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2016 (7) TMI 539 - ITAT KOLKATA

2016 (7) TMI 539 - ITAT KOLKATA - TMI - Deemed speculation loss u/s 73 - assessee is a member of National Stock Exchange and conducts trading in listed shares and securities - CIT(A) deleted the addition - Held that:- Both in share broking as well as in proprietary share trading, the underlying business transactions giving rise to income involved only purchase and sale of shares of other companies and therefore in terms of Explanation to Section 73 of the Act, the entire business of the stock br .....

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broker, there is a common terminal, one membership of the stock exchange, common bank account and the common work force with the help of which the business of proprietory trading as well as trading on behalf of the clients are conducted. Therefore it could be safely concluded that the entire business of the stock broker constituted as one single composite indivisible business and therefore income or loss cannot be artificially bifurcated. - The provisions of Explanation to Section 73 of the .....

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ich is much more than the speculation loss of ₹ 1,02,12,277/- Decided in favour of assessee - I.T.A. No. 2723/Kol/2013 - Dated:- 8-7-2016 - Shri N. V. Vasudevan, JM And Shri M. Balaganesh, AM For the Appellant: Shri K. K. Tripathi, JCIT, Sr. DR For the Respondent: Shri D. S. Damle, AR ORDER Per Shri M. Balaganesh, AM: This appeal by revenue is arising out of order of CIT(A)-IV, Kolkata vide appeal No. 95/CIT(A)-IV/12-13 dated 16.07.2013. Assessment was framed by DCIT, Circle-4, Kolkata u/s .....

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is appeal is as to whether the ld CITA is justified in deleting the addition of Rs . 1,02,12,277/- treated as deemed speculation loss u/s 73 of the Act in the facts and circumstances of the case. 4. The brief facts of this issue is that the assessee carried on business of trading and dealing in shares in its capacity as member of a recognized stock exchange. In its capacity as member of recognized stock exchange, the assessee derived income in various forms and for accounting purposes the income .....

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nsists of income from business, other sources and capital gains as under:- Income from business: a) Brokerage 60,12,948/- b) Future & Option 97,70,575/- c) Trading in share speculation 8,76,950/- d) Share trading loss (-) 1,02,12,277/- Total Business Income (-) 2,68,72,750/- Income from Capital Gain & Other Sources: a) Short term capital gain 1,04,37,642/- b) Long term capital gain 60,336/- c) Interest Received 98,27,423/- d) Dividend Income 32,69,797/- 2,35,95,198/- The AO however, held .....

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al Calcutta High Court in the case of Parkview Properties (P) Limited (supra) or with the decision of the Bombay High Court in the case of Darshan Securities Pvt. Ltd (supra). It is settled legal proposition that a deeming provision like the Explanation to Sec 73 must be strictly construed and should not to be construed liberally. In the present case the AO invoked Explanation to Sec 73 by placing reliance on the judgment of the Calcutta High Court in the case of Eastern Aviation Industries Ltd. .....

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se of Parkview Properties (P) Limited while determining applicability of the Explanation to Sec 73 however compared only the loss or negative income incurred in share trading business with income assessed under the head "other sources" and found that negative income of ₹ 8,98,799/- was higher than "other sources" income of ₹ 5,73,701/- and therefore held that the Explanation to Sec. 73 was applicable. 9. If the principle laid down in the decision of the Jurisdicti .....

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her than the negative income derived from share trading. Applying ratio laid down by the Calcutta High Court in the case of CIT Vs. Parkview Properties (P) Limited (261 ITR 473) I find that Explanation to Sec 73 was not applicable. I therefore hold that Explanation to Sec 73 was not applicable to the appellant's case and accordingly loss in proprietary share trading was not assessable by way of loss in deemed speculation business. The AO is directed to modify his assessment order and recompu .....

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vailable for set off with the loss incurred in share trading activity. The ld CITA also held that the share broking income derived by the assessee amounting to ₹ 60,12,948/- is also available for setting off of loss incurred in share trading . If these profit figures are considered and set off with loss on share trading of ₹ 1,02,12,277/- , there would be no resultant loss and hence the provisions of Explanation to Section 73 of the Act at all. 6. Aggrieved, the revenue is in appeal .....

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erred in law in not appreciating the fact that the assessee has a higher business income than aggregate income of Other sources and Capital Gains. 7. The ld DR argued that the facts of the assessee s case does not fall under the exceptions provided in Explanation to Section 73 of the Act and accordingly prayed for confirmation of the order of the ld AO. In response to this, the ld AR argued that the assessee's case fell squarely within the first limb of exception provided in Explanation to S .....

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y under normal provisions of Act and it is only thereafter, it has to be determined as to whether gross total income so computed consists mainly of income which is chargeable under any of heads referred to in Explanation. In the facts of the present case, the income returned under the head business was ₹ 71,01,301/- whereas income from capital gains and other sources was ₹ 2,35,95,198/-. Applying the ratio laid down by the Bombay High Court in the decision rendered in the case of CIT .....

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e single indivisible and composite business establishment for carrying on the business transactions involving purchase & sale of shares & securities. Even though for the purpose of accounting different nomenclatures and segment heads of accounts were used; yet the underlying transactions giving rise to income chargeable under the head profits & gains of business involved purchase & sale of shares. Qua the stock exchanges; transactions involving purchase & sales of shares were .....

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f shares (involving delivery of shares) the assessee had incurred loss of ₹ 1,02,12,278/ -. Entire such loss was treated by the AO to be loss incurred in "speculation business" within the meaning of Explanation to Sec 73. The assessee submits that the assessee conducted transactions in shares both in cash segment and futures segment. As per the prudent practice followed by share traders, the trading bets are hedged by the traders by taking contrary or opposite positions in cash a .....

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segment are carried out by the traders as "hedge" for the risks taken in the cash segment. It is for this reason it was claimed before the AO that the assessee's trading transactions and derivative transactions could not be considered in isolation of each other. It was submitted that for tax purposes the character of trading transactions in both cash and futures segments should be considered cumulatively. Once the income/loss earned in cash and futures segment is considered on agg .....

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se & sale of shares. Since the assessee s business of stock broking consisted "purchase & sales of shares", the income arising from the said activity was liable to be considered as profit or loss arising from deemed speculative business and therefore the income arising from stock broking was also integral part of assessee s deemed speculative business entitled for set off against loss arising deemed speculation business. The ld AR further submitted that during the year, the ass .....

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; 1,02, 12,277/ - as loss incurred in deemed speculation business and refused its set off. 8. We have heard the rival submissions and perused the materials available on record. We find that the following facts are undisputed and indisputable:- (i) The assessee is a member of National Stock Exchange and conducts trading in listed shares and securities. (ii) The assessee s transactions on the platform of the said exchange are both on proprietary account and on behalf of its clients. (iii) Transact .....

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sessee s books, such income was accounted under different accounting heads , each source was intrinsically related to the activity of purchase and sale of shares But for the activity of purchase and sale of shares & securities, the assessee could not have earned income / loss. Hence we do not appreciate the action of the ld AO in treating the loss incurred in proprietary share trading as loss of deemed speculation business, while parallely all the other transactions carried out by the assess .....

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e fluctuation in one segment was hedged by transacting in the other. He further observed that in the overall analysis, the assessee incurred loss in share trading in cash segment whereas earned net profit in derivative segment. The assessee s proprietary trading transactions in cash and derivative segments were found to be inter linked and inter connected and therefore the transactions in cash segment could not be considered in isolation. The proprietary transactions in derivative segments invol .....

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/2011 dated 28.11.2011. 8.2. We find that similar issue was also adjudicated by the Hon ble Delhi High Court in the case of CIT vs DLF Commercial Developers Ltd reported in (2013) 35 taxmann.com 280 (Del HC) wherein it was held that the Explanation to Section 73 does not differentiate between derivatives and delivery based shares. Placing reliance on clause (d) of Explanation to section 43(5) , it was the assessee s plea that the derivative trading transactions were not speculative transactions .....

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ansactions could be considered to be speculation business loss. The High Court noted that the derivatives were assets whose values were derived from the underlying assets. Derivatives were transacted where the underlying assets were shares of other bodies corporate. The High Court held that if the loss incurred in purchase and sale of underlying assets was hit by provisions of Explanation to Section 73 , then by equal measure, loss incurred in the derivative transactions where shares constituted .....

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speculation business. A business which falls within the scope of speculation business under the Explanation to Section 73, remains so, irrespective of the fact whether the assessee incurs loss or earns income in such business. In the circumstances, if the loss incurred in derivatives is held by the Delhi High Court to be loss in speculation business then by equal measure, profit derived from derivative transactions would constitute profit derived from speculation business . Accordingly, the ass .....

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ch is speculative income to the tune of ₹ 8,76,950/-. 8.4. We find that the assessee had derived share broking income to the tune of ₹ 60,12,948/- which is also available for set off against the loss incurred on share trading. Reliance in this regard is placed on the co-ordinate bench decision of this Tribunal in the case of Guiness Securities Limited vs DCIT in ITA No. 894 & 895 /Kol/2007 dated 29.6.2007. This Tribunal relied on the decision of the Hon ble Calcutta High Court in .....

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other companies and therefore in terms of Explanation to Section 73 of the Act, the entire business of the stock broker assessee came within the ambit of Explanation to Section 73 of the Act. We find that once these profits (i.e 97,70,575 + 8,76,950 + 60,12,948) are set off with the loss incurred on share trading business, there would be only resultant gain from speculative business and hence there would be no scope to apply the provisions of Explanation to Section 73 of the Act in the absence .....

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erefore income or loss cannot be artificially bifurcated. 8.6. We also deem it necessary at this juncture to understand the intention behind the words used in the Explanation to Section 73. We find that the legislature has consciously not used the expression share trading or share dealing business in the said Explanation. The language consciously used by the legislature provides that where any part of the business of a company assessee consists of purchase and sale of shares of other companies t .....

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the expression part of the business connotes that the assessee s business itself need not be that of share trading. The assessee may carry on any business or range of businesses not amounting to trading in shares. In such a case, any income or loss which is relatable to the activity of purchase and sale of shares is deemed to be the income or loss derived from deemed speculation business. 8.7. One more excruciating evidence that was filed by the assessee before the ld.CITA which the ld CITA had .....

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turnover, transaction charges were collected from the assessee by the exchange. It therefore transpired from the transactional documents that as per the Stock exchange regulations, purchase and sale of shares both on proprietary and clients account were regarded to be assessee s own trading turnover and accordingly transaction charges were collected from the assessee thereby proving beyond doubt, that both in respect of proprietary share trading and trading on behalf of the clients, the assessee .....

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safely concluded that the provisions of Explanation to Section 73 of the Act would not be applicable in the instant case in the absence of speculation loss if consolidated business income is considered. 8.8.1. Alternatively, even if Explanation to section 73 is to be applied, we hold that the assessee s case falls under the exception provided in the first limb of Explanation to Section 73 of the Act where the gross total income of the assessee comprises of income from other sources which is much .....

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uot;income from other sources" is to the tune of ₹ 10,13,798/-. We are, therefore, of the opinion that the assessee's gross total income consisted mainly of income assessable under the head "income from other sources". It therefore, follows that the loss in share trading has to be treated as business loss. We direct the A.O. accordingly." Aggrieved by the order of the learned Tribunal, the revenue has come up in appeal. At the time of hearing, Mr. Saraf, learned adv .....

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irst mandated a computation of the gross total income of the company. The words "consists mainly" are indicative of the fact that the Legislature had in its contemplation that the gross total income consists predominantly of income from the four heads that are referred to therein. Obviously, in computing the gross total income the normal provisions of the Act must be applied and it is only thereafter, that it has to be determined as to whether the gross total income so computed consist .....

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