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Income Tax Appellate Tribunal, MUMBAI BENCHES “H” MUMBAI
Before: SHRI MAHAVIR SINGH & SHRI N.K. PRADHAN
ORDER
PER N.K. PRADHAN, AM
This is an appeal filed by the assessee. The relevant assessment year is 2011-12. The appeal is directed against the order Commissioner (Appeals) – 10, Mumbai and arises out of order u/s 143(3) of the Income Tax Act, 1961 (the ‘Act’).
The grounds of appeal filed by the assessee read as under:-
i. On the facts and in the circumstances of the case and in law, the Learned CIT(A)-28 erred in confirming the disallowances of Rs. 14,65,325/- by treating loss on trading in derivatives as speculation business under explanation to section 73(4). ii. On the facts and in the circumstances of the case and in law, the Learned CIT(A)-28 erred in not appreciating the fact that provisions of explanation to section 73(4) are only applicable to ‘’shares’’ and not applicable in case of trading in ‘’Derivatives’’.
In a nutshell, the facts are that the assessee, M/s Heetu Chemicals & Alkalies Ltd. (HCAL) debited Rs. 14,65,325/- in its P&L account on account of loss on sale of investments / derivatives. In response to a query raised by the Assessing Officer (AO), HCAL submitted that such loss was fully allowable as business loss as all the transactions were carried out by the assessee-company on recognised stock exchange and such transactions had also suffered Security Transaction Tax (STT). It was also submitted before the AO that on similar facts, HCAL had earned speculative profit in F.Y. 2009- 10 of Rs. 35,307/- and the same was offered to tax. Conversely, during the year under consideration, HCAL has incurred loss and the same should be allowed as deduction. Referring to section 43(5) of the Act, it was submitted before the AO that ‘derivatives are different from shares and therefore Explanation to section 73 which covers only shares and not derivatives is not applicable to the assessee’.
3.1 The AO was not convinced with the above explanation of HCAL, as the assessee was in the business of reselling of various chemicals manufactured in its plant. Therefore, trading in derivatives was not the business activity of HCAL. The AO held that by virtue of section 43(5) r.w.s 73 of the Act, loss on account of trading in derivative in shares and securities cannot be set off against the normal business income as the same is a speculative loss. Reliance was placed by the AO on the judgment of the Hon'ble Delhi High Court in CIT vs. DLF Commercial Developers Ltd. [2013] 35 taxmann.com 280(Del). Considering the above the AO disallowed the claim of loss of Rs. 14,65,325/- incurred on account of trading in derivative in shares and securities.
The assessee preferred an appeal against the order of the AO before the learned CIT(A). We find that the learned CIT(A) followed the decision in DLF Commercial Developers Ltd. (supra) and confirmed the disallowance made by the A.O.
Before us, the learned counsel of the assessee relies on the decision in the case of CIT vs. Bharat R. Ruia (HUF) (2011) 337 ITR 452 (Bom). On the other hand, the learned DR relies on the decision in DLF Commercial Developers Ltd. (supra).
We have heard the rival submissions and perused the relevant material on record. We begin with the decisions relied on by the learned counsel of the assessee. In Bharat R. Ruia (HUF) (supra), in the A.Y. 2003-04, the assessee had entered into derivative transactions which resulted in loss amounting to Rs. 28,37,707/-. The assessee claimed the above loss as business loss. The AO rejected the contention of the assessee and held that the loss incurred was speculative loss u/s 43(5) of the Act. The learned CIT(A) agreed with the order of the AO. On further appeal filed by the assessee, the ITAT held that clause (d) to the proviso to section 43(5) of the Act being retrospective in nature, the losses incurred from the derivative transactions could not be treated as speculative losses incurred by the assessee in the A.Y. 2003-04. On appeal filed by the revenue, the Hon'ble High Court held: “In the result, we hold that the exchange traded derivative transactions carried on by the assessee during the assessment year 2003-04 are speculative transactions covered under section 43(5) of the Act and the loss incurred in those transactions are liable to the treated as speculative loss and not business loss. We further hold that clauses (d) inserted to the proviso to section 43(5) with effect from April 1, 2006, is prospective in nature and the Income-tax Appellate Tribunal was in error in holding that clauses (d) to the proviso to section 43(5) applied retrospectively so as to apply to the transactions carried on by the assessee during the assessment year 2003-04”.
6.1 The decision in Bharat R. Ruia (HUF) is in favour of the revenue.
6.2 Now we turn to the decision in the case of DLF Commercial Developers Ltd. (supra). In that case the assessee claimed loss of Rs. 492.71 lakhs on account of purchase and sale of shares. The assessee argued that the loss in trading of derivatives was not a speculative loss in terms of section 43(5) of the Act and could not be disallowed as speculative loss under any provisions of the Act. The AO rejected that submission and held that section 73 applied since it was independent of section 43(5). Explanation to section 73 can be applied even if there is delivery based sale purchase of shares and also in situations of trading of derivatives. The AO held that loss of Rs. 492.71 lakhs had to be treated as speculative loss and could not be allowed to be adjusted against business income. The CIT(A) rejected the assessee’s contention. In further appeal, the ITAT accepted the contention that Explanation to section 73 applied and granted the relief claimed. In further appeal, the Hon'ble High Court held that (i) definition of ‘speculative transaction’ as indicated in section 43(5) is restricted in its application to working out mandate of sections 28 to 41 only, (ii) in terms of Explanation to section 73, in case of certain types or classes of companies, business of purchase and sale of shares is deemed to be speculation business, and (iii) where by all accounts derivatives were based on stocks and shares, which fall squarely within Explanation to section 73, loss from sale – purchase of such derivative would be speculative loss, which would not be permitted to be carried forward.
6.3 In the computation of income of the year of assessment u/s 28 of the Act, the assessee is not entitled to set off speculative losses against profits from other business activities of the same year. This was so held by the Hon'ble Supreme Court in CIT vs. Gauri Dutta Bhagwan Dass and Co. (1969) 71 ITR 296 (SC); CIT vs. Kanodia & Co. (JP) (1970) 77 ITR 515 (SC); CIT vs. Gupta Bros. (P) Ltd. (1972) 83 ITR 443 (SC).
Thus u/s 73, losses in speculation business cannot be set off against any income under the head ‘business or profession’ nor u/s 71 against income under any other head, but it can be set off only against profits, if any, of another speculation business.
6.4 HCAL is a company. As per Explanation to section 73, where any part of the business of a company ( whether private or public ) consists of the purchase and sale of shares of other companies, such company shall 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. The assessee in the present case does not fall in the exception mentioned in Explanation to section 73.
6.5 To sum up, respectfully following the ratio laid down in DLF Commercial Developers Ltd. (supra), we hold that the assessee cannot set off the loss of Rs. 14,65,325/- because as per Explanation to section 73 if the part of the business of the company consists of sale and purchase of shares of other companies such business of shares shall be deemed to be a speculative business. As such, the loss of Rs. 14,65,325/- is a loss from speculation business and it can be set off only from the income of speculation business and not from any other business.
In view of the reasons delineated at para 6 to 6.5 here-in-above, the order of the learned CIT(A) on the above issue is confirmed.
In the result, the appeal is dismissed.
Order pronounced in the open court on 16/03/2017