ACIT, CHENNAI V. Shri V.Prabhakar Ram, CHENNAI

ITA 1287/CHNY/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 61226 (ITAT-CHENNAI)
• Duration Of Justice: 11 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-06-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 23-05-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 07-07-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: V RA VICHANDRAN
• Keywords: Salary income; Rule of consistency; Transactions in derivatives; Speculation loss
• Section: 43(5)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI BEFORE SHRI N.S.SAINI, ACCOUNT ANT MEMBER AND SHRI VIKAS AWASTHY, JUDICIAL MEMBER ITA NOS.1286 & 1287/MDS/2011 (ASSESSMENT YEAR: 2006-07 & 2007-08) THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-IV(4), CHENNAI-600 034. VS. SHRI V.PRABHAKAR RAM, NEW NO.68 (268), ROYAPETTA HIGH ROAD, ROYAPETTAH, CHENNAI-600 014. PAN:AACPP3492P (APPELLANT) (RESPONDENT) APPELLANT BY : MR. SHAJI P.JACOB, ADDL. CIT RESPONDENT BY : MR. V.RA VICHANDRAN, FCA DATE OF HEARING : 23 RD MAY, 2012 DATE OF PRONOUNCEMENT : 28 TH JUNE, 2012 O R D E R PER VIKAS AWASTHY, JUDICIAL MEMBER: THE PRESENT TWO APPEALS I.E. ITA NOS.1286 & 1287/MDS/2011 HAVE BEEN FILED BY THE REVENUE AGAIN ST THE ORDER DATED 15.04.2011 PASSED BY THE CIT(A)-V, CHEN NAI, RELEVANT TO THE ASSESSMENT YEARS 2006-07 AND 2007-0 8 RESPECTIVELY. SINCE BOTH THE APPEALS HAVE COMMON IS SUE, THEY ARE HEARD TOGETHER AND DISPOSED OFF BY THIS C OMMON ORDER. ITA NOS.1286 & 1287/MDS/2011 2 2. THE ASSESSEE IS A CEO IN NEWGEN IMAGING SYSTEMS PVT.LTD. APART INCOME FROM SALARY, THE ASSESSEE HA D EARNED INCOME FROM DIVIDEND AND CAPITAL GAINS FROM TRANSA CTION IN SHARES. THE ASSESSEE HAD ALSO TRANSACTED IN FUTURE S & OPTIONS. HOWEVER, HE SUFFERED LOSS FROM SUCH TRANSA CTIONS. THE ASSESSEE FILED RETURN OF HIS INCOME RELEVANT TO THE ASSESSMENT YEAR 2006-07 ON 31.07.2006 SHOWING TOTA L INCOME OF ` 1,40,12,172/-. THE RETURN OF THE ASSESSEE WAS PROCESSED UNDER SECTION 143(1) ON 8.12.2006. SUBSEQ UENTLY, THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY AND NOTICE UNDER SECTION 143(2) WAS ISSUED TO THE ASSESSEE ON 2.7.2007. DURING THE YEAR, THE ASSESSEE CLAIMED LOS S OF ` 36,38,488/- FROM TRANSACTIONS IN FUTURES & OPTIONS . THE ASSESSEE SET OFF THE LOSS AGAINST SHORT TERM CAPITA L GAIN DERIVED FROM TRANSACTIONS IN SHARES AND MUTUAL FUND UNITS. THE ASSESSING OFFICER TREATED THE LOSS AS SPECULATI VE LOSS AND DISALLOWED THE CLAIM OF THE ASSESSEE VIDE ASSESSMEN T ORDER DATED 26.12.2008. SIMILARLY FOR THE ASSESSMENT YEAR 2007-08, THE ASSESSING OFFICER DISALLOWED THE CLAIM OF THE ASSES SEE TO THE ITA NOS.1286 & 1287/MDS/2011 3 TUNE OF ` 44,91,433/- ARISING OUT OF LOSS FROM TRANSACTION OF FUTURES &OPTIONS VIDE ASSESSMENT ORDER DATED 10.12. 2009. 3. AGGRIEVED AGAINST THE AFORESAID ASSESSMENT ORDER S, THE ASSESSEE HAS FILED SEPARATE APPEALS BEFORE THE CIT( A), WHEREIN THE CIT(A) HAS HELD AS UNDER:- AS TO THE QUANTUM OF THE TRANSACTIONS, THE FOLLOWING FACTS ARE WORTH CONSIDERING: FOR THE ASSESSMENT YEAR 2007-08, THE APPELLANT HAS DECLARED SHORT TERM CAPITAL GAINS OF ` 60.48 LACS ( ` 144.66 LACS IN 2006-07) AND LONG TERM CAPITAL GAIN OF ` 150.17 LACS ( ` 57.95 LACS IN 2006-07). THE RATIO OF F & O (NET VALUE) OF ` 44.91 LACS ( ` 36.38 LACS IN 2006-07) WORKED OUT TO ABOUT 4% (6% IN 2006-07) OF THE TOTAL VALUE OF SALE OF SHARES DURING THE YEA R. ALL THE TRANSACTIONS HAVE BEEN HANDLED THRU REGISTERED STOCK BROKERS OF RECOGNIZED STOCK EXCHANGES AFTER PAYING THE SECURITIES TRANSACTION TAX. HIS HOLDING OF SHARES WAS TO THE EXTENT OF ` 751 LACS AS ON 31.3.2006 AND ` 728 LACS AS ON 31.3.2007. I FIND THAT THE APPELLANT IS A BUSY PERS ON FREQUENTLY TRAVELLING ABROAD IN HIS CAPACITY AS THE CEO OF NEWGEN FOR BUSINESS PURPOSES (HE WAS OUT OF INDIA FOR 91 DAYS DURING THE A.Y 2006-07 AND 83 DAYS DURING AY 2007-08). HIS INTENTION IS TO INVEST IN SHARES AND NOT TO DO REGULAR BUSINESS IN SHARES. ITA NOS.1286 & 1287/MDS/2011 4 JUST TO COVER EARLIER YEAR LOSSES AND AS ADVISED BY THE BROKERS HE HAD ENTERED INTO DERIVATIVE TRANSACTIONS AND TAKING INTO ACCOUNT THE PRINCIPLE OF CONSISTENCY [JANAK S.RANGAMALA VS. ACIT 2007 11 SOT 627 (MUM)] SPECIFYING THAT DETERMINATION ON THE BASIS OF BOOKS OF ACCOUNTS AND INTENTION TO B E THE DECISIVE FACTORS TAKING INTO ACCOUNT THAT UNL ESS THERE IS A MATERIAL CHANGE, PRINCIPLE OF CONSISTENC Y SHOULD BE APPLIED AND ALSO TAKING INTO ACCOUNT THE INTENTION OF THE APPLICANT AT THE TIME OF PURCHASE, FREQUENCY OF TRANSACTIONS, REGULARITY/CONTINUITY OF THE TRANSACTIONS, VOLUME OF TRANSACTIONS, PERIOD OF HOLDING, SOURCE AND THE MANNER OF PURCHASE AND SALE, EXISTENCE OF OTHER OCCUPATION, PERCENTAGE OF VOLUME BETWEEN DELIVERY BASED/NON-DELIVERY BASED TRANSACTIONS AND STATUS/NATURE OF ACTIVITIES IN THE PREVIOUS YEARS, AND APPRECIATING THE FACT THAT NOT A SINGLE CRITERION IS DECISIVE BUT ONLY THE TOTAL EFF ECT OF THE FACTS AND CIRCUMSTANCES OF THE CASE SHOULD BE CONSIDERED TO DETERMINE THE NATURE OF INCOME, THEREBY TAKING THE OVERALL TOTAL EFFECT OF THE ABOV E INTO ACCOUNT, I HOLD THE F&O TRANSACTIONS OF THE APPLICANT AS INVESTMENT TRANSACTIONS AND NOT BUSINESS/SPECULATIVE TRANSACTIONS AND DECIDE THE APPEAL IN FAVOUR OF THE APPELLANT ALLOWING THE LOSS INCURRED BY HIM IN THE F&O TRANSACTIONS TO BE ADJUSTED WITH OTHER SHORT TERM CAPITAL GAINS MADE ITA NOS.1286 & 1287/MDS/2011 5 DURING THE RESPECTIVE YEARS. ACCORDINGLY, THE APPEALS OF THE APPELLANT ON THIS GROUND STAND ALLOWED. THE CIT(A) ALLOWED THE APPEALS OF THE ASSESSEE HOLD ING THAT FUTURES & OPTIONS TRANSACTIONS OF THE ASSESSEE ARE NOT BUSINESS OR SPECULATIVE TRANSACTIONS. THEREFORE, TH E LOSS SUFFERED BY THE ASSESSEE IN FUTURES & OPTIONS TRANS ACTIONS CAN BE ADJUSTED WITH OTHER SHORT TERM CAPITAL GAINS DURING THE RESPECTIVE YEARS. 4. AGGRIEVED AGAINST THE FINDINGS OF THE CIT(A), TH E REVENUE HAS COME IN APPEAL BEFORE THE TRIBUNAL FOR BOTH THE ASSESSMENT YEARS I.E. 2006-07 & 2007-08 ASSAILING T HE ORDER OF THE CIT(A) ON THE GROUND THAT THE CIT(A) HAS ERR ED IN HOLDING THAT FUTURE & OPTION TRANSACTIONS OF THE AS SESSEE SHOULD BE TREATED AS INVESTMENT TRANSACTION AND NOT AS BUSINESS OR SPECULATIVE TRANSACTIONS. 5. THE D.R. APPEARING ON BEHALF OF THE REVENUE SUBM ITTED THAT FUTURES & OPTIONS ARE NOT DELIVERY BASED TRANS ACTIONS AND THEREFORE THEY FALL UNDER THE CATEGORY OF SPECULATI VE TRANSACTIONS. IN ORDER TO SUPPORT HIS CONTENTIONS, HE RELIED ON ITA NOS.1286 & 1287/MDS/2011 6 THE JUDGEMENT OF THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF ABDUL GANI HAJI ABIB VS. CIT., REPORTED AS 72 IT R 6. 6. ON THE OTHER HAND, AUTHORISED REPRESENTATIVE OF THE ASSESSEE SUBMITTED THAT FUTURES & OPTIONS ARE PART OF DERIVATIVES AND ARE NOT SPECULATIVE TRANSACTIONS. HE STRONGLY SUPPORTED THE ORDER OF THE CIT(A). IN ORDER TO SUPP ORT HIS CONTENTIONS, THE AUTHORIZED REPRESENTATIVE RELIED O N THE JUDGEMENT OF THE HONBLE BOMBAY HIGH COURT IN THE C ASE OF CIT VS. SHRI BHARAT R.RUIA(HUF) REPORTED AS 199 TAX MANN 87(BOM). HE POINTED OUT THAT IN SUB-PARA (7) OF PAR A 19 OF THE JUDGEMENT, THE HONBLE HIGH COURT BY RELYING UPON THE JUDGEMENT OF THE HONBLE MADRAS HIGH COURT IN THE C ASE OF RAJSHREE SUGARS & CHEMICALS LTD. VS. AXIS BANK LTD. 8 MLJ 261 HAS OBSERVED THAT FUTURES & OPTIONS ARE SUB-CA TEGORIES OF DERIVATIVES. HE FURTHER RELIED ON EXPLANATORY NO TES ON THE PROVISIONS OF THE FINANCE ACT, 2005 VIDE CIRCULAR NO.3 OF 2006 OF CBDT, WHEREIN TRADING IN DERIVATIVES HAVE B EEN EXCLUDED FROM THE AMBIT OF SPECULATIVE TRANSACTIONS IN PURSUANCE TO THE AMENDMENT TO THE PROVISIONS OF SE CTION 43(5)(D). HE FURTHER POINTED OUT THAT AS PER CIRCUL AR NO.3/2006 ITA NOS.1286 & 1287/MDS/2011 7 DATED 27.02.2006(SUPRA), THE AMENDMENT IS APPLICABL E WITH EFFECT FROM ASSESSMENT YEAR 2006-07 ONWARDS. FURTHE R, IN ORDER TO SUPPORT HIS CONTENTIONS THAT TRADING IN FU TURES & OPTIONS IS NOT SPECULATIVE TRANSACTION, HE RELIED O N THE ORDER OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF PRADEEP KUMAR HARLALKA VS. ACIT., REPORTED AS 47 SOT 204(MU M). 7. WE HAVE HEARD THE SUBMISSIONS MADE BY THE PARTIE S AND HAVE GONE THROUGH THE DOCUMENTS ON RECORD AND T HE JUDGEMENTS RELIED ON BY THE RESPECTIVE PARTIES. FIN ANCE ACT, 2005 HAS BROUGHT AN AMENDMENT CLARIFYING THE TAX TR EATMENT OF DERIVATIVE TRANSACTION UNDER THE INCOME TAX ACT . THE RELEVANT EXTRACT OF THE PROVISIONS OF SECTION 43(5) (D) AFTER AMENDMENT INSERTED BY FINANCE ACT, 2005 TO BE EFFEC TIVE FROM 1.4.2006 ARE AS UNDER:- SPECULATIVE TRANSACTION MEANS A TRANSACTION IN WH ICH A CONTRACT FOR THE PURCHASE OF SALE OF ANY COMMODITY, INCLUDING STOCKS AND SHARES, IS PERIODICALLY OR ULTIMATELY SE TTLED OTHERWISE THAN BY THE ACTUAL DELIVERY OR TRANSFER O F THE COMMODITY OR SCRIPS: PROVIDED THAT FOR THE PURPOSE OF THIS CLAUSE ] ITA NOS.1286 & 1287/MDS/2011 8 A) XXXXXX B)XXXXX C)XXXXX D) AN ELIGIBLE TRANSACTION IN RESPECT OF TRADING IN DERIVATIVES REFERRED TO IN CLAUSE (AC) OF SECTION 2 OF SECURITI ES CONTRACTS (REGULATION) ACT, 1956 CARRIED OUT IN A RECOGNIZED STOCK EXCHANGE SHALL NOT BE DEEMED TO BE A SPECULATIVE TRANSACTION. THE CBDT CIRCULAR NO.3/2006 DATED 27.02.2006 SPECIF ICALLY PROVIDES THAT AMENDMENT IN SECTION 43(5) BY THE FIN ANCE ACT, 2005 SHALL BE APPLICABLE FROM ASSESSMENT YEAR 2006- 07 ONWARDS. IN THE INSTANT CASE THE ASSESSEE HAS DONE FUTURE AND OPTION TRANSACTIONS IN THE FINANCIAL YEARS RELE VANT TO ASSESSMENT YEAR 2006-07. IT HAS NOT BEEN DISPUTED B Y THE REVENUE THAT THE TRANSACTIONS HAVE BEEN CARRIED OUT AT THE RECOGNIZED STOCK EXCHANGE. THUS THE CASE OF THE AS SESSEE IS SQUARELY COVERED BY THE AMENDMENT IN THE ACT. THE CIT(A) IN HIS DETAILED ORDER HAS RIGHTLY HELD THAT FUTURES & OPTIONS TRANSACTIONS CARRIED OUT BY THE ASSESSEE AR E NOT SPECULATIVE TRANSACTIONS AND THUS LOSS ARISING OUT OF THE ITA NOS.1286 & 1287/MDS/2011 9 TRANSACTIONS IS ELIGIBLE FOR SET OFF AGAINST CAPITA L GAINS DURING THE RESPECTIVE YEARS. THE MUMBAI BENCH OF THE TRIBU NAL IN THE CASE OF GAJENDRA KUMAR T.AGARWAL VS. ITO REPO RTED AS 2011 TIOL 337 ITAT (MUM) HAS HELD AS UNDER:- 27 . AS A RESULT OF THE AMENDMENT IN SECTION 43(5) WITH EFFECT FROM 1 ST A P R I L 2006 , LOSSES INCURRED IN DERIVATIVE TRADING ARE HELD TO BE ELIGIBLE FOR BEING SET OFF AGAINST N O R M A L BUSINESS P R O F I T S , AS DERIVATE TRADING ITSELF IS TREATED AS A NON- SPECULATIVE B US I N E SS , AND L O SS E S O F ANY NON- SPECULATIVE BUSINESSES CAN BE ADJUSTED PROFITS OF ANY NON-SPECULATIVE B US I N E SS . I R O N I C A LL Y , H O W E V E R , THIS APPARENTLY WELL- INTENDED MEASURE OF RELIEF TO THE ASSESSEE HAS RESULTED I N AN ABSURD SITUATION IN WHICH PAST LOSSES OF DERIVATIVES TRADING CANNOT BE SET OFF A G A I NS T PROFITS OF DERIVATIVES TRADING I T S E L F . WHAT WAS MEANT TO BE A SOURCE OF RELIEF HAS TURNED INTO A C AUS E OF M I S E R Y . THAT IS CLEARLY AN A B SU R D I T Y . AS TO WHAT SHOULD BE DONE IN SUCH A SI T UA T I O N , WE F I ND GUIDANCE FROM THE OBSERVATIONS MADE BY H O N B L E S UP R E M E C O U R T , IN THE CASE CIT VS H I N DU S T AN BULK C A RR I E R S LTD (259 ITR 449 ) , AS F O LL O W S : A CONSTRUCTION WHICH REDUCES THE STATUTE TO A FUTILITY HAS TO BE A V O I D E D . A S T A T U T E OR ANY ENACTING PROVISION ITA NOS.1286 & 1287/MDS/2011 10 THEREIN MUST BE SO CONSTRUED AS TO MAKE IT EFFECTIVE AN D OPERATIVE ON THE PRINCIPLE EXPRESSED IN MAXIM UT RES MAGIS VALEAT QUAM P E R E A T I.E., A LIBERAL CONSTRUCTION SHOULD BE PUT UPON WRITTEN I N S T R U M EN T S , SO AS T O UPH O L D T H E M , IF P O SS I B L E , AND CARRY INTO EFFECT THE INTENTION OF THE P A R T I E S . [ S EE B R OOM S L EG A L MAXIMS (10TH E D I T I O N ) , PAGE 361, C R A I E S ON S T A T U T ES (7TH E D I T I O N ) PAGE 95 AND MAXWELL ON S T A T U T ES (11TH E D I T I O N ) PAGE 221.] A STATUTE IS DESIGNED TO BE WORKABLE AND THE INTERPRETATION T H E R E O F BY A C O U R T SH O U L D BE TO SECURE THAT OBJECT UNLESS CRUCIAL OMISSION OR CLEAR DIRECTION MAKES THAT EN D UNATTAINABLE - WHITNEY V. C O MM I SS IO N E R OF INLAND REVENUE [1926] AC 37 P. 52 R E F E RR E D TO IN CIT V. S. TEJA SINGH AIR 1959 SC 352, G U R S A H A I S A I G A L V. CIT AIR 1963 SC 1062 . THE C O U R T S WILL HAVE TO REJECT THAT CONSTRUCTION WHICH WILL D E F EA T THE P L A I N INTENTION OF THE L E G I S L A T U R E EVEN THOUGH THERE MAY BE SOME INEXACTITUDE IN T H E LANGUAGE USED - S A L M O N V. DUNCOMBE [1886] 11 AC 627 P. 634 (PC), C U R T I S V. STOVIN [ 1889 ] 22 CBD 513 R E F E RR E D TO IN S. TEJA S I N G H S CASE ( S U P R A ) . IF THE CHOICE IS BETWEEN TWO ITA NOS.1286 & 1287/MDS/2011 11 I N T E R P R E T A T I O N S , THE NARROWER OF WHICH WOULD FAIL T O ACHIEVE THE MANIFEST PURPOSE OF THE LEGISLATION WE SHOULD A V O I D . W H ENE V E R IT IS POSSIBLE TO DO SO, IT MUST BE DONE TO CONSTRUE THE PROVISIONS W H I C H APPEAR TO CONFLICT SO THAT THEY H A R MO N I S E . IT SHOULD NOT BE LIGHTLY ASSUMED T H A T PARLIAMENT HAD GIVEN WITH ONE HAND WHAT IT TOOK AWAY WITH THE O T H E R . 8. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF SHR I BHARAT R.RUIA(HUF) (SUPRA) HAS HELD THAT FUTURE & O PTION ARE ONE OF THE CATEGORIES OF DERIVATIVES. ON THE CONTRA RY, THE JUDGEMENT RELIED ON BY THE D.R. IN THE CASE OF ABDU L GANI HAJI ABIB VS. CIT (SUPRA) IS NOT APPLICABLE IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE. OVER THE PERIOD OF TIME, SCOPE OF DEFINITIONS HAVE ENLARGED TO INCLUDE CERTA IN TERMS WHICH WERE NOT EARLIER PART OF THE DEFINITIONS. IN THE LIGHT OF THE ABOVE JUDGEMENTS, WE ARE OF THE CONSIDERED OPINION THAT LOSS SUFFERED BY THE ASSESSEE DURING FUTURE & OPTION TRA NSACTIONS IS NOT A SPECULATIVE LOSS. THUS, THE SAME CAN BE SE T OFF AGAINST SHORT TERM CAPITAL GAINS BY THE ASSESSEE DU RING THE RELEVANT ASSESSMENT YEAR. WE, DO NOT FIND ANY INFIR MITY IN THE ITA NOS.1286 & 1287/MDS/2011 12 IMPUGNED ORDER OF THE CIT(A). WE, THEREFORE, UPHOLD THE SAME AND DISMISS BOTH THE APPEALS OF THE REVENUE BE ING DEVOID OF ANY MERIT. ORDER PRONOUNCED IN THE OPEN COURT ON THURSDAY , THE 28 TH DAY OF JUNE, 2012 AT CHENNAI. SD/- SD/- ( N.S. SAINI ) ( VIKAS AWASTHY ) ACCOUNTANT MEMBER JUDICIAL MEMBER CHENNAI, DATED THE 28 TH JUNE, 2012. SOMU COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT (4) CIT(A) (5) D.R. (6) G.F .