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TMI Blog2015 (12) TMI 562X X X X Extracts X X X X X X X X Extracts X X X X ..... from the profits from F & O in share transactions, the character of the income being the same and also hold that before application of the Explanation to section 73, aggregation of the business profit or loss is to be worked out irrespective of the fact whether it is from share delivery transaction or derivative transactions. - Decided in favour of assessee. - ITA No. 487/Kol/2012 - - - Dated:- 9-12-2015 - Shri Mahavir Singh, Judicial Member And Shri M. Balaganesh, Accountant Member For the Appellant : Shri Dilip Kumar Patni, CA, ld. AR For the Respondent : Shri G. Mallikarjuna, CIT, ld. DR ORDER Shri M. Balaganesh, AM This appeal of the assessee arises out of the order passed by the Learned CIT(A), VII, Kolkata in Appeal No. 238/CIT(A)-VI/Cir-6/10-11/Kol for the Asst Year 2008-09 dated 02-01-2012 against the order of assessment passed by the Learned AO u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act ). 2. The first issue to be decided in this appeal is as to whether in the facts and in the circumstances of the case, the loss of ₹ 5,36,90,032/- in respect of delivery based transactions in respect of purchase and sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Purchases 2,24,74,30,512.74 Closing Stock 5,50,63,313.42 Total 2,30,11,09,755.20 Total 2,24,74,19,723.17 Loss = ₹ 5,36,90,032 The assessee claimed that its case falls under the proviso (b) and (c) to section 43(5) of the Act. 2.3. The Learned AO observed that proviso (b) and (c) to section 43(5) of the Act are not applicable for delivery based transactions and hence the explanation to section 73 is squarely applicable in the instant case. Accordingly, the Learned AO treated the loss of ₹ 5,36,90,032/- as speculation loss. 2.3.1. The Learned AO further observed that as per the provisions of section 43(5)(d) of the Act, the profit of ₹ 36,86,29,893/- as stated supra out of Future Option Dealing in respect of trading in derivatives shall not be deemed to be a speculative transaction. Accordingly, the profit of ₹ 36,86,29,893/- is treated as regular business profit (i.e non speculative profit) by the Learned AO. 2.3.2. The Learned AO further observed that the loss on account of NSE BSE Capital marke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s deemed speculation loss u/s. 73 of the Income Tax Act, 1961. The company is engaged in a composite business of share broker, share trading mainly in the form of arbitrage and jobbing activities. In case of arbitrage activities, the company takes a position in one segment of the exchange and simultaneously reverse position is taken in another segment. If the trade is reversed on next day or subsequent day the profit or (loss) arising on the said transaction in the capital market segment is booked as delivery profit/(loss). Loss in dealing in shares incurred by the company because of above mentioned type of transactions are exempted from the definitions of speculation given u/s. 43(5) of the Income Tax Act, 1961. Hence question of applicability of Explanation to section 73 does not arise. Further it is well settled law that in case of the business activities are composite in nature, the profit or loss from the same is required to be computed as a whole. 2.5. The Learned AR argued that during the assessment year under consideration, the assessee incurred substantial loss in its share trading business involving actual delivery of shares amounting to ₹ 5,36,90,032/- and l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact that the transactions may otherwise not have been regarded as speculative transactions by applying the provisions of section 43(5) of the Act. He argued further that the transactions of purchase and sale of derivatives cannot be regarded as transactions in shares and the provisions of Explanation to section 73 would therefore not apply to a derivatives trading business and therefore the profit or loss from derivative consists of a distinct business of the assessee and is not the same as that of trading in shares. 2.7. We have heard the rival submissions and perused the materials available on record. At the outset, we find that the activities carried on by the assessee could be summarized as under:- 1. Purchase and sale of shares on behalf of its client where actual delivery of securities take place. 2. Purchase and sale of shares on behalf of its client where transactions has been squared up without delivery both in capital market segment and Future Option segment. 3. Purchase and sale of shares in its own account where actual delivery of securities take place. 4. Purchase and sale of shares in its own account where transactions has been squared up w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee had earned profit from derivatives trading (future options) amounting to ₹ 36,86,29,893/- and the Learned AO had invoked Explanation to section 73 to part of the transactions only i.e only for delivery based transactions wherein share trading loss of ₹ 5,36,90,032/- was incurred and non delivery based transactions wherein share trading loss of ₹ 2,46,33,241/-, but whereas the transactions related to F O are also of the same nature wherein profits were earned and there is only effective surplus out of the same if profit from F O are considered and hence there is no loss available with the assessee. Hence we find that the alternate submissions of the Learned AR also holds good that the transactions in F O have been entered into with a view to hedge against the shares held by the assessee and the assessee has been benefited by such hedging by the fact that the loss suffered in share transactions have been hedged by way of profit in F O. 2.7.4. We find that F O transactions are based on shares on which point there is no dispute. Thus , there is no bar on the assessee to submit that such transactions were in the nature of hedging. The transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsist of purchase and sale of shares of other companies in which some brokerage was earned and in some other loss or profit is earned. The entire business activity is inter linked and is to be treated as same activity. I am of the opinion that the case referred by the ld.A.R being CIT Vs. Nirmal Kumar Co. 161 ITR 413 (Cal) is fully applicable in the present case. The addition of ₹ 10,06,974/- under the head deemed speculation by applying the explanation to section 73 is, therefore deleted. Similarly, in case of M/s. Somany Stock Broking Pvt. Ltd Vs. Assistant Commissioner of Income Tax, Kolkata, ITA No. 1914/Kol/2004, it was held that:- The assessee company is engaged in a composite business of share broker, share trading etc during the year under consideration. The assessee has earned income from such composite business for taxation in Income Tax Return. There is a common management inter-liaison of resources. There is a common work force as such bifurcation of such business is not possible. In this regard the reference can be made to the decision of the Supreme Court in the case of Prithvi Insurance Ltd reported in 53 ITR page 632 and 637 and in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s.49.40- ₹ 3.97) ₹ 45.20 Lakhs. Thus, there is no merit in the action of the assessing officer in treating the loss of ₹ 3.97 lakhs in isolation by disregarding income earned by the assessee by way of brokerage in the said share trading business itself. In view of the above, we are of the considered view that the assessing officer was not justified in attracting the explanation to Section 73 and holding that loss of ₹ 3.97 Lacs was deemed to be speculation loss. We also find that the decision of Kolkata Tribunal has been approved by the Hon ble Calcutta High Court in the case of CIT vs M/s Sand Dune Trade Pvt Ltd in ITAT NO. 146 of 2010 , G.A.No. 1982 of 2010 and G.A.No. 1983 of 2010 dated 21.7.2010 , wherein it was ordered as below:- The Court: Being satisfied with the explanations as have been submitted we allow the prayer for condonation. The delay is condoned. At this juncture the matter is taken up for admission hearing. Since we have dismissed already an appeal being ITAT 147 of 2010 which has also been impugned here on the self-same facts and circumstances and in this case also it appears that assessing officer deleted the claim of & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 73 : Losses in speculation business: (1) *** *** *** *** *** *** *** (2) (i) (ii)*** *** *** *** *** *** *** (3) (4) *** *** *** *** *** *** *** 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 to the extent to which the business consist of the purchase and sale of such shares.] We find that it is clear that in the case of a company whose business consists mainly or partly of purchase and sale of shares of other companies, it will amount to speculation business unless such company s gross total income consists mainly of income under the heads of Interest on securities , Income from house property , Capital Gains and Income from other source ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le Jurisdictional High Court in assessee s own case in GA No. 3481 of 2013 and ITAT No. 215 of 2013 dated 12.3.2014, has held as under:- Clause (d) of Section 43(5) became effective with effect from 1st April, 2006. Therefore, prior to 1st April, 2006 any transaction in which a contract for the purchase or sale of any commodity including stocks and shares was periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrip was a speculative transaction. Sub-section 1 of Section 73 provides as follows: (1) Any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business. The resultant effect was that any loss arising out of speculative transaction could only have been set off against profits arising out of speculative transaction. In the present case, the assessee, as already indicated, has been dealing in shares where delivery was in fact taken and also in shares where delivery was not ultimately taken. In other words, the assessee has been dealing in actual selling and buying of shares as also dealing i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecial Bench in CIT vs Concord Commercial Pvt Ltd in (2005) 95 ITD 117 (Mum) (SB) , wherein it was held that : Before considering whether the assessee s case is hit by the deeming provision of Explanation to Section 73 of the Act, the aggregate of business profit / loss has to be worked out based on the nonspeculative profits, either it is from share delivery or from share derivative. c) Decision of Hon ble Delhi High Court in the case of CIT vs DLF Commercial Developers Ltd in ITA No. 94/2013 dated 11.7.2013 wherein it was held that the Explanation to Section 73 does not differentiate between derivatives and delivery based shares. 11. The stated objective of Section 73-apparent from the tenor of its language is to deny speculative business the benefit of carry forward of losses. Explanation to Section 73(4) has been enacted to clarify beyond any shadow of doubt that share business of certain types or classes of companies are deemed to be speculative. That in another part of the statue, which deals with computation of business income, derivatives are excluded from the definition of speculative transactions, only underlines that such exclusion is limited for the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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