M/S KHANDWALA SECURITIES LTD., MUMBAI V. DCIT CIR. 4(3)(1), MUMBAI

ITA 1146/MUM/2020

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 3424 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 2 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-04-2022
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: H
• Assessment Year: 2009-2010
• Appeal Filed On: 13-02-2020
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Retrospective amendment; Speculation loss; Capital Gains
• Section: 143(3); 43(5); 73

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL "H" BENCH, MUMBAI SHRI PRAMOD KUMAR, VICE PRESIDENT SHRI RAHUL CHAUDHARY, JUDICIAL MEMBER ITA No. 1146/MUM/2020 (ASSESSMENT YEAR: 2009-10) M/s Khandwala Securities Ltd., G7, Vikas Building, Green Street, Mumbai – 400004 Also at: Excel Legal Services, 304-306, 3 rd Floor, J.K. Building, Opposite G.P.O., 40/42, Mint Road, Fort, Mumbai - 400001 [PAN: AAACK2214P] Deputy Commissioner of Income Tax, Circle -4(3)(1), Mumbai, Room No. 649, 6 th Floor, Aaykar Bhavan, M.K. Marg, Churchgate, Mumbai - 400020 .................. Vs ................... Appellant Respondent Appearances For the Appellant/Assessee For the Respondent/Department : Shri V.M. Chavda Ms. Neha Thakur Date of conclusion of hearing Date of pronouncement of order : : 21.02.2022 28.04.2022 O R D E R Per Rahul Chaudhary, Judicial Member: 1. By way of the present appeal the Appellant/Assessee has challenged the order, dated 06.12.2019, passed by the Ld. Commissioner of Income Tax (Appeals)-9, Mumbai [hereinafter referred to as „the CIT(A)‟] in appeal [CIT(A)-9/76/2018-19] for the Assessment Year 2009-10, whereby the CIT(A) had dismissed the appeal filed by the Assessee against the Assessment Order, dated 02.11.2018, passed under Section 143(3) read with Section 254 of the Income Tax Act, 1961 [hereinafter referred to as „the Act‟]. ITA. No. 1146/Mum/2020 Assessment Year: 2009-10 2 2. Brief facts of the case are that the Appellant is a company engaged in the business of investment broking and providing corporate advisory services. The Appellant filed return of income on 25.09.2009. The case of the Appellant was selected for detailed scrutiny and assessment was framed on the Appellant vide order dated, 23.12.2011 wherein loss of INR 68,20,061/- on account of share trading activity was treated as a speculation loss. The issue travelled to the Tribunal and vide order dated, 17.03.2017, it was restored to the file of Assessing Officer (AO). The AO, vide order dated 02.11.2018, passed under Section 143(3) read with Section 254 of the Act, again held that the loss suffered by the Appellant on account of share trading activity was a speculation loss as per Section 73 of the Act, which was not allowed to be set-off against income under other heads of income. 3. The appeal against the Assessment Order, dated 02.11.2018, was dismissed by CIT(A) vide order, dated 06.12.2019. Being aggrieved by the aforesaid order passed by the CIT(A), the Appellant has preferred the present appeal. The Appellant has raised 5 grounds of appeal all challenging the order of CIT(A) holding loss of INR 68,20,061/-, suffered by the Appellant on account share trading activity, to be speculative loss. Accordingly, all the grounds of appeal raised by the Appellant are being taken up together. 4. The Ld. Counsel for the Appellant appearing before us submitted that the Appellant is engaged in banking business and in this regard he relied upon object clause contained in the Memorandum of Association of the Appellant reproduced in para 4.2.7 of the impugned. He submitted that the object clause clearly provides that the primary object of the Appellant was to carry out business as a merchant banker which establishes that the principal business of the Appellant was banking and therefore, the Appellant is covered by un- amended Explanation to Section 73 of the Act. Further, he contended ITA. No. 1146/Mum/2020 Assessment Year: 2009-10 3 that the definition of banking must be understood in commercial parlance and should be construed liberally to include a company not holding a banking license issued by Reserve Bank of India. The Ld. Authorized Representative further submitted that the corporate advisory income earned by the Appellant included income from equity capital market transactions, merger & acquisition advisory, capital raising advisory and transaction execution relating to structured finance, real estate & infrastructure, which were in the realm of merchant banking and investment. Based on the aforesaid, Ld. Authorised Representative of the Appellant contended that the Appellant was engaged in the principal business of banking during the relevant previous year and therefore, the loss suffered by the Appellant of account of trading in shares was not a speculation loss as per Explanation to Section 73 of the Act. Per contra, the Ld. Departmental Representative submitted that the Hon‟ble Supreme Court has, in the case of Snowtex Investment Ltd. V. Principal CIT, Central-2, Kolkata reported in 2019 SCC online SC 749, held that amendment to Explanation to Section 73 of the Act, whereby the expression „the principal business of which is the business of banking‟ has been substituted by „the principal business of which is the business of trading in shares or banking‟, is prospective in nature and therefore, benefit of the amended Explanation to Section 73 of the Act cannot be granted to the Appellant. She further submitted that the contention of the Appellant that the Appellant is covered by un-amended Explanation to Section 73 of the Act has been rightly rejected by AO and CIT(A) as the Appellant is not engaged in the business of banking, and in this regard the Ld. Departmental Representative relied upon para 4.2.6 to 4.2.9 of the impugned order. 5. We have considered the rival contentions and perused the material on record. The Hon‟ble Supreme Court in the case of Snowtex ITA. No. 1146/Mum/2020 Assessment Year: 2009-10 4 Investment Ltd. (supra) has held the amendment to Explanation to Section 73 of the Act is prospective in nature. The relevant extract of the aforesaid judgment reads as under: “16. Section 73 deals with losses from speculation business. Under sub-section (1) of Section 73, a loss computed in relation to speculation business carried on by an assessee can only be set off against the profits and gains of another speculation business. The Explanation to Section 73 contains a deeming fiction where certain businesses shall, for the purposes of the section, be deemed to be speculation businesses. The Explanation also carves out an exception in respect of certain specified businesses which shall lie outside the fold of the deeming fiction. Prior to the amendment of the Explanation by the Finance (No. 2) Act 2014 with effect from 1 April 2015, the business of trading in shares carried on by a company was not excluded from its purview. However, by the amendment which was brought into force from 1 April 2015, the explanation to Section 73 reads as follows: 'Explanation - Where any part of the business of a company (other than 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", or a company the principal business of which is the business of trading in shares or banking or the granting of 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.' 17. While on the one hand, Parliament amended Section 43(5) with effect from 1 April 2006 as a result of which trading in derivatives on recognised stock exchanges fell outside the purview of the business of speculation, a corresponding amendment to the Explanation to Section 73 ITA. No. 1146/Mum/2020 Assessment Year: 2009-10 5 in respect of trading in shares was brought in only with effect from 1 April 2015. xx xx 30. In conclusion, we therefore, hold that the amendment which was brought by Parliament to the Explanation to Section 73 by the Finance (No. 2) Act, 2014 was with effect from 1 April, 2015. In its legislative wisdom, the Parliament amended Section 43(5) with effect from 1 April, 2006 in relation to the business of trading in derivatives, Parliament brought about a specific amendment in the Explanation to Section 73, insofar as trading in shares is concerned, with effect from 1 April, 2015. The latter amendment was intended to take effect from the date stipulated by Parliament and we see no reason to hold either that it was clarificatory or that the intent of Parliament was to give it retrospective effect.” Thus, as per the above judgment, the amendment to Explanation to Section 73 is effective from 01.04.2015 and therefore, does not apply to the case before us which pertains to Assessment Year 2009- 10. Further, we are in agreement with the finding of the lower authorities that the principal business of the Appellant is not the business of banking. Merely because the object clause contained in Memorandum of Association of the Appellant/Company provides that the Appellant could carry out the business as a merchant bankers does not establish that the principal business of the Appellant was banking. The CIT(A) has taken note of the fact that the income earned by the Appellant during the relevant previous year consisted of the following: Amount (INR) Brokerage 39,547,677/- Corporate Advisory Services 74,369,513/- Income from Capital Market Operations 33,090/- Profit on sale of long term investments 457,750/- Other Income 123,106,904/- ITA. No. 1146/Mum/2020 Assessment Year: 2009-10 6 6. The Ld. Authorised Representative relied upon the above to persuade us to conclude that Appellant is engaged in the banking business since the corporate advisory income earned by the Appellant includes income from services in the realm of merchant banking & investment. However, we are not persuaded as this is not sufficient to hold that the Appellant is engaged in banking business. We concur with the following findings of CIT(A): “4.2.8 I have considered the arguments made by the appellant mentioned in the earlier paragraphs. I find that the appellant has tried very hard to somehow fit in to the label of being a company having it‟s principal business of banking‟. In the process, the appellant has overstretched the expression “business of banking” mentioned in the Act and has also tried to blow, one customary mention in the memorandum of association, out of proportion. The appellant has wrongly stated that the expression „banking business‟ as defined in P. Ramanatha Aiyar‟s The Law Lexicon, 4th Edition in a very broad sense includes dealing in negotiable securities of corporations. The definition mentions “dealing in negotiable securities issued by the Government.” While listing such securities issued by the Government it further mentions that the same may be issued by the State Government, National Government, Municipal and other Corporations. The appellant in it‟s arguments has mischievously selected the word “Corporations” by omitting the other important guiding mentions. The word “corporations” has to be read with the earlier words such as “Government “, “State” “National” and “Municipal”. It is very clear that the mention is in respect of negotiable instruments issued by the government such other institutions. Therefore, the arguments of the appellant in this regard are rejected. 4.2.9 The principal source of business in the year under consideration as admitted by the appellant in the submission was of corporate advisory services. It is very clear from the description of corporate advisory services as appearing in the annual report that these services were not in the nature of banking services. The relevant paragraph having the title ITA. No. 1146/Mum/2020 Assessment Year: 2009-10 7 “Corporate Advisory Business” on the page 11 of the Sixteenth Annual Report of 2009 is reproduced below: “The corporate advisory business of the company. Includes equity capital market transaction execution, mergers and acquisitions advisory and capital raising advisory and transaction execution relating to structured finance, real estate and infrastructure. During the period the total income from advisory services was Rs. 7.44 Crores” It is clear from the plain reading from the above paragraph that the activities were necessarily in the form of various kinds of advisory services and were not in the nature of banking services. In fact, there is hardly any activity during the year under consideration which can be considered to be in the nature of banking business. The appellant has tried to obfuscate by making over stretched arguments with convoluted logic: Thus, it is very clear that the principal source of business in the year under consideration was not banking business. The arguments of the appellant in this regard are rejected. 4.2.10 In view of the discussion in the earlier paragraphs, I am of the opinion that the AO has rightly rejected the arguments made by the appellant that, it was covered by the exception provided in the explanation to section 73 of the Act. In view of the judgement of Hon‟ble Supreme Court in the case of Snowtex Investment Ltd. (Supra) the amendment to explanation to section 73 of the Act are also not clarificatory. Therefore, the order giving effect to the ITAT‟s order under section 143(3) r.w.s 254 of the Act passed by the AO is hereby upheld. The grounds are dismissed.” (Emphasis Supplied) 7. On perusal of the object clause contained in Memorandum of Association, activities undertaken by the Appellant during the relevant previous year and the income earned from the same, we are of the view that the lower authorities were justified in rejecting it. The business activities undertaken by the Appellant during the relevant previous year are not in the nature of banking and the have been classified by the Appellant itself as corporate advisory services. ITA. No. 1146/Mum/2020 Assessment Year: 2009-10 8 Though, in the present case, the business was urged to be principal business of banking, we cannot accept this submission. 8. In view of the above, we confirm the order of CIT(A) and AO holding that the loss suffered by the Appellant from trading in securities is speculation loss as per Section 73 of the Act and the same is not allowed to be set-off against income under other heads of income. Grounds raised by the Appellant are dismissed. 9. In result, the appeal is dismissed. Order pronounced on 28.04.2022. Sd/- Sd/- (Pramod Kumar) Vice President (Rahul Chaudhary) Judicial Member म ुंबई Mumbai; दिन ुंक Dated : 28.04.2022 Alindra, PS आदेश की प्रतितिति अग्रेतिि/Copy of the Order forwarded to : 1. अपील र्थी / The Appellant 2. प्रत्यर्थी / The Respondent. 3. आयकर आय क्त(अपील) / The CIT(A)- 4. आयकर आय क्त / CIT 5. दिभ गीय प्रदिदनदि, आयकर अपीलीय अदिकरण, म ुंबई / DR, ITAT, Mumbai 6. ग र्ड फ ईल / Guard file. आिेश न स र/ BY ORDER, सत्य दपि प्रदि //True Copy// उप/सह यक पुंजीक र /(Dy./Asstt. Registrar) आयकर अपीलीय अदिकरण, म ुंबई / ITAT, Mumbai