SIDDHESH CAPITAL MARKET SERVICES P,.LTD,MUMBAI vs. DCIT 3(3), MUMBAI

order dated 13/09/2011 and 10/01/2014 of the CIT (A) – 7, Mumbai the assessee and the Assessing Officer (AO) have filed the above-mentioned appeals for the year under consideration. The assessee has filed the appeal against the addition made by the AO in quantum proceedings, whereas, the AO has challenged the deletion of penalty levied u/s.271 of the Act.For the sake of convenience, we are disposing of both the appeals by a single common order.Assessee-company,engaged in the business of finance, trading, investment, filed its return of income on 29/09/2008, declaring Loss of Rs. 30.52 crores.The AO completed the assessment, on 26/11/2010, u/s.143 (3) of the Act, determining its income at Rs. 3.72 crores. Vide its application dt. 23.2.16 the assessee made an application for additional ground. It was argued that facts are already on record that it does not warrant any fresh investigation into facts. Before us, the Authorised Representative (AR) made the same submissions and the Departmental Representative (DR) left the issue to the discretion of the Bench. We find that the additional ground raised

2. Effective ground of appeal is about upholding valuation loss of Rs.34.26 crores on stock of shares as speculation loss u/s.73 of the Act. During the assessment proceedings,the AO 1259&2583/M/12&14(08-09) M/s. Siddesh Capital Market Services P.Ltd. directed the assessee to explain as to why the loss initiated should not be treated speculation loss. In its response, the assessee referred to Explanation 1 to section 73 of the Act and stated that its business consisted of only share trading, that the object behind the section was to prevent profits of non-share trading business to be set off against the share trading losses. It referred to the cases of A. B. Shanti (225 ITR 258); Allied Motors Private Ltd(224ITR677) and Podar Cement Private Ltd. (226 ITR 625) and argued that the assessee had not adopted any device to manipulate and reduce the taxable income, that the assessee had made profit on sale of shares, that the loss was on account of valuation of stock and not on trading, that the loss on valuation was on account of consistent inventory policy followed by it for valuation of inventories, that the trading loss incurred by it comprised of actual profit/loss and mark to market losses, that the assessee had realised profit of Rs.22.35 lakhs on sale/purchase of shares, that the loss was on account of valuation, that it had purchased equity shares when the sharemarket was all-time high, that subsequently due to global turmoil and recession market were falling when the shares were valued at lower of cost or market price at the balance sheet date as per the consistent accounting policy followed by it, that there was a book loss, that the loss on account of valuation of stock had been reversed in the subsequent years in valuation or sales when market improved. After considering the submission of the assessee, the AO held that as per Explanation 1 to section 73 loss on sale of shares had to be treated as speculation loss, that explanation was deeming fiction. Referring to the case of Eastern Aviation & Industries Ltd. (208/1023), the AO held that the loss suffered by the assessee during the previous year of Rs.34.26 crores was to be treated as loss of speculative business. 3.Aggrieved by the order of AO the assessee preferred an appeal before the First Appellate Authority(FAA).Before him the assessee made elaborate submissions. After considering the same, the FAA held that the issue involved stood covered against the assessee by judgment of Hon'ble Jurisdictional High Court in the case of Lokmat Newspapers Pvt.Ltd.(332ITR 43).Taking note of the aforesaid judgment he dismissed the appeal filed by the assessee. 4.During the course of hearing before us,the AR stated that loss suffered by the assessee was part of the normal business conducted by it,that the loss resulted from the valuation of stock, that the only business of assessee was dealing in shares, that the intention of introducing explanation to section 73, as per the Circular 204 of 24.07.96 was to curb the device to manipulate and reduce the taxable income of companies under their control, that the facts of Lokmat Newspaper (P.) Ltd.were not applicable to the facts of the case under appeal, that the 1259&2583/M/12&14(08-09) M/s. Siddesh Capital Market Services P.Ltd. case of the assessee is covered by the exception to explanation. He referred to Pg-8 of the PB and stated that assessee had earned profit of Rs.2.20 crores under the head ‘income from capital gains’. He also referred to the order passed by AO for the AY 2013-14 where similar kind of disallowance was not made.He relied on the case of HSBC Securities and Captal Markets India (P.)Ltd.(208taxmann 439) of the Hon'ble Bombay High Court.The DR supported the order of the FAA.

5.We have heard the rival submissions and perused the material before us.We find that the assessee had claimed loss on account of valuation of closing stock on the last date of AY, that the AO invoked the provisions of section 73 and held that the transactions entered into by the assessee were of speculative nature, that the FAA confirmed his order, that both the authorities did not consider the argument about the exception to the explanation to section 73, that the assessee had earned profit of Rs.2,20,67,126/-, that it had STCG on sale of mutual funds to the tune of Rs.2.68 crores. It is a fact that shares traded by the assessee were not of any of the good companies.The assessee had in the normal course of business purchased the shares. Because of the turmoil in the share market in the year under consideration the assessee suffered huge loss.It was valuing its stock on cost or market price whichever was lower and had accordingly valued the shares.The resultant loss, in these circumstances, cannot be considered speculative loss as held by AO and confirmed by FAA.In our opinion facts of Lokmat case are applicable to the facts of present case. We would like to reproduce the substantial question of law raised by the Hon'ble Bombay High Court in the case of HSBC Securities and Capital Markets (P.) Ltd. (supra). First we are reproducing the question raised before the Hon’ble Court and it reads as under: "Whether on the facts and in the circumstances of the case and in law the Hon'ble I.T.A.T. was justified in holding the trading loss of Rs. 84,51,000/- as Ordinary Business Loss as against Speculation Loss as held by the Assessing Officer by relying on the decision of the ITAT Delhi bench in the case of Aman Portfolio Pvt. Ltd. 93 ITD 324ignoring the decision of the Divisional Bench of ITAT Delhi in the case of Frontline Capital Services Ltd. 96 TTJ 201 and also the decision of the ITAT Delhi Bench in the case of Rohini Capital Services Ltd. 92 ITD 317while deciding that the Explanation to Sec. 73 of the Income-Tax Act, 1961 cannot be invoked in the case of the assessee ?" Facts of the case the relevant portion of the judgment are as follow: 4. On 1.12.1997, the respondent filed its return for the assessment year 1997-1998 declaring a total loss of Rs. 1,95,12,651/-. On 12.3.1998, the respondent filed a revised return declaring a total loss of Rs. 1,24,92,940/-. In the revised return, the assessee showed loss of Rs. 1,65,29,711/- arising out of the purchase and loss of shares. The AO by an assessment order dated 29.3.2000 under section 143(3) inter alia recorded as under: "The assessee's gross total income as per the second revised return was loss of Rs. 1,65,29,711/-. The composition of the same is as under :

1259&2583/M/12&14(08-09) M/s. Siddesh Capital Market Services P.Ltd.

Business Profit (-) Rs. 1,72,31,711/- Income from other sources Rs. 7,02,000/- (-) Rs. 1,65,29,711/-"

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 a deeming 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 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.