DEVESH N SHAH,MUMBAI vs. ITO 7(2)(4), MUMBAI

आयकर अपील�य अ�धकरण “D” �यायपीठ मुंबई म�। IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER आयकर अपील सं./I.T.A. No.778/Mum/2014 (�नधा�रण वष� / Assessment Year : 2009-10) Devesh N. Shah, Income Tax Officer, बनाम/ Rashmi Zaveri & Co., 7(2)(4), v. Chartered Accountants, Mumbai. Arham, Ground Floor, Plot 266, Sion (E), Mumbai – 400022. �थायी लेखा सं./PAN : ABVPS5960P (अपीलाथ� /Appellant) .. (��यथ� / Respondent)

Assessee by Shri Sanjay R. Parikh Revenue by : Shri Sunil Kumar Agarwal, JCIT

सुनवाई क� तार�ख /Date of Hearing : 25-05-2016 घोषणा क� तार�ख /Date of Pronouncement : 29-07-2016 आदेश / O R D E R PER RAMIT KOCHAR, Accountant Member

This appeal, filed by the assessee, being ITA No. 778/Mum/2014, is directed against the appellate order dated 5th December, 2013 passed by learned Commissioner of Income Tax (Appeals)- 13, Mumbai (hereinafter called “the CIT(A)”), for the assessment year 2009-10, the appellate proceedings before the learned CIT(A) arising from the assessment order dated 24th November, 2011 passed by the learned Assessing Officer (hereinafter called “the AO”) u/s 143(3) of the Income Tax Act,1961 (Hereinafter called “the Act”).

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“1. Under the facts and circumstances of the case and in law, the learned Assessing Officer has erred in disallowing Rs 24,907 u/s 14A of the Income Tax Act, 1961. 2. Under the facts and circumstances of the case and in law, the learned Assessing Officer has erred in disallowing carried forward and set off of Rs. 20,83,591 being speculative loss of A.Y 2006-07 on account of F & O transactions. Your appellant submits that the full amount of Rs. 20,83,591 should be allowed to be carried forward and set off against business income of the year under appeal u/s 43(5)(d).”

It was observed by the AO from the return of income filed for the assessment year 2006-07 that the assessee has himself shown speculation loss of Rs. 20,83,591/- on account of transaction in F&O but the same was set off against the normal business by the assessee during the year. Further, the loss incurred by the assessee in F & O transactions in National Stock Exchange of India or in Bombay Stock Exchange, were incurred on a date prior to 25.01.2006 i.e. the date of their being notified as "recognized stock exchange" for the purpose of proviso (d) to clause (5) of Section 43 of the Act which cannot be treated as a transaction covered by the said provision, and was considered within the definition of 'speculative transaction'. Since the assessee has incurred loss in respect of F&O transactions before 25th January, 2006 of Rs.20,83,591/- which cannot be treated as normal business loss as the transaction in F & O before 25th January, 2006 i.e. prior to the date when the stock exchange was notified as recognized stock exchange for

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the purpose of proviso (d) to clause (5) of Section 43 of the Act, and even though clause (d) come into effect from 1st April, 2006, the impugned transactions before 25th January, 2006 did not satisfy the requirements of proviso (d) to clause (5) of Section 43 of the Act as it was not carried out through recognized stock exchange, thus, the A.O. treated the loss on F & O of Rs.20,83,591/- prior to 25.01.2006 as speculation loss even though the assessee himself treated as speculation loss and is allowed to be set off against speculation income of the assessee, vide assessment order dated 24- 11-2011 passed by the AO u/s 143(3) of the Act.

Similarly, addition was made by the A.O. of Rs. 24,907/- and the said sum was added back to the income of the assessee u/s 14A of the Act by applying Rule 8D(2)(iii) of the Income Tax Rules, 1962 being 0.5% of average value of investment held by the assessee ,vide assessment order dated 24-11-2011 passed by the AO u/s 143(3) of the Act.

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to dismissal of the above ground no. 1 raised by the assessee in the memo of appeal filed with the Tribunal . Accordingly we order dismissal of ground no. 1 with respect to disallowance of Rs. 24,907/- u/s 14A of the Act as not being pressed. We order accordingly.

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incurred losses in eligible derivatives transactions in the assessment year 2006-07 which were entered into prior to 25-01-2006 i.e. date of notification of NSE and BSE as recognized stock exchanges and the losses should be allowed as normal business loss.

The assessee had incurred losses of Rs.20,83,591/- in F & O transactions which are derivative transactions in the assessment year 2006-07 which the assessee is seeking to be allowed to be carried forward as non-speculative losses and to get it adjusted against normal business income in the instant assessment year 2009-10 under appeal. The said F & O loss had occurred in the previous year 2005-06 itself but prior to 25th January 2006 on which date the National Stock Exchange(NSE) and Bombay Stock Exchange(BSE) were notified by Central Government as ‘recognized stock exchanges’ in accordance with the powers conferred by clause (ii) in the Explanation to clause (d) of the proviso to clause (5) of Section 43 of the Act read with Rule 6DDB of the Income Tax Rules, 1962 vide notification no 2/2006 (SO 89(E) , dated 25-01- 2006 ( F.No. 142/38/2005-TPL) which notification along with explanatory Memorandum is reproduced hereunder :

“Section 43(5), clause (ii) of Explanation to clause (d) of proviso of the Income-tax Act, 1961 – Recognised Stock Exchange – Notified Stock Exchanges

NOTIFICATION NO. 2/2006 [SO 89 (E)], DATED 25-1-2006

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In exercise of the powers conferred by clause (ii) in the Explanation to clause (d) of the proviso to clause (5) of section 43 of the Income-tax Act, 1961(43 of 1961) read with sub-rule (4) of rule 6DDB of the Income- tax Rules, 1962, the Central Government hereby notifies the following stock exchanges as recognised stock exchanges for the purposes of the said clause with effect from the date of publication of this notification.in the Official Gazette, namely:-

(1) National Stock Exchange of India Limited, Mumbai (2) Bombay Stock Exchange Limited, Mumbai 2. The Central Government may withdraw the recognition granted to the stock exchange if any of the conditions prescribed in rule 6DDA of the income-tax Rules, 1962, subject to which the recognition is granted, is violated. 3. This notification shall remain in force until the approval granted by the Securities and Exchange Board of India is withdrawn or expires, or this notification is rescinded by the Central Government as provided in sub-rule (5) of rule 6DDB of the Income-tax Rules, 1962.

[F.No. 142/38/2005-TPL]

Explanatory Memorandum in respect of Notification S. O. 89(E) Dated 25th January, 2006

The said Notification notifies Bombay Stock Exchange Limited, Mumbai and National Stock Exchange of India Limited, Mumbai as recognised Stock Exchanges for the purposes of clause (d) of the proviso to section 43(5) of the Income-tax Act, 1961. An eligible transaction in respect of trading in derivatives carried out on these two Stock Exchanges with effect from 25th January, 2006 shall not be deemed to be speculative transaction. The expression ‘eligible transaction’ is defined in the Explanation appearing after the proviso to section 43(5) of the Income-tax Act, 1961.”

As per above notification , An eligible transaction in respect of trading in derivatives carried out on these two Stock Exchanges NSE and BSE with effect from 25th January, 2006 shall not be deemed to be speculative transaction, while in the instant case the assessee incurred F & O losses i.e.

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in derivative transactions during the previous year 2005-06 but prior to 25- 01-2006 and is seeking carrying forward as non-speculative losses and adjustment against the normal business income for the impugned assessment year 2009-10, by treating the said losses as non-speculative in nature while notification allow such losses to be treated as non-speculative only with respect to transactions in derivatives undertaken on NSE/BSE w.e.f. 25-01-2006.

Before we proceed further, it would be relevant to analyse the provisions of proviso (d) to clause (5) of Section 43 of the Act read with explanation which was introduced in Statute by Finance Act, 2005 w.e.f. 01-04-2006 and are applicable for assessment year 2006-07 and subsequent assessment years reads as under:

'Definitions of certain terms relevant to income from profits and gains of business or profession.

Xx

(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:

Provided that for the purposes of this clause-

(a) to (c) xx

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(d) an eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognised stock exchange; or

(e) xx

shall not be deemed to be a speculative transaction.

Explanation - For the purposes of clause (d), the expressions-

(i) "eligible transaction" means any transaction,-

(A) carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary registered under section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or the Depositories Act, 1996 (22 of 1996) and the rules, regulations or bye-laws made or directions issued under those Acts or by banks or mutual funds on a recognised stock exchange; and

(B) which is supported by a time stamped contract note issued by such stock broker or sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub-clause (A) and permanent account number allotted under this Act;

(ii) "recognised stock exchange" means a recognised stock exchange as referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfils such conditions as may be prescribed and notified by the Central Government for this purpose;'

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Section 43(5) of the Act provides that 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 actual delivery or transfer of the commodity or scrips shall be speculative transactions , while proviso(d) to Section 43(5) of the Act inter-alia provides that an eligible transaction in respect of trading in derivatives referred to in clause (ac) of Section 2 of the Securities Contracts(Regulation) Act, 1956 carried out in a recognized stock exchange shall not be deemed to be a speculative transaction. It is an admitted position between the rival parties that F & O transactions i.e. derivative transaction which the assessee undertook on which the assessee sustained loss of Rs.20,83,591/- was otherwise qualifying all the conditions as stipulated by the proviso (d) to clause (5) of Section 43 read with explanation , except that it was carried out by the assessee in the previous year 2005-06 prior to 25-01-2006 when NSE/BSE were being notified as recognized stock exchanges by Central Government on 25-01-2006 vide notification no. 2/2006 (SO 89(E)) , dated 25-01-2006.

The Memorandum explaining the provisions in the Finance Bill, 2005 which introduced clause (d) ((2005) 194 CTR(St.) 147 , the purpose of introduction of clause (d) has been explained, which reads as under:

"Measures to rationalize the tax treatment of derivative transaction

Under the existing provisions (cl.(5) of s.43) a transaction for the purchase and sale of any commodity including stocks and shares is deemed to be a 'speculative transaction', if it is settled otherwise than by actual delivery. However, certain categories of transactions are excluded from the purview of said provision. Further, the unabsorbed speculation losses are allowed to be carried forward for eight years for set-off against speculation profits in subsequent years. These restrictions were essentially designed as an anti- evasion measure to prevent claims of artificially generated losses in the absence of an appropriate institutional infrastructure.

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Recent systemic and technological changes introduced by stock markets have resulted in sufficient transparency to prevent generating fictitious losses through artificial transactions or shifting of incidence of loss from one person to another. The screen based computerized trading provides for an excellent audit trail. Therefore, the present distinction between speculative and non- speculative transactions, particularly relating to derivatives is no more required.

The proposed amendment therefore, seeks to provide that an eligible transaction carried out in respect of trading in derivatives in a recognized stock exchange shall not be deemed to be a speculative transaction. The proposed amendment also seeks to notify relevant rules etc. regarding conditions to be fulfilled by recognized exchanges in this regard. Further it is also proposed to amend sub-s. (4) of s.73 so as to reduce the period of carry forward of speculation losses from eight assessment years to four assessment years.

These amendments will take effect from 1st April 2006 and will, accordingly, apply in relation to asst. years 2006-07 and subsequent years."

From the above it is evident that the eligible transactions in derivatives carried out through recognized stock exchanges are exempted from the purview of being speculative transactions by virtue of proviso (d) to clause (5) of Section 43 read with explanation provided other conditions are satisfied because of recent and systemic and technological changes introduced by stock exchanges which are in-fact anti evasion measures to prevent generating fictitious losses through artificial transactions or shifting of incidence of loss from one person to another. It is also pertinent to note that in derivatives, the transaction is always settled or squared otherwise than by actual delivery or transfer of the commodity or scrips. Thus, the law-makers granted the exemptions to specified derivatives trading from being classified as speculative transaction provided they meet all the stipulated conditions u/s 43(5) of the Act, by introduction of proviso (d) to

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Section 43(5) by Finance Act,2005 w.e.f. 01-04-2006 which is applicable from assessment year 2006-07 and subsequent assessment years , and this was done by the Parliament keeping in view the recent systemic and technological changes introduced by stock markets which have resulted in sufficient transparency to prevent generating fictitious losses through artificial transactions or shifting of incidence of loss from one person to another. The screen based computerized trading provides for an excellent audit trail. Therefore, the present distinction between speculative and non-speculative transactions, particularly relating to derivatives is no more required. Thus, when the Hon’ble Finance Minister introduced the afore-stated proposed amendment vide Finance Bill, 2005 in Parliament which is introduced on 28th February 2005 , the Central Government was fully aware that now Stock Exchanges in India are technically equipped to prevent manipulations in the markets, and derivative transactions which complies with all the stipulated prescribed requirements are to be taken out of being treated as speculative transaction and hence amendments were proposed from April 1, 2006 i.e. w.e.f. assessment year 2006-07 and subsequent assessment years onwards , which is absolutely clear and corroborated from the language used in Memorandum while introducing the proposed amendments vide Finance Bill, 2005, which reads as under:

“Recent systemic and technological changes introduced by stock markets have resulted in sufficient transparency to prevent generating fictitious losses through artificial transactions or shifting of incidence of loss from one person to another. The screen based computerized trading provides for an excellent audit trail. Therefore, the present distinction between speculative and non- speculative transactions, particularly relating to derivatives is no more required.”

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Thus, under these circumstances recognition to NSE/BSE for the purposes of proviso (d) to clause (5) of Section 43 read with explanation and notification thereof by Central Government was a mere procedural requirement to be complied with as the technical and systemic changes were already introduced by these two stock exchanges which have resulted in sufficient transparency to prevent generating fictitious losses through artificial transactions or shifting of incidence of loss from one person to another. The screen based computerized trading provided for an excellent audit trail. This was within the knowledge of Central Government when the proposed amendments were introduced in Parliament vide Finance Bill , 2005 on 28th February 2005. Thus, it cannot be presumed that when the Parliament approved the proposed amendments vide Finance Bill , 2005 it was not aware of the technological and systemic changes introduced by Stock Exchanges to prevent manipulations in stock market as set out in Memorandum to the Finance Bill, 2005. The NSE/BSE were finally notified by Central Government as recognized stock exchanges w.e.f. 25-01-2006 (SO 899E) , dated 25-01-2006, but it was rather merely a procedural requirement as these stock exchanges were otherwise technologically equipped to be granted recognition when the Finance Bill,2005 was itself introduced by the Hon’ble Finance Minister in the Parliament on 28-02-2005 as culled out from the language used in memorandum to Finance Bill, 2005 and hence the losses incurred in derivative transactions which otherwise complies with all the requirements stipulated in the proviso (d) to clause (5) of Section 43 read with explanation from the beginning of relevant previous year i.e. 01-04-2005 shall be allowable as non-speculative losses and are to be treated as covered by exclusion clause set out in proviso (d) to clause (5) of Section 43 read with explanation despite the fact that NSE/BSE were recognized on 25-01-2006. The said amendment in Statute was brought by Finance Act, 2005 w.e.f 01-04-2006 and is applicable for assessment year 2006-07 and subsequent years . It was held by the Hon’ble Gujarat High Court in case of Claris Lifesciences Limited v. ACIT(2008) 112 ITD 307 (Guj HC) that once the approval is granted in the relevant previous year , and in the absence of anything indicated to the contrary, the approval has to be taken as

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effective from the beginning of the relevant year. The Mumbai Tribunal in the case of Prem Associates Advertising and Marketing v. JCIT in ITA 6547/Mum/2009 vide orders dated 17-09-2010 has allowed the losses incurred in derivative transactions during previous year 2005-06 but prior to 25-01-2006 to be treated as covered by the exclusion clause set out in the proviso (d) to clause (5) of Section 43 of the Act , by holding as under:

“ 7. We find that it is undisputed position that the stock exchanges, on which the impugned transactions were carried out , were duly notified on 25th January 2006, and that in accordance with the views of the co-ordinate bench in the case of Anand Buildwell(supra), as also with the views of Hon’ble Gujarat High Court in the case of Claris Lifesciences(supra), once the approval is granted in the relevant previous year, and in the absence of anything indicated to the contrary , the approval has to be taken as effective from the beginning of the relevant year. The issue is thus covered, in favour of the line of reasoning adopted by the assessee, by decision of the coordinate bench in the case of Anand Brothers(supra) and by Hon’ble Gujarat High Court’s judgment in the case of Claris Lifesciences(supra). Respectfully following these decisions, we uphold the grievance of the assessee and hold that the derivative transactions entered into by the assessee at the recognized stock exchanges even prior to the date of notification in the relevant previous year, are to be treated as covered by the exclusion clause set out in Section 43(5)(d). The assessee gets relief accordingly.”

It was held by the Tribunal in other cases as cited by the learned counsel of the assessee as detailed above in preceding para’s that losses incurred prior to issue of notification on 25th January, 2006 but during the relevant previous year 2005-06 shall be treated as non-speculative normal business losses provided it satisfies other conditions as stipulated vide proviso (d) to clause (5) of Section 43 of the Act read with explanation. In our considered view, the losses incurred by the assessee i.e. Rs. 20,83,591/- which are stated to be incurred during previous year 2005-06

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but prior to 25th January, 2006 i.e. the date when NSE/BSE were recognised by Central Government vide notification issued by Central Government on 25-01-2006, but within the previous year 2005-06 which was relevant to the assessment year 2006-07 should be treated as normal non-speculative business losses and are to be treated as covered by the exclusion clause set out in proviso (d) to clause (5) of Section 43 read with explanation and allowed to be carried forward as non- speculative business losses to set off against the normal business income of the instant previous year relevant to the assessment year in question, as laid down in the ratio of the decisions of the Tribunal cited before us as set out above and also as per our detailed discussions in preceding para’s of this order, hence we allow the appeal filed by the assessee on this ground. It is pertinent to mention here that true nature and character of the past losses suffered by the assessee in the assessment year 2006-07 which are to be set off in the impugned assessment year 2009-10 , it is open to be decided in the impugned assessment year which ratio of law is supported by the decision of Hon’ble Bombay High Court in the case of Western India Oil Distributing Co. Limited v. CIT (1980) 126 ITR 497(Bom.) which was affirmed by Hon’ble Supreme Court in CIT v. Western India Oil Distributing Company Limited reported in (2001) 249 ITR 517(SC). This proposition of law was also followed in one of cases cited by learned counsel of the assessee , decided by the Mumbai Tribunal in Gajendra Kumar T. Agarwal v. ITO reported in (2011) 11 ITR (Trib.) 640(Mumbai). This disposes of ground no 2 raised by the assessee in memo of appeal filed with the Tribunal which is adjudicated by allowing this ground of appeal raised by the assessee as indicated above. We order accordingly.

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Order pronounced in the open court on 29th July , 2016. आदेश क� घोषणा खुले �यायालय म� �दनांकः 29-07-2016 को क� गई ।

Sd/- sd/- (SAKTIJIT DEY) (RAMIT KOCHAR) JUDICIAL MEMBER ACCOUNTANT MEMBER मुंबई Mumbai; �दनांक Dated 29-07-2016 [ व.�न.स./ R.K. R.K. R.K., Ex. Sr. PS R.K. आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. आयकर आयु�त(अपील) / The CIT(A)- concerned, Mumbai 4. आयकर आयु�त / CIT- Concerned, Mumbai �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, मुंबई / DR, ITAT, Mumbai “D” Bench 5. 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy// उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील�य अ�धकरण, मुंबई / ITAT, Mumbai