Aachman Vanijya Pvt. Ltd., Kolkata V. ITO, WD-11(2), KOLKATA, Kolkata

ITA 1248/KOL/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 1741 (ITAT-KOLKATA)
• Duration Of Justice: 1 year(s) 2 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-08-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 15-05-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 02-06-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NIRAJ KUMAR
• Assessee Lawyers: GIRISH SHARMAFCA
• Keywords: Transactions in derivatives; Speculation loss; Assessment record; Revised return; Revenue expenditure
• Section: 14A; 133(6); 43(5); 263; 12; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B, BENCH KOLKATA BEFORE SHRI N.V.VASUDEVAN, JM & DR. A.L.SAINI, AM ./ ITA NO.1248/KOL/2016 ( / ASSESSMENT YEAR :2011-2012) AACHMAN VANIJYA PRIVATE LIMITED, GARIA, MAHAMAYAPUR WEST, NEAR KARMA MANDIR CLUB, KOLKATA-700084 VS. ITO WARD-11(2), KOLKATA ./ ./PAN/GIR NO. : AACCA 5165 H ( /APPELLANT ) .. ( / RESPONDENT ) /ASSESSEE BY :SHRI GIRISH SHARMA,FCA /REVENUE BY : SHRI NIRAJ KUMAR, CIT(DR) / DATE OF HEARING : 15/05/2017 /DATE OF PRONOUNCEMENT 04/08/2017 / O R D E R PER DR. ARJUN LAL SAINI, AM: THE CAPTIONED APPEAL FILED BY THE ASSESSEE, PERTAINING TO ASSESSMENT YEAR 2011-2012, IS DIRECTED AGAINST THE ORDER PASSED BY THE LD. COMMISSIONER OF INCOME TAX-4 , KOLKATA, UNDER SECTION 263 OF THE INCOME TAX ACT, 1961, DATED 31.03.2016, WHICH IN TURN ARISES OUT OF AN ORDER PASSED BY THE ASSESSING OFFICER (AO) U/S.143(3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT), DATED 23.1.2014. 2. BRIEF FACTS QUA THE ASSESSEE ARE THAT THE ASSESSEE IS A COMPANY FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2011-12 ON 25.9.2011. SUBSEQUENTLY, THE ASSESSEE HAS FILED HIS REVISED RETURN OF INCOME ON 26.9.2011 SHOWING TOTAL INCOME OF RS.13,561/-. ASSESSEES CASE WAS SELECTED FOR SCRUTINY U/S.143(3) OF THE ACT AND THE AO HAS COMPLETED THE ASSESSMENT BY MAKING VARIOUS DISALLOWANCE. THE AO OBSERVED THAT THE ASSESSEE HAD DERIVATIVE LOSS IN TRANSACTION OF SHARES. THE ASSESSEE FILED ITA NO.1248/16 AACHMAN VANIJYA PVT. LTD. 2 THE PROFIT AND LOSS ACCOUNT OF DERIVATIVE TRANSACTIONS AND IT WAS OBSERVED BY THE AO THAT M/S PRUDENT BROKING SERVICES PVT. LTD (SHARE BROKER) CHARGED A PENALTY OF RS. 25,000/-AGAINST TRANSACTION. THE ASSESSEE CHARGED DERIVATIVE LOSS INCLUDING THE ABOVE PENALTY OF RS.25,000/- WHICH WAS NOT ALLOWABLE AS PER AO, THEREFORE, AO ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE. THE ASSESSEE HAD CLAIMED AS DEFERRED REVENUE EXPENDITURE WRITE OFF TO THE TUNE OF RS.11,300/-. THESE EXPENSES WERE INCURRED BY THE ASSESSEE TO INCREASE THE AUTHORIZED SHARE CAPITAL. THE AO HELD THAT THESE EXPENSES WERE CAPITAL IN NATURE AND IT IS NOT ALLOWABLE EXPENSES U/S 35D OF THE I.T. ACT, THEREFORE AO MADE ADDITION OF RS.11,300/-. THE ASSESSING OFFICER ALSO MADE THE DISALLOWANCE OF RS.2,14,434/- UNDER SECTION 14A OF THE ACT. 3. SOON AFTER, THE CIT HAS EXERCISED HIS JURISDICTION U/S.263 OF THE I.T.ACT, 1961. THE CIT(A) OBSERVED THAT THE ASSESSEE HAD SHOWN IN ITS BOOKS OF ACCOUNTS THE VALUE OF QUOTED SHARE SCRIP FOR RS.5,27,20,520/- AND ITS MARKET VALUE AS ON 31.3.2011 WAS AT RS.1,89,66,000/- , THEREFORE, THERE WAS A LOSS OF RS.3,37,54,250/- ( THAT IS RS.5,27,20,520/-RS.1,89,66,000/- ) IN SHARE TRADING ACCOUNT WHICH WAS CONTINGENT IN NATURE AND NOT ALLOWABLE. BUT THE SAME WAS ALLOWED DURING THE ASSESSMENT PROCEEDINGS BY THE AO. THE LD. CIT(A) FURTHER OBSERVED THAT A LOSS OF RS.1,60,01,415/- ON ACCOUNT OF DERIVATIVE SEGMENT HAS BEEN ALLOWED IN THE ASSESSMENT ORDER DATED 23.1.2014. SINCE THE SAME IS SPECULATION LOSS, CANNOT BE SET OFF AGAINST OTHER SOURCE OF INCOME. THEREFORE, THE LD CIT HELD THAT, THE ITA NO.1248/16 AACHMAN VANIJYA PVT. LTD. 3 A.O. HAD NOT EXAMINED THIS ISSUE IN THE ORDER PASSED BY HIM U/S.143(3) ON DATED 23.1.2014. THE LD. CIT HELD THAT THE ORDER PASSED BY THE AO U/S.143(3) WAS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE AND ACCORDINGLY A SHOW CAUSE NOTICE U/S.263 OF THE INCOME TAX, 1961 WAS ISSUED TO THE ASSESSEE COMPANY ON 22.3.2016. 4. THE ASSESSEE COMPANY HAS REPLIED THE SHOW CAUSE NOTICE STATING THAT ASSESSEE COMPANY IS A REGISTERED NBFC ENGAGED IN THE BUSINESS OF GRANTING OF LOANS AND ADVANCES. REGARDING THE VALUATION LOSS ON SHARES OF RS.3,37,54,250/-, IN CASE OF CLOSING STOCK OF SHARES OF COMPANY, THE VALUATION IS DONE ON THE BASIS OF ACCOUNTING STANDARD 2 .ONE OF THE METHOD PRESCRIBED IN THIS MANDATORY ACCOUNTING STANDARD IS: - COST OR MARKET VALUE WHICHEVER IS LOWER. IT IS A CONSISTENT METHOD APPLIED BY THE COMPANY YEAR AFTER YEAR. ANY LOSS ARISING ON ACCOUNT OF SUCH VALUATION METHOD FOLLOWED CONSISTENTLY YEAR AFTER YEAR IS AN ALLOWABLE BUSINESS LOSS AS PER INCOME TAX ACT ALSO. IT IS NOT A CONTINGENT OR NOTIONAL LOSS SINCE THIS WILL AGAIN BECOME OPENING STOCK FOR THE NEXT YEAR THEREAFTER NULLIFYING THE IMPACT AS THE DEBIT OR EXPENDITURE SIDE WILL BE OF REDUCED AMOUNT IN THE NEXT YEAR. THE ASSESSEE ALSO POINTED OUT BEFORE THE CIT THAT THE ABOVE ISSUE HAS ARISEN DUE TO REFERENCE TO CBDT'S INSTRUCTION NO. 03/2010 DATED 23-03- 2010 WITH RESPECT TO WHICH PLEASE BE INFORMED THAT IT APPLIES TO FOREIGN EXCHANGE DERIVATIVE TRANSACTIONS AND NOT TO DELIVERY BASED TRADING BUSINESS ASSETS LIKE CLOSING STOCK OF TANGIBLE ITEMS. DERIVATIVES ARE NOT TANGIBLE ITEMS. SINCE, THE ASSESSEE HAS NOT TRADED IN FOREIGN EXCHANGE ITA NO.1248/16 AACHMAN VANIJYA PVT. LTD. 4 DERIVATIVE TRANSACTIONS. THEREFORE, THIS VALUATION LOSS OF RS 3,37,54,250/- IS ALLOWABLE BUSINESS LOSS AND NOT NOTIONAL LOSS OR CONTINGENT IN NATURE AND IS COVERED BY ACCOUNTING STANDARD 2. FURTHER, THE FOREIGN EXCHANGE DERIVATIVE TRANSACTIONS ARE COVERED BY ACCOUNTING STANDARD 32.THE CONCEPT OF SALE OR SETTLEMENT BASIS OR LOSS ON 'MARKET TO MARKET' BASIS APPLIES TO FOREIGN EXCHANGE DERIVATIVE TRANSACTIONS AND NOT TO TRADING BUSINESS ASSETS. THE ASSESSEE ALSO POINTED OUT THAT THE LD AO DURING THE COURSE OF SCRUTINY PROCEEDINGS WAS PROVIDED COMPLETE DETAILS & DOCUMENTS OF THE SAID SHARE VALUATION LOSS OF RS 3,37,54,250/-. IT WAS ACCEPTED AS GENUINE BUSINESS LOSS SINCE THE SAME CLOSING STOCK HAS BEEN CONSIDERED AS OPENING STOCK OF SUCCEEDING YEAR. THIS METHOD OF VALUATION HAS BEEN CONSISTENTLY FOLLOWED BY THE COMPANY SINCE INCEPTION. THEREFORE, BASED ON ABOVE SUBMISSION THE ASSESSEE REQUESTED THE CIT THAT THE SHARE VALUATION LOSS IS NOT CONTINGENT OR NOTIONAL LOSS. THE LOSS HAS BEEN RIGHTLY ALLOWED BY THE LD AO IN SCRUTINY PROCEEDINGS. 4.1 REGARDING THE NEXT ISSUE, WHERE THE CIT HAD TREATED THE LOSS OF RS.1,60,01,415/- ON ACCOUNT OF DERIVATIVE SEGMENT BEING CONSIDERED AS SPECULATION LOSS NOT TO BE ALLOWED FOR SET OFF AGAINST OTHER SOURCE OF INCOME. IN THIS RESPECT, THE ASSESSEE SUBMITTED BEFORE THE CIT, THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, A COMPLETE DETAILS & DOCUMENTS WERE PROVIDED INCLUDING COPIES OF STAMPED ONLINE CONTRACT NOTES OF TRANSACTIONS WITH RECOGNIZED STOCK EXCHANGE OF THE BROKERS. FURTHER NECESSARY ENQUIRY AS PER INCOME TAX ACT, 1961 U/S 133(6) WERE MADE OF THE DERIVATIVE TRANSACTIONS & REPLIES WERE RECEIVED. AFTER THOROUGH INVESTIGATION & EXAMINATION OF THE LOSS ON DERIVATIVE TRANSACTIONS THE LD AO ALLOWED THE LOSS AS BUSINESS LOSS & NOT SPECULATION LOSS. THE ASSESSEE ALSO EXPLAINED THE PROVISIONS OF SECTION 43(5) OF THE INCOME TAX ACT, 1961 AS FOLLOWS: ITA NO.1248/16 AACHMAN VANIJYA PVT. LTD. 5 43. IN SECTIONS 28 TO 41 AND IN THIS SECTION, UNLESS THE CONTEXT OTHERWISE REQUIRES- , (5) 'SPECULATIVE TRANSACTION' MEANS A TRANSACTION IN WHICH A CONTRACT FOR THE PURCHASE OR SALE OF ANY COMMODITY, INCLUDING STOCKS AND SHARES, IS PERIODICALLY OR ULTIMATELY SETTLED OTHERWISE THAN BY THE ACTUAL DELIVERY OR TRANSFER OF THE COMMODITY OR SCRIPS: PROVIDED THAT FOR THE PURPOSES OF THIS CLAUSE- (A) A CONTRACT IN RESPECT OF RAW MATERIALS 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; [OR]] [(E) AN ELIGIBLE TRANSACTION IN RESPECT OF TRADING IN COMMODITY DERIVATIVES CARRIED OUT IN A RECOGNIZED ASSOCIATION [, WHICH IS CHARGEABLE TO COMMODITIES TRANSACTION TAX UNDER CHAPTER VII OF THE FINANCE ACT, 2013 (17 OF 2013),]] SHALL NOT BE DEEMED TO BE A SPECULATIVE TRANSACTION. [ [EXPLANATION 1].-FOR THE PURPOSES OF [CLAUSE (D')], THE EXPRESSIONS- (/) 'ELIGIBLE TRANSACTION' MEANS ANY TRANSACTION,- (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 SECURITIES AND EXCHANGE, BOARD OF INDIA ACT, 1992 (15 OF 1992) IN ACCORDANCE WITH THE PROVISIONS OF THE SECURITIES CONTRACTS (REGULATION) ACT,. 1956 (42 OF 1956) OR THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 (15 OF 1992) OR THE DEPOSITORIES ACT, 1996 (22 OF 1996) AND THE ITA NO.1248/16 AACHMAN VANIJYA PVT. LTD. 6 RULES, REGULATIONS OR BYE-LAWS MADE OR DIRECTIONS ISSUED UNDER THOSE ACTS OR BY BANKS OR MUTUAL FUNDS ON A RECOGNIZED STOCK EXCHANGE; AND (8) WHICH IS SUPPORTED BY A TIME STAMPED CONTRACT NOTE ISSUED BY SUCH STOCK BROKER OR SUB-BROKER OR SUCH OTHER INTERMEDIARY TO EVERY CLIENT INDICATING IN THE CONTRACT NOTE THE UNIQUE CLIENT IDENTITY NUMBER ALLOTTED UNDER ANY ACT REFERRED TO IN SUB-CLAUSE (A) AND PERMANENT ACCOUNT NUMBER ALLOTTED UNDER THIS ACT; (II) 'RECOGNIZED STOCK EXCHANGE' MEANS A RECOGNIZED STOCK EXCHANGE AS REFERRED TO IN CLAUSE (F) OF SECTION 2 OF THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 (42 OF 1956) AND WHICH FULFILS SUCH CONDITIONS AS MAY BE PRESCRIBED AND NOTIFIED BY THE CENTRAL GOVERNMENT FOR THIS PURPOSE;] IN THE LIGHT OF THE PROVISIONS OF SECTION 43(5), THE ASSESSEE SUBMITTED BEFORE THE CIT THAT THE LOSS ON DERIVATIVE TRANSACTIONS OF RS 1,60,01,415/- HAS BEEN CARRIED OUT BY THE COMPANY DURING THE YEAR THROUGH RECOGNIZED STOCK EXCHANGE BY MEANS OF STAMPED & TIMED CONTRACT NOTES. THE TRANSACTIONS ARE WELL COVERED BY SECTION 43(5) AS PER WHICH FROM AY 2006-07 ONWARDS THE LOSS ON DERIVATIVE TRANSACTIONS, IF FULFILLS THE CONDITIONS LAID DOWN IN SECTION 43(5) ARE NOT SPECULATIVE TRANSACTIONS UNDER THE PROVISIONS OF THE ACT. FURTHER THE COMPANY IS FALLING IN THE EXCEPTIONS TO THE EXPLANATIONS TO THE PROVISIONS OF SECTION 73 BEING A LOANS & ADVANCES COMPANY THE QUESTION THE TRANSACTIONS BEING SPECULATIVE U/S 73 DO NOT ARISE.THE COMPANY IS NOT ENGAGED IN THE BUSINESS OF TRADING IN SHARES RATHER THE COMPANY IS ENGAGED PRINCIPALLY IN THE BUSINESS OF LOANS & ADVANCES GENERATING INCOME FROM FINANCIAL ACTIVITIES. THE QUESTION OF APPLICABILITY OF SECTION 73 DOES NOT ARISE IN THE CASE. THE LOSS ON DERIVATIVE TRANSACTIONS OF THE COMPANY ARE NEITHER SPECULATIVE IN TERMS OF SECTION 43(5) AS WELL AS DO NOT FALL SIMILARLY IN THE DEFINITION OF PROVISIONS OF SECTION 73. THE ASSESSEE FURTHER SUBMITTED THAT THE ASSESSEE NBFC COMPANY, IS A LOANS & ADVANCES COMPANY WHICH IS FACTUALLY PROVED & ACCEPTED FROM THE INCOME PATTERN AS WELL AS ASSET DEPLOYMENT PATTERN. IT HAS MAJOR INCOME ITA NO.1248/16 AACHMAN VANIJYA PVT. LTD. 7 FROM FINANCIAL ACTIVITIES LIKE INTEREST INCOME. FURTHER THE LOANS & ADVANCES OF THE COMPANY ARE MAJOR BUSINESS ASSET CONSISTING OF MORE THAN 70% OF THE BALANCE SHEET'S TANGIBLE ASSETS. IT HAS BEEN PROVED AT SCRUTINY PROCEEDINGS THAT THE COMPANY IS A 'A COMPANY, THE PRINCIPAL BUSINESS OF WHICH IS THE BUSINESS OF BANKING OR THE GRANTING OF LOANS AND ADVANCES'. THUS IT FALLS IN THE EXCEPTIONS TO THE EXPLANATION TO THE PROVISIONS OF SECTION 73. A LOANS & ADVANCE COMPANY IS NOT ATTRACTED BY SUCH PROVISIONS. THEREFORE, THE ASSESSEE POINTED OUT THAT THE DERIVATIVE LOSS OF RS 1,60,01,415/- HAS BEEN RIGHTFULLY TREATED AS NON SPECULATIVE AT THE TIME OF SCRUTINY PROCEEDINGS AFTER THOROUGH EXAMINATION & INVESTIGATION BY THE LD ASSESSING OFFICER. 5. HOWEVER, THE CIT HAS IGNORED THE SUBMISSIONS OF THE ASSESSEE AND HELD THAT VALUATION LOSS OF SHARES OF RS.3,37,54,250/- BEING CONTINGENT IN NATURE AND LOSS OF RS.1,60,01,415/- ON ACCOUNT OF DERIVATIVE SEGMENT TO BE CONSIDERED AS SPECULATION LOSS AND SHOULD NOT BE ALLOWED FOR SET OFF AGAINST OTHER SOURCE OF INCOME. THIS WAY, THE CIT HAD DIRECTED THE AO TO PASS ORDER AFTER EXAMINATION OF THE CONTINGENT LOSS AND THE SPECULATION LOSS. THE CIT HAD SET ASIDE THE ORDER PASSED U/S.143(3) OF THE ACT AND DIRECTED TO THE AO TO FRAME A DE NOVO ASSESSMENT. 6. NOT BEING SATISFIED WITH THE ORDER OF CIT U/S.263 OF THE ACT, THE ASSESSEE IS IN APPEAL BEFORE US AND HAS TAKEN THE FOLLOWING GROUNDS OF APPEAL :- 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE LD. PR.CIT ERRED IN INITIATING PROCEEDINGS U/S.263 OF THE I.T.ACT, 1961 AS THERE WAS NO CASE OF ERRONEOUS ORDER AND/OR ORDER PREJUDICIAL TO THE INTEREST OF REVENUE. ALL THE FACTS WERE DULY CONSIDERED AT THE TIME OF ASSESSMENT MADE U/S.143(3) OF THE I.T.ACT, 1961. ITA NO.1248/16 AACHMAN VANIJYA PVT. LTD. 8 2. THAT THE ORDER PASSED U/S.263 OF THE I.T. ACT, 1961 IS BADE IN LAW. 3. THAT, THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND, DELETE, SUBSTITUTE ANY OF THE GROUNDS AND/OR TAKE ADDITION GROUND/S BEFORE OR AT ANY TIME OF HEARING OF THIS APPEAL. 7. LD. AR FOR THE ASSESSEE HAS SUBMITTED BEFORE US THAT THE ORDER PASSED BY THE AO U/S.143(3) OF THE ACT WAS NEITHER ERRONEOUS NOR PREJUDICIAL TO THE INTEREST OF REVENUE. BECAUSE THE FACTS WERE DULY CONSIDERED BY THE AO AT THE TIME OF ASSESSMENT U/S.143(3) OF THE ACT. THE LD. AR FOR THE ASSESSEE HAS SUBMITTED THAT SO FAR THE VALUATION LOSS OF SHARES OF RS.3,37,54,250/- IS CONCERNED, IT IS NOT IN CONTINGENT IN NATURE. THE CLOSING STOCK OF THE SHARES OF THE COMPANY ARE VALUED ON THE BASIS OF ACCOUNTING STANDARD-2, VALUATION OF INVENTORIES. ACCOUNTING STANDARD-2 PRESCRIBES THE METHOD TO VALUE THE CLOSING STOCK AT COST OR NET REALIZABLE VALUE, WHICHEVER IS LOWER. IT IS A CONSISTED METHOD APPLIED BY THE COMPANY YEAR AFTER YEAR. ANY LOSS ARISING OUT OF SUCH VALUATION, FOLLOWED CONSISTENTLY YEAR AFTER YEAR IS AN ALLOWABLE BUSINESS LOSS AS PER INCOME TAX ACT ALSO. IT IS NOT A CONTINGENT OR NOTIONAL LOSS SINCE THIS WILL AGAIN BECOME OPENING STOCK OF THE NEXT YEAR. THEREAFTER NULLIFYING THE IMPACT AS THE DEBIT OR EXPENDITURE SIDE WILL BE OF THE REDUCED AMOUNT IN THE NEXT YEAR. SO FAR THE CBDT INSTRUCTION NO.3/2010 DATED 23.3.2010 IS CONCERNED, THE LOSS OF FOREIGN EXCHANGE TRANSACTIONS ARISING OUT OF MARKET TO MARKET ,CONVERSION ON THE CLOSING DATE OF THE ACCOUNTING PERIOD IS ONLY NOTIONAL AND COULD NOT BE ALLOWED. THE ASSESSEE HAS CLARIFIED THAT THE ITA NO.1248/16 AACHMAN VANIJYA PVT. LTD. 9 SAID INSTRUCTION APPLIES TO ONLY FOREIGN EXCHANGE DERIVATIVES TRANSACTIONS AND THE SAID INSTRUCTIONS NO.3/2010 DOES NOT APPLY TO SHARE VALUATION METHOD. THE ASSESSEE HAS NOT TRADE IN FOREIGN EXCHANGE DERIVATIVE TRANSACTIONS, THEREFORE, THE VALUATION LOSS OF RS.3,37,54,250/- IS ALLOWABLE BUSINESS LOSS AND NOT NOTIONAL LOSS OF CONTINGENT IN NATURE. THIS TYPE OF LOSS IS COVERED BY THE AS-2. THE AO DURING THE COURSE OF SCRUTINY PROCEEDINGS HAD ACCEPTED THIS, AS A GENUINE BUSINESS LOSS SINCE THE SAME CLOSING STOCK HAS BEEN CONSIDERED AS OPENING STOCK OF SUCCEEDING YEAR. THIS METHOD OF VALUATION HAS BEEN CONSISTENTLY FOLLOWED BY THE COMPANY SINCE INCEPTION. THEREFORE, LD. AR EXPLAINED THAT SHARE VALUATION LOSS IS NOT CONTINGENT NOR IT IS NOTIONAL LOSS. THE SAID LOSS HAD BEEN RIGHTLY ALLOWED BY THE AO IN SCRUTINY PROCEEDINGS U/S.143(3) OF THE ACT AND, THEREFORE, THE ORDER PASSED BY THE AO IS NEITHER ERRONEOUS NOR PREJUDICIAL TO THE INTEREST OF REVENUE. 7.1 REGARDING SECOND ISSUE, ON THE LOSS OF RS.1,60,01,415/- ON ACCOUNT OF DERIVATIVE SCHEME, WHICH WAS CONSIDERED BY THE CIT AS SPECULATION LOSS NOT TO BE ALLOWED FOR SET OFF AGAINST ANY OTHER SOURCE OF INCOME. THE LD. AR SUBMITTED THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS COMPLETE DETAILS AND DOCUMENTS WERE PROVIDED TO THE AO. THE ASSESSEE DURING THE ASSESSMENT PROCEEDING SUBMITTED COPIES OF STAMPED ONLINE CONTRACT NOTES OF TRANSACTIONS WITH RECOGNIZED STOCK EXCHANGE OF THE BROKERS. IN ADDITION TO THIS, ENQUIRY AS PER I.T. ACT, 1961, U/S.133(6) WERE MADE BY AO IN RESPECT OF DERIVATIVE TRANSACTIONS AND THE AO RECEIVED THE REPLY THEREOF. AFTER THOROUGH INVESTIGATION AND EXAMINATION OF ITA NO.1248/16 AACHMAN VANIJYA PVT. LTD. 10 HUNDREDS OF DERIVATIVE TRANSACTIONS, THE LD. AO ALLOWED THE BUSINESS LOSS AND NOT SPECULATION LOSS. THE LD. COUNSEL ALSO SUBMITTED THAT SECTION 43(5) OF THE ACT PROVIDES THE DEFINITION OF SPECULATIVE TRANSACTION. SECTION 43(5) SHOWS THAT SPECULATION TRANSACTION ITSELF A TRANSACTION IN WHICH A CONTRACT FOR THE PURPOSE OR SALE OF ANY COMMODITY INCLUDING STOCK AND SHARES, IS PERIODICAL OR ULTIMATELY SETTLED OTHERWISE THAN BY ACTUAL DELIVERY OR TRANSFER OF THE COMMODITY OR SCRIPS. BUT SECTION 43(5) CONTAINS THE PROVISO WHEREIN CERTAIN TRANSACTIONS ARE NOT CONSIDERED AS A DERIVATIVE TRANSACTIONS. ASSESSEES CASE FALLS IN CLAUSE-D OF THE PROVISO TO SECTION 43(5) OF THE ACT WHERE AN ALLOWABLE 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 RECOGNISED STOCK EXCHANGE. THEREFORE, THE DERIVATIVE TRANSACTIONS OF RS.1,60,01,415/- HAS BEEN CARRIED OUT BY THE COMPANY DURING THE YEAR, THROUGH THE RECOGNIZED STOCK EXCHANGE BY MEANS OF STAMPED AND TIMED CONTRACT NOTES. THE TRANSACTIONS WERE WELL COVERED BY THE SECTION 43(5) OF THE ACT. APART FROM THIS, LD. COUNSEL FOR THE ASSESSEE RELIED ON THE JUDGMENTS OF KOLKATA HIGH COURT IN THE CASE OF ASIAN FINANCIAL SERVICES LTD., 70 TAXMAN.COM 9, WHEREIN IT WAS HELD AS UNDER :- WE CAN THUS ARRIVE AT A CONCLUSION THAT SPECULATION TRANSACTION MAY PARTAKE THE CHARACTER OF DEEMED BUSINESS WHERE STATUTE SO PROVIDES. DEFINITION OF ''SPECULATIVE TRANSACTION'' HAS BEEN PROVIDED IN SUB- SECTION (5) OF SECTION 43, WHICH IN SO FAR AS MATERIAL FOR OUR PURPOSES, IS AS FOLLOWS:- '(5) 'SPECULATIVE TRANSACTION' MEANS A TRANSACTION IN WHICH A CONTRACT FOR THE PURCHASE OR SALE OF ANY COMMODITY, INCLUDING ITA NO.1248/16 AACHMAN VANIJYA PVT. LTD. 11 STOCKS AND SHARES, IS PERIODICALLY OR ULTIMATELY SETTLED OTHERWISE THAN BY THE ACTUAL DELIVERY OR TRANSFER OF THE COMMODITY OR SCRIPS: PROVIDED THAT FOR THE PURPOSES OF THIS CLAUSE- (A) A CONTRACT IN RESPECT OF RAW MATERIALS 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 RECOGNISED STOCK EXCHANGE; [OR] (E) AN ELIGIBLE TRANSACTION IN RESPECT OF TRADING IN COMMODITY DERIVATIVES CARRIED OUT IN A [RECOGNISED ASSOCIATION, WHICH IS CHARGEABLE TO COMMODITIES TRANSACTION TAX UNDER CHAPTER VII OF THE FINANCE ACT, 2013 (17 OF 2013)] SHALL NOT BE DEEMED TO BE A SPECULATIVE TRANSACTION;' 11. IT WOULD APPEAR THAT THE ACTIVITIES APPEARING IN CLAUSES (A) TO (E) ARE NOT TO BE DEEMED 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 ITA NO.1248/16 AACHMAN VANIJYA PVT. LTD. 12 THE ASSESSEE IS ENTITLED TO SET OFF SUCH LOSS ARISING OUT OF DEEMED BUSINESS AGAINST THE INCOME ARISING OUT OF BUSINESS PROPER. LD. AR FOR THE ASSESSEE HAS ALSO RELIED ON THE CBDT CIRCULAR NO.3/10 DATED 23.3.2010, WHEREIN IT WAS HELD AS UNDER :- 3. IN A CASE WHERE A LOSS ON A FOREX-DERIVATIVE TRANSACTION ARISES ON ACTUAL SETTLEMENT/CONCLUSION OF CONTRACT AND IS NOT A NOTIONAL OR MARKED TO MARKET BOOK ENTRY, A FURTHER QUESTION WILL ARISE AS TO WHETHER SUCH A LOSS IS ON ACCOUNT OF A SPECULATIVE TRANSACTION AS CONTEMPLATED IN SECTION 43(5) OF THE INCOME-TAX ACT. FOR DETERMINING WHETHER LOSS FROM A TRANSACTION IN RESPECT OF A FOREX- DERIVATIVE IS A SPECULATION LOSS OR NOT, THE ASSESSING OFFICERS MAY REFER TO PROVISO (D) BELOW SUB-SECTION (5) OF SECTION 43 INSERTED BY THE FINANCE ACT, 2005, WITH EFFECT FROM 1-4-2006. IT LAYS DOWN THAT ANY 'ELIGIBLE TRANSACTION' IN RESPECT OF TRADING IN DERIVATIVES REFERRED TO IN CLAUSE (AC) OF SECTION 2 OF THE SECURITIES CONTRACTS (REGULATION) ACT, 1956, THAT HAS BEEN CARRIED OUT IN A RECOGNIZED STOCK EXCHANGE SHALL NOT BE TREATED AS A SPECULATIVE TRANSACTION. FURTHER, AN 'ELIGIBLE TRANSACTION' FOR THIS PURPOSE WOULD BE ONE THAT FULFILS THE CONDITIONS LAID DOWN IN EXPLANATION TO SECTION 43(5)(D). ANY LOSS IN A SPECULATIVE TRANSACTION CAN BE SET OFF ONLY AGAINST PROFIT FROM SPECULATIVE TRANSACTIONS. 8. ON THE OTHER HAND, LD. DR FOR THE REVENUE HAS REITERATED THE STAND TAKEN BY THE CIT U/S.263 WHICH WE HAVE ALREADY NOTED IN OUR EARLIER PARA AND IS NOT BEING REPEATED FOR THE SAKE OF BREVITY. 9. HAVING HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL AVAILABLE ON RECORDS, WE ARE OF THE VIEW THAT DURING THE ASSESSMENT PROCEEDINGS U/S.143(3) THE ASSESSEE HAS PROVIDED COMPLETE DETAILS AND DOCUMENTS OF THE SHARE VALUATION LOSS OF RS.3,37,54,250/-. IT WAS ACCEPTED BY THE AO AS A GENUINE BUSINESS LOSS. SINCE THE SAME CLOSING STOCK HAS BEEN CONSIDERED AS OPENING STOCK OF SUCCEEDING YEAR, METHOD OF VALUATION HAS BEEN DONE AS PER ACCOUNTING STANDARD 2, VALUATION OF INVENTORIES AND ITA NO.1248/16 AACHMAN VANIJYA PVT. LTD. 13 THE SAID VALUATION HAS BEEN CONSISTENTLY FOLLOWED BY THE COMPANY SINCE ITS BEGINNING. THEREFORE, SAID VALUATION LOSS IS NOT A CONTINGENT OR NOTIONAL LOSS. SO FAR AS THE DERIVATIVE SEGMENT AND SPECULATION LOSS OF RS.1,60,01,415/- IS CONCERNED, THE ASSESSEE HAS SUBMITTED THE COMPLETE DETAILS AND DOCUMENTS DURING THE ASSESSMENT PROCEEDINGS. THE ASSESSEE SUBMITTED TO THE AO THE COMPLETE DETAILS AND DOCUMENTS, SUCH AS, COPIES OF STAMPED ONLINE CONTRACT NOTES, THE TRANSACTIONS WITH RECOGNISED STOCK EXCHANGE. IN ADDITION TO THIS, THE NECESSARY ENQUIRY AS PER THE ACT, U/S.133(6) WERE MADE BY THE ASSESSING OFFICER. THE DERIVATIVES SEGMENT IS NOT SPECULATION LOSS BECAUSE IT IS MENTIONED IN ONE OF THE EXCEPTIONS OF PROVISO TO SECTION 43(5) WHEREIN IT HAS BEEN MENTIONED THAT AN ELIGIBLE TRANSACTION IN RESPECT OF DERIVATIVES WHICH ARE CARRIED OUT THROUGH RECOGNISED STOCK EXCHANGE, SHOULD NOT BE TREATED AS SPECULATIVE TRANSACTION. WE ALSO NOTICE THAT THE ASSESSEE HAS SUBMITTED ALL THE DOCUMENTS AND DETAILS IN RESPECT OF THE TRANSACTIONS BEFORE THE AO. MERELY BECAUSE THE AO DID NOT BRING THESE DETAILS AND DOCUMENTS ON THE ASSESSMENT RECORD, DOES NOT MEAN THAT THE AO DID NOT APPLY HIS MIND. MERELY BECAUSE THE ASSESSMENT ORDER IS CRYPTIC AND DOES NOT GIVE THE REFERENCE OF THE THESE DOCUMENTS AND DETAILS SUBMITTED BY THE ASSESSEE, DOES NOT MEAN THAT THE AO HAS NOT APPLIED HIS MIND PROPERLY. THEREFORE, IT CANNOT BE SAID THAT THE ORDER PASSED BY THE AO IS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE. ITA NO.1248/16 AACHMAN VANIJYA PVT. LTD. 14 THEREFORE, BASED ON THE ABOVE DISCUSSION, WE ARE OF THE VIEW THAT THE ORDER PASSED BY THE AO IS NEITHER ERRONEOUS NOR PREJUDICIAL TO THE INTEREST OF REVENUE. THEREFORE, WE QUASH THE ORDER PASSED BY CIT U/S.263. 10. IN THE RESULT, APPEAL FILED BY THE ASSESSEE, IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 04/08/2017. SD/ - (N.V.VASUDEVAN) SD/ - (DR. A.L.SAINI) / JUDICIAL MEMBER / ACCOUNTANT MEMBER /KOLKATA ; DATED 04/08/2017 /PRAKASH MISHRA ,SR.PS. / COPY OF THE ORDER FORWARDED TO : / BY ORDER, SENIOR PRIVATE SECRETARY, HEAD OF OFFICE/D.D.O, I.T.A.T, KOLKATA BENCHES, KOLKATA . 1. / THE APPELLANT-AACHMAN VANIJYA PVT. LTD 2. / THE RESPONDENT.- ITO WARD-11(2), KOLKATA 3. ( ) / THE CIT(A), KOLKATA. 4. / CIT 5. , , / DR, ITAT, KOLKATA 6. / GUARD FILE. //TRUE COPY//