2011 (12) TMI 545 - AT - Income Tax

Aggregation of share delivery loss and derivative profit under non-speculative income, Section 43(5)

The Tribunal upheld the CIT(A)'s decision that both share delivery loss and derivative profit are non-speculative under Section 43(5) and should be ... Share trading loss and profit from derivative transactions - Held that:- We are of the view that trading of shares which is done by delivery transactions are not hit by Sec.43(5) as speculation. Similarly, derivative transaction in shares profit/loss is also not hit by Sec.43(5) of the I. T. Act, which deals about speculation transaction. As such, both profit/loss from all the share delivery transactions and derivative transactions are having the same meaning, so far as, Sec.43(5) of the I. T. Act is concerned. When once we held that the transactions done by delivery as well as the transactions of derivatives are not hit by section 43(5) of the Act it is in our considered view that the aggregation of the share trading loss and profit from derivative transactions should be done before the application of the Explanation to section 73 of the IT Act is applicable. Addition u/s 14A - Held that:- AO has not disallowed any expenditure on account of interest. Therefore, respectfully following the decision of the Hon’ble Bombay High Court in the case of Godrej and Boyce Mfg. Pvt. Ltd. (2010 (8) TMI 77 - BOMBAY HIGH COURT) we consider it to set aside this issue to the file of AO and direct the AO to determine the disallowance u/s 14A of the IT Act after giving a reasonable opportunity of being heard to assessee. The assessee is also at liberty to establish whether there is any nexus of the expenditure issue and the exempted dividend income. Issues Involved:1. Applicability of Section 43(5) of the Income Tax Act to derivative transactions.2. Treatment of deemed speculation loss under Explanation to Section 73.3. Applicability of Explanation to Section 73 to delivery-based share transactions.4. Disallowance of expenses under Section 14A read with Rule 8D related to earning dividend income.Detailed Analysis:Issue 1: Applicability of Section 43(5) of the Income Tax Act to Derivative TransactionsThe Revenue contested that the CIT(A) erroneously held that transactions in derivatives are not speculative under Section 43(5) of the Income Tax Act. The Assessing Officer (AO) argued that Section 43(5)(d) excludes trading in derivatives from being speculative, thus, losses from non-derivative share transactions deemed speculative cannot be offset against profits from derivative transactions. The CIT(A) concluded that both share delivery transactions and derivative transactions are non-speculative under Section 43(5) and should be aggregated before applying Explanation to Section 73. The Tribunal upheld the CIT(A)'s view, stating that both types of transactions should be considered non-speculative for the purposes of Section 43(5).Issue 2: Treatment of Deemed Speculation Loss under Explanation to Section 73The AO treated the loss from share trading as deemed speculative under Explanation to Section 73, which the CIT(A) disagreed with, directing that the net result of share delivery loss and derivative profit should be considered. The Tribunal supported the CIT(A), emphasizing that aggregation of business profits and losses should be done before applying Explanation to Section 73. The Tribunal referenced decisions from the ITAT Special Bench and the Hon'ble Bombay High Court, which supported the aggregation approach.Issue 3: Applicability of Explanation to Section 73 to Delivery-Based Share TransactionsThe AO applied Explanation to Section 73, treating the share trading loss as speculative. However, the CIT(A) and the Tribunal held that delivery-based share transactions are not speculative under Section 43(5). The Tribunal agreed with the CIT(A) that both share delivery and derivative transactions should be aggregated and treated as non-speculative before applying Explanation to Section 73, thus dismissing the Revenue's appeal on this ground.Issue 4: Disallowance of Expenses under Section 14A read with Rule 8D Related to Earning Dividend IncomeThe AO disallowed Rs. 4,50,325/- under Section 14A read with Rule 8D, arguing that expenses must have been incurred to earn exempt dividend income. The CIT(A) deleted this disallowance, noting that all shares were held as stock-in-trade and not as investments, thus no expenses were attributable to earning the dividend. The Tribunal found that the AO's allocation was not based on a clear nexus between the expenses and the dividend income. However, the Tribunal also noted that the CIT(A) incorrectly applied the Kerala High Court decision, which pertained to interest expenditure. Consequently, the Tribunal set aside this issue to the AO for re-determination, directing a reasonable opportunity for the assessee to present evidence.Conclusion:The Tribunal upheld the CIT(A)'s decision on the aggregation of share delivery loss and derivative profit, confirming that both are non-speculative under Section 43(5) and should be aggregated before applying Explanation to Section 73. The disallowance under Section 14A was remanded back to the AO for re-evaluation. The appeal was partly allowed for statistical purposes.