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Income Tax Appellate Tribunal, “F”, BENCH
Before: SHRI MAHAVIR SINGH, JM & SHRI M.BALAGANESH, AM
आदेश / O R D E R PER M. BALAGANESH (A.M): This appeal in A.Y.2012-13 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-9, Mumbai in appeal No.CIT(A)-9/Cir.4/89/15-16 dated 31/01/2017 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3)of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 17/03/2015 by the ld. Dy. Commissioner of Income Tax-4(2)(1), Mumbai (hereinafter referred to as ld. AO).
M/s. Urja Investments Pvt. Ltd.,
The first issue to be decided in this appeal is as to whether the ld CITa was justified in treating the share trading loss of Rs 6,98,422/- as speculation loss by invoking Explanation to section 73 of the Act. The inter connected issue involved thereon is with regard to allocation of expenses as attributable to deemed speculation activity in the sum of Rs 1,70,78,134/- as against the total expenses claimed in the sum of Rs 1,71,39,837/-.
2.1. The brief facts of this issue are that the assessee is engaged in the business of stock broking and a member of National Stock Exchange in Equity Segment, Derivative Segment , Currency Derivative Segment etc. The ld AO from perusal of the profit and loss account of the assessee observed that major activities of the assessee is from sale of equity shares of Rs 355,54,22,722/- and assessee has shown share trading loss of Rs 6,98,422/-. The ld AO showcaused the assessee as to why the said loss should not be treated as speculation loss by invoking Explanation to Section 73 of the Act. The ld AO also directed the assessee to give the details of expenses towards speculative and non-speculative activities and also showcaused as to why the said expenses should not be disallowed in turnover ratio. The assessee replied that the provisions of Explanation to Section 73 of the Act are not applicable to it. The assessee submitted that Explanation to Secton 73 of the Act excludes companies where Gross Total Income mainly consists of income which is chargeable under the head ‘Interest on Securities’, ‘Income from House Property’, ‘Capital Gains’ and ‘Income from Other Sources’. The Break up of Gross Total Income of the assessee was given as under:-
Business Loss - (Rs 71,08,800/-) Long Term Capital Gain - Rs 13,590/- Income from Other Sources- Rs 17,95,048/-
M/s. Urja Investments Pvt. Ltd.,
----------------------- Gross Total Loss (Rs 53,00,162/-) ----------------------- 2.2. The assessee pleaded that from the above , it is evident that the gross total income mainly comprises of income which is chargeable under the head ‘interest on securities’ and ‘capital gains’ and accordingly the provisions of Explanation to Section 73 of the Act are not applicable.
2.3. With regard to yet another query of the ld AO regarding break up of expenses for earning brokerage income and other income, the assessee replied that it carries on business as one unit and it is not possible to bifurcate expenses incurred for earning brokerage income and other income.
2.4. The ld AO observed that the assessee company is engaged in the business of share trading and share broking. As a share broker, the assessee company is an intermediary between the buyer and seller of shares through stock exchange. The shares bought and sold by the assessee company are not owned by the assessee but it merely executes the transactions on behalf of its clients. In the capacity of intermediary as a share broker, the assessee company is not responsible and liable for any profit earned or loss incurred out of the transactions in purchase and sale of shares on behalf of the clients. The only benefit or interest which accrues to the assessee company from such transactions is the brokerage income earned by it from its clients for executing the transactions on behalf of them. On the other hand, as a trader in shares, the assessee engages itself in purchase and sale of shares for its own sake and whatever the profit or loss accrues or arises from such transactions would be to assessee company’s own account. This is distinctly different from its M/s. Urja Investments Pvt. Ltd., role as a share broker. The ld AO observed that the difference between these two roles cannot be ignored or misplaced. The share brokers are not excluded from the purview of Explanation to Section 73 of the Act. The ld AO observed that by virtue of the deeming provision, loss from share trading is deemed to be out of speculation business and the same need to be carried forward to be set off against the speculation profit of the future years. The ld AO observed that the share dealing activity carried out on behalf of the clients (broking activity) stands on a different footing as compared to share trading activity carried on by the assessee on its behalf. The ld AO observed that the assessee’s case is not covered by the exceptions provided in Explanation to Section 73 of the Act and accordingly he proceeded to treat the share trading loss of Rs 6,98,422/- as speculation loss.
2.5. Apart from this, the ld AO observed that the determination of derivative trading loss cannot be possible without allocation of expenses which are invariably incurred for derivative trading. He observed that the proportionate expenditure incurred towards speculation transactions are also liable to be separated and disallowed. The total expenses as per profit and loss account was Rs 1,71,39,837/- and the same was allocated in proportion of turnover as under:- Total Turnover Non-Speculative Speculation Turnover % (Amount in Rs) Turnover (Sum of Profit and loss On F&O Trade)
3567998592 12575870 3555422722 99.64% Accordingly the ld AO concluded that 99.64% of total expenses are attributable to speculation activity. The total expenses claimed was Rs 1,71,39,837/- and 99.64% of that would be Rs 1,70,78,134/- which would be attributable to speculation activity. Accordingly, the ld AO disallowed
M/s. Urja Investments Pvt. Ltd., a sum of Rs 1,70,78,134/- towards expenses related to share trading by treating the same as speculation activity in addition to disallowing the share trading loss of Rs 6,98,422/- by treating it as speculation loss. The ld AO however, allowed both these figures to be carried forward to subsequent years .
The assessee pleaded before the ld CITA that it has drawn a composite profit and loss account wherein income from various sources like brokerage, derivative trading , interest income and income from trading in shares etc are reflected. The break-up of the same are as under:-
M/s. Urja Investments Pvt. Ltd., 3.1. The assessee submitted that it is engaged in the business of capital market operations involving share trading such as own share trading, on behalf of client share trading and derivative trading wherein the underlying assets are shares. It was pleaded that the assessee has common terminals, common bank accounts and common workforce for all its businesses. All the incomes / losses from trading of shares, brokerage and derivatives are intrinsically interlinked and involved underlying transactions of purchase and sale of shares. The assessee alternatively pleaded before the ld CITA that the transactions entered into by it are in the nature of jobbing and arbitrage done to guard against loss which could have arisen in the ordinary course of assessee’s business as a member. It was submitted that section 73 of the Act would come into operation only when the transaction was found to be speculative transaction and not otherwise. The transaction must lead to a speculation business or activity and the result must be a loss. On satisfaction of both these conditions, section 73 of the Act would come into operation. However, section 43(5)(c ) clearly provides that the transactions in the nature of jobbing and arbitrage are not to be considered as speculative transaction. Therefore, when the transaction is not to be treated as speculative transaction, the loss suffered by the transaction would be an ordinary business loss. Reliance in this regard was placed on the decision of Hon’ble Karnataka High Court in the case of CIT vs First Securities P Ltd reported in 370 ITR 72 (Kar).
3.2. It was pleaded that the ld AO without granting the assessee an opportunity of being heard had treated 99.64% of the total expenses as attributable to speculation activity without appreciating the fact that assessee company is engaged in a composite business of share broker, share trading and derivatives trading during the year under consideration.
M/s. Urja Investments Pvt. Ltd., The assessee also pleaded that there is common management, interliaison of resources, common work force and as such bifurcation of such business was not possible. Reliance in this regard was placed on the decision of Hon’ble Supreme Court in the case of Prithvi Insurance Ltd reported in 53 ITR 632 (SC) ; Exchange Corporation Limited reported in 77 ITR 739 (SC). Accordingly, the assessee pleaded that since the assessee is doing composite business, the income therefrom had to be assessed as a whole. Since the share broking activity, share dealing on own account all form an integrated business of the assessee company, the profit or loss from the same is required to be computed as a whole. Hence these expenses cannot be bifurcated to arrive at profit under separate heads.
3.3. The assessee without prejudice to the aforesaid arguments, also pleaded that in para 8.12 of the assessment order, the ld AO while calculating turnover, had considered only the turnover of share trading business, whereas the turnover figures for share broking business and derivative business were ignored by him and only the net brokerage income and derivatives income were considered in the total turnover worked out by the ld AO. The ld AO had thus absurdly worked out the share trading turnover at 99.64% of the total turnover and disallowed almost all the expenses incurred by the company.
3.4. The ld CITA upheld the action of the ld AO by observing as under:-
“5.3. I have considered the stand of the AO in the assessment order and the submissions of the appellant. The main contention of the appellant is that the appellant is a share broker and therefore, speculation loss has to be adjusted against income of the appellant. The Ld.AR has also cited certain Judicial pronouncements from Mumbai ITAT. I have gone through the same. In the judgement cited by the Ld.AR, the Hon'ble court has allowed adjustment of loss
M/s. Urja Investments Pvt. Ltd., against the income but, these were arising out of share trading by the respective assessee in two different segments of the stock market i.e., (i) Cash Segment and (ii) F & O Segment However/ in the case of the appellant, the fact is different. The appellant has already made adjustment of the entire share trading profit or loss consisting of all the segments and then posted in the net loss in its computation. This net loss has been claimed once again to be allowed to be set off against the normal income of the share broker i.e, Brokerage income. This claim of the appellant is not falling within the purview of Section 43(5)(c) because the brokerage income is a normal business income and is independent of speculative transactions where the appellant gets percentage of commission/brokerage charge and is never bound to make any losses, except vandah losses which is not the case here. Accordingly, the disallowance made by the AO is upheld in view of the facts and judicial pronouncements narrated by the AO, which is not being reproduced for the sake of brevity and the distinction of the case laws made by me. In the result, this ground of appeal is Dismissed. Ground Nos.2, 3 & 4 are common and therefore disposed off together. The AO made certain disallowance by re-allocating expenses attributable to the speculation activity which has been explained by the AO in para 8.12 of the assessment order. The details of calculation has been worked out by the AO in the assessment order. The only grievance of the appellant is that the disallowance made by the AO is on the higher side and even if ground 1 is Dismissed, the disallowance resulting out of proportionate expenses made by the AO needs to be reasonably disallowed. I have- considered the submissions of the appellant. However, since ground no.l is upheld by me, I do not find any reason to make any changes in the calculation made by the AO because the appellant had not been able to pin point any defect in the calculation of the AO.”
3.5. Aggrieved, the assessee is in appeal before us.
3.6. We have heard the rival submissions and perused the materials available on record including the judicial pronouncements that were relied upon by the parties before us at the time of hearing. At the outset, we find that the ld AO had drawn an erroneous conclusion in para 5.3 of his
M/s. Urja Investments Pvt. Ltd., order that the assessee had arrived at the net loss on composite basis and the said net loss has been claimed once again to be allowed to be set off against the normal brokerage income. We find that this is factually incorrect as is evident from the aforesaid table. It is not in dispute that the assessee had derived profit from derivative trading during the year in the sum of Rs 37,64,097/-. The income from derivative trading is not to be considered as speculative transaction as per the provisions of section 43(5)(d) of the Act. But this is relevant only for section 43(5) and cannot be extended to section 73 of the Act. In this regard, it would be pertinent to reproduce the provisions of section 43(5) of the Act which reads as under:- Definitions of certain terms relevant to income from profits and gains of business or profession.
In sections 28 to 41 and in this section, unless the context otherwise requires—
(5) "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; [or] (d) an eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognised stock exchange; [or]
M/s. Urja Investments Pvt. Ltd.,
(e) an eligible transaction in respect of trading in commodity derivatives carried out in a recognised 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:
3.6.1. Hence from the aforesaid provisions that are in bold letters, it is very clear that the derivative transactions shall not be treated as speculative transaction only for the purpose of section 43(5) of the Act and not otherwise. The same cannot be extended to provisions of Section 73 of the Act. Reliance in this regard has been rightly placed by the ld AR on the decision of Hon’ble Delhi High Court in the case of CIT vs DLF Commercial Developers Limited reported in 218 Taxman 45 (Del) wherein it was held as under:-
The stated objective of Section 73- apparent from the tenor of its language is to deny speculative businesses the benefit of carry forward of losses. Explanation to Section 73 (4) has been enacted to clarify beyond any shadow of doubt that share business of certain types or classes of companies are deemed to be speculative. That in another part of the statute, which deals with computation of business income, derivatives are excluded from the definition of speculative transactions, only underlines that such exclusion is limited for the purpose of those provisions or sections. To borrow the Madras High Court's expression, "derivatives are assets, whose values are derived from values of underlying assets"; in the present case, by all accounts the derivatives are based on stocks and shares, which fall squarely within the explanation to Section 73 (4). Therefore, it is idle to contend that derivatives do not fall within that provision, when the underlying asset itself does not qualify for the benefit, as they (derivatives -once removed from it and entirely dependent on stocks and shares, for determination of their value)
3.6.2. We hold that the share trading loss incurred by the assessee in the sum of Rs 6,98,422/- is speculative in nature and to this extent, we uphold the action of the ld AO. We find that the ld DR placed reliance on the decision of Hon’ble Calcutta High Court in the case of CIT vs Parkview
M/s. Urja Investments Pvt. Ltd., Properties P Ltd reported in 261 ITR 473 (Cal). We find that even in that decision, it has been held that the speculation loss could be set off against speculative profits for the purpose of section 73 of the Act, which is what is done by the assessee also in the instant case by setting off the derivative profit with share trading loss. Hence the decision of Hon’ble Calcutta High Court supra actually supports the view of the assessee and our decision rendered hereinabove. In view of the aforesaid observations with regard to the restrictive applicability of provisions of section 43(5)(d) of the Act as detailed supra and respectfully following the judicial precedent relied supra, we hold that the assessee is entitled for setting off the derivative profit of Rs 37,64,097/- with the share trading loss of Rs 6,98,422/-. Hence there is no need for making separate disallowance of share trading loss of Rs 6,98,422/-. Accordingly, we reverse the treatment of the ld AO in allowing the carry forward of share trading loss of Rs 6,98,422/- to subsequent years.
3.6.3. Similarly we find from the aforesaid table that the assessee had incurred loss on account of jobbing and arbitrage transactions in the sum of Rs 10,77,588/-. This falls under section 43(5)(c ) of the Act wherein the said transaction was not considered as speculative transaction. However, the same would apply only for section 43(5) and cannot be extended to section 73 of the Act as held hereinabove. Accordingly, we hold that the said loss on account of jobbing of Rs 10,77,588/- also would have to be set off against derivative profit of Rs 37,64,097/-.
3.6.4. With regard to expenses incurred by the assessee which were apportioned towards speculation activity on turnover ratio by the ld AO, we find that the assessee had carried on composite business of derivative trading and share trading. We hold that the ld AO had not considered the M/s. Urja Investments Pvt. Ltd., turnover figures for derivative business and had considered only the turnover of share trading business, which had resulted in absurdity by apportioning 99.64% of total expenses only towards speculation activities. We direct the ld AO to recompute the apportionment of expenditure by considering the income of derivative transactions, jobbing transactions and share trading transactions alone by considering them in absolute figures i.e ignoring the negative signs (losses). We direct the ld AO to apportion the expenditure in the following manner:-
Total Expenditure incurred by assessee - Rs 1,71,39,837/-
Speculation Activity Non-Speculation Activity Brokerage 78,52,203 Derivative Trading 37,64,097 Share Trading taken in absolute figures 6,98,422 Other Income 20,37,158 Jobbing Charges taken in Absolute figures 10,77,588 ------------------ ----------------- 55,40,107 98,89,361 ------------------ ----------------- 35.91% 64.09% Expenses attributable 61,54,915 1,09,84,922 3.6.5. The ld AO is directed to make disallowance as per the aforesaid directions.
3.6.6. Accordingly, the grounds raised by the assessee are disposed off as above.
M/s. Urja Investments Pvt. Ltd.,
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court on this 26/07/2019