2022 (5) TMI 1099 - AT - Income Tax

Tribunal limits disallowance under Section 14A, upholds speculative nature of loss. Decision on May 20, 2022.

Hinduja Finance Ltd. Versus Dy. CIT, Range-7 (1) (2), Mumbai

The Tribunal partially allowed the appeal by limiting the disallowance under Section 14A to Rs. 2,52,536 as offered by the assessee. However, the ... Disallowance u/s 14A - Expenditure incurred on exempt income earned - HELD THAT:- In the light of the decision rendered by Hon’ble Jurisdictional High Court in the case of Nirved Traders (P.) Ltd. [2019 (4) TMI 1738 - BOMBAY HIGH COURT] disallowance under section 14A of the IT Act cannot be more than the exempt income earned by the Assessee during the assessment year in question. In this case, there is no dispute that the dividend i.e. the exempt income earned by the Assessee during the relevant Assessment Year, was only Rs. 1,58,998/-. Accordingly, the disallowance in this case could not have exceeded Rs. 1, 58,998/-. It is only because the Assessee voluntarily offered a disallowance to the extent of Rs. 2, 52,536/-, we confirm disallowance to the extent of Rs. 2, 52,536/-. Decided in favour of the Assessee. Loss on account of intra-day trading in the shares - Disallowance of loss treating the same as speculation loss - HELD THAT:- We are in agreement with the findings of AO and Ld. CIT (A) that the loss suffered by the appellant on account of intraday trading in the shares of Indusind Bank (Without Delivery) was speculative in nature because the transactions were settled without actual delivery of the shares. As explained by the appellant BEFORE US “In this connection, the assessee specifically relies on the exception created under the proviso to section 43(5), wherein it is provided under clause (b) that “a contract in respect of stock and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations” is not to be deemed as speculative. Discussion of section 73 is not relevant here, as first of all the nature of transaction has to be ascertained by virtue of section 43(5) and then only question of set-off/ carry forward as defined in section 73 will arise. The provisions of Section 43(5) were amended by the Finance Act, 2005. Prior to the amendment, Section 43(5) defined a 'speculative transaction' to mean a transaction in which a contract for the purchase or the sale of any commodity including stocks and shares is settled otherwise than by the actual delivery or transfer of the commodity or scrip. The impact of the amendment by the Finance Act, 2005 was that an eligible transaction on a recognised stock exchange in respect of trading in derivatives was deemed not to be a speculative transaction. With effect from 1 April 2006, trading in derivatives was by a deeming fiction not regarded as a speculative transaction when it was carried out on a recognized stock exchange. It clearly indicates that the transaction mentioned in section 43(5) (supra) and delivery based trading alone can’t be treated as speculative transaction. Where as in the case of assessee neither he entered into the transaction in the nature of F&O nor delivery based trading, rather he settled his transaction without delivery by placing the order of purchase and sales. The consequence is that in A.Y. 2010-2011, the loss which occurred to the assessee as a result of its activity of intraday trading in shares, without delivery (a loss arising from the business of speculation) was not eligible of being set off against the profits which it had earned against the business of futures and options/trading in shares with delivery, since the latter did not constitute profits and gains of a speculative business. [Re: Snowtex Investment Ltd. vs. PCIT [2019 (5) TMI 1165 - SUPREME COURT]. - Decided against assessee. Issues Involved:1. Disallowance under Section 14A of the Income Tax Act.2. Treatment of loss as speculative in nature.Issue-wise Detailed Analysis:1. Disallowance under Section 14A of the Income Tax Act:The assessee contested the disallowance made under Section 14A, which was confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) upheld the disallowance of Rs. 7,06,985/- as against Rs. 2,52,536/- computed by the appellant, citing the Supreme Court decision in Maxopp Investment Ltd Vs CIT [2018] 91 taxmann.com 154 (SC). The CIT(A) reasoned that the disallowance in respect of stock in trade is covered against the appellant by this decision.During the appellate proceedings, the appellant argued that the only exempt income earned was a dividend on mutual funds amounting to Rs. 1,58,998/-. The appellant cited several judicial precedents, including the Bombay High Court decision in the case of Ballarpur Industries Limited and Nirved Traders Pvt. Ltd., asserting that the disallowance under Section 14A cannot exceed the exempt income earned.The Tribunal agreed with the appellant's position, stating that the disallowance under Section 14A read with Rule 8D cannot exceed the exempt income earned, which was Rs. 1,58,998/-. The Tribunal directed the Assessing Officer (AO) to delete the additional disallowance of Rs. 1,88,562/- and accept the disallowance offered by the assessee at Rs. 2,52,536/-. Thus, this ground of appeal was decided in favor of the assessee.2. Treatment of Loss as Speculative in Nature:The second issue pertained to the treatment of a loss of Rs. 33,48,000/- incurred by the assessee on account of intraday trading in the shares of Indusind Bank. The CIT(A) upheld the AO's decision to treat this loss as speculative, as the transactions were settled without actual delivery of shares. The CIT(A) noted that the transactions did not fall under the exceptions provided by the proviso (b) to subsection (5) of Section 43 of the Income Tax Act, which pertains to contracts entered into by a dealer or investor to guard against loss through price fluctuations.The AO had observed that the assessee engaged in regular share trading and maintained separate portfolios for business income and capital gains. The AO noted that the intraday transactions in Indusind Bank shares were speculative as they were settled without delivery, unlike the other transactions which were treated as business income.The Tribunal agreed with the findings of the AO and CIT(A), emphasizing that the transactions were speculative in nature as they were settled without actual delivery. The Tribunal referred to Section 43(5) of the Income Tax Act, which defines speculative transactions and noted that the assessee's transactions did not fall under the exceptions provided in the proviso to Section 43(5). The Tribunal also cited the Supreme Court decision in Snowtex Investment Ltd. vs. PCIT [2019] 414 ITR 227 (SC), which held that losses from speculative transactions cannot be set off against non-speculative business income.Consequently, the Tribunal dismissed this ground of appeal and confirmed the order of the CIT(A), treating the loss as speculative in nature.Conclusion:The appeal was partly allowed. The Tribunal directed the AO to limit the disallowance under Section 14A to Rs. 2,52,536/- as offered by the assessee, while the treatment of the loss as speculative was upheld. The order was pronounced in the open court on 20th May 2022.