2015 (12) TMI 38 - AT - Income Tax

Tribunal allows set-off of trading loss, restricts interest disallowance, prevents double addition under Section 14A.

The Tribunal dismissed the revenue's appeal, allowing the assessee to set off the share trading loss against profits from derivative transactions, ... Treatment to share trading loss - CIT(A) not treating the same as speculative loss - Held that:- The claim of the assesse for set off of loss from share dealing should be allowed from the profits from F & O in share transactions, the character of the income being the same and also hold that before application of the Explanation to section 73, aggregation of the business profit or loss is to be worked out irrespective of the fact whether it is from share delivery transaction or derivative transactions. - Decided against revenue. Interest on borrowed funds disallowed - interest on borrowed funds as not meant for business purposes when loans and advances were advanced without interest - CIT(A) deleted disallowance - Held that:- We find that the Learned CITA had rightly granted relief to the assessee to the extent of availability of own funds with the assessee. This issue is now settled by the decision of the Bombay High Court in the case of Reliance Utilities and Power Ltd reported in [2009 (1) TMI 4 - HIGH COURT BOMBAY] wherein it was held that “Where an assessee has his own funds as well as borrowed funds, a presumption can be made that the advances for non-business purposes have been made out of own funds and that the borrowed funds have not been used for this purpose.” - Decided against revenue. Disallowance u/s 14A - CIT(A) deleted disallowance - Held that:- CITA had rightly granted relief to the assessee by stating that while applying the second limb of Rule 8D , the interest that is already disallowed u/s 36(1)(iii) of the Act should be ignored for the purpose of separate disallowance u/s 14A of the Act in order to avoid double addition. - Decided against revenue. Issues Involved1. Treatment of share trading loss as speculative loss.2. Disallowance of interest on borrowed funds.3. Disallowance under Section 14A of the Income Tax Act.Detailed Analysis1. Treatment of Share Trading Loss as Speculative LossFacts and Contentions:- The assessee, a company engaged in trading shares, securities, and derivatives, claimed a share trading loss of Rs. 1,71,52,934 and set off the same against other business profits.- The Assessing Officer (AO) treated this loss as a speculative loss under Explanation to Section 73 of the Income Tax Act, thereby disallowing the set-off against other business profits.- The assessee argued that it is a Non-Banking Financial Company (NBFC) and its principal business includes granting loans and advances, which should exempt it from the provisions of Explanation to Section 73.Tribunal's Findings:- The Tribunal noted that the assessee's principal business includes the granting of loans and advances, which brings it outside the ambit of Explanation to Section 73.- It was observed that the AO had invoked Explanation to Section 73 only for physical transactions and ignored the profits from derivatives (F&O), which are of the same nature.- The Tribunal held that aggregation of share trading loss and profit from derivative transactions should be done before applying Explanation to Section 73.- The Tribunal cited various precedents to support the view that both delivery-based and non-delivery-based transactions should be treated as one composite business.Judgment:- The Tribunal dismissed the revenue's appeal, holding that the share trading loss should be set off against the profits from F&O transactions, and the entire business activity should be treated as one composite business.2. Disallowance of Interest on Borrowed FundsFacts and Contentions:- The assessee debited Rs. 62,84,112 towards interest on loans in its profit and loss account.- The AO disallowed the entire interest payment, arguing that the assessee had advanced interest-free loans more than the borrowed funds.- The CIT(A) restricted the disallowance to Rs. 21,44,241, considering the availability of own funds.Tribunal's Findings:- The Tribunal upheld the CIT(A)'s decision, relying on the Bombay High Court's ruling in the case of Reliance Utilities and Power Ltd, which states that if an assessee has both own and borrowed funds, it can be presumed that the advances for non-business purposes have been made out of own funds.- The Tribunal emphasized that there is no compulsion to charge interest on loans and that the relevant consideration is whether the borrowed capital was used for business purposes.Judgment:- The Tribunal found no infirmity in the CIT(A)'s order and dismissed the revenue's appeal, thereby allowing the partial relief to the assessee.3. Disallowance under Section 14AFacts and Contentions:- The assessee earned dividend income of Rs. 26,002, which is exempt.- The AO applied Section 14A read with Rule 8D and disallowed Rs. 5,80,018.- The CIT(A) held that the interest already disallowed under Section 36(1)(iii) should not be considered again for disallowance under Section 14A to avoid double addition.Tribunal's Findings:- The Tribunal agreed with the CIT(A) that considering the same interest for disallowance under both sections would result in double addition.Judgment:- The Tribunal upheld the CIT(A)'s order and dismissed the revenue's appeal, thereby granting relief to the assessee.ConclusionThe Tribunal dismissed the revenue's appeal on all grounds, thereby allowing the assessee to set off the share trading loss against profits from derivative transactions, restricting the disallowance of interest on borrowed funds, and preventing double addition under Section 14A.