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2015 (12) TMI 513 - ITAT DELHI

2015 (12) TMI 513 - ITAT DELHI - TMI - Disallowance of set off being loss on account of trading in Futures and Options/derivatives against other income - Held that:- The assessee although had incurred loss of ₹ 3,93,08,929/- in trading of derivatives, but it had dividend income of ₹ 14,64,859/- and interest income under the head “income from other sources” amounting to ₹ 39,236/-. Therefore, the only positive income of the assessee was under the head “income from other sources” .....

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ading in Futures and Options/derivatives against other income should be allowed - Decided in favour of assessee. - ITA No. 6859/Del/2014 - Dated:- 4-12-2015 - 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 pass .....

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rred 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 bad in the eye of law and liable to be quashed. 4. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming the addition despite the fact tha .....

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oth on facts and in law in making the various additions without there being any incriminating material being found during the course of the search. 7(i) On the facts and circumstances of the case, the learned Cit(A) has erred both on facts and in law in confirming the action of AO in not allowing the set off of ₹ 3,93,08,929/- being loss on account of trading in Futures and Options/derivatives against other income. (ii) That the above said loss has not been allowed to be set off by treatin .....

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. 9. The appellant craves leave to add, amend or alter any of the grounds of appeal. 3. Ground Nos. 1 to 6, 8(i) & 8(ii) were not pressed, so these grounds are dismissed as not pressed. The Ground No. 9 is general in nature. 4. Now the only issue agitated by the assessee vide Ground Nos. 7(i) & (ii) relates to the confirmation of the action of the AO is not allowing the set off of ₹ 3,93,08,929/- being loss on account of trading in Futures and Options/derivatives against other inco .....

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ome 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 admissib .....

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Sheet that stock of shares as on 31.03.2005 was ₹ 9,21,500/-. Further stock as on 31.03.2006 was also ₹ 9,21,500/-. It means that the assessee was playing in Future and options/derivatives without having stock and booked a loss of ₹ 3,93,08,929/-. It was purely speculative transactions as the assessee has nothing to deliver as it had virtually no stock. The assessee s case is not covered by Clause (d) to section 43(5) of Income Tax Act, 1961. If the assessee had sufficient stoc .....

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ainst business income. 6. Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted that the issue is covered by proviso to Section 43(5) of the Act wherein certain kinds of transactions have been held to be nonspeculative in spite of there being no actual delivery of goods. It was stated that clause (d) of proviso to Section 43(5) of the Act covers trading in derivatives carried out in a recognized stock exchange which would not be deemed to be a speculative transaction. I .....

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was also present before the ld. CIT(A) and submitted that the case of the assessee was covered by explanation to Section 73 of the Act which provides that where any part of business of a company consisted of purchase and sale of shares of other 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 .....

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e 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 income from share trading and brokerage income. The appellant .....

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e is in appeal. The ld. Counsel for the assessee reiterated the submission made before the authorities below and further submitted that the loss incurred by the assessee was mainly from derivatives and not from the shares. Therefore, the explanation to Section 73 of the act was not applicable. It was further submitted that the ld. CIT(A) had not examined the basic condition for applying explanation to Section 73 of the Act which is applicable to a company other than the company whose gross total .....

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the income of the assessee consisted mainly of dividend and interest which was chargeable under the head income from other sources . It was also contended that the gross total income for the purpose of ascertaining its constituent can only be comprised of the positive income. It was accordingly submitted that since the assessee had earned income from other sources only, therefore, the loss incurred and to be carry forward, cannot be considered to be a speculative loss. The reliance was placed on .....

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der 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 b .....

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s 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.] 11. A bare reading of the above provisions clarifies that where any part of the business of a company other than the investment company or banking company or finance company relates to the purchase and sale of shares, such company shall for the purpose of these sections be deemed to be carrying on a speculative business to the extent to which the bu .....

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ecified heads then the assessee will fall within the purview of the exception carved out in the explanation to Section 73 of the Act and consequently the assessee could not deemed to be carrying on a speculative business for the purpose of Section 73(1) of the Act. In the present case, the AO himself admitted in para 5 of the assessment order that the only positive income earned by the assessee was ₹ 14,64,859/- on account of the dividend which was claimed as exempt. In the present case, t .....

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of ₹ 39,236/- was received by the assessee. The said income falls under the head income from other sources , as per the provisions of Section 56 of the Act which defines the income from other sources and read as under: 56. Income from other sources.- (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head Income from other sources , if it is not chargeable to income-tax under any of the heads specified in se .....

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come-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 .....

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………………….. …………………………….. …………………………….. 12. From the above, it is clear that the dividend income and interest income comes under the definition of income from other sources as per the provisions of Section 56 of the Act. In the present case, the assessee is having the income only under the head inc .....

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ch must be comprised of the positive income, is under the head income from other sources . Therefore, the assessee would not be deemed to be carrying on speculative business for the purpose of Section 73(1) of the Act as has been held by the Hon ble Bombay High Court in the case of CIT Vs HSBC Securities & Capital Markets India Pvt. Ltd. (supra) wherein their lordships observed as under: 8. In the present case, section 73 would not apply in view of the fact that the explanation thereto, does .....

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vision Bench of this Court in the case of The Commissioner of Income Tax-3 versus. M/s Darshah Securities Pvt. Ltd. supports the respondent's case. In that case, during the 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 .....

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es 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 loans and advances. 7. The submission which has been urged on behalf of the Revenue is that in computing the gross total income for the pur .....

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for a moment, the exception, which is carved out by the explanation to Section 73, the explanation creates a deeming fiction by which a company is deemed to be carrying on a speculation business where any part of its business consists in the purchase and sale of shares of other companies. Now, the exception which is carved out applies to a situation where the gross total income of a company consists mainly of income which is chargeable under the heads Interest on securities , Income from house p .....

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f speculation business can be set off only against the profits and gains of another speculation business. However, for Sub Section (1) of Section 73 to apply the loss must arise in relation to a speculation business. The explanation provides a deeming definition of when a company is deemed to be carrying on a speculation business. If, the submission of the Revenue is accepted, it would lead to an incongruous situation, where in determining as to whether a company is carrying on a speculation bus .....

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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 .....

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. 13. In the present case also the assessee although had incurred loss of ₹ 3,93,08,929/- in trading of derivatives, but it had dividend income of ₹ 14,64,859/- and interest income under the head income from other sources amounting to ₹ 39,236/-. Therefore, the only positive income of the assessee was under the head income from other sources . We, therefore, by considering the totality of the facts as discussed hereinabove are of the view that the assessee s case falls within t .....

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plicable to the assessee company for relevant year, i.e., in terms of the provision, or not. The same boils down to the computation of gross total income (GTI) for the purpose of section 73. The term gross total income is defined under section 80B(5), even as the same is, as the said provision itself clarifies, for the purposes of that Chapter, i.e., under which the defining provision of section 80B(5) falls, or Chapter VI-A. The same, therefore, would not be relevant. Further, if the GTI is to .....

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tter could be looked upon from another angle as well. The whole import of section 73, as afore-noted, is whether income from purchase and sale of shares is to be regarded as speculative or non-speculative business income; different consequences attending the two classifications. Per contra, the loss from the purchase and sale 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? Th .....

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o 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 whethe .....

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e could be fulfilled, is, in our view, by ignoring the said loss. Gross total income, for the purpose of ascertaining its constituents, can only be comprised of positive income/s. How could the extent of income assessable under any head of income be taken into account if the same stands, or stands to be, set off, wholly or partly, against income falling under another head of income? The same could well be set off against any head of income, leading, however, to different consequences in terms an .....

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ncome for any head of income, would exclude negative incomes, so computed for any head of income. How could, one may ask, it, i.e., a loss, which is only a negative income, be compared with a positive one? This also follows from the requirement of the section that the gross total income, i.e., a positive sum, is to be examined for its constituents, i.e., in terms of the incomes falling under different heads of income, comprising it. A set off of income falling under one head against income from .....

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ative 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 .....

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s, ₹ 3.41 lacs and ₹ 19.68 lacs respectively. Quite plainly, the assessee s GTI, whichever way one may reckon it, cannot be considered as consisting mainly of the incomes under the heads specified under Explanation to section 73, viz. income from house property , capital gains and income from other sources . Even though we do not subscribe thereto, and is also not consistent with the forgoing discussion, the difference is so huge and apparent, that even the set off of loss on trading .....

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