Appeal allowed for assessee: Disallowance recalculated. Speculation loss set off permitted.

The appeal was allowed in favor of the assessee. The Assessing Officer's disallowance under Section 14A read with Rule 8D was recalculated to consider only the proportionate interest on the loan from India Infoline Finance Ltd. Additionally, the set off of speculation loss against income earned from trading in shares was permitted, following the decision of the Hon'ble Bombay High Court in Lokmat Newspapers P. Ltd. The order was pronounced on 04-07-2018.

---

---

Issues Involved:
1. Disallowance of expenses related to exempt income under Section 14A read with Rule 8D.
2. Non-allowance of set off of carry forward business loss from trading activity in shares treated as speculation loss.

Issue 1: Disallowance of Expenses Related to Exempt Income under Section 14A Read with Rule 8D

The first issue concerns the disallowance of expenses related to exempt income under Section 14A of the Income Tax Act, 1961, read with Rule 8D of the Income Tax Rules, 1962. The assessee had earned dividend income and long-term capital gains, claiming these as exempt under Section 10(38) of the Act. The Assessing Officer (AO) noticed that the assessee had made significant investments in equities and mutual funds and had suo moto disallowed a sum of Rs. 28,13,275/- as expenditure incurred in earning this exempt income. However, the AO found this disallowance unreasonable and computed the disallowance under Rule 8D, resulting in a total disallowance of Rs. 1,75,36,506/-. After accounting for the amount already disallowed by the assessee, the AO restricted the disallowance to Rs. 47,23,231/-. The CIT(A) upheld this disallowance.

The assessee contended that the interest expenditure of Rs. 5,64,97,902/- was for business purposes and not for making investments in equities and mutual funds. The CIT(A) noted that the entire interest debited to the Profit & Loss account should be considered for disallowance under Rule 8D(2)(ii). The Tribunal, however, directed the AO to consider only the proportionate disallowance on the interest of Rs. 67,30,620/- related to the loan from India Infoline Finance Ltd., following the formula under Rule 8D(2)(ii). The Tribunal referenced its earlier order for AY 2009-10 and the decision of the Hon'ble Bombay High Court in CIT vs. HDFC Bank Ltd., which presumes that investments in equities and mutual funds are made from interest-free funds if such funds are available. The Tribunal directed the AO to verify the figures and restrict the disallowance accordingly.

Issue 2: Non-Allowance of Set Off of Carry Forward Business Loss from Trading Activity in Shares Treated as Speculation Loss

The second issue pertains to the non-allowance of set off of carry forward business loss from trading activity in shares, which was treated as speculation loss in the assessment proceedings of AY 2009-10. The assessee argued that this loss should be set off against the business income of the current assessment year. Alternatively, the assessee contended that the business loss from trading activity in shares treated as speculation loss should be set off against profit earned from trading in shares and securities, as such profit falls within the purview of the explanation to Section 73 of the Act.

The Tribunal noted that in the immediate preceding year, the loss incurred in share trading activity was treated as speculation loss based on the Jurisdictional High Court's decision in Prasad Agents (P) Ltd. The Tribunal agreed with the assessee's alternative submission, referencing the Hon'ble Bombay High Court's decision in CIT vs. Lokmat Newspapers P. Ltd., which allows the set off of speculation loss against profits from speculative business. The Tribunal directed the AO to verify the facts and allow the set off of the speculation loss against the income earned from trading in shares.

Conclusion

The appeal was allowed in favor of the assessee, with directions to the AO to:
1. Recompute the disallowance under Section 14A read with Rule 8D, considering only the proportionate interest on the loan from India Infoline Finance Ltd.
2. Allow the set off of speculation loss against the income earned from trading in shares, following the decision of the Hon'ble Bombay High Court in Lokmat Newspapers P. Ltd.

Order Pronounced:
The order was pronounced in the open court on 04-07-2018.

---