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Income Tax Appellate Tribunal, “A” BENCH: KOLKATA
Before: Shri Mahavir Singh, JM & Shri Waseem Ahmed, AM]
ORDER Per Shri Mahavir Singh, JM:
Both these cross appeals by revenue and assessee are arising out of order of CIT(A)-VI, Kolkata in Appeal No.1018/CIT(A)-VI/2009-10/Cir-6/Kol dated 31.01.2011. Assessment was framed by DCIT, Cir-6, Kolkata u/s. 143(3)/115WE(3) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) for Assessment Year 2007-08 vide his order dated 31.12.2009.
The first issue in this appeal of revenue is against the order of CIT(A) deleting the addition made by AO in respect to expenses relatable to exempted income by invoking the provisions of section 14A of the Act read with Rule 8D of the I. T. Rules, 1962, (hereinafter referred to as the “Rules”). For this, revenue has raised following ground no.1: “1. That on the facts and circumstances of the case, ld. CIT(A)-VI, Kolkata has erred in law in holding that Rule 8D will not be applicable for the assessment year 2007-08 and the addition u/s. 14A should be restricted to rs.5,99,545/-.”
3. Briefly stated facts are that the assessee claimed exempt income of dividend of Rs.37,34,300/- and long term capital gain of Rs.5,62,20,229/- but attributed only expenses 2 & 607/K/2011 K. B. Capital Ltd. AY 2007-08 relatable to this exempt income at Rs.3,14,353/-. The AO during the course of assessment proceedings noted that in view of the decision of Special bench of Mumbai Tribunal in the case of ITO Vs. Daga Capital Management Pvt. Ltd. [2009]312 ITR (A.T.) 0001 (SB Mum), wherein the applicability of Rule 8D of the Rules is held to be retrospective and applying the same, he made disallowance of interest expenses relatable to exempt income at Rs.16,60,862/- and also disallowed other expenses relatable to exempt income at Rs.9,15,267/- thereby total disallowance was at Rs.28,90,482/-. Against this, assessee has already offered the disallowance of direct expenses at Rs.3,14,353/- u/s. 14A of the Act. Aggrieved, assessee preferred appeal before CIT(A), who following the decision of Hon’ble Bombay High Court in the case of Godrej & Boycee Mfg. Co. Ltd. Vs. DCIT (2010) 328 ITR 81 (Bom), wherein it is held that Rule 8D of the Rules is prospective and not retrospective and restricted the disallowance at 1% of exempt income and accordingly, computed the disallowance at Rs.5,99,545/-. Aggrieved, now revenue is in appeal before us.
We have heard rival submissions and gone through facts and circumstances of the case. We find that the relevant assessment year involved is 2007-08 and as held by Hon’ble Bombay High court in the case of Godrej & Boycee Mfg. Co. Ltd., supra that Rule 8D of the Rules as inserted by the I. T (Fifth Amendment) Rules, 2008 w.e.f. 24.3.2008 is prospective and not retrospective. We find that the exempted income of dividend is to the extent of Rs.37,34,300/- and long term capital gain of Rs.5,62,20,229/- in AY 2007-08. Rule 8D of the Rules is not applicable in this assessment year in the assessee’s case as held by Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (Supra) being prospective. We are of the view that the CIT(A) has rightly restricted the disallowance at 1% of the exempted income and we confirm the same. This issue of revenue’s appeal dismissed.
The next issue in this appeal of revenue is against the order of CIT(A) in deleting the disallowance made by AO on account of donation. For this revenue has raised following ground no.2:
2. That on the facts and circumstances of the case, Ld. CIT(A)-VI, Kolkata has erred in law in directing the AO to allow donation of Rs.18,002/-.”
3 & 607/K/2011 K. B. Capital Ltd. AY 2007-08 6. We have heard rival submissions and gone through facts and circumstances of the case. We find that the AO has disallowed the claim of donation of Rs.18,000/- on the basis that no evidence was produced by the assessee during the assessment proceedings but CIT(A) directed the AO to allow the claim of the assessee after verification of copies of receipts and declaration issued by approved charities and as produced by assessee before him. The assessee produced receipts from the following approved charitable institutions:
Sl. No. Name Amount (Rs.) Remarks 1 Concern India Foundation 3,001 Donation qualified u/s. 80G 2 Vision Research Foundation 10,000 Donation qualified u/s. 35(1)(ii) 3 Shree Poorna Trust 5001 Donation qualified u/s. 80G We find that the CIT(A) has directed the AO to examine the receipts for the donations mentioned above. He has not decided the issue. However, we feel that this issue can be verified by the AO and accordingly, this issue of revenue’s appeal is set aside and allowed for statistical purposes.
The next issue in this appeal of revenue is against the order of CIT(A) deleting the addition made by AO in respect to expenses relatable to exempted income by invoking the provisions of section 14A of the Act read with Rule 8D of the I. T. Rules, 1962, (hereinafter referred to as the “Rules”). For this, revenue has raised following ground no.3: “3. That on the facts and circumstances of the case, Ld. CIT(A)-VI, Kolkata has erred in law in holding that Rule 8D will not be applicable for the assessment year 2007-08 and the addition u/s. 14A should be restricted to Rs.5,99,545/- in computing book profit u/s. 115JB.”
8. At the outset, Ld. Counsel for the assessee stated that the issue has already been dealt with and it is the same issue which is decided while adjudicating the first issue. Hence, this issue of revenue’s appeal, exactly on identical principles, is dismissed.
9. The next issue is as regards to the order of CIT(A) allowing rebate u/s. 88E of the Act on the computed book profit u/s. 115JB of the Act. For this, revenue has raised following ground no.4: “4. That on the facts and circumstances of the case, Ld. CIT(A)-VI, Kolkata has erred in law in holding that rebate u/s. 88E will be allowable to the assessee when its tax payable is computed as per section 115JB.”
4 & 607/K/2011 K. B. Capital Ltd. AY 2007-08 10. At the outset, Ld. Counsel for the assessee stated that this issue is not arising out of the order of CIT(A), hence, this issue cannot be adjudicated and this ground cannot be raised by revenue. On query from the Bench, Ld. Sr. DR fairly conceded that no such ground was raised before CIT(A) by the assessee and hence, he concedes that this issue cannot be raised before Tribunal for the first time. Accordingly, this ground of appeal of revenue is dismissed being infructuous.
11. The only issue in this appeal of assessee is against the order of CIT(A) in upholding the order of AO in applying Explanation to sec. 73 of the Act disallowing loss in business of purchase and sale of shares to be assessed as deemed speculation loss. For this, assessee has raised following ground nos. 3 to 5: “3) For that on the facts and in the circumstances of the case, the CIT(A) erred in law and on fact in upholding the finding of the Assessing Officer that the Explanation to Sec. 73 of the Income Tax Act was applicable to the appellant's case for the A.Y. 2007-08 and therefore the loss in business of purchase and sale of shares was to be assessed as deemed speculation loss. 4) For that on the facts and in the circumstances of the case, the lower authorities wrongly applied Explanation to Sec. 73 of the Income Tax Act ignoring the fact that if the Explanation to Sec. 73 was applicable then the same was applicable to all sources of income involving the underlying business transactions of purchase & sale of shares and therefore income derived by the appellant from stock broking, derivative trading and portfolio management fees should have been assessed as income derived from purchase & sale of shares. 5) For that on the facts and in the circumstances of the case, the AO be directed to assess the loss in purchase & sale of shares amounting to Rs.95,02,451/- as business loss and be directed to be set off against other business income.”
12. Briefly stated facts are that the AO noted from the audited accounts of the assessee that the assessee is in the business of purchase and sale of shares including share trading, share broking, portfolio management services and derivative trading. According to AO, the assessee has incurred loss of Rs.95,02,451/- in this scheme of business and this loss is a speculation loss within the meaning of Explanation to Sec. 73 of the Act. According to AO, this issue is covered by the decision of Hon’ble jurisdictional High Court in the case of CIT Vs. Parkview Properties Pvt. Ltd. (2003) 261 ITR 473. He also relied on CBDT Circular No. 204 dated 24.07.1976 and stated that the second clause of Explanation to Sec. 73 of the Act does not apply to this case and to qualify for the first exception the income from business is to be computed with the income from other sources and he noted that the business income is at Rs.1,88,23,827/- for setting off of share trading loss which is more than the other sources income at Rs.1,31,18,686/-. Therefore, he disallowed the 5 & 607/K/2011 K. B. Capital Ltd. AY 2007-08 claim of the assessee of business loss of Rs.95,02,451/- by treating the same as deemed speculation loss u/s. 73 of the Act. Aggrieved, assessee preferred appeal before CIT(A), who also confirmed the action of AO. Aggrieved, now assessee is in appeal before us.
We have heard rival submissions and gone through facts and circumstances of the case. Ld. Counsel for the assessee filed summary of gross total income of the assessee for AY 2007-08 as assessable as per the accounts of the assessee and which is relevant for the issue and hence, the same is reproduced from the submissions of the assessee as under: “HEADWISE SUMMARY OF INCOME INCLUDED IN THE ASSESSABLE INCOME A. Profits & Gains of Business (i) Brokerage Rs. 1,51,65,389 (ii) Share Speculation Profit Rs. 98,649 (iii) Income from Depository Operations Rs. 13,97,970 (iv) Proprietary Trading in Derivatives Rs. 1,31,81,302 (v) Interest Rs. 5,95,198 (vi) Other Income Rs. 7,58,915 Income from other Business Rs. 3,11,97,423 Income from Share Trading Rs. 95,02,450 Rs. 2,16,94,973 Less: Business administrative Exp., Depn. & Interest allowed by Assessing Officer Rs. 1,49,17,729 Profits & Gains of Business Rs. 67,77,244 B. Short Term Capital Gains Rs. 1,31,18,686 Gross Total Income Rs. 1,98,95,930 Particulars Amount (in Rs.) Net Business Income 67,77,244 Income from Capital Gains 1,31,18,686”
Ld. Counsel for the assessee, first of all, before us claimed that assessee’s Gross total primarily comprises of “Income from Capital Gains” and therefore the case falls under the first limb of exception in Explanation to Sec. 73 of the Act. Secondly, he argued that the above income of steams were intimately connected with transactions involving purchase and sale of shares and all the income and receipts were earned by assessee in the course of single integrated business involving transactions in capital market. According to Ld. Counsel, the underlined transactions from which income/revenues were generated involved purchase and sale of shares. According to him, income of loss could not have been earned or suffered unless transactions involving purchase and sale of shares were carried out by the assessee. Ld. Counsel for the assessee relied on Coordinate Bench of this Tribunal in the case of Bhartia Stock Broking Pvt. Ltd. Vs. ITO, dated 25.05.2007, wherein the Explanation to Sec. 73, which creates a legal fiction, and the issue u/s. 43(5) of the Act was discussed as under: “Even otherwise if a transaction is not treated as speculative transactions it could be par with a transaction for purchase and sale of shares where actually delivery is taken. Merely because a transaction does not fall within the definition of ‘speculative transaction u/s. 43(5) would be no ground for non-application of the explanation to sec.
The operation of Explanation to Sec. 73 is independent of application or non-application of transaction being a speculative transaction or not under section 43(5). In view of the above, we direct the AO to treat the profit from a future and option difference; Capital market trade difference etc. as profits from speculative business within the meaning of the Explanation to Sec. 73.”
We find that in exactly identical facts the Coordinate Bench in the case of DCIT Vs. Baljit Securities Private Limited in dated 21.10.2014 has considered this issue by following Special Bench of Mumbai in the case of CIT Vs. Concord Commercial Pvt. Ltd. (2005) 95 ITD 117 (Mum SB), wherein it is held as under: “5. We have heard rival submissions and gone through facts and circumstances of the case. The assessee is engaged in the business of share trading which involves stock and share broking activities, purchase and sale of delivery based shares and purchase & sale of non-delivery based shares i.e., derivative trading. The assessee incurred loss on delivery based purchase and sale of shares at Rs.7,29,56,706/- and earned profit on non- delivery based sale purchase of shares at Rs.5,12,81,265/-. The AO during the course of assessment proceeding bifurcated the business of purchase and sale of shares into two separate headings namely Trading in Shares and F & O Operations. The AO, thereafter, applied explanation of Section 73 of the Act and denied the claim of set off of loss from dealing of shares with profit from F & O operations. The assessee carried the matter to CIT(A) who allowed the claim of the assessee by holding that share trading loss is to be allowed to be set off with the profits earned in derivative transactions. Further, the CIT(A) also held that receipt from the surrender of Keyman Insurance Policy has to be assessed as business income and to be allowed for set off with loss from business under the same head. The assessee conducted its business of purchase and sale of shares under the following two heads:- a) The first mode involved the delivery of shares so purchased and sold, known as trading in shares and b) The second mode being in the nature of F&O operations did not involve delivery of the shares so purchased and sold. The assessee earned profit from derivative i.e., F&O operation in shares and suffered loss in trading in shares. The assessee also invested in Keyman Insurance Policy in order to mitigate the losses in shares business and for that paid premium out of profit derived from business of purchase of shares. The AO in assessment completed for all prior assessment years allowed the claim of the assessee in the 5 ITA No.1183/K/2012 Baljit Sec. Pvt. Ltd. AY 2009-10 respective assessment years. The assessee treated the entire activity of purchase and sale of shares which comprised of both delivery based and non- delivery based trading, as one, before application of the deeming provision contained in explanation to section 73 of the Act and accordingly, claimed set off of the loss incurred in delivery based trading with the profit derived from derivative trading and further, with the receipt of surrender of the keyman policy treated as a business receipt. We have examined the provisions of section 43(5) of the Act, which contains the definition of ‘speculative transaction’, only applied for purposes of Sec. 28 of the Act i.e., it does not apply to the other sections of the Act. On the contrary, Explanation to Sec. 73 of the Act creates a deeming fiction by which among the assessee, who is a company, as indicated in the said Explanation dealing with the transaction of share and suffer loss, such transaction should be treated to be speculative transaction within the meaning of Sec. 73 of the Act notwithstanding the fact that according to the definition of speculative transaction mentioned in Sec. 43(5) of the Act, the transaction is not of that nature as there has been actual delivery of the scrips of share. As per the definition of section 43(5) of the Act, trading of shares which is done by taking delivery does not come under the purview of the said section. Similarly as per clause (d) of Section 43(5), derivative transaction in shares is also not speculation transaction as defined in the said section. Therefore, both profit / loss from all the share delivery transactions and derivative transactions are having the same meaning, so far as Sec. 43(5) of the Act is concerned. Again, in view of the fact that both delivery based transactions and derivative transaction are non-speculative as far as Sec. 43(5) is concerned, it follows that both will have the same treatment as far as application of Explanation to Sec. 73 is concerned. Therefore aggregation of the share trading loss and profit from derivative transactions should be done before the Explanation to Section 73 of the Act, is applied. The above view has been taken up by Special Bench of this Tribunal, Mumbai Bench, in the case of CIT v. Concord Commercial Pvt. Ltd. (2005) 95 ITD 117 (Mum) (SB). In this case, the Special Bench held that, “Before considering whether the assessee’s case is hit by the deeming provision of Explanation to Sec. 73 of the Act, the aggregate of the business profit / loss has to be worked out based on the non-speculative profits; either it is from share delivery or from share derivative.”
Baljit Sec. Pvt. Ltd. AY 2009-10 6. From the above, it is concluded that both trading of shares and derivative transactions are not coming under the purview of Section 43(5) of the Act which provides definition of “speculative transaction” exclusively for purposes of section 28 to 41 of the Act. Again, the fact that both delivery based transaction in shares and derivative transactions are non-speculative as far as section 43(5) is concerned goes to confirm that both will have same treatment as regards application of the Explanation to Section 73 is concerned, which creates a deeming fiction. Now, before application of the said Explanation, aggregation of the business profit/loss is to be worked out irrespective of the fact, whether it is from share delivery transaction or derivative transaction. Now, this view has been confirmed by the Hon’ble jurisdictional High Court in assessee’s own case in GA No.3481 of 2013 and ITAT No. 215 of 2013 dated 12th March, 2014, has held as under:- “Clause (d) of Section 43(5) became effective with effect from 1st April, 2006. Therefore, prior to 1st April, 2006 any transaction in which a contract for the purchase or sale of any commodity including stocks and shares was periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrip was a speculative transaction. Sub-section 1 of Section 73 provides as follows: ‘(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.’ The resultant effect was that any loss arising out of speculative transaction could only have been set off against profits arising out of speculative transaction. In the present case, the assessee, as already indicated, has been dealing in shares where delivery was in fact taken and also in shares where delivery was not ultimately taken. In other words, the assessee has been dealing in actual selling and buying of shares as also dealing in shares only for the purpose of settling the transaction otherwise than by actual delivery. The question arise whether the losses arising out of the dealings and transaction in 8 & 607/K/2011 K. B. Capital Ltd. AY 2007-08 which the assessee did not ultimately take delivery of the shares or give delivery of the shares could be set off against the income arising out of the dealings and transactions in actual buying and selling of shares. An answer to this question is to be found in the explanation appended to Section 73 which reads as follows: ‘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”, or a company the principal business of which is the bu9siness 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.” In order to resolve the issue before us, the section has to be read in the manner as follows: “Explanation : Where any part of the business of a company (… … … … … … … … … … … … … … …. … … … … … …. … … … … … … … … …. … … .. .. … .. … … … .. … .. … … … .. … … .. …. … … … .. … .. … … … … …. … … …) consist 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 would, thus, appear that where an assessee, being the company, besides dealing in other things also deals in purchase and sale of shares of other companies, the assessee shall be deemed to be carrying on a speculation business. The assessee, in the present case, principally is a share broker, as already indicated. The assessee is also in the business of buying and selling of shares for self where actual delivery is taken and given and also in buying and selling of shares where actual delivery was not intended to be taken or given. Therefore, the entire transaction carried out by the assessee, indicated above, was within the umbrella of speculative transaction. There was, as such, no bar in setting off the loss arising out of derivatives from the income arising out of buying and selling of shares. This is what the learned Tribunal has done.”
In view of the above facts and circumstances and the proposition of law as discussed above, we are of the view that assessee has a loss which is arising out of business and accordingly, the same is a business loss and not speculation loss as held by lower authorities. Accordingly, we allow this issue of assessee’s appeal.
Ground nos. 1 and 2 raised by assessee is against the order of CIT(A) in upholding the validity of the assessment order dated 31.12.2009 without appreciating the submissions of the assessee that the order was passed beyond the period of limitation. For this, assessee has raised following two grounds: “1. For that on the facts and in the circumstances of the case, the CIT (A) erred in upholding the validity of the assessment order dated 31st December 2009; without appreciating the submissions of the appellant that the order was passed beyond the period of limitation.
9 & 607/K/2011 K. B. Capital Ltd. AY 2007-08 2) For that on the facts and in the circumstances of the case, the CIT(A) appreciating the fact; that there was considerable delay in service of the assessment order; ought to have held that the order of assessment was passed beyond the period of limitation and for this reason he should have held the order of assessment ab initio void and should have cancelled the same.”
At the time of hearing Ld. Counsel for the assessee did not press these grounds. Hence the same are dismissed as not pressed.