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Facts
The assessee filed its return of income declaring a total income. The Assessing Officer (AO) noted a loss from trading of shares and income from jobbing in shares. Upon verification, the AO treated the loss on sale of shares as speculation loss as per Section 73 of the IT Act, 1961.
Held
The Tribunal held that the loss incurred on trading of equity shares cannot be adjusted against other business income, but it is a speculation loss. However, upon considering the case law, the Tribunal observed that the gross total income mainly consisted of capital gains. Therefore, the explanation to Section 73 of the IT Act does not operate.
Key Issues
Whether the loss on trading of shares can be treated as speculation loss under Section 73 of the IT Act, 1961.
Sections Cited
Section 73 of the IT Act, 1961
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Income Tax Appellate Tribunal, ‘A‘ BENCH
आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeal has been filed by the assessee against order dated 04/10/2023 passed by NFAC, Delhi for the quantum of assessment passed u/s.143(3) for the A.Y.2009-10. 2. The main issue involved in various grounds of appeal is the treatment of loss and trading of shares of Rs.80,33,000/- while
2 ITA No. 4364/Mum/2024 Amu shares and Securities Ltd calculating the gross total income and it remaining the same as speculation loss from deleting in shares in view of explanation to Section 73 of the Act.
The brief facts are that assessee has filed its return of income on 23/09/2009 declaring total income of Rs. 38,48,450/-. The said case was selected for scrutiny and ld. AO noted that the assessee has shown loss of Rs.2,79,572/- from trading of shares. In addition to that, the assessee has shown income of Rs.63,87,049/- from jobbing in shares. However, on verification of the details filed of purchase and sale of shares, it was noticed that the assessee has included the purchase cost and sale proceedings of BSE shares in the statement filed. Since BSE shares is a capital assets, the same cannot be included in the trading of shares/securities and was declared as capital gain. In view of that, the purchase cost and sale consideration has been reduced from the statement filed. The net Income from sale and purchase of shares and jobbing income was determined at a loss of Rs. 7,89,523/-. As the assessee has incurred loss on purchase and sale of shares and jobbing in shares, the loss of Rs 7,89,523/- was treated as speculation loss in view of provision of explanation to section 73 of the IT Act, 1961. 4. Further, ld. AO asked to allocate direct expenses relating to purchase and sale of shares and jobbing in shares. Accordingly, the assessee filed the details of direct expenses incurred and purchase of shares and sale of shares and share trading
3 ITA No. 4364/Mum/2024 Amu shares and Securities Ltd aggregating to Rs.41,93,553/-. The observation of the ld. AO in this regard reads as under:- “As per the details filed by the assessee, the assessee has filed the details which relate to the direct expenses Incurred on purchase and sale of shares and share trading as under: Description Amount (in Rs.) STT 2661312 Transaction tax 701533 Stamp Duty 287791 Salary 250050 Clearing House Expenses 292844 4193530 5 In addition to that, the assessee is asked to allocate the indirect expenses Incurred by the assessee relating to business of purchase and sale of shares. The assessee has allocated indirect expenses on the basis of no. of transactions executed In share trading and F&O and broking. On the basis of allocation of the indirect expenses to the ratio of no of transactions, the allocation of indirect expenses comes to Rs. 3049947/- to the business of purchase and sale of shares. Therefore, total allocation of direct and indirect expenses to the business of purchase and sale of share comes to Rs.7243477/- (Rs.4193530/- plus Rs 3049947/-) Adding the same to the loss incurred on the purchase and sales of Rs. 789523/-, the total loss is recomputed at Rs. 8033000/- which is treated as speculation loss in view of provisions of explanation to section 73 of the I.T. Act, 1961. 5.2 As per the details filed by the assessee regarding computation of income from the share trading, F&O and business income and Capital Gain the income from business is determined at Rs. 5134452/- on the basis of return of income after considering the effect given. 5. The assessee had also shown capital gain on sale of BSE shares of Rs.60,93,476/- and accordingly, the income was computed by the ld. AO in the following manner:-
4 ITA No. 4364/Mum/2024 Amu shares and Securities Ltd
Rs. Business income as per 5134452 assessee's computation submitted & discussed at para No.5.2 Add: Disallowance/additions Disallowance u/s 317014 14A(as per para 6) Business Income... 5451466 Income from LTCG (as 6093476 per para 7) Total Income 11544942 Rounded off to 11544940
As discussed in paras 4 and 5, Rs. 80,33,000/- is treated as speculation loss in view of provisions of explanation to section 73 of the IT. Act, 1961 and allowed to be c/f for subsequent years
The ld. CIT(A) after referring to Section 73 r.w. Explanation thereto, confirmed the action of the ld. AO after observing and holding as under:- 4.1.6 The matter has been examined and it is seen that the appellant has declared income under the head "Business Income" only in the ITR at Rs. 38,48,452/- and taxes @30% + EC @ 3% i.e. Rs. 11,89,171/- has been paid. In the ITR, the appellant has neither shown any income from capital gains nor income from other sources. Perusal of audited profit & loss account also shows that the appellant has not shown any profit/gain on investment. In fact, the spa shoes sheet also reveals nil investment as on 31.03.2009 as well as 31.03.2008. This clearly shows that the appellant
5 ITA No. 4364/Mum/2024 Amu shares and Securities Ltd didn't had any investment in BSE shares, which can fetch any capital gain during the present financial year. Also, the appellant didn't furnished any third party evidences to show that it had long term capital gain but paid the taxes at normal rate i.e. 30% + EC@3%. 4.1.7 On examination of the facts of the case discussed above, it is found that the appellant's main income consists of business & profession income such as Brokerage Income of Rs. 10,40,995/-, Jobbing Income of Rs. 63,87,050/-, derivative profit of Rs. 56,56,231/-, share trading loss of Rs. 2,79,572/-, dividend income of Rs. 9,29,033/- and Interest Income of Rs. 74,02,219/- but does not constitute income from "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources and rather that it has incomes offered under the head 'profits and gains of business or profession only. Therefore, the appellant's contention that it's case is covered under the exception category is hereby rejected. 4.1.8 Since the appellant had income under the head "income from business or profession" only, the decision of the Hon'ble Bombay High Court in the case of Darshan Securities (P) Ltd [2012] 18 taxmann.com 142(Bom) is not applicable as the facts of both the cited case and appellant's case are different and not similar. 4.1.9 In view of the above. I am of the considered view that the loss Rs. 80,33,000/- incurred on trading of equity shares by the appellant is a speculation loss, which cannot be adjusted against the other business income Thus, the treatment trading shares of ting of loss on amounting Rs.80,33,000/- as speculation loss is hereby confirmed. Thus, the sole ground of appeal is hereby dismissed. 7. Before us, ld. Counsel submitted that this issue is squarely covered by the following decisions:- 1. CIT vs. Darshan Securities Pvt. Ltd. (341 ITR 556 Bom.) 2. CIT vs. HSBC Securities and Capital Markets (India) Private Limited (208 Taxman 439, Bom) 3. CIT v. Madona Commercial (P.) Lptd (257 Taxman 116, Bom) 4. DCIT v. Quant Securities (P) Ltd [[2022] 145 taxmann.com 355 (Mum-Trib)]
6 ITA No. 4364/Mum/2024 Amu shares and Securities Ltd 5. Af-taab Investment Company Ltd. VS ACIT Circle-2(1), in I.T.A. No. 6913/Mum/2012 for A.Y. 2002-03 dated 26th March, 2021.
Apart from that he submitted that to derive the net profit earned during the year the net income from all the sources has to be calculated by reducing the expenses incurred both direct and indirect from the gross income and if that exercise is done, it can be seen that the major income of the assessee is from long term capital gain therefore, the provision of explanation to Section 73 is not triggered. He has strongly relied upon the decision of the Hon’ble Bombay High Court in the case of Darshan Securities Pvt. Ltd and HSBC Securities and Capital Markets (India) Private Limited and submitted that the business income assessed by the ld. AO at Rs.54,51,466/- and loss in the share trading which has been assessed at Rs.80,33,000/- would have to be taken into account in computing the income under the head ‘profit and gains’ which would result in loss of Rs.25,81,534/-. Since assessee has also earned capital gain of Rs.60,93,476/-, therefore, the gross total income consists mainly of income which is chargeable under the head ‘capital gain’ therefore, the case of the assessee falls within the purview of expenditure carved out in Explanation of Section 73 and accordingly, the loss of Rs.80,33,000/- should not be treated as speculative loss. 9. On the other hand, ld. DR relying upon the following judgments:- 1.[2017] 88taxmann.com 669(Gujarat) Gujarat High Court in the case of Ratnamani Seamless v. Income-tax Officer
7 ITA No. 4364/Mum/2024 Amu shares and Securities Ltd
2.[2011] 198 taxman 349(Calcutta) High Court Calcutta in the case of RPG Industries Ltd. vs Commissioner of Income-tax 3. S. Sundaram Pillai, Etc vs V.R. Pattabiraman 1985 AIR 582 Hon'ble Supreme Court Followed by Calcutta High Court in the case of RPG Industries Ltd) 10. Apart from that he referred to various observations of the ld. CIT (A) also. 11. We have heard the rival submissions and also perused the relevant finding given in the impugned orders. As noted above, the only issue is whether ld. AO and ld. CIT (A) is justified in treating the loss of sale of shares of Rs.80,33,000/- as speculative loss by invoking explanation t Section 73. First of all, the gross total income shown by the assessee from various sources is as under:- Particulars Total Income Share F&O, Capital Trading Brokerage & Gain on Loss & Other Income account of Jobbing sale of BSE shares Income
Loss on (2,79,572) (2,79,572) - share trading Jobbing 63,87,049 63,87,049 - Income
Capital Transfer (68,97,000) 68,97,000 Gains amount income
8 ITA No. 4364/Mum/2024 Amu shares and Securities Ltd Brokerage 10,40,995 10,40,995 - Income
F&O 56,56,231 56,56,231 - Income (Derivative Profit)
Dividends 9,29,033 9,29,033 - Received
Interest 74,02,219 74,02,219 - income earned
Total: 2,11,35,955 (7,89,523) 1,50,28,478 68,97,000
As far as loss on share trading, the same has been determined in the following manner:- Particulars Amount (Rs.) Amount (Rs.) Total Sales of 8,97,79,247 Shares Cost Of Shares sold: Opening Stock 5,52,49,541 Purchases 7,15,56,179 Closing Stock (3,67,46,901) (9,00,58,820)
9 ITA No. 4364/Mum/2024 Amu shares and Securities Ltd Loss on share (2,79,573) trading
To arrive at the net profit earned during the year, the income from all the above sources is to be calculated by reducing the expenses incurred both direct and indirect form the above gross incomes. The assessee before us and also before the ld.AO had submitted the allocation apportionment of expenses both direct and indirect on various heads of income which for the sake of ready reference is summarized hereunder:- Particulars Total Share F & Q Capital Income Trading Brokerage & Gain Loss & Other on account Jobbing Income of sale of Income BSE shares
Income as per 2,11,35,955 (7,89,523) 1,50,28,478 68,97,000 Table 1 : Direct Expenses: STT 26,61,312 26,61,312 - - Transaction Tax 7,01,533 7,01,533 - - Stamp Duty 2,87,791 2,87,791 - - Salary ( Direct) 20,98,500 2,50,050 18,48,450 - Clearing House 2,92,844 2,92,844 Expenses Brokerage on 1,50,000 1,50,000 Capital Gain
10 ITA No. 4364/Mum/2024 Amu shares and Securities Ltd
Sub - Total (A) 61,91,980 41,93,530 18,48,450 1,50,000 Indirect Expenses: Conveyance 4,68,594 1,40,578 3,28,016 Travelling Clearing - Other 58,785 17,636 41,150 Trade Expenses Communication 6,66,799 2,00,040 4,66,759 * Expenses General 8,76,776 2,63,033 6,13,743 - Expenses Office 6,27,247 1,88,174 4,39,073 Equipment Expenses Professional 2,47,742 74,323 1,73,419 - Charges Rent, Rates & 1,97,742 59,323 1,38,419 - Taxes Salary (Admin 22,54,008 6,76,202 15,77,806 - staff) Other Expenses 33,32,786 9,99,836 23,32,950 - Sub- Total (B) 87,30,479 26,19,144 61,11,335 - Total Expenses: 1,49,22,459 68,12,674 79,59,785 1,50,000 Net Profit 62,13,496 (76,02,197) 70,68,692 67,47,000 before
11 ITA No. 4364/Mum/2024 Amu shares and Securities Ltd Depreciation: Depreciation: (21,00,674) (6,30,202) (14,70,472) - Dividend: (9,29,033) - (9,29,033) - Depreciation 6,64,664 1,99,399 4,65,265 - Difference: Net Taxable 38,48,452 (80,33,000) 51,34,452 67,47,000 Income
It is the loss on share trading and jobbing income of Rs.80,33,000/- which has been treated as speculative loss. 15. First of all while computing gross total income, the normal provisions of the Act has to be applied and it is only thereafter it needs to be seen whether the gross total income so computed, consist mainly of income which is chargeable under the heads as referred to in the Explanation. For the sake of ready reference Explanation to Section 73 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 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."
12 ITA No. 4364/Mum/2024 Amu shares and Securities Ltd 16. The Explanation envisaged that transfer / explanation about the 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, they are outside the purview of expenditure. It is applicable only to those companies and the part of the business consists in the purchase and sale of shares, then for the purpose of Section 73, it is deemed to be carrying on speculation business to the extent of which business consist of purchase and sale of such shares. The Hon’ble Bombay High Court in the case of Darshan Securities Pvt. Ltd. wherein their Lordships held that in order to determine as to whether exception carved out in the form of bracketed portion in Explanation to sec. 73 applies, firstly, one has to compute gross total income of a company under the normal provisions of the Act and it is only thereafter, it has to be determined as to whether gross total income so computed consists mainly of income which is chargeable under any heads referred to in the Explanation (i.e., the heads of income other than 'Profits & Gains of business or profession'). The Facts of the case were as under:- As per Darshan Securities Amount in Rs. Case Judgement Income from Service Charges 2,25,04,588 Loss from Share Trading (2,23,32,127)
13 ITA No. 4364/Mum/2024 Amu shares and Securities Ltd 1,72,461 Dividend Income 4,79,325 Gross Total Income 6,51,786
The Hon'ble Bombay High Court held as under: "6. The explanation to Section 73 Introduces a deeming fiction. The deeming fiction stipulates that where any part of the business of a company consists in the purchase and sale of shares of other companies, such company shall, for the purposes of the section be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sales of such shares. The deeming fiction applies only to a company and the provision makes it clear that the deeming fiction extends only for the purposes of the section. The bracketed portion of the explanation, however carves out an exception. The exception is that the provision of the explanation shall not apply to 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 whose principal business is of banking or the granting of loans and advances." "7. The submission which has been urged on behalf of the Revenue is that in computing the gross total income for the purpose of the explanation to Section 73, income under the heads of profits and gains of business or profession must be ignored. Alternatively, it has been urged that where the income from business includes a loss in the trading of shares, such a loss should not be allowed to be setoff against the income from any other source under the head of profits and gains of business or profession." "8. In our view, the submission which has been urged on behalf of the Revenue cannot be accepted. Leaving aside for a moment, the exception, which is carved out by the explanation to Section 73, the explanation creates a deeming fiction by which a company is deemed to be carrying on a speculation business where any part
14 ITA No. 4364/Mum/2024 Amu shares and Securities Ltd of its business consists in the purchase and sale of shares of other companies. Now, the exception which is carved out applies to a situation where the gross total income of a company consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources". Now, ordinarily income which arises from one source which falls under the head of profits and gains of business or profession can be set off against the loss which arises from another source under the same head. Sub Section (1) of Section 73 however sets up a bar to the setting off of a loss which arises in respect of speculation business against the profits and gains of any other business. Consequently, a loss which has arisen on account of speculation business can be set off only against the profits and gains of another speculation business. However, for Sub Section (1) of Section 73 to apply the loss must arise in relation to a speculation business. The explanation provides adeeming definition of when a company is deemed to be carrying on a speculation business. If, the submission of the Revenue is accepted, it would lead to an incongruous situation, where in determining as to whether a company is carrying on a speculation business within the meaning of the explanation, sub section (1) of Section 73 is applied in the first instance. This would in our view not be permissible as a matter of statutory interpretation, because the explanation is designed to define a situation where a company is deemed to carry on speculation business. It is only thereafter that sub section (1) of section 73 can apply. Applying the provisions of Section 73(1) to determine whether a company is carrying on speculation business would reverse the order of application. That would be Impermissible, nor, is it contemplated by Parliament. For, the ambit of Sub Section(1) of Section 73 is only to prohibit the setting off of a loss which has resulted from a speculation business, save and accept against the profits and gains of another speculation business. In order to determine whether the exception that is carved out by the explanation applies, the legislature has first mandated a computation of the gross total income of the Company. The words "consists mainly" are indicative of the fact that the legislature had in its contemplation that the gross total income consists predominantly of income from the four heads that are referred to therein. Obviously, in computing the gross total income the normal provisions of the Act must be applied and it is only thereafter, that
15 ITA No. 4364/Mum/2024 Amu shares and Securities Ltd it has to be determined as to whether the gross total income so computed consists mainly of income which is chargeable under the heads referred to in the explanation." "9. Consequently, in the present case the gross total income of the assessee was required to be computed inter alia by computing the income under the head of profits and gains of business or profession as well. Both the income from service charges in the amount of Rs. 2.25 crores and the loss in share trading of Rs. 2.23crores, would have to be taken into account in computing the income under that head, both being sources under the same head. The assessee had a dividend income of Rs. 4.7 lacs (income from other sources). The Tribunal was justified, incoming to the conclusion that the assessee fell within the purview of the exception carved out in the explanation to Section 73 and-that consequently the assessee would not be deemed to be carrying on a speculation business for the purpose of Sec. 73(1)." 18. If we follow the principle of the Hon’ble Bombay High Court in the present case, then the gross total income as computed by the ld.AO worked out to Rs.35,11,942/- which consists of Long- term Capital Gains of Rs.60,93,476/ which is adjusted against current year's business loss of Rs. 25,81,534/-. Therefore, Explanation to sec. 73 as interpreted by the Hon’ble Bombay High Court if applied on the facts of the assessee’s case then, the loss in share trading of Rs.80,33,000/- cannot be treated as ‘speculation loss’ albeit, it has to be treated as regular business loss which has to be adjusted against all other sources of income earned by the assessee company during the year under consideration. This principle has been reiterated by the Hon’ble Bombay High Court in the case of HSBC Securities and Capital Markets (India) Private Limited (supra) wherein in that case the business loss was Rs.-1,72,00,000/- and income from other
16 ITA No. 4364/Mum/2024 Amu shares and Securities Ltd sources was Rs.7,00,000/- and gross total income of Rs.- 1,65,00,000/-. All these facts of such computation, the Hon’ble High Court held that the loss cannot be treated as ‘speculation loss’.
Further, in another decision Hon’ble Bombay High Court in the case of CIT vs. Madona Commercial (P.) Ltd (257 Taxman 116, Bom) wherein their lordships have observed as under:-
"8. On perusal of the assessment order, we find that in paragraph 3.4 it records that the gross total income as returned by the assessee consists of the following: (a) Income from Business Rs. 87,684/- (b) Income from other sources Rs.9,66,013/- It further records that the above is the result of the various transactions which have been referred to therein as under: "3.4..... However, the above is the result of following transactions :- (a) Profit from trading in yarn Rs. 84,802 (b) Profit from trading in steel Rs. 7,174 (c) Service charges received shown as business income Rs. 2,24,94,436 (d) Commission income shown as business Income Rs.24,31,560 (e) Loss in trading of shares Rs. 2,74,09,727 (f)Dividend/interest Rs. 11,40,097”
This working evidences that the loss on trading in shares at Rs.2.74 crores has been taken into account to arrive at income from business."
17 ITA No. 4364/Mum/2024 Amu shares and Securities Ltd "9. Thus, the basic premises on the part of the Revenue that the respondent assessee's income mainly consisted of income from business is factually incorrect. Once it is found as a fact in the order dated 17th September, 1998 of the Tribunal that the assessee's income mainly consisted of income from other sources as it forms 91.68% of its total Income, then in the absence of any challenge to the finding of fact, it cannot be a subject of inquiry. This has been so held by the Supreme Court in K. Ravindranathan Nair v. CIT [2001] 114Taxman 53/247 ITR 178 and Patnaik & Co. Ltd. v. CIT [1986] 27 Taxman287/161 ITR 365. This was contested by the Revenue and reliance was placed upon the decision of the Apex Court in Sohan Pathak & Sons v. CIT [1953] 24ITR 395 and Khan Bahadur Ahmed Alladin & Sons v. CIT [1968] 68 ITR 573 to contend that as the statement of case is not clear, the Court should call for a supplementary statement of case from the Tribunal. We do not find-that the statement of case is not clear. In any event, to satisfy ourselves, we went through the basis of the Revenue's contention viz. the assessment order and find no substance in the contention." "10. Therefore, once the finding of fact has not been challenged, it must follow that Section 73 of the Act which introduces a deeming fiction to define as peculation business will not apply as the bracketed portion in the Explanation carves out an exception so far as main income is from "Income from other sources". Thus, in our view, the question has proposed for our consideration stands concluded by the decision of this Court in Darshan Securities (P.) Ltd. (supra)." 20. These principles have been followed by the Tribunal in various judgments also.
If he follows the sequitor of aforesaid judgments, the gross total income of the assessee shall be computed in the following manner:-
18 ITA No. 4364/Mum/2024 Amu shares and Securities Ltd
Particulars Amount Business Income as determined as per the 54,51,466 Assessment Order dated 16-1 1-201 1 passed u/s 143(3) of the Act. Share Trading Loss (80,33,000) Income / loss from Business (25,81,534) Long Term Capital Gain as per the Assessment 60,93,476 Order dated 16- 11-2012 GROSS TOTAL INCOME 35,11,942
Thus, the aforesaid computation which is under the normal provisions of the Act that the gross total income mainly consists of income which is chargeable under the head ‘capital gains’ and therefore, on these facts Explanation to Section 73 does not operate. Accordingly, we uphold the contention of the assessee and hold that both the authorities have erred in law in treating the share trading loss of Rs.80,33,000/- as ‘speculative loss’ in terms of deeming provisions of Explanation to Section 73. 23. Since, we had followed the principle and judgment laid down by the Hon’ble Jurisdictional High Court in three cases therefore, we do not deem to refer to the judgments relied upon by the ld. DR of Hon’ble Gujarat High Court and Hon’ble Calcutta High Court.
19 ITA No. 4364/Mum/2024 Amu shares and Securities Ltd
In the result, appeal of the assessee is allowed.
Order pronounced on 26th July, 2024.
Sd/- Sd/- (RENU JAUHRI) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 26/07/2024 KARUNA, sr.ps
Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. //True Copy//
BY ORDER,
(Asstt. Registrar) ITAT, Mumbai