M/S. Ashok Investment , Mumbai vs Assessee

ITA No.2166/Mum/2011 ( Assessment Year :2006-07) M/s Ashok Investment, 112, Vs. ITO, W ard-19(2)(1), Arun Bazar, Station Road, Mumbai Santacruz (West), Mumbai-54 PAN/GIR No. : AAGFA 8364 B ( Appellant) .. ( Respondent) AND ITA No.1684/Mum/2011 ( Assessment Year :2006-07) ITO, W ard-19(2)(1), Vs. M/s Ashok Investment, 112, Mumbai Arun Bazar, Station Road, Santacruz (West), Mumbai-54 PAN/GIR No. : AAGFA 8364 B ( Appellant) .. ( Respondent) .

/Assessee by : Shri V.P.Kothari /Revenue by : Shri Sachidanand Dubey

Date of Hearing : 30th December,2014 Date of Pronouncement : 21st January, 2015

ORDER

PER R.C.SHARMA (A.M.) :

These are the cross appeals filed by the assessee and Revenue

against the order of CIT(A), for the assessment year 2006-07, in the

matter of order passed under Section 143(3) of the I.T. Act.

2 ITA Nos.2166&1684/2011

2. The assessee in its appeal (i.e. ITA No.2166/Mum/2011) has taken

following grounds :-

"1. The learned Commissioner of Income Tax (Appeals) has erred in law and on facts in confirming the disallowance of the entire business expenses of Rs.1,93,045/ - u/ s 14A r.w. Rule 8D of the Income Tax Act,1961 without properly considering the fact that the appellant is having substantial Business Income of Rs.78,48,948/ - as compared to the tax free dividend income of Rs.8,95,949/-.

2. The learned Commissioner of Income Tax (Appeals) has erred in law and on facts in confirming the interest income of Rs.22,55 ,865/ - as Income from Other Sources instead of Business Income as claimed by the appellant in view of the facts that the appellant is carrying on finance business as per Partnership Deed.

3. The learned Commissioner of Income Tax (Appeals) has erred in law and on facts in confirming the re-computations of remuneration to partners and restricting the same to Rs.12,91,855/- instead of Rs.21,96,072/- as claimed by the appellant which has already been declared as income of the partners in their personal return and have paid tax @ 30% on the same."

Whereas the Revenue in its appeal (i.e ITA No.1684/Mum/2011) has

taken following grounds :-

"1. Whether on the facts and in the circumstances of the case and in law, the learned CIT(A) was right in holding that the loss suffered by the assessee on account of the future and options transactions has to be considered as business loss and not be considered as speculative loss.

2) The appellant prays that the order of the CIT (A) on the above ground be set aside and that of the AO be restored."

3. Rival contentions have been heard and record perused. Facts in

brief are that assessee is engaged in the business of investment and

trading in shares. During the course of assessment, the AO disallowed

business expenses of Rs.1,93,052/- u/s.14A r.w.r.8D.

4. By the impugned order, the CIT(A) confirmed the disallowance. 3

ITA Nos.2166&1684/2011

5. It was contended by ld. AR that expense debited to profit and loss

a/c of Rs. 193052/- does not have direct nexus they are general

expenditure for running of business also assessee has not incurred any

interest expenditure. The assessee also relies on judgment of M/s. Vidyut

Investment Limited Vs. ITO, (2006) 10 SOT 284 Delhi ITAT, where in it

was held that where the shares were purchased merely for trading in the

same and earning of dividend income was only incidental, no part of

interest paid on investment or the depository/ custodial charges could be

disallowed by invoking section 14A- The AO cannot merely allocate the

expenses in relation to trading results by proportionately disallowing the

same. The assessee further relies on judgement of Hon'ble Bombay High

court in the case of CIT Vs. Reliance Industries Ltd.[2011] 39 ITR 632

(Bom). On the other hand, ld. DR relied on the orders of the lower

authorities.

6. We have considered rival contentions and found that during the

year assessee has received dividend income of Rs.8,95,949/-, interest

income of Rs.22,55,865/- and other income of Rs.4,352/-. In the profit and

loss account, assessee has claimed following expenses :-

Sl.No. Particulars Amount Nature 1. Salary & Wages 18,000.00 Directly related to business 2. Profession Fees 49,025.00 Statutory compliance & Directly related to business 3. Printing & Stationery 735.00 Directly related to business 4. Telephone Expenses 16,624.84 Directly related to business 5. Bank Charges 220.00 Directly related to business 6. Repairs & Maintenance 14,439.00 Directly related to business 7. Conveyance Expenses 4,451.00 Directly related to business 8. Account Writing Expenses 18,000.00 Directly related to business 9. Audit Fees 67,344.00 Directly related to business 10. Sundry Expenses 3,451.00 Directly related to business 11. Depreciation 756.00 Directly related to business 1,93,045.84 4 ITA Nos.2166&1684/2011

By applying rule 8D, the AO had disallowed the entire business

expenditure on the plea that same was incurred for the earning of exempt

income, ignoring the fact that assessee was having taxable business

income of Rs.78,48,948/-, as compared to the tax free dividend of

Rs.8,95,949/-. The relevant assessment year is 2006-07, wherein rule 8D

is not applicable but at the very same time, reasonable disallowance is

warranted as per decision of the Hon'ble jurisdictional High Court in the

case of Godrej & Boyce Mfg. Co. Ltd., 328 ITR 81. Considering the

amount of expenditure incurred for earning the total income main part of

which was taxable i.e. Rs.78.48 lakhs as against exempt income of

Rs.8.95 lakhs, we deem it appropriate to restrict the disallowance to the

extent of Rs.20,000/-. Accordingly, the AO is directed to restrict the

disallowance u/s.14A to Rs.20,000/-.

7. The next grievance of the assessee relates to taxing the business

income earned in the form of interest as income from other sources. We

have considered rival contentions and found that in addition to the share

business assessee was also carrying on business of finance as per the

clause 4 of partnership deed, wherein assessee has earned interest

income of Rs.22,55,865/-. However, the AO has considered it as income

from other sources on the plea that interest is only incidental to the main

business of share trading without considering the objects clause/nature of

business as per partnership deed. There is no dispute to the fact that the

main purpose/object of formation of partnership business was trading and

investment in shares and securities and finance and brokerage business,

as per clause 4 of the partnership deed filed before the AO. Ld. AR also 5 ITA Nos.2166&1684/2011

relied on the judicial pronouncements of ITAT Bangalore Bench in the

case of Jindal Vijayanagar Steel ltd., 87 ITD 630(Ban). As per our

considered view, if the assessee is engaged in the business of financing

in addition to the business of trading in shares, the interest earned on

loans and advances are liable to tax as business income. However, where

the assessee is having interest income out of the surplus fund deployed

with bank or party, the same is liable to be taxed as income from other

sources. It is not in dispute that assessee has substantially earned

interest income out of the financing business undertaken by it.

Accordingly, we do not find any merit in the action of the lower authorities

for treating the income earned in its financing business as income from

other sources.

8. The assessee is also aggrieved for reducing partners remuneration

by excluding the interest income from income by treating the same as

income from other sources in place of business income. We have

considered rival contentions. In view of our finding given in para 7

hereinabove, we direct the AO to treat the interest income as business

income and to recompute assessee's claim of partners remuneration

accordingly.

9. The revenue is aggrieved by action of CIT(A) for holding that loss

suffered by the assessee on account of future and options transactions

has to be considered as business loss and not be considered as

speculation loss. We have considered rival contentions and found that the

AO in the assessment order observed as under :-

6

ITA Nos.2166&1684/2011

"It is seen from the computation of income that assessee has set off of carried forward loss for A.Y.2003-04 at Rs.18,36,430/- and of A.Y.2005-06 at Rs.20,96,497/- and consider as unabsorbed business loss. In this regard the assessee was asked to explain why the carry forward losses have been set off as the same are not allowable. The assessee's representative vide para 1 of letter dated 14.11.08 has explained that 'As regards the set off of carried forward losses, you have stated that the same are not allowable in view of its nature of speculation loss. In this connection, I would like to state that as per the amended section 43(5)(d) of the I. T.Act 1961 the future & Option transactions have been deleted from the definition of speculative business transaction and hence the future & option trading loss cannot be considered as speculative loss but, it is a normal business loss. Therefore, it is allowable set off against gross total income of the current assessment year". The above explanation of the assessee is not accepted as from A. Y. 2006-07, section 43(5) has been amended by inserting the clause D, clarify that F&O trading is not in the nature of speculation. The auditor of the assessee has also reported in note to account 3(1/1) that firm is carrying on business of share trading including F&O treating and filing return of income declaring F&O trading under the head business income. In view of this the earlier year losses are treated as speculation and not allowed to set off against the current years income under the head business income."

10. By the impugned order, the CIT(A) allowed assessee's claim after

having the following observations :-

"6.4 I have carefully gone through the assessment order, the submissions made on behalf of the appellant and the facts of the case. The learned AR of the appellant has drawn my attention to the fact that in appellant's own case, the Hon. ITAT, 'A" Bench, Mumbai for A.Y. 2003-04 vide their order No. ITA NO.3085Mum/06 dated 30.01.2009 has held that the Future & Option trading losses are to be treated as business loss only and not as speculative loss. A copy of the aforesaid order has been placed on record. In view of the order of the Hon'ble ITAT in appellant's own case, the AO is directed to take necessary action with regard to the setting off of carry forward loss of A.Y. 2003-04 and A.Y. 2005-06. This ground of appeal is allowed for statistical purpose."

11. We have considered rival contentions and found that the CIT(A) has

restored the matter back to the file of AO with a direction to decide the

issue as per the order of the ITAT in assessee's own case for the

assessment year 2003-04 and to allow the necessary carry forward loss 7 ITA Nos.2166&1684/2011

as per law if the assessee is entitled for the same. We do not find any

infirmity in the direction so given by the CIT(A).

12. In the result, appeal filed by the assessee is allowed in part,

whereas appeal of the Revenue is dismissed.

Order pronounced in the open court on this 21st January.2015.

21st Jan,2015

Sd/- Sd/- ( ) ( ) (VIJAY PAL RAO) (R.C.SHARMA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER Mumbai; Dated 21/01/2015 /pkm, PS Copy of the Order forwarded to : 1. / The Appellant 2. / The Respondent. 3. / The CIT(A), Mumbai. 4. / CIT 5. / DR, ITAT, Mumbai

6. Guard file.

//True Copy// / BY ORDER,

(Asstt. Registrar) / ITAT, Mumbai