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TMI Blog2017 (2) TMI 723X X X X Extracts X X X X X X X X Extracts X X X X ..... of Ld. AO, in making the impugned addition by denying the set off of the loss aggregating to Rs. 27,63,30,230/- (Rs. 17,27,16,630/- loss on account of trading in derivatives, Rs. 10,10,75,192/- loss on account of trading in shares and Rs. 25,38,408/- loss on account of intraday trading in shares) and framing the impugned assessment order, is bad in law and against the facts and circumstances of the case. 3. That the appellant craves the leave to add, modify, amend or delete any of the grounds of appeal at the time of hearing and all the above grounds are without prejudice to each other." 2. Facts in brief of the case are that the assessee was engaged in the business of trading of shares and securities etc. as well as execution of works contract. For the year under consideration, the assessee filed return of income on 21/09/2009 declaring loss of Rs. 25,94,45,470/-. The case was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961 (in short 'the Act') was issued and complied with. In the course of scrutiny proceedings, the Assessing Officer observed that the assessee claimed loss of Rs. 27,63,30,230/-from business of trading of shares etc, which was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... According to the Assessing Officer, the provision of section 73 are specific and relevant for the limited purpose of setoff of the business. In view of the observations, the Assessing Officer disallowed claim of setoff of the losses of Rs. 27,63,30,230/- and addition was made accordingly. Before the learned Commissioner of Income-tax (Appeals), the assessee contested loss of Rs. 10,10,75,192/- on account of delivery based purchase and sale of shares and loss of Rs. 17,27,16,630/- on account of derivative trading. After considering the various judicial pronouncements mentioned in the impugned order, the learned Commissioner of Income- tax (Appeals) upheld the finding of the Assessing Officer on the issue in dispute. 3.3 Before us, the learned counsel of the assessee submitted that as far as losses from the derivative transactions was concerned the issue in dispute has been decided in favour of Revenue in the case of DLF Commercial Developers Ltd. by the Hon'ble Delhi High Court, reported in 261 CTR 126, whereas same issue in dispute has been decided by the Hon'ble Calcutta High Court in the case of Asian Financial Services Ltd. Vs. Commissioner of Income Tax, in GA No. 3250 of 201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le of shares can be set of against the business income in terms of section 73 of the Act. 3.7.1 Regarding the first issue, the assessee has shown loss on derivatives trading on NSE/BSE Rs. 17,27,16,630/- and claimed to set off the same against business income. The learned CIT(DR) submitted that issue in question is covered by the decision of the Hon'ble Delhi High Court in the case of CIT Vs. DLF Commercial Developers Ltd.(supra). We find that the Hon'ble High court referred to both Section 73 and Section 43 of the Income-tax Act and decisions available on the issue in dispute and held that loss from the derivative transactions was speculative for the purpose of section 73 of the Act and, therefore, could not be adjusted against business profit. The relevant finding of the Hon'ble High Court is reproduced as under: "6. Before a discussion on the merits of the appeal, it would be essential to extract the relevant provisions of the Income Tax Act. Section 73 (with explanation), to the extent it is relevant, reads as follows: "Losses in speculation business. 73. (1) Any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or (b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or (c) a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member (or) (d) An eligible transaction in respect of trading in derivatives referred to in clause {(ac)} of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognized stock exchange;] Shall not be deemed to be a speculative transaction, [Explanation - Four the purpose of this clause, the expressions - (A)Carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary registered under section 12 of the Secur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contending that the only definition of derivatives is to be found in Section 43(5); yet the Court cannot ignore or overlook that the definition - to the extent, it excludes such transactions from the mischief of the expression "speculative transactions" is confined in its application. Parliamentary intendment that such transactions are also excluded from the mischief of Explanation to Section 73 (4), however, is not borne out. In this context, it would be instructive to notice that in Rajshree Sugars and Chemicals Ltd (supra), the Madras High Court noticed, rather dramatically, that "..'Derivatives are time bombs and financial weapons of mass destruction' said Warren Buffett, one of the world's greatest investors, who overtook Microsoft Maestro in 2008 to become the richest man in the world and who is known as the 'Sage of Omaha or Oracle of Omaha'. Derivatives, according to him, can push companies on to a spiral that can lead to a corporate melt down...." The High Court then, after examining the nature and characteristics of derivatives transactions, observed that: "5. What are these 'derivatives' which have gained such a great deal of notoriety? I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... why all definitions in statutes generally begin with the qualifying words similar to the words used in the present case, namely, unless there is anything repugnant in the subject or context. Therefore in finding out the meaning of the word " insurer " in various sections of the Act, the meaning to be ordinarily given to it is that given in the definition clause. But this is not inflexible and there may be sections in the Act where the meaning may have to be departed from on account of the subject or context in which the word has been used and that will be giving effect to the opening sentence in the definition section, namely, unless there is anything repugnant in the subject or context. In view of this qualification, the court has not only to look at the words but also to look at the context, the collocation and the object of such words relating to such matter and interpret the meaning intended to be conveyed by the use of the words under the circumstances." Similarly, in N.K. Jain and Ors. v C.K. Shah and Ors. AIR 1991 SC 1289, it was held that: "4. The subject matter and the context in which a particular word is used are of great importance and it is axiomatic that the obje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eemed to be speculative transactions. Therefore, this comes within the category of deemed business which is however distinct and separate from any other business. Now, the question is, whether loss arising out of such deemed business can be set off against the profit arising out of other business or businesses which may for clarity be called proper business. Under Section 70 of the Act, the assessee is entitled to have the loss set off against his income from any other source under the same head unless otherwise provided. Therefore answer to the question is that the assessee is entitled to have the loss arising out of deemed business set off against the income arising out of business proper unless otherwise provided. The question however remains whether the explanation to Sub-Section (4) of Section 73 relied upon by Mr. Lodh provides otherwise. A plain reading of the explanation quoted above cannot be said to have provided otherwise. In that case the irresistible conclusion is that the assessee is entitled to set off such loss arising out of deemed business against the income arising out of business proper. The learned Tribunal has supported the contention of the revenue relying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uage to be ambiguous or capable of more meanings than one, then we have to adopt that interpretation which favours the assessee, more particularly so because the provision relates to imposition of penalty." 3.7.6 Respectfully following the above decision of the Hon'ble Supreme Court in the case of Vegetable Product Ltd. (supra), we are inclined to follow the decision of the Hon'ble Calcutta High Court on the issue in dispute. Accordingly, we hold that the loss incurred on derivative transaction was not a speculative loss and is allowed to be adjusted against business income. 4. On the second issue whether the loss of Rs. 10,10,75,192/- from the activity of trading in shares, i.e., purchase and sale of shares is a speculation loss in terms of explanation to section 73(4) of the Act, is concerned, in the case of a company, business of purchase and sale of shares is deemed to be speculation business except following companies: (i) 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'. (ii) a company, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by the assessee-company on the one hand carries on the sale and purchase of shares on behalf of his clients and on the other hand purchase and sale of shares on his own can be said to be a speculative business as suggested by the appellant. When we examine this in the light of the Explanation attached to the Section, the answer to this question is given in the statute itself. The statute lays down in the Explanation that where the business of the company consists in purchase and sale of shares of other companies (other companies (assessee-company) emphasis supplied) shall be deemed to be carrying on speculation business to the extent to which the business consists of business of purchase and sale of shares. A bare look at the Explanation leaves no room to doubt that when a company like the appellant-company before us enters into a transaction vis-a-vis the sale and purchase of shares to its own account, it is deemed to be into the speculative business. The commission earned by no stretch of imagination in the form of brokerage can be said to be his speculative business income for the various reasons stated above. Sec. 73 of the IT Act, more particularly sub-cl. (i) is categorical ..... 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