2022 (9) TMI 76 - AT - Income Tax

Loss on account of Mark to Market - Speculation or non speculation loss (Business Loss) - loss incurred on futures and options (derivative transactions) - Section Section 43(5)(d) - whether the provisions of Explanation to Section 73 of the Act per se could be made applicable to the facts of the instant case? - HELD THAT - In terms of Section 43(5)(d) of the Act, the loss incurred on futures and options (derivative transactions) would have to be construed only as business loss and hence the provisions of Section 73 and its explanation thereon would not come into operation at all for the same. We also hold that Section 43(5)(d) of the Act should have to be first given effect while computing gross total income of the assessee before applying Section 73 and its Explanation thereon. - Accordingly, the set off of F O losses with the regular business income done by the assessee is in order. Loss of share trading - HELD THAT - What is left is only loss incurred on share trading and applicability of Explanation to Section 73 of the Act to the same. We have already held hereinabove that the gross total income mainly consists of income from house property, income from capital accounts and income from other sources for the assessee and thereby, the case of the assessee falls in the first exception carved out in Explanation to Section 73 - This view is further fortified by the decision in the case of CIT vs. HSBC Securities and Capital Markets India Pvt. Ltd. 2012 (6) TMI 715 - BOMBAY HIGH COURT Principal business of the assessee, not being granting of loans and advances and thereby not eligible for exception and accordingly, the deeming fiction provided in Explanation to Section 73 would get attracted. The Hon ble Apex Court in the case of Snowtex Investment Limited 2019 (5) TMI 1165 - SUPREME COURT had merely upheld the action of the Hon ble High Court in this regard. With regard to the amendment brought in Explanation to Section 73 of the Act w.e.f. 01/04/2015, the Hon ble Apex Court held that it should be given only prospective application. This has been discussed till the end of the judgement i.e. till para 33. Ultimately, the Hon ble Apex Court had only upheld the order of the Hon ble Calcutta High Court. We find the decision of the Hon ble Apex Court referred to supra is completely and effectively distinguishable with that of the assessee before us. Hence, we have no hesitation in holding that the said decision is not applicable to the facts before us and does not advance the case of the Revenue. On the contrary, the decision of the Hon ble Bombay High Court relied upon by the ld. AR in 2012 (6) TMI 715 - BOMBAY HIGH COURT is directly on the issue before us. Hence, the same would have to be followed in the facts and circumstances of the instant case. Accordingly, the ground No.1 raised by the Revenue is dismissed.

Summary

Issues Involved:
1. Applicability of Explanation to Section 73 of the Income Tax Act, 1961.
2. Classification of losses incurred by the assessee as speculation loss or business loss.

Issue-wise Detailed Analysis:

1. Applicability of Explanation to Section 73 of the Income Tax Act, 1961:
The core issue was whether the Explanation to Section 73 of the Income Tax Act, 1961, applied to the assessee's case. The assessee, a private limited company engaged in real estate development, leasing, and trading in shares and derivatives, reported a total loss of Rs. 8,28,91,018. The Assessing Officer (AO) treated this loss as speculation loss under Explanation to Section 73, while the assessee claimed it as a business loss. The explanation to Section 73 deems a company to be carrying on a speculation business if any part of its business involves the purchase and sale of shares, unless its gross total income mainly consists of income from interest on securities, house property, capital gains, or other sources.

The Tribunal noted that the assessee's gross total income consisted mainly of income from house property (Rs. 5,73,65,001), capital gains (Rs. 3,03,512), and other sources (Rs. 21,51,576), with a business loss of Rs. 12,84,78,109. Given this composition, the Tribunal concluded that the assessee's case fell under the exceptions carved out in Explanation to Section 73, meaning the loss on shares did not qualify as speculation loss.

2. Classification of Losses Incurred by the Assessee:
The Tribunal examined whether the losses from futures and options (F&O) and share trading should be treated as speculation losses. The AO had treated the entire loss of Rs. 8,28,91,018 as speculation loss, arguing that the underlying assets in derivative transactions were shares, thus falling under the Explanation to Section 73.

However, the Tribunal highlighted Section 43(5)(d) of the Act, which states that eligible transactions in derivatives carried out in a recognized stock exchange are not deemed speculative transactions. Since the assessee's F&O transactions were conducted in recognized stock exchanges through SEBI-registered brokers, the Tribunal held that these losses (Rs. 5,19,33,951 and Rs. 12,65,977) should be treated as business losses, not speculation losses.

The Tribunal also referenced the decision of the Hon'ble Calcutta High Court in Asian Financial Services Ltd. vs. CIT, which supported the view that losses from derivatives are business losses. Additionally, the Tribunal cited the Hon'ble Bombay High Court's decision in CIT vs. HSBC Securities and Capital Markets India Pvt. Ltd., which reinforced that if the gross total income mainly consists of income from other heads, the Explanation to Section 73 does not apply.

Regarding the share trading loss of Rs. 2,96,91,090, the Tribunal reiterated that the assessee's gross total income mainly consisted of income from house property, capital gains, and other sources. Thus, the assessee's case fell under the exceptions in Explanation to Section 73, and the share trading loss should not be treated as speculation loss.

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming that the assessee's losses from F&O transactions should be treated as business losses under Section 43(5)(d), and the share trading loss did not fall under the ambit of speculation business due to the exceptions in Explanation to Section 73. The Tribunal's decision was consistent with the rulings of the Hon'ble Calcutta High Court and the Hon'ble Bombay High Court.