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Income Tax Appellate Tribunal, “A” BENCH, CHENNAI
Before: HON’BLE SHRI V. DURGA RAO & HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM
आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member)
Aforesaid appeal by assessee for Assessment Year (AY) 2014-15 arises out of the order of learned Commissioner of Income Tax (Appeals)-1, Madurai [CIT(A)] dated 06.03.2020 in the matter of assessment framed by Ld. Assessing Officer [AO] u/s. 143(3) of the Act on 30.12.2016. The grounds raised by the assessee read as under:
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The order of the Commissioner of Income Tax (Appeals) is opposed to law and the facts and circumstances of the case. 2. The Commissioner (Appeals) erred in not appreciating the oral and written submissions and the contents of the paper book filed before him and dismissing the appeal. 3. The Commissioner (Appeals) erred in sustaining the action Of the assessing officer in treating loss of Rs.45,05,705/- from trading in transactions in shares and securities derivatives (Futures & Options) through Geojit BNP Paribas Service Ltd., an intermediary attached to National Stock Exchange (a recognized stock exchange for trading equity share derivative) on the ground it is speculative in nature and hence not allowable for set off against the business income. 4. The appellant submits that reliance on the Judgment Of the Delhi High Court in the case CIT Vs DLF Commercial Developers Ltd., (2013) 35 taxmann.com 280 (Delhi) on the facts of his case is misconceived since Section 73 Of the Act referred to in the Judgment refers to the business of purchase and sale of shares and not the business of derivative transactions carried out through recognized stock exchanges. 5. The appellant submits that the applicable section in his case is Section 43(5)(d) only and not section 73 of the Act. 6. The appellant further submits that his case is covered under eligible transactions in respect of trading in derivatives in terms of section 43(5)(d) and hence loss in derivatives cannot be treated as speculative loss and the same should be allowed to be adjusted against the business income. 7. The Commissioner (Appeals) erred in not appreciating the submissions Of the appellant that his case is covered by the Judgment of the Calcutta High Court in Asian Financial Services Ltd., Vs CIT., (2016) 240 taxman 192 (Cal) wherein it is held that loss incurred on account of derivatives would be deemed business loss under proviso to section 43(5) and not speculation loss and, hence, Explanation to section 73 could not be applied and as such, loss would be allowed to be set off against income arising out of proper business because derivatives were treated differently within meaning of Explanation to section 73(4) and not at par with shares. 8. The appellant submits in his case Explanation to Section 73 is not applicable for the reason the income from principal business is from Shiva Textiles (Rs.82,23,449) and Angayarkanni investments (Rs.1,38,849/-) totaling Rs.83,68,298/- against loss of Rs.45,11,108/- from derivative trading; Explanation to Section 73 is applicable only in a case where the principal business of the assessee is purchase and sale of shares. 9. Without prejudice to the above contentions the appellant submits that both the Commissioner of Income Tax (Appeals) as well as the assessing officer failed to note that the appellant being an individual the provisions of Section 73 of the Act is not applicable in his case. 10.The appellant further submits that the object of introduction Of the Explanation to section 73 is to curb the device resorted to by business houses controlling groups of companies to manipulate and reduce the taxable income of companies under their control and thus is intended not for non-companies. 11. For these and other grounds that may be adduced at the time of hearing, the appellant prays that the Hon'ble Tribunal be pleased to allow this appeal and render justice.
As evident the assessee is aggrieved by the fact that net loss of Rs.45.05 Lacs arising on securities / shares derivative transactions has been treated by Ld. AO as speculative transactions in terms of Sec.73 of
ITA No.10/Chny/2021 - 3 - the Act and the set-off of the same has been denied from normal business income earned by the assessee. 2. The registry has noted a delay of 246 days in the appeal, the condonation of which has been sought by the assessee on the strength of condonation petition wherein it has been submitted that delay occurred due to lockdown situation arising out of Covid-19 pandemic. The impugned order is stated to have been received by the assessee on 19.03.2020 which falls in the lockdown period during Covid-19 pandemic. Though Ld. DR opposed condonation of delay, however, concurring with assessee’s pleadings, we condone the delay and proceed for adjudication of the appeal on merits. 3. The Ld. AR submitted that the exception as stated in Explanation-1 to Sec.43(5)(d) was applicable and reliance on the provisions of Sec. 73 was misconceived. The Ld. Sr. DR submitted that the provisions of Sec.73 were applicable to the facts of the case as rightly held by Ld. CIT(A) in the impugned order. Having heard rival submissions, our adjudication would be as under. Assessment Proceedings 4.1 The assessee being resident individual is stated to be engaged in Textile Business under proprietary concern namely M/s Shiva Textile and share-broking business under proprietary concern namely Angayarkanni Investments. The assessee carried out shares & securities derivative trading through stock broker M/s Geojit BNP financial Services Ltd. and suffered loss of Rs.45.11 Lacs which was claimed as Short-term capital loss. The Ld. AO opined that since the transactions were settled otherwise than by actual delivery of shares and securities, the same were to be treated as speculation business loss. The assessee
ITA No.10/Chny/2021 - 4 - submitted that the transactions were carried out electronically through registered stock-broker on stock exchange and therefore, these transactions are eligible transactions as per explanation-1 to Sec.43(5)(d) of the Act. Accordingly, the transactions shall not be deemed to be speculative transactions. 4.2 However, considering the explanation to Section 73 which provide that where any part of the business of the company consists in the sale and purchase of shares then such company shall be deemed to be carrying on a speculation business to the extent to which such business consists of purchase and sale of shares. Relying upon the decision of Hon’ble Delhi High Court in CIT V/s DLF Commercial Developers Ltd. (261 CTR 126) which held that stock derivative value is dependent on shares and therefore, the explanation to Sec. 73 would apply, Ld. AO opined that the explanation to Sec. 73 was applicable to the case of the assessee and the losses were speculative in nature. Consequently, the assessee was not entitled for set-off of the losses from business income. The assessee suffered loss of Rs.45.11 Lacs from derivatives in shares and gain of Rs.0.05 Lacs from commodity trading and the net of the two i.e., Rs.45.05 Lacs was held to be speculative business loss. Appellate Proceedings 5. Before Ld. CIT(A), the assessee reiterated that the case would fall under Sec.43(5)(d) & (e) and the transactions were eligible transactions which were not to be considered as speculative in nature. It was also submitted that similar issue in AY 2013-14 was held in assessee’s favor by the learned first appellate authority. However, Ld. CIT(A) upheld the action of Ld. AO. This decision of Hon’ble Delhi High Court in DLF Commercial Developers Ltd. (supra) was held to be applicable. The
ITA No.10/Chny/2021 - 5 - favorable decision of Hon’ble Calcutta High Court in the case of Asian Financial Services Ltd. V/s CIT (70 Taxmann.com 9) as relied upon by assessee was not to be followed since the Special Leave Petition of the department was admitted by Hon’ble Apex Court. Aggrieved, the assessee is in further appeal before us. Our findings & Adjudication 6. We find that Hon’ble Apex Court in Snowtex Investment Ltd. Vs Pr. CIT (105 Taxmann.com 282) has observed that the provisions of Sec. 43(5) were amended by Finance Act, 2005. Prior to the amendment, Section 43(5) defined a 'speculative transaction' to mean a transaction in which a contract for the purchase or the sale of any commodity including stocks and shares is settled otherwise than by the actual delivery or transfer of the commodity or scrips. The impact of the amendment by the Finance Act, 2005 was that an eligible transaction on a recognized stock exchange in respect of trading in derivatives was deemed not to be a speculative transaction. With effect from 01/04/2006, by deeming fiction, trading in derivatives was not to be regarded as speculative transaction when it was carried out on a recognized stock exchange.The CBDT Circular dated 27/02/2006 indicated that this amendment was occasioned by the changes which were introduced by SEBI both at the legal and technological level for bringing in greater transparency in the market for derivatives. Explaining the reason for the amendment, the Circular stated as under: - "3.10 Excluding 'trading in derivatives' on recognised stock exchanges from the ambit of 'speculative transactions' Existing provisions of clause (5) of section 43 define 'speculative transaction' to mean a transaction in which a contract for the purchase or sale of any commodity including stocks and shares is settled otherwise than by the actual delivery or transfer of the
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commodity or scrips. The proviso to section 43(5) lists out certain transactions which are not deemed to be speculative transactions. Systemic and technological changes introduced by SEBI have resulted in sufficient transparency in the stock markets and have to a large extent curbed the scope for generating fictitious losses through artificial transactions or shifting of incidence of loss from one person to another. The screen based computerized trading provides for audit trail. In the wake of these developments, the present distinction between speculative and non-speculative transactions, in respect of trading in derivatives of securities is losing relevance. The Finance Act, 2005 has, accordingly, amended section 43(5) to provide that an eligible transaction in respect of trading in derivatives of securities carried out on a recognised stock exchange shall not be deemed as speculative transaction. The notification prescribing the rules and the conditions to be fulfilled by a stock exchange to be recognized by the Central Government for the purposes of section 43(5) [i.e., Rules 6DDA and 6DDB of the Income-tax Rules, 1962] has been published in the Official Gazette on 1st July, 2005 vide S. O. No. 932(E). Applicability: From A.Y. 2006-07 onwards." 7. In the aforesaid case before Hon’ble Supreme Court, the assessee sought set-off of losses arising out of trading in shares from derivative income. The same was in view of the assertion that amendment to Explanation to Sec.73 by Finance Act, 2014 was retrospective in nature. However, rejecting the same, Hon’ble Court held that the amendment to Explanation to Sec.73 was prospectively effective only from 01/04/2015 and therefore, the speculation losses arising out of share trading activity could not be allowed to be set-off from income from trading in derivatives since the derivative income, as per amendment made by Finance Act, 2005 was deemed not to be a speculative transaction. 8. In the present case before us, the assessee has incurred losses in derivative segment and claims the set-off of the same from normal business income. It is undisputed fact that the derivative transactions are eligible transactions carried out on recognized stock exchange and the same are eligible transactions which are deemed to be non-speculative in nature. This is as per amendment brought in by Sec.43(5) w.e.f. AY
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2006-07 which provide that the derivative income / losses are to be deemed as non-speculative in nature. The trading in derivatives in shares could not be held to be at par with trading in shares since the legislatures has intended to treat them differently. The above case law of Hon’ble Supreme Court clearly supports the case of the assessee. Therefore, there is no hindrance for the assessee to claim the set-off of losses of impugned eligible transactions from normal business income. We direct Ld. AO to allow the set-off and re-compute assessee’s income. 9. The appeal stands allowed in terms of our above order.
Order pronounced on 05th May, 2022.
Sd/- Sd/- (V. DURGA RAO) (MANOJ KUMAR AGGARWAL) �ाियकसद5 /JUDICIAL MEMBER लेखासद5 /ACCOUNTANT MEMBER
चे*ई/ Chennai; िदनांक/ Dated : 05-05-2022 JPV JPV JPV JPV आदेशकीWितिलिपअ9ेिषत/Copy of the Order forwarded to : 1. अपीलाथ�/Appellant2. ��यथ�/Respondent 3. आयकरआयु� (अपील)/CIT(A)4. आयकरआयु�/CIT 5. िवभागीय�ितिनिध/DR6. गाड�फाईल/GF