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Income Tax Appellate Tribunal, MUMBAI BENCH “C”, MUMBAI
Before: SHRI RAJESH KUMAR & SHRI AMARJEET SINGH
Per Rajesh Kumar, Accountant Member:
The above titled two appeals have been preferred by the Revenue against the orders dated 15.06.2017 & 16.06.2017 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment years 2013-14 & 2014- 15 respectively.
The grounds raised by the Revenue in AY 2013-14 are 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.1,69,65,626/- by the Assessing Officer being speculation income and deletion of disallowance of expenses of Rs.17,22,253/- attributable to the speculation income in proportion to total income.
The appellant craves leave to amend or later any ground or add new ground which may be necessary.”
2 ITA Nos.5655 & 5656/M/2017 M/s. Priyasha Meven Finance Ltd.
The only issue raised by the Revenue in the sole ground is against the deletion of Rs.1,69,65,626/- by the Ld. CIT(A) as made by the AO on account of speculation loss and also against the deletion of disallowance of expenses to the tune of Rs.17,22,253/- by Ld. CIT(A) attributable to speculation income which were in proportion to total income.
The facts in brief are that the assessee is engaged in the business of sale and purchase of shares as share broker and sub broker. The assessee during the year filed the return of income on 28.09.2013 declaring income of Rs.23,06,920/- which was processed under section 143(1) of the Act. Thereafter the case of the assessee was selected for scrutiny and statutory notices were issued and served upon the assessee. During the course of assessment proceedings, the AO, on the basis of the details furnished by the assessee especially upon examination of profit & loss account, noticed that the major activities of the assessee were sale and purchase of equity shares and the assessee has shown share trading loss of Rs.1,69,65,626/- in trading in shares and accordingly the AO asked the assessee to explain as to why the share trading loss should not be treated as speculation loss which was replied by the assessee. The AO relied on the explanation to section 73 to treat the share trading loss as of speculation loss and also called upon the assessee to furnish the details of speculative and non speculative expenses. The AO called upon the assessee as to why speculation expenses should not be disallowed in the ratio of turnover. The Ld. A.R. submitted before the AO that provisions of section 73 are not applicable to the assessee on the ground that assessee is
3 ITA Nos.5655 & 5656/M/2017 M/s. Priyasha Meven Finance Ltd. engaged in the business of share trading and share broking. It was stated that as a share broker the assessee company is acting as intermediary between the buyer and the seller of shares through stock exchange and the shares dealt in by the assessee were not owned by the company but merely the transactions are executed on behalf of the clients. In the said capacity as share broker, the assessee is not responsible and liable for any profit earned or loss incurred on the transactions of sale and purchase of shares on behalf of the clients and the assessee received income by way of brokerage/commission from its clients whereas as share trader the role of the assessee is distinct from role of a share broker. In this case, the entire sale and purchase of shares are done at the risk of the assessee and the profit or loss arising from such transactions would be assessee’s own profit or loss from share trading. Thus there are two distinct roles of the assessee in the business. But the AO not finding the explanation as tenable , rejected the same. Finally, the AO came to the conclusion that the assessee is covered by the explanation under section 73 and does not fall within the exceptions provided as its business consists of sale and purchase of shares of other companies and therefore the assessee shall be deemed to be carrying speculation business for the purpose of section 73 to the extent of business of purchase and sale of shares and thus holding that the loss incurred from such business of share trading can not be set off against the profit and gains of another business and consequently the trading loss of Rs.1,69,65,626/- was treated as speculative loss. The AO also disallowed the proportionate expenses incurred towards speculation transactions and a disallowance of
4 ITA Nos.5655 & 5656/M/2017 M/s. Priyasha Meven Finance Ltd. Rs.17,22,253/- was made out of the total expenses of Rs.42,00,618/- by applying the percentage of speculation income to the total income in the assessment framed under section 143(3) of the Act vide order dated 26.03.2016.
In the appellate proceedings, the Ld. CIT(A) dismissed the appeal of the assessee after taking into account the contentions and submissions of the assessee made during the appellate proceedings by observing and holding as under: “6.3.3. I have considered the stand of the AO in the assessment order as well as submission of the appellant. The appellant company is engaged in business of trading in shares and securities in cash market and also in Future &Option. The AO has observed that the appellant has incurred share trading loss of Rs 1,69,65,626/- in own trading.
The AO has treated said loss as speculative loss by invoking the Explanation to section 73 of the I.T. Act 1961 without co-relating the facts of the case to the deeming provision of the section 73. Section 73 and its deeming provision will be applicable only where any part of the business of the company [other than a company whose gross total income consist 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 trading in shares or banking or the granting of loans and advances] consisting in the purchase and sale of shares of other companies.
6.3.4. Section 73 of the Act stipulates that any loss computed in respect of speculation business shall not be set off except against profits and gains of speculation business. Section 43(5) of the Act clarifies 'speculative transaction to mean a transaction in which a contract for purchase or sale of any commodity including stock and shares is periodically or ultimately settled otherwise than by actual delivery. Prior to 01.04.1977, if any assessee was carrying on any speculative transactions, i.e. a contract ultimately settled otherwise than by actual delivery, then such speculative transactions are considered as speculation business. In other words, transactions prior to 01.04.1977, which were delivery based, were not treated as speculative transactions and hence the loss arising from such transactions was allowed to be adjusted against the income of the year under consideration. In pursuant to the Wanchoo Committee Report of December, 1971, an Explanation to section 73 of the Act was inserted by the Taxation Laws (Amendment) Act, 1975 w.e.f. 01.04.1977. After the insertion of Explanation to section 73 of the Act, companies other than investment companies or finance companies carrying on business of purchase and sale of shares, then the loss from such business would be treated as speculation business loss.
5 ITA Nos.5655 & 5656/M/2017 M/s. Priyasha Meven Finance Ltd. The intention behind the insertion of Explanation to section 73 of the Act has been explained by the CBDT, through Circular No. 204 dated 24.07.1976 as it was to curb the methods/devices sometimes resorted to by business house controlling groups of companies to manipulate and reduce the taxable income of companies under their control by showing loss on purchase and sale of shares of group companies. It appears that the intention of the Legislature, from a perusal of the Wanchoo Committee Report and CBDT Circular No. 204 dated 24.07.1976, was not to treat purchase and sale of shares by companies whose main business is trading in shares as speculative business and therefore the Explanation to section 73 of the Act should be read only to the extent of the purpose for which it was inserted.
The subsequently amendment was inserted by Finance (No.2) Act, 2014 in the Explanation to section 73 of the Act. The said amendment appears to be made in order to clarify the real intention behind the insertion thereof, by removing the obvious hardship caused to various assessees whose main business is trading in shares. The amendment has removed the anomaly and brought the ambit of the Explanation to section 73 of the Act in line with the intention of the Legislature by placing the companies whose principal business is trading in shares as part of the exception to Explanation to section 73 of the Act, because such companies were not the companies for whom the Explanation was inserted.
The insertion of the amendment in the Explanation to section 73 of the Act by the Finance (No. 2) Act, 2014, in my view, is curative and classificatory in nature. For this reason also, the amendment inserted to Explanation to section 73 of the Act by Finance (No. 2) Act, 2014 is to be applied retrospectively from the date of the insertion to Explanation to section 73 of the Act. In coming to this view, support from the decision of the Hon'ble Apex Court in the case of CIT vs. Alom Extrusions Ltd. (319 ITR 306) wherein their Lordships were considering the amendment made by Finance Act, 2003 by omitting the second proviso to section 43B of the Act w.e.f. 01.04.2004 and bringing about uniformity in the first proviso by equating tax, duty, cess and fees with contribution to welfare funds (viz. Provident Fund, etc.). The Hon'ble Apex Court held that the aforesaid amendment in section 43B of the Act by Finance Act, 2003 is curative in nature and would therefore apply retrospectively w.e.f. 01.04.1988. In the case of Allied Motors Pvt. Ltd. vs. CIT (224 ITR 677), The Hon'ble Apex Court held that when a proviso is inserted to remedy unintended consequences and to make the provision workable, the proviso which supplies an obvious omission in the section and which is to be read into the section to give it a reasonable interpretation, it could be read as retrospective in operation to give effect to the section as a whole The Hon'ble Apex Court in the case of CIT vs. J.H. Gotla (156 ITR 323) at page 339 and 340 thereof has observed as under: " In the case of Varghese v, ITO [1981]131 ITR 597, this court emphasised that a statutory provision must be so construed, if possible, that absurdity and mischief may be avoided. "Where the plain literal interpretation of a statutory provision produces a manifestly unjust result which could never have been intended by the Legislature, the court might modify the language used by the Legislature so as to achieve the intention of the Legislature and produce a rational construction.
6 ITA Nos.5655 & 5656/M/2017 M/s. Priyasha Meven Finance Ltd. In the case of Daga Capital Management Pvt. Ltd. (117 ITD 169) the Tribunal by majority view held that the ultimate test for considering the retrospective or prospective operation of an amendment is to consider its nature rather than going by the date on which it is stated to be applicable from. In the case of SubhalakshmiVanijya Pvt. Ltd. vs. CIT [(2015) 60 taxmann.com 60 (CalTrib.) held that the amendment to section 68 of the Act by insertion of proviso is clarificatory and hence retrospective.
6.3.5. Further reference is made to the case of Fiduciary Shares & Stock (P) Ltd. where, the Jurisdictional Hon'ble ITAT, Mumbai has decided in favour of the appellant which has been reported in (2016) 70 taxmann.com 23.
In this case, the Hon'ble Tribunal has held that where a company's principal business is trading in shares, the loss incurred by the said company in share trading will not be treated as speculation loss, but shall be treated as normal loss and therefore, can be adjusted against business / other income. An relevant extract of the decision is as under:
"by virtue of the insertion of Explanation to section 73 of the Act, if companies whose principal business is of purchase and sale of shares suffer losses from share trading, then such loss from share trading is to be treated as speculative business loss. The intention behind the insertion of Explanation to section 73 of the Act has been explained by the CBDT, Circular No. 204 dated 24-07-1976 was to curb the methods/devices sometimes resorted to by business house controlling groups of companies to manipulate and reduce the taxable income of companies under their control by showing loss on purchase and sale of shares of group companies. It appears that the intention of the Legislature, from a perusal of the Wanchoo Committee Report and CBDT Circular No. 204 dated 24-07-1976, was not to treat purchase and sale of shares by companies whose main business is trading in shares as speculative business and therefore the Explanation to section 73 of the Act should be read only to the extent of the purpose for which it was inserted. The subsequent amendment made by Finance (No.2) Act, 2014 in the Explanation to section 73 of the Act appears to be made in order to clarify the real intention behind the insertion thereof, by removing the obvious hardship caused to various assessees whose main business is trading in shares. The amendment has removed the anomaly and brought the ambit of the Explanation to section 73 of the Act in line with the intention of the Legislature by plating the companies whose principal business is trading in shares as part of the exceptions to Explanation to section 73 of the Act, because such companies were not the companies for whom the Explanation was inserted. [Para 5.6,2]
The insertion of the amendment in the Explanation to section 73 of the Act by the Finance (No. 2) Act, 2014, is curative and classificatory in nature. If the amendment is applied prospectively from assessment year 2015-16, a piquant situation would arise that an assessee who has earned profit from purchase and sale of shares in assessment year 2015-16 would be treated as
7 ITA Nos.5655 & 5656/M/2017 M/s. Priyasha Meven Finance Ltd. normal business profit and not speculation business profit in view of the exception carried out by the amendment in Explanation to section 73 of the Act. In these circumstances, speculation business loss incurred by trading in shares in earlier years will not be allowed to be set-off against such profit from purchase and sale of shares to such companies in assessment year 2015-16. For this reason also, the amendment inserted to Explanation to section 73 of the Act by Finance (No. 2) Act, 2014 is to be applied retrospectively from the date of the insertion to Explanation to section 73 of the Act. [Para 5.63]
Thus, the amendment inserted in Explanation to section 73 by Finance (No. 2) Act, 2014 with effect from 01-04-2015 is clarificatory in nature and would therefore operate retrospectively from 01-04-1977 from which date the Explanation to section 73 was placed on the statute since this amendment to section 73 of the Act'.... or a company the principal business of which is the business of trading in shares .....' brings in the assessee whose principal business is trading of shares. Therefore, the loss incurred in share trading business by such companies, i.e. like the assessee will not be treated as speculation business loss but normal business loss, and hence the same loss can be adjusted against other business income or income from any other sources of the year under consideration. In this view of the matter, the Assessing Officer is directed to allow the assessee's claim for setting off the loss from ‘share trading business' against ‘other business income’ and income from any other sources during the year under consideration. [Para 5.6.12]"
6.3.6. Further reference is made to the decision of Hon'ble Bombay High Court in the case of Darshan Securities (P) Ltd. [2012] 18 taxmann.com 142 the Hon'ble Bombay High Court, which squarely covers the issue involved here in favour of the appellant.
6.3.7. Keeping in view of the above discussions and various decisions as referred above and recent decisions by MUMBAI ITAT "F" BENCH in case of FIDUCIARY SHARES & STOCK P. LTD. VS. ACIT 4(2), ITA NO. 321/MUM/2013, it is held that insertion of the amendment in the Explanation to section 73 by the by Finance (No. 2) Act, 2014 w.e.f. 01.04.2015 will have a retrospective effect and will be squarely applicable to the appellant. The appellant company is engaged business of trading in shares and securities in cash market and also in Future &Option. Hence loss on delivery based share trading of Rs. 3,53,79,676/- along with allocated expenses cannot be treated as speculative loss rather it has to be treated as regular business loss and is allowed to be set off/carry forward as business loss. In the result, the AO is directed to treat the said loss as regular business loss. In the result, this part of ground of appeal is to be treated as Allowed.
6.3.8 In the result the delivery based loss in shares has to be treated as normal business loss in the case of present appellant therefore is directed to be allowed as business loss to be set off against the business income.
8 ITA Nos.5655 & 5656/M/2017 M/s. Priyasha Meven Finance Ltd. As regards the consequential and proportionate expenses disallowed by the AO amounting to Rs.17,22,253/- the same cannot be sustained because the said transactions of the appellant have been treated as normal business loss. In the result this ground of appeal is to be treated as Allowed.”
The Ld. A.R. vehemently submitted before us that the assessee is engaged in the business of share broking and sub broking and also trading in shares which is the main business of the assessee and no other business was being carried on by the assessee during the year. The Ld. A.R. contended that if the assessee’s business comprised of buying and selling of shares in part then it is a speculative business. But if the company is wholly and exclusively engaged in the share broking business and trading in shares then the business from the said buying and selling from the share has to be treated as normal profits as these are the transactions which are entered into by the assessee in the ordinary course of business. In defence of his argument, the Ld. A.R. relied on a series of decisions namely; 1. Fiduciary Shares and Stocks Pvt. Ltd. vs. ACIT order dated 31.05.2016 Mumbai-Trib. 2. CIT vs. Darshan Securities Pvt. Ltd. (Mumbai –Trib.) ITA No.288/M/2009 order dated 02.12.2012 3. DCIT vs. Baljeet Securities Pvt. Ltd. order dated 21.10.2014 Kolkata Bench.
The Ld. A.R. submitted that in the case of Fiduciary Shares and Stocks Pvt. Ltd. vs. ACIT (supra) the Tribunal has held that amendment of explanation to section 73 by Finance (No.2) Act, 2014 w.e.f. 01.04.2015 is clarificatory in nature and operates retrospectively from 01.04.1977 being the date, the explanation to section 273 was placed on the statute book. Therefore, loss incurred in share trading business by companies whose principal business is trading in shares will not be treated as
9 ITA Nos.5655 & 5656/M/2017 M/s. Priyasha Meven Finance Ltd. speculative loss but as normal business loss and can be adjusted against income from business or other sources. The Ld. A.R. also submitted that in the case of CIT vs. Darsharn Securities Pvt. Ltd. (supra) wherein the Jurisdictional High Court has held that the total income of the assessee was required to be computed inter-alia by computing the income under the head “profit and gains of business or profession” as well and income from service charges of Rs.2.25 crores and loss in share trading of Rs.2.23 crores would have to be taken into account in computing the income under that head as both being the sources under the same head and thus upheld the order of the Tribunal wherein the Tribunal has concluded that assessee fall within the purview of the exceptions carved out in the explanation to section 73 and consequently the assessee would not be deemed to be carrying on a speculation business for the purpose of section 73. While passing the order the Hon’ble High Court following the decision in the case of CIT vs. Hiroj Textiles and Trading Ltd. ITA No.2011 of 2009 dated 29.01.2008 and CIT vs. Mansi Trading Pvt. Ltd. ITA No.47 of 2001 decided on 29.01.2008. Similarly, the Ld. A.R. relied on the decision of DCIT vs. Baljeet Singh Pvt. Ltd. (supra) a decision of Kolkata Bench wherein a similar ratio has been laid down by holding that assessee is engaged in the composite business of purchase and sale of shares and is also registered stock broker, the Bench held that the main intention of the assessee in dealing in shares and securities is to earn profit and therefore both delivery based transactions in shares and derivative transactions are non speculative so far as section 43(5) is concerned which goes to confirm that both will have the same treatment as regards
10 ITA Nos.5655 & 5656/M/2017 M/s. Priyasha Meven Finance Ltd. application of explanation to section 73 is concerned which creates a deeming fiction. The Tribunal held that before application of the explanation to section 73 ,the business profit/loss is to be worked out whether it is share delivery transactions or derivative transactions. The said view of the Tribunal has been affirmed by the Hon’ble High Court in assessee’s own case in ITA No.3481 of 2013 and ITAT No.2015/13 dated 12.03.2014. The Ld. A.R. also relied on the order of Ld. CIT(A) heavily which has been passed after following the jurisdictional High Court decision and various other decisions of the co-ordinate benches of the Tribunal and thus prayed before the Bench same may kindly be affirmed.
The Ld. D.R., countering the arguments of the ld AR vehemently submitted before the Bench that the assessee is carrying on a speculative transactions so far as the loss of Rs.1,69,65,626/- arising out of delivery based share trading transactions is concerned which are speculative in nature and also justified the addition by way of disallowance of expenses of Rs.17,22,253/- relating to speculative business. The Ld. A.R. submitted that AO has rightly relied on the explanation to section 73 of the Act, 1961 w.e.f. 01.04.2015 which is not applicable retrospectively and would have a prospective application and thus the loss from buying and selling of shares has rightly been treated as speculation loss by the AO. The Ld. D.R. therefore prayed before the Bench that the order of Ld. CIT(A) may be set aside and that of the AO may be restored.
After hearing both the parties and perusing the material on record, we observe that in the present case the assessee is
11 ITA Nos.5655 & 5656/M/2017 M/s. Priyasha Meven Finance Ltd. mainly engaged in the business of dealing in shares and also acting as stock broker and sub broker. The assessee has incurred loss of Rs.1,69,65,626/- in trading in buying and selling of shares. The AO treated the said loss as speculative loss and also disallowed expenses attributable to the said loss to the tune of Rs.17,22,253/-. In the appellate proceedings, the Ld. CIT(A) after following the decision of Hon’ble High Court in the case of Darsharn Securities Pvt. Ltd. (supra) and various other decisions held that the loss of Rs.1,69,65,626/- is not a speculative loss and also that expenses of Rs.17,22,253/- were wrongly disallowed as speculative expenses. The Ld. CIT(A) also held that the amendment in explanation to section 73 by Finance (No.2) Act, 2014 will have a retrospective effect and will be squarely applicable to the assessee’s case while deciding the issue in favour of the assessee. After taking into account the facts and circumstances of this case and in the light of various decisions referred to by the Ld. A.R., we are of the view that Ld. CIT(A) has passed a very reasoned and speaking order by following the decision of the co-ordinate benches of the Tribunal and the Hon’ble Jurisdictional Bombay High Court and we do not find any reason to interfere with the same and accordingly, the order of Ld. CIT(A) is upheld.
ITA No. 5656/M/2017 Assessment Year: 2014-15 9. The issue raised by the revenue is identical to one as decided by us in ITA No. 5655/Mum/2017 AY 2013-14 (supra) and therefore our decision in that appeal would, mutatis mutandis, apply to this appeal as well. Accordingly the order of CIT(A) is upheld by dismissing the appeal of the revenue.
12 ITA Nos.5655 & 5656/M/2017 M/s. Priyasha Meven Finance Ltd. 10. In the result, both the appeals of the Revenue are dismissed.
Order pronounced in the open court on 26.03.2019.
Sd/- Sd/- (Amarjeet Singh) (Rajesh Kumar) JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai, Dated: 26.03.2019. * Kishore, Sr. P.S.
Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT (A) Concerned, Mumbai The DR Concerned Bench //True Copy// [ By Order
Dy/Asstt. Registrar, ITAT, Mumbai.