2020 (3) TMI 47 - HC - Income Tax

Nature of loss - business loss or speculation loss - HELD THAT - A conjoint reading of clause (d) of the proviso to sub-section (5) of Section 43 of the Act and the explanation attached to it makes it clear that if a transaction in trading of derivatives is carried out electronically on screen based system through a stock broker or sub-broker and it is supported by a time stamped contract note issued by such broker which indicates unique client identity and PAN number of the client, it shall be an eligible transaction and shall not be deemed to be a speculative transaction . Tribunal while considering the appeal of the Revenue found that the CIT(A) at the time of deciding the appeal of the assessee against the addition made by AO treating the same as speculation loss, had called for the remand report to ascertain as to whether the assessee did fulfill the condition laid down under sub-clause (d) of proviso to Sub-section (5) of Section 43 - Contract notes were also produced by the assessee before the CIT(A), amongst which the note issued by the broker M/s Arihant Capital Market Ltd. through whom the assessee had undertaken the alleged transactions in respect of trading in derivatives i.e. F O of shares was also examined in particular. The contract note clearly revealed that the transactions were supported by time stamped contract notes issued by the stock broker in which unique client identity and PAN number etc were also indicated in accordance with the explanation-1 attached to clause (d) of proviso to sub-section (5) of Section 43 of the Act. Section 43(5) of the Act was also discussed in the order by the CIT(A) and on the basis of the same, the CIT(A) had arrived at the conclusion that the assessee had fully satisfied the requirements under clause (d) of the proviso to Sub-section (5) of Section 43 of the Act. Revenue has failed to point out that the findings returned by the CIT(A) and the Tribunal are erroneous or are perverse in any manner or are based on mis-appreciation of material on record. Loss sustained by the assessee from the transaction of purchase and sale of the shares cannot be deemed to be speculation loss. Accordingly, we answer the substantial question of law against the appellant-Revenue in the present case that the loss as claimed by the Revenue is not a speculation loss.

Summary

Issues:
1. Whether the loss of ?96,50,334/- constituted business loss and not a speculation loss?

Analysis:
The appeal under Section 260A of the Income Tax Act, 1961 was filed by the Revenue against an order passed by the Income Tax Appellate Tribunal relating to Assessment Year 2007-08. The primary issue was whether the loss of ?96,50,334/- claimed by the assessee constituted business loss or speculation loss. The respondent-assessee derived income from the business of shares sub-brokers, trading in futures and option (F&O) of shares and commodities futures. The original assessment was completed, but the Assessing Officer later issued a notice under Section 148 of the Act, leading to the addition of ?96,50,334/- as speculation loss. The Commissioner of Income Tax (Appeals-I) allowed the appeal and deleted the addition, which was further challenged by the Revenue before the Tribunal.

The preliminary objection raised by the respondent-assessee regarding the maintainability of the appeal due to the tax effect being below ?1.00 Crore was rejected by the Court. The Revenue argued that despite the tax effect being below the limit, as there was a Revenue audit objection, the appeal could be filed. The Court noted this fact and proceeded with the case.

The Revenue contended that the appellate authorities erred in treating the speculation loss claimed by the assessee as general business loss. They argued that the transactions did not meet the criteria of an 'eligible transaction' under the Act. However, the respondent-assessee defended the impugned order, stating that the appellate authorities had already addressed the submissions made by the Revenue.

The Court found that the addition of ?96,50,334/- as speculation loss was made due to confusion, as admitted by the Revenue. It was agreed that the loss from shares and futures was not speculation loss but an allowable deduction against business income. The Court upheld the order of the CIT(A) and dismissed the appeal by the Revenue.

The Court analyzed the relevant statutory provisions under Section 43(5) of the Act and the explanation attached to it. It clarified that if a transaction in trading of derivatives met certain conditions, it would not be deemed a speculative transaction. The CIT(A) had verified the compliance with these conditions by the assessee and concluded that the requirements under the Act were fulfilled.

In conclusion, the Court found no merit in the arguments presented by the Revenue and upheld the decision that the loss claimed by the assessee was not a speculation loss. The appeal was dismissed based on the findings and circumstances of the case.