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TMI Blog2015 (12) TMI 513X X X X Extracts X X X X X X X X Extracts X X X X ..... -2015 - Sh. N. K. Saini, Accountant Member For the Petitioner : Sh. Ved Jain, Adv. For the Respondent : Sh. Sarabhjit Singh, DR ORDER This is an appeal by the assessee against the order dated 14.11.2014 of ld. CIT(A)-XXXI, New Delhi. 2. Following grounds have been raised in this appeal: 1. On the facts and circumstances of the case, the order passed by the learned Commissioner of Income Tax (Appeals) [CIT(A)] is bad both in the eye of law and on facts. 2. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in ignoring the fact that the order passed by the learned AO under Section 153A is bad and liable to be quashed as the same has been framed consequent to a search which itself was unlawful and invalid in the eye of law. 3. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in ignoring the fact that the proceedings initiated including the notice issued under Section 153A and the assessment framed under Section 153A/143(3) are in violation of the statutory conditions of the Act and the procedure prescribed under the law and as such the same is ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, 1961 (hereinafter referred to as the Act) in the case of M/s A.K. Capital Services Ltd., its group companies, directors of such companies and their relatives on 26.04.2007, the assessee belonged to the said group. During the course of above said operations, substantial documents were seized and impounded. The assessee filed the return of income on 29.11.2006 showing total loss at ₹ 3,93,08,929/- from business and profession. The said loss was on account of derivative trading. The AO during the course of assessment proceedings asked the assessee to explain as to why loss of ₹ 3,93,08,929/- on share trading in Future and Options/Derivatives (in which there was no actual delivery of shares) may not be disallowed for being speculative as no delivery takes place in Future and Options/Derivatives as such loss was not admissible in view of the provisions of Section 43(5) and 73 of the Act. The assessee submitted that it was covered under proviso (c) to Section 43(5) of the Act and it was business loss as per the Act which was clearly allowable. The AO however did not find merit in the submission of the assessee and observed as under: The argument was examined but is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r companies, such company should be deemed to be carrying on a speculation business to the extent of such share trading and since the assessee was holding in future options/derivatives without actual delivery of the stock, therefore, it was duly speculative transaction. The reliance was placed on the judgment of the Hon ble Delhi High Court in the case of CIT, Delhi-IV Vs DLF Commercial Developers Ltd. (2013) 35 Taxmann.com 280 (Del). The assessee in its rejoinder reiterated the submission that the issue was covered by clause (d) of proviso to Section 43(5) of the Act and not by explanation to Section 73 of the Act. 7. The ld. CIT(A) after considering the submissions of both the parties confirmed the action of the AO by observing in para 3.6 of the impugned order as under: The facts of the case show that the appellant was involved in trading in Futures and Options/derivatives. It had incurred a loss of ₹ 3,93,08,929/-. It is a company whose income mainly consists of income chargeable under the heads interest of Securities and business of trading in shares etc. The income details appearing in P L A/c show that it has income from interest income, dividend income and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs were furnished which are placed on record. 9. In his rival submissions the ld. DR reiterated the observations of the ld. CIT(A) made in para 3.6 of the impugned order and strongly supported the order passed by the authorities below. 10. I have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, the only controversy to be resolved is that as to whether the provisions contained in explanation to Section 73 of the Act are applicable to the facts of the present case or not. The provision of explanation to Section 73 of the Act reads as under: 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 ', Income from house property , Capital gains and Income from other sources ] or a company the principal business of which is the business 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eable to income-tax under any of the heads specified in section 14, items A to E. (2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head Income from other sources , namely :- (i) dividends ; (ia) income referred to in sub-clause (viii) of clause (24) of section2; (ib) income referred to in sub-clause (ix) of clause (24) of section2; (ic) income referred to in sub-clause (x) of clause (24) of section 2, if such income is not chargeable to income-tax under the head Profits and gains of business or profession ; (id) income by way of interest on securities, if the income is not chargeable to income-tax under the head Profits and gains of business or profession ; (ii) income from machinery, plant or furniture belonging to the assessee and let on hire, if the income is not chargeable to income-tax under the head Profits and gains of business or profession ; (iii) where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant assessment year, the assessee had a loss of about ₹ 2.33 crores in the share trading and had dividend income of about ₹ 4.80 lacs. The Division Bench held in paragraphs 6, 7, 8 and 9 as under:- 6. The explanation to Section 73 introduces a deeming fiction. The deeming fiction stipulates that where any part of the business of a company consists in the purchase and sale of shares of other companies, such company shall, for the purposes of the section be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sales of such shares. The deeming fiction applies only to a company and the provision makes it clear that the deeming fixation (sic) extends only for the purposes of the section. The bracketed portion of the explanation, however carves out an exception. The exception is that the provision of the explanation shall not apply to a company whose gross total income consists mainly of income which is chargeable under the heads Interest on securities , Income from house property , Capital gains and Income from other sources or a company whose principal business is of banking or the granting of loa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on where a company is deemed to carry on speculation business. It is only thereafter that sub section (1) of section 73 can apply. Applying the provisions of Section 73(1) to determine whether a company is carrying on speculation business would reverse the order of application. That would be impermissible, nor, is it contemplated by Parliament. For, the ambit of Sub Section (1) of Section 73 is only to prohibit the setting off of a loss which has resulted from a speculation business, save and accept against the profits and gains of another speculation business. In order to determine whether the exception that is carved out by the explanation applies, the legislature has first mandated a computation of the gross total income of the Company. The words consists mainly are indicative of the fact that the legislature had in its contemplation that the gross total income consists predominantly of income from the four heads that are referred to therein. Obviously, in computing the gross total income the normal provisions of the Act must be applied and it is only thereafter, that it has to be determined as to whether the gross total income so computed consists mainly of income which is ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of shares is not to be set off against any other income for the purpose of the applicability of section 73. To what effect therefore the negativity of the income per se? The GTI, for the purpose of section 73, must therefore be computed by giving effect to provisions up to Chapter V, and indeed of Chapter VI, i.e., in-sofar as they do not impinge upon the working of section 73. Why, the Explanation thereto itself speaks of the computation of income under different heads of income. The only manner therefore in which the GTI is to reckoned is by disregarding the loss on the purchase and sale of shares, i.e., excluding the same. Why, if loss on the said activity is to taken in to account, i.e., for the purpose of computing the GTI, the corollary thereof would its adjustment u/s. 72, which is precisely what section 73 seeks to regulate, i.e., in respect of loss arising on the purchase and sale of shares by a closely held company, as in the instant case. If the loss is, or stands to be, adjusted, the same, or the negative figure, does not survive, defeating in effect the purpose of the provision. The whole purpose of the provision is to determine as to whether the loss arising f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provided for by the section. This is as it is only its character, i.e., as speculative or non-speculative, and, thus, its availability for set off against any other business income, or the income falling under any head of income for that matter, that is being sought to be determined. Adjusting it, so that its independent identity is lost, would defeat and detract from the very purpose for which its character, by determining the applicability or otherwise of the provision of sec.73, is being ascertained. The legislative intent behind a provision, it is well settled, is to be the foundational basis for any interpretative exercise [refer: Padmasundara Rao (Decd.) and Others vs. State of Tamil Nadu and Others [2002] 255 ITR 147 (SC); CIT vs. Baby Marine Exports [2007] 290 ITR 323 (SC)], and has guided our said interpretation. 3.3 In the admitted facts of the case, the assessee has income from advisory charges and brokerage at ₹ 121.81 lacs and ₹ 14.93 lacs respectively. Its other incomes are rent; dividend; and capital gains (long-term), at ₹ 6.39 lacs, ₹ 3.41 lacs and ₹ 19.68 lacs respectively. Quite plainly, the assessee s GTI, whichever way on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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