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TMI Blog2018 (1) TMI 191X X X X Extracts X X X X X X X X Extracts X X X X ..... - 10-11 21. 09.2010 Rs. 48, 14,034/- 11. 02. 2013 Rs. 49,72,360/- ITA/6532/Mum/2015-AY. 2009-10. 2. First ground of appeal, raised by the assessee, is about upholding disallowance of depository charges of Rs. 2. 20 lakhs related to shares held as stock in trade. During the assessment proceedings, the AO found that the assessee had claimed dividend income of Rs. 2. 20 crores, u/s. 10(34) of the Act. He directed the assessee to furnish the details of expenditure incurred for earning exempt income and also to show cause as to why the expenses incurred in claiming exempt income should not be disallowed as per the provisions of section 14A read with rule 8D of the Income Tax Rules, 1962 (Rules). After considering submission of the assessee, he made a disallowance of Rs. 12. 11 lakhs (Rs. 2. 20 lakhs under the head depository charges + Rs. 9. 23 lakhs under the head interest expenditure + Rs. 67, 718-0. 5% of average value of investment). 2.1. Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority(FAA) and made elaborate submissions. After considering the assessment order and the submissions of the assessee, he held that the AO wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eased, that expenditure incurred by it was to increase the share capital, that it was a capital expenditure. Finally, he made a disallowance of Rs. 7. 32 lakhs. 3.1. Before the FAA, the assessee made detailed submissions. After considering the available material, he held that the assessee had failed produce any valid explanation/evidences in support of its contention, that the expenditure was incurred in relation to increase the share capital, that the expenditure was capital in nature, that the AO was completely justified in rejecting the claim of the assessee. Finally upheld the order of the AO. 3.2. Before us, the Authorised Representative (AR)contended that all the necessary details were available on record, that there was an inadvertent mistake in claiming the deduction, that expenditure was incurred for amalgamation, that in the subsequent year expenditure was claimed u/s. 35DD of the Act, that if the matter was restored back the assessee would file requisite details, that FAA should not have rejected the claim in a hurried manner even if it was a new claim. The Departmental Representative(DR)supported the order of the FAA and stated that assessee has incurred expenditure f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at it had purchased equity shares when the sharemarket was all-time high, that subsequently due to global turmoil and recession market were falling when the shares were valued at lower of cost or market price at the balance sheet date as per the consistent accounting policy followed by it, that there was a book loss, that the loss on account of valuation of stock had been reversed in the subsequent years in valuation or sales when market improved. After considering the submission of the assessee, the AO held that as per Explanation 1 to section 73 loss on sale of shares had to be treated as speculation loss, that explanation was deeming fiction. Referring to the case of Eastern Aviation & Industries Ltd. (208/1023), the AO held that the loss suffered by the assessee during the previous year of Rs. 34. 26 crores was to be treated as loss of speculative business. 3. Aggrieved by the order of AO the assessee preferred an appeal before the First Appellate Authority(FAA). Before him the assessee made elaborate submissions. After considering the same, the FAA held that the issue involved stood covered against the assessee by judgment of Hon'ble Jurisdictional High Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce the substantial question of law raised by the Hon'ble Bombay High Court in the case of HSBC Securities and Capital Markets (P. ) Ltd. (supra). First we are reproducing the question raised before the Hon‟ble Court and it reads as under: "Whether on the facts and in the circumstances of the case and in law the Hon'ble I. T. A. T. was justified in holding the trading loss of Rs. 84, 51, 000/- as Ordinary Business Loss as against Speculation Loss as held by the Assessing Officer by relying on the decision of the ITAT Delhi bench in the case of Aman Portfolio Pvt. Ltd. 93 ITD 324ignoring the decision of the Divisional Bench of ITAT Delhi in the case of Frontline Capital Services Ltd. 96 TTJ 201 and also the decision of the ITAT Delhi Bench in the case of Rohini Capital Services Ltd. 92 ITD 317while deciding that the Explanation to Sec. 73 of the Income-Tax Act, 1961 cannot be invoked in the case of the assessee ?" Facts of the case the relevant portion of the judgment are as follow: 4. On 1. 12. 1997, the respondent filed its return for the assessment year 1997-1998 declaring a total loss of Rs. 1, 95, 12, 651/-. On 12. 3. 1998, the respondent filed a revised r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 73 introduces a deeming fiction. The deeming fiction stipulates that where any part of the business of a company consists in the purchase and sale of shares of other companies, such company shall, for the purposes of the section be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sales of such shares. The deeming fiction applies only to a company and the provision makes it clear that the deeming fixation (sic) extends only for the purposes of the section. The bracketed portion of the explanation, however carves out an exception. The exception is that the provision of the explanation shall not apply to a company whose gross total income consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources" or a company whose principal business is of banking or the granting of loans and advances. 7. The submission which has been urged on behalf of the Revenue is that in computing the gross total income for the purpose of the explanation to Section 73, income under the heads of profits and gains of business or profession must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder of application. That would be impermissible, nor, is it contemplated by Parliament. For, the ambit of Sub-Section (1) of Section 73 is only to prohibit the setting off of a loss which has resulted from a speculation business, save and accept against the profits and gains of another speculation business. In order to determine whether the exception that is carved out by the explanation applies, the legislature has first mandated a computation of the gross total income of the Company. The words "consists mainly" are indicative of the fact that the legislature had in its contemplation that the gross total income consists predominantly of income from the four heads that are referred to therein. Obviously, in computing the gross total income the normal provisions of the Act must be applied and it is only thereafter, that it has to be determined as to whether the gross total income so computed consists mainly of income which is chargeable under the heads referred to in the explanation. 9. Consequently, in the present case the gross total income of the assessee was required to be computed inter alia by computing the income under the head of profits and gains of business or professi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ules. 5.2. Before us, the AR referred to page 9 of the PB and stated that the FAA had not taken into account the stock in trade while computing the disallowance, that expenditure incurred by an assessee for its business has to be allowed as per the provisions of section 37 of the Act, that it had made suo-motu disallowance that were sufficient to take care of disallowance to be made as per rule 8D (2)(iii). The DR supported the order of the FAA. 5. 3. We have heard the rival submissions and perused the material before us. We find that the FAA had given part relief the assessee, that the AO and the assessee both have agitated the issue of sustaining/deleting the 14A disallowance. In our opinion, provisions of section 14A r. w. r. 8D were introduced to discourage the assessees from claiming double deductions i. e. claiming expenditure against exempt income. So, expenses booked against exempt income are not be allowed. But, first step is incurring of expenses. The AO/FAA has not given any details of expenses incurred by the assessee for earning exempt income. They have also not given any reason as to why the calculation made by the assessee was not acceptable. No automatic disallowa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee's own funds in case they are in excess of the investments made in the securities (notwithstanding the fact that the assessee concerned may also have taken some funds on interest) applies, when applying section 14A of the Act. Thus, the decision of the court in HDFC BANK LTD. for the first time settled the issue holding that the test of presumption as held by the court in RELIANCE UTILITIES AND POWER LTD. while considering section 36(1)(iii) of the Act would apply while considering the application of section 14A of the Act. The decision of this court in HDFC BANK LTD. has also been accepted by the Revenue. The decision of the court in GODREJ AND BOYCE MANUFACTURING CO. LTD. v. DEPUTY CIT [2010] 328 ITR 81 (Bom) only makes a reference to the decision of the court in RELIANCE UTILITIES AND POWER LTD. and gives no findings on the issue which arose in that case and its applicability while interpreting section 14A of the Act. The court in GODREJ AND BOYCE MANUFACTURING CO. LTD. has in fact restored all the issues to the Assessing Officer for fresh consideration." Respectfully following the above, we decide the effective ground of appeal against the AO. As a result , app ..... X X X X Extracts X X X X X X X X Extracts X X X X
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