading in shares in earlier years will not be allowed to be set off against such profit from purchase and sale of shares to such companies in A.Y. 2015-16. For this reason also, the amendment inserted to Explanation to section 73 of the Act by Finance (No. 2) Act, 2014 is to be applied retrospectively from the date of the insertion to Explanation to section 73 of the Act. In coming to this view, we draw support from the decision of the Hon'ble Apex Court in the case of CIT vs. Alom Extrusions Ltd. (319 ITR 306) wherein their Lordships were considering the amendment made by Finance Act, 2003 by omitting the second proviso to section 43B of the Act w.e.f. 01.04.2004 and bringing about uniformity in the first proviso by equating tax, duty, cess and fees with contribution to welfare funds (viz. Provident Fund, etc.). The Hon'ble Apex Court held that the aforesaid amendment in section 43B of the Act by Finance Act, 2003 is curative in nature and would therefore apply retrospectively w.e.f. 01.04.1988. 5.6.3 In the case of Allied Motors Pvt. Ltd. vs. CIT (224 ITR 677), the que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purpose of a particular provision is easily discernible from the whole scheme of the Act, which in this case is to counteract the effect of the transfer of assets so far as computation of income of the assessee is concerned, then bearing that purpose in mind, we should find out the intention from the language used by the Legislature and if strict literal construction leads to an absurd result, i.e., a result not intended to be sub served by the object of the legislation found in the manner indicated before, then if another construction is possible apart from strict literal construction, then that construction should be preferred to the strict literal construction. Though equity and taxation are often strangers, attempts should be made that these do not remain always so and if a construction results in equity rather than in injustice, then such construction should be preferred to the literal construction. Furthermore, in the instant case, we are dealing with an artificial liability created for counteracting the effect only of attempts by the assessee to reduce tax liability by transfer. It has also been noted how for various purposes the business from which profit is included or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e invoked. It was also contended that even though this second proviso is stated to be w.e.f. 01.04.2013, since the amendment is declaratory and curative in nature, it should be given retrospective effect from 01.04.2005, i.e. the date from which subclause (ia) of 40(a) was inserted in the statute by way of Finance (No.2) Act, 2004. At para 7 thereof the Tribunal held as under: - "7. When we look at the overall scheme of the section as it exists now and the bigger picture as it emerges after insertion of second proviso to section 40(a)(ia), it is beyond doubt that the underlying objective of section 40(a)(ia) was to disallow deduction in respect of expenditure in a situation in which the income embedded in related payments remains untaxed due to non deduction of tax at source by the assessee. In other words, deductibility of expenditure is made contingent upon the income, if any, embedded in such expenditure being brought to tax, if applicable. In effect, thus, a deduction for expenditure is not allowed to the assessees, in cases where assessees had tax withholding obligations from the related payments, without corresponding income inclusion by the recipient. That is the clearly d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Explanation to section 73 of the Act by Finance (No. 2) Act, 2014 w.e.f. 01.04.2015 is clarificatory in nature and would therefore operate retrospectively from 01.04.1977 from which date the Explanation to section 73 was placed on the statute since this amendment to section 73 of the Act '.... or a company the principal business of which is the business of trading in shares .....' brings in the assessee whose principal business is trading of shares. Therefore, the loss incurred in share trading business by such companies, i.e. like the assessee will not be treated as speculation business loss but normal business loss, and hence the same loss can be adjusted against other business income or income from any other sources of the year under consideration. In this view of the matter, we direct the AO to allow the assessee's claim for setting off the loss from 'share trading business' against 'other business income' and income from any other sources during the year under consideration. Since we have allowed the assessee's primary contention/ground, we do not consider it necessary to adjudicate the alternative contention raised by the assessee." 9. In o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,021/- and disallowed the same on account of expenditure incurred for earning of exempt income. The Ld. CIT(A) confirmed the said disallowance. 12. At the outset, the Ld. A.R. for the assessee, before us, has stated that the assessee has maintained two portfolios in relation to share transactions i.e. one relating to the investments made and the other being trading portfolio. He has further submitted the assessee had made investments only in the wholly owned subsidiaries and in associated companies aggregating to Rs. 5,06,00,000/-. That the entire investments were made for business purposes for having control over subsidiary and associated companies. He, therefore, has submitted that the strategic investments made by the assessee were not for the purpose of earning of exempt income but the same were relating to the business strategy of the assessee. He, therefore, has contended that while making out the disallowance under section 14A read with rule 8D of the Income Tax Rules, the strategic investments made in the group concerns should not be considered and be excluded while calculating the disallowance under rule 8D. He has further submitted that strategic investments were made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... do not require any day today monitoring as they are inherently long term in nature. No expenditure on day- to-day basis is incurred for managing those investments. Therefore, strategic investment should be excluded for attributing administrative expenses for making disallowance u/s 14A of the Act. The ld. A.R. has placed reliance on the following decisions:- i) HSBC Securities and Capital Markets (I) P. Ltd. - ITA No. 3186/M/08 ii) Zenstar Technologies Ltd. - ITA No. 4538/M/05 iii) Shri Bhalchandra R. Sule - ITA No. 3684/M/05 iv) EIH Associated Hotels vs. DCIT - ITA No. 1503/Mad/12 v) Interglobe Enterprises Ltd. vs. DCIT - ITA No. 1362 & 1032/De1/13 vi) JM Financial Limited vs. ACIT - ITA No. 4521/M/12 vii) CIT vs. Oriental Structural Engineers P. Ltd. - ITA 605 of 2012(HC) viii) ACIT vs. Oriental Structural Engineers P. Ltd. ITA No. 4245/De1/2011 ix) Garware Wall Ropes Ltd. vs. ACIT - ITA No. 5408/M/2012 In view of the above judicial pronouncements, the ld. A.R. prayed that the A.O. be directed to exclude the investments made in foreign subsidiaries and investment made in companies which are strategic in nature while computing the disallowance u/s 14A of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s available, both interest free and over draft and/or loans taken, then a presumption would arise that investments would be out of the interest free fund generated or available with the company, if the interest free funds were sufficient to meet the investment. Similar view has been taken in the case of "CIT vs. HDFC Bank Ltd." in ITA No.330 of 2012 decided on 23rd July 2014 by the Hon'ble Bombay High Court. In the light of the above cited decisions, even otherwise, no interest disallowance is attracted in relation to investments made by the assessee as the assessee had its own sufficient funds for the purpose of making investments. 16. Further, the Hon'ble Delhi High Court in the case of Joint Investment Private Limited (supra) has held that section 14 of the Act or rule 8D cannot be interpreted so as to mean that the entire tax exempt income of the assessee is to be disallowed. That the window for disallowance is indicated in Section 14A, and is only to the extent of disallowing expenditure incurred by the assessee in relation to the tax exempt income. This proportion or portion of the tax exempt income surely cannot swallow the entire amount of tax exempt income. The Hon'ble De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntage Securities Ltd." in ITA No.6711/M/2011 vide order dated 14.09.2012 while relying upon the decision of the Hon'ble Kerala High Court in the case of "CIT vs. Smt. Leena Ramachandran (339 ITR 296) and further on the decision of the Hon'ble High Court of Karnataka in the case of "CCI Ltd. vs. JCIT" 250 CTR 291 has held that disallowance under section 14A in relation to dividend received from trading shares cannot be made. The said finding of the Tribunal has been upheld by the Hon'ble Jurisdictional Bombay High Court in the case of "CIT vs. India Advantage Securities Ltd." in ITA No.1131 of 2013 vide order dated 17.03.2015 (supra). The said decision holds binding precedent upon this Tribunal. Moreover the assessee has already offered the dividend income earned on the shares held as stock in trade as business income of the assessee. 19. Respectfully following the above referred to decisions of the higher courts, this issue is accordingly decided in favour of the assessee and the disallowance made by the AO in the case of the assessee under section 14A of the Act is hereby ordered to be deleted. 20. In the result, this appeal of the assessee is allowed. 21. Now coming to the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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