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Income Tax Appellate Tribunal, MUMBAI BENCH “F”, MUMBAI
Before: SHRI B.R. BASKARAN & SHRI SANJAY GARG
Per Sanjay Garg, Judicial Member:
The above titled cross appeals one by the assessee and the other by the Revenue have been preferred against the common order dated 05.03.2012 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 2008-09. The same were heard together and are being disposed of by this common order.
First we take up the assessee’s appeal i.e. ITA No.3256/M/2012.
ITA No.3256/M/2012 2 M/s. Vinamra Universal Traders Pvt. Ltd. ITA No.3256/M/2012 (Assessee’s Appeal) 3. The assessee in its appeal has agitated the action of the lower authorities in treating the profit on sale of shares amounting to Rs.8,69,17,308/- as business income as against the capital gains treated by the assessee in the return of income. The Assessing Officer (hereinafter referred to as the AO) during the assessment proceedings observed that the assessee had shown purchase/sale transactions of shares in 10 listed companies and had also shown investment in mutual fund units. Some of the shares in respect of the said 10 companies were sold during the year and the assessee had returned the profits earned as short term capital gains. The AO treated the above stated income from the from the sale and purchase transactions of shares as business income of the assessee observing that in all the scripts, holding period was not substantial and further that the assessee had taken huge borrowings for making investment in shares. He therefore observed that the objective of the assessee was to carry out trading in shares. He therefore treated the income of the assessee from share transactions as business income of the assessee. Being aggrieved by the order of the AO, the assessee preferred appeal before the Ld. CIT(A).
The Ld. CIT(A) confirmed the above findings of the AO. Being aggrieved, the assessee has come in appeal before us.
We have heard the rival contentions and have also gone through the records. The Ld. A.R. of the assessee has brought our attention to page 3 of the paper book which is scheduled forming the part of the balance sheet wherein the assessee has shown the shares of the above stated companies as investments. The Ld. A.R. of the assessee has further brought our attention to pages 4 to 9 of the paper book to show that the assessee has been maintaining two separate portfolios i.e. investment portfolio and trading portfolio. He has further stated that from the very beginning, the intention of the assessee was to hold the shares of the above stated companies as investments. Whereas the ITA No.3256/M/2012 3 M/s. Vinamra Universal Traders Pvt. Ltd. assessee had also held shares of various companies as stock in trade in relation to which the assessee had returned the income as business income. The Ld. A.R. of the assessee has further brought our attention to page 10 of the paper book which is a chart showing that even in the subsequent years the AO has treated the shares of these companies as investments. He has further submitted that this was the first year of the incorporation of the company as the company was incorporated on 17.07.2007. He has further submitted that there were no common shares/companies in the investment portfolio and trading portfolio. The companies, shares of which were kept in investment portfolio were not there in list of trading portfolio and vice versa. He has further submitted that even the assessee in the subsequent years had incurred loss in the share transactions relating to the investment portfolio but the same was not claimed as business loss. The assessee has consistently been maintaining its stand from the very beginning and even the claim of the assessee of long term capital loss has been accepted by the AO in assessment year 2011-12. The Ld. D.R., on the other hand, has relied upon the findings of the lower authorities.
After considering the submissions of the Ld. Representatives of the parties, we find that the assessee has consistently been in the subsequent assessment years also has given the same treatment to the shares kept in investment portfolio. The very intention of the assessee at the time of purchase was decipherable from the act and conduct of the assessee. The assessee has maintained two portfolios. The profits/loss incurred in respect of trading portfolio has been treated as business income whereas in respect of investment portfolio, the assessee has returned the income/loss as capital gains/loss. Even subsequently, the long term capital loss claimed by the assessee in respect of the same scripts has been accepted by the AO in assessment order for A.Y. 2011-12. Though the assessee had made the investments by using borrowed funds also but that itself cannot be a sole ground to treat the assessee as a ITA No.3256/M/2012 4 M/s. Vinamra Universal Traders Pvt. Ltd. trader in respect of the scripts which had been kept in the investment portfolio, especially when the assessee has clearly bifurcated the investment portfolio and trading portfolio and has consistently maintained the same.
7. In view of the above, the profit on share transactions relating to investment portfolio of the assessee is ordered to be treated as capital gains and not as business income of the assessee. Appeal of the assessee is therefore allowed.
8. Now coming to the appeal of the Revenue i.e. ITA No.3680/M/2012. (Revenue’s Appeal) 9. The Revenue in its appeal has agitated the action of the Ld. CIT(A) in holding that the explanation to section 73 of the Act would not be attracted in the case of the assessee in relation to the share transactions which were treated by the AO as speculative in nature. The AO noted that the assessee had credited its profit & loss account by profit on dealing in shares, securities and derivatives at Rs.9,28,34,535/-. The assessee during the year had shown loss on shares at Rs.221,38,13,206/-, which had been set off against future and options income. He observed that since the assessee was a company, hence as per the provisions of explanation to section 73 of the Act, any loss incurred in share trading was required to be treated as speculation loss and therefore could not be set off against any other income. He accordingly treated the said loss as ‘speculation loss’ and denied its set off from the business income of the assessee from the other activities and added back the same to the taxable income of the assessee. He also observed that the assessee company had incurred various expenses which included interest of Rs.93.70 crores and other expenditure of Rs.3.25 crores. Out of the said amount, the AO treated the amount of Rs.10 crores as relating to share trading. He therefore increased the share trading loss by Rs.10 crores and treated the total amount of Rs.2,31,38,30,206/- as speculation loss of the assessee.
ITA No.3256/M/2012 5 M/s. Vinamra Universal Traders Pvt. Ltd.
The Ld. CIT(A) , however, allowed the claim of the assessee while relying upon the various case laws and thereafter concluding as under: “As held in the case of Rajan Enterprise (P)ltd 41 ITD 469 (Mumbai)-para 9 In determining the income - one has to set off the loss against the profits of other sources under the same head under Sec.70 and thereafter against the income from other head u/s.71. It is only then one has to see whether the proviso to Sec.73 was applicable or not as the provisions come into play when the Gross Total Income is computed first.
The Gross Total Income as per Return of Income is as under: Income from Business (240838112) Capital Gain 86917308 Income from other sources 196673974 Gross Total Income 42753170
The appellants' GTI would after the observations would be as under:
Income from business as per Return of Income (24,08,38,112) Add: Additional disallowance u/s 14A 3,68,85,5 13 Capital Gain considered as business 8,69,17,308 Undisputed addition u/s 94(7) 50,03, 62 6 Income from Business (11,20,31,661 (11,20,3 1,665) Income from other source 19, 66, 73,974 Gross Total Income 8,46,42,309 ========== • Perusal of the aforesaid facts clearly shows the Gross Total Income of the Assessee amounting to Rs.8,46,42,309/- is mainly on Income from other sources of Rs.19,66,73,974/-. • As per the ratio in the case of Rajan Enterprises Vs ITO in ,TAT Mumbai Bench D & ACIT Vs. Concord Commercials P.Ltd 95 lTD 117 Mumbai ( Special Bench)- and CIT Vs.Darshan Securities (Pvt) Ltd of 2009 (Mum HC) dated 2/2/12 for determining the nature and transaction of sale/purchase in the case of the assessee - the same is to be determined with respect to Gross Total Income of the assessee without applying the provisions of Explanation to Sec.73. Gross Total Income of the Appellant which is Rs.8,46,42,309/- as discussed aforesaid mainly comprises of Income from Other sources. Loss on purchase/sale of shares therefore cannot be treated as Speculation Loss as the Appellant's case falls in the exceptional clause to the Explanation to Sec.73 i.e. being a Company whose Gross total Income mainly consists of income chargeable under the head "Income on Securities, Capital Gains and Income from Other Sources."
• As such, provisions to Explanation to Sec.73 does not apply to ITA No.3256/M/2012 6 M/s. Vinamra Universal Traders Pvt. Ltd. the Appellant's case. • Loss of Rs.22 1.38 crores in the purchase and sale of shares is therefore not a speculation loss under Explanation to Sec.73 for detailed reasons and case laws cited above. This ground of appeal is therefore allowed.” 4.4
The Ld. CIT(A) thereafter held that since the loss in share trading had been treated by him as regular business loss and not speculation loss, he therefore treated the amount of expenditure of Rs.10 crores as normal business expenditure as against the treatment given by the AO as incurred towards speculative business.
We have heard the contentions of the rival parties and also gone through the records. At the outset, the Ld. AR of the assessee has brought our attention to the computation of income, as reproduced in the impugned order and stated that the assessee has incurred a loss so far as business income is concerned. The assessee had a positive income from other sources of Rs. 196673974/- He has further submitted that, in the gross tota1 income of the assessee, predominant positive income was under the head “income from other sources”. He has further relied upon the decision of the Hon’ble Bombay High Court in the case of “CIT vs HSBC Securities & Capital Markets India (P) Ltd.” reported in [2012] 23 taxman.com377(Bom) wherein, Hon’ble Bombay High Court while relying on the another decision of the Bombay High Court in the case of “CIT vs Darshan Securities Pvt. Ltd” [2012] 206 Taxman 68 has held that section 73 would not apply to a company whose gross total income consists mainly of income, which is chargeable under the heads of interest, securities, income from house property, capital gains & ‘income from other sources’. The Ld. AR of the assessee has further pointed out that in the case of “HSBC Securities” (supra), the only positive income was “income from other sources whereas business income was negative i.e. losses. The Hon’ble High Court held that section 73 was not applicable to the facts of the case observing as under:
ITA No.3256/M/2012 7 M/s. Vinamra Universal Traders Pvt. Ltd. “In the present case, section 73 would not apply in view of the fact that the explanation thereto, does not operate in respect of a company whose gross total income consists mainly of income which is chargeable under the heads of "interest on securities", "income from housing property", "capital gains" and "income from other sources". We have set out the relevant part of the assessment order which indicates that in the relevant year, the income from other sources was the only chargeable income, as the respondent had suffered a business loss otherwise.
In that view of the matter, the judgment of the Division Bench of this Court in the case of Darshan Securities (P.) Ltd.(supra) supports the respondent's case. In that case, during the relevant assessment year, the assessee had a loss of about Rs. 2.33 crores in the share trading and had dividend income of about Rs. 4.80 lacs. The Division Bench held in paragraphs 6, 7, 8 and 9 as under :- "6. The explanation to Section 73 introduces a deeming fiction. The deeming fiction stipulates that where any part of the business of a company consists in the purchase and sale of shares of other companies, such company shall, for the purposes of the section be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sales of such shares. The deeming fiction applies only to a company and the provision makes it clear that the deeming fixation (sic) extends only for the purposes of the section. The bracketed portion of the explanation, however carves out an exception. The exception is that the provision of the explanation shall not apply to 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 whose principal business is of banking or the granting of loans and advances.
The submission which has been urged on behalf of the Revenue is that in computing the gross total income for the purpose of the explanation to Section 73, income under the heads of profits and gains of business or profession must be ignored. Alternatively, it has been urged that where the income from business includes a loss in the trading of shares, such a loss should not be allowed to be set off against the income from any other source under the head of profits and gains of business or profession.
In our view, the submission which has been urged on behalf of the Revenue cannot be accepted. Leaving aside for a moment, the exception, which is carved out by the explanation to Section 73, the explanation creates a deeming fiction by which a company is deemed to be carrying on a speculation business where any part of its business consists in the purchase and sale of shares of other companies. Now, the exception which is carved out applies to a situation where the gross total income of a company consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources". Now, ordinarily income which arises from one source which falls under the head of profits and gains of business or profession can be set off against the loss which arises from another source under the same head. Sub- Section (1) of Section 73 however sets up a bar to the setting off of a loss which arises in respect of speculation business against the profits and gains of any other business. Consequently, a loss which has arisen on account of speculation business can be set off only against the profits and gains of another speculation business. However, for Sub-Section (1) of Section 73 to apply the loss must arise in relation to ITA No.3256/M/2012 8 M/s. Vinamra Universal Traders Pvt. Ltd. a speculation business. The explanation provides a deeming definition of when a company is deemed to be carrying on a speculation business. If, the submission of the Revenue is accepted, it would lead to an incongruous situation, where in determining as to whether a company is or, the ambit of Sub-Section (1) of Section 73 is only to prohibit the setting off of a loss which has resulted from a speculation business, save and accept against the profits and gains of another speculation business. In order to determine whether the exception that is carved out by the explanation applies, the legislature has first mandated a computation of the gross total income of the Company. The words "consists mainly" are indicative of the fact that the legislature had in its contemplation that the gross total income consists predominantly of income from the four heads that are referred to therein. Obviously, in computing the gross total income the normal provisions of the Act must be applied and it is only thereafter, that it has to be determined as to whether the gross total income so computed consists mainly of income which is chargeable under the heads referred to in the explanation.
Consequently, in the present case the gross total income of the assessee was required to be computed inter alia by computing the income under the head of profits and gains of business or profession as well. Both the income from service charges in the amount of Rs. 2.25 crores and the loss in share trading of Rs. 2.23 crores, would have to be taken into account in computing the income under that head, both being sources under the same head. The assessee had a dividend income of Rs. 4.7 lacs (income from other sources).The Tribunal was justified, in coming to the conclusion that the assessee fell within the purview of the exception carved out in the explanation to Section 73 and that consequently the assessee would not be deemed to be carrying on a speculation business for the purpose of Sec. 73(1).
9. In the circumstances, the appeal is dismissed but with no order as to costs”.
Since the facts and issue involved in the present appeal are identical to the case of HSBC Securities (supra), respectfully following the decision of the Hon’ble High Court in the given facts, we do not find any infirmity in the order of the Ld. CIT(A) and the same is therefore upheld. Accordingly the appeal of the Revenue is hereby dismissed.
In the result, the appeal of the assessee allowed and the appeal of the Revenue is hereby dismissed. Order pronounced in the open court on 31.12.2015.