2016 (7) TMI 539 - AT - Income Tax

Deemed speculation loss u/s 73 - assessee is a member of National Stock Exchange and conducts trading in listed shares and securities - CIT(A) deleted the addition - Held that - Both in share broking as well as in proprietary share trading, the underlying business transactions giving rise to income involved only purchase and sale of shares of other companies and therefore in terms of Explanation to Section 73 of the Act, the entire business of the stock broker assessee came within the ambit of Explanation to Section 73 of the Act. We find that once these profits (i.e 97,70,575 8,76,950 60,12,948) are set off with the loss incurred on share trading business, there would be only resultant gain from speculative business and hence there would be no scope to apply the provisions of Explanation to Section 73 of the Act in the absence of speculation loss. We are in agreement with the arguments advanced by the ld AR that in the case of a stock broker, there is a common terminal, one membership of the stock exchange, common bank account and the common work force with the help of which the business of proprietory trading as well as trading on behalf of the clients are conducted. Therefore it could be safely concluded that the entire business of the stock broker constituted as one single composite indivisible business and therefore income or loss cannot be artificially bifurcated. The provisions of Explanation to Section 73 of the Act would not be applicable in the instant case in the absence of speculation loss if consolidated business income is considered and accordingly we find no infirmity in the order passed by the ld CITA on this issue Alternatively, even if Explanation to section 73 is to be applied, we hold that the assessee s case falls under the exception provided in the first limb of Explanation to Section 73 of the Act where the gross total income of the assessee comprises of income from other sources which is much more than the speculation loss of ₹ 1,02,12,277/- - Decided in favour of assessee

Issues Involved:
1. Whether the delay in filing the appeal by the revenue should be condoned.
2. Whether the CIT(A) was justified in deleting the addition of Rs. 1,02,12,277/- treated as deemed speculation loss under Section 73 of the Income Tax Act, 1961.

Detailed Analysis:

1. Condonation of Delay:
At the outset, the Tribunal noted that there was an 18-day delay in filing the appeal by the revenue. The revenue had duly filed a condonation petition, and the respondent's representative conceded to condone the delay. Consequently, the delay was condoned, and the appeal was admitted for adjudication.

2. Deletion of Addition of Rs. 1,02,12,277/- as Deemed Speculation Loss:
The core issue in the appeal was whether the CIT(A) was justified in deleting the addition of Rs. 1,02,12,277/- treated as deemed speculation loss under Section 73 of the Income Tax Act, 1961.

a. Background and AO's Findings:
The assessee, a member of a recognized stock exchange, derived income from various segments including stock broking, derivative trading, speculative trading involving non-delivery, and trading involving deliveries. During the assessment, the AO invoked the Explanation to Section 73, treating the loss incurred in share trading as speculation loss and disallowed Rs. 1,02,12,277/-.

b. CIT(A)'s Observations and Decision:
The CIT(A) deleted the addition, observing that the AO's aggregation of absolute numeric values of all sources under the head "business" was not in conformity with judicial precedents. The CIT(A) cited the Jurisdictional Calcutta High Court decision in Parkview Properties (P) Limited and the Bombay High Court decision in Darshan Securities Pvt. Ltd, emphasizing that a deeming provision like the Explanation to Section 73 must be strictly construed. The CIT(A) noted that the assessee's gross receipts from sources other than "business" were higher than the negative income from share trading, hence the Explanation to Section 73 was not applicable.

c. Revenue's Grounds of Appeal:
The revenue contended that the CIT(A) erred in deleting the addition without considering the distinct facts of the case and argued that the assessee had a higher business income than aggregate income from other sources and capital gains.

d. Tribunal's Analysis and Decision:
The Tribunal considered the following undisputed facts:
- The assessee is a member of the National Stock Exchange, conducting trading in listed shares and securities.
- Transactions were both on proprietary account and on behalf of clients, in cash and derivative segments.
- The assessee incurred a loss in proprietary share trading but earned profits in proprietary derivative trading, intra-day share trading, and share broking income.

The Tribunal observed that the AO's action of treating the loss from proprietary share trading as deemed speculation business while treating other transactions as non-speculation business was not justified. The Tribunal emphasized that all transactions were intrinsically related to the activity of purchase and sale of shares and securities.

e. Interlinked Transactions and Judicial Precedents:
The Tribunal noted that the proprietary trading transactions in cash and derivative segments were interlinked and inter-connected. The Tribunal referred to the Delhi High Court decision in CIT vs DLF Commercial Developers Ltd, which held that even though derivative transactions were not speculative under Section 43(5), they could be considered speculation business under Explanation to Section 73.

f. Set Off of Profits Against Losses:
The Tribunal held that the assessee was entitled to set off the loss incurred in share trading with profits from derivative transactions, intra-day share trading, and share broking income. This resulted in no resultant loss, making the provisions of Explanation to Section 73 inapplicable.

g. Composite Business Nature:
The Tribunal agreed with the argument that the entire business of a stock broker constituted a single composite indivisible business, and income or loss could not be artificially bifurcated.

h. Legislative Intent and Stock Exchange Certification:
The Tribunal highlighted the legislative intent behind the Explanation to Section 73 and noted the certificate from the National Stock Exchange, which treated both proprietary and client transactions as the assessee's own trading turnover.

i. Alternative Argument - Exception to Explanation to Section 73:
The Tribunal also considered the alternative argument that the assessee's case fell under the exception provided in the first limb of Explanation to Section 73, where the gross total income comprised mainly of income from other sources, which was higher than the speculation loss.

Conclusion:
The Tribunal concluded that the provisions of Explanation to Section 73 were not applicable to the instant case. The appeal of the revenue was dismissed, and the order of the CIT(A) was upheld. The decision was pronounced in the open court on 08.07.2016.

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