TMI Blog2010 (4) TMI 714X X X X Extracts X X X X X X X X Extracts X X X X ..... ar shares in its books as well as balance sheet as investments is a relevant factor in deciding whether the shares are investment or stock in trade - Held it is short term capital gain - Appeal of the revenue is partly allowed - ITA No. 976/Mum/2009 - - - Dated:- 30-4-2010 - B. RAMAKOTAIAH ACCOUNTANT MEMBER J. N.V. VASUDEVAN JUDICIAL MEMBER J. Assessee by : Shri Anant N.Pai Department by : Shri S.K. Singh ORDER PER N.V. VASUDEVAN, JM :- This is an appeal by the revenue against the order dated 28.11.2008 of learned CIT(A)-XII, Mumbai for A.Y. 2005-06. 2. Ground No.1 raised by the revenue reads as follows :- On the facts and circumstances of the case and in law, learned CIT(A) was justified in treating the transactions in derivatives and futures as business (hedging) transactions and not speculative transactions and thereby allowing the loss on account of the transaction in derivatives as business loss instead of speculation loss. 3. The assessee is a HUF. It is engaged in the business of dealing in shares and securities. In the profit and loss account, the assessee had debited loss on account of Nifty hedging transactions of Rs. 1,30,41,270/-. Gene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of inventory of shares held by the assessee on that particular day was less than the value of purchase of Nifty futures. In this regard, Assessing Officer has analyzed 38 transactions given by the assessee. Shri Dinesh K. Mehta HUF The Assessing Officer thereafter referred to Circular No. 23 dated 12.9.1960; wherein CBDT had clarified as follows:- Hedging sales can be taken to be genuine only to the extent the total of such transactions does not exceed the ready stock. Hedging contract is a contract where the person dealing with the actual commodity ensures himself against the adverse price fluctuations in that commodity in future. The transaction in the future market corresponds to an earlier transaction in the ready market. The future transaction is basically to off-set any loss that may arise on the earlier transaction. The Assessing Officer thereafter referred to certain judicial pronouncements in the case of M.G. Brothers Vs. CIT, 154 ITR 695 (AP); Pankaj Oil Mills Vs. CIT, 115 ITR 824 (Guj). The Assessing Officer thereafter culled out following principles :- Thus the basic principles which emerge from the above case laws are follows :- (i) the test of whether a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. On the above basis and analysis of transactions, the Assessing Officer arrived at a sum of Rs. 98,66,738/- as the loss on account of speculative transactions and this loss was not allowed as a deduction. In respect of the remaining loss the Assessing Officer found that the value of stock was more than the value of purchase of Nifty Futures and these transactions were accepted by the Assessing Officer as Hedging transactions and loss to that extent was allowed as deduction. 6. Before the first appellate authority, the assessee submitted that under the assessee submitted that under section 43(5) clause (d), which was introduced w.e.f. 1.4.2006, it has been specifically laid down that eligible transaction in respect of trading in derivatives are not to be regarded as speculative transaction. The assessee further submitted that the Mumbai Bench of the Tribunal in the case of CIT Vs. SSKI Investors Pvt. Ltd. had taken the view that the aforesaid amendment was clarificatory and was therefore applicable retrospectively. The assessee submitted before learned CIT (A) that in view of the aforesaid decision, loss in question cannot be considered as speculative loss and therefore assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epted that a dealer or investor in stocks or shares can enter into hedging transactions in script outside his holdings. The material words in clause (c) of the proviso to Explanation 2 to section 24(1) are to guard against less in his holdings of stock and shares through price fluctuations . Therefore, hedging transactions having reasonable relations to the value and volume of the dealer s or the investor s holdings are excepted from the ambit of speculative transactions, but transactions in script outside his holdings are not. It is thus clear that the value and volume of a dealer or investor holding hedging transactions should be in equal proportion and hedging transactions can never be in excess. It is further a condition that hedging transaction should be in respect of very same script held by an assessee as inventory in the business of stocks and shares. In the present case, the Assessing Officer has not gone by script-wise tally but has gone by value of overall inventory. To this extent, the Assessing Officer has been very reasonable. We therefore hold that Circular was very much relevant and applicable in the case of the assessee. 9. We are also of the view that under cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as speculative while working out the loss is an acceptable plea. To this extent, plea of the assessee is accepted and the Assessing Officer is directed to work out speculation loss by taking excess of the assessee s position in forward market over actual stock in ready market and work out the speculative loss proportionately. Thus, Ground No. 1 of the revenue is partly allowed. 11. Ground No. 2 raised by the revenue reads as follows :- On the facts and circumstances of the case and in law, learned CIT(A) was justified in reversing the action of the Assessing Officer of treatment of the short term capital gains of Rs. 16,02,739/- as income under the head profits and gains from business and profession . 12. The assessee declared short term capital gains of Rs. 16,02,739/-The Assessing Officer was of the view that since, the assessee was dealer in shares and was having huge volume of share transactions in such business, it was hard to believe that the assessee held shares as investment also, the Assessing Officer therefore treated the short term capital gain declared by the assessee also as income from business. 13. On appeal by the assessee, learned CIT(A) held that gain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee that should be the determining factor. In the assessee s case, its allocation of shares as stock in trade and investment appears to be justified by its manner in dealing with the shares. Whereas the shares involved in high frequency in dealing large volumes etc. have been treated as stock in trade, the ones in which the period of holding is larger and volume of holding is small has been demarcated as investments. This method of accounting has been followed consistently by the assessee and this lends credibility to the assessee s allocation of shares as investments and stock in trade. The Supreme Court in its decision in the case of Karam Chand Thapar Bros. P. Ltd. Vs. CIT, 82 ITR 899 (sc) has observed that the circumstances that the assessee has shown particular shares in its books as well as balance sheet as investments is a relevant factor in deciding whether the shares are investment or stock in trade. The assessee has reasonably discharged its onus of showing that it is in dual role of both investor and dealers of shares by cogent evidence and reasoning. The Assessing Officer is therefore directed to treat the income of Rs. 16,02,739/- as income from short term c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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