TMI Blog2016 (8) TMI 735X X X X Extracts X X X X X X X X Extracts X X X X ..... Per Shri M. Balaganesh, AM: This appeal by revenue is arising out of order of CIT(A)-VI, Kolkata vide appeal No. 78/CIT(A)-VI/Cir-5/2011-12/Kol dated 07.01.2013. Assessment was framed by DCIT, Circle-5, Kolkata u/s. 143(3) 115WE(3) of the Income tax Act, 1961 (hereinafter referred to as the Act ) for AY 2009-10 vide his order dated 28.09.2011. 2. At the outset, we find that there is a delay of 63 days in filing the appeal before us by the revenue which is supported with condonation petition. In view of the concession given by the ld AR for condonation of delay, we hereby condone the delay and admit the appeal of the revenue for adjudication. 3. The only issue to be decided in this appeal is as to whether the ld CITA is justified in treating the share trading loss of ₹ 2,07,38,602/- as normal business loss instead of speculation loss in the facts and circumstances of the case. 4. The brief facts of this issue is that the assessee is a member of the National Stock Exchange (NSE) having its main business as stock broking. In addition to the broking business, it also deals in shares and derivatives for self. During the year, the assessee has incurred loss in del ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n as per Sec. 43 (5) of the I. Tax Act . iii) The transactions of purchase and sale of shares and derivatives are carried out by the broker and payments are settled in a consolidated manner considering the debit/credit in one segment (Purchase Sales) with the credit/debit with the other segment (derivatives). iv) The results of both Shares and derivatives are inter dependent for the primary reason, that derivatives are used as a tool for protecting the losses in the stock of shares and securities. The CBDT also for the similar reason has treated the derivative transactions at par with the purchase and sale of shares. v) From the accounts, it is clear that the loss on purchase and sales of shares is ₹ 2,86,80,084/- against that there is a profit on futures and options of ₹ 4,11,05,676/- and profit from speculation transaction of ₹ 86,34,063/-. The net result of the profit from shares comes to ₹ 2,10,59,655/-. As apparently there is no loss on share trading activities, since both trading of shares as well as futures and options are of the same nature so far as Income Tax Act is concerned, assessee's case is not hit by the Explanation to Sec. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that both purchase and sale of shares by physical delivery and purchase and sale of shares in derivative (F O) segment does not come under speculation as per section 43(5) of the Act. The ld DR vehemently supported the order of the ld AO. 6.1. We find that the transactions of purchase and sale of shares and derivatives are carried out by the assessee and payments are settled in a consolidated manner considering the debit / credit in one segment (purchase sale of shares) with the credit / debit with the other segment (derivatives). The results of both shares and derivatives are inter dependent for the primary reason, that derivatives are used as a tool for protecting the losses in the stock of shares and securities. The CBDT also for the similarly reason has treated the derivative transactions at part with the purchase and sale of shares. We find that the arguments of the ld AR are acceptable as the capital market operations of the assessee consists of two distinct and separate parts. The first part of his business relates to trading in shares. The second part of his business relates to F O operations. The assessee has maintained separate trading accounts for this purpose. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sh and futures segments are intrinsically related to each other because the share / security transacted in cash segment forms or constitutes underlying security for the transaction carried out in the futures market. The transactions in the futures 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 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 aggregate basis, the Explanation to Sec 73 will have no application to the assessee's case. The ld AR further submitted that in respect of share broking activity, the underlying transactions giving rise to income involved purchase sale of shares. We find that Explanation to Sec 73 of the I T Act is applicable not to income or loss. The said Explanation defines the terms speculation business to mean that part of the assessee's business which consists of purchase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es not come into play at all. 6.3. 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. The Hon ble 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 Hon ble 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 the underlying assets, were equally hit by the Explanation to Section 73. The High Court accordingly held that loss incurred by the assessee in derivative transaction was liable to be assessed as loss of deemed speculation business even though for the purpose of section 43(5) the transactions in derivatives were not speculative transactions . At this stage it is pertinent to note that section 73 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares by such companies are treated for tax purposes in a manner analogous to speculation. No doubt, companies whose main business activities centre around investment in shares will have to be left out. Accordingly, we recommend that the results of dealings in shares by companies, other than investment, banking and finance companies, should be treated in a manner analogous to speculation business. 6.4.2. We find that in order to achieve the real objective of curbing tax avoidance methods resorted to by business houses controlling their group companies, the legislature by inserting an amendment to Explanation to Section 73 of the act by Finance Act 2014 , has extended the exception carved out in the Explanation by putting all the companies, the principal business of which is the business of trading in shares into the exception. We find that the amendment brought in by the Finance Act 2014 in Explanation to Section 73 of the Act appears to be made in order to clarify the real intention behind the insertion thereof, by removing the obvious hardship caused to various assessees whose main business in trading in shares. The amendment has removed the anamoly and brought the ambit of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f. 01.04.2004 and bringing about uniformity in the first proviso by equating tax, duty, cess and fees with contribution to welfare funds (viz provident fund etc) . The Hon ble Apex Court held that the aforesaid amendment in section 43B of the Act by Finance Act 2003 is curative in nature and would therefore apply retrospectively w.e.f. 01.04.1988. 6.4.5. In the case of Allied Motors Pvt Ltd vs CIT reported in 224 ITR 677 (SC), the question before the Hon ble Apex Court was whether sales tax collected by the assessee and paid after the end of the relevant previous year but within the time allowed under the relevant sales tax law should be disallowed u/s 43B of the Act. The ITO disallowed the deduction of sales tax collected by the assessee for the last quarter of the accounting year as the same was paid in the subsequent year. The aforesaid difficulty was cured by the insertion of the first proviso w.e.f. 01.04.1988. The Hon ble Apex Court held that when a proviso is inserted to remedy unintended consequences and to make the provision workable, the proviso which supplies an obvious omission in the section and which is read to be read into the section to give it a reasonable inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n always so and if a construction results in equity rather than in injustice, then such construction should be preferred to the literal construction. Furthermore, in the instant case, we are dealing with an artificial liability created for counteracting the effect only of attempts by the assessee to reduce tax liability by transfer. It has also been noted how for various purposes the business from which profit is included or loss is set off is treated in various situations as the assessee s income. The scheme of the Act as worked out has been noted before. 6.5. Respectfully following the judicial precedents relied upon hereinabove, Wanchoo Committee report of December 1971 and our findings given in Para 6.4.3 above , we hold that the amendment brought in by the Finance Act 2014 should be construed as curative in nature and hence to be given retrospective applicability. It is not in dispute that the principal business of the assessee in the instant case is trading in shares. If the amendment supra is given retrospective effect, then the same would automatically fall under the exception provided in the Explanation to Section 73 of the Act and accordingly the loss incurred on del ..... X X X X Extracts X X X X X X X X Extracts X X X X
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