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Income Tax Appellate Tribunal, MUMBAI BENCH “SMC”, MUMBAI
Before: SHRI G.S. PANNU
The captioned appeal by the Revenue is directed against the order of CIT(A)-5, Mumbai dated 23.06.2016, pertaining to the Assessment Year 2012-13, which in turn has arisen from the order dated 18.02.2015 passed by the Assessing Officer, Mumbai under section 143(3) of the Income Tax Act, 1961 (in short ‘the Act’).
In its appeal, Revenue has raised the following Grounds of appeal :-
“1. On the facts and in the circumstances of the case and in law, whether the Ld. CIT(A) is right in directing the AO to assess the income of share transactions as capital gains instead of business income.
M/s. Pinetree Properties Pvt. Ltd.
2. On the facts and in the circumstances of the case and in law, whether the Ld. CIT(A) is right in directing the AO to compute the derivative trading loss as a normal business loss further stating that main income of the assessee is from capital gains and other sources which is exempt u/s. 73 of the I.T. Act, 1961.”
Insofar as the first Ground is concerned, the same arises from the action of the CIT(A) in upholding the assessee’s claim that Long Term as well as Short Term Capital Gains earned by the assessee on sale of shares is liable to be assessed as ‘Capital Gains’ and not as ‘Business Income’ canvassed by the Assessing Officer.
In this context, the relevant facts are that assessee had declared Capital Gains of Rs.4,15,566/- which, inter-alia, included short term Capital Gain of Rs.23,795/- and the balance was Long Term Capital Gains. The entire gain was assessed by the Assessing Officer as ‘Business Income’. The CIT(A) noted that assessee was a company which was engaged in the business of investment and trading in shares and securities. The CIT(A) further noted that one of the reason noted by the Assessing Officer to treat the gain on sale of shares as ‘Business Income’ was the fact that borrowings were used for acquiring shares and securities. In this context, CIT(A) noted that the borrowings were from the Director who was also a major shareholder of the assessee-company, and the same was interest-free. Further, the CIT(A) noted that all along, assessee has reflected the acquisition of shares and securities as part of its investments. In this regard, the CIT(A) relied upon the CBDT Circular no. 6/2016 dated 29.02.2016 to hold that where assessee has declared the share dealings as part of investments, same should be M/s. Pinetree Properties Pvt. Ltd.
accepted by the Assessing Officer. In this background, the CIT(A) accepted the stand of the assessee.
Before me, the ld. DR has not brought out any credible reason which would require interference with the decision of the CIT(A) which is based on the Circular no. 6/2016 dated 29.02.2016 (supra) and is fair and proper having regard to the facts and circumstances of the case. Thus, the Revenue fails on this Ground.
Insofar as the issue raised in Ground of appeal no. 2 is concerned, the same relates to the loss incurred by the assessee from derivative trading of Rs.91,21,600/-. Such loss was considered by the assessee as ‘Business Loss’ whereas the Assessing Officer treated it as a loss in speculation business by relying on the Explanation to Sec. 73 of the Act. As per the Assessing Officer, the transactions of trading in derivatives reflected the transactions in buying and selling of the underlying shares and, therefore, Sec. 73 of the Act was attracted in such a situation also and accordingly, the loss from derivative trading was assessed as loss from speculation business.
7. Before the CIT(A), the plea of the assessee was that the Explanation to Sec. 73 of the Act deals with purchase and sale of shares and that share transactions are not involved in derivative trading. Before the CIT(A), assessee also pointed out that in view of proviso (d) to Sub-section (5) to Sec. 43 of the Act, derivative trading is excluded from the meaning of expression ‘speculation transaction’. Apart therefrom, assessee canvassed before the CIT(A) that its income was mainly from ‘Capital Gains’ and ‘Other Sources’ and, therefore, the exception provided in Explanation to Sec. 73 of M/s. Pinetree Properties Pvt. Ltd.
the Act itself takes the assessee outside the purview of the Explanation. Therefore, it was contended that the Assessing Officer was not justified in invoking Sec. 73 of the Act. The CIT(A) upheld the stand of the assessee on both the aspects against which Revenue is in appeal before the Tribunal.
Having heard the rival stands, it is noticed that Sec. 73(1) of the Act prescribes that any loss computed in respect of speculation business carried on by the assessee shall not be allowed to be set-off except against profit and gains, if any, of another speculation business. Explanation to Sec. 73 of the Act, which is relevant for our purpose, reads as under :-
“Explanation — 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 trading in shares or 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.”
A perusal of the aforesaid Explanation shows that it prescribes a deeming fiction. In terms of the Explanation, where any part of the business of a corporate consists of purchase and sale of shares of other companies, such corporate shall, for the purposes of Sec. 73 of the Act, be deemed to be carrying on a speculation business to the extent to which the business consists of purchase and sale of such shares. The Explanation prescribes an exception, which is to the effect that a company whose gross total income consists mainly of income which is chargeable under the heads ‘Interest on M/s. Pinetree Properties Pvt. Ltd.
Securities’, ‘Income from House Property’, ‘Capital Gains’ and ‘Income from Other Sources’ is excluded from the purview of the Explanation. The plea of the assessee before the CIT(A) was that its income is mainly consisting of income under the head ‘Capital Gains’ and ‘Income from Other Sources’. This aspect has been accepted by the CIT(A) and, therefore, it has been held that assessee falls in the exception prescribed in Explanation to Sec. 73 of the Act. The said finding has not been assailed by the Revenue before me on the basis of any cogent reasoning and, therefore, I uphold the ultimate conclusion of the CIT(A). Thus, on this aspect also, Revenue fails.
Resultantly, appeal of the Revenue is dismissed.
Order pronounced in the open court on 21st March, 2018.