Raag Vihar Apartments Private Limited vs DCIT Circle 16(1)

PER MANISH AGARWAL, A.M.:

The present appeal is filed by assessee against the order dated 24.10.2025 passed by Ld. Commissioner of Income Tax (A)/ADDI/JCIT(A)-4, Mumbai [“Ld. CIT(A)”] in Appeal No. CIT(A), Delhi-6/10527/2017-18 u/s 250 of the Income Tax Act, 1961 [“the Act”] arising out of assessment order dated 18.12.2017 passed u/s 143(3) of the Act pertaining to Assessment Year 2015-16.

Brief facts of the case are that the assessee company engaged in the business of real estate and e-filed its return of income, declaring total income of INR 8,20,41,380/- on 30.09.2015. The case was selected for scrutiny under CASS and the assessment was completed in terms of order passed u/s 143(3) of the Act dated 18.12.2017 wherein total income was assessed at INR 8,64,72,720/- by making disallowance of INR 44,21,431/- as speculative loss suffered due to transaction in shares and securities and derivatives by invoking the Explanation to section 73(4) of the Act. Further, disallowance of INR 9,910/- was made u/s 14A of the Act.

Against the said order, assessee filed an appeal before Ld. CIT(A) who vide impugned order dated 24.10.2025, has dismissed the appeal of the assessee.

Aggrieved by the order of Ld.CIT(A), assessee is in appeal before the Tribunal by taking various grounds of appeal mentioned in the appeal memo.

Grounds of appeal Nos. 1 & 2 raised by the assessee are with respect to confirmation of addition of INR 44,21,431/- on account of trading of shares and derivatives by invoking the provision of Explanation to section 73(4) of the Act and further estimating the expenses on such trading activity of INR 10 Lakhs apportioned out of the total expenses claimed in the Profit & Loss Account.

Before us, ld. AR submits that the AO observed that main business of the assessee is trading in real estate and during the year under appeal, has claimed loss of INR 34,21,431/- from the trading in shares and loss on F&O activity. The AO further observed that in terms of Explanation to section 73(4) of the Act, the said loss cannot be treated as business loss to be adjusted against business income of the assessee and therefore, is not allowed to be set off and to be carried forward as a speculative loss. The AO further observed that the assessee must have incurred expenses on share trading business therefore, out of total expenses claimed at of INR 1,48,51,236/-, a sum of INR 10 Lakhs were estimated and apportioned towards the share trading activities. Thereafter, by placing reliance on the judgements of Hon’ble Delhi High Court in the case of CIT vs DLF Commercial Developers Ltd., AO has disallowed the said loss being speculative in nature. The claim of the assessee was that out of the total brokerage claimed at INR 8,24,374/- in the Profit & Loss a/c, a sum of INR 1,61,724/- relates to the brokerage paid for share trading activity. Likewise, Service Tax claimed at INR 9,81,534/- includes a sum of INR 1,61,724/- in respect of F&O segment.

As per Ld. AR, the trading in derivatives (F&O Segment) is not speculative transactions as per the provisions of section 43(5) of the Act and therefore, the same cannot be considered as part of share trading business as referred in Explanation to section 73(4) of the Act. Before going further, we first examine the provision of Explanation to section 73(4) of the Act which reads as under:-

As could be seen from the aforesaid provision, the loss incurred from the purchase and sale of shares of other company shall be for the purpose of allowing deduction, deemed as speculative business.

Here it is relevant to state that Explanation to section 73(4) of the Act refers the purchase and sale of shares and do not refer the transactions in F & O segment i.e. derivatives thus the same cannot be included as part of transaction of purchases and sales of shares of other companies. In this regard, judgement of Hon’ble Delhi High Court in the case of DLF Commercial Developers Ltd. (supra) relied by the AO. Our attention is invited to the judgement of Hon’ble Bombay High Court in the case of M/s. Souvenir Developers (I) (P.) Ltd. vs Union of India reported in [2022] 138 taxmann.com 187 (Bom.) wherein Hon’ble Mumbai High Court after considering the judgement in the case of DLF Commercial Developers Ltd. (supra) has held that Explanation to section 73(4) of the Act does not include the transaction of derivatives on recognized stock exchange as defined in section 43(5)(d) of the Act and therefore, the loss on derivates is not the speculative transaction.

After considering the entirety of the facts and by considering the material available on record and further considering the fact that Explanation to Section 73(4) does not refer Derivative transaction as part of purchases and sales of shares, therefore, the loss incurred from the derivative transactions should be excluded from the total loss disallowed by the AO. Accordingly, out of total loss of INR 34,21,431/- claimed by the assessee, a sum of INR 9,11,932/- being loss from purchase and sale of shares which is held as speculative loss and balance loss is hereby, treated as business loss. Regarding the disallowance of INR 10 Lakhs made out of various expenses holding the same as related to share trading activity, it is observed that the AO has not given any basis for making such apportioned and therefore, in our opinion, a sum of INR 1.00 Lakh would be fair and reasonable as related to share trading activity. Accordingly, as against total disallowance of INR 44,21,431/-, a sum of INR 10,11,932/- [INR 9,11,932/- + INR 1.00 Lakh] is hereby, confirmed and balance addition is deleted. Thus, Grounds of appeal Nos. 1 & 2 raised by the assessee are partly allowed.

Ground of appeal No.3 raised by the assessee on account of confirmation of addition of INR 9,910/- u/s 14A r.w. Rule 8D of the Income Tax Rules, 1962.

1Heard the parties and perused the material available on record. It was the claim of the assessee that no exempt income was earned and thus no disallowance could be made u/s 14A of the Act. From the perusal of Note 19 to Balance Sheet placed at page 55of PB, it is observed that assessee has no exempt income in the shape dividend thus no disallowance could be made u/s 14A of the Act. This view is supported by the judgement of Hon’ble Delhi High Court in the case of Cheminvest Ltd. vs. CIT reported (2015) 378 ITR 33 (Del) and CIT vs. Holcim India P. Ltd. reported in (2014) 90CCH 081-Del-HC, and the Hon'ble Supreme Court of India in the case of South Indian Bank Ltd. v. CIT in Civil Appeal No. 9607-9615 of 2011, 2963 and 3367 of 2012 wherein it is held that the amount of disallowance u/s. 14A cannot exceed the amount of exempt income. Accordingly, the disallowance of Rs. 9,910/- made u/s 14A is hereby, deleted. The Ground of appeal No. 3 raised by the assessee is thus, allowed.

In the result, appeal filed by the assessee is partly allowed.