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2016 (4) TMI 912 - ITAT KOLKATA

2016 (4) TMI 912 - ITAT KOLKATA - TMI - Treatment to speculation loss as income from non-speculation business - Held that:- We find that the assessee had treated the entire activity of purchase and sale of shares which comprised of both delivery based and non-delivery based trading as one composite business before the application of deeming provision contained in Explanation to Sec.73 of the Act and accordingly, claimed set off of the loss incurred in delivery based trading with profit derived f .....

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clause (d) of section 43(5), derivative transaction in shares is also not speculation transaction as defined in the said section. Therefore, both profit/loss from all share delivery transactions and derivative transactions have the same meaning as far as Section 43(5) of the Act is concerned. It thus follows that both will have the same treatment as far as application of the said section is concerned.

Thus we hold that the claim of the assessee for set off of loss from share dealing .....

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es and are therefore to be treated as to profit derived from speculative business as per the provision contained under Explanation to Sec. 73. - Decided against revenue

Disallowance u/s 14A r.w.r 8D - Held that:- AO has invoked the provision of Sec. 14A of the Act read with Rule 8D of the IT Rules without recording the satisfaction that the assessee’s books of account are not showing the correct expenditure incurred in relation to dividend income. We find that it is only if the Assess .....

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f the assessee, he is not satisfied with the correctness of the assessee's claim, that he will have jurisdiction of taking recourse to the method prescribed under rule 8D - Decided against revenue - ITA No.841/Kol /2013, C.O. No.54/Kol /2013 - Dated:- 18-3-2016 - Shri N.V.Vasusdevan, Judicial Member and Shri Waseem Ahmed, Accountant Member For The Assessee : Shri D.S.Damle, FCA For The Revenue : Shri Sanjit Das, JCIT, SR-DR ORDER PER Waseem Ahmed, Accountant Member:- This appeal by Revenue a .....

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the facts and circumstances of the case, in allowing the total disallowance of ₹ 87,74,852/- to be set off with the profit earned from derivative transactions. 2. That on the facts and circumstances of the case Ld. CIT(A) erred in law in holding that the AO was not justified in making disallowance of ₹ 57,20,303/- u/s 14A of the Act read with Rule 8D of the Income Tax Rules and restricting the expenses disallowed with rule 8D to the extent of ₹ 38,156/- only. On proper apprecia .....

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so a member of National Stock Exchange (NSE) and Bombay Stock Exchanges (BSE). During the course of assessment proceedings, Assessing Officer observed that has declared following sources of income under the head business :- (i) brokerage income of ₹22,07,895/- (ii) income from derivative of ₹ 91,62,100/- (iii) income from speculation business of ₹4,32,735/- (iv) income from share trading business non-speculative (-) ₹33,30,124/- (v) interest earned from Fixed Deposit of & .....

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d the loss from share dealing business is of 33,30,124/- and on the other hand the income from other sources of business and capital gains are of ₹3,12,692/-. Therefore, the loss from share dealing the business was treated the loss from share speculation business. There was a loss of ₹33,30,124/- from the activity of share trading business which in the opinion of AO was also speculation loss and it can only be set off against the speculation business. Accordingly, AO called upon the .....

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. There is the common management and common administration with regard to all the transactions of different segments of capital market operation. The assessee also submitted that interest earned from fixed deposit for ₹51,30,351/- should also be treated as speculation income as per the different provision of IT Act. 3.1 However, AO has disregarded the plea taken by assessee and recast the share trading account for working out the loss arising from the trading of share business which stand .....

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ieved, assessee preferred an appeal before Ld. CIT(A) where it was submitted that the assessee being the member of NSE and BSE is engaged in the business of capital market operations. For the accounting purposes the assessee has classified its sources of income under business head. The explanation to section 73 of the Act does not speak about treating the speculation loss for the shares trading activities in its own account or third party s account. It is also silent for the shares trading activ .....

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of income for the sake of convenience. The assessee reiterated that explanation to section 73 of the Act does not make any distinction for the deeming loss on account of shares trading in assessee s own account or on behalf of the clients. So both the activities should be treated at par. As regards profit earned from derivatives it was submitted that this activity was not per se hit by Sec. 43(5) of the Incometax Act, 1961 in applying the provisions of explanation to section 73 of the Act. The .....

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e business. The assessee also relied in the jurisdictional Kolkata High Court in the decision of CIT (Kol-2) vs. M/s Sand Dune Trade Pvt. Ltd., 146 ITR of 2010 the profit/loss on derivate trading has arisen from the same business activity of purchase and sale of shares and it deserves to be set off against loss from share trading activity. 4.1 The assessee has incurred expenses such as STT and transactions charges which pertain to all the sources of income of the assessee but the AO has attribut .....

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M/s Arion Commercial Pvt Ltd., Kolkata in ITA No. 1010/Kol/2011 dated 29.12.2011 and held that the transaction done by delivery as well as the transaction of derivative of shares profit/loss is not hit by section 43(5) and therefore the aggregation of share trading loss and profit from derivative transactions should be done before the application of the Explanation to Section 73. Therefore, in view of the above the appellant is entitled to set off of the share trading loss with the profit earne .....

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erefore, the total disallowance of ₹ 87,74,852/- is allowed to be set off with the profit from derivative trading. Being aggrieved by this order of Ld. CIT(A) Revenue is in appeal before us. Shri D.S. Damle Ld. Authorized Representative appearing on behalf of assessee and Shri Sanjit Das Ld. Departmental Representative appearing on behalf of Department. 5. We have heard rival contentions and perused the materials available on record. The ld. DR vehemently relied on the order of the AO. Bef .....

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e purchase and sale of shares of companies made on own behalf and/ or on behalf of the clients. The brokerage income is derived out of the purchase and sale of shares on behalf of the clients so it should be treated within the purview of the explanation to Sec.73 of the Act. Regarding the derivative profit the ld. AR submitted that the finding of the AO that the profit on derivative cannot be set off against the share trading loss according to the provisions of Sec.43(5) is incorrect and bad in .....

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R relied on the order of the ld. CIT(A). From the aforesaid discussion we find that the assessee is a member of the BSE and NSE. During the year, assessee has earned income from the source of derivative activities, brokerage income and losses from the share trading activities. The AO disallowed the loss incurred from the share trading activities by holding the same, as speculative business therefore the set off of such loss was not allowed. However, Ld. CIT(A) allowed the set off of the above lo .....

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d the decision of the CITA with regard to deletion of the addition under Explanation to Sec.73 by making the following observations:- I have carefully considered the submission of the ld.A.R. The assessing Office has added ₹ 10,06,974/- being loss suffered in trading in shares which was set off against brokerage income of shares of ₹ 12,90,172/-. The appellant is a share broker, registered with SEBI and its entire activity in shares is to be treated as the activity of share business .....

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f Companies made on own behalf and/ or behalf of others, where entire business activity of the company consist 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 ₹ .....

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mon management interliaison 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 Exchange Corporation Limited 77 ITR 739 (SC) in the case of Exchange Corporation Limited, it was held that the test is unit of control and not the nature of the two line of business. Hon ble Supreme Court .....

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e share broking activity, share dealing on own account all form an integrated business of the appellant company, the profit or loss from the same is required to be computed as a whole. In the instant case of the company, it is very difficult to segregate business activities and allocate respective amount of expenditure incurred for the purpose of earning the same. Since the activities are being carried out at common work place with a work force, the work staff, the expenses incurred are also com .....

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are dealing amounting to ₹ 3.97 lacs in respect of which assessing officer has attracted the explanation to Section 73. The brokerage income earned by the assessee is out of its business of purchase & sale of shares and not in respect of any other activity being carried on by the assessee company. As per our considered view while arriving at the total profit on account of the said share dealing business, one has to take into account not only the profit or loss on sale and purchase of s .....

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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. 5.2 We also find that the decision of Kolkata Tribunal has been approved by the Hon ble jurisdictional 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 wi .....

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e the Commissioner of Income Tax(Appeal). The Commissioner of Income Tax(Appeal) held that loss incurred in the business of transaction of share would not be speculation loss and has held that explanation to Section 73 would not be applicable to the case of the assessee company. Therefore, the Commissioner of Income Tax (Appeal)) while relying on the judgment of this Court in case of [CIT vs. Nirmal Kumar & Co.] reported in 161 ITR 413 has granted relief and held that addition of ₹ 10, .....

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oss of ₹ 10,,06,974/- claimed by the assessee in respect of sale and purchase of the share by way of brokerage of share. It is recorded by the learned Tribunal further that there is no dispute to the fact that explanation to Section 73 does not apply to an investment company or a company whose principal business is banking or money lending. The learned Tribunal has, therefore, affirmed the order of the Commissioner of Income Tax (Appeal) in view of the judgment of this Court [CIT vs.Nirmal .....

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The application being 1982 of 2010 is disposed of. Certified photostat copy of this order be made available to the parties, if applied for, on compliance of usual formalities. 5.3 It is pertinent to get into the Explanation to Sec.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 , I .....

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e 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 and 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 companie .....

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f purchase and sale of shares which comprised of both delivery based and non-delivery based trading as one composite business before the application of deeming provision contained in Explanation to Sec.73 of the Act and accordingly, claimed set off of the loss incurred in delivery based trading with profit derived from derivative trading. 5.5 We hold that the transactions done by delivery as well as the transactions of derivatives are not hit by Sec.43(5) of the Act and hence the aggregation of .....

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which provides definition of speculative transaction exclusively for purposes of section 28 to 41 of the Act. Again, the fact that both delivery based transaction in shares and derivative transactions are non-speculative as far as section 43(5) of the 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 .....

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odity 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 .....

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the dealings and transaction in which the assessee did not ultimately take delivery of the shares or give delivery of the shares could be set off against the income arising out of the dealings and transactions in actual buying and selling of shares. 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 cha .....

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resolve the issue before us, the section has to be read in the manner as follows: Explanation : where any part of the business of a company………………………………………………………………… ……………………………………………) consist in the purcha .....

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ally is a share broker, as already indicated. The assessee is also in the business of buying and selling of shares where actual delivery was not intended to be taken or given. Therefore, the entire transaction carried out by the assessee, indicated above, 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 .....

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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 .....

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ovision, when the underlying asset itself does not qualify for the benefit, as they (derivatives-once removed from it and entirely dependent on stocks and shares, for determination of their value). 12. In the light of the above discussion, it is held that the Tribunal erred in law in holding that the assessee was entitled to carry forward its losses; the question framed is answered in favour of the revenue and against the assessee. The appeal is, therefore, allowed; there shall be no order as to .....

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n shares is also not speculation transaction as defined in the said section. Therefore, both profit/loss from all share delivery transactions and derivative transactions have the same meaning as far as Section 43(5) of the Act is concerned. It thus follows that both will have the same treatment as far as application of the said section is concerned. 5.8 In view of the aforesaid facts and circumstances and judicial precedents relied upon hereinabove, we hold that the claim of the assessee for set .....

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A No. 1454/Kol/2006, wherein this Tribunal vide its order dated 28.09.2006 at para-12.3 has held as under:- now the contention of the Revenue is that Explanation to Sec. 73 would be applicable only if there is a loss in share trading business and this Explanation will not be applicable when there is profit from share trading business. We are unable to accept this contention of the Revenue. Explanation nowhere provides that the deeming provision of trading the share trading business to be specula .....

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from the order of this Tribunal in the case of Bhartia Stock Broking Pvt. Ltd. vs. ITO in ITA No.2058/Kol/2006, wherein it was held as under:- Even otherwise, if a transaction is not treated as speculative transactions it could be at par with a transaction for purchase and sale of shares when actually delivered is taken. Merely because a transaction does not fall within ht definition of speculative transaction under Section 43(5) would be non ground for non application of the Explanation to Sec .....

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jurisdictional High Court, it is apparent that los in share trading and profit in share difference are both part of the business of purchase and sale of shares to which Explanation to Section 73 is applicable and therefore loss in purchase and state of shares quality for a set off against the profit derived from the same business. 5.10 Applying the ratio of the above decision, we are of the opinion that even the brokerage income and interest income for margin money are to be considered as integ .....

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e decisions of the Calcutta High Court in the case of CIT vs. Arvind Investment Ltd. (supra) and of the Calcutta Bench of the ITAT in TIO vs. Share & Stock Broking Services Ltd. (supra). As there is only one Terminal one Demat A/c one Dealer one Books of A/c one Finance, one set of staff & other things and also deeming provision of Explanation to Sec. 73 does not provide any bifurcation of business of purchase and sale of shares into two, one for brokerage and the other for own a/c treat .....

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ntire such business as speculative business. We also find that the similar situation arose before this Tribunal in the case of M/s Guiness Securities Ltd. v. DCIT in ITA No. 894-895/Kol/2007 dated 29.06.2007, wherein it was held as under:- It is apparent that loss in share in trading and profit in share difference or both part of the business of purchase and sale of shares to which Explanation to Sec. 73 is applicable and therefore loss in purchase and sale of shares quality for a set off agains .....

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money should be considered as income derived from purchase and sale of shares and are therefore to be treated as to profit derived from speculative business as per the provision contained under Explanation to Sec. 73. We therefore dismiss the ground of appeal of Revenue. 6. The issue in ground no. 2 raised by the Revenue in this appeal is that the ld. CIT(A) erred in restricting the addition made by the AO for an amount of ₹ 38,156/- under section 14A of the Act read with rules 8D of the .....

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e u/s. Rule 8D of IT Rules as under:- i) direct expenses Rs.54,44,727/- ii) interest expenses of Rs.1,98,165/- iii) .5% of average value of investment of Rs.1,15,567/- Accordingly, AO disallowed the expenses of ₹ 57,08,459/- u/s 14A of the Act and added it to the total income of assessee. 7. Aggrieved, assessee preferred an appeal before Ld. CIT(A) who has deleted the addition by observing as under:- 14. The facts relating to payment of interest of this case are same. Therefore, respectful .....

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t the outset, we observe that the AO has invoked the provision of Sec. 14A of the Act read with Rule 8D of the IT Rules without recording the satisfaction that the assessee s books of account are not showing the correct expenditure incurred in relation to dividend income. We find that it is only if the Assessing Officer is not satisfied with the correctness of the assessee's claim under section 14A that he can assume jurisdiction to arrive at the quantum of disallowance of expenditure in acc .....

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ying in the Decision of the co-ordinate bench of Kolkata Tribunal in the case of REI Agro Ltd , Kolkata vs DCIT in ITA No. 1331 / Kol / 2011 dated 19.6.2013 reported in (2013) 35 taxmann.com 404 (Kolkata-Trib.) wherein it was held that : 6. We have considered the rival submissions. A perusal of the provisions of section 14A, more specifically sub-section (2), shows that if the AO is not satisfied with the correctness of the claim of the assessee, then the AO shall determine the amount of expendi .....

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might not be able to make a disallowance under section 14A. Thus, where the assessee makes a claim that only a particular amount is to be disallowed under section 14A or where the assessee does not make a disallowance under section 14A, if the AO proposes to invoke the section 14A, he is to record a satisfaction on that issue. This satisfaction cannot be a plain satisfaction or a simple note. It is to be done with regard to accounts of the assessee. In the present case, there is no satisfaction .....

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