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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: Dr.
IN THE INCOME TAX APPELLATE TRIBUNAL “I” BENCH, MUMBAI BEFORE SRI MAHAVIR SINGH, JM AND SRI RAJESH KUMAR, AM
ITA No. 5179/Mum/2016 (A.Y. 2012-13) Kunal G. Kataria The Asst. Commissioner of 2B, Censed Apartment Income Tax Central Circle Near Bajaj Park, Dr. 8(1), Mumbai Vs. Ambedkar Road Bandra (West), Mumbai-400 050 Appellant .. Respondent PAN No. AODPK3994G Assessee by : Madhur Aggarwal & CC Dangi, ARs’ Revenue by : Saurabhkumar Rai, DR
Date of hearing: 07-02-2018 Date of pronouncement : 23-02-2018
O R D E R PER MAHAVIR SINGH, JM:
This appeal by the Assessee is arising out of the order of Commissioner of Income Tax (Appeals)-33, Mumbai, [in short CIT(A)] in appeal No. CIT(A)-33/Rg.23/26/2015-16 dated 13-06-2016. The Assessment was framed by the Asst. Commissioner of Income Tax, Circle 23(2), Mumbai (in short ACIT) for the assessment year 2012-13 order vide dated 30-03-2015 under section 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’).
The only issue in this appeal of assessee is against the order of CIT(A) confirming the action of the AO in disallowing assessee’s claim of set off of derivative loss against derivative profit treating the same as speculative loss without considering that the business of the assessee which is trading in derivatives only on various exchanges as speculative business. For this assessee has raised following three grounds: -
“1. The learned Commissioner of Income Tax (Appeals) has erred in law and on facts in
ITA No.5179/Mum/2016 confirming the order of the ACIT disallowing the appellant's claim of setoff of derivative loss of Rs.4,48,73,079/- against derivative profit of Rs.5,27,05,518 treating the same as speculative loss without properly considering the facts of the appellant's business which trading in derivative only on various exchanges as business which constitute the business as speculative business hence the income of the appellant should be speculative business income in totality.
The learned Commissioner of Income Tax (Appeals) has erred in law and on facts in confirming the action of the ACIT treating the derivative trading carried out on exchanges other than MCX and NSE as speculative loss instead of appreciating the fact that the appellant's only business activity is trading in derivatives and therefore the same can be looked into the cumulative effect instead of individual exchange wise effect of the Profit and Loss as taken by the Assessing Officer.
The learned Commissioner of Income Tax (Appeals) has erred in law and on facts in considering the applicability of provision of section 43(5)(d) of the Income Tax Act,1961 instead of section 43(5)(e) applicable to the derivate trading in commodity as inserted by Finance Act 2013 applicable from Assessment Year 2014-2015. The appellant also submit that if section 43(5)(d) is applicable to derivative trading commodity then there was no need to insert section 43(5)(c) which is
ITA No.5179/Mum/2016 applicable exclusively for derivative trading in commodity.”
Brief facts relating to this issue are that the assessee is carrying on business of trading in commodity derivatives on various exchanges like NSE, BSE, MCX, ICEX etc. The assessee declared net income from commodity feature amounting to ₹ 78,32,439/- derived from the profit and loss from various exchanges as under:-
Trading on Recognized Exchange
Commodity/ Derivatives trading
Dr. Cr. MCS [Kayees Finance & 14,65,600 Investments –Own Trading) Trading Through Broker 2,10,02,819 Broker- Odyessey Commodities Pvt. Ltd. Mark to market (inclu ST/ Trans Chrgs/ Brokrg) Trading Through Broker 2,38,70,260 Broker-Ashlar-commodities Pvt. Ltd Mart to market (inclu ST/Trans chrgs/ Brokrg) Broker-Kayess Forex 5,12,39,918.92 Mark to market (Inclu ST/Trans Chrgs/ Brokg) 4,48,73,079.84 5,27,05,518.92 78,32,439.08 4. The AO applied the provisions of sections 43(5)(d) of the Act and bifurcated the earnings for the recognized stock exchanges and non- recognized stock exchanges as given in the above chart reproduced in the above Para. The AO relying on the decision of ITAT Mumbai Bench in the case of ACIT vs. Arnav Akshay Mehta in ITA No. 2742/Mum/2011 stated that the claim of the assessee that the transaction derivatives are not of casual nature but it is a business activity and for this he stated in para 6.5 and 6.6 as under: -
“6.5 The claim of the assessee that transactions in derivatives are not of casual nature but it is a business activity, and as such the assessee has
ITA No.5179/Mum/2016 declared the profit from derivative trading as Business Income. However, a closer look at the profits declared reveals that he assessee has set off speculative loss from derivatives trading in un- recognised exchanges as proved above against business profits earned through derivative trading which is in the nature of business as declared by the assessee which is not permissible.
6.6 In view of these facts and after considering the evidences on record, the loss booked from trading in derivatives from un-recognized exchange is held as speculation loss and is not allowed to be set off against business profit of ₹ 5,27,05,518/- is disallowed. Accordingly the business income of the assessee is assessed at ₹ 5,27,05,518/- as against ₹ 78,32,439/- declared by the assessee.”
Accordingly, he disallowed the assessee’s claim of speculation loss of ₹ 4,48,73,079/- not allowable from the regular business income, which is income from recognized stock exchanges as specified in section 43(5)(d) of the Act. Aggrieved, assessee preferred appeal before CIT(A).
The CIT(A) after going through the submissions of the assessee confirmed the action of the AO vide Para 17 to 19 as under:-
The reliance of the Id AR of the appellant on the case of Varsha Corporation Ltd. vs DCIT in ITA no. 6534/ Mum/ 2012 dated 17.01 .2014 is without any strength as distinguishable on facts The said case pertains to A Y. 2009-10, the year in which MCX was not a recognized stock exchange under sec 43(5)(d), the question before Hon'ble ITAT, F- Bench, Mumbai was whether the action of the AO in
ITA No.5179/Mum/2016 treating the loss of Rs. 21,04,331/- incurred on trading in futures and options by hedging the gold in MCX, as speculation loss instead of business loss, was correct. The Hon'ble Tribunal after considering the submission of the assessee found that MCX through which the assessee carried out the transaction, was not a recognized stock exchange as required under the provisions of section 43(5)(d), but was later on notified as a "recognized association" for the purpose of clause (e) of sec. 43(5) wef 1st April. 2014. The Hon'ble Tribunal also distinguished the cases of ACIT vs Arnav Akshay Mehta (2012) 53 SOT 581 (Mum) and Delhi High Court judgment in CIT vs Nasa Linelease P. Ltd in ITA no 647/2012 dated 06.09.2013. Accordingly, the decision was rendered against the assessee and in favour of revenue.
However, in the instant case there is no controversy regarding recognition of MCX and its applicability of the provisions of sec 43(5) on the transactions carried out through it since the year under consideration is A.Y. 2012-13, much after the recognition of MCX under sec. 2(f) of the SCRA, 1956. Moreover, after the recognition of MCX under sec. 2(f) of the SCRA, 1956 for the purpose of sec. 43(5)(d) wef from 22.05.2009. MCX and NCDEX were recognised as 'recognised association" under sec. 2 of the SCRA, 1956 for the purpose of sec. 43(5)(e) of the I.T. Act with effect from 29.11.2013 and 27.11.2013 respectively. The recognisation as "recognised association" will not preclude MCX from its recognisation as "recognised stock exchange", as
ITA No.5179/Mum/2016 the latter is not cancelled till date. It is also observed that the Hon'ble ITAT in the case Varsa Corporation Ltd. vs DCIT (supra) took cognizance of the recognization as "recognized association" only and not the recognizance granted to MCX on 22.05.20 as "recognised stock exchange". In this regard, it is observed that the existing judgment in the case of CIT vs Shri Bharat R Ruia (HUF) in ITA no. 1539 of 2010 delivered by Hon'ble Mumbai High Court on 18.04.2011 was also not brought to the knowledge of the Hon’ble Members of ITAT, Mumbai bench in the case of Varsha Corporation Ltd. (supra), which touches on the core issue involved in such cases. The relevant portion of the judgment of Hon’ble Mumbai High Court is reproduced as under:
"35) The argument that Section 43(5) refers to contracts which are capable of settlement by actual delivery whereas the transactions in futures are incapable of settlement and therefore, transactions in futures would fall outside the scope of Section 43(5) is also without any merit, because, the very object of Section 43(5) is to treat transactions which are settled otherwise than by actual delivery as speculative transactions. As noted earlier, Section 43(5) refers to contracts for purchase / sale of any commodity and it is not restricted to contracts which are capable of performance by actual delivery. Therefore, the fact that the futures contracts are settled otherwise than actual delivery cannot be a ground to hold that the futures contracts are
ITA No.5179/Mum/2016 not speculative transactions under Section 43(5) of the Act.
36) The exceptions enumerated in the proviso to Section 43(5) clearly provide that where speculative transactions are carried out with a view to guard against loss in respect of contracts for actual delivery in cases referred to in clause (a), (b) & (c) of the proviso, then, such speculative transactions shall not be deemed, to be speculative transactions. So far as the transactions covered under clause (d) are concerned, they are deemed not to be speculative transactions only with effect from 1/4/2006. Therefore, the transactions covered under clause (d) would not be treated as speculative transactions only with effect from 1/4/2006.”
Taking into consideration the entire facts and circumstances of the issue involved and various relevant judgments, in my considered opinion, the AO has correctly disallowed the appellant's claim of set off of derivate loss in commodity trading of ₹ 4,48,73,079/- by treating the derivative trading carried out on exchanges other than MCX and NSE as speculative by invoking the provisions of clause (d) of provisions to sec. 43(5) of the Act. Moreover, no cognizance can be taken of the appellant’s claim of the provisions of clause (e) of proviso to sec. 43(5) as the same came into effect from 01.04.2014 and not for the year under consideration. Hence,
ITA No.5179/Mum/2016 grounds of appeals No.1 and 2 and the additional ground are dismissed.”
We have heard rival contentions and gone through facts and circumstances of the case. We find that the assessee has started his business activity of derivative trading in commodity only and he has not done any activity of derivative trading in securities and equity. We are of the view that the derivative trading in commodity is to be considered as one business and the net income from the same should be assessed as business income of speculation business, since section 43(5) does not exclude commodity trading during the year. We find from the facts of the case that the assessee is member of MCX and he has to carry out transaction on another exchange because on MCX there was no volume in commodity like Coper, Crude Oil, Silver etc. and also there was difference in lot size of the commodity in Lead, Gold etc. Further in MCX exchange, some time, the trading limit exhausted and hence he has to approach other brokers of other exchange to continue the activity. We find from the facts of the case that the assessee on ICEX exchange earned profit in Lead and Gold commodity and incurred loss in Iron Ore. Thus, the observations of the AO that the transactions carried out in the last two months of the year has no relevance to the business activity of derivative trading is of no substance. The commodity transactions are not covered by section 43(5)(d) of the Act. Clause (d) of section 43(5) is relating to transactions in respect of the trading in derivatives referred to in clause (ac) of section 2 of Securities Control (Regulation) Act.1956. Clause (ac) of section 2 of Securities Control (Regulation) Act,1956 defined as under:
(A) A security derived front a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for difference or any other form of Security.
ITA No.5179/Mum/2016 (B) A contract which derives its value from the prices, or index of prices, of underlying securities.
From the above definition it is clear that commodity derivative trading is not covered by Securities Control (Regulation) Act, 1956 and therefore the provision applied by the AO is against the facts of the case.
Even the board circular No. 3 of 2006 dated 27-12-2006 has explained the scope and effect of ammendment with effect from 01-06- 2006 made in section 43(5) by the Finance Act 2005, which have been elaborated in the following portion of departmental circular: -
“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 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
ITA No.5179/Mum/2016 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.”
But, the proviso to clause (e) takes out the definition of speculative transaction w.e.f 01.04.2014 by inserting the proviso by Finance Act, 2013, which we will discuss in the next paragraph.
Alternative argument made by assessee is that commodity transaction are covered by proviso (e) of section 43(5) of the Act, which has been added by Finance Act, 2013 with effect front 01.04.2014 applicable for & from AY 2014-2015. Hence the transactions of derivative trading in commodity are speculation transactions as provided by section 43(5) of the Act and therefore the transactions carried out by NSE, BSE, MCX, ICEX or any other exchanges are on same footing and shall be adjusted against each other as whose transactions irrespective of any exchange are speculative transactions. The above view is also support by the judicial decision of the coordinate bench of this Tribunal in case of Varsha Corp. Ltd vs DCIT in appeal No.6534/Mum/2010 for AY 2009- 2010. The Tribunal in Para 8 and 9 of the Order has made interpretation
ITA No.5179/Mum/2016 and discussed the facts and after interpreting the various decisions as mentioned in the order finally held that the benefit of clause (e) of the proviso to section 43(5) of the Act, cannot be entitled the assessee for the transactions carried out prior to Assessment Year 2014-2015 and accordingly the appeal filed by the assessee was dismissed.
Now we have to discuss the provision of section 43(5) of the Act with all its provision to understand the assessee's case. The relevant provision reads as under: -
Section 43(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 scripts.
(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 delivers 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 hic holding of stocks and share through price fluctuations; or
(c) A contract entered into by a member of a forward market or a stock exchange in the course of an 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
ITA No.5179/Mum/2016 (d) An eligible transaction in respect of trading in derivatives referred to in clause l(ac) at section 2 of the Securities Contracts (Regulation) Act,1956 (42 of 1956) carried out in a recognized stock exchange; or
(e) An eligible transaction in respect of trading in commodity derivatives carried out in a recognized association which is chargeable to commodities transaction tax under Chapter VII of the Finance Act, 2013 (17 of 2013), I shall not be deemed to be a speculative transaction.
From the plain reading of this provision, we observed that this clause (d) was added with effect from 01.04.2006 which is related to the transaction covered under Securities Contract (Regulation) Act. 1956 and clause (e) was inserted for trading in commodity derivatives with effect from 01.04.2014. In view of this position, we are of the view that the commodity derivatives transactions are speculative transactions and the assessee's business is only and only derivatives trading in commodity, the loss incurred or profit earned should be speculative loss / profit and should be allowed to set off against each other.
In view of the above position of law, we are of the view that in the given facts of the case that the assessee is exclusively carrying on business of derivative trading on various exchanges and the transaction entered into derivative on various exchanges is his business activity whether considered as speculative or non speculative transaction as per section 43(5), the derivative transactions are not speculative transaction, in view of the fact that the derivative transaction is not supported or backed by deliverable commodity. The assessee is not claiming any special deduction under section 43(5)(d) of the Act for treating the profit as business profit. The nature of activity is carried throughout the year by
ITA No.5179/Mum/2016 the assessee is one and only one to trade in derivatives on various exchanges and earned profit or income which includes loss. In such facts, we are of the opinion that the assessee is eligible for set off of this loss against the profit. We reverse the orders of the lower authorities and allow the claim of the assessee. This issue of assessee’s appeal is allowed.
In the Result, the appeal of assessee is allowed.
Order pronounced in the open court on 23-02-2018.
Sd/- Sd/- (RAJESH KUMAR) (MAHAVIR SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated: 23-02-2018 Sudip Sarkar /Sr.PS Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. The CIT (A), Mumbai. 4. CIT BY ORDER, 5. DR, ITAT, Mumbai 6. Guard file. //True Copy// Assistant Registrar ITAT, MUMBAI