2015 (12) TMI 562 - AT - Income Tax

Loss in respect of delivery based transactions in respect of purchase and sale of shares - whether to be treated as speculation loss or not? - Held that - From the provisions of section 43(5)(d) of the Act, it is clear that the definition of speculative transaction as contained in section 43(5) of the Act is only for purpose of sections 28 to 41 of the Act. It does not apply to the other sections of the Act. 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 share delivery transactions and derivative transactions have the same meaning as far as Section 43(5) of the Act is concerned. It thus follows that both will have the same treatment as far as application of the said section is concerned. Thus we hold that the claim of the assessee for set off of loss from share dealing should be allowed from the profits from F & O in share transactions, the character of the income being the same and also hold that before application of the Explanation to section 73, aggregation of the business profit or loss is to be worked out irrespective of the fact whether it is from share delivery transaction or derivative transactions. - Decided in favour of assessee.

Issues Involved:
1. Treatment of loss from delivery-based share transactions.
2. Treatment of profit from Future & Option (F&O) non-delivery based transactions.
3. Treatment of loss from non-delivery based share transactions.
4. Applicability of Explanation to Section 73 of the Income Tax Act, 1961.
5. Consistency in the treatment of speculative and non-speculative transactions.

Detailed Analysis:

1. Treatment of Loss from Delivery-Based Share Transactions:
The primary issue was whether the loss of Rs. 5,36,90,032 from delivery-based share transactions should be treated as a regular business loss or speculation loss. The assessee argued that these losses were incidental to its broking activities and should be considered regular business losses. However, the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] treated these losses as speculation losses under the Explanation to Section 73 of the Income Tax Act, 1961. The Tribunal held that the entire activity of purchase and sale of shares, including delivery-based and non-delivery based trading, should be considered as one composite business before applying the deeming provision in Explanation to Section 73.

2. Treatment of Profit from Future & Option (F&O) Non-Delivery Based Transactions:
The assessee earned a profit of Rs. 36,86,29,893 from F&O transactions, which both the assessee and the AO treated as regular business profit. The Tribunal upheld this treatment, noting that F&O transactions are not speculative as per Section 43(5)(d) of the Act. Therefore, the profit from these transactions was rightly treated as regular business profit.

3. Treatment of Loss from Non-Delivery Based Share Transactions:
The assessee incurred a loss of Rs. 2,46,33,241 from non-delivery based transactions, which it treated as regular business loss. The AO, however, treated these losses as speculation losses. The Tribunal noted that the AO had not established a one-to-one mapping between these transactions and F&O operations, and the auditor had categorized these transactions as speculative. Despite this, the Tribunal held that the entire activity of purchase and sale of shares, including non-delivery based trading, should be treated as one composite business.

4. Applicability of Explanation to Section 73:
The AO invoked Explanation to Section 73 to treat the losses from delivery-based and non-delivery based share transactions as speculation losses. The Tribunal, however, held that the assessee's activities in dealing with shares and securities should be considered as a composite business. The Tribunal relied on precedents to hold that the aggregation of share trading loss and profit from derivative transactions should be done before applying Explanation to Section 73. The Tribunal emphasized that both delivery-based transactions and derivative transactions are not speculative under Section 43(5) and should be treated similarly for the purpose of Explanation to Section 73.

5. Consistency in the Treatment of Speculative and Non-Speculative Transactions:
The Tribunal highlighted the principle of consistency, noting that in previous assessment years (2007-08 and 2009-10), the AO had treated non-delivery based transactions as regular business losses. The Tribunal cited the Supreme Court's decision in Radhasoami Satsang vs CIT, emphasizing that a consistent position should not be changed in subsequent years unless there is a significant reason. The Tribunal also referenced several judicial precedents to support its view that the entire business activity of the assessee, including delivery-based and non-delivery based transactions, should be treated as one composite business.

Conclusion:
The Tribunal concluded that the assessee's claim for setting off the loss from share dealing against the profits from F&O transactions should be allowed. The Tribunal held that before applying the Explanation to Section 73, the aggregation of business profit or loss should be worked out irrespective of whether it is from delivery-based or non-delivery based transactions. The appeal of the assessee was allowed, and the Tribunal ordered that the losses from share dealing should be set off against the profits from F&O transactions.

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