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Income Tax Appellate Tribunal, AHMEDABAD “A” BENCH
Before: SHRI N.K. BILLAIYA & SHRI MAHAVIR PRASAD
PER N.K. BILLAIYA, ACCOUNTANT MEMBER:
This appeal by the Assessee is preferred against the order of the Ld. CIT(A)-2, Vadodara dated 12.01.2016 pertaining to A.Y. 2012-13.
ITA No. 1007/Ahd/2016 2 . A.Y. 2012-13 2. The first ground relates to the addition of Rs. 48,56,908/- by treating share trading as speculation business loss and the second ground relates to the disallowance of Rs. 7,78,480/- on account of interest expenses.
The appellant company is engaged in the business of Leasing, Financing & Share Trading. During the year under consideration, the appellant has shown net loss of Rs. 83,571/- from business.
During the course of the scrutiny assessment proceedings, the A.O. noticed that the assessee has shown share trading loss of Rs. 48,56,908/-. The A.O. was of the firm belief that such loss is nothing but speculative loss and therefore can be set off only against speculation profit. The assessee was asked to show cause as to why loss from share trading should not be treated as speculative loss. The assessee replied as under:- In response to your notice No.BRD/ITO, Wd.2(I)(2)/PAFL/2014~l 5 dated 24th Feb. 2015, we submit here as under-
In respect of the query regarding why loss from derivative amounting to Rs. 48,56,908/- should not be treated as speculation loss,
As per section 43(5)-
"A transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by actual delivery or transfer of commodity or scrip's,"
As per the explanation stated above it can be concluded that a transaction to be categorized as speculative following ingredients are essential- a) It should be transaction of purchase/sale of commodity. Commodity would include stock and share. b) The transaction envisages delivery/transfer. c) The transaction is settled otherwise than by delivery/transfer.
The word : Derivative " has been defined in Clause (ac) of section 2 of the securities Contracts (Regulation) Act, 1956 as : "Derivatives includes - (A) A Security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for difference or any other
ITA No. 1007/Ahd/2016 3 . A.Y. 2012-13 form of security; (B) A contract which derives its value from the prices or index of prices of underlying securities"
Transactions in future carried on through the Stock Exchange were to be settled only in terms of money, by payment/receipt of price differences. Under this exchange permitted transactions, delivery of shares is not contemplated. These transactions in Derivatives can never result in purchase/sale of the underlying security. The underlying security only gives a market driven price, so that it cannot be manipulated. It should determined the quantum of profit/loss on the contract. As per section 43(5), a transaction would be called speculative transaction only if there is contract for purchase / sale of shares / commodity. The transaction in exchange traded derivatives are not intended for purchase/sale of shares So it can be inferred that the persons entering into derivative contracts only makes profit/loss in terms of money. It doesn't affect purchase/sale of the security, Therefore, the transaction would not fall within the purview of Section 43(5) of the Act. We present the below cases for your ready reference: • P.S Kapur V/s Assistant Commissioner of Income-tax, IT AT, Jaipur "A " Bench - wherein it was clearly held that the loss claimed by the assessee in derivative transaction needs to be allowed as business loss as the same is not covered by section 43(5) • DC1T V/s SSKI Investors Services P. Ltd. - wherein it was held that dealing in derivatives, being a separate kind of transaction which does not involve any sale or purchase, loss on sale of derivatives cannot be treated as speculation loss ",
The reply of the assessee did not find any favour with the A.O. who proceeded by making addition of Rs. 48,56,908/- drawing support from the decision of the Hon’ble High Court of Delhi in the case of DLF Commercial Developers Ltd. wherein it was held as under:- "Since stock derivatives derive their value from underlying shares, the derivatives also fall within the scope of the deeming provision. Restrictions, as applicable for set off and carry forward of share trading loss for companies, will equally apply to stock derivative loss.”
Assessee agitated the matter before the ld. CIT(A) and reiterated its contention that by virtue of Section 43(5) of the Act, derivative transaction are not considered as speculative transaction and therefore the loss should not be treated as speculative loss. The First Appellate Authority was also not convinced with the claim of the assessee and was of the opinion that the A.O.
ITA No. 1007/Ahd/2016 4 . A.Y. 2012-13 has rightly relied upon the decision of the Hon’ble High Court of Delhi in the case of DLF Commercial Developers Ltd. Appeal was dismissed.
Before us, once again the ld. counsel for the assessee reiterated what has been stated before the lower authorities.
We have given a thoughtful consideration to the orders of the authorities below. Section 43(5) of the Act reads as under:- 5) 1 " speculative transaction" means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips: Provided that for the purposes of this clause- (a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or (b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or (c) 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; (d) an eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulations) Act, 1956 (42 of 1956) carried out in a recognised stock exchange; (e) an eligible transaction in respect of trading in commodity derivatives carried out in a recognized association [which is chargeable to commodities transaction tax under Chapter VII of the Finance Act, 2013 (17 of 2013),]]
shall not be deemed to be a speculative transaction; Explanation – For the purposes of this clause (d), the expressions-
(i) “eligible transaction” means any transaction.–
(A) carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary registered under section 12 of the
ITA No. 1007/Ahd/2016 5 . A.Y. 2012-13 Securities and Exchange Board of India Act, 1992 (15 of 1992) in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or the Depositories Act, 1996 (22 of 1996) and the rules, regulations or bye-laws made or directions issued under those Acts or by banks or mutual funds on a recognised stock exchange; and (B) which is supported by a time stamped contract note issued by such stock broker or sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub-clause (A) and permanent account number allotted under this Act; (ii)“recognized stock exchange” means a recognised stock exchange as referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfills such conditions as may be prescribed and notified by the Central Government for this purpose; “ [Explanation 2.—For the purposes of clause (e), the expressions— (i) "commodity derivative" shall have the meaning as assigned to it in Chapter VII of the Finance Act, 2013; (ii) "eligible transaction" means any transaction,—
(A) carried out electronically on screen-based systems through member or an intermediary, registered under the bye-laws rules and regulations of the recognised association for trading in commodity derivative in accordance with the provisions of the Forward Contracts (Regulation) Act, 1952 (74 of 1952) and the rules, regulations or bye-laws made or directions issued under that Act on a recognised association; and (B) which is supported by a time stamped contract note issued by such member or intermediary to every client indicating in the contract note, the unique client identity number allotted under the Act, rules, regulations or bye-laws referred to in sub-clause (A), unique trade number and permanent account number allotted under this Act;
(iii) "recognised association" means a recognised association as referred to in clause (j) of section 2 of the Forward Contracts (Regulation) Act, 1952 (74 of 1952) and which fulfils such conditions as may be prescribed and is notified by the Central Government for this purpose;]
The facts emanating from the assessment order and the order of the ld. CIT(A) are not clear as to whether the entire loss is on account of derivative trading or some part of the loss is also relates to the share trading.
ITA No. 1007/Ahd/2016 6 . A.Y. 2012-13 10. In our considered opinion, Section 43(5) relates to the loss on account of derivative transaction because the exception provided in the Section 43(5) relate to the transaction in F & O segment.
The contention of the revenue authorities is that the assessee company is dealing in purchase of sale of shares which does not come within the exceptions carved out in explanation itself is hit by the mischief of the explanation to Section 43(5) of the Act.
As mentioned elsewhere, it is not coming out from the records whether the loss is on account of Settlement of Future and Option. As the facts are not clear, we deem it fit to restore the issue to the files of the A.O. The A.O. is directed to verify whether the impugned loss is on account of Settlement of Future and Option contract and if found so, the same has to be allowed as a business loss in the light of Section 43(5) of the Act. The assessee is directed to furnish necessary details including Contract Notes to demonstrate that the loss was on account of derivative trading in F & O segment of the stock exchange. Needless to mention that the A.O. shall afford adequate opportunity of being heard to the assessee. Ground no. 1 is treated as allowed for statistical purpose.
Insofar as the grievance raised vide ground no. 2 is concerned, the facts show that the assessee has claimed interest expenses of Rs. 7,78,480/-. The A.O. found that the assessee has given interest free loans and advances to the following parties:- Sr. No. Name of the person Amount (in Rs.) 1 Shri Ibrahimbhai Vallbhai 1,56,34,840 2 Shri Mohammad Vali 7,00,000 3 Shri Sultan Khan 2,00,000
ITA No. 1007/Ahd/2016 7 . A.Y. 2012-13 4 Shri Bhagwan B Makhijani 1,00,000 5 Shri Ketan Bhallal Shah 5,00,000 Total 1,71,34,840
The A.O. was of the firm belief that the assessee has diverted its interest bearing funds for giving interest free advances. The A.O. accordingly disallowed the claim of interest expenses of Rs. 7,78,480/-.
Assessee carried the matter before the ld. CIT(A) but without any success.
Before us, the ld. counsel for the assessee vehemently stated that the assessee was having sufficient free funds from which it gave interest free advances. It is the say of the ld. counsel that no part of interest bearing funds was utilized for making interest free advances. The ld. D.R. strongly supported the findings of the revenue authorities.
We have given a thoughtful consideration to the orders of the authorities below qua the issue. We find that the contention of the assessee has not been considered by the lower authorities factually. In our considered opinion, this issue has to be re-examined at the assessment stage. We accordingly restore this issue to the files of the A.O. The assessee is directed to demonstrate that it has sufficient own funds to make the interest free advances and no part of interest bearing funds have been diverted towards interest free advances. The A.O. is directed to verify the details and decide the issue accordingly. Ground no. 2 is treated as allowed for statistical purpose.
ITA No. 1007/Ahd/2016 8 . A.Y. 2012-13 18. In the result, the appeal filed by the Assessee is treated as allowed for statistical purpose.
Order pronounced in Open Court on 14 - 2- 2018
Sd/ Sd/- (MAHAVIR PRASAD) (N. K. BILLAIYA) JUDICIAL MEMBER True Copy ACCOUNTANT MEMBER Ahmedabad: Dated 14 /02/2018 Rajesh Copy of the Order forwarded to:- 1. The Appellant. 2. The Respondent. 3. The CIT (Appeals) – 4. The CIT concerned. 5. The DR., ITAT, Ahmedabad. 6. Guard File. By ORDER
Deputy/Asstt.Registrar ITAT,Ahmedabad