2020 (8) TMI 191 - AT - Income Tax

Tribunal directs fresh verification of speculation loss issue, recompute section 14A disallowance, COVID-19 procedural adjustments

The Tribunal set aside the issue of deemed speculation loss to the Assessing Officer for fresh verification and recomputation. It directed the AO to ... Deemed speculative loss under the Explanation to section 73 - principal business test for trading in shares - application of section 14A and Rule 8D for expenditure relating to exempt income - inclusion of shares held as stock-in-trade for computation of average value of investments - recording of satisfaction under section 14A(2) - apportionment limited to investments yielding exempt incomeDeemed speculative loss under the Explanation to section 73 - principal business test for trading in shares - Whether loss from purchase and sale of shares is to be treated as speculative loss under the Explanation to section 73 or as normal business loss where the assessee's principal business is trading in shares. - HELD THAT: - The Tribunal examined the Explanation to section 73 and the amendment by Finance Act, 2014, and noted the binding pronouncement of the Supreme Court that the 2014 amendment is prospective from 01/04/2015. The authorities below recorded conflicting factual findings: the Assessing Officer found that the assessee incurred losses from share trading, whereas the CIT(A) found profit from share trading (computed without certain direct and indirect expenses). Because the legal consequence under the Explanation to section 73 (i.e., classification as deemed speculative loss) depends on the factual determination whether the assessee earned profit or incurred loss from share trading and whether the principal-business test is satisfied, the Tribunal held that the matter requires fresh verification. The Tribunal therefore applied the legal principle that if the assessee has profit from share trading then the Explanation does not apply, but if it has loss from share trading the Explanation will render that loss a deemed speculative loss and restrict set off; given contradictory findings and incomplete consideration of expenditures, the factual matrix must be re-examined by the AO. [Paras 11]Set aside to the file of the Assessing Officer for fresh examination and recomputation of profit or loss from share trading and for determining applicability of the Explanation to section 73 in accordance with law.Application of section 14A and Rule 8D for expenditure relating to exempt income - inclusion of shares held as stock-in-trade for computation of average value of investments - recording of satisfaction under section 14A(2) - apportionment limited to investments yielding exempt income - Whether disallowance under section 14A read with Rule 8D is sustainable, including (a) whether the AO recorded requisite satisfaction under section 14A(2), (b) whether shares held as stock-in-trade are includible in average value of investments, and (c) the proper scope of investments to be considered for disallowance. - HELD THAT: - The Tribunal found that the AO had in fact recorded satisfaction under section 14A(2) having regard to the amount of exempt income and the assessee's suo moto computation and therefore was entitled to apply Rule 8D. Reliance was placed on the Supreme Court position that once exempt dividend is earned the theory of apportionment under section 14A is triggered, and accordingly shares held as stock in trade must be included in computing average value of investments for Rule 8D. The Tribunal also examined the assessee's contention that mixed funds presumed to be own funds (and therefore no disallowance) was not sustainable on the facts, noting that the assessee's own capital was lower than investments (if stock in trade were included) and that substantial interest expenditure had been incurred. The Tribunal clarified the settled principle that only those investments which yielded exempt income for the year should be taken for computing the average value for the purpose of the 0.5% disallowance under Rule 8D(2)(iii). In view of these principles the Tribunal directed recomputation by the AO in accordance with the directions given. [Paras 15, 16]AO's invocation of Rule 8D sustained; shares held as stock in trade are to be included for computing average value; AO to restrict consideration to investments yielding exempt income, net off interest income as directed, and recompute disallowance under section 14A/Rule 8D afresh.Final Conclusion: The Tribunal allowed the appeal and cross objection for statistical purposes by setting aside both disputed issues to the file of the Assessing Officer: (i) the question of treatment of loss/profit from share trading under the Explanation to section 73 is remitted for fresh factual and consequential legal determination; and (ii) disallowance under section 14A/Rule 8D is upheld in principle with directions on inclusion of stock in trade and limiting investments to those yielding exempt income, and the AO is directed to recompute the disallowance accordingly. Issues Involved:1. Deletion of additions made by the Assessing Officer (AO) towards deemed speculation loss by invoking Explanation to section 73 of the Income Tax Act, 1961.2. Disallowance of expenditure incurred in relation to exempt income under section 14A of the Income Tax Act, 1961.Issue-wise Detailed Analysis:1. Deletion of Additions Made by AO Towards Deemed Speculation Loss by Invoking Explanation to Section 73 of the Income Tax Act, 1961:The revenue appealed against the order of the Commissioner of Income Tax (Appeals) [CIT(A)], which deleted the additions made by the AO towards deemed speculation loss of Rs. 1,85,25,973/- by invoking Explanation to section 73 of the Income Tax Act, 1961. The AO had categorized the loss incurred by the assessee from trading in shares as speculative loss, which could not be set off against income from derivative trading. The AO's decision was based on the explanation that any company engaged in the purchase and sale of shares is deemed to be carrying on speculative business. However, the CIT(A) relied on the decision of ITAT, Mumbai, in Fiduciary Shares & Stock Pvt. Ltd., which held that the explanation to section 73 inserted by the Finance Act, 2014, is clarificatory and operates retrospectively from 01/04/1977. Therefore, the CIT(A) concluded that the loss incurred from trading in shares should not be treated as speculative loss.The Tribunal, however, noted that the Supreme Court in Snowtex Investments Ltd. vs. PCIT held that the amendment to Explanation to section 73 is prospective and effective from 01/04/2015. The Tribunal found that the findings of the CIT(A) were contrary to the Supreme Court's settled position. The Tribunal also observed discrepancies between the AO's and CIT(A)'s findings regarding whether the assessee incurred losses or profits from share trading activity. Consequently, the Tribunal set aside the issue to the AO for fresh verification and recomputation of profit after considering relevant expenditure related to share trading activity.2. Disallowance of Expenditure Incurred in Relation to Exempt Income Under Section 14A of the Income Tax Act, 1961:The assessee challenged the disallowance of Rs. 82,94,849/- made by the AO under section 14A read with Rule 8D of the Income Tax Rules, 1962. The assessee argued that the provisions of section 14A were not applicable, and the AO did not record any satisfaction under sub-section (2) of section 14A regarding the correctness of the voluntary disallowance made by the assessee. The CIT(A) rejected the assessee's contention that shares held as stock-in-trade should not be included in the computation of average value of investments, relying on the Supreme Court's decision in Maxopp Investments Ltd. vs. CIT.The Tribunal upheld the CIT(A)'s view that shares held as stock-in-trade should be included in the computation of average value of investments for the purpose of disallowance under section 14A. The Tribunal also noted that the assessee's own funds were not sufficient to cover the investments in shares, including shares held as stock-in-trade. Therefore, the interest expenditure could not be excluded from the disallowance computation. The Tribunal directed the AO to recompute the disallowance by considering only those investments that yielded exempt income for the year and to determine the disallowance of expenditure in relation to exempt income under section 14A accordingly.Conclusion:The Tribunal set aside the issue of deemed speculation loss to the AO for fresh verification and recomputation. It also directed the AO to recompute the disallowance of expenditure under section 14A, considering only those investments that yielded exempt income for the year. The appeal filed by the revenue and the cross-objection filed by the assessee were treated as allowed for statistical purposes. The procedural aspect of the pronouncement of the order was addressed, considering the nationwide lockdown due to the COVID-19 pandemic.