C I T CENTRAL JAIPUR vs. PRAKASH CHAND JAIN

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ITA/16/2014HC RajasthanRJHC02020096201318 September 20178 pages
AI SummaryDismissed

What did the High Court hold?

The Tribunal held that the assessee's jobbing/arbitrage transactions were not speculative transactions and were covered by clause (c) of the proviso to Section 43(5) of the Income Tax Act, 1961. The Tribunal reasoned that both the AO and CIT(A) had failed to understand clause (c) correctly. While the AO admitted the transactions were jobbing in nature, they were disallowed due to lack of delivery. The Tribunal clarified that clause (c) specifically applies to contracts entered into by a member of a stock exchange in the course of jobbing or arbitrage to guard against loss in the ordinary course of business. The Tribunal found that the transactions were conducted through MCX, an organized stock exchange, and that the profit or loss was settled by the exchange. The Tribunal also noted that the AO himself admitted the nature of the transaction as jobbing. The Tribunal disagreed with the CIT(A)'s view that such transactions could only qualify under clause (c) under "forceful circumstances." Relying on various case laws, the Tribunal concluded that the assessee's case falls under clause (c), and the losses incurred should be treated as business losses eligible for set-off against other business income. The Tribunal directed the AO to allow the assessee's claim for both years. The High Court upheld the Tribunal's decision.

What were the facts?

The Revenue, Commissioner of Income Tax-Central, Jaipur, appealed against an order of the Income Tax Appellate Tribunal (ITAT) which partly allowed the assessee's appeal. The ITAT had modified the orders of the Commissioner of Income Tax (Appeals) and the Assessing Officer (AO). The core of the dispute revolves around whether jobbing/arbitrage transactions entered into by the assessee, Shri Prakash Chand Jain, were speculative transactions under Section 43(5) of the Income Tax Act, 1961. The assessee claimed losses from these transactions as business losses, which the AO and CIT(A) had disallowed, treating them as speculative. The ITAT, however, held that these transactions qualified for an exception under proviso (c) to Section 43(5). The amount in dispute is Rs. 68,25,182/-.

What were the issues?

1. Whether the Tribunal was justified in reversing the findings of the Assessing Officer and CIT(A) and deleting the addition of Rs. 68,25,182/- by holding that the jobbing/arbitrage transactions of the assessee are not speculative transactions, and that proviso (c) to Section 43(5) of the Income Tax Act is applicable, despite the assessee failing to meet the mandatory conditions of the said proviso? (Mixed question of law and fact, concerning Section 43(5) of the Income Tax Act, 1961). Assessee's Contention (as understood from the judgment): The assessee contended that their jobbing/arbitrage transactions, conducted through MCX (an organized stock exchange), fall under clause (c) of the proviso to Section 43(5). They argued that these transactions are in the nature of jobbing and are entered into to guard against future losses in the ordinary course of business as a member of the stock exchange. They relied on various case laws, including Commissioner of Income Tax vs. Ram Kishan Gupta, Commissioner of Income Tax vs. Sharwan Kumar Agarwal, and Commissioner of Income Tax, Bangalore vs. First Securities (P) Ltd. Revenue's Contention: The Revenue argued that the Tribunal erred in allowing the assessee's appeal. They contended that the assessee failed to meet the mandatory conditions provided in proviso (c) to Section 43(5), and that the transactions should be considered speculative under the main clause of Section 43(5).

Which sections of the Income-tax Act were involved?

Section 43(5),Section 73

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances
HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 16 / 2014 Commissioner of Income Tax-Central, New Central Revenue Building, Statue Circle, Jaipur(Raj) ----Appellant Versus Shri Prakash Chand Jain, 305, Jaipur Tower, 3rd Floor, M.I. Road, Jaipur ----Respondent _____________________________________________________ For Appellant(s) : Mr. Anil Mehta with Mr. Sameer Sharma For Respondent(s) : Mr. Sanjay Jhanwar with Ms. Archana _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYAS

Order 18/09/2017

1.

By way of this appeal, the appellant has assailed the judgment and order of the Tribunal whereby the Tribunal has partly allowed the appeal of the assessee modifying the order of CIT(A) as well as AO.

2.

This Court while admitting the matter framed the following substantial question of law:- “Whether the Tribunal was justified in reversing the findings given by the Assessing Officer as well as CIT(A), thereby deleting the addition of Rs. 68,25,182/- by holding that the transactions of jobbing/arbitrage entered into by the assessee are not speculative transaction and proviso © of Section 43(5) of the Act is applicable in the case of the assessee, despite the assessee failing to meet the mandatory conditions provided in the (2 of 8) [ITA-16/2014] said proviso?”

3.

Counsel for the appellant submitted that the Tribunal has seriously committed an error in allowing the appeal of the assessee inasmuch as Section 43(5) of the Income Tax Act reads as under:- “Speculative transaction means a transaction in which a contract for the purchase or sale of any commodity including stocks and share is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips.”

4.

He has contended that it is not in regular course of business the provision will not apply in the case where contract is entered between a member of stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of business. In that view of the matter, he contended that the Tribunal has seriously committed an error.

5.

Counsel for the respondent has taken us to para 11 of the Tribunal which reads as under:- “11. After going through the written submissions and the orders of the AO as well as of ld. CIT(A) and after taking into consideration the submissions of ld. D/R, we find that assessee deserves to succeed on this ground. Clause © of section 43(5) has been reproduced somewhere above in this order while discussing the facts as well as while section 43(5) it has been provided that speculation transaction means a transaction in which a contract for purpose or sale of any commodity including stock and shares is periodically or ultimately settled otherwise then by the actual delivery or transfer of commodity or scrip. Thereafter under clause (a), (b) and (c) the exceptional clause is provided. Under clause

(3 of 8) [ITA-16/2014] (c) it has been provided that a contract entered into by a member of a forward market or stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member. In our considered view, both the lower authorities i.e. AO and ld. CIT(A) could not understand the clause (c) in right perspective. The AO says the assessee could not prove the transaction as there is no delivery. However, at various points of time the AO accepts the assessee’s transaction as jobbing in nature but they are not done during the regular course of business. Clause (c) specifically provides that if any member of a stock exchange entered into transaction either of loss or profit that will be treated as business transaction. All these transactions are transacted through MCX which is an organized stock exchange. If a member wants to enter into transaction of a future date then the transaction has to be done through stock exchange and if the same members wants to settle those transactions by selling or purchasing then again transaction has to be transacted through stock exchange which has been done in this case. A sample copy dated 5.3.2008 is placed on record. By this sample copy it is seen that the assessee member gave an order for trading to buy gold of future date i.e. 5th April, 2008. For the sake of clarification, this transaction was ordered on 5.3.2008. Thereafter assessee thought proper to settle this transaction, again after few hours the assessee gave order to the stock exchange to sell the same for a future date. Both these transactions are done by stock exchange and whatever the profit or loss is there that has been settled by the stock exchange in account of the assessee member. No doubt remains that assessee had done its transaction on regular basis which cannot be termed that they are not regular course of business as provided in clause (c) of section 43(5). The ld. CIT(A) also accepted that transaction has been done but in his view this transaction either falls under the main clause of section 43(5) or clause (a). Section 43(5) is about speculative transaction. Therefore, ld. CIT(A) has treated this transaction as speculative in nature and in clause (a) a contract in respect of raw material or merchandise entered into by a person in the course of his manufacturing or merchandising business to guard against loss through future price fluctuation in respect of his contract for (4 of 8) [ITA-16/2014] actual delivery of goods manufactured by him or merchandise sold by him. This clause cannot be applied on the assessee as assessee is not doing the business of manufacturing or merchandising business but doing the transaction for himself of future date through stock exchange and this falls under clause (c) where it is clearly mentioned that a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of business as such member. The AO himself admitted that the nature of transaction entered into by the assessee is in nature of jobbing. However, as delivery was not given, therefore, he treated this transaction as speculative in nature. It has been also mentioned that no contract was filed in written. In our considered opinion this observations of the AO are without any basis because the assessee is a member of stock exchange called MCX and all the transactions are done by him as jobbing transaction which has been admitted by the AO also. Therefore, there is no question of any delivery or question of any written contract. These are regular transactions and as per clause (c) this transaction has to be treated as done in the regular course of business. AO has also mentioned somewhere in his order that case of the assessee may fall under clause (d) of section 43(5) deals with derivative transaction, therefore, the assessee’s case does not fall under clause (d) of section 43(5) of the Act.

11.

1 The Ld. CIT (A) somewhere in his order has observed that the actual user of any commodity enter into jobbing transaction under forceful circumstances, then only those transactions shall be qualified for clause (c). We are not understandable that how forcefully transactions can be identified as transactions of jobbing. Undisputedly, the transactions by assessee are of jobbing transactions for the safeguard of future loss and, therefore, it clearly falls under clause (c) of section 43(5). Various case laws relied upon by Ld. A/R before the Assessing Officer as well as before Ld. CIT (A) and now here before the Tribunal support the case of the assessee. The ratio of these cases have been discussed in the written submissions filed on behalf of the assessee which are reproduced somewhere above in this order, therefore, we are not repeating ratio of those case laws once again. The contention of Ld. D/R that decision of (5 of 8) [ITA-16/2014] Hon'ble Allahabad High Court is not in detail. Whether the order of Hon'ble Allahabad High Court is detailed or not but it deals with the clause (c) of section 43(5) and it has been held that if the transaction entered into by assessee through stock exchange are of jobbing nature then they fall under clause (c). Similar view has been expressed in case of Komal Export, 19 SOT 602 (Del) and also Bangalore Bench of the Tribunal in case of M/s. First Securities Pvt. Ltd., (2009) TIOL 443 and in case of LDK Shares and Securities Pvt. Ltd. These cases have been discussed in the written submissions. Therefore, we are not repeating again. Regarding the decision in case of Shree Capital Services Ltd. in ITA No. 1294/Kol/2008 relied upon by Assessing Officer, it is seen that this decision is in fact falls under clause (d) and not clause (c). Therefore, the decision of Kolkata Bench in case of Shree Capital Services Pvt. Ltd. (supra) is not applicable in the facts of the present case. In view of these facts and circumstances and in view of various case laws , we are of the considered view that case of assessee falls under clause (c) of section 43(5) and, therefore, the loss incurred by assessee has to be treated as business loss eligible for set off against other business income of the year. Accordingly we direct the Assessing Officer to allow the claim of the assessee for both the years.”

6.

He has relied upon the decision in case of Commissioner of Income Tax vs. Ram Kishan Gupta [2014] 361 ITR 387 (Allahabad) wherein it has been held as under:- “27. The Tribunal having returned a finding that the details of each and every transaction were disclosed by the assessee which were part of the paper book. No discrepancy in any of the transactions can be pointed out by the Assessing Officer nor the bona fide of the transactions were doubted, the transaction thus carried out were part of the "jobbing" within the meaning of proviso (c) to section 43(5). 28.We are thus of the view that the order of the Tribunal allowing the appeal of the assessee is to be upheld although confined to the ground that the losses suffered by the assessee cannot be termed to be speculative loss by virtue of proviso (c) to section 43(5). In view of the foregoing discussions, all the questions are answered in (6 of 8) [ITA-16/2014] favour of the assessee and against the Revenue.

The appeal is dismissed.

6.1.

He has also relied upon the decision in case of Commissioner of Income Tax vs. Sharwan Kumar Agarwal [2001] 249 ITR 233 (All) wherein it has been held as under:- “2. The assessee is a share broker and filed his return of income on December 13, 1994. The assessment was completed under Section 143(3) of the Income Tax Act, 1961. During the course of assessment proceedings, the Assessing Officer had found that the assessee had at times settled the share transactions by corresponding deliveries and at times settled the contract without effecting the delivery. On an examination of invoice bills, the Assessing Officer found that the assessee had earned a profit of Rs. 32,80,949 and suffered a loss of Rs. 1,10,14,010, thereby incurring a net loss of Rs. 77,33,061. It was held that this was speculative transaction within the meaning of Sub-section (5) of Section 43 of the Income Tax Act. Invoking the provisions of Section 73 of the Income Tax Act, the Assessing Officer held that the speculative loss of Rs. 77,33,061 could not be allowed to be set off against the profit of general business of the assessee. The order was affirmed by the Commissioner of Income Tax (A)-1, Kanpur. The Income Tax Appellate Tribunal in appeal held that the assessee was entitled to the exception covered by Clause (c) of the proviso to Section 43(5) of the Income Tax Act, which reads as under : "a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member ; shall not be deemed to be a speculative transaction ;"

6.

The Tribunal found dial the assessee was entitled to the exception covered by the proviso, Clause (c) to Sub-section (5) of Section 43 of the Income Tax Act. The onus of proof was on the Department to establish that such exception was not applicable. It has placed reliance upon the decision of the Supreme Court in CIT v. Ramakrishna Deo

(7 of 8) [ITA-16/2014] MANU/SC/0059/1958MANU/SC/0059/1958 : [1959]35ITR312(SC) . It further found that no material was collected at the appellate stage to show that the condition was fulfilled. Learned counsel for the applicant has not shown that there was any material to show that the assessee was not entitled to the exception, referred to above. It may also be noted that the applicant has not sought any question to be referred in regard to proviso, Clause (c) to Sub-section (5) of Section 43 of the Income Tax Act.”

6.2.

He has relied upon another decision in case of Commissioner of Income Tax, Bangalore vs. First Securities (P) Ltd. [2015] 370 ITR 72 (Karnataka) wherein it has been held as under:- “Therefore, it has no application to a contract entered into by a member of the NSE or Bangalore Stock Exchange, whose business is in trading of shares on behalf of his clients, which is known as jobbing or arbitrage. Any loss which may arise in the course of such business, shall not be deemed to be a speculative transaction. If the nature of the transaction by the assessee is not a speculative transaction at all, then, the Explanation to section 73 of the Act has no application. The loss sustained by the assessee is a business loss which can be set off against the income from the other sources. Therefore, the prohibition under section 73 of the Act is attracted only to set off the loss in a speculative business against the profit from other business, because loss from speculation business should be set off only from a profit of speculation business. Therefore, the Tribunal was justified in setting aside the order passed by the authorities and allowing the claim of the assessee. The substantial question of law is answered in favour of the assessee and against the Revenue. We do not see any merit in these two appeals. Accordingly, the appeals are dismissed.”

7.

We have heard counsel for both the sides.

8.

Taking into account, the MCX is only for the purpose of government and it is doing only job work therefore, there is no (8 of 8) [ITA-16/2014] delivery. Even the Tribunal has admitted the transaction being of jobbing nature. In that view of the matter, the Tribunal has rightly invoked the provision of Section 43(5) and Clause (c) in holding that transactions are not speculative transaction.

9.

Hence, the issue is answered in favour of the assessee against the department.

10.

The appeal stands dismissed. (VIJAY KUMAR VYAS),J. (K.S. JHAVERI),J. A.Sharma/27

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