By TIOL News Service

MUMBAI, MAY 27, 2016: THE issue before the Bench is - Whether the amendment in the Explanation to section 73 of the Act by the Finance (No. 2) Act, 2014 is curative and clarificatory in nature & operates retrospectively from 01.04.1977. YES is the answer.

Facts of the case

A) The assessee, a company engaged in consultancy and dealing in shares and debt instruments, filed its return of income for A.Y. 2009-10 declaring income. The return was processed under section 143(1) and the case was subsequently taken up for scrutiny. The assessment was completed under section 143(3) wherein the income of the assessee. AO noticed that the assessee had earned tax free dividend income and that no expenses had been allocated as having been expended for earning such exempt income. AO held that a certain percentage of the expenses claimed by the assessee company would definitely be attributable to the exempt income earned as the assessee-company had a common pool of human and financial resources which were being utilized to earn income in various forms. AO applying the provisions of Rule 8D of the I.T. Rules computed disallowance of expenses under Rule 8D(2)(ii) and under Rule 8D(iii). CIT(A) upheld the order of AO.

B) AO noticed that the assessee had incurred share trading loss and loss on sale of shares - speculation and had set off share trading loss on delivery based transactions against business income from non-speculation business in the form of brokerage and commission income. AO invoking the provisions of Explanation to section 73 disallowed the adjustment of loss on trading of shares against brokerage and commission income holding that the loss on trading of shares is speculative loss which can only be adjusted against speculative income. AO also apportioned indirect expenses incurred for earning various sources of income and allocated Rs. 21,96,147/- as indirect expenses incurred for trading in shares. AO further added the direct expenses which were incurred for trading in shares. Thus, AO disallowed the loss incurred in share trading, holding it to be speculation loss and holding that the same is not allowable to be set off against non-speculation business income. CIT(A) upheld this disallowance made by the AO.

C) AO noticed that in the year under consideration, the assessee had debited an amount on account of transaction charges paid to the Stock Exchange. The AO observing that the assessee had not deducted tax at source while making the payment of transaction charges to the Stock Exchange invoked provisions of section 40(a)(ia) of the Act and disallowed the same. CIT(A) held that the transaction charges were paid to the Stock Exchange for rendering the managerial services which constituted fees for technical services under section 194J r.w. Explanation to section 9(1)(vii) of the Act and hence the assessee was liable to deduct tax at source before crediting the transaction charges to the Stock Exchange. He upheld the disallowance.

Having heard the parties, the ITAT held that,

A) ++ Jurisdictional Court in the case of India Advantage Securities Ltd. in ITA No. 1131 of 2013 dated 17.03.2015 =2015-TIOL-1202-HC-MUM-IT has held that disallowance, if any, to be made under section 14A r.w. Rule 8D should only be made with regard to investments and not with regard to shares held as stock-in-trade. This decision of Bombay High Court has been followed by the Coordinate Bench of this Tribunal in the case of Devkant Synthetics (India) Pvt. Ltd. in ITA No. 2663 to 2665/Mum/2015 dated 28.10.2015 wherein it was held that the shares held as stock in trade should be excluded for the purpose of computing disallowance u/s 14A of the Act, since they cannot be said to be "investment" made for the purpose of earning dividend income.

++ the disallowance under section 14A r.w. Rule 8D cannot be made in respect of shares held as stock-in-trade and therefore the AO directed to delete the disallowance made under section 14A r.w. Rule 8D.

B) ++ Amendment made by Finance (No.2) Act, 2014 in the Explanation to section 73 of the Act appears to be made in order to clarify the real intention behind the insertion thereof, by removing the obvious hardship caused to various assessees whose main business is trading in shares. The amendment has removed the anomaly and brought the ambit of the Explanation to section 73 of the Act in line with the intention of the Legislature by placing the companies whose principal business is trading in shares as part of the exception to Explanation to section 73 of the Act, because such companies were not the companies for whom the Explanation was inserted.

++ the insertion of the amendment in the Explanation to section 73 of the Act by the Finance (No. 2) Act, 2014 is curative and classificatory in nature.

++ the amendment inserted in Explanation to section 73 of the Act by Finance (No. 2) Act, 2014 w.e.f. 01.04.2015 is clarificatory in nature and would therefore operate retrospectively from 01.04.1977 from which date the Explanation to section 73 was placed on the statute since this amendment to section 73 of the Act ‘.... or a company the principal business of which is the business of trading in shares .....’ brings in the assessee whose principal business is trading of shares. Therefore, the loss incurred in share trading business by such companies, i.e. like the assessee will not be treated as speculation business loss but normal business loss, and hence the same loss can be adjusted against other business income or income from any other sources of the year under consideration. AO directed to allow the assessee’s claim for setting off the loss from ‘share trading business’ against ‘other business income’ and income from any other sources during the year under consideration.

C) ++ Apex Court in the assessee of CIT vs. Kotak Securities Ltd. in Civil Appeal No. 3141 of 2016 dated 29.03.2016 held that no TDS is required to be deducted on payments of transaction charges paid by members to Stock Exchange as they are not for ‘technical services’ rendered but are in the nature of payments for facilities provided by the Stock Exchange.

++ no TDS is deductible on payment of transaction charges paid by members to Stock Exchange under section 194J of the Act, as they are not for technical services rendered but are in the nature of payments for facilities provided by the Stock Exchange and accordingly AO directed to delete the disallowance made on account of transaction charges paid to Stock Exchange.

(See 2016-TIOL-888-ITAT-MUM)