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Deputy Commissioner of Income-tax Versus M/s. Raima Equities Pvt. Ltd.

Treatment to share trading loss - normal business loss or speculation loss - assessee is a member of the National Stock Exchange (NSE) having its main business as stock broking - Held 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 t .....

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dent: ShriAshok Kr. Tulsyan, FCA & Shri Amit Kumar, ACA ORDER 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 be .....

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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 delivery based share transactions and profits in the transactions in the derivatives segment and jobbing. The assessee reported the following income from share transactions as below:- Income from Brokerage 85,55,143 Profit from derivatives (F&O) .....

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ved that the losses incurred by a company carrying on business of purchase and sale of shares shall be deemed to be carrying on speculation business as per Explanation to Section 73 of the I.Tax Act. It was further held that Explanation to Section 73 cannot be read to mean only when there is purchase and sale of shares in course of a financial year but it will cover both, shares which are stock in trade and shares which are traded in course of financial year for purpose of considering loss and p .....

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urther submitted that for the purpose of Explanation to Section 73 of the Act, it is necessary to arrive at the result of purchase and sale of shares and derivatives taken together for the following reasons :- i) The assessee's primary and only business is to deal in shares and securities including derivatives for clients and also for self. ii) Both purchase & sale of shares by physical delivery and purchase & sale of shares of F&0 (derivative) does not come under speculation as .....

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es. 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 activ .....

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ture and therefore income from both the transactions is to be clubbed to work out the share trading income of the assessee. Explanation to Sec. 73 of the I. Tax Act will hit only in case of aggregate of share trading is loss. In the case of the assessee, the aggregate of share trading is profit and hence, there is no question of application of Explanation to Sec. 73 of the Act. So far as allocation of expenditure is concerned, nowhere in the Act, it is provided that expenditure should be allocat .....

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speculation loss. 2. That the Ld. CIT(A) has erred in holding the loss of ₹ 2,07,38,602/- as share trading loss instead of speculation loss. The said carry forward loss can be set off against speculation income only in subsequent years. 6. We have heard the rival submissions and perused the materials available on record. We find that the assessee had derived income from the following categories:- a) Stock Broking b) Derivative trading - Future and Options (F&O) c) Speculative trading .....

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and had also derived brokerage income. The ld AR had argued 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 i .....

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erations 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. The ld AO invoked Explanation to Section 73 of the act to the first part, namely , dealing in shares. Thereby the loss arising from such operation was treated by him as loss from speculation. He also applied clause (d) of proviso to s .....

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common terminal, one membership of the stock exchange, common bank account and the common work force with the help of which the business of proprietary 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 assessee had maintained one single indivisible and composite business es .....

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sessee had incurred loss. Entire such loss was treated by the AO to be loss incurred in "speculation business" within the meaning of Explanation to Sec 73. It is not in dispute that the assessee conducted transactions in shares both in cash segment and futures segment. The ld AR argued that 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 and future segments. By simultaneously executing th .....

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edge" 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 .....

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ted "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. We find that amendment has been brought in the Finance Act 2005 w.e.f. 1.4.2006 wherein transaction in respect of trading in derivative .....

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e before the application of the Explanation to Section 73 of the Act. We also find that the Special Bench of Mumbai Tribunal in the case of CIT vs Concord Commercial Pvt Ltd reported in (2005) 95 ITD 117 (Mum) (SB) had held that before making application of Explanation to Section 73 of the Act, set off of all business income should be allowed. The ld AR argued that the income from share trading, speculative transactions and derivative transactions (F&O) are to be held cumulatively as specula .....

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ivative transactions are to be aggregated as they are of the same nature. Hence the share trading loss from delivery based transactions are to be set off from the profit from derivative transactions. Once this is done, the resultant figure is only surplus and hence in the absence of any loss, the application of Explanation to Section 73 of the Act does 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 Commerc .....

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s 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 sta .....

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by equal measure, profit derived from derivative transactions would constitute profit derived from speculation business . Accordingly, the assessee is entitled to set off the loss incurred on share trading business with the profit earned from derivative transactions. 6.3.1. From the aforesaid findings and the ratio laid down in the aforesaid judicial precedents relied upon, it could be safely concluded that the provisions of Explanation to Section 73 of the Act would not be applicable in the in .....

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n. In this regard, we hold that it is not in dispute that the principal business of the assessee is trading in shares. We find that the amendment was brought by Finance Act 2014 w.e.f. 1.4.2015 by insertion of the expression - principal business of which is the business of trading in shares or banking………… 6.4.1. It would be pertinent to refer to the recommendations of Wanchoo Committee Report of December 1971 pursuant to which the Explanation to Section 73 of the Act .....

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rposes 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 grou .....

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bvious hardship caused to various assessees whose main business in trading in shares. The amendment has removed the anamoly and brought the ambit of the Explanation to Section 73 of the Act in line with the intention of the legislature by placing the companies whose principal business is trading in shares as part of the exception to Explanation to Section 73 of the Act, because such companies were not the companies for whom the Explanation was inserted. 6.4.3. We find that though this amendment .....

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ss . (b) The provisions of section 73 of the Act provides that the brought forward speculation loss could be set off only against speculation profits. (c) Pursuant to the amendment by Finance Act 2014 supra, the loss derived from the principal business of trading in shares would not be construed as speculative in nature. The logical corollary is profit derived thereon also would be treated only as normal business profits and not speculative profits. (d) In this situation, the brought forward spe .....

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held to be curative in nature. Hence we hold that the said amendment should be given retrospective effect only. In our considered opinion, the amendment would not serve its object in the instant case unless it is construed retrospective in operation. 6.4.4. We draw support from the decision of the Hon ble Apex Court in the case of CIT vs Alom Extrusions Ltd reported in 319 ITR 306 (SC) wherein their Lordships were considering the amendment made by Finance Act 2003 by omitting the second proviso .....

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urt 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 .....

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e section was brought on the statute. 6.4.6. The Hon ble Apex Court in the case of CIT vs J.H.Gotla reported in (1985) 156 ITR 323 (SC) at page 339 and 340 had observed as under:- In the case of K P Varghese vs ITO (1981) 131 ITR 597 , this court emphasized that a statutory provision must be so construed, if possible, that absurdity and mischief may be avoided. Where the plain literal interpretation of a statutory provision produces a manifestly unjust result which could never have been intended .....

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ould not make a fortress out of the dictionary but remember that statutes always have some purpose or object to accomplish and sympathetic and imaginative discovery is the surest guide to their meaning. We have noted the object of s.16(3) of the Act which has to be read in conjunction with s.24(2) in this case for the present purpose. If the purpose of a particular provision is easily discernible from the whole of the scheme of the Act which in this case, is to counteract the effect of transfer .....

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