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2015 (12) TMI 38 - ITAT KOLKATA

2015 (12) TMI 38 - ITAT KOLKATA - TMI - Treatment to share trading loss - CIT(A) not treating the same as speculative loss - Held that:- The claim of the assesse for set off of loss from share dealing should be allowed 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 de .....

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of Reliance Utilities and Power Ltd reported in [2009 (1) TMI 4 - HIGH COURT BOMBAY] wherein it was held that “Where an assessee has his own funds as well as borrowed funds, a presumption can be made that the advances for non-business purposes have been made out of own funds and that the borrowed funds have not been used for this purpose.” - Decided against revenue.

Disallowance u/s 14A - CIT(A) deleted disallowance - Held that:- CITA had rightly granted relief to the assessee by stat .....

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RDER SHRI M. BALAGANESH, AM: This appeal of the revenue arises out of the order of the ld. CIT(A), Kolkata dated 13-12-2011 for the assessment year 2008-09 against the order of assessment framed 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 that as to whether the Learned CITA is right in not treating the share trading loss of ₹ 1,71,52,934/- as speculative loss. 2.1. The brief facts of this issue is that the .....

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the Learned CITA that the assessee is a non banking financial company as per certificate of registration granted by Reserve Bank of India to that effect ; that it carries on business of non banking finance company in addition to delivery based trading in shares ; that it also carries on share transactions in future and options and both are inter dependent and identical business activities ; that the assessee had earned profit from derivatives trading (future & options) amounting to ₹ 2 .....

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e 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 ; that granting of loans and advances is being carried on by the assessee which is part and parcel of activities of the assessee which brings the assessee outside the ambit of provisions of Explanation to sect .....

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before us on the following ground:- 1. That on the facts and in the circumstances of the case, the ld.CIT(A) has erred by allowing relief to the assessee in respect to treatment of share trading loss of ₹ 1,71,52,934/- which was taken as speculation loss by the AO. 2.2. The Learned DR argued that the assessee company was earlier named as M/s Satnaliwala Investment Ltd and it changed its name to M/s Snowtex Investment Ltd on 2.1.2006 ; that the claim of the assessee that it is a NBFC but th .....

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ced any credit rating in respect of its NBFC business and has also not proved that it complies with the Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998 which not only mandate certain methods but also prescribe the manner of furnishing the Balance Sheet and Final Accounts ; that the assessee has borrowed unsecured loans to the tune of ₹ 5,92,05,571/- and had given loans and advances to the tune of ₹ 11,32,95,921/- which includes interest free lending t .....

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tion to Section 73 of the Act. He further argued that explanation to section 73 of the Act deems the business of a company consisting of purchase and sale of shares as speculation business. This explanation applies to a company, notwithstanding the fact that the transactions may otherwise not have been regarded as speculative transactions by applying the provisions of section 43(5) of the Act. As mentioned above, the derivatives are distinct securities, separate from shares. Transactions of purc .....

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in the following two approaches :- • The first approach involved the delivery of shares so purchased and sold, known as trading in shares and , • The second approach being in the nature of F&O operations did not involve delivery of the shares so purchased and sold. 2.3.1. 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, but however, the assessee had ea .....

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sed and derivative transactions and hence in any case, there is no loss available with the assessee for invoking the provisions of section 70 to 74A much less section 73 read with its Explanation. 2.3.2. He further argued that the assessee company was originally known as Satnaliwala Investments Ltd and the name was subsequently changed as per fresh certificate of incorporation consequent on change of name to Snowtex Investments Ltd. The company in the original name of Satnaliwala Investments Ltd .....

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the assessee company as stated by the Learned DR. The assessee company has duly complied with the Prudential Norms of RBI directions regarding NBFC as certified by its auditors and part of the profits have been transferred to General Reserve in pursuance to requirement of RBI for NBFC. 2.3.3. The assessee has advanced monies to various persons. Such advances clearly indicates its principal activities and in view of substantial investment by way of such advances, it is not hit by the Explanation .....

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ng of delivery based shares and non-delivery based shares, it arrived at the figure of net business income for the relevant assessment year after setting off the loss incurred in the business of purchase and sale of delivery based shares with income earned from derivative transactions by treating the entire activity of purchase and sale of shares which comprised of both delivery and non delivery based trading as one composite business before the application of deeming provision contained in Expl .....

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rposes of section 28 to 41 of the Act. Again, the fact that both delivery based transaction in shares and derivative transactions are nonspeculative as far as section 43(5) is concerned goes to confirm that both will have same treatment as regards application of the Explanation to section 73 is concerned, which creates a deeming fiction. Now, before application of the said Explanation, aggregation of the business profit/loss is to be worked out irrespective of the fact, whether it is from share .....

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issions and perused the materials available on record. It is pertinent to get into the Explanation to Section 73 of the Act at this juncture :- Section 73 : Losses in speculation business: 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 .....

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siness 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 sources , or where the principal business of the company is the business of banking or of granting loans and advances. Hence from this, the following points emerge :- • It applies to companies whose business consists of purchase and sale of shares of other companies. • It applies to all purchase and sale o .....

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before the application of deeming provision contained in Explanation to Section 73 of the Act and accordingly, claimed set off of the loss incurred in delivery based trading with profit derived from derivative trading. 2.8. From the provisions of section 43(5)(d) of the Act, it is clear that the definition of speculative transaction as contained in section 43(5) of the Act is only for purpose of sections 28 to 41 of the Act. It does not apply to the other sections of the Act. 2.9 As per the def .....

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eatment as far as application of the said section is concerned. 2.10 On the other hand, the Explanation to section 73 creates a deeming fiction by which an assessee, who is a company, dealing with share transaction, such transaction should be treated as speculative transaction within the meaning of sec 73 of the Act notwithstanding the fact that, according to the definition of the speculative transaction in sec 43(5) of the Act, the transaction is not of that nature as there has been actual deli .....

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ng fiction would not apply. Hence, admittedly it follows that business activity of purchase and sale of shares of other companies is only hit by the said Explanation. 2.11 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. 2.12. Now, analyzing the present case in the light of the above explanation, it is submitted that during the relevant assessment year, the assessee arrived at the .....

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iness consisting of purchase and sale of shares as one composite business. 2.13. We also find that that the Learned AO had completed the scrutiny assessment u/s 143(3) of the Act for the Asst Year 2010-11 on 14.2.2013 wherein the transactions in share trading has not been considered by invoking the Explanation to Section 73 of the Act in view of the fact that the advances have been given by the assessee. This goes to prove that the stand taken by the assessee in the assessment year under appeal, .....

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to decide whether the principal business of the assessee is that of granting of loans and advances, the decisive factor is the nature of the activities of the assessee and not the actual income from such activities during a particular year. Merely because the numerical value of the profit/loss in purchase and sale of shares is more than the interest income during the relevant period, does not mean that the principal business of the assessee ceases to be that of granting of loans and advances. Wh .....

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the assessee. If any particular year, the assessee has nominal business income and has substantial interest income, it does not imply that the assessee s principal business is of finance or granting of loans and advances. Similarly the assessee, the principal business of which is the granting of loans and advances, may earn a comparatively high income from other activities in any particular year and still the principal business of the assessee may remain granting of loans and advances. The Expl .....

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are-dealing, held that: The phrase to the extent to which the business consisted of purchase and sale of such shares also does not indicate that the Legislature had several other actual and existing non-speculative activities of business in mind. It merely indicates that the business activity which consists of purchase and sale of shares will be treated as speculation business. If the entire business activity of a company consists of purchase and sale of shares of other companies, then the entir .....

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lt would be that sub-s.(1) of s. 73 would apply and any loss arising out of the speculation business would be set off only against profits from another speculation business. There is no definition of the words speculation business appearing in the Explanation. The definition of speculation transaction in s.43(5) is only for the purposes of ss.28 to 41 of the Act. d) 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 .....

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d from the definition of speculative transactions, only underlines that such exclusion is limited for the purpose of those provisions or sections. To borrow the Madras High Court s expression, derivatives are assets, whose values are derived from values of underlying shares, which fall squarely within the explanation to Section 73(4). Therefore, it is idle to contend that derivatives do not fall within that provision, when the underlying asset itself does not qualify for the benefit, as they (de .....

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) 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 non-speculative profits, either it is from share delivery or from share derivative. 2.15. In view of the aforesaid facts and circumstances and judicial precedents relied upon hereinabove, we hold that the claim of the assesse for set off of loss from sh .....

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nd circumstances of the case, the interest on borrowed funds is to be disallowed as not meant for business purposes when loans and advances were advanced without interest. 3.1. The brief facts of this issue is that the assessee debited a sum of ₹ 62,84,112/- towards interest on loans in its profit and loss account. The Learned AO during the course of assessment proceedings found that the assessee on one hand had made borrowings to the tune of ₹ 5,92,05,572/- and suffered interest the .....

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refore, the assessee company had deployed a sum of ₹ 9.58 corres - 7.56 crores=Rs.2.02 crores as interest free advances out of interest bearing funds of ₹ 5.92 crores. The balance funds are utilized for business of share trading and giving loans and advances. Therefore, the disallowance of interest is restricted to the extent of ₹ 2.02 crores/Rs.5.92 crores X ₹ 62,84,112/- = ₹ 21,44,241/- and assessee is entitled to get relief of ₹ 41,39,871/- (Rs.62,84,112/- .....

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the Learned AR argued that the Learned AO had not disputed the fact that the lending is for the purpose of business of the assessee. He supported the order of the Learned CITA by stating that the Learned CITA had rightly granted relief to the assessee to the extent of availability of own funds with the assessee and upheld the disallowance made by the Learned AO on the utilization of borrowed funds to lend interest free advances. 3.3. We have heard the rival submissions and perused the materials .....

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the borrowed funds have not been used for this purpose. It is further submitted that there is no bar against advancing of loan interest-free or at a low rate of interest. There may be very many considerations, including business considerations, for not charging interest or charging interest at a low rate. Dispute between the Revenue and the assessee often arises when money is borrowed with interest and loan is advanced interest-free or at a low rate of interest. In such a case the tendency of t .....

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and whether interest paid. In the interest of maintain good business relation, interest-free loans or loans at a low rate of interest may be given to others with whom the assessee has business relation or with whom he expects to establish business connection or with whom he has other business obligations, present or past. There may be many other reasons also, both business or non-business. If interest-free loan or loan at a low rate of interest is given for business consideration out of the cap .....

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ot charged or charged at a low rate on the lending, the interest paid for borrowing cannot be disallowed. It is a matter of business prudence and entirely upto the assessee as to how he utilizes the fund in the interest of his business. The basic requirement is that the borrowed capital should be used for the purposes of business or profession. An argument may be advanced that if interest-free loan had not been given then the assessee could have reduced his debt and consequently the interest pay .....

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