2019 (10) TMI 834 - AT - Income Tax

Treating the share trading loss as speculation loss by invoking Explanation to section 73 - allocation of expenses as attributable to deemed speculation activity as against the total expenses claimed in the sum - HELD THAT - The derivative transactions shall not be treated as speculative transaction only for the purpose of section 43(5) of the Act and not otherwise. The same cannot be extended to provisions of Section 73 of the Act. Share trading loss incurred by the assessee in is speculative in nature and to this extent, we uphold the action of the ld AO. DR placed reliance on the decision of Hon ble Calcutta High Court in the case of CIT vs Parkview Properties P Ltd 2003 (1) TMI 69 - CALCUTTA HIGH COURT wherein as been held that the speculation loss could be set off against speculative profits for the purpose of section 73 of the Act, which is what is done by the assessee also in the instant case by setting off the derivative profit with share trading loss. Hence the decision of Hon ble Calcutta High Court supra actually supports the view of the assessee and our decision rendered hereinabove. In view of the aforesaid observations with regard to the restrictive applicability of provisions of section 43(5)(d) of the Act as detailed supra and respectfully following the judicial precedent relied supra, we hold that the assessee is entitled for setting off the derivative profit with the share trading loss. Hence there is no need for making separate disallowance of share trading loss of ₹ 6,98,422/-. Accordingly, we reverse the treatment of the ld AO in allowing the carry forward of share trading loss to subsequent years. Similarly we find from the aforesaid table that the assessee had incurred loss on account of jobbing and arbitrage transactions in the sum of ₹ 10,77,588/-. This falls under section 43(5)(c) of the Act wherein the said transaction was not considered as speculative transaction. However, the same would apply only for section 43(5) and cannot be extended to section 73 of the Act as held hereinabove. Accordingly, we hold that the said loss on account of jobbing also would have to be set off against derivative profit. Expenses incurred by the assessee which were apportioned towards speculation activity on turnover ratio - assessee had carried on composite business of derivative trading and share trading. AO had not considered the turnover figures for derivative business and had considered only the turnover of share trading business, which had resulted in absurdity by apportioning 99.64% of total expenses only towards speculation activities. We direct the AO to recompute the apportionment of expenditure by considering the income of derivative transactions, jobbing transactions and share trading transactions alone by considering them in absolute figures i.e ignoring the negative signs (losses). AO is directed to make disallowance as per the aforesaid directions.

Summary

Issues Involved:

1. Treatment of share trading loss as speculation loss under Explanation to Section 73 of the Income Tax Act.
2. Allocation of expenses attributable to deemed speculation activity.

Issue-Wise Detailed Analysis:

1. Treatment of Share Trading Loss as Speculation Loss:

The first issue revolves around whether the CIT(A) was justified in treating the share trading loss of ?6,98,422 as speculation loss by invoking Explanation to Section 73 of the Income Tax Act. The assessee, engaged in stock broking and trading, argued that Explanation to Section 73 excludes companies whose gross total income mainly consists of income chargeable under heads such as 'Interest on Securities' and 'Capital Gains'. The breakup of the assessee's gross total income showed a business loss, long-term capital gain, and income from other sources, leading to a gross total loss of ?53,00,162. The assessee contended that since their gross total income mainly comprised of interest and capital gains, the provisions of Explanation to Section 73 were not applicable.

The AO, however, treated the share trading loss as speculation loss, arguing that the share dealing activity carried out on behalf of clients (broking activity) is different from share trading activity carried out by the assessee on its own behalf. The AO's stance was that share brokers are not excluded from the purview of Explanation to Section 73 and thus treated the share trading loss as speculation loss.

The Tribunal held that the share trading loss of ?6,98,422 is speculative in nature and upheld the AO's action to this extent. However, the Tribunal found that the assessee is entitled to set off the derivative profit of ?37,64,097 against the share trading loss of ?6,98,422, reversing the AO's treatment of allowing the carry forward of the share trading loss to subsequent years.

2. Allocation of Expenses Attributable to Deemed Speculation Activity:

The second issue pertains to the allocation of expenses attributable to deemed speculation activity. The AO had allocated 99.64% of the total expenses of ?1,71,39,837 towards speculation activity, resulting in a disallowance of ?1,70,78,134. The assessee argued that it carried on a composite business of share broking, share trading, and derivative trading, making it impossible to bifurcate expenses incurred for earning brokerage income and other income. The assessee also contended that the AO's calculation was flawed as it did not consider the turnover figures for share broking and derivative business.

The Tribunal directed the AO to recompute the apportionment of expenditure by considering the income of derivative transactions, jobbing transactions, and share trading transactions in absolute figures. The expenses were to be apportioned as follows:

- Total expenditure incurred by the assessee: ?1,71,39,837
- Speculation Activity: ?61,54,915
- Non-Speculation Activity: ?1,09,84,922

The Tribunal instructed the AO to make disallowance as per these directions, thereby partially allowing the appeal of the assessee.

Conclusion:

The Tribunal upheld the treatment of the share trading loss as speculative but allowed the set-off of this loss against derivative profits. It also directed a revised computation for the allocation of expenses attributable to speculation activity. The appeal of the assessee was partly allowed.