Ms. Edelweiss Capital Ltd. Vs DCIT (ITAT Mumbai)
From the record, we found that assessee was carrying out business of commodity trading on un-recognised exchange and also business of trading in shares. Assessee has claimed set off of loss arising out of trading in shares against the income arising out of trading in commodities. The AO declined set off on the plea that assessee has suffered speculative loss from trading in shares where as assessee was having non-speculative income from trading in commodities. Since, the assessee was doing trading in commodities at unrecognized exchange, the CIT(A) held that income so accrued by trading of commodities at unrecognized exchange is also speculation in nature, therefore, the speculation loss so arose out of trading in share is liable to be set off against the speculative income from trading in commodities. The CIT(A) also discussed the amendment of Section 43(5)(d) which came into force subsequently i.e. 22/05/2009 and which was to provide benefit to the assessee to treat their losses as non-speculative only when such losses were incurred while trading in recognized stock only and not otherwise. In the instant case before us, since assessee was trading at un-recognised stock exchange, therefore, income arising out of trading of commodities at such unrecognized stock exchange also amounts to speculation income, therefore, there is nothing wrong for allowing set off speculation loss against speculation income and for carry forward of unabsorbed speculative loss to be set off against the future speculation income. The AO has not disproved that the commodity trading income was not out of unrecognized commodity exchange market and as long as when the assessee earned out of unrecognized commodity exchange, the income or loss out of transaction on such unrecognized exchange will remain speculative in nature- the amendment in Sec 43(5)(d) was only to provide benefit to the assessees to treat their losses as non speculative only when such losses were incurred while trading on any recognized stock exchange and not otherwise.
In view of decision of Hon’ble Bombay High Court in the case of Bharat Ruia in Income Tax Appeal No.1539/2010 dated 18/04/2011 and Delhi High Court in case of DLF Commercials Ltd., in ITA 94/2013 dated 11/07/2013 the assessee has correctly set off speculation loss on shares against speculative income from trading in commodity and carried forward the unabsorbed speculative loss to the subsequent year to be set of against speculative income.
FULL TEXT OF THE ITAT JUDGMENT
These are cross appeals filed by assessee and revenue against the order of CIT(A)-Mumbai for the A.Y.2007-08 to 2010-11, in the matter of order passed u/s.143(3) / 143(3) r.w.s. 147 of the IT Act.
2. Most of the grounds are common in all the years under consideration. Ld. AR placed on record orders of jurisdictional High Court, orders of Tribunal including orders of group concerns covering the issues under consideration.
3. Common grievance of the revenue in all the years pertains to disallowance of interest u/s.36(1)(iii) of the IT Act being difference of interest on loan given to subsidiary companies, and disallowance of interest under rule 8D (2)(ii) of I.T.Act.
4. Common grievance of assessee in all the years pertains to disallowance u/s.14A r.w.R. 8D(2)(iii).
5. Rival contentions have been heard and record perused.
6. Facts in brief are that assessee is engaged in the business of advisory and transactional services, trading / investment in securities and During the course of scrutiny assessment for the A.Y.2007- 08, AO disallowed claim of deduction of interest paid to the extent of differential rate in between the borrowings made from M/s. Lehman Brothers and the interest charged on the short term leading to wholly owned subsidiary companies amounting to Rs.65,09,590/-. The A.O. has discussed this issue in detail in para 4 of the assessment order. The relevant portion of A.O.’s order is extracted herein below: –
“After analysis of Balance Sheet and fund flow, it emerges that the loan received from M/s.Lehman Brothers has been utilized for making loans to subsidiary companies. Admittedly, the rate of interest charged is lower than the rate of interest paid to M/s.Lehman Brothers. The assessee is engaged in the business of merchant banking and advisory services. The assessee has given large loans to such subsidiary companies. Therefore, it is evident that the main purpose of the loan taken from M/s.Lehman Brothers was to provide fund to subsidiary companies, which are operating in different fields, such as NBFCs, Insurance business etc. In the case of ascessee company, there was no reason other than to provide funds to its subsidiary companies for taking loan from,M/s.Lehman Brothers. Therefore, by this transaction, the assessee company has incurred loss on account of difference in rate of interest charged and rate of interest paid, Such loss cannot be treated as allowable considering that the transaction is a non-commercial transaction.
In view of the above discussion, the loss arising on account of difference between the rate of interest paid to M/s. Lehman Brothers and rate of interest charged from subsidiary companies is hereby disallowed.”
7. By the impugned order, CIT(A) deleted the disallowance after observing as under:-
“8.2 I have considered the A. O. ‘s order as well as appellant AR’s submission. It is an admitted fact that the appellant has issued 13.5% fully convertible debentures to Lehman Brothers and had advanced these funds, to its wholly owned subsidiaries on interest @ 9% p.a. It is further clear that the funds received on issuance of the 13.5% fully convertible debentures were for a period of 5 years whereas the funds advanced to subsidiary companies were repayable on call & demand. It is further clear the wholly owned subsidiaries are carrying on business activities related to Finance and Capital Markets. In the assessment orders passed u/s. 143(3), in the cases of wholly owned subsidiary companies, there is no finding recorded that the funds borrowed have not been used for business purposes. In the case of S.A. Builders Ltd. v CIT (288 ITR 1) (SC), it has been held on page 10 as under:
“However, where it Is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the appellant would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans.”
In the case of CIT v Dalmia Cement Bharat Ltd. 330 ITR 595 (Del) it has been held as under.
a We, therefore, answer the reference by ho/ding that the Tribunal was correct in holding that no portion of the interest paid by the assesses on its borrowed funds can be disallowed on the ground that a portion thereof has been diverted to subsidiary company. “
The other decisions relied by the A.R. ‘s also support the claim of the appellant that no disallowance is called for merely for the reason that the 5 year term borrowings from Lehman Brothers have been utilized for giving loans to wholly owned subsidiary companies at a lower rate of interest.
8.3 In the circumstances the disallowance of claim of deduction of interest paid to the extent of the differential rate in between the borrowings made from Lehman Brothers and the interest charged on the short term lending to wholly owned subsidiary companies of Rs. 65,09,590/- is deleted. Thus, the appellant this ground of appeal is allowed.”
8. During the course of hearing before us, the learned AR has relied on the following judicial pronouncements in support of contention that no disallowance of interest is warranted in case of advance to subsidiary at concessional rate of interest or without interest
