Tribunal modifies disallowance, remits STT allocation issue to AO, and directs fresh review of common expenses allocation.

The tribunal partly allowed the appeal by deleting the disallowance under section 14A, remitting the issue of Securities Transaction Tax (STT) allocation to the Assessing Officer for fresh adjudication, and directing a reconsideration of the allocation of common expenses between speculation and non-speculation business based on previous decisions. The tribunal upheld the assessee's grievance in principle, sending the matter back to the AO for further review. The judgment was delivered on 29th September 2015.

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Issues Involved:
1. Disallowance under section 14A
2. Allocation of Securities Transaction Tax (STT)
3. Allocation of common expenses between speculation and non-speculation business

Detailed Analysis:

1. Disallowance under section 14A:
The assessee challenged the disallowance of Rs. 42,97,650 under section 14A of the Income Tax Act, 1961. The assessee, engaged in trading shares, had a closing stock of shares worth Rs. 8,36,57,556 and earned a tax-exempt dividend income of Rs. 5,28,274. The Assessing Officer (AO) computed the disallowance by taking the value of the closing stock of shares as "investment income from which does not form part of the total income," resulting in a disallowance of Rs. 42,97,650. The CIT(A) upheld this disallowance, relying on the judgment of the Hon'ble Bombay High Court in Godrej & Boyce Mfg Co Ltd Vs DCIT [328 ITR 81 (Bom)].

The tribunal, however, found that the issue was covered by a coordinate bench decision in DCIT Vs Gulshan Investment Co Ltd [(2013) 31 taxmann.com 113 (Kol. - Trib.)], which held that Rule 8D(2)(ii) and (iii) applies only when shares are held as investments, not as stock in trade. Since the shares were held as stock in trade, the disallowance under Rule 8D(2)(ii) and (iii) was not applicable. Consequently, the tribunal deleted the disallowance of Rs. 42,97,650, granting relief to the assessee.

2. Allocation of Securities Transaction Tax (STT):
The assessee was aggrieved by the allocation of STT amounting to Rs. 10,12,199. The tribunal, with the consent of both parties, remitted this issue to the AO for fresh adjudication. The AO was directed to consider the principles laid down by the Hon'ble Bombay High Court in CIT Vs Manish D Innai [370 ITR 679 (Bom)] and other binding judicial precedents. The tribunal refrained from adjudicating on merits due to the lack of material on record to verify the factual elements of the assessee's arguments.

3. Allocation of common expenses between speculation and non-speculation business:
The assessee contested the allocation of common expenses amounting to Rs. 27,57,751 between speculation and non-speculation business. This issue was found to be covered by the tribunal's decision in the assessee's own case for the preceding assessment year. The tribunal had previously determined that the allocation should be made based on the turnover of different activities (purchase and sale of shares, speculative loss from commodity transactions, and income from derivative transactions). The tribunal directed the AO to allocate the expenses accordingly and to consider the loss from the business of share trading by delivery as non-speculative, following the judgment of the Hon'ble Bombay High Court in CIT Vs Darshan Securities Pvt. Ltd.

The tribunal saw no reason to deviate from its previous decision and remitted the matter to the AO for fresh adjudication in light of the observations made. The assessee's grievance was upheld in principle, but the matter was sent back to the AO for reconsideration.

Conclusion:
The appeal was partly allowed. The tribunal deleted the disallowance under section 14A, remitted the issue of STT allocation to the AO for fresh adjudication, and directed the AO to reconsider the allocation of common expenses between speculation and non-speculation business based on the tribunal's previous decision. The judgment was pronounced in the open court on 29th September 2015.

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