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2015 (12) TMI 562 - ITAT KOLKATA

2015 (12) TMI 562 - ITAT KOLKATA - TMI - Loss in respect of delivery based transactions in respect of purchase and sale of shares - whether to be treated as speculation loss or not? - Held that:- 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.

As per the definition of section 4 .....

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plication of the said section is concerned.

Thus we hold that the claim of the assessee 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 delivery transaction or derivative transactions. - Decided in fav .....

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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 sale of shares has to be treated as speculation loss or not. 2.1. The brief facts of this issue is that the assessee company is mainly engaged in dealing in shares and securities on beh .....

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the exchange and simultaneously reverse position is taken in another segment. For example if company buys JP Hydro in capital market segment , then the company also simultaneously sells the same quantity and script in derivatives segment. In case if the transaction get reversed in the same day, profit or loss arising on the said transaction in the capital market segement booked as intra day profit / loss or if the trade is reversed on next day or subsequent day, the profit / loss arising on the .....

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; Option Dealing 34,39,96,652 2.2. During the year under appeal, the assessee had incurred loss in dealing in shares due to arbitrage. The assessee claimed that the loss in dealing in shares incurred by the company because of abovementioned two types of transactions are exempted from the definitions of speculation and accordingly the applicability of section 73 is not relevant. The workings for arriving at the loss in delivery based dealing of shares are as below:- Opening Stock 5,96,79,242.46 S .....

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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 fur .....

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bbing or arbitrage . He observed that in the audited accounts, the auditor of the assessee has treated these transactions as speculative transaction and clubbed these transactions with F & O Operations. The assessee also has not treated these transactions as part of jobbing or arbitrage. Accordingly, he held that the transactions do not fall under proviso (c) to section 43(5) of the Act. He held that the loss of ₹ 2,46,33,241/- is treated as speculation loss. 2.4. The treatment of shar .....

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erivative transactions) - ₹ 2,46,33,241/- Treated as regular business loss by the assessee. Treated as speculation loss by the Learned AO. 2.4.1. From the above , it could be seen that the assessee had chosen to treat the entire loss incurred on both delivery and non-delivery based share transactions as regular business loss and sought to set off the same against the regular business profit derived from derivative transactions . The Learned AO in turn treated the entire loss incurred on bo .....

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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 b .....

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red substantial loss in its share trading business involving actual delivery of shares amounting to ₹ 5,36,90,032/- and loss incurred on non-delivery based derivative transactions amounting to ₹ 2,46,33,241/- but however, the assessee had earned income on its share trading business by way of derivative transactions amounting to ₹ 36,86,29,893/-. The Learned AR further argued that , even assuming without conceding , that the action of the Learned AO in treating the share trading .....

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the details of share transactions clearly revealed that the assessee has incurred loss in dealing in shares due to arbitrage. For example, in case of Jindal Steel , the assessee bought 1875 shares in capital market on 8.2.2008 and sold the same quantity in F & O segment in order to hedge. The assessee has reversed the position on 12.2.2008. In this transaction, the assessee has incurred delivery loss of ₹ 5,83,031/- in capital market and earned ₹ 5,51,000/- in F & O Segment. .....

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cial provision whereas section 43(5) of the Act is a general provision. The assessee is engaged only in speculation business and hence the loss treated by the Learned AO as speculation loss need not be disturbed. He further argued that no hedging was done by the assessee so as to fall under section 43(5)(c ) 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 ap .....

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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 an .....

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shares where no delivery has taken place as well as with brokerage and other income and profit / loss from all these activities should be adjusted with each other. We also find from the materials available on record that loss incurred in transaction where no delivery has taken place was treated as regular business loss in Asst Years 2007-08 and 2009-10 on the ground of jobbing and arbitrage and the same was accepted by the Learned AO in both the assessment years. This fact is also stated at page .....

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he same he has given a detailed submission with evidence, which are placed on record. In view of section 43(5)(c ) of the Income Tax Act, the jobbing and arbitrage is not a speculative transaction. Hence, the view of the assessee is considered. 2.7.2. Here we are aware that though the principle of res judicata does not apply to income tax proceedings, the principle of consistency cannot be given a complete go bye as has been held by the Hon ble Supreme Court in the case of Radhasoami Satsang vs .....

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ot be at all appropriate to allow the position to be changed in a subsequent year. 2.7.3. We find that 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/ .....

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ging 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 transactions in the derivatives have been carried on simultaneously with purchases. He submitted that hedging may be carried out in items different than the items purchased / sold. 2.7.5. .....

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one composite business before the application of deeming provision contained in Explanation to Section 73. 2.7.6. We find from the facts available on record, the assessee is operating in one segment i.e dealing in shares and securities and all the activities under this segment are interrelated. In this regard, we place reliance on the following decision of the coordinate bench of this tribunal in the case of ITO s Sand Dune Credit Pvt Ltd in ITA Nos. 2075 & 2076 /Kol / 2008 for the Asst Year .....

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ker, registered with SEBI and its entire activity in shares is to be treated as the activity of share business whether it was by way of trading of shares and/or by way of brokerage in shares. The activity which was conducted by the appellant on a/c of other parties in which brokerage income was earned and the activity of dealing in shares in their own a/c was treated as share trading business. The entire activity has to be treated as one and as such the explanation to section 73 is not applicabl .....

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T 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. .....

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as held that the test is unit of control and not the nature of the two line of business. Hon ble Supreme Court held that the tribunal was right in holding share business and other business carried by the appellant company constituting the same business within the meaning of Section 24(2). As thus before the amendment in 1955 while deciding the case the Hon ble Supreme Court has applied the ratio of decision in the case of Prithi Insurance Ltd (supra). Thus this is now accepted as principle of la .....

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re being carried out at common work place with a work force, the work staff, the expenses incurred are also common in nature. Hence, this expenses cannot be bifurcated to arrive at profit under separate heads. As such the Explanation appended to Section 73 will not be applicable in the present case. In case of ITO, C.W 2(2) Vs. GDB Share & Stock Broking Service Ltd ITA No.235(Cal) of 2001 it was held that The assessee has shown brokerage income of ₹ 49.17 lacs, interest income of ͅ .....

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said share dealing business, one has to take into account not only the profit or loss on sale and purchase of shares but also the brokerage earned on the purchase & sale of shares. As the brokerage income is inextricably related with the said share transaction business, the net profit of which work out to (Rs.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 e .....

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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 o .....

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IT vs. Nirmal Kumar & Co.] reported in 161ITR 413 has granted relief and held that addition of ₹ 10,06,974/- under the head deemed speculation by applying the Explanation to Section 73 is deleted. The Learned Tribunal while noting the aforesaid findings of the Commissioner of Income Tax (Appeal) recorded that during the course of hearing departmental representative has not disputed the fact stated by CIT(A) (Supra). The Learned Tribunal also observed that income of the assessee in the .....

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rmed the order of the Commissioner of Income Tax (Appeal) in view of the judgment of this Court [CIT vs. Nirmal Kumar & Co.] (supra) reported in 161 ITR 413. In view of the aforesaid findings and application of law in this matter we do not think it is a fit case for admission. It is not submitted that the decision rendered in the case of [CIT vs.Nirmal Kumar & Co.] reported in 161 ITR 413 (Supra) is not applicable in the facts and circumstances of this case nor it is argued that the said .....

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* *** (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 compan .....

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rty , 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 of shares. • It does not differentiate between Delivery based transactions and F&O operations. • It applies to the entire busine .....

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ncurred in delivery based trading with profit derived from derivative trading. 2.7.8. We hold that the transactions done by delivery as well as the transactions of derivatives are not hit by section 43(5) of the Act and hence the aggregation of the share trading loss and profit from derivative transactions should be done before application of the Explanation to section 73 of the Act. Reliance is placed on the following decisions:- a) Kolkata Tribunal in the case of DCIT vs M/s Baljit Securities .....

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Act 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 is from share delivery transaction or derivative transaction. Now, this view has been confirmed by the Hon ble Jurisdictional High Court in assessee s own case in GA No. 3481 of 2013 .....

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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 .....

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An answer to this question is to be found in the explanation appended to Section 73 which reads as follows: 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 .....

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;………………………… ………………………………………………) consist 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 shares. It would, thus, appear t .....

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ove, was within the umbrella of speculative transaction. There was, as such, no bar in setting off the loss arising out of derivatives from the income arising out of buying and selling of shares. This is what the learned Tribunal has done. b) Mumbai Tribunal, Special 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 aggr .....

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ve 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 purpose of those provisions or sections. To borrow the Madr .....

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