2016 (5) TMI 430 - AT - Income Tax

Losses in speculation business - adjustment with profit from non speculative business - Held that - 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. 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. - Decided against revenue

Summary

Issues Involved:
1. Delay in filing the appeal.
2. Adjustment of loss from speculative transactions with profit from non-speculative business.
3. Applicability of provisions of Section 73 to an assessee dealing in shares.
4. Separation of business of dealing in shares into speculative and non-speculative business.

Detailed Analysis:

1. Delay in Filing the Appeal:
The Revenue's appeal was delayed by 69 days due to the inability to trace the assessment records. The Tribunal, after considering the reasons provided in an affidavit, found the cause reasonable and sufficient, thereby condoning the delay.

2. Adjustment of Loss from Speculative Transactions with Profit from Non-Speculative Business:
The Assessee, a company engaged in trading shares, derivative transactions, and share broking, incurred a loss of ?34,61,912 in share trading and earned a profit of ?90,58,340 from derivatives. The Assessee adjusted the share trading loss against the derivative profits and declared the resultant income under "Income from Business." The AO contended that, per Explanation to Section 73 of the Income Tax Act, 1961, the loss from purchase and sale of shares should be regarded as speculative and cannot be set off against normal business income from derivatives.

3. Applicability of Provisions of Section 73 to an Assessee Dealing in Shares:
Section 73(1) stipulates that any loss from a speculation business shall be set off only against profits from another speculation business. The explanation to Section 73 deems a company dealing in the purchase and sale of shares as carrying on a speculation business unless it falls under specific exceptions. The profits from derivatives are not considered speculative due to proviso (d) to Section 43(5), which excludes eligible transactions in derivatives carried out in a recognized stock exchange from being deemed speculative.

4. Separation of Business of Dealing in Shares into Speculative and Non-Speculative Business:
The AO argued that the Assessee's share trading and share broking were distinct businesses, with share trading being speculative and share broking generating normal business income. The AO cited the Calcutta High Court's decision in R.P.G. Industries Ltd. vs. CIT, which held that losses from share transactions should be treated as speculative even if there was actual delivery of shares. Consequently, the AO did not allow the set-off of share trading losses against derivative profits.

Tribunal's Findings:
The CIT(A) agreed with the Assessee's contention that the business of trading in shares and derivatives should be regarded as one inseparable business. The CIT(A) noted that the Assessee's income from share trading and derivatives should be aggregated before applying the Explanation to Section 73. The CIT(A) referenced previous ITAT decisions which held that transactions in derivatives and delivery-based share trading are not speculative under Section 43(5) and should be aggregated for determining business income.

The Tribunal upheld the CIT(A)'s decision, referencing the Delhi High Court's judgment in CIT Vs. DLF Commercial Developers Ltd., which allowed the set-off of losses from share trading against derivative profits. The Tribunal dismissed the Revenue's appeal, affirming that the Assessee is entitled to set off the share trading loss with the profit from derivative transactions.

Conclusion:
The Tribunal concluded that the Assessee's share trading loss should be allowed to be set off against the profit from derivative transactions, as both are part of the same business. The Revenue's appeal was dismissed, and the CIT(A)'s order was upheld.