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TMI Blog2019 (5) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... to the speculative loss recorded by the CIT(A), which was set aside by the ITAT. The CIT(A) had substituted or rather modified the findings of the AO who had brought to tax the entire loss amount of Rs. 73,54,155/-. 3. In ITA 1144/2018, solitary question is with respect to the correctness of the ITAT's findings with regard to the disallowance under Section 14A. 4. The facts are that although the original entity i.e. Jindal Strips Ltd. was engaged in multifarious activities, pursuant to the de-merger and corporate restructuring process undertaken in 2004-2005, the assessee, however, CONTINUED with the principal objective of functioning as a non-banking financial institution, i.e. advancing loans and engaging in investment activities. It reported a loss for assessment year (AY) 2005-06, to the tune of Rs. 73,54,155/-. The AO after due inquiry was of the opinion that this amount could not be allowed as loss and added it back under Section 68, holding transactions to be suspect. 5. The CIT(A) upon being approached in appeal, granted relief but the Appellate Commissioner, however, held that though the veracity of the transactions stood established, the assessee, had indulged in spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a speculation business to the extent to which the business consists of the purchase and sale of such shares.]" 10. A plain reading of the explanation clarifies that where any part of the business of a company consists in the purchase and sale of shares of other companies, it is deemed to be carrying on a speculative business. In the present case, assessee falls within the exception carved out in the part of the section, which is found in the parenthesis ("other than 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 [the principal business of which is the business of trading in shares of banking or the granting of loans and advances); its total income mainly consists of income derived from the granting of loans and advances. Such being the case, the CIT(A) clearly falls into error in holding that the loss reported pertains to a speculative transaction; the ITAT acted correctly in law in setting aside that finding. Therefore, no question of law arises in this aspect. 11. As to the second question [in ITA 1142/2018], wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. CIT, (Central), Calcutta (1971) 82 ITR 363 (SC). Furthermore, this Court is also of the opinion that Section 36(2) also applied to the facts and circumstances of this case. 14. On the last question urged by the Revenue i.e. disallowance under Section 14A, this Court notices that at the outset the period when the disallowance was to be calculated- in both appeals, was when there was no Rule 8D setting out the formula for calculating disallowance, under Section 14A(3). The assessee had claimed that it incurred no expenditure in earning dividend (i.e. tax exempt) income, which constituted approximately 40% of its income. The AO rejected its argument, and roughly apportioned about 9-10% of the exempt income, which bore some proportion to the tax exempt income: for instance, in AY 2005-06, the tax exempt income was Rs. 4.06 crores and the disallowance by the AO (and the CIT (A)) was Rs. 36,35,873/-; for AY 2006-07, the tax exempt income was Rs. 6.50 crores and the disallowance calculated was Rs. 72.62 lakhs. 15. The tribunal's reasoning for the first year, which prevailed in its analysis for the second year, is as follows: ".. 7. We have heard the rival submissions. It is not a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing Officer that no interest bearing funds had been diverted to make investments leading to tax exempt income. The Assessing Officer, under section 14A read with rule 3D of the Income-tax Rules, 1962, disallowed expenditure in respect of the dividend earned by the assessee holding that interest bearings funds had been used to earn tax-free dividend. The Commissioner (Appeals) held that the Revenue had not been able to prove that interest bearing funds were used. This was confirmed by the Tribunal holding that as the Assessing Officer had failed to prove that interest bearing funds were used, it would not invite disallowance under section 14A. On appeal: Held, dismissing the appeal, that as there was no tangible material on record that could have enabled the Assessing Officer to record satisfaction in terms of section 14A the findings recorded by the Commissioner (Appeals) and the Tribunal that the Assessing Officer had failed to discharge this onus were neither perverse nor arbitrary and, therefore, did not call for interference." 8. Considering the facts of the case and in the absence of any satisfaction recorded by the AO, no disallowance should have been made by the author ..... X X X X Extracts X X X X X X X X Extracts X X X X
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