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Income Tax Appellate Tribunal, “A” BENCH : KOLKATA
Before: Hon’ble Shri P.M.Jagtap, AM & Sri N.V.Vasudevan, JM ]
IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : KOLKATA [Before Hon’ble Shri P.M.Jagtap, AM & Sri N.V.Vasudevan, JM ] I.T.A No. 1712/Kol/2013 Assessment Year : 2009-10
D.C.I.T., Circle-6, -vs.- M/s.Guiness Securities Ltd. Kolkata Kolkata [PAN : AAACG9843L) (Respondent) (Appellant) For the Appellant : None For the Respondent : Shri Miraj D.Shah, FCA
Date of Hearing : 11.03.2016. Date of Pronouncement : 06.04.2016.
ORDER This is an appeal by the Revenue against the order dated 20.02.2013 of CIT(A)- VI, Kolkata, relating to AY 2009-10.
There is a delay of about 69 days in filing appeal by the revenue. The same has been explained in an affidavit filed before us as owing to inability to trace the assessment records. After considering the reasons given in the affidavit, we are satisfied that the delay in filing the appeal was due to reasonable and sufficient cause. Accordingly the delay in filing the appeal is condoned.
The grounds of appeal of the revenue reads as follows: 1. Whether on the facts and circumstances of the case, Ld. CIT(A ) erred in law in allowing the loss of Rs 34,61,912/- on speculative transactions to be adjusted with profit from non speculative business. 2. Whether on the facts and circumstances of the case, Ld. CIT(A) erred in law in stating that provisions to Section 73 are not applicable in the case of an assessee dealing in shares. 3. Whether on the facts and circumstances of the case, Ld. CIT(A) erred in law in stating that the business of dealing in shares is one and inseparable and it could not separated into speculative and non speculative business.
2 ITA No.1712/Kol/2013 M/s. Guiness Securities Ltd. A.Yr.2009-10 4. That the appellant craves for leave to add, delete or modify any of the grounds of appeal before or at the time of hearing.
The Assessee is a company. It is engaged in the business of trading in shares on own account, derivative transactions and share broking activity The Assessee incurred a loss of Rs.34,61,912/- in share trading on his own account. It is not in dispute that there was actual delivery of shares in the transactions carried out by the Assessee which resulted in the loss in the business of trading in shares on own account by the Assessee. The Assessee earned profit of Rs.90,58,340/- from trading in Derivatives (Futres & Options). The Assessee adjusted the loss arising from own trading in shares against the profits from trading in derivatives and declared the resulted income under the head “Income from Business”. The AO was of the view that in view of Explanation to Sec.73 of the Income Tax Act, 1961 (Act), loss from purchase and sale of shares in the case of an Assessee which is a company had to be regarded as speculation loss and therefore cannot be set off against normal business income from trading in derivatives.
“Sec.73: 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 year, and— (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.
3 ITA No.1712/Kol/2013 M/s. Guiness Securities Ltd. A.Yr.2009-10 (4) No loss shall be carried forward under this section for more than four 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 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.
It can be seen from Explanation to Sec.73 of the Act that if an Assessee is a company and it carries on business in purchase and sale of shares of other companies than such company shall be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares. There are exceptions set out in the explanation. The explanation does not apply to
(a) a company whose gross total income consists mainly of income which is chargeable under the head "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources": (b) a company the principal business of which is the business of banking (c) a company whose principal business of which is granting of loans and advances. It can also be seen from Sec.73(1) of the Act that 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.
The profits from dealing in derivatives are not in the nature of profits and gains of speculation business in view of proviso (d) to Sec.43(5) of the Act, which reads thus:
“Sec.43: Definitions of certain terms relevant to income from profits and gains of business or profession. In sections 28 to 41 and in this section, unless the context otherwise requires—
4 ITA No.1712/Kol/2013 M/s. Guiness Securities Ltd. A.Yr.2009-10 (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 )…….
(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
shall not be deemed to be a speculative transaction; Explanation 1 : 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 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.
It is not in dispute that the transactions carried out by the Assessee in derivatives was through a recognized stock exchange and in a manner contemplated by Explanation 1 to Sec.43(5)(d) of the Act and therefore the gain or profit from such transactions cannot be regarded as income from speculation business in view of the proviso (d) to Sec.43(5) of the Act and therefore was of the nature of normal business loss.
5 ITA No.1712/Kol/2013 M/s. Guiness Securities Ltd. A.Yr.2009-10 8. According to the Assessee the business of trading in shares and business of dealing in derivatives were to be regarded as one business and loss in share trading ought to be allowed to be set off against the income from trading in derivatives. Such set off has to be done even before the stage of application of Chapter VI of the Act which contains the provisions of Sec.73 of the Act.
According to the AO, the two business of dealing in shares and share broking were distinct businesses. In share broking business the Assessee buys and sells stocks and shares on behalf of the client. The risk and rewards are that of the client and not of the Assessee. The Assessee receives commission for his services. In the business of dealing in shares where shares and brought and sold, irrespective of delivery or no delivery, the deeming provisions of Explanation to Sec.73 will operate. The AO in this regard referred to the decision of the Hon’ble Calcutta High Court in the case of R.P.G. Industries Ltd. vs. CIT & Anr. (2011) 241 CTR (Cal) 19 wherein it was held that by Explanation to s. 73, a legal fiction has been created whereby loss suffered by a company in share transactions is to be treated as a speculative loss within the meaning of s. 73, notwithstanding the fact that there was actual delivery of scrips of shares and the transaction is not within the purview of the definition of speculative transaction in s. 43(5).
The AO further held that though dealing in derivatives was part of the business of dealing in shares, in view of proviso (d) to Sec.43(5) of the Act, income from such activity had to be regarded as normal business loss and not speculative loss. In view of the above, the loss from trading in shares was speculative in nature and the income from trading in derivatives was normal business loss and therefore could not be set off against the loss in share trading. Accordingly the set off claimed by the Assessee was not allowed by the AO.
6 ITA No.1712/Kol/2013 M/s. Guiness Securities Ltd. A.Yr.2009-10 11. Before CIT(A), the Assessee claimed that in it’s own case in AY 2001-02 & 2002- 03 the ITAT vide its order dated 29.6.2007 has accepted identical contention of the Assessee by following decision rendered by co-ordinate bench of ITAT in a case reported in (2004) 3 SOT 569 (Kol). It was further contended that the deeming provision of Explanation to Sec.73 of the Act does not provide any bifurcation of business of purchase and sale of shares into two categories of business and hence all the income/loss from purchase and sale of shares and/or related to the same is to be considered similar in nature and the net result of the same has to be treated as business income/loss from purchase and sale of shares. It was also contended that the Hon’ble Calcutta High Court in the case of R.P.G.Industries Ltd.(supra) held that all transactions i.e., even though covered by proviso (d) to Sec.43(5) of the Act have to be regarded as speculative in nature and income there from has to be regarded as Speculative income/loss.
The CIT(A) agreed with the contentions put forth by the Assessee. On facts the CIT(A) found
“30. I have considered the observations of the Assessing Officer in the assessment order and submissions of the appellant. The appellant is a share broker deriving income from trading in shares, stock brokering and dealing in Future & Options. The appellant has submitted that it is primary and only business is to deal in shares and securities including derivatives and work as broker on behalf of clients. All the business activities are cumulatively related to sale and purchase of shares. The appellant has shown income from interest, brokerage, dividend, misc. income, penalty charge recovered, F&O & share trading etc. The income and expenditure account shows that there is a profit of Rs.27,96,413/-. The appellant has income from derivative trading amounting to Rs.90,58,340/- and stock broking operations amounting to Rs.9,58,95,368/- and loss from share trading of Rs.34,61,912/-. The appellant has shown an income of Rs.30,88,216/- in the return filed on 27.09.2009. There is a net income of the appellant from F & O and share trading as combined activities/part of business.”
The CIT(A) thereafter found that the ITAT Calcutta bench in the case of ITO Vs. Arena Textiles & Industries Ltd. In ITA No.1019/Kol/2011 dated 29.12.2011 and in the case of ITO Vs. Rajanigandha Properties Ltd. In ITA No.1011/Kol/2011 dated 6
7 ITA No.1712/Kol/2013 M/s. Guiness Securities Ltd. A.Yr.2009-10 29.12.2011 and M/S.Arion Commercial Pvt.Ltd. ITA No.1010/kol/2011 dated 29.12.2011 held that transactions done by delivery as well as the transaction in derivative trading are not hit by Sec.43(5) of the Act and therefore income or loss from the respective businesses have to be aggregated before application of Explanation to Sec.73 of the Act.
The CIT(A) thereafter observed as follows:
“32. The submissions of the assessee are acceptable as the capital market operations of the assessee consists of two distinct and separate parts. The first part of his business relates to trading in shares. The second part of his business relates to F&O operations. The assessee has maintained separate trading accounts for this purpose. The A.O. invoked Explanation to Section 73 of the Income tax Act to the first part, namely, dealing in shares. Thereby, the loss arising from such operations was treated by him loss from speculation. He also applied clause (d) of proviso to clause 5 of section 43 to the F & O operations (derivatives) and treated the profits from such operations as normal business profits. Thus, he did not permit the set-off of the loss from dealing in shares with profits from operations in Futures. The profits from Futures & Options in Shares operations amounted to Rs.90,58,340/- and loss from trading in shares amounted to Rs.34,61,912/-. Even after allocating expenses to the earning of income from F&O and share trading, there is net income and the provisions of section 73 are not applicable, if there is net income from share trading business. 33. On the analysis of the above decisions it can be concluded that for an assessee who is in the business of shares, the net profit is determined by considering the derivative and non derivative transactions as different modes of carrying out the said business which is one and inseparable. Further, before the Explanation below Section 73 can be applied to an assessee, the share trading loss and profit from derivative transactions ,are to be aggregated as they are of the same nature. Applying the above ratio to the case of the appellant it can be concluded that share trading loss should be allowed to be set-off loss from profit from Futures and Options. Therefore, in view of the above the appellant is entitled to set off of the share trading loss with the profit earned from derivative transactions. The same issue was involved in the case of the appellant for the assessment year 2008-09 and as CIT(A)-VI, Kolkata, I have upheld the set off of loss from share trading with income from F & 0 in Appeal No. 04/CIT(A)-VI/Cir-6/11-12!Kol dated 18.02.2013 and decided accordingly 34. Therefore, it is held that since 'there is net income from share trading and F&O, therefore, the provision of section 73 are not applicable in the case of the appellant. Hence, the amount of Rs.34,61,912/- is allowed to be set off with income from derivative trading. This ground of appeal is allowed.” 7
8 ITA No.1712/Kol/2013 M/s. Guiness Securities Ltd. A.Yr.2009-10 15. Aggrieved by the order of the CIT(A), the revenue is in appeal before the Tribunal. The request for adjournment made on behalf of the learned DR was refused as the issues raised by the revenue in the grounds of appeal have been consistently held against the revenue in several decisions, referred to by the learned AR before us.
We have considered the submissions made before us in the light of the various decisions rendered on identical facts and circumstances of the case such as the Assessee. In the case of ITO Vs. Bijco Holdings Ltd., ITA No.1036/Kol/2012 dated 9.1.2015 rendered by a co-ordinate Bench of ITAT, Kolkata, the facts were identical to the facts of the Assessee in the present appeal. The Assessee in that case for the relevant assessment year 2007-08 reflected income from share trading, investment in shares and securities and also financing. The AO noticed from the Profit & Loss a/c. that it had earned interest income of Rs.3,53,956/- and also noticed that the assessee has suffered loss of Rs.50,51,968/- in share trading business. The Assessee sought to set off the loss suffered in share trading business against interest income which was assessed as business income from the business of financing. The AO held that loss suffered in share trading business is covered under Explanation to section 73 of the Act and thereby he treated the loss of Rs. 50,51,968/- as deemed speculation loss in terms of Explanation to section 73 of the Act and disallowed to be set off against other business income i.e. interest income earned from loans and derivative profits. On further appeal, the Hon’ble ITAT held as follows:
“5. We have heard rival contentions and gone through facts and circumstances of the case. Before us, the ld. Sr.DR, Smt. M.M.Ghosh relied on the assessment order and the findings given by the AO whereas the ld. Counsel for the assessee raised a new issue that he has no grievance against the assessment order but in case the AO treats the loss arising from shares as speculation loss, in that eventuality, in view of the provisions of section 43(5)(b) of the Act, the profits from derivatives is to be set off, since both the transactions are speculative in nature. For this proposition, Ld. counsel for the assessee relied on the judgment of the Hon’ble Delhi High Court in the case of CIT Vs. DLF Commercial Developers Ltd. in ITA No.94 of 2013 dated 11.07.2013, wherein in has been held as under: 8
9 ITA No.1712/Kol/2013 M/s. Guiness Securities Ltd. A.Yr.2009-10
“11. The stated objective of Section 73 – apparent from the tenor of its language is to deny speculative businesses the benefit of carry forward of losses. Explanation to Section 73(4) has been enacted to clarify beyond any shadow of doubt that share business of certain types or classes of companies are deemed to be speculative. That in another part of the statute, which deals with computation of business income, derivatives are excluded from the definition of speculative transactions, only underlines that such exclusion is limited for the purpose of those provisions or sections To borrow the Madras High Court’s expression, “derivatives are assets, whose values are derived from values of underlying assets”; in the present case, by all accounts the derivatives are based on stocks and shares, which fall squarely within the explanation to Section 73(4). Therefore, it is idle to contend that derivatives do not fall within that provision, when the underlying asset itself does not qualify for the benefit, as they (derivatives – once removed from it and entirely dependent on stocks and shares, for determination of their value).” In view of the alternative plea of the assessee, we are in agreement with the argument of Ld. counsel for the assessee that the income from derivatives is defined in section 43(5) of the Act and since it excludes such transactions from the nature of speculative transaction and AO treats that the transaction has not been excluded from section 73 of the Act, therefore, the assessee was entitled to claim the loss of shares against the income of derivatives. Respectfully following the decision of Hon'ble Delhi High Court in the case of DLF Commercial Developers Ltd. supra, we allow the alternative claim of the assessee and direct the AO to allow this loss against derivative incomes. This issue of revenue’s appeal is dismissed but on alternative plea of the assessee.”
The facts of the case before the Hon’ble Delhi High Court in the case of DLF Commercial (supra) were that the assessee claimed loss of Rs.492.71 lakhs on account of purchase and sale of shares. The assessee argued that the loss in trading of derivatives was not a speculative loss in terms of Section 43(5) of the Income Tax Act and could not be disallowed as speculative loss under any provisions of the Income Tax Act. The Assessing Officer rejected that submission and held that Section 73 applied since it was independent of Section 43(5). Explanation to Section 73 can be applied even if there is delivery based sale purchase of shares and also in situations of trading of derivatives. It was held that the assessee was not engaged in any of the specifically excluded categories of business as to render Explanation to Section 73 inapplicable. The AO held that loss of Rs.492.71 lakhs had to be treated as speculative loss and could not be 9
10 ITA No.1712/Kol/2013 M/s. Guiness Securities Ltd. A.Yr.2009-10 allowed to be adjusted against business income. The CIT (Appeals) rejected the assessee's contentions. Therefore, a further appeal was preferred to the ITAT, which accepted the contention that Explanation to Section 73 applied, and granted the relief claimed. On further appeal, the Hon’ble Delhi High Court held that the loss or profit in derivatives trading was to be regarded as speculative loss despite the provisions of Sec.43(5)Proviso (d) of the Act. 18. If that be so, then the income from derivative trading in the present case being of the nature of income from speculative business can be set off from the loss incurred on own trading in shares suffered by the Assessee. In view of the decision of the Hon’ble Delhi High Court referred to above which was followed by a co-ordinate Bench of ITAT Kolkata, in the case of Bijco Holdings Ltd. (supra), we uphold the order of the CIT(A) and dismiss the appeal by the Revenue. 19. In the result, appeal by the Revenue is dismissed. Order pronounced in the Court on 06.04.2016.
Sd/- Sd/- [P.M.Jagtap] [ N.V.Vasudevan ] Accountant Member Judicial Member
Dated : 06.04.2016. [RG PS]
Copy of the order forwarded to: 1.M/s. Guiness Securities Ltd., 10, Canning Street, 3rd Floor, Kolkata-700001. 2. D.C.I.T., Circle-6, Kolkata. 3. CIT(A)-VI, Kolkata 4. CIT-II, Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata.