DCIT, CIRCLE - 6,, KOLKATA vs LOKNATH SARAF SECURITIES LTD.,, KOLKATA

Income Tax Appellate Tribunal, KOLKATA ‘A’ BENCH, KOLKATA

Before: Shri P.M. Jagtap & Shri S.S. Viswanethra Ravi

Per Shri P.M. Jagtap :- Out of these four appeals, ITA 852/KOL/2008 is the appeal of the Revenue for assessment year 2003-04 and ITA 1200/KOL/2012 is the appeal of the assessee for assessment year 2008-09, while the remaining two appeals being ITA 417/KOL/2011 (assessee’s appeal) and ITA 299/KOL/2011 (Revenue’s appeal) are the cross appeals for assessment year 2005-06. Since some of the issues involved in these appeals are common, the same have been heard together and are being disposed of by a single composite order.

First we shall take up the appeal of the Revenue for A.Y. 2003-04 being ITA No. 852/KOL/2008, which is directed against the order of ld. Commissioner of Income Tax (Appeals)-VI, Kolkata dated 05.03.2008.

The main issue involved in this appeal relates to the action of the ld. CIT(Appeals) in holding that the provision of Explanation to Section 73 is not applicable in the case of the assessee and directing the Assessing Officer to club together the profit/loss from share trading, self- difference, jobbing, future and option and share brokerage business.

The assessee in the present case is a Company, which is engaged in the business of share broking. The return of income for the year under

I.T.A. No. 852/KOL./2008 Assessment year: 2003-2004 ITA No. 299/KOL/2011 Assessment Year: 2005-2006, ITA No. 417/KOL/2011 Assessment Year: 2005-2006 & ITA No. 1200/KOL/2012 Assessment Year: 2008-2009 Page 3 of 27

consideration was filed by it on 28.11.2003 declaring a loss of Rs.1,88,47,120/-. In the said return, the loss suffered from purchase and sale of shares on its own account amounting to Rs.2,84,99,205/- was shown by the assessee under the head “profit and gains of business or profession” along with the loss of Rs.56,88,920/- suffered on account of mark to mark/differences/jobbing and after adjusting the same against the income from self-difference/jobbing premium on F&O on account of brokerage, dividend and interest on Fixed Deposit declared under the same head, a net loss of Rs.1,88,47,120/- was declared by the assessee. According to the Assessing Officer, various transactions entered into by the assessee in shares were either in the nature of speculative or non- speculative transactions and accordingly he proceeded to examine separately the nature of all such transactions which had given rise to income/loss to the assessee. On such examination, he was of the view that the loss of Rs.2,84,99,205/- incurred by the assessee on account of purchase and sale of shares on its own account was liable to be treated as speculation loss as per Explanation to Section 73. In this regard, following submission was made by the assessee before the Assessing Officer in support of its stand that the said Explanation was not applicable in its case:- “Regarding treatment of loss of Rs.2,84,99,205/- in share transactions and invoking of explanation in section 73 of the Income Tax Act, you are kindly inform that the same is not applicable in our case for the following reasons.

Before treating the business loss as speculation loss we have to ascertain the nature of transactions which generates the income. Section 43(5) defines Speculative transactions- as under

"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 scripts:

Provided that for the purposes of this clause

(i) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or

(ii) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holding of stocks and shares through price fluctuations; or

(iii) a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member.

The following clause (d) inserted after clause (C) in the proviso to clause (5) of section 43 by the Finance Act, 2005 w.e.f. 1.4.2006.

(iv) an eligible transaction in respect of trading in derivatives referred to in clause (aa) of section 2 of the Securities Contracts (Regulation) Act 1956 (42 of 1956) carried out in a recognized stock exchange;

shall not be deemed to be a speculative transaction;

As you are aware that we are member of leading Stock Exchange of India and our income had general only out of normal course of business with regular transactions through stock Exchanges business and as such it is our business income.

Regarding invoking of Explanations of section 73 is applicable only when the section 73 itself applies, as the explanation so of any sections without application of that particular section is not justified.

Sir, when we have no speculative transactions at all as specified in S N (a) how our income can be of speculation income.

In the circumstances we hope that Explanations to section 73 is not applicable”.

The above submission of the assessee was not found acceptable by the Assessing Officer. According to him, it was clear from the plain reading of Explanation to Section 73 that there was no distinction made between a broker and any other person. He held that the said Explanation was applicable uniformly to all class of assessees and since the gross total income of the assessee did not consist mainly of interest on securities or income from other sources and its principal business was purchase and sale of shares including broking on behalf of the clients and not of granting of loans and advances, Explanation to Section 73 was clearly applicable in its case. He, therefore, invoked the said Explanation and treated the loss suffered by the assessee on purchase and sale of shares on its own account amounting to Rs.2,84,99,205/- as speculation loss. All other incomes earned by the assessee during the year under consideration including the loss suffered on account of mark to mark/differences/jobbing, however, was treated by the Assessing Officer as normal business or non-speculative and accordingly, the claim of the assessee for adjustment/set off of loss suffered on account of purchase and sale of shares on its own account against the said income was disallowed by him in the assessment completed under section 143(3) vide an order dated 13.12.2005.

Against the order passed by the Assessing Officer under section 143(3), an appeal was preferred by the assessee before the ld. CIT(Appeals) challenging, inter alia, the action of the Assessing Officer in

treating the loss of Rs. 2,84,99,205/- incurred on purchase and sale of shares on its own account as speculation loss by applying the Explanation to Section 73. During the course of appellate proceedings, a detailed submission was made by the assessee before the ld. CIT(Appeals) in support of its case that Explanation to Section 73 is not applicable in its case and after considering the same in the light of the relevant provisions of the Act as well as the judicial pronouncements on the issue, the ld. CIT(Appeals) allowed the claim of the assessee for set off of loss on purchase and sale of shares made on its own account against other income by holding that Explanation to Section 73 was not applicable in the case of the assessee-company. The relevant observations/findings recorded by the ld. CIT(Appeals) in this context in his impugned order are reproduced hereunder:- “3.9. I have considered the submission of the appellant. The appellant company is a registered Share broker and during the year apart from brokerage receipts, it made trading in shares on its own, dealt in futures and options, received dividend on traded shares and earned interest on fixed deposit.

In course of its business activity of Share Trading, the appellant suffered loss of Rs.2,84,99,205/- and earned profit under self difference/jobbing Rs.2,53,95,129/-, Premium on futures and options amounting to Rs.56,33,840/-. The Profit in share Trading, Jobbing profit, Profit on future trading & option trading and also the premium paid on account of future and option are part of Share Business of appellant. Different treatment to transaction separately does not constitute business activity. When the Share Broker trading in exchange at its own, he safeguard future transaction, entered into jobbing transaction, purchase sale stock of shares. The entire activity of share business by registered stock exchange broker constitutes business activity, and the same could not be dealt separately.

Section 73 of the Income Tax act read as follows: Losses in speculation business:

(1) Any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business.

(2) Where for any assessment year any loss computed in respect of a speculation business has not been wholly set off under sub- section (1), so much of the loss as is not so set off or the whole loss where the assessee had no income from any other speculation business, shall, subject to the other provisions of this Chapter, be carried forward to the following assessment

(i) it shall be set off against the profits and gains, if any, of any speculation business carried on by him assessable for that assessment year; and

(ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on.

(3) In respect of allowance on account of depreciation or capital expenditure on scientific research, the provisions of sub-section (2) of section 72 shall apply in relation to speculation business as they apply in relation to any other business.

(4) No loss shall be carried forward under this section for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed.

[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 banking or the granting of loans and advances consists ill. 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.

The term "Speculation Business" has not been defined in the definition section i.e., Section 2 of the Income Tax Act 1961. However, section 43 (5) of the Act has defined the term "Speculative Transaction'. It defines speculative transaction to

mean a transaction in which a contract for the purchase or sale of any commodity, including stock and shares, is periodically or ultimately settled otherwise than by actual delivery or transfer of the commodity or scrips.

However, in section 73, an explanation has been inserted by Finance Act, 1961 to provide that that the business of purchase and sale of share by companies even if there is actual delivery of shares will be deemed to be a speculation business.

The expression 'Speculation business' is defined at two places in the I.T. Act- first in Expln. (2) to section 28 read with section 43(5) and second explanation to section 73 of IT Act. In both of these places, the emphasis is on business as a whole and not on transactions, Explanation (2) to section 28 states that where speculation transactions carried on by the assessee are of such it nature as to constitute a business, such speculation business shall be deemed to be distinct and separate from any other business, Speculative transactions, in turn, are defined in section 43(5) which broadly, and subject to certain exceptions which are not relevant for the purposes, cover the transactions in which a contract for sale and purchase of any commodity, including for stocks and securities is periodically or ultimately settled otherwise than by actual delivery or transfer of the commodity or scrips, It is th.us clear when an assessee carries on speculative transactions in the course of, what can be described as, business, such business is to be deemed as distinct from any other business carried on by the assessee. The emphasis is on a business as a whole. The computation of profits of such a speculation business has to be therefore something more than arithmetical exercise of aggregating the profits and losses from the speculative transactions. It must therefore take into account all profits and losses which are attributable to such speculation business. Explanation to section 73 expands the scope of 'Speculation business' a little further, by introducing a deeming fiction. This deeming fiction provides that where business of a company includes purchasing and selling of shares of other companies to that extent, the company shall be deemed to be carrying 'Speculation business'. Once again the emphasis is on the business as a whole and not to the transactions of sale and purchase perse. What is to be, therefore computed as 'losses of speculation business' in the context of bar in set off in section 73 (1), is of the business as a whole and not merely the aggregate or net result of profit and losses on all such transaction of purchase

and sale. There are two exclusion clauses however from this deeming fiction and these exclusion clauses are built in the explanation to section 73 itself. The First exclusion clause is based on income composition test and second exclusion clause is based on business activity testing either of test satisfied, again this deeming fiction will have no application.

The Tribunal in the case of Aman Portfolio (P) Ltd Vs. Dy. CIT (2005) 92 ITD 324 (Del) analyse the scope of explanation to section 73 and the back ground in which it was introduced. One way of so reading down the provisions could be, as was held by the Tribunal in Aman Portfolio's case (supra), that the provisions of explanation to section 73 could not be invoked unless there was some material on record to show that the assessee is a company controlled by a business house and the share transactions in question are effected with a view to manipulate or reduce its income However the aforesaid decision has subsequently been specifically disapproved by a division bench of this tribunal in the case of Dy.CIT vs. Frontline Capital services (P) Ltd (2006) 96 TTJ (Del 201. The question whether or not the provisions of explanation to section 73 could be invoked, without meeting the tests laid down in Aman Portfolio's case (Supra), could be purely academic.

Section 70 and section 71 of the Act meaning and interpretations are as under:- Section 70: set off of loss from one source against income from another source under the same head of income. (1)Save as otherwise provided in this Act, where the net result for any assessment year in respect of any source falling under any head of income, other than "Capital gains", is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head.

2) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any short-term capital asset is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset.

(3) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any capital asset (other than a short-term capital asset) is a loss, the assessee

shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset not being a short-term capital asset.

Section 71: Set off of loss from one head against income from another. (1) Where in respect of any assessment year the net result of the computation under any head of income, other than "Capital gains", is a loss and the assessee has no income under the head "Capital gains", he shall, subject to the provisions of this Chapter, be entitled to have the amount of such loss set off against his income, if any, assessable for that assessment year under any other head.

(2) Where in respect of any assessment year, the net result of the computation under any head of income, other than "Capital gains", is a loss and the assessee has income assessable under the head "Capital gains", such loss may, subject to the provisions of this Chapter, be set off against his income, if any, assessable for that assessment year under any head of income including the head "Capital gains" (whether relating to short-term capital assets or any other capital assets).

[(2A) Notwithstanding anything contained in sub-section (1) or sub-section (2), where in respect of any assessment year, the net result of the computation under the head "Profits and gains of business or profession" is a loss and the assessee has income assessable under the head "Salaries", the assessee shall not be entitled to have such loss set off against such income.]

(3) Where in respect of any assessment year, the net result of the computation under the head "Capital gains" is a loss and the assessee has income assessable under any other head of income, the assessee shall not be entitled to have such loss set off against income under the other head.

[(4) Where the net result of the computation under the head "Income from house property' is a loss, in respect of the assessment years commencing on 1st day of April, 1995 and the 1st day of April, 1996, such loss shall be first set off under sub- sections (1) and (2) and thereafter the loss referred to in section 71A shall be set off in the relevant assessment year in accordance with the provisions of that section.]

The normal presumption is that loss of anyone business has to be set off against the income of other business, all coming under the same head of business income. The above presumption is the substance of law stated in section 70 of the said Act.

The appellant submitted that the assessee company was dealing in share as one of its business and therefore loss if any could be set off against the profits of other business carried on by the assessee company, under the same head of income as provided in section 70 of the Act. It is submitted that the assessing officer has not pointed out any provision of law in the Act which does not support the above presumption regarding intra-head set off of Income/Loss arising out of different business carried on by an assessee.

Again remainder loss could be set off against income from other head as provided in Section 71 of the Act. Accordingly the assessee company has calculated the Gross total Income applying the provisions of section 70 and 71 of the Act and than it has looked into the matter of applicability of section 73. It also submitted that Explanation to Section 73 cannot be invoked without adjusting the losses and gains from various sources under the head 'business' as permitted by the provisions of section 70 and 71 of the said Act.

It is also submitted that law does not mandate to bifurcate the business income once computed under the head 'profits and gains of business or profession' in the context of computing the gross total income of assessee company. If any specific item is to be considered differently, the same would have been specifically stated in Explanation to Section 73 as in the case of section 32A(3), 32AB(3) etc.

In Explanation to section 32A(3) it has specifically mentioned the items to be considered for computing total income.

Explanation.-Where for any assessment year, investment allowance is to be allowed in accordance with the provisions of this sub-section in respect of any ship or aircraft acquired or any machinery or plant installed in more than one previous year, and the total income of the assessee assessable for that assessment year [the total income for this purpose being computed after deduction of the allowances under section 33 and section 33A, but without making any deduction under sub-section (1) of this

section or any deduction under Chapter VI-A) is less than the aggregate of the amounts due to be allowed in respect of the assets aforesaid for that assessment year, the following procedure shall be followed, namely:-

(a) the allowance under clause (iz) shall be made before any allowance under clause (l) is made; and

(b) where an allowance has to be made under clause (ii) in respect of amounts carried forward from more than one assessment year, the amount carried forward from an earlier assessment year shall be allowed before any amount carried forward from a later assessment year.

It was held in the case Assistant Commissioner of Income Tax, Special Circle (1) v. Concord Commercials (p) Ltd. (2005) 95 ITD 117 (Mum) (Special Bench) that:

There is no material on record to show that the assessee company did make loss in the share trading activities in order to reduce the tax incidence. In respect of the contention regarding "gross total income" section 73 does not provide for any special treatment. The Supreme Court has held in CIT vs. Venkateswara Hatcheries (P) Ltd (1999) 237 ITR 1743 that the same word occurring more than once in the Act should generally be given the same meaning, but the context may indicate the contrary legislative intention. There is no such indication in section 73 and the explanation thereto. Therefore, the meaning of the expression "Gross Total Income" has to be construed as given in section 80B(5).

In the light of above, I hold that provisions of section 73 read with explanation thereto, are not applicable to the assessee company, I therefore, direct to allow the loss in Share business against the Share Trading, against self difference/jobbing, future option business and with other Share brokerage business of assessee company. The entire business profit/loss shall be clubbed and be computed as profit or loss of share business and in case of loss from share business activity be allowed to carry forward for set-off with Share Business of appellant in subsequent years as per provision of Section 70 & 71 of IT Act. Accordingly, ground no. 4 is allowed”.

The ld. D.R. contended that the provisions of Explanation to Section 73 are clearly applicable in the case of the assessee-company as made out by the Assessing Officer. He contended that the ld. CIT(Appeals), however, failed to appreciate the case made out by the Assessing Officer while applying the said Explanation in the right perspective and allowed the claim of the assessee for set off of the loss on purchase and sale of shares made on its own account against other income mainly on the ground that all the relevant transactions related to shares constituted one composite business of the assessee. He contended that the Explanation to Section 73 is applicable even in such case where the entire transactions are related to shares and cited the decisions of Hon’ble Calcutta High Court in the case of CIT –vs.- Arvind Investments Limited [192 ITR 365] and in the case of CIT –vs.- Park View Properties Pvt. Limited [261 ITR 473] in support of the Revenue’s case.

The ld. counsel for the assessee, on the other hand, submitted that all the relevant transactions resulting into profit/loss are pertaining to the same business of the assessee of dealing in shares and keeping in view the nature of the business of the assessee, the ld. CIT(Appeals) is fully justified in holding that Explanation to Section 73 could not be applied to treat the transactions made by the assessee of purchase and sale of shares on its own account as speculative transactions. He contended that the said Explanation at the most can be applied only after computing income of the assessee from the business of dealing in shares as all the transactions relating to the shares as entered into by the assessee-company were part of one composite business. In support of this contention, he relied, besides various decisions of this Bench, on the decision of Mumbai, Special Bench of ITAT in the case of ACIT –vs.- Concord Commercials (P) Limited [95 ITD 117 (Mum.), Hyderabad Bench of ITAT in the case of Godavari Capital Limited –vs.- DCIT [91 ITD 274].

We have considered the rival submissions and also perused the relevant material available on record. It is observed that the main business of the assessee is that of purchase and sale of its shares either on its own account or on behalf of its clients on brokerage basis, and all the transactions giving profit or loss from different activities were part of the same business. Although the Assessing Officer accepted that the nature of all these transactions was mainly normal business transactions or non-speculative transactions, he treated the transactions entered into by the assessee-company of purchase and sale of shares on its own account as speculative in nature by applying Explanation to Section 73. In the case of M/s. Somani Stock Broking Pvt. Limited –vs.- ACIT (ITA No. 1914/KOL/2004), a similar issue had come up for consideration before the Coordinate Bench of this Tribunal in the identical facts and circumstances and the same was decided by the Tribunal in favour of the assessee by holding as under:- “The assessee company is engaged in a composite business of share broker, share trading etc during the year under consideration. The assessee has earned income from such composite business for taxation in Income Tax Return. There is a common management inter-liaison of resources. There is a common work force as such bifurcation of such business is not possible. In this regard the reference can be made to the decision of the Supreme Court in the case of Prithvi Insurance Ltd reported in 53 ITR page 632 and 637 and in the case of Exchange Corporation Limited 77 ITR 739 (SC) in the case of Exchange Corporation Limited, it was held that the test is unit of control and not the nature of the two line of business. Hon’ble Supreme Court held that the tribunal was right in holding share business and other business carried by the appellant company constituting the same business within the meaning of Section 24(2). As thus before the amendment in 1955 while deciding the case the Hon’ble Supreme Court has applied the ratio of decision in the case of Prithi Insurance Ltd (supra). Thus this is now accepted as principle of law that once such activity are composite in nature, the income therefrom has to be assessed as a whole. Since the share broking activity, share dealing on own account all form an integrated business of the appellant company, the profit or

loss from the same is required to be computed as a whole. In the instant case of the company, it is very difficult to segregate business activities and allocate respective amount of expenditure incurred for the purpose of earning the same. Since the activities are being carried out at common work place with a work force, the work staff, the expenses incurred are also common in nature. Hence, this expenses cannot be bifurcated to arrive at profit under separate heads. As such the Explanation appended to Section 73 will not be applicable in the present case.”

10.

The similar issue again came up for consideration before the Division Bench of this Tribunal in the case of ITO –vs.- Sand Dune Credit Pvt. Limited and the same was decided by the Tribunal in favour of the assessee for the following reasons given in paragraph no. 6 of its order dated 24.04.2009 passed in ITA Nos. 2075 & 2076/KOL/2008:- “6. We observe that the assessee is a Private Limited Company, registered with SEBI whose entire business consists of dealing in shares and the assessee debited an amount of Rs.10,06,974/- towards "loss in share trading operation". The A.O. has held that the assessee is engaged in the business of share brokerage business registered with SEBI. The A.O. has stated that the conditions laid down in Explanation to Section 73 are satisfied in the case of the assessee. Therefore, the assessee is deemed to be carrying on a speculation business with regard to the business of sale and purchase of shares. Accordingly, the A.O. held that the loss incurred in the business of transactions in shares would be a speculation loss as per Explanation to Section 73 and added the same to the business of the assessee.

However, in the first appeal, the Id. CIT(A) has held that the Explanation to Section 73 would not be applicable to the case of the assessee-company. Therefore, the Id. CIT(A) has deleted the said addition by observing as under :- "I have carefully considered the submission of the ld. A.R The Assessing Officer has added Rs. 10,06,974/- being the loss suffered in trading in shares which was set off against brokerage income of shares of Rs.12,90,172/-. The appellant is a share broker, registered with SEBI and its entire

activity in shares is to be treated as the activity of share business whether it was by way of trading of shares and/or by way of brokerage in shares. The activity which was conducted by the appellant on a/c. of other parties in which brokerage income was earned and the activity of dealing in shares in their own a/c was treated as shares trading business. The entire activity has to be treated as one and as such the explanation to section 73 is not applicable in the instant case. I hold that the statute has not made a distinction between purchase and sale of shares of Companies made on own behalf and/or on behalf of others, where entire business activity of the company consist of purchase and sale of shares of other companies in some of which brokerage was earned and in some others loss or profit is earned. The entire business activity is inter linked and is to be treated as same activity. I am of the opinion that the case referred by the Id. A.R. being CIT-vs.- Nirmal Kumar & Co. 161 ITR 413 (Cal.) is fully applicable in the present case. The addition of Rs.10,06,974/- under the head deemed speculation by applying the explanation to section 73 is, therefore, deleted".

During the course of hearing, the Id. Departmental Representative has not disputed the above facts as stated by the Id. CIT(A). We also observe that the income of the assessee in the assessment year under consideration from brokerage income of shares of Rs.12,90,172/-, which is more than the loss of Rs.10,06,974/- claimed by the assessee in respect of the sale/purchase of shares and /or by way of brokerage of shares. There is no dispute to the fact that the Explanation to Section 73 does not apply to an investment company or a company whose principal business is banking or money lending. By respectfully following the decision of the Hon'ble Kolkata High Court in the case of Nirmal Kumar & Co. [161 ITR 413] (supra), we are of the considered view that the case of the assessee falls in the excluded category to Explanation of Section 73 of the Act. Accordingly, we hold that the Id. CIT(A) has rightly held that the Explanation to Section 73 would not be applicable to the case of the assessee and as such we find no infirmity in the order of the Id. CIT(A) and agree

with the Id. CIT(A) to delete the said addition of Rs.10,06,974/- made by the A.O. Accordingly, the ground of appeal taken by the Department is rejected”.

11.

A similar issue thus was decided by the Tribunal in favour of the assessee by following the decision of the Hon’ble Calcutta High Court in the case of CIT –vs.- Nirmal Kumar & Company [161 ITR 430] and when the Department preferred an appeal against the said order of the Tribunal before the Hon’ble Calcutta High Court, the same was dismissed by Their Lordships by observing that there was no case made out by the Department by submitting that the decision rendered in the case of CIT – vs.- Nirmal Kumar & Company (supra) is not applicable in the facts and circumstances of the case nor it was argued by the Department that the said decision of the Court has been overruled. A similar issue again arose for consideration before the Coordinate Bench of this Tribunal recently in the case of M/s. Lohia Securities Limited –vs.- DCIT and keeping in view the ratio of the judicial pronouncements discussed herein above, the Tribunal decided the same in favour of the assessee vide its order dated 09.12.2015 passed in ITA No. 487/KOL/2012 by holding that the claim of the assessee for set off of loss from share dealing should be allowed from the profits earned from F&O transactions being of the same character. It was held by the Tribunal that before application of Explanation to Section 73, aggregation of the business profit or loss has to be done irrespective of the fact whether it is from share delivery transactions or derivative transactions. In our opinion, the issue involved in the present case relating to applicability of Explanation to Section 73 thus is squarely covered by the various decisions of the Coordinate Bench of this Tribunal as well as the decision of the Hon’ble Calcutta High Court in the case of Sandview Trading Pvt. Limited (supra). As regards the cases of Arvind Investments Limited (supra) and Park View Properties P. Limited (supra) cited by the ld. D.R., it is observed that the issue relating to applicability

of Explanation to Section 73 was involved in the said cases in all together different context and even the facts involved in the said cases were different from the facts involved in the present case. The decision rendered by the Hon’ble Calcutta High Court in the said cases thus has no application in the present case and the reliance of the ld. D.R. thereon is clearly misplaced. We, therefore, uphold the impugned order of the ld. CIT(Appeals) allowing the claim of the assessee for set off of loss from the purchase and sale of shares made on its own account against other income arising from the transactions forming part of the same business of share trading by holding that Explanation to Section 73 has no application in the facts of the assessee’s case.

12.

The only other issue raised by the Revenue in its appeal for A.Y. 2003-04 as taken in Ground No. 5 relates to the deletion by the ld. CIT(Appeals) of the addition of Rs.22,75,185/- made by the Assessing Officer by way of disallowance under section 43B.

13.

We have heard the arguments of both the sides and also perused the relevant material available on record. It is observed that a sum of Rs.22,75,185/- paid towards turnover fees for the earlier year was debited by the assessee-company in the Profit & Loss Account as prior period expenses. In the assessment completed under section 143(3), the Assessing Officer disallowed the same without making any discussion whatsoever. Before the ld. CIT(Appeals), it was pointed out by the assessee that the said expenditure on account of turnover fees pertaining to earlier years was claimed in the year under consideration as per the provisions of section 43B on payment basis. The ld. CIT(Appeals) accordingly allowed the deduction claimed by the assessee on account of turnover fees pertaining to the earlier year as per the provisions of section 43B. The limited grievance of the Revenue on this issue as

projected in the ground and further reiterated by the ld. D.R. before us is that the ld. CIT(Appeals) ought to have given an opportunity to the Assessing Officer to verify the claim of the assessee of having paid the amount of turnover fees in question during the year under consideration as per Rule 46A of the Income Tax Rules, 1962. Although the ld. counsel for the assessee has submitted that the factum of such payment was never disputed by the Assessing Officer, he has not raised any objection in sending this matter back to the Assessing Officer for the limited purpose of verification of the payment of turnover fees by the assessee during the year under consideration. Accordingly, this issue is restored to the file of the Assessing Officer for the limited purpose of verifying the claim of the assesese of having paid the amount of turnover fees in question during the year under consideration so as to allow the same as deduction on payment basis under section 43B. Ground No. 5 of the Revenue’s appeal is accordingly treated as allowed for statistical purposes.

14.

Now we shall take up the cross appeals for A.Y. 2005-06 being ITA No. 417/KOL/2011 (assessee’s appeal) and ITA No. 299/KOL/2011 (Revenue’s appeal), which are directed against the order of the ld. Commissioner of Income Tax (Appeals)-VI, Kolkata dated 12.11.2010.

15.

As regards Ground No. 1 raised in the appeal of the assessee for A.Y. 2005-06, it is observed that the issue involved therein relating to the treatment given by the Assessing Officer and confirmed by the ld. CIT(Appeals) to the loss suffered by the assessee from the delivery based share trading amounting to Rs.9,02,696/- as deemed speculation loss as per Explanation to Section 73 is similar to the one involved in the appeal of the Revenue for A.Y. 2003-04, which has already been decided by us in the foregoing portion of this order. Since all the material facts relevant to this issue as well as the arguments advanced by both the sides are similar

to A.Y. 2003-04, we follow the conclusion drawn by us in A.Y. 2003-04 and direct the Assessing Officer to treat the loss incurred by the assessee in delivery based share trading as normal business loss. Ground No. 1 is accordingly allowed.

16.

As regards Ground No. 2 of the appeal of the assessee for A.Y. 2005- 06, it is observed that the issue involved therein relating to the treatment given by the Assessing Officer and upheld by the ld. CIT(Appeals) to the income of Rs.1,71,54,470/- earned as well as loss of Rs.1,00,42,079/- and Rs.1,14,73,595/- suffered from the operations in the F&O Segment in the stock broking business as speculation income/loss is squarely covered in favour of the Revenue and against the assessee by the decision of Special Bench of this Tribunal in the case of Shree Capital Services Limited rendered vide its order dated 31.07.2009, wherein it was held that income/loss from the F&O transactions prior to 24.01.2006 has to be treated as speculation profit/loss and this position is accepted even by the ld. counsel for the assessee at the time of hearing before us. We, therefore, respectfully follow the said decision of the Special Bench of this Tribunal and uphold the impugned order of the ld. CIT(Appeals) on this issue. Ground No. 2 is accordingly dismissed.

17.

As regards Grounds No. 3 & 4 of the assessee’s appeal for A.Y. 2005- 06, it is observed that the issues involved therein relating to the action of the authorities below in treating the expenditure incurred on STT amounting to Rs.4,87,093/-, transaction charges amounting to Rs.5,02,978/- and turnover fees amounting to Rs.35,000/- relating to the transactions in F&O Segment as related to the speculative transactions and not normal business transactions are consequential to the main issue involved in Ground No. 2 in assessee’s appeal for A.Y. 2005-06. Since we have decided the issue involved in Ground No. 2 against the assessee by

following the decision of Special Bench of this Tribunal in the case of Shree Capital Services Limited (supra), we decide these consequential issues raised in Grounds No. 3 & 4 of the assessee’s appeal also against the assessee. These grounds are accordingly dismissed.

18.

The issue involved in Ground No. 5 of the assessee’s appeal for A.Y. 2005-06 relates to the disallowance of Rs.11,00,000/- made by the Assessing Officer under section 14A, which is sustained by the ld. CIT(Appeals) to the extent of Rs.5,16,000/-.

19.

During the year under consideration, dividend income of Rs.60,46,319/- and long-term capital gain of Rs.1.56 crores arising from the sale of shares was claimed to be exempt by the assessee in the return of income. No disallowance on account of expenses incurred in relation to the said exempt income, however, was offered by the assessee as required by section 14A of the Act. The Assessing Officer estimated such expenses relating to exempt dividend income at Rs.3,00,000/- and relating to long- term capital gain at Rs.8,00,000/- and made a disallowance of Rs.11,00,000/- under section 14A. On appeal, the ld. CIT(Appeals) revised the said estimate made by the Assessing Officer to Rs.5,16,000/- and accordingly restricted the disallowance under section 14A to that extent.

20.

We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. It is observed that in the relevant year under consideration i.e. A.Y. 2005-06, Rule 8D was not applicable and, therefore, the disallowance under section 14A on account of expenditure incurred by the assessee in relation to the exempt income is required to be made on some reasonable basis. In this regard, this Tribunal has taken a consistent view that the disallowance under section 14A on account of expenses incurred in relation to the exempt

income at 1% of such exempt income would be fair and reasonable. Following this consistent stand taken by the Tribunal, we restrict the disallowance under section 14A to the extent of 1% of the exempt income in the form of dividend and long-term capital gain and allow partly Ground No. 5 of the assessee’s appeal.

21.

Now we shall take up the Revenue’s appeal for A.Y. 2005-06 being ITA No. 299/KOL/2011. At the outset, it is noticed that there is a delay of 10 days on the part of the Revenue in filing this appeal before the Tribunal. In this regard, the Revenue has filed an application seeking condonation of the said delay and keeping in view the reasons given therein, the said delay is condoned and the appeal of the Revenue is being disposed of on merit.

22.

It is observed that the issue involved in Ground No. 1 of this appeal relating to the deletion by the ld. CIT(Appeals) of the disallowance of Rs.64,946/- made by the Assessing Officer on account of penalty charges paid to Stock Exchange is covered in favour of the assessee by the various decisions of this Tribunal, wherein it has been consistently held that the penalty imposed by Stock Exchange Authorities for delay in complying with the various requirements by the members is compensatory in nature and the same not being imposed for infringement of any law, Explanation to Section 37 cannot be invoked to disallow such penalty. Following this consistent stand taken by the Tribunal, we uphold the impugned order of the ld. CIT(Appeals) giving relief to the assessee on this issue and dismiss Ground No. 1 of the Revenue’s appeal.

23.

As regards the issue involved in Ground No. 2 of the Revenue’s appeal relating to the deletion by the ld. CIT(Appeals) of the disallowance of Rs.1,00,000/- made by the Assessing Officer under section 40A(9) of

the Act, it is observed that the disallowance on this issue was made by the Assessing Officer mainly relying on the Tax Audit Report. Before the ld. CIT(Appeals), it was pointed out by the assessee that the amount of Rs.1,00,000/- in question actually represented payment made by the assessee to Prime Minister’s Relief Fund and the same was wrongly mentioned as disallowable under section 40A(9) in the Tax Audit Report. Keeping in view this submission made by the assessee for the first time before him and the documentary evidence filed in support as additional evidence, the ld. CIT(Appeals) directed the Assessing Officer to verify the same. At the time of hearing before us, the only grievance that is raised by the ld. D.R. on this issue is that this direction given by the ld. CIT(Appeals) is beyond the powers conferred upon him as he no more has power to set aside the issue to the file of the Assessing Officer. We find merit in this argument of the ld. D.R. The impugned order of the ld. CIT(Appeals) on this issue is accordingly set aside and the matter is remitted back to him for deciding the same afresh in accordance with law. Ground No. 2 of the Revenue’s appeal is accordingly treated as allowed for statistical purposes.

24.

The issue raised in Ground No. 3 of the Revenue’s appeal for A.Y. 2005-06 relates to the deletion by the ld. CIT(Appeals) of the addition of Rs.95,95,480/- made by the Assessing Officer on account of disallowance of interest expenses.

25.

During the year under consideration, the expenditure on account of interest amounting to Rs.1,78,48,733/- was incurred by the assessee. According to the Assessing Officer, the assessee had substantial operations in F&O Segment which required payment of margin money to the Stock Exchange and, therefore, it was a case where the borrowed funds were utilized by the assessee both for normal business transactions

as well as speculative transactions in F&O. He, accordingly, apportioned the interest expenditure incurred by the assessee between these two types of transactions in the ratio of volume of transactions and the interest expenditure allocated to the F&O transactions on such basis amounting to Rs.95,95,480/- was treated by the Assessing Officer as related to the speculative business and not to the normal business.

26.

The action of the Assessing Officer in treating the interest expenditure to the extent of Rs.95,95,480/- as related to the speculative business was challenged by the assessee in the appeal filed before the ld. CIT(Appeals) and after considering the submissions made by the assessee as well as the material available on record, the ld. CIT(Appeals) directed the Assessing Officer to treat the entire interest expenditure incurred by the assessee as related to the normal business for the following reasons given in his impugned order:- “I have considered the above submissions of Ld. A.R. From the balance sheet of the assessee it is seen that as on 31.3.2005, the loan funds are about Rs.18.6 cr. and the inventories are about Rs.20.9 cr. Further Ld AR has given the details of loan taken from Shri Suresh Saraf during the previous year. These details show that the majority of funds taken from Shri Saraf on different occasions have been invested in acquiring shares and very few fund have been used of paying margin money. These facts show that borrowed funds are mainly used for acquiring stock in trade and not much are used for paying the margin money. Ld. A.R. has also submitted details about the day to day movement of margin money used in different share transactions of the assessee. These movements show that on a large number of occasions the assessee maintains substantial credit balance with the stock exchange which comprises net profit earned on that day and the margin money. In view of these facts it appears that not much of tne borrowed funds are used as margin money in the F&O segment transactions of the assessee. Even if some funds of the assessee are utilized as margin money they can be said to have come out of non interest bearing funds such

as share capital, reserves and surplus. Therefore, I am of the opinion that no portion of interest paid by the assessee can be said to be related to the F&O segment transactions of the assessee which has been treated by the A.O. as speculation business. Therefore, the AO is directed not to treat interest of Rs.95,95,480/- s related to speculative business”.

27.

We have heard the arguments of both the sides and also perused the relevant material available on record. As found by the ld. CIT(Appeals) from the relevant details furnished by the assessee, the interest expenditure was incurred by the assessee mainly in respect of loan taken from one Shri Suresh Saraf, which was substantially used for acquiring shares. It was also found by the ld. CIT(Appeals) from the balance-sheet of the assessee as on 31.03.2005 that the loan funds raised by the assessee were about Rs.18.6 crores, while the investment made in shares was Rs.20.9 crores. As further found by the ld. CIT(Appeals) from the relevant details furnished by the assessee that the net profit earned by the assessee was used as margin money on a large number of occasion during the year under consideration. On the basis of these findings of fact, the ld. CIT(Appeals) arrived at a conclusion that the borrowed funds were mainly utilized by the assessee for share trading business and not for keeping margin money in the F&O Segment. At the time of hearing before us, the ld. D.R. has not been able to rebut or controvert the findings recorded by the ld. CIT(Appeals) in this context. We, therefore, find no justifiable reason to interfere with the impugned order of the ld. CIT(Appeals) giving relief to the assessee on this issue and upholding the same, we dismiss Ground No. 3 of the Revenue’s appeal.

28.

As regards the issue involved in Ground No. 4 of the Revenue’s appeal for A.Y. 2005-06 relating to the treatment given by the ld. CIT(Appeals) to the Assessing Officer to charge tax on short-term capital

gain at 10% as per section 111A of the Act, it is observed that the said section has been introduced in the Act w.e.f. 01.04.2005 and the same, therefore, has been made applicable from the year under consideration, i.e. A.Y. 2005-06 and not from A.Y. 2006-07 as sought to be contended by the ld. D.R. We, therefore, find no infirmity in the direction given by the ld. CIT(Appeals) to the Assessing Officer to levy tax on short-term capital gain at 10% as per section 111A. Ground No. 4 of the Revenue’s appeal is accordingly dismissed.

29.

Although the assessee has filed an appeal for A.Y. 2008-09 in ITA No. 1200/KOL/2012, the ld. counsel for the assessee at the time of hearing before us has sought permission of the Bench to withdraw this appeal filed by the assessee. The permission as sought by the assessee is granted and the appeal is dismissed as withdrawn.

30.

In the result, to sum up ITA No. 852/KOL/2008 filed by the Revenue is partly allowed for statistical purposes, ITA No. 417/KOL/2011 filed by the assessee is partly allowed for statistical purposes, ITA No. 299/KOL/2011 filed by the Revenue is partly allowed and ITA No. 1200/KOL/2012 filed by the assessee is dismissed as withdrawn. Order pronounced in the open Court on July 14, 2016.

Sd/- Sd/- (S.S. Viswanethra Ravi) (P.M. Jagtap) Judicial Member Accountant Member Kolkata, the 14th day of July, 2016

Copies to : (1) Deputy Commissioner of Income Tax, Circle-6, Kolkata, Aayakar Bhawan, P-7, Chowringhee Square, Kolkata-700 069

(2) Lokenath Saraf Securities Limited, M-33, Fortune Chambers, 6, Lyons Range, Kolkata-700 001

(3) Commissioner of Income-tax (Appeals)-VI, Kolkata, (4) Commissioner of Income Tax, Kolkata (5) The Departmental Representative (6) Guard File By order

Assistant Registrar, Income Tax Appellate Tribunal, Kolkata Benches, Kolkata Laha/Sr. P.S.

DCIT, CIRCLE - 6,, KOLKATA vs. LOKNATH SARAF SECURITIES LTD.,, KOLKATA