ITO, WD-2(4), KOLKATA, KOLKATA vs. M/S SUVRIDHI CAPITAL MARKETS LTD., KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL “B”, BENCH KOLKATA BEFORE SHRI N. V. VASUDEVAN, JM & DR. A.L.SAINI, AM आयकर अपील सं./ITA No.830 & 831/Kol/2015 (िनधा�रण वष� / Assessment Year: 2008-09 & 2010-11) Vs. M/s Suvridhi Capital I.T.O., Ward – 2(4), Kolkata Markets Ltd. 516, Kamalalaya Centre, 156A, Lelin Sarani, Kolkata – 700 013. �थायी लेखा सं./जीआइआर सं./PAN/GIR No. : AAECS 4092 F ( APPELLANT) .. (RESPONDENT) Appellant by :Shri G. H. Sema, ACIT(DR) Respondent by :Shri Ashis Kumar Rustogi, FCA सुनवाई की तारीख / Date of Hearing : 17/08/2017 घोषणा की तारीख/Date of Pronouncement : 31/08/2017 आदेश / O R D E R Per Dr. Arjun Lal Saini, AM: These two captioned appeals filed by the Revenue pertaining to Assessment Year 2008-09 and 2010-11, are directed by order passed by the ld. Commissioner of Income Tax (Appeals), which is in turn arises out of assessment orders passed by the Assessing Officer u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’). 2. Since these two appeals filed by the Revenue pertain to same assessee, different Assessment Years and identical issues are involved, therefore, these have been clubbed and heard together and a consolidated order is being passed for the sake of convenience and brevity. The Revenue`s appeal in ITA No.830/Kol/2015, Assessment Year 2008-09, is taken as a lead case.

M/s Suvridhi Capital Markets Ltd. ITA No.830 & 831/Kol/2015 Assessment Year: 2008-09 & 2010-11 3. The Grounds of appeal raised by the Revenue in the lead case in ITA No.830/Kol/2015, are as follows: “1.On the facts and in the circumstances of the case, the ld. CIT(A), has erred in deleting the additions on account of share trading loss of Rs.38,22,259/- from share trading as speculation loss under explanation to Section 73 of the Income Tax Act, 1961. 2.On the facts and in the circumstances of the case, the ld. CIT(A) has erred in treating both delivery transactions and derivative transactions at par in line with Section 43(5) of the I.T Act without appreciating that Section 73 is independent of Section 43(5) of the Income Tax Act, 1961. 3.The assessee craves leave to amend, modify or alter any grounds of appeal during the course of this case.” 4. The brief facts qua the issue are that the assessee filed its return of income for the Assessment Year 2008-09 on 09.09.2008 declaring total income of Rs.1,62,09,940/-. The assessee’s return of income was duly processed u/s 143(1) on 20.08.2009. Later on, the assessee’s case was selected u/s 143(2) of the Act, and the Assessing Officer completed the assessment by making various additions. The assessee company during the previous year was engaged in trading of shares. The assessee company has income under the head business income to the tune of Rs.5,37,29,371/-, and under the head income from other sources to the tune of Rs.56,89,079/- during the year under consideration. It was further observed by the AO that there was huge loss of Rs.38,22,259/- in share trading during the year. The assessee is neither NBFC company nor engaged in the business of granting loans and advances. From the deployment of fund of the assessee company as on 31.03.2008, it was seen by the AO that inventories of shares was Rs. 2,82,56,886/- and investment was at Rs. 22,28,923/- , this was apart from the loans and advances to the tune of Rs.1,89,36,604/-. Therefore, the AO observed that from the fund deployment position it was crystal clear that the principal business of the assessee Page | 2

M/s Suvridhi Capital Markets Ltd. ITA No.830 & 831/Kol/2015 Assessment Year: 2008-09 & 2010-11 was not granting loans and advances, but to deal in shares trading in derivatives and delivery based transactions. 4.1 During the course of assessment proceedings the AO asked the assessee to explain as to why provision of section 73 of the IT Act should not be applied in his case. The Assessing Officer also asked the assessee, to explain, why the proportioned expenses incurred to earn deemed speculation income should not be disallowed. During the course of assessment proceedings the assessee company replied to the AO stating that they agreed with the applicability of the provision of section 73 of the IT Act as also agreed with regard to addition of proportionate expenses incurred to earn deemed speculation income. Therefore, based on the reply of the assessee, the Assessing Officer treated the loss in the share trading business during the F.Y 2007-08 relevant to Assessment Year 2008-09, as speculation loss under Explanation to section 73 of the I. T. Act, 1961. 5. Aggrieved by the order of the Assessing Officer, the assessee filed an appeal before the CIT(A), who has allowed the assessee’s appeal. The ld. CIT(A) observed that only issue in said appeal was against the application of section 73 for the purpose of calculation of speculation loss. The ld. CIT(A) observed that the assessee had been engaged in trading of shares and apart from business income of Rs.5,37,29,371/-, the assessee had income from other sources of Rs.56,89,079/-. The CIT(A) also noted that there was a loss of Rs.38,22,259/- in share trading during the year and the assessee company, during the previous year, was neither a NBFC nor engaged in the business of grating loan and advances. Page | 3

M/s Suvridhi Capital Markets Ltd. ITA No.830 & 831/Kol/2015 Assessment Year: 2008-09 & 2010-11 5.1 During the appellate proceedings the assessee submitted that Assessing Officer had erred in calculating the speculation loss and to support his plea he relied on the various case laws/precedents. The assessee submitted that in order to determine whether the Explanation to Section 73 applies, the gross total income must be computed to ascertain whether it consists mainly of income chargeable under the head referred to in the Explanation. [Drshana Securities Pvt. Ltd, 341 ITR 556 (2012) ]. Section 4 of the Income Tax Act 1961 is the charging section for levy of Income tax which charges it in respect of the Total Income of the person. "Total income" means the total amount of, income referred to in section 5, computed in the manner laid down in this Act. Chapter IV of the Income Tax Act, 1961 deals with Computation of Total Income, The total income of an assessee (subject to statutory exemptions), is chargeable under section 4(1) of the Act. The scope of ‘Total Income’ is defined in Section 5. Section 14 enumerates the five heads under which the income of an assessee falls to be charged. Sections 15-59 quantify the total income under different heads of income as per the rules specified for that head of income. Chapter VI deals with Aggregation of Income and Set off or carry forward of Loss. According to Section 66, of the Act, in computing the total income of an assessee, there shall be included all income on which no income tax is payable under chapter VII. The assessee stated that it was held by the Gujarat High Court in CIT Vs. Baroda Peoples Co-operative Bank Ltd. 280 ITR 282 that the gross total income means the total income, computed in accordance with the provisions of this Act and while computing the total income, deduction under this chapter are not to be taken into consideration. Thus, the net income under any particular head or item has to go in as a component of gross total income before any deduction under Chapter VI-A ,is to be allowed. Therefore, Income from Business and profession has to be computed in accordance with the provisions of sections applicable to it, firstly under Chapter IV of the Income Tax Act, 1961. The assessee, during the appellate proceedings, relied on the case of Mumbai ITAT in Rajan Enterprises Ltd [41 ITD 469], wherein it was held that: i) Explanation to Section 73 comes in Chapter VI which deals with set off and carry forward; Page | 4

M/s Suvridhi Capital Markets Ltd. ITA No.830 & 831/Kol/2015 Assessment Year: 2008-09 & 2010-11 ii) Chapter VI comes into play only after income under the 5 heads are computed; iii) One has to find out income under each head and then see the applicability of Chapter VI and deeming provision would not apply if share trading business income is less than the income from other heads of income mentioned in the Explanation. During the Appellate Proceedings, the reliance had also been placed by the assessee on the decision of ITAT, Kolkata in DCIT, Circle-8, Kolkata vs Baljit Securities Pvt. Ltd., Order dated 21.10.2014. The assessee had submitted before the CIT(A) that the Kolkata Tribunal had categorically held in a very elaborate order that both profit/loss from all the share delivery transactions and derivative transactions are having the same meaning, so far as Sec, 43(5) of the Act is concerned. Therefore, in view of the fact that both delivery based transactions and derivative transaction are non- speculative as far as Section 43(5) is concerned, it follows that both will have the same treatment as far as application of Explanation to Sec.73 is concerned. Accordingly, aggregation of the share trading loss and profit from derivative transactions should be done before the Explanation to Section 73 of the Act, is applied. It was further submitted by the assessee that the said view had been affirmed by the Kolkata High court in GA No. 3481 of 2013 ITAT No. 215 of 2013, in the case of CIT Vs. M/S Baljit Securities Pvt. Ltd. Therefore, it is clear that the profits from derivatives and share trading should be set off against each other before applying the setoff and carry forward provisions of section 73 of the Income Tax Act, 1961. Therefore, the assessee submitted before the CIT(A) that the assessee company, in the present case, principally is a share broker. The assessee is also in the business of buying and selling of shares for self where actual delivery is taken and given and also in buying and selling of shares where actual delivery was not intended to be taken or given. Therefore, the entire transaction carried out by the assessee, was within the umbrella of non- Page | 5

M/s Suvridhi Capital Markets Ltd. ITA No.830 & 831/Kol/2015 Assessment Year: 2008-09 & 2010-11 speculative transactions. There was, as such no bar in setting off the loss arising out of derivatives from the income arising out of buying and selling of shares. The case of the assessee clearly falls within the ambit of the above judicial rulings of the Kolkata Tribunal and Kolkata High Court (Supra). Thus, there should be no reason for disallowing the adjustment of losses on share trading with other business income as held by the adjudicating authorities. 5.2 Based on the submissions of the assessee, the CIT(A) observed that assessee is stock broker and treating in shares and debentures. It had shown business income of Rs.5,37,29,371/- and income from other sources of Rs.56,89,079/-. It had also shown loss of Rs.38,22,259/- from share trading. The A.O, had considered this trading loss as Speculation Loss by applying explanation to Section 73 of the Act. Therefore, the CIT(A) noted that, the only issue in the said appeal is regarding the claim of the assessee that Explanation to Section 73 could not be applied in respect of its Share trading business by treating the trading loss as speculation Loss. The A.O. has considered the trading loss as speculation loss by applying the provisions as contained in explanation to section 73 which lays down that: – “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 accompany 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.” During the appellate proceedings, the CIT(A) noted that where the assessee earned profit from derivative i.e., F&O operation in shares and suffered loss in trading in shares. The assessee treated the entire activity of purchase and sale of shares which comprised of both delivery based and non-delivery based trading, as one, before application of the deeming provision contained in explanation to section 73 of the Act and accordingly, claimed set off of the loss incurred in delivery based trading with the profit derived from derivative trading. The provisions of section 43(5) of the Act, which contains the definition of ‘speculative transaction', only applied for Page | 6

M/s Suvridhi Capital Markets Ltd. ITA No.830 & 831/Kol/2015 Assessment Year: 2008-09 & 2010-11 purposes of Sec. 28 of the Act i.e, it does not apply to the other sections of the Act. On the contrary, Explanation to Sec. 73 of the Act creates a deeming fiction by which among the assessee, who is a company, as indicated in the said Explanation dealing with the transaction of share and suffer loss, such transaction should be treated to be speculative transaction within the meaning of Sec. 73 of the Act, notwithstanding the fact that according to the definition of speculative transaction mentioned in Sec. 43(5) of the Act, the transaction is not of that nature as there has been actual delivery of the scrips of share. As per the definition of section 43(5) of the Act, trading of shares which is done by taking delivery does not come under the purview of the said section. Similarly as per clause (d) of Section 43(5), derivative transaction in shares is also not speculation transaction as defined in the said section. Therefore, both profit/loss from all the share delivery transactions and derivative transactions are having the same meaning, so far as Sec. 43(5) of the Act is concerned. Again, in view of the fact that both delivery based transactions and derivative transaction are non-speculative as far as Sec. 43(5) is concerned, it follows that both will have the same treatment as far as application of Explanation to Sec. 73 is concerned. Therefore aggregation of the share trading loss and profit from derivative transactions should be done before the Explanation to Section 73 of the Act, is applied. The above view has been taken up by Special Bench of this Tribunal, Mumbai Bench, in the case of CIT v. Concord Commercial Pvt. Ltd. (2005) 95 ITD 117 (Mum) (SB). In this case, the Special Bench held that, "Before considering whether the assessee's case is hit by the deeming provision of Explanation to Sec. 73 of the Act, the aggregate of the business profit / loss has to be worked out based on the non-speculative profits; either it is from share delivery or from share derivative. Therefore, the CIT(A) noted that both profit/loss from Share delivery transactions and derivative transactions were to be considered at par so far as Section 43(5) is concerned. Accordingly, it was seen by CIT(A) that the A.O could not invoke the provisions of section 73 and Explanation thereto without adjusting the losses and gains from various sources under the head 'Business' as permitted by sections 70 and 71 and only then, if the assessee's case fell within the non-excluded categories of companies as per the Explanation to section 73, could these provisions be Page | 7

M/s Suvridhi Capital Markets Ltd. ITA No.830 & 831/Kol/2015 Assessment Year: 2008-09 & 2010-11 invoked. Therefore, ld CIT(A) held that the aggregation of Share trading and profit from derivative transactions should be done before explanation to Section 73, is applied. Therefore, ld CIT(A) directed the AO, to verify the above claim and allow the set off before applying explanation to Section 73 of the I.T. Act. 6. Not being satisfied with the order of the ld. CIT(A), the Revenue is appeal before us. The ld. DR for the revenue has defended the order of the Assessing Officer stating that the Assessing Officer has passed a reasoned order and it should be protected. Therefore, the ld. DR for the revenue has primarily reiterated the stand taken by the Assessing Officer which we have already noted in our earlier para and is not repeated for the sake of brevity. 7. On the other hand, the ld Counsel for the assessee has submitted before us that in order to determine whether the Explanation to Section 73 applies, the gross total income must be computed to ascertain whether it consists mainly of income chargeable under the head referred to in the Explanation. [Drshana Securities Pvt. Ltd, 341 ITR 556 (2012) ]. Section 4 of the Income Tax Act 1961 is the charging section for levy of Income tax which charges it in respect of the Total Income of the person. "Total income" means the total amount of income referred to in section 5, computed in the manner laid down in this Act. Chapter IV of the Income Tax Act, 1961 deals with Computation of Total Income, the total income of an assessee (subject to statutory exemptions), is chargeable under section 4(1) of the Act. The scope of ‘Total Income’ is defined in Section 5. Section 14 enumerates the five heads under which the income of an assessee falls to be charged. Sections 15-59 quantify the total income under different heads of income as per the rules specified for that head of income. Chapter VI deals with Aggregation of Income and Set off or carry forward of Loss. According to Section 66, of the Act, in computing the total income of an assessee, there shall be included all income on which no income tax is payable under chapter VII. The assessee stated that it was held by the Gujarat High Court in CIT Vs. Baroda Peoples Co-operative Bank Ltd. 280 ITR 282 that the gross total Page | 8

M/s Suvridhi Capital Markets Ltd. ITA No.830 & 831/Kol/2015 Assessment Year: 2008-09 & 2010-11 income means the total income, computed in accordance with the provisions of this Act and while computing the total income, deduction under this chapter are not to be taken into consideration. Thus, the net income under any particular head or item has to go in as a component of gross total income before any deduction under Chapter VI-A ,is to be allowed. Therefore, Income from Business and profession has to be computed in accordance with the provisions of sections applicable to it, firstly under Chapter IV of the Income Tax Act, 1961. The Counsel relied on the case of Mumbai ITAT in Rajan Enterprises Ltd’s case [41 ITD 469], wherein it was held that: i) Explanation to Section 73 comes in Chapter VI which deals with set off and carry forward; ii) Chapter VI comes into play only after income under the 5 heads are computed; iii) One has to find out income under each head and then see the applicability of Chapter VI and deeming provision would not apply if share trading business income is less than the income from other heads of income mentioned in the Explanation. The Counsel relied on the decision of ITAT, Kolkata in DCIT, Circle-8, Kolkata vs Baljit Securities Pvt. Ltd., Order dated 21.10.2074, wherein it was held by the Kolkata Tribunal that both profit/loss from all the share delivery transactions and derivative transactions are having the same meaning, so far as Sec, 43(5) of the Act is concerned. Therefore, in view of the fact that both delivery based transactions and derivative transaction are non- speculative as far as Section 43(5) is concerned, it follows that both will have the same treatment as far as application of Explanation to Sec.73 is concerned. Accordingly, aggregation of the share trading loss and profit from derivative transactions should be done before the Explanation to Section 73 of the Act, is applied. It was further submitted by the Counsel that the said view had been affirmed by the Kolkata High court in GA No. 3481 of 2013 ITAT No. 215 of 2013, in the case of CIT Versus M/S Baljit Securities Pvt. Ltd. Therefore, it is clear that the Page | 9

M/s Suvridhi Capital Markets Ltd. ITA No.830 & 831/Kol/2015 Assessment Year: 2008-09 & 2010-11 profits from derivatives and share trading should be set off against each other before applying the setoff and carry forward provisions of section 73 of the Income Tax Act, 1961. Therefore, the Counsel submitted before the CIT(A) that the assessee company, in the present case, principally is a share broker. The assessee is also in the business of buying and selling of shares for self where actual delivery is taken and given and also in buying and selling of shares where actual delivery was not intended to be taken or given. Therefore, the entire transaction carried out by the assessee, was within the umbrella of non- speculative transactions. There was, as such no bar in setting off the loss arising out of derivatives from the income arising out of buying and selling of shares. The case of the assessee clearly falls within the ambit of the above judicial rulings of the Kolkata Tribunal and Kolkata High Court (Supra). Thus, there should be no reason for disallowing the adjustment of losses on share trading with other business income. 7.1 The ld Counsel submitted that from the above discussion, it may be concluded that both trading of shares and derivative transactions are not coming under the purview of Section 43(5) of the Act which provides definition of "speculative transaction" exclusively for purposes of section 28 to 41 of the Act. Again, the fact that both delivery based transaction in shares and derivative transactions are non-speculative as far as section 43(5) is concerned and goes to confirm that both will have same treatment as regards application of the Explanation to Section 73 is concerned, which creates a deeming fiction. 7.2 Having heard the rival submissions and perused the material available on record, we are of the view that both profit / loss from all the share delivery transactions and derivative transactions are having the same meaning, so far as Sec. 43(5) of the Act is concerned. Again, in view of the fact that both delivery based transactions and derivative transaction are non-speculative as far as Sec. 43(5) is concerned, it follows that both will have the same treatment as far as application of Explanation to Sec. 73 is concerned. Therefore aggregation of the share trading loss and profit from derivative Page | 10

M/s Suvridhi Capital Markets Ltd. ITA No.830 & 831/Kol/2015 Assessment Year: 2008-09 & 2010-11 transactions should be done before the Explanation to Section 73 of the Act, is applied. This view has been affirmed by the Kolkata High Court in GA No. 3481 of 2013 ITAT No. 215 of 2013 Commissioner of Income Tax, Kol III versus M/S Baljit Securities Pvt. Ltd. Therefore, it is clear that the profits from derivatives and share trading should be set off against each other before applying the setoff and carry forward provisions of section 73 of the Income Tax Act, 1961. In the present case, assessee is a share broker. The assessee is also in the business of buying and selling of shares for self where actual delivery is taken and given and also in buying and selling of shares where actual delivery was not intended to be taken or given. Therefore, the entire transaction carried out by the assessee, indicated above, was within the umbrella of non-speculative transactions. There was, as such, no bar in setting off the loss arising out of derivatives from the income arising out of buying and selling of shares. The case of the assessee clearly falls within the ambit of the judicial rulings of the Kolkata Tribunal and Kolkata High Court in the case of M/S Baljit Securities Pvt. Ltd (supra). Thus, there should be no reason for disallowing the adjustment of losses on share trading with other business income. Based on the above cited reasoning and factual position, we confirm the order of CIT(A). 7.3 In the result, both the appeals filed by the Revenue (ITA No.830/Kol/2015 and ITA No.831/Kol/2015), are dismissed. Order pronounced in the open court on this 31/08/2017. Sd/- Sd/- (N. V. VASUDEVAN) (DR. A.L.SAINI) �ाियक सद� / JUDICIAL MEMBER लेखा सद� / ACCOUNTANT MEMBER कोलकाता /Kolkata; िदनांक Dated 31/08/2017 RS, SPS. आदेश की �ितिलिप अ�ेिषत/Copy of the Order forwarded to : अपीलाथ� / The Appellant – I.T.O., Ward – 2(4), Kolkata 1. ��थ� / The Respondent- M/s Suvridhi Capital Markets Ltd. 2. आयकर आयु�(अपील) / The CIT(A), :Kolkata. 3. आयकर आयु� / CIT 4. Page | 11

M/s Suvridhi Capital Markets Ltd. ITA No.830 & 831/Kol/2015 Assessment Year: 2008-09 & 2010-11 िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, कोलकाता / DR, ITAT, Kolkata 5. गाड� फाईल / Guard file. 6. स�ािपत �ित