STEWART AND MACKERTICH WEALTH MANAGEMENT LTD.,KOLKATA vs. THE DCIT, CIRCLE-10, KOLKATA, KOLKATA

4. The assessee has raised an additional ground before the Ld. CIT(A) regarding the disallowance u/s. 14A of the Act read with Rule 8D of the I. T. Rules. The Ld. CIT(A) observed that while filing the return of income, assessee had suo moto made disallowance u/s. 14A of the Act. The Ld. AR for the assessee has submitted before us that the income tax return filed by the assessee wherein we observe that the assessee has shown the exempt income u/s. 14A of the Act at Rs.1,46,902/- and he has disallowed suo moto the expenses which relates to exempt income at Rs.5,38,538/-. The AO accepted the exempt income declared by the assessee in the return of income and also accepted suo moto disallowance made by the assessee u/s. 14A of the Act. But the assessee has raised additional ground before the Ld. CIT(A) stating that the assessee is entitled to claim more relief because of the new judgment of the Hon’ble High Court and Hon’ble Supreme Court, which were delivered by the various courts later on and it seemed to the assessee to claim more benefit and, therefore, he raised the additional ground before the Ld. CIT(A) to allow the more benefit u/s. 14A of the Act. But the Ld. CIT(A) has disallowed the assessee’s contention observing that the issue u/s. 14A of the Act did not attain finality and still various decisions are giving interpreting the quantum of disallowance differently. Secondly, the disallowance u/s. 14A of the Act is not a legal and assessee himself has calculated the quantum of basis of law prevailing at that time. In addition to this, the Ld. CIT(A) deleted the addition of Rs.25,66,694/- holding that the business of purchase and sale of shares are not speculative in nature. While deleting the addition made by the AO on account of speculative transaction, the Ld. CIT(A) has observed the following:

“I have carefully considered the facts of the case and the submissions of the assessee. First let us see what is the main business activity of the assessee. Is it earning brokerage income or is it earning income on share trading on its own account. In Form 3CD, Auditors of the company mentioned the following in column 8(a): 8 (a) Nature of business or profession Brokerage income for Security Broking & (if more than one business or on distribution of financial products. The profession is carried on during Company is a trading member of Bombay the previous year, nature of Stock Exchange Ltd., National Stock every business or profession) Exchange of India Ltd., The Calcutta Stock Exchange Ltd., OTC Exchange of India, Depository Participant of Central Depository Services India Ltd. and registered with AMFI (Association of Mutual Funds in India)

In Director's report, under the head 'Activities and Performance/Future Prospects', following is mentioned. "During the year under review, the stock market remained more or less stable. As a consequence, the bottom-line of the Company witnessed a substantial improvement. The Company while consolidating its focus on Institutional and Corporate Stock Broking, had successfully managed QIPs of select corporate. With the world economy witnessing steady recovery, the future outlook of Stock Broking Industry as a whole and your Company in particular, appears to be bright, barring unforeseen circumstances.” Item No. 32 of Form 3CD mentions turnover as under: (i) Brokerage income Rs. 11,87,32,756/- (ii) Trading shares Rs. 1,86,47,504/- Analysis of the above mentioned information throw following facts :- (i) Main business activities of the company is that of earning brokerage, which the Auditors have reported in Audit Report.

(ii) Focus of the company is on earning brokerage and the bottom lines of the company are dependent on earning brokerage. Director's & Company's attentions are focussed on brokerage income. Share trading activities is not even discussed. (iii) There is loss in share trading activities. But even the turnover of share trading activities are not comparable with that of brokerage income. If we take turnover of share transactions resulting in brokerage income, then it is Rs.46,979,211,826- by assessee's own admission as submitted during assessmentproceedings. Compared to this assessee's turnover on own amount is miniscule. Even if we compare the brokerage income with turnover of share trading on own amount, it is seen that brokerage income is more than 10 (ten) times as compared to share trading turnover. Under the facts and circumstances, as discussed above, it is clear that the main business activity of the appellant is earning brokerage income and not share trading on own accounts. Now let us see the effect of the amendment vide Finance Act(No.2), 2014. As a result of the amendment, apart from the existing exceptions, even those companies would be out of the purview of Explanation to sec. 73 whose main business is that of trading in shares. Without admitting but just presuming that these amendments areto be applied retrospectively, even then it would not benefit appellant, as main business of the assessee is not that of trading in shares. Hence, the ratio of the decision in Fiduciary Shares and Stock Pvt. Ltd. (supra) is notrelevant to the facts of assessee. Now coming to the alternative argument of the appellant that both brokerage income and share trading income should be assessed under the same head, eithernormal business or speculative business, it is seen that this claim is based on some judicial pronouncements which started with the judgment of Hon'ble Calcutta High Court in CIT -Vs- Nirmal Kumar & Co. 26 Taxmann 382. Thejudgment has been followed by Kolkata ITAT in Lohia Securities Ltd. -Vs- DCIT(2016) 66 Taxmann.com 86 wherein it has been held that brokerage income in share dealing and share trading income fall under the same head. Perusal of the judgment in Nirmal Kumar & Co.(supra) shows that thisjudgment was rendered by a division bench of Calcutta High Court on 28.01.1986. Facts of the case are that assessee was dealing in PDOs. This term is not clarified in the order but a little search shows that PDOs stands for instruments issued by 'Public Debt Office' of the Reserve Bank of India (RBI). This department deals in issuing securities. Thus assessee was basically dealing in securities which was a debt instrument and not equity instrument like shares. Assessee was earning a small brokerage on dealing in PDOs(Securities) apart from trading in them. Settlements were made without delivery of the securities. In the earlier years income from both activities, i.e. brokerage on dealing in PDOs and their trading income were assessed under the same head. However, in the current year A.O. treated the loss on trading in PDOs as speculative transactions and the brokerage income earned as normal business activity. However, the Appellate Authority and the Hon'ble Tribunal gave a finding of fact which is summarized in the words of the ITAT as under: "The assessee transacted business in PDOs with third parties in its own account and suffered a loss of Rs. 8,96,300/ -. From these transactions the assessee also earned brokerage of Rs. 12,50,868/-. In the past the income from brokerage and from PDO's transactions had been treated as income under the same head, i.e. 'Business'. As pointed out by the AAC in the assessment year 1970-71, the ITO himself treated a major portion of the brokerage received out of the PDO's transactions as inseparable from the business dealings in PDO's in such transactions." Under the facts and circumstances of the case and the nature of the business activities i.e. dealing in PDOs it was held that earning of brokerage is intrinsically linked to trading in PDOs.

Under the circumstances, ITAT held that the 2(two) incomes as above should be assessed under 1(one) head. Hon'ble High Court upheld the view of Tribunal under these peculiar facts of the case. In the light of the above mentioned facts it is worthwhile to mention that Explanation to sec. 73 has never been discussed in the order of Hon'ble High Court and there could not have been the necessity also as A.O. has not held the loss on trading in PDOs to be speculative loss by invoking Explanation to sec.

Grounds of appeal raised by the Revenue (ITA No.1858/Kol/2016):

“1. Whether the Ld. CIT(A) was correct in deleting the disallowance of Rs.8,65,560/- on account of advances written off by the assessee without looking in to the fact that the assessee has taken no step to recover the advances nor has clarified as to when such advances were made? 2. Whether the Ld. CIT(A) was correct in deleting the addition of Rs.25,66,694/- disregarding the fact that the principal business of the Company is neither granting of loans and advance nor it is a banking company and therefore, the business income earned has to be treated as speculation business to the extent of business of purchase of sale of shares thereby attracting the mischief of section 73 of the Act? Whether the Ld. CIT(A) was correct in not appreciating the fact that the AO had to segregate the expenditure attributable to own purchase of sale of 7 & 1820/Kol/2016 Stewart &Mackertich Wealth Management Ltd...AY. 2011-12 shares and reckoned the figure at Rs.27,01,695/- as disallowable within the meaning of explanation to section 73 of the Act allowing the expenditure as speculation loss carrying it forward to the next year to be set off against speculation profit? 3. Whether the Ld. CIT(A) was correct in deleting the addition of Rs.1,22,350/ - without appreciating that the employees' contribution has to be deposited within the due date by which the assessee was required as employer to credit the employees contribution to the employees' account in the relevant fund under any Act or Rule?” Grounds of appeal raised by the Assessee ( ):

1. That, on the facts and in the circumstances of this case, the learned Commissioner of Income Tax (Appeals) erred in concurring with the decision of Ld. Assessing Officer that the provisions of section 73 read with Explanation thereto are applicable to the facts of this case and thereupon further erred in confirming the sum of Rs.1,35,001 to be treated as Speculative Loss.

2. That the Ld. Commissioner of Income Tax (Appeals) erred in treating the aforesaid amount of Rs.1,35,001 as "Speculative Loss" in complete disregard of the Judgment of Jurisdictional Tribunal in the case of "Lohia Securities Ltd. vs. DCIT" ( 2016) 66 taxmann.com 86 by saying that the judgment of Jurisdictional Tribunal is not acceptable to him. 3. That the Judgment of Jurisdictional Tribunal is a binding precedence and therefore the order of the Ld. Commissioner of Income Tax (Appeals) recording conclusions contrary to judgment of the Jurisdictional Tribunal amounts to judicial indiscipline and exercising arbitrary powers. 4. That the Ld. Commissioner of Income Tax (Appeals) erred in refusing to admit the additional ground raised

before him which related to disallowance of Rs.5,38,538 made by the Assessing Officer under section 14A of the Act.

5. That the order of the Ld. Commissioner of Income Tax (Appeals) is against law and facts of this case.”

5. Since these two appeals relate to the same assessee, same assessment year and identical issues involved, therefore, these have been clubbed and heard together and a consolidated order is being passed for the sake of convenience and brevity.

6. In Revenue appeal i.e. the ground no. 2 and in assessee’s appeal i.e. , the ground no. 1, 2 and 3 are same and on the exact identical issue, therefore, they are being adjudicated together. The main issue involved is “Speculation loss” of Rs.1,35,001/-.

7 The Ld. AR for the assessee has submitted before us that the assessee under consideration is a Member of the National Stock Exchange and having its main business as 8 & 1820/Kol/2016 Stewart &Mackertich Wealth Management Ltd...AY. 2011-12 stock broking. In addition to the broking business it also deals in shares and derivatives for its own trading business. During the year under consideration the assessee’s income from brokerage is at Rs.11,87,32,756/-. Apart from this, the trading loss shown by the assessee on its own trading activity is at Rs.40,631/-. The assessee is earning income by way of brokerage and by way of doing its own trading in shares i.e. purchase and sale of shares and securities. The AO invoked the provisions of explanation to section 73 of the Act and treated the loss incurred on delivery based share trading as speculation loss and did not allow the assessee to set off the loss. The Ld. AR for the assessee submitted before us that the Explanation to section 73 of the Act is not applicable in the case under consideration as it is not incurred any business loss which it intends to set off or carry forward. All the two segments of the business broking and trading of the assessee should be considered together. The Ld. AR for the assessee further submitted that for the purpose of explanation to section 73 of the Act, it is necessary to arrive at the result of purchase and sale of shares and derivatives taken together for the following reasons:

(i) The assessee’s primary and only business is to deal in shares and securities including derivatives for clients and also for self.

(ii) Both purchase and sale of shares by physical delivery and purchase of sale of shares for future and option derivative does not come under speculation u/s. 43(5) of the Act.

(iii) The transactions of purchase and sale of shares and derivatives are carried out by the broker and payments are settled in a consolidated manner considering the debit/credit in one segment. (iv) The result of both shares and derivatives are inter dependent for the primary reasons that derivatives are used as a tool for protecting the losses in the stock of shares and securities. At this juncture, the Ld. AR for the assessee drew our attention to the provisions of section 43(5) of the Act and explanations to sec. 73 of the Act, which read as under:

“Sec. 43 Definitions of certain terms relevant to income from profits and gains of business or profession.

9 & 1820/Kol/2016 Stewart &Mackertich Wealth Management Ltd...AY. 2011-12 (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 scrips” Section73 :Losses in speculation business. “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 trading in shares or 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.

DCIT Vs. Raima Equiities Pvt. Ltd. (ITA No. 1994/K/2013 “6.4.3. We find that though this amendment is made effective only from Asst Year 2015-16 onwards, the real intention behind introduction of this amendment, in our opinion, is curative in nature. In our considered opinion, the amendment, if not held retrospective, would result in hardship to the assessee in the following manner:-

(a) The assessee engaged in trading of shares would be treated as speculation business uptoAsst Year 2014-15. That assessee might be having losses eligible to be carried forward under the head ‘speculation business’.

(b) The provisions of section 73 of the Act provides that the brought forward speculation loss could be set off only against speculation profits.

10 & 1820/Kol/2016 Stewart &Mackertich Wealth Management Ltd...AY. 2011-12 (c ) Pursuant to the amendment by Finance Act 2014 supra, the loss derived from the principal business of trading in shares would not be construed as speculative in nature. The logical corollary is profit derived thereon also would be treated only as normal business profits and not speculative profits.

(d) In this situation, the brought forward speculation loss could never be eligible to set off against the profits when there is absolutely no change in the business activities of the assessee (i.e trading in shares as its principal business). That loss would get lapsed for no fault of the assessee thereby creating genuine hardship to the assessee. We feel that the insertion in Explanation to Section 73 of the Act by the Finance Act 2014 should be looked into from this perspective which would create genuine hardship to the assessee if not held to be curative in nature. Hence we hold that the said amendment should be given retrospective effect only. In our considered opinion, the amendment would not serve its object in the instant case unless it is construed retrospective in operation.

6.4.4. We draw support from the decision of the Hon’ble Apex Court in the case of CIT vs Alom Extrusions Ltd reported in 319 ITR 306 (SC) wherein their Lordships were considering the amendment made by Finance Act 2003 by omitting the second proviso to section 43B of the Act w.e.f. 01.04.2004 and bringing about uniformity in the first proviso by equating tax, duty, cess and fees with contribution to welfare funds (viz provident fund etc) . The Hon’ble Apex Court held that the aforesaid amendment in section 43B of the Act by Finance Act 2003 is curative in nature and would therefore apply retrospectively w.e.f. 01.04.1988.

6.4.5. In the case of Allied Motors Pvt Ltd vs CIT reported in 224 ITR 677 (SC), the question before the Hon’ble Apex Court was whether sales tax collected by the assessee and paid after the end of the relevant previous year but within the time allowed under the relevant sales tax law should be disallowed u/s 43B of the Act. The ITO disallowed the deduction of sales tax collected by the assessee for the last quarter of the accounting year as the same was paid in the subsequent year. The aforesaid difficulty was cured by the insertion of the first proviso w.e.f. 01.04.1988. The Hon’ble Apex Court held that when a proviso is inserted to remedy unintended consequences and to make the provision workable, the proviso which supplies an obvious omission in the section and which is read to be read into the section to give it a reasonable interpretation, it could be read as retrospective in operation to give effect to the section as a whole. The Hon’ble Apex Court held that the first proviso to section 43B of the Act was curative in nature and hence retrospective in operation, i.e. w.e.f. 01.04.1984 from when the section was brought on the statute.

6.4.6. The Hon’ble Apex Court in the case of CIT vs J.H.Gotla reported in (1985) 156 ITR 323 (SC) at page 339 and 340 had observed as under:- “In the case of K P Varghese vs ITO (1981) 131 ITR 597 , this court emphasized that a statutory provision must be so construed, if possible, that absurdity and mischief may be avoided. Where the plain literal interpretation of a statutory provision produces a manifestly unjust result which could never have been intended by the legislature, the court might modify the 11 & 1820/Kol/2016 Stewart &Mackertich Wealth Management Ltd...AY. 2011-12 language used by the legislature so as to achieve the intention of the legislature and produce a rational construction. The task of interpretation of a statutory provision is an attempt to discover the intention of the legislature from the language used. It is necessary to remember that language is at best an imperfect instrument for the expression of human intention. It is well to remember the warning administered by Judge Learned Hand that one should not make a fortress out of the dictionary but remember that statutes always have some purpose or object to accomplish and sympathetic and imaginative discovery is the surest guide to their meaning. We have noted the object of s.16(3) of the Act which has to be read in conjunction with s.24(2) in this case for the present purpose. If the purpose of a particular provision is easily discernible from the whole of the scheme of the Act which in this case, is to counteract the effect of transfer of assets so far as computation of income of the assessee is concerned, then bearing that purpose in mind, we should find out the intention from the language used by the legislature and if strict literal construction leads to an absurd result, i.e., result not intended to be subserved by the object of the legislation found in the manner indicated before, then another construction is possible apart from strict literal construction then that construction should be preferred to the strict literal construction. Though equity and taxation are often strangers , attempts should be made that these do not remain always so and if a construction results in equity rather than in injustice, then such construction should be preferred to the literal construction. Furthermore, in the instant case, we are dealing with an artificial liability created for counteracting the effect only of attempts by the assessee to reduce tax liability by transfer. It has also been noted how for various purposes the business from which profit is included or loss is set off is treated in various situations as the assessee’s income. The scheme of the Act as worked out has been noted before.”

6.5. Respectfully following the judicial precedents relied upon hereinabove, Wanchoo Committee report of December 1971 and our findings given in Para 6.4.3 above , we hold that the amendment brought in by the Finance Act 2014 should be construed as curative in nature and hence to be given retrospective applicability. It is not in dispute that the principal business of the assessee in the instant case is trading in shares. If the amendment supra is given retrospective effect, then the same would automatically fall under the exception provided in the Explanation to Section 73 of the Act and accordingly the loss incurred on delivery based share transactions should not be construed as speculation loss. Hence the grounds raised by the revenue in this regard are dismissed.

12 & 1820/Kol/2016 Stewart &Mackertich Wealth Management Ltd...AY. 2011-12 earlier para and is not being repeated for the sake of brevity. In addition to this, the Ld. DR for the revenue has relied on the following judgments:

(i) Anjalee Exim (P) Ltd. Vs. DCIT (2013) 35 taxmann.com 374 (Guj), wherein it has been held as under:

“Section 37(1), read with section 73 of the Income-tax Act, 1961 - Business expenditure - Allowability of [Bifurcation of expenses] - Assessment year 2007-08 - Assessee-company was engaged in business of trading of shares, gold bullion and commodities - It filed return of income declaring total income and speculation loss - It claimed deduction of administrative and other expenses - Assessing Officer having noticed that said expenses were relatable to both speculative and non-speculative activities bifurcated same in ratio of 2:3 between speculative and non-speculative income - Whether since on administrative and other expenses reflected in books by assessee no segregation had been made and they were relatable to both speculative and non-speculative activities, bifurcation of sue expenses was not only necessary but inevitable - Held, yes.” (ii) CIT Vs. Eureka Stock & Share Broking Services Ltd., (2016) 74 taxmann.com 114 (Cal) wherein it has been held as under :

Section 73, read with sections 147, of the Income-tax Act, 1961 - Losses - In speculation business (Explanation of section 73) - Assessment year 2001-02 - Assessee incurred loss on sale and purchase of shares and claimed set off of said loss against brokerage earned from its business as a sharebroker - Whether, sinceimpugned loss was incurred by assessee on sale and purchase of shares, which had no connection with business as a share broker, said loss would be treatedasspeculation loss as per provisions of Explanation to section 73 - Held, yes.

13 & 1820/Kol/2016 Stewart &Mackertich Wealth Management Ltd...AY. 2011-12 to purchase and sale of shares. Therefore, we find that both purchase and sale of shares (trading activity and the brokerage activity) do not fall under speculation transactions as per section 43(5) of the Act. Therefore, considering the factual position, we dismiss the ground no.,2 raised by the revenue and allow the ground nos. 1, 2 and 3 raised by the assessee in its cross appeal (ITA No.1820/k/16).

11.In the result, the ground no.,2 raised by the revenue is dismissed and ground nos. 1, 2 and 3 raised by the assessee are allowed.

In so far as deduction of advances given to the employees are concerned, which had become irrecoverable that may not cause it of a problem. Advances were given to the persons who had been employed by the assessee company and if they became irrecoverable, it would clearly be treated as business loss. Law on this aspect stands crystallized by the judgment of the Hon’ble Bombay High Court in the case of CIT Vs. Maina Ore Transport Pvt. Ltd. 324 ITR 100.

14 & 1820/Kol/2016 Stewart &Mackertich Wealth Management Ltd...AY. 2011-12 cited by him supra and the facts narrated by him above. As the Ld. AR for the assessee has pointed out that if it seems to the assessee that any debtor or the advance given by the assessee becomes irrecoverable, he may write it off as a bad debt. Therefore, considering the factual position, we do not find any infirmity in the order passed by the Ld. CIT(A). Therefore, we confirm the same.

16.In the result, the appeal filed by the Revenue in ground no. 1 of is dismissed.

24. On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the AO and the Ld. CIT(A), which we have already noted in our earlier para and is not being repeated again for the sake of brevity.

25. Having heard rival submissions and perused the material available on record, we are of the view that this issue requires a fresh examination at the end of the AO. Whether the assessee has wrongly stated suo moto disallowance at Rs.5,38,538/- or not, is to be 16 & 1820/Kol/2016 Stewart &Mackertich Wealth Management Ltd...AY. 2011-12 examined afresh and, therefore, we are of the view to remit the said issue to the file of the AO to examine this issue afresh after considering the documents and explanations/evidence submitted by the assessee. Therefore, we allow this ground for statistical purposes.

26. In the result, the assessee`s ground No. 4 in is allowed for statistical purposes.

Order pronounced in the open court on 12.04.2017