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TMI Blog2014 (10) TMI 659X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the said Explanation, aggregation of the business profit/loss is to be worked out irrespective of the fact, whether it is from share delivery transaction or derivative transaction – relying upon assessee’s own case as decided in Commissioner of Income Tax, Kol-III Versus M/s. Baljit Securities Pvt. Ltd. [2014 (6) TMI 475 - CALCUTTA HIGH COURT] - where an assessee, being the company, besides dealing in other things also deals in purchase and sale of shares of other companies, the assessee shall be deemed to be carrying on a speculation business - The assessee is a share broker, as already indicated - The assessee is also in the business of buying and selling of shares for self where actual delivery is taken and given and also in buying and selling of shares where actual delivery was not intended to be taken or given - the entire transaction carried out by the assessee was within the umbrella of speculative transaction - There was no bar in setting off the loss arising out of derivatives from the income arising out of buying and selling of shares – thus, the order of the CIT(A) is upheld – Decided against revenue. Invocation of section 14A – Held that:- A plain reading of Rul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on by the assessee during the year vis-a-vis preceding years. For this, the AO recorded this fact that There has been no material difference or any deviation in the nature of business carried on by the assessee during the year vis- -vis the preceding year. Having regard to the accounts of the assessee and the nature of business for the year under consideration, issues emanating from the applicability of section 73, income earned from surrendering certain keyman insurance policies, income from derivative transactions, income from brokerage, interest on FD/margin deposits . The AO noted from the accounts of the assessee that the assessee has incurred loss of ₹ 7,29,56,706/- in respect of business of purchase and sale of shares on account as under: Opening Stock of shares Rs.19,05,19,828/- Purchase of shares Rs.14,62,02,483/- Rs.33,67,22,311/- Less: Sale of shares Rs.12,23,58,673/- Closing stock of shares Rs.14,14,06,932/- Rs.26,37,65,605/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and held that the transaction done by delivery as well as the transaction of derivative of shares, profit/loss is not hit by Section 43(5) and therefore the aggregation of share trading loss and profit from derivative transactions should be done before the application of the Explanation to Section 73. Therefore, in view of the above the appellant is entitled to set off of the share trading loss with the profit earned from derivative transactions. My attention is also drawn to the appellate order passed by the CIT(A)-VI, Kolkata in Appeal No.147/CIT(A)-VI/R-6/Kol/10- 11 vide order dated 30.03.2012 has decided the identical issue in favour of the assessee on similar facts of the case. Thus. keeping in view the entire facts of the case and the legal position as above and respectfully following the judgment of the Hon'ble ITAT A Bench Kolkata, it is held that the share trading loss of ₹ 7,29,56,706/- is to be allowed to be set off with the profit in Derivative transactions amounting to ₹ 5,12,81,265/-. As regards the receipts of ₹ 7,72,77,900/- on account of Keyman Insurance, it is stated that the appellant being engaged in various forms of capital market trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been allowed. Considering the entire facts of the case, I agree with the contention of the AR of the appellant. It is apparent from above that considering the effect of all the aforesaid receipts and losses, the appellant arrived at net business income in the business of purchase and sale of shares. Therefore, in my opinion, the receipt from the surrender of the Keyman Insurance Policy has to be assessed as income from Business and be allowed for set off with the loss from business under the same head. Aggrieved, revenue came in appeal before us. 5. We have heard rival submissions and gone through facts and circumstances of the case. The assessee is engaged in the business of share trading which involves stock and share broking activities, purchase and sale of delivery based shares and purchase sale of non-delivery based shares i.e., derivative trading. The assessee incurred loss on delivery based purchase and sale of shares at ₹ 7,29,56,706/- and earned profit on non-delivery based sale purchase of shares at ₹ 5,12,81,265/-. The AO during the course of assessment proceeding bifurcated the business of purchase and sale of shares into two separate headings name ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... withstanding the fact that according to the definition of speculative transaction mentioned in Sec. 43(5) of the Act, the transaction is not of that nature as there has been actual delivery of the scrips of share. As per the definition of section 43(5) of the Act, trading of shares which is done by taking delivery does not come under the purview of the said section. Similarly as per clause (d) of Section 43(5), derivative transaction in shares is also not speculation transaction as defined in the said section. Therefore, both profit / loss from all the share delivery transactions and derivative transactions are having the same meaning, so far as Sec. 43(5) of the Act is concerned. Again, in view of the fact that both delivery based transactions and derivative transaction are non-speculative as far as Sec. 43(5) is concerned, it follows that both will have the same treatment as far as application of Explanation to Sec. 73 is concerned. Therefore aggregation of the share trading loss and profit from derivative transactions should be done before the Explanation to Section 73 of the Act, is applied. The above view has been taken up by Special Bench of this Tribunal, Mumbai Bench, in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ling and buying of shares as also dealing in shares only for the purpose of settling the transaction otherwise than by actual delivery. The question arise whether the losses arising out of the dealings and transaction in which the assessee did not ultimately take delivery of the shares or give delivery of the shares could be set off against the income arising out of the dealings and transactions in actual buying and selling of shares. An answer to this question is to be found in the explanation appended to Section 73 which reads as follows: 'Explanation: where any part of the business of a company other than a company whose gross total income consists mainly of income which is chargeable under the heads interest on securities , or a company the principal business of which is the bu9siness of banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares. In order to resolve the issue before us, the section has to be read in the manner a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required the assessee to give the details of expenditure incurred in relation to this tax free income and also show caused as to why disallowance of this expenditure should not be made by invoking the provisions of section 14A of the Act read with rule 8D of I. T. Rules, 1962. The assessee explained that the entire holding of shares was stock in trade while carrying on sale and purchase of securities and the companies declared dividend and record date for dividend purposes matched with the period during which the share were held as stock in trade. But the AO noted that the assessee's business of dealing in shares as well as stock broking and it is maintaining mixed accounting system. The AO noted that it had expended lot of expenditure in term of stock exchanges like margin money, turnover fee, other user charges of stock exchange platform etc. The AO by referring to Rule 8D(2)(iii) of the I. T. Rules, 1962 and after making calculation disallowed the average value of investment at ₹ 8,29,817/-. Aggrieved, assessee preferred appeal before CIT(A), who deleted the addition by observing as under: As per the provisions of section 94(7), if any person buys any shares three ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ock in trade only and further no interest expenses have been incurred for investments. However, the provison of 14A is still applicable where it provides that no dedution has been made in respect of expenditure incurred by the assessee . in relation to exempted income as has been held recently by the Hon'ble Delhi High Court in the case of CIT vs. Galileo India Pvt. Ltd. In ITA No. 1074/2012 vide order dated 19.12.2011. In this case it has been held that even though Rule 8D is prospective as held in Maxapp Investment Ltd. Vs. CIT, NewDelhi in ITA No. 687/2009, dated 18.11.201 1(Del.) however, in the said decison it has been observed that direct and indirect expenses have to be disallowed u/s 14A when an assessee earns exempt income. In the particular case of CIT vs. Galileo India Pvt. Ltd.(supra) as the AO has not disallowed expenses u/s 14A though the assessee earns dividend, the revision uls 263 of the Act by the CIT has been held perfect. Therefore, in view of the factual position and the emerging legal position above, it is held that there are expenses incurred by the appellant for eaming dividend income as well as earning of the business income. The dividend income may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )(ii) (iii) is to be computed is the value of nvestments, income from which does not or shall not form part of total income . If there are no such investments, the rule cannot have any application. When no amount can be computed under the formula given in rule 8D(ii) and (iii), no disallowance can be made under rule 8D (2)(ii) (iii) either. As held in B. C. Srinivas Shetty 128 ITR 294 (SC), when the computation provisions fail, the charg ng provisions cannot be applied, and by the same logic, when the computation provisions under rule 8D (2) (ii) and (iiz) fa l, disallowance there under cannot be made either as the said provision is rendered unworkable. However, this does not exclude the appl cation of rule 8D(2)(i) which refers to the amount of expenditure directly relat ng to income which does not form part of total income . Accordingly, in a case where shares are held as stock- n-trade and not as investments, the disallowance even under rule 8D is restricted to the expenditure directly relatable to earning of exempt income. The result is that the scope of disallowance under Rule 8D is narrower than that of s. 14A. Similarly, Hon'ble Karnataka High Court in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X
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