DCIT, CIR - 4(2)(1), MUMBAI V. M/S.OHM STOCK BROKER P. LTD., MUMBAI

ITA 1445/MUM/2020

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 5131 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 3 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-06-2022
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Assessment Year: 2014-2015
• Appeal Filed On: 05-03-2020
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Transactions in derivatives; Earning of tax free income; Speculation loss; Futures and options; Speculative transactions; Set aside
• Section: 12; 28; 142(1); 43(5); 143(1); 143(2); 192; 43; 73

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH, MUMBAI BEFORE SHRI ABY T. VARKEY, HON'BLE JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, HON'BLE ACCOUNTANT MEMBER ITA NO. 1445/MUM/2020 (A.Y. 2014-15) DCIT – Circle – 4(2)(1) Room No. 642, 6 th Floor Aayakar Bhavan, M.K. Road Mumbai - 400020 v. M/s. Ohm Stock Brokers Pvt. Ltd., 301-A, Poonam Chambers B-Wing, Dr. A.B. Road Worli, Mumbai -400018 PAN: AAACO3526E (Appellant) (Respondent) Assessee by : None Department by : Shri M.P. Ahuja Date of Hearing : 25.05.2022 Date of Pronouncement : 21.06.2022 O R D E R PER S. RIFAUR RAHMAN (AM) 1. This appeal is filed by the revenue against order of Learned Commissioner of Income Tax (Appeals)-9, Mumbai [hereinafter in short “Ld.CIT(A)”] dated 04.12.2019 for the A.Y.2014-15. 2. Brief facts of the case are, assessee filed return of income on 26.09.2014 declaring total income of ₹.5,32,15,200/-. The return was 2 ITA NO. 1445/MUM/2020 (A.Y. 2014-15) M/s. Ohm Stock Brokers Pvt. Ltd., processed u/s. 143(1) of Income-tax Act, 1961 (in short “Act”) accepting the return of income. Subsequently the case was selected for scrutiny and statutory notice u/s. 143(2) and 142(1) of the Act were issued and served on the assessee. In response AR of the assessee attended and submitted the information as called for. 3. The assessee is engaged in the business of Stock Broking Activity, Trading and Investment in Shares, Securities and Derivatives. The Assessing Officer observed from the financial statements that major activities of the assessee is from sale of equity shares and the assessee has shown share trading loss of ₹.7,79,70,706/- in own trading in shares. The Assessing Officer asked the assessee to explain why Explanation to Section 73 of the Act are not attracted in assessee’s case. However, assessee has not filed any explanation in this regard. The Assessing Officer observed in Assessment Order that assessee apart from dealing in share broking also involved in trading of shares and derivatives and he acknowledged that these two activities are two distinct activities. The assessee is involved in trading of shares both speculation and non speculation business, since activities of the assessee are covered under Explanation to Section 73 of the Act, the share dealing activity carried on by the assessee is comes under speculation business for the purpose of 3 ITA NO. 1445/MUM/2020 (A.Y. 2014-15) M/s. Ohm Stock Brokers Pvt. Ltd., Section 73 to the extent of its business consists of purchase and sale of shares. Therefore, the loss on account of share trading activity of the assessee has to be treated as speculation loss. Accordingly, the trading loss claimed by the assessee was accordingly, treated as speculation loss by the Assessing Officer. Further, Assessing Officer disallowed the expenses incurred on such speculation business based on the proportion of turnover, he worked out percentage of speculative transaction @14.68% to the total turnover. Accordingly, he allocated the expenses relating to share trading to the extent of ₹.1,32,66,373/-. Therefore, the Assessing Officer disallowed total loss relating to speculative business to the extent ₹.9,12,37,079/-. 4. Aggrieved assessee preferred an appeal before the Ld.CIT(A) and before the Ld.CIT(A) assessee filed detailed submissions, for the sake of clarity it is reproduced below: - "Ground- Share Trading Business Loss treated as Speculative Loss. 1. The Appellant Company had incurred losses in trading in future and options of Rs.7,79,70,705.89/- which has been claimed as set off against brokerage income earned during the year. 2. During the course of assessment proceedings, the Learned AO. had asked as to why the set off of the losses incurred by the assessee company in futures and options against the income from brokerage be not denied. 4 ITA NO. 1445/MUM/2020 (A.Y. 2014-15) M/s. Ohm Stock Brokers Pvt. Ltd., 3. In response your Appellant had submitted vide letter dated 2712.2016 that the Appellant is a share broker and registered with BSE and NSE carrying on brokerage business as well as trading in equity segment and futures and options segments. Copy of letter dated 27.12.2016 is enclosed herewith for your reference. (Refer Pg No. 15 to 18) 4. The details of Profit and Loss A/c from the above trading activity is asunder. 5. Further, it was also submitted that as per section 43(5) of the IT Act In sections 28 to 41 and in this section, unless the context otherwise requires speculative transaction" 25 means a transaction in which a contract 25 for the purchase or sale of any commodity 25 , 5 ITA NO. 1445/MUM/2020 (A.Y. 2014-15) M/s. Ohm Stock Brokers Pvt. Ltd., including stocks and shares, is periodically or ultimately settledotherwise than by the actual delivery 35 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; (d) an eligible transaction in respect of trading in derivatives referred to in clause [(ac)] of section 2 28 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognized stock exchange; (e) an eligible transaction in respect of trading in commodity derivatives carried out in 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 32 [clause(d)], the expressions- (i) "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 rules, regulations or bye- laws made or directions issued under those Acts or by banks or mutual funds on a recognized stock exchange; and 6 ITA NO. 1445/MUM/2020 (A.Y. 2014-15) M/s. Ohm Stock Brokers Pvt. Ltd., (B) 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) "recognised stock exchange" means a recognised stock exchange as referred to in clause U) of section 233 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;] [Explanation 2.—For the purposes of clause (e), the expressions— (i) "commodity derivative" shall have the meaning as assigned to it in Chapter VII of the Finance Act, 2013; (ii) "eligible transaction" means any transaction,— (A) carried out electronically on screen-based systems through member or an intermediary, registered under the bye-laws, rules and regulations of the recognised association for trading in commodity derivative in accordance with the provisions of the Forward Contracts (Regulation) Act, 1952 (74 of 1952) and the rules, regulations or bye-laws made or directions issued under that Act on a recognised association; and (B) which is supported by a time stamped contract note issued by such member or intermediary to every client indicating in the contract note, the unique client identity number allotted under the Act, rules, regulations or bye-laws referred to in sub-clause (A), unique trade number and permanent account number allotted under this Act; (iii) "recognised association" means a recognised association as referred to in clause (I) of section 236o the Forward Contracts (Regulation) Act, 1952 (74 of 1952) and which fulfils such conditions as may be prescribed36a and is notified36k by the Central Government for this purpose;] The above section has excluded the transactions in F&0 derivatives from the scope of speculative transactions by virtue of clause(d) of sub section (5) of section 43 w.e.f assessment year 2006-07. It would be seen that Section 43 opens with the sentence, "In sections 28 to 41 and in this section, unless the context otherwise requires": It is therefore clear that in so far as computation of income under the head "Profits and gains of business or profession" is concerned 7 ITA NO. 1445/MUM/2020 (A.Y. 2014-15) M/s. Ohm Stock Brokers Pvt. Ltd., the deeming clause 43(5)(d) makes derivative transactions as non- speculative transactions and therefore the assessee company has correctly computed the loss from share trading at (-) Rs. 7,79,70,706/- 6. Similarly, the brokerage income earned by the assessee company is assessable under the head "Profits and gains of business orprofession": Thus, the assessee has correctly worked out its revenue from business operations at Rs. 9,97,43,0731-. Copy of Profit and Loss A/c is enclosed herewith (Refer Pg.No 6) 7. In addition, the assessee company has earned other income of Rs. 5,45,54,749/- which income has been historically treated and assessed under the head "Profits and gains of business or profession": (Refer Pg No 6). It would be the seen that the assessee company has no come chargeable to tax under any other head and therefore the Computation of income as made in the return of income filed by the assessee company is in accordance with the provisions of Section 28 to 41 as well as Section 70 of the Act. 8. The provisions of Section 73 comes into operation where for assessment year any loss is computed in respect of speculation business. In the case of the assessee company there is no loss from any speculation business after taking into account the provisions of Section 43(5). Thus, the question of application of Section 73 did not arise at all. 9. The Learned AO has disallowed the expenses of Rs.1,32,66,373/- considering the same as related to share trading activity. The Appellant Company states that no part of the expense be disallowed considering the same as related to share trading activity. Particulars Amount(Rs) Total Expenses as per P&L (Refer Pg No 6) 9,09,85,102/- Less: Expenses for exempt income (Refer Pg. 2) 614,7141/-- 9,03,70,388/- 14.68% of Rs. 9,03,70,388/- 1,32,66,373/- Based on the above submissions, the appellant relies on the following judicial Pronouncements: 10. CIT v. Rajan C Sheth -Born HC (2016): It was held that According to section 43(5), proviso (c), a contract entered into by a member of a forward market or 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, 8 ITA NO. 1445/MUM/2020 (A.Y. 2014-15) M/s. Ohm Stock Brokers Pvt. Ltd., the member shall not be deemed to be a speculative transaction. In the instant case loss claimed by the assessee was allowed to be set off against business profits as provisions of section 43(5), proviso (c), of the Act are very clear vis-a-vis exclusion of jobbing activity carried out to guard against loss from the ambit of speculative loss. Asian Financial Services Ltd. vs. Commissioner of I come Tax-3. Kolkata HC (2016): It has been held that once it is deemed to be business loss under the proviso appended to section 43(5), the question of applying section 73 or the explanation thereto for the purpose of refusing the loss to be set off from the business income is palpably wrong. D H Sechron Electrodes (P) Ltd vs. JT.CIT ITAT -Indore (2018): It was held that Loss incurred by assessee on account of future and option transactions entered during year could not be termed as speculation loss in view of Explanation to section 73. It was further impugned loss falls under proviso (d) to section 43(5) and therefore could not be treated as speculative loss and as such assessee was eligible to set off impugned loss from future and option transactions against other business income earned by assessee during year. 11. In view of the above submissions, the appellant submits that the loss incurred by the Appellant be treated as normal business loss and not speculative loss. Thus, disallowance u/s 73 is not warranted and the addition made by the Learned AO is to be deleted in full." 5. After considering the detailed submissions of the assessee Ld.CIT(A) deleted the additions made by the Assessing Officer with the following observations: - “4.3.2 It is seen that the AO has completely ignored the crucial facts regarding the breakup of the total income of the appellant which were brought to his notice vide letter dated 27/12/2016 filed by the appellant during the course of assessment proceedings. These facts are crucial while deciding the issue under hand. The breakup of the total income as submitted by the appellant is as follows: 9 ITA NO. 1445/MUM/2020 (A.Y. 2014-15) M/s. Ohm Stock Brokers Pvt. Ltd., STT charges . (6,63,799.00) (6,63,799.00) Other Charges - (30,007.90) (30,007.90) Derivatives / Futures & Options Segment F&O / Derivatives Trading (12,11,56,106.7 7) (12,11,56,106.77) Currency Derivatives Trading 2,52,065.00 -. 2,52,065.00 TOTAL 30,854.75 (7,80,01,560.6 4) (7,79,70,705.89) As per Profit and Loss Account (7,79,70,705.89) It is seen that the appellant has earned profit of Rs. 5,01,11,062.42/- from delivery-based transactions and a loss of Rs. 12,11,56,106.77/- from derivatives transactions. I have gone through the facts of the case and appellant's submissions carefully. I find that the above details regarding the breakup of the share trading and derivatives income were submitted by the appellant vide it's letter dated 27-12- 2016 filed during assessment proceedings. It is evident from the order sheet noting dated 28-12-2016 made by the AO that the letter was filed by the appellant. The letter was also found on the record within the assessment folder. 4.3..3 The appellant has sought for set-off of losses of Rs. 12,11,56,106.77/- arising from derivative transactions as non- speculative loss as claimed in the return of income. The appellant's main contention is that, Explanation to section 73 cannot apply to loss arising from derivative transactions which are categorically 10 ITA NO. 1445/MUM/2020 (A.Y. 2014-15) M/s. Ohm Stock Brokers Pvt. Ltd., excluded from being regarded as speculative business as defined under section 43(5) read with proviso (d) thereto. The appellant has relied upon judicial pronouncements which have been passed after the Delhi High Court judgment in case of DLF Commercial Developers Ltd. wherein the stand taken by the Delhi High Court has been distinguished and it has been held that the loss incurred in trading in derivative is a business loss. I have perused the Memorandum of the Finance Bill, 2005 introducing the provisions of clause (d) of Section 43(5) and the judicial pronouncements in an identical case of Asian Financial Services Ltd. vs. CIT [2016] 70 taxmann.com 9/240 Taxman 192 (Cal HC). The intent of the legislature in exempting the transactions of derivatives carried out through recognized stock exchanges from the purview of speculative transactions is due to technological changes in the Stock Exchanges which provide transparency and prevent generation of fictitious losses. The memorandum itself states the present distinction between speculative and non-speculative transactions is no more required. 4.3.4 The Hon. Calcutta High Court in the case of Asian Financial Services Ltd has duly considered the judgment of DLF Commercial Developers Ltd. and has taken a distinct stand that loss incurred in derivatives is a business loss and not a speculative loss. The Calcutta High Court has held that sub-section (5) of section 43 is a general provision and the provision contained in section 73 is specific in nature. On the contrary, the object of sub-section (5) of section 43 is to define 'speculative business'. Group-D of Chapter-IV of the Income-tax Act consists of sections 28 to 44DB. When the statute talks of profit, it also talks of losses because loss has been construed as a negative profit. Sections in Group-D of Chapter-IV evidently deal with profits and losses of business or profession. 4.3.5 The controversy regarding the treatment to be given to the loss/profit from derivative segment has been settled recently by the Supreme Court in it's judgement in the case of Snowtex Investment Ltd Vs PCIT Central Circle-2, Kolkata. It has held that as per the provisions of sub-section (5) of section 43 of the Act, the profit/loss from the derivative trading is not to be treated as speculative profit/loss. In view of the above discussion the loss from derivatives transactions is required to be treated as a business loss which is not speculative in nature. The AO is directed to verify the correctness of the claim regarding loss of Rs. 12,11,56,106.77/- on account of derivatives transaction, which was made by the appellant in it's letter dated 27/12/2016, by calling for the necessary supporting documents. The A0 should also verify whether the transactions were carried out from the recognized stock exchange as required by the provisions of the Act. If the facts regarding the loss of Rs. 11 ITA NO. 1445/MUM/2020 (A.Y. 2014-15) M/s. Ohm Stock Brokers Pvt. Ltd., 12,11,56,106.77/- on F & 0 transactions as presented by the appellant are found to be correct then this loss is to be treated as non-speculative in nature. 4.3.6 Further, it is seen that the appellant has treated profit from cash segment of share trading of Rs. 5,01,11,062.42/- as non- speculative business income. However, as per the judgement of Supreme Court in the case of Snowtex Investment Ltd Vs PCIT Central Circle-2, Kolkata, the income from trading of shares by an assessee hving it's principle business that of trading in shares is to be treated as speculation income as per the explanation to section 73 of the Act. The Apex Court, in the said judgement, has unequivocally stated that the amendment in the Explanation to section 73 of the Act by the Finance (No. 2) Act, 2014, is prospective and not to be applied retrospectively. Therefore, profit from cash segment of Rs. 5,01,11,062.42/- is to be treated as speculation income. 4.3.7 On the basis of the above facts and circumstances of the case, and the combined reading of the judicial pronouncements, and relying on the judgements of Hon'ble Supreme Court in the case of Snowtex Investment Ltd Vs PCIT Central Circle-2, Kolkata and Hon'ble High Court of Calcutta in the case of M/s Asian Financial Services Ltd. v. CIT [2016] 70 taxmann.com 9/240 Taxman 192, I am of the considered opinion that, in the case of the appellant, the derivative transaction (Future and options) in shares are non- speculative in nature whereas the transactions of trading in shares done by taking delivery, are speculative transactions. 4.3.8 In view of the above, the loss of Rs. 12,11,56,106.77/- on account of derivative segment (Futures and Options) is to be treated as business loss, after making necessary verifications of the facts and the set off of this loss against the speculation income of Rs. 5,01,11,062.42/- is required to be allowed. As a result of these decisions, the net loss of Rs. 7,79,70,706/- shown by the appellant in the return of income is required to be treated as business loss of the appellant. Ground No 2(i) and 2(iii) are allowed. 4.4. Ground No. 2(ii): this ground is in respect of disallowance of expenses of ₹.1,32,66,373/- considering the same as related to share trading activity, which was considered as speculative in nature. The appellant had shown the share trading loss of Rs. 7,79,70,706/- 12 ITA NO. 1445/MUM/2020 (A.Y. 2014-15) M/s. Ohm Stock Brokers Pvt. Ltd., and expenses of Rs.9,03,70,388/- incurred towards share trading. Since, the share trading loss was treated as speculation loss by the AO, hence, 14.68% of the total expenses of Rs. 9,03,70,288/-, i.e. Rs. 1,32,66,373/-, were treated as expenses incurred on speculation activity and were disallowed. The appellant has challenged the decision of the AO by arguing that the loss was on account of the loss in the derivatives transactions amounting to Rs. 12,11,56,106.77/- which were not speculative in nature. 4.4.1 As per the discussions and the decision taken in the earlier paragraphs, the derivatives transactions are required to be considered as non-speculative in nature. The net loss arrived at in such situation is also not a speculation loss. Therefore, in view of these facts, the apportionment of expenses attributable to the speculation loss is not required. In view of the above, the addition of Rs. 1,32,66,373/- made by the AO by treating these expenses as, expenses incurred for speculation activity resulting in loss, is hereby deleted. Ground No 2(ii) is allowed.” 6. Aggrieved revenue is in appeal before us raised following grounds in its appeal: - 1. “Whether On the facts and in the circumstances of the case and in law, the Ld. CIT(A) can issue direction to the assessing officer to verify certain transaction in view of the amended provision u/s.251(1)(a) to set aside the assessment. 2. “Whether On the facts and in the circumstances the case and in law, the Ld. CIT(A) erred in directing the AO to verify the correctness of the claim regarding loss of Rs.12,11,56,106.77/- on account of derivatives transaction.” 7. In spite of issue of notice none appeared on behalf of the assessee. The notice was sent through RPAD to the address given in Form No.36 by the assessee and returned unserved with an endorsement “Not Known” 13 ITA NO. 1445/MUM/2020 (A.Y. 2014-15) M/s. Ohm Stock Brokers Pvt. Ltd., by the postal authorities. Since the notice issued was returned unserved, we dispose off this appeal on merits on hearing the Ld.DR. 8. In the grounds of appeal, Revenue has raised the issue whether Ld.CIT(A) can issue direction to the Assessing Officer to verify certain transactions in view of the amended provisions of section 251(1)(a) to set aside the assessment. Further, in Ground No. 2 whether Ld.CIT(A) erred in directing the Assessing Officer to verify the correctness of the claim regarding loss on account of derivatives transaction. 9. Considered Ld. DR submissions and material placed on record, we observe that Ld.CIT(A) after considering relevant facts on record has decided the issue in favour of the assessee by clearly allowing the Ground No. 2(i), 2(ii) and 2(iii) raised before him in favour of the assessee and directed the Assessing Officer to delete the additions. However, in Para No. 4.3.5 as a passing comments he directed the Assessing Officer to verify the correctness of the claim of the assessee. However, in the decision part the Ld.CIT(A) has clearly directed the Assessing Officer to delete the additions made by him and decided the issue in favour of the assessee. Therefore, the provisions of section 251(1)(1)(a) are properly adhered to. Even on merits after going through facts on record, we are 14 ITA NO. 1445/MUM/2020 (A.Y. 2014-15) M/s. Ohm Stock Brokers Pvt. Ltd., in agreement with the Ld.CIT(A) that the loss claimed by the assessee on account of derivative schemes is to be treated as business loss only and the Explanation to Section 73 of the Act has not application in the case of the assessee. Therefore, the findings of the Ld.CIT(A) is proper and as per law. Therefore, we do not find any infirmity with the findings of the Ld.CIT(A). Accordingly, grounds raised by the revenue are dismissed. 10. In the result, appeal filed by the Revenue is dismissed. Order pronounced in the open court on 21 st June, 2022. Sd/- Sd/- (ABY T. VARKEY) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai / Dated 21.06.2022 Giridhar, Sr.PS Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. The CIT(A), Mumbai. 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. //True Copy// BY ORDER (Asstt. Registrar) ITAT, Mum