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Income Tax Appellate Tribunal, “A” Bench, Mumbai
Before: Shri Shamim Yahya (AM) & Shri Sandeep Gosain (JM)
O R D E R Per Shamim Yahya (AM) : This appeal by the Revenue is directed against the order if learned CIT(A) dated 12.1.2017 and pertains to A.Y. 2013-14.
Grounds of appeal
reads as under :-
1. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the addition of Rs.39,73,042/- which was treated as speculation loss instead of business loss and not allowed to be set off against the other sources of income.
2. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the addition of Rs.1,70,63,905/- made on account of allocation of expenses towards cash segment of share trading activities and treating the same as speculation loss."
Brief facts of the case are as under :-
The assessee is a private limited company and engaged in the business of share broking and dealing in shares and securities. In the assessment order 2 M/s. Adroit Share and Stock Broker P. Ltd. assessing officer at the outset referred to the provisions of section 73 and also referred to decision from honourable to High Court as under :- 4.1 The Explanation to section 73 read as under :- where any part of the business of a company (other than a company whose gross total income consists mainly of income which is chargeable under the heads ”interest on securities”, “income from house property”, “Capital gains”, and “Income from other sources”, or a company the principal business of which is the business of banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.
Explanation to section 73 provides that where any part of the business of a company (other than a company whose gross total income consist mainly of income which is chargeable under the head “Interest on Securities” “Income from House Property” “capital gains” and “Income from other sources”) or a company, the principal business of which is the business of banking or the granting of loans and advances consists in the purchase and sale of shares of other companies, such company shall, for the purpose of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of share.
Hence, the explanation provides a deeming provision as per which a company whose main income is from income from business and which carries on the business of purchase and sale of shares, the income to that extent related to purchase and sale of shares would be treated as speculative business income. Accordingly, once a company is falling within the purview of explanation to section 73, the transaction of purchase and sale of shares would be considered as speculation transactions. Thus, even if, in the normal course, the transaction is not a speculative transaction, once the explanation to section 73 is attracted, all the transactions of purchase and sale of shares would be treated as speculative transaction.
The explanation provides a deeming fiction and it is immaterial whether the assessee has obtained the delivery of the shares or the transaction is specifically considered as non speculative u/s. 43(5). It is settled law that deeming provisions have to be strictly construed and once, the assessee’s case is coming within the purview of explanation to section 73, the transaction of purchase and sale of shares have to be necessarily treated as speculative business. It is to be noted that once 3 M/s. Adroit Share and Stock Broker P. Ltd. the assessee’s main source of income is from business, the provisions of section 73 would be applicable and the general provisions of section 43(5) are not applicable to the case. Explanation to section 73 treats the entire business as speculative while section 43(5) is limited to each individual transaction. Hence, once the provisions of Explanation to section 73 are applicable, reference to section 43(5) has to be excluded.
In view of the decision of Hon'ble Supreme Court in I.S. Sundaram Pillai Vs. V.R. Pattabiramana AIR 1985 SC 582, it is clear that although ordinarily, the object of an explanation is not to enlarge the scope of the original section that it is supposed to explain, if on a true reading of an Explanation, it appears that it has widened the scope of the main section, effect should be given to the legislative intent, notwithstanding the fact that the legislative had named that provisions as an explanation.
Following the aforesaid principles of law in the context of the instant case, the intention of the legislature is unambiguous. Therefore, the explanation to section 73 which creates a legal fiction, by which the purchases and sale of shares specified in the said explanation, which is specifically used for the purpose of section 73 as deemed speculation loss can be applied to section 70, 71 and 72 and in determining the gross total income, the said explanation to section 73 can be applied while considering the set off loss under section 70 and 71 and c/f fo such loss u/s. 72.
The applicability of provisions of explanation to section 73 of the I.T. Act, 1961 is restricted to the business of purchase and sale of shares. As the derivative are not shares, the profit earned by the assessee on the derivative transaction cannot be set off with the loss from the business of purchase and sale of shares which is treated deemed speculation loss in view of the provisions of explanation to section 73 of the IT. Act, 1961.
4.2 also, Hon'ble Calcutta High Court, dealing with these provisions in the case of CIT Vs. Arvind Investments Pvt. Ltd. 192 ITR 369 held that ‘part’ includes whole. If the whole business of a company consists of purchase and sale of shares, then it is not that Explanation to section 73 will not apply. On the contrary, it will apply to the whole.
Referring to the above the Assessing Officer made the following disallowance :- “From the perusal of records (script-wise details of the share trading)of submission of assessee, it can be seen that the assessee has earned a profit of Rs. 7,94,41,102/- from the share trading business in the F&O 4 M/s. Adroit Share and Stock Broker P. Ltd. segment and the assessee has incurred a loss of Rs. 39,73,042/- in share trading business in the cash segment. Further, the assessee has also shown an expenses of Rs. 1,70,63,905/- on account of share trading business in cash segment. In view of the above discussion, the share treading business in the cash segment is considered as a speculative business activity. Hence the loss incurred in the same and the expenses incurred on account of the said business activity are hereby treated as speculation loss of the current year and are not allowed to be set off against the business income of the year. Therefore the loss of Rs, 2,10,36,947/- is treated as speculation loss and the same is not allowed to set off with other source of income”.
Against above order assessee appealed before the learned CIT-A. Learned CIT-A observed that identical issue was decided by him in favour of the assessee in the assessment year 2012-13 following the above learned CIT-A held as under :- “I have considered the stand of the AO in the assessment order as well as the submissions of the appellant. The issue of adjustment of profit and loss in two segments i.e. cash segment and F & O segment were also there in A Y 2012-13 and was decided by me in favour of the appellant for the reasons and analysis given therein as well as the judicial pronouncements of Jurisdictional Hon'ble ITAT/Hon'ble Bombay High Courts vide appeal order No. CIT(A)-9/Cir.4/404/2014-15 dated 28/03/2016; the relevant part of which is being reproduced as under:
"The AO has disallowed the above amount by invoking Sec 73 and treating the transactions of appellant made in cash segment and F&O segment differently and putting them in two different category. While doing so the AO has further referred and relied on the case of Arvind Investments P Ltd 192 ITR 365 of Hon'bleKolkatta High Court. However, it may be stated that in the case of Arvind Investment Co. was engaged in share dealing activities-whereas the present appellant is a recognized share broker Company with BSE and NSE. Therefore, there is a difference and so the two activity and transactions of the two cases cannot be treated on same footing.
Any share broker company may have income from brokerage income from the clients and in addition to that may also engage itself in (i) share dealing which may be either delivery base or non delivery based, (ii)arbitrage transactions and (iii) jobbing transactions. Further, Section 43(5)(c) of the I.T.Act provides certain exceptions for the share brokers.
5 M/s. Adroit Share and Stock Broker P. Ltd. During the appellate proceedings the appellant has contended that it has carried out arbitrage transactions on the cash segment as well as F&O segments and they are correlated to each other. The appellant has further submitted that being a broker it is free to carry out arbitrage transactions either in the same stock exchange or in two different stock exchange and depending upon the overall market situation, it does arbitrage accordingly."
It was found that the appellant was engaged in share trading in both the segments- i.e., Cash Segments as well as F & O Segments and their Profit & Loss amounts were adjusted to arrive net income/loss. Further observation of the previous appeal order dated 28.03.2016, is further reproduced as under:-
"Whether, the transaction will result in income or loss is altogether a different issue - When it is income it has to be taxed and when it is loss then the loss has also to be allowed. Moreover, the appellant is a registered share broker. Therefore, the exceptional clause 43(5)(c) will be applicable to the present facts of the case and the appellant share broker company becomes eligible for the benefit of the exceptional clause meant for the share broker. The AO has erroneously arrived at the conclusion that deeming provisions of Sec 73 of the I.T.Act can be invoked in the present case but in my opinion deeming provision of Sec 73 cannot be invoked in the present facts of the case of the Appellant share broker. Besides, deeming provisions cannot be invoked in the present case because the transaction falling under Sec 43 includes the transactions which falls under section 28 to 41 of the I.T.Act, 1961 under the chapter profits and gains of business or profession whereas the deeming provisions of section 73 is with regard to set off provisions which falls under Chapter VI of the I.T. Act. Accordingly, the disallowance made by the AO amounting to Rs. 3,22,49,303/- is directed to be deleted on this account itself.
It may further be mentioned here that the appellant has taken legal and alternative ground also. According to the appellant as per decision of Hon'ble Delhi High Court in the case of CIT vs DLF Commercial Developers Ltd. (2013) 35 Taxmann.com 280 (Del), the transactions in future and options has also been decided as speculative in nature. This decision is a solitary decision from High Court and has not been contradicted by any other High Court or the Hon'ble Supreme Court and therefore, it is binding for all the appellate/judicial authorities below the High Court. It has been submitted by the Ld. AR that if the transactions pointed out by the AO is to be treated as speculative in nature then the loss therefrom needs to be adjusted against the income from F & O, which is, as on date, as per Hon'ble Delhi High Court 6 M/s. Adroit Share and Stock Broker P. Ltd. decision in above referred DLF case is also speculative transactions and speculative income. The alternative plea of the appellant has also been considered and I am of the opinion that at this stage as long as the decision of Hon'ble Delhi High Court which has not been contradicted by any other High courts nor it has been modified by the apex court, the alternative plea/submission of the appellant also has got merit and has to be allowed, subject to the final outcome of the case of DLF Commercial Ltd in the Hon'ble Supreme Court.
In the result, the appellant's these grounds of appeals are Allowed."
Since the issue remains the same, the issue is covered in favour of the appellant by my previous appeal order for A Y 2012-13 and therefore, similar decision is being taken in the present appeal also. Accordingly, the AO directed to delete the disallowance of Rs.39,73,042/-. Therefore, ground 1 is to be treated as Allowed.
Against above order Revenue is in appeal before us.
Learned departmental representative submitted that learned CIT-A has erred as he has not followed the honourable Calcutta High Court. He further submitted that there should be harmonious construction he further submitted that learned CIT-A has erred in holding that assessee falls in exceptional clause of secton 43(5)(c).
Per contra learned counsel of the assessee submitted that identical issue was decided by the learned CIT-A in assessee's favour in the earlier assessment year and the same had not been appealed by the Department. Hence he submitted that revenue cannot take a stand in this assessment year. Learned counsel further submitted that learned CIT-A has passed a reasonable order and the same should be upheld.
We have carefully considered the submission perused the records .Up on careful consideration, we find that it is undisputed that identical issue was decided by learned CIT(A) in favour of the assessee and Revenue did not challenge that decision. It is true that re judicata does not apply to the Income Tax proceedings. Nevertheless there has to be an element of conformity. It is not the case of that there is in any change in facts and law as operating in the 7 M/s. Adroit Share and Stock Broker P. Ltd. present assessment year as compared to the earlier assessment year. We find that learned CIT(A) has given a finding that on the facts and circumstances of the case the assessee’s case was falling under the exceptional clause of section 43(5)(c), which provided that the impugned transaction would not be treated as speculative transaction. Hence, he has held that the deeming provisions of section 73 would not apply. Learned CIT(A) has also held that the decision referred by the Assessing Officer regarding Hon'ble Calcutta High Court decision is not applicable on the facts of the case. Furthermore, learned CIT(A) has also allowed the assessee’s claim also on the alternative plea based on the Delhi High Court decision in the case of CIT Vs. DLF Commercial (supra) which provided that transaction in future option are also speculative transaction and in this view of the matter the loss therefrom has to be adjusted that against the income from F&O. We find that on the facts and circumstances of the case, learned CIT(A) has taken correct view and nothing has been produced before us that there is any illegality in the view taken by learned CIT(A). Accordingly, in the background of aforesaid discussion and precedent we do not find any infirmity in order of learned CIT(A). Accordingly we uphold the same.
In the result, appeal of the Revenue stands dismissed. Order has been pronounced in the Court on 14.5.2019.