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Tushti Securities Pvt. Ltd. Versus ACIT, Circle-3, Ahmedabad

2016 (5) TMI 351 - ITAT AHMEDABAD

Disallowance of intra head adjustment in respect of business loss and Profit under the head Capital Gain by invoking provision of explanation to section 73 - Held that:- Respectfully following the judgment in the case of CIT vs. HSBC Securities & Capital Markets India P. Ltd. (2012 (6) TMI 715 - BOMBAY HIGH COURT ) and the decision of ACIT, Spl.Circle 18(1) vs. Concord Commercials (P) Ltd.(2005 (1) TMI 314 - ITAT BOMBAY-H ), we are of the view that during the year under appeal assessee’s income .....

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s not correct in invoking the explanation to section 73 of the Act on the assessee’s case and therefore, erred in treating business loss as deemed speculation loss and not allowing set off against the income from capital gain. - Decided in favour of assessee. - ITA No. 1089/Ahd/2012 - Dated:- 5-5-2016 - Shri Rajpal Yadav, JM And Shri Manish Borad, AM. For the Appellant : Shri Parin Shah, AR For the Respondent : Shri James Kurien, Sr. DR ORDER Per Manish Borad, Accountant Member This appeal of as .....

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f business loss and Profit under the head Capital Gain by invoking provision of explanation to section 73 of the Income tax Act, 1961. 2) The appellant craves to add, to alter, to substitute, to amend any ground / grounds of appeal at any time or at the time of hearing of the appeal if occasion arises. 3) It is, therefore, prayed that the : (a) Appeal be accepted, (b) Set off of ₹ 618448/- should be allowed in respect of business loss and profit under the head Capital gain. (c) Penalty pro .....

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e. During the course of assessment proceedings ld. Assessing Officer observed that assessee has claimed set off of business loss of ₹ 6,18,448/- against short term capital gain of ₹ 6,58,227/-. However on the basis of examination of financial statement of the assessee ld. Assessing Officer was of the view that explanation to provisions of section 73 of the Act are clearly applicable to the assessee as the main source of income of the assessee is from share trading and, therefore, los .....

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the same were adjusted against short term capital gain. The said business loss was on account of shares trading and appellant being company, provisions of explanation to section 73 are applicable. Loss on trading of shares is to be treated as speculative if any part of the business of the appellant consisted of purchase and sale of shares. It is not in dispute that substantial activity of the appellant was trading in shares. The profit from share trading was more than RS 11 lakhs as against pro .....

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ainst, other income. The decision relied upon by the appellant is not applicable to the facts of this case. Appellant's alternative argument that loss on futures and options transactions RS 161187 cannot be treated. as speculative is justified since derivatives are not shares and accordingly not hit by explanation to section 73. Assessing officer is therefore directed to treat loss in F & O activities as business loss and allow the same to be set off against other income. As regards appe .....

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mpany has incurred loss of ₹ 618448/- under the head business & profession and income of ₹ 658227/- under the head Capital Gain and made intra head adjustment at the time of calculating its total income. The ld. Assessing officer while passing the order u/s 143(3), treated the Business loss of ₹ 618448/- as speculation loss by invoking the provisions of Explanation to section 73. In this connection we would like to first of all bring to your notice the exact wordings of Exp .....

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oans, and advances) consists in .the purchase and sale of shares of other companies, such companies shall for the purposes of this section .be deemed to be carrying on a speculativebusiness to the extent to which the business consists of the purchase and sale of such shares." As can be seen from the plain reading of the provisions of the section, the provisions of this mischievous explanation are not applicable to the company whose total income mainly consists of Income from Other Sources, .....

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items, i.e. business income of Rs.(-) 6,18,448/- and capital gains of ₹ 6,58,227/-. Since the amount of capital gains even in absolute terms are more than business income, it is very clear that the income mainly consists of capital gains and therefore the provisions of explanation to section 73 are not applicable to the assessee company. In this connection, we rely on the decision of Banglore Bench of ITAT in the case of Asiatic Industrial Gases Ltd. Vs. DCIT(2006) (6 SOT 243] (Bang], whe .....

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xplanation to section 73 of the Income Tax Act 1961 Components of various heads understatement of total income is required to be verified to decide whether which head has a higher income and not an individual items of Profit & Loss Account for the purpose to determine whether proviso to section 73 is applicable or not. The Learned assessing officer has erred by looking at composition of Profit and Loss Account instead of Components of Gross Total Income. Hence addition made by the Ld. Assess .....

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the other hand ld. DR supported the orders of lower authorities. 8. We have heard the rival contentions and perused the material on record and gone through the judgment of Hon. Bombay High Court and the decision of the Tribunal (Special Bench). Solitary grievance of the assessee is against the order of ld. CIT(A) in confirming the addition made by ld. Assessing Officer by way of not allowing the claim of set off of business loss of ₹ 6,18,448/- against the short term capital gains of ͅ .....

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under the head business or profession at ₹ 6,18,448/- and the only dispute whether this loss of ₹ 6,18,448/- can be termed as business loss or to be taken as deemed speculation loss as per explanation to provisions of sec.73 of the Act. It will be note worthy to go through the provisions of section 73 which reads as under :- Sec.73. (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, o .....

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iness carried on by him assessable for that assessment year; and (ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on. (3) In respect of allowance on account of depreciation or capital expenditure on scientific research, the provisions of sub-section (2) of section 72 shall apply in relation to speculation business as they apply in relation to any other business. (4) No loss shall be carried forward un .....

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loans and advances) consists 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 consists of the purchase and sale of such shares.] 9. We further observe that there has been an amendment with effect from 1.4.2015 brought in by Finance (No.2) Act 2014 by way of which the line the principal business of which is the business of trading in shares and banking .....

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nies will be out of the purview of explanation to sec.73 of the Act. 10. We further observe that Hon. Bombay High Court in the case of CIT vs. HSBC Securities & Capital Markets India P. Ltd. (supra) dealt with similar issue wherein assessee company showed loss of ₹ 1.72 crores as business loss and had income from other sources at ₹ 7 lacs and ld. Assessing Officer by invoking the provisions of section 73 of the Act held business loss of ₹ 1.72 crores as deemed speculation l .....

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e, Explanation to section 73 would not apply in the instant case. Further the Judgment of the Bombay High Court in the case of CIT v. Darshan Securities (P.) Ltd. [2012] 206 Taxman supports the assessee's case. [Para 8] 11. We further observe that the Tribunal (Special Bench) Mumbai also dealt with the issue of transactions of purchase and sale of shares. It will be relevant to reproduce the brief facts and the decision given by the co-ordinate bench which read as under :- FACTS The assessee .....

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idend income. The Assessing Officer, while holding that the said share trading loss was in the nature of speculation loss within the meaning of Explanation to section 73 and, therefore, it was not permissible to set off the same against other items of business income, disallowed the same and added back the said amount to the taxable income of the assessee. On appeal, the Commissioner (Appeals), while accepting the assessee's contention that the Assessing Officer could not invoke the provisio .....

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in the Explanation, such loss shall not be set off except against profits and gains, if any, of another speculation business. [Para 20] But. the Explanation has provided two exceptions. The first exception is available in the case of 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'. The second exception is in the c .....

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e company is mainly made up of income under the head 'Profits and gains of business or pofcssion \ it is caught by the mischief of Explanation to section 73. [Para 22] As far as the second category of exception is concerned, the thrust is on the nature of business carried on by the company. If the company is carrying as its principal business, the business of banking or the granting of loans and advances, Explanation to section 73 does not apply. The company is excluded from the ambit of Exp .....

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he character of gross total income, the other test relating to the nature of principal business carried on by it does not apply. Likewise in the second category of company where the test is the nature of the principal business carried on by it, the test of the gross total income does not apply. The two exceptions provided in Explanation to section 73 are governed by two di//erent tests laid down in the said Explanation itself. Therefore, the examination of the exceptions provided in Explanation .....

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ogether, the income from business was a loss. The assessee-company further earned dividend income from shares held as its stock-in-trade. The loss had been computed under the head 'Profits and gains of business or profession'. The dividend income had been computed under the head 'Income from other sources'. After the set off of the dividend income and the business loss, the gross total income had been worked out which was entirely made up of dividend income computed under the hea .....

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en in Explanation to section 73. [Para 32] The chargeabililv of income under a specified head is the prime consideration in verifying the composition of gross total income for the purpose of Explanation io section 73. As the question whether an income is chargeable under any of the specified heads of income or not is to be looked into, it is equally important to follow the principles governing the classification of income. The classification of income under different heads is import in the conte .....

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e of Explanation to section 73 need to be examined on the basis whether the main chunk of the gross total income is made up of income 'chargeable' under the head 'Income from other sources'. The gross total income in the instant case was made up of dividend from shares held as stock-in-trade. Therefore, the gross total income in the instant case was chargeable under the head 'Income from other sources'. [Para 37] Further, the lest of gross total income itself suggested th .....

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ontention regarding 'gross total income', section 73 did not provide for any special treatment. The Supreme Court held in CIT v. Venkateswara Hatcheries (P.) Ltd. [1999] 237 ITR I74/ 103 Taxman 503 that the same word occurring more than once in the Act should generally be given the same meaning, but the context may indicate the contrary legislative intention. There is no such indication in section 73 and the Explanation thereto. Therefore, the meaning of the expression 'gross total i .....

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