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TMI Blog2017 (3) TMI 185X X X X Extracts X X X X X X X X Extracts X X X X ..... d to produce all necessary details of expenses incurred for earning dividend income u/s 10(34) of the Act and other evidences/explanations in its defense and also to enable A.O. to make the disallowance of expenditure incurred in relation to earning of exempt income in accordance with mandate of Section 14A of the Act . Marked to market loss - Held that:- The eligible transactions are carved out of speculative transactions vide insertion of clause (d) to Section 43(5) of the Act by Finance Act, 2005 w.e.f. 01-04-2006. Hence, the matter needs to be set aside to the file of the A.O. for the denovo determination of the issue on merits for verifying whether the said transactions carried out by the assessee falls within the mandate of Section 43(5)(d) of the Act read with explanation 1 to be covered as business loss vis-à-vis speculative loss and the assessee is directed to produce all relevant cogent evidences and explanations to support its contention. The assessee is in business of trading in shares and stocks. The marked to market loss arising out of derivative contract entered into by the assessee shall be allowed arising due to adverse movement of share prices on the last date of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment year 2007-08 by the assessee in memo of the appeals filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called "the tribunal") read as under:- "I. The Commissioner of Income-tax (Appeals) - 5, Mumbai (hereinafter referred to as the CIT(A)) erred in upholding the action of the Deputy Commissioner of Income-tax - 2(2), Mumbai (hereinafter referred to as the Assessing Officer) in disallowing a sum of ₹ 2,94,880 on account of expenses incurred for earning dividend income by invoking the provisions of section l4A of the Act. The appellants contend that on the facts and in the circumstances of the case and in law, the CIT(A) ought not to have upheld the action of the Assessing Officer in disallowing the aforesaid amount of ₹ 2,94,880 as there is no expenditure incurred in relation to earning dividend income and as such, no disallowance can be made under section 14A. Without prejudice, the appellants contend that the calculation of proportionate expenses allocated to the earning of exempt income is not in consonance with the provisions of Rule 8D and hence, needs to be calculated as per law. 2. The CIT(A) erred in upholding the action of the Assessing O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to earning of dividend income by the assessee and hence, no disallowance can be made u/s 14A of the Act. The ld. CIT(A) observed that the A.O. has made disallowance u/s 14A of the Act by invoking the provisions of Rule 8D(2)(iii) of Income-tax Rules, 1962 , the disallowance was upheld by ld. CIT(A). The ld. CIT(A) relied on the following case laws while upholding the assessment order dated 27-10-2009 passed by the AO u/s 143(3) of the Act , vide appellate order dated 23-11-2012:- i) Southern Petro Chemical Industries v. DCIT (2005) 93 TTJ (Chennai) 161. Held, Expenditure attributable to earning of dividends which are exempt under s.10(33)-Whether to invest or not to invest and whether to retain the investments or to liquidate the same are very strategic decisions in which top management is involved-Said decision -making process is very complicated and requires very careful analysis - Thus, proportionate management expenses are required to be deducted while computing the dividend income. ii) DCIT v. S. G. Investments and Industries Ltd (2004) 89 ITD 44 (Cal), Held, expenditure incurred by the assessee in relation to income which does not form part of the total income as mentioned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CA Rajiv Khandelwal, CA Neelkanth Khandelwal and CA. Hetal Panchal . The said Chartered Accountants were appointed by the assessee company vide Power of Attorney dated 18th March, 2014 executed in favour of these Chartered Accountants, which is placed in file . The said Chartered Accountants duly accepted the appointment on 18-03-2014 itself to attend to this appeal before the tribunal. We have observed that said counsels have sought adjournments on one pretext or another from time to time or they have not attended the hearing on the dates fixed for hearing by the tribunal , which we will explain in details hereinafter. We have observed that on 01-12-2014, the adjournment was sought on the ground that CA Neelkanth Khandelwal, who is briefed in the matter has to attend marriage in family on 01-12-2014 (letter of adjournment dated 01-12-2014 placed in file). The adjournment was granted by tribunal and matter was fixed for hearing on 07-01-2015. Then , again on 16-09- 2015, letter of adjournment dated 16-09-2105 was filed on the pretext that CA Rajiv Khandelwal, who is briefed in the matter has twisted his ankle and has been advised rest for a day, letter of adjournment is placed in f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal due to any reason whatsoever, then as per established standards and procedures, they should make a request before the tribunal to withdraw their Power of Attorney with copy to assessee instead of continuing with such appeals . We hope that our comments will be taken in true spirit by learned counsels and they will ensure due compliance at the time of hearing before the tribunal and help in quick disposal of the appeals by the tribunal. 7. The ld. D.R. submitted that the assessee has earned dividend amount of ₹ 5,35,539/- which has been claimed to be exempt u/s 10(34) of the Act. The A.O. disallowed an amount of ₹ 2,94,880/- by invoking provisions of section 14A of the Act r.w.r. 8D(iii) of Income-tax Rules, 1962 which has been later upheld by the ld. CIT(A). 8. We have heard ld. D.R. and perused the material placed on record. We have observed that the impugned assessment year is assessment year 2007- 08. The AO has invoked Section 14A read with Rule 8D of Income-tax Rules, 1962 for making disallowance of expenditure incurred towards earning of exempt income. The Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. DCIT, (2010) 328 ITR 81(Bom.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that these are notional losses which cannot be allowed. It was also stated that apart from business losses , the assessee also had earned speculation profits to the tune of ₹ 18.68 lacs . The ld. D.R. further relied upon the order of the ld. CIT(A). 10. We have heard ld. D.R. and perused the orders of authorities below and material on record. We have observed that the assessee has entered into futures and options transactions in the shares whereby contracts have been taken w.r.t. Gujarat Ambuja Cement Limited and Reliance Industries Limited wherein marked to market losses amounting to ₹ 15,71,714/- has been claimed as business loss by the assessee. In our considered view, section 43(5) of the Act has been amended by Finance Act, 2005 w.e.f. 1.4.2006 wherein clause (d) is inserted to Section 43(5) of the Act wherein eligible transactions in respect of trading in derivatives referred to in clause (ac) of Section 2 of the Securities Contract (Regulation) Act, 1956 carried out in a recognized stock exchange is carved out of speculative transactions . Explanation 1 to Section 43(5) of the Act is also added wherein eligible transaction is defined. The said Section 43(5)(d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee is directed to produce all relevant cogent evidences and explanations to support its contention. The assessee is in business of trading in shares and stocks. The marked to market loss arising out of derivative contract entered into by the assessee shall be allowed arising due to adverse movement of share prices on the last date of previous year. Reference may be drawn to the decision of the Mumbai benches of the tribunal in the case of Inventurus Knowledge Services (P.) Ltd. v. ITO (2016)156 ITD 727(Mum.-trib), wherein the tribunal allowed marked to market losses by holding as under: "9. Thus in view of our above foregoing discussions, we allow the appeal of the assessee company on following reasons:- 1. That the assessee company has entered into derivative transactions in foreign currency through recognised stock exchange and has complied with the other conditions as stipulated in Section 43(5) read with proviso(d) and Explanation 1 to the said Section 43(5) of the Act for which cogent material is brought on record. 2. That the contract for derivatives in foreign currency are commodity as defined u/s 43(5) of the Act, the underlying asset being foreign currency ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng year when the said derivative contracts are finally concluded/completed. In the result, appeal of the assessee is allowed for statistical purposes. We order accordingly. 11. In the result, appeals of the assessee in ITA No. 538/Mum/2013 for assessment year 2008-09 is allowed for statistical purposes as indicated above. Now, we shall take up assessee's appeal in ITA No. 539/Mum/2013 for assessment year 2008-09. 12. The following grounds of appeal have been raised by the assessee in this appeal:- "1. The Commissioner of Income-tax (Appeals) - 5, Mumbai (hereinafter referred to as the CIT(A)) erred in upholding the action of the Income-tax Officer - 2(2)(1), Mumbai (hereinafter referred to as the Assessing Officer) in disallowing a sum of 87,56,848 on account of expenses incurred for earning dividend income by invoking the provisions of section 14A read with rule 8D of the Act. The appellants contend that on the facts and in the circumstances of the case and in law, the CIT(A) ought not to have upheld the action of the Assessing Officer in disallowing the aforesaid amount of ₹ 87,56,848 inasmuch as the same is not in accordance with the prescription of section 14A read ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee submitted detailed explanation stating that there were no direct or indirect or common expenses debited to the P&L account related to earning of dividend income. It was also submitted by the assessee that for the purpose of calculation of disallowance under Rule 8D(2) of Rules of 1962, the investment will not include stock-intrade. However, the A.O. did not agree with the contentions of the assessee and worked out the disallowance u/s 14A of the Act r.w.r. 8D of Rules of 1962 as under:- Particulars Amount Rs) Amount (Rs) i) Direct expenditure relating to exempt income 46,491 ii) Amount computed as per Rule 8D(2) [A X B/C] A = Interest expenses 5,37,73,185 B = Average investment 9,35,64,244 C = Average total asset 61,04,00,400 82,42,546 iii) 0.5% of average investment 4,67,821 Total disallowance u/s 14A as per Rule 8D(2) 87,56,848 The disallowance u/s 14A of the Act of 1961 was worked out by the AO at ₹ 87,56,848/- and added back to the total income of the assessee, vide assessment order dated 29-12-2010 passed by the AO u/s 143(3) of the Act. 14. The A.O. further observed that assessee has ,inter-alia, shown short term capital gain of ͅ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per Sec.14A r.w.r. 8D(2)(ii) is therefore called for. • The disallowance of ₹ 82,42,536/- made by the AO is therefore upheld. (c) Disallowance u/s 14A r.w.r. 8D(2)(iii) - ₹ 4,67,821/- • The appellant has substantial amount of investments in securities income from which is exempt. Besides, the appellant is also having purchases and sales of securities, dividend income from which is exempt, which is being shown by the appellant as stock in trade. The same is also covered u/s 14A r.w.r. 8D(2)(iii). • Under these facts and circumstances the disallowance made by the AO u/s 14A r.w.r. 8D(2)(iii) is called for. This view has also been upheld in various case laws. i) Southern Petro Chemical Industries Vs. DCIT (2005) 93 TTJ (Chennai) 161- Held, Expenditure attributable to earning of dividends which are exempt under s.10(33)-Whether to invest or not to invest and whether to retain the investments or to liquidate the same are very strategic decisions in which top management is involved-Said decision -making process is very complicated and requires very careful analysis- Thus, proportionate management expenses are required to be deducted while computing the divid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellate order dated 24.11.2012 passed by the ld. CIT(A), the assessee is in appeal before the tribunal. 18. The ld. D.R. submitted that the assessee has earned dividend income of ₹ 16,07,123/- which is claimed as exempt u/s 10(34) of the Act. The learned DR submitted that the impugned assessment year is 2008-09 and the authorities below have rightly invoked Section 14A r.w.r. 8D of Rules of 1962 to disallow expenditure to the tune of ₹ 87,56,848/- incurred in relation to earning of income which does not form part of the total income. The ld. D.R. relied upon the order of the ld. CIT(A). With respect to the second issue of treating short term capital gains as business income , the learned DR submitted that facts in the instant year are distinguishable vis-à-vis facts of immediately preceding year as substantial interest bearing funds are raised by the assessee during the previous year relevant to the assessment year. The learned DR submitted that the assessee itself is claiming the shares as stock-in-trade , and hence the profits arising from sale of shares were rightly treated by Revenue as business income. The ld. D.R. supported the orders of the ld. CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t assessment year. We do not find any infirmity in the well reasoned order of the ld. CIT(A) treating the profit of ₹ 67,27,044 /- shown by the assessee as business income and not short term capital gain keeping in view the factual matrix of the case and more-so the assessee is engaged in the business of trading in shares and stocks. Thus, we are not inclined to interfere with the well reasoned order of learned CIT(A) which we confirms/sustain. We order accordingly. 20. Ground No. 3 is with respect to the disallowance of ₹ 56,916/- on account of provision for loss-ESF Account which is similar to ground No. 2 in assessee's appeal in ITA No. 538/Mum/2013 for assessment year 2007-08 which we have already adjudicated in this order vide para No. 9 and 10 of this order and our decision in ITA No. 538/Mum/2013 shall apply mutatis mutandis to this issue in ITA No. 539/Mum/2013 for the assessment year 2008-09 . 21 Ground No 4 is with respect to leviability of interest u/s 234A and 234B of the Act by the AO which has been stated to be upheld by learned CIT(A) as per the contentions of the assessee in ground no 4 filed with appeal memo. The leviability of interest u/s 234A and 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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