The ACIT,Ahmedabad Circle-3, Ahmedabad V. M/s. Vrudev Finstock Pvt.Ltd., Ahmedabad

ITA 1530/AHD/2011

• Counselvise Citation: 153020514 RSA 2011
• Duration Of Justice: 4 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-10-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 16-09-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 31-05-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VINOD TANWANISR
• Assessee Lawyers: S N SOPARKAR
• Keywords: Business income; Transactions in derivatives; Speculation loss
• Section: 142(1); 43(5); 28

Judgement Text

- 1 - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH CAHMEDABAD BEFORE S/SHRI D. K. TYAGI, J.M. AND A. K. GARODIA, A.M. ITA NO.1530/AHD/2011 ASST. YEAR 2007-08 C.O. NO.190/AHD/2011 ASST. YEAR 2007-08 ASSTT. CIT, CIRCLE-3, AHMEDABAD. VS. M/S VRUDEV FINSTOCK (P) LTD., 116, B-WING KAMDHENU COMPLEX, NR. PANJRA POLE POLYTECHNIC, AMBAWADI, AHMEDABAD. (APPELLANT) .. (RESPONDENT) APPELLANT BY :- SHRI VINOD TANWANI,SR.DR RESPONDENT BY:- SHRI S.N.SOPARKAR, SR.ADVOCATE DATE OF HEARING :16/9/2011 DATE OF PRONOUNCEMENT :7/10/2011. O R D E R PER D. K. TYAGI, JUDICIAL MEMBER. THE APPEAL HAS BEEN FILED BY THE REVENUE AND THE C ROSS OBJECTION BY THE ASSESSEE AGAINST THE ORDER OF LD. CIT(A) DAT ED 31/03/2011. 2. THE REVENUE HAS RAISED THE FOLLOWING GROUND: (1) THE LD. CIT(A) ERRED IN LAW AND ON FACTS IN DEL ETING THE DISALLOWANCE OF RS.10,47,117/- 3. THE ASSESSEE HAS RAISED FOLLOWING GROUND IN THE CROSS OBJECTION : ITA NO.1530/AHD/2011 ALONG WITH CO NO.190/AHD/2011 ASST. YEAR 2007-08 2 (1) THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE VIEW TAKEN BY AO IN RESTRICTING REBATE CLAIMED BY T HE APPELLANT U/S 88E OF THE ACT. BOTH THE LOWER AUTHORITIES ERRED IN NOT APPRECIATING THE FACT THAT NO DIRECT EXPENSES WERE INCURRED FOR EARNING THE SHARE TRADING INCOME AND HENCE REBATE U/S 88E OUGHT TO HA VE BEEN GRANTED FULLY AGAINST TAX PAYABLE. 4. THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS A COMPANY. THE ASSESSEE FILED ITS RETURN OF INCOME ON 31.10.2007 D ISCLOSING THEREIN TOTAL INCOME AT RS.1,62,64,000/-. THE ASSESSEE IS DERIVIN G INCOME MAINLY FROM TRADING IN SHARES/SECURITIES AND STOCK BROKING BUSI NESS. THE SAID RETURN OF INCOME WAS PROCESSED U/S 143(1) OF THE IT ACT. THE CASE WAS SELECTED FOR SCRUTINY UNDER CASS AND STATUTORY NOTICE U/S 143(2) OF THE IT ACT DATED 23.07.2008 WAS ISSUED AND SERVED UPON THE ASSESSEE BY SPEED POST/RPAD. NOTICE U/S 142(1) OF THE ACT WAS ISSUED ON 23.02.2009. IN THE ASSESSMENT ORDER THE AO HAS STATED THAT FROM TH E PERUSAL OF SCRIP WISE DETAILS FILED BY THE ASSESSEE IT WAS OBSERVED THAT THE ASSESSEE HAD EARNED PROFIT ON SALE OF SHARE AT RS.74,46,617/-. FROM THE DETAILS SUBMITTED BY THE ASSESSEE IT WAS OBSERVED THAT THE SAID SCRIP WI SE DETAILS INCLUDED PROFIT OR LOSS, BOTH FROM DELIVERY BASED TRANSACTIONS AND NON-DELIVERY BASED TRANSACTIONS. IT WAS ALSO OBSERVED THAT THE ASSESSE E HAD DERIVED PROFIT IN FY 2006-07 FROM DELIVERY BASED SHARE TRANSACTION AT RS.84,93,734/-. THE ASSESSEE FURTHER SUBMITTED THAT THERE IS OVERALL LO SS OF RS.10,47,117/- FROM NON-DELIVERY BASED SHARE TRANSACTIONS. THE ASS ESSEE SUBMITTED BEFORE THE AO THAT THE ASSESSEE COMPANY WAS DOING S HARE TRADING ON BTST BASIS, I.E. BUY TODAY AND SELL TOMORROW. THUS COMPANY PURCHASES SHARES OF X COMPANY AND SELL THE SAME ON NEXT DAY I N OPENING SESSION ITSELF, HOWEVER ON THE DAY OF SELL, COMPANY PURCHAS E THE SAME SCRIPT IN CLOSING SESSION OF THAT DAY AND THUS FOR PARTICULAR DAY IT IS SQUARE UP TRANSACTIONS. THE SAME SCRIPT IS AGAIN SOLD ON NEXT DAY IN OPENING SESSION ITA NO.1530/AHD/2011 ALONG WITH CO NO.190/AHD/2011 ASST. YEAR 2007-08 3 AND PURCHASED ON THE SAME DAY IN CLOSING SESSION. T HIS PROCESS LAST TILL THE STOCK IS FULLY SOLD. IN THIS PROCESS, THERE MIG HT BE PROFIT OR LOSS. THUS DAY TRADING IS NOTHING BUT HEDGING TRANSACTIONS FOR STOCK OF PARTICULAR SCRIPT HELD BY THE COMPANY. THUS LOSS OCCURRED IN S QUARE UP TRANSACTIONS SHOULD NOT BE TREATED AS SPECULATION LOSS BUT BUSIN ESS LOSS AS PROVIDED (B) TO SECTION 43(5). THE ASSESSEE STATED THAT IN FY 20 06-07 THE ASSESSEE HAD INCURRED LOSS OF RS.10,47,117/- ON SHARE TRANSACTIO NS WHERE NO DELIVERIES WERE EFFECTED AND THE SAME NEED TO BE TREATED AS LO SS ARISING FROM SPECULATIVE TRANSACTIONS, WITHIN THE MEANING OF SEC TION 43(5) OF THE ACT. THOUGH, VIDE ITS LETTER DATED 9.12.2009 THE ASSESSE E HAD SUBMITTED THAT THE SAID LOSS SHOULD BE CONSIDERED AS LOSS ARISING OUT OF HEDGING TRANSACTIONS, THE ASSESSEE HAD NOT SUBMITTED ANY PROOF IN SUPPORT OF ITS CLAIM. HENCE THE AO ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE PROFIT ON DELIVERY BASED TRANSACTIONS OF RS.84,93,734/- BE NOT TREATED SEPARATELY AND THE LOSS ON NON DELIVERY BASED TRANSACTIONS RS.74,46,617/- B E TAKEN AS SPECULATIVE LOSS AND THE SAME COULD NOT BE ALLOWED TO BE SET OF F AGAINST THE NON SPECULATIVE PROFITS. THERE WAS NO PROOF SUBMITTED B Y THE ASSESSEE THAT THE NON DELIVERY BASED TRANSACTION WERE TO BE TREATED A S HEDGING LOSS AND THEREFORE WHY THE LOSS BE NOT DISALLOWED. THE ASSES SEE EXPLAINED THAT IT WAS CARRYING ON THE SHARE TRADING ACTIVITIES, BOTH ON DELIVERY AND NON DELIVERY BASIS OVER AND ABOVE FUTURE TRADING. LOOKI NG TO THE MARKET CONDITIONS AND TREND, IT TOOK A POSITION IN THE CLO SING HOURS OF MARKET FOR BUYING SPECIFIC SCRIPTS AND ON NEXT DAY WHEN THE MA RKET OPENS, THE POSITION IS GENERALLY SQUARED UP. AGAIN ON NEXT DAY S, SIMILAR ACTIVITIES WERE CARRIED ON. IN THIS PROCESS, MANY A TIMES THE SAME SCRIPTS WERE TRADED ON CONTINUOUS DAYS. EVEN MANY A TIMES THE SH ARE TRADING WAS DONE ON INTRA DAY BASIS, I.E. SETTLEMENT OF SCRIPTS ON T HE SAME DAY. THE POSITION IN MARKET WAS TAKEN UP CONSIDERING OVER ALL POSITIO N IN CASH AS WELL AS F&O SEGMENTS. MOST OF THE TIMES, THE ARBITRAGE ACTI VITY WAS CARRIED ON IN ITA NO.1530/AHD/2011 ALONG WITH CO NO.190/AHD/2011 ASST. YEAR 2007-08 4 CASH SEGMENT VERSUS POSITION IN F&O SEGMENT. THUS T HE BASIC CHARACTERISTICS OF THE ACTIVITIES IN SHARE MARKET W ERE HEDGING/ARBITRAGE IN VARIOUS SCRIPTS. THUS THE PROFIT OR LOSS ON NON-DEL IVERY TRANSACTIONS MIGHT ALSO BE CONSIDERED AS NORMAL BUSINESS, AS THE SAME WAS COVERED BY EXCEPTIONS TO SECTION 43(5). 4.1 THE ASSESSEE FURTHER STATED THAT WITHOUT PREJUD ICE TO THE ABOVE EXPLANATION TO SECTION 73 IS APPLICABLE IN ITS CASE AND THEREFORE WHATEVER PROFIT/LOSS IS DERIVED ON ACCOUNT OF DELIVERY TRANS ACTIONS SQUARE UP TRANSACTIONS ON SAME DAY OR OTHERWISE WOULD FALL UN DER THE CATEGORY OF SPECULATION BUSINESS AND ACCORDINGLY WHATEVER PROFI T LOSS ARISES ON THIS ACCOUNT WAS TO BE CONSIDERED AS SPECULATIVE PROFIT/ LOSS. THUS PROFIT OF RS.84,93,734/- (ONLY DELIVERY) WAS SPECULATIVE PROF IT. IN VIEW OF THIS REASON TOTAL PROFIT LOSS WAS REQUIRED TO BE CONSIDE RED AS SPECULATIVE BUSINESS INCOME/LOSS. THUS THE NET RESULT OF RS.74, 46,617/- WAS SPECULATIVE PROFIT U/S 73. ACCORDINGLY, THERE IS NO QUESTION OF DISALLOWANCE OF SPECULATIVE LOSS OF RS.10,47,117/- FROM TOTAL INCOME. THE EXPLANATION TO SECTION 73 READS AS WHERE ANY PART OF THE BUSINESS OF A COMPANY..CONSISTS IN THE PURCHASES AND SALE OF S HARES OF OTHER COMPANIES, SUCH COMPANY SHALL, FOR THE PURCHASE 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 S UCH SHARES. THIS CLEARLY PROVES THAT WHERE THE EXPLANATION TO SECTIO N 73 APPLIES, THE BUSINESS IS TO BE CONSIDERED AS SPECULATION BUSINES S AND NO SPECIFIC REFERENCE IS MADE FOR PROFIT OR LOSS OF THE BUSINES S TO BE CONSIDERED AS SPECULATIVE. ACCORDINGLY, IN THE CASE OF THE ASSESS EE THE BUSINESS OF PURCHASE AND SALE OF SHARES OF OTHER COMPANIES ON D ELIVERY BUSINESS IS CLEARLY TO BE CONSIDERED AS SPECULATION BUSINESS AN D ALSO THE BUSINESS WHICH HAS BEEN CARRIED OUT ON INTRA DAY BASIS I.E. NON DELIVERY BUSINESS IS ITA NO.1530/AHD/2011 ALONG WITH CO NO.190/AHD/2011 ASST. YEAR 2007-08 5 OBVIOUSLY SPECULATION BUSINESS. THIS AGAIN MEANS BO TH THE ACTIVITIES ARE TO BE CONSIDERED AS SPECULATION BUSINESS AND HENCE THERE IS NO NEED TO BIFURCATE THE ACTIVITIES INTO NORMAL AND SPECULATIO N BUSINESS AND PROFIT OR LOSS OF WITHER OF THE ACTIVITIES ARE TO BE COMPUTED IN ONE SINGLE SOURCE OF INCOME I.E. SPECULATION BUSINESS INCOME/LOSS. THE A SSESSEE ARGUED THAT SIMILAR VIEW HAS BEEN EXPRESSED IN CIRCULAR NO.204 DATED 24/7/1976 WHICH CLEARLY STATES THAT THE EXPLANATION HAS BEEN ADDED TO PROVIDE THAT THE BUSINESS OF DEALING IN SHARES BY A COMPANY WILL BE TREATED AS ON THE SAME FOOTING AS A SPECULATION BUSINESS. IN A RECENT CASE LAW OF M/S METROPOLITAN TRADERS (P) LTD. VS. ITO IN ITA NO.153 5/MUM/2007 DECIDED ON 30.06.2009 BY HONBLE TRIBUNAL, MUMBAI, THE SAME OPINION IS GIVEN. 4.2 THE AO DID NOT ACCEPT THE ABOVE EXPLANATION SAY ING THAT FROM FACTS MENTIONED ABOVE IT IS EVIDENT THAT THE ASSESSEE HAS INCURRED LOSS OF RS.10,47,117/- ON THE SHARE TRANSACTIONS ON WHICH T HE DELIVERIES WERE NOT EFFECTED. HENCE SUCH TRANSACTIONS SQUARELY FALL UND ER THE CATEGORIES OF SPECULATIVE TRANSACTIONS WITHIN THE MEANING OF SE CTION 43(5) OF THE ACT. WHEN THE SAME WAS POINTED OUT TO THE ASSESSEE, THE ASSESSEE VIDE ITS LETTER DATED 9.12.2009 HAD EXPLAINED THAT THE SAID LOSS SH OULD BE CONSIDERED AS LOSS ARISING OUT OF HEDGING TRANSACTIONS AND HENCE THEY ARE OUT OF PURVIEW OF THE PROVISIONS OF SECTION 43(5) OF THE ACT. SINC E THE ASSESSEE HAD NOT SUBMITTED ANY PROOF IN SUPPORT OF ITS CLAIM THAT TH E SAID LOSS IS ARISING OUT OF HEDGING TRANSACTIONS, SO THE ASSESSEE WAS REQUES TED TO SUBMIT THE NECESSARY PROOF IN SUPPORT OF ITS CLAIM. IN SPITE O F SPECIFICALLY BEING ASKED THE ASSESSEE COULD NOT SUBMIT ANY PROOF IN SU PPORT OF ITS CLAIM THAT THE SAID TRANSACTIONS ON WHICH LOSS HAS ARISEN AND WHERE THE DELIVERIES WERE NOT EFFECTED, WERE INDEED HEDGING TRANSACTION AS STIPULATED IN PROVISO TO SECTION 43(5) OF THE ACT. HAVING FAILED TO SUBSTANTIATE ITS CLAIM ITA NO.1530/AHD/2011 ALONG WITH CO NO.190/AHD/2011 ASST. YEAR 2007-08 6 THAT THE SAID LOSS HAD ARISING OUT OF HEDGING TRANS ACTIONS, THE ASSESSEE VIDE ITS LETTER DATED 17.12.2009 HAS SUBMITTED THAT MOST OF THE TIMES, THE ARBITRAGE ACTIVITY IS CARRIED ON IN CASH SEGMENT VE RSUS POSITION IN F & O SEGMENT AND THUS THE BASIC CHARACTERISTICS OF THE A CTIVITIES IN SHARE MARKET ARE HEDGING/ARBITRAGE IN VARIOUS SCRIPTS. THE ASSES SEE FURTHER SUBMITTED THAT THUS THE PROFIT OR LOSS ON NON-DELIVERY TRANSA CTIONS MAY ALSO BE CONSIDERED AS NORMAL BUSINESS, AS THE SAME IS COVER ED BY EXCEPTIONS TO SECTION 43(5). THE AO WAS OF THE VIEW THAT ASSESSEE S ARGUMENT WAS DEVOID OF ANY MERIT AS THE PROVISIONS OF SECTION 43 (5) STIPULATES AS UNDER : SPECULATIVE TRANSACTIONS MEANS A TRANSACTION IN W HICH A CONTRACT FOR THE PURCHASE OR SALE OF ANY COMMODITY, INCLUDING ST OCK AND SHARES, IS PERIODICALLY OR ULTIMATELY SETTLED OTHERWISE THAN B Y THE ACTUAL DELIVERY OR TRANSFER OF THE COMMODITY OR SCRIPS: PROVIDED THAT FOR THE PURPOSE OF THIS CLAUSE - (A) A CONTRACT IN RESPECT OF RAW MATERIALS OR MERCHANDI SE ENTERED INTO BY A PERSON IN THE COURSE OF HIS MANUFACTURING OR M ERCHANTING BUSINESS TO GUARD AGAINST LOSS THROUGH FUTURE PRICE FLUCTUATIONS IN RESPECT IN HIS CONTRACTS FOR ACTUAL DELIVERY OF GOO DS 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 HO LDINGS OF STOCKS AND SHARES THROUGH PRICE FLUCTUATIONS; OR (C) A CONTRACT ENTERED INTO BY A MEMBER OF A FORWARD MA RKET OR A STOCK EXCHANGE IN THE COURSE OF ANY TRANSACTION IN THE NA TURE OF JOBBING OR ARBITRAGE TO GUARD AGAINST LOSS WHICH MAY ARISE IN THE ORDINARY COURSE OF HIS BUSINESS AS SUCH MEMBER. SHALL NOT BE DEEMED TO BE A SPECULATIVE TRANSACTION THE AO OBSERVED THAT FROM THE ABOVE IT CAN BE SEEN THAT PROVISO (A) IS NOT APPLICABLE TO THE ASSESSEE AS THE ASSESSEE IS NEITH ER A MANUFACTURER NOR DEALING IN RAW MATERIALS. SIMILARLY, PROVISO (C) IS ALSO NOT APPLICABLE TO ITA NO.1530/AHD/2011 ALONG WITH CO NO.190/AHD/2011 ASST. YEAR 2007-08 7 THE ASSESSEE AS THE ASSESSEE IS NOT A MEMBER OF FOR WARD MARKET, NOR OF NSE OR BSE WHERE IT HAS CARRIED OUT TRANSACTIONS IN SHARES. THOUGH THE ASSESSEE IS A MEMBER OF ASE BUT IT HAS NOT CARRIED OUT ANY TRADING ACTIVITIES AT ASE. FURTHER PROVISO (C) IS APPLICABL E TO A MEMBER OF STOCK EXCHANGE ONLY WHEN THE HEDGING IS DONE TO GUARD LOS S WHICH MAY ARISE IN THE ORDINARY COURSE OF HIS BUSINESS AS SUCH MEMBER, I.E. AS A STOCK BROKER. HOWEVER, IN THE PRESENT CASE IT IS AN ADMITTED FACT THAT THE ASSESSEE, THOUGH IS A BROKER OF ASE HAS DONE TRADING OF SHARE S AT NSE AND BSE THROUGH OTHER STOCK BROKER. AS PER PROVISO (B) A CO NTRACT IN RESPECT OF STOCKS AND SHARES ENTERED INTO BY A DEALER OR INVES TOR THEREIN TO GUARD AGAINST LOSS IN HIS HOLDINGS OF STOCK AND SHARES TH ROUGH PRICE FLUCTUATIONS SHALL NOT BE DEEMED TO BE A SPECULATIVE TRANSACTION S BUT IN THE PRESENT CASE THE ASSESSEE HAS FAILED TO SUBMIT ANY DETAILS OR PROOF THAT A PARTICULAR CONTRACT WAS ENTERED INTO TO GUARD AGAINST LOSS IN HIS HOLDINGS OF ANY PARTICULAR STOCK/SHARES I.E. THE ASSESSEE HAS NEITH ER IDENTIFIED SUCH A CONTRACT NOR THE HOLDING OF SUCH STOCK/SHARES. IN A BSENCE OF SUCH DETAILS AND PROOF THE AO WAS OF THE VIEW THAT THE BENEFIT O F PROVISION (B) TO SECTION 43(5) OF THE ACT CANNOT BE EXTENDED TO THE ASSESSEE. THE AO FURTHER STATED THAT THE ASSESSEES ALTERNATE ARGUMENT IS THAT IT IS A COMPANY, SO EXPLANATION TO SECTION 73 OF THE ACT IS APPLICABLE IN ITS CASE AND THEREFORE WHATEVER PROFIT/LOSS DERIVED ON ACCOU NT OF DELIVERY TRANSACTIONS, SQUARED UP TRANSACTIONS ON SAME DAY O R OTHERWISE WILL FALL UNDER THE CATEGORY OF SPECULATION BUSINESS AND ACCO RDINGLY WHETHER PROFIT/LOSS ARISES ON THIS ACCOUNT IS TO BE CONSIDE RED AS SPECULATIVE PROFIT/LOSS. THUS PROFIT OF RS.84,93,734/- ON DELIV ERY BASED TRANSACTIONS IS SPECULATIVE PROFIT. THE ASSESSEE HAS FURTHER SUBMIT TED THAT IN ITS CASE THE NET RESULT OF RS.74,46,617/- IS ALSO SPECULATIVE PR OFIT U/S 73 OF THE ACT AND HENCE THERE IS NO QUESTION OF DISALLOWANCE OF SPECU LATION LOSS OF ITA NO.1530/AHD/2011 ALONG WITH CO NO.190/AHD/2011 ASST. YEAR 2007-08 8 RS.10,47,117/- FROM TOTAL INCOME. THIS ARGUMENT OF THE ASSESSEE WAS DEALT BY AO BY OBSERVING THAT FROM THE SCHEME OF TH E IT ACT IT CAN BE SEEN THAT THE SPECULATIVE BUSINESS HAS TO BE TREATE D AS DISTINCT AND SEPARATE FROM ANY OTHER BUSINESS. WHAT CONSTITUTE THE SPECUL ATION BUSINESS IS DEFINED IN EXPLANATION 2 TO SECTION 28 OF THE ACT W HICH STIPULATES AS UNDER:- WHERE SPECULATIVE TRANSACTIONS CARRIED ON BY AN AS SESSEE ARE OF SUCH A NATURE AS TO CONSTITUTE A BUSINESS, THE BUSINESS (H EREINAFTER REFERRED TO AS SPECULATION BUSINESS SHALL BE DEEMED TO BE DISTIN CT AND SEPARATE FROM ANY OTHER BUSINESS. THE AO STATED THAT WHAT IS SPECULATIVE TRANSACTION IS DEFINED IN SECTION 43(5) OF THE ACT, WHICH STIPULATES AS UNDER : SPECULATIVE TRANSACTIONS MEANS A TRANSACTION IN W HICH CONTRACT FOR PURCHASE OR SALE OF ANY COMMODITY, INCLUDING STOCKS AND SHARES IS PERIODICALLY OR ULTIMATELY SETTLED OTHERWISE THAN B Y THE ACTUAL DELIVERY OR TRANSFER OF THE COMMODITY OR SCRIPS . ACCORDING TO THE AO EACH TRANSACTION HAS TO BE ANAL YSED IN VIEW OF THE PROVISIONS OF SECTION 43(5) OF THE ACT TO ASCERTAIN WHETHER IT IS A SPECULATIVE TRANSACTION OR NOT. IF ANY TRANSACTION IS SPECULATIVE TRANSACTION WITHIN THE MEANING OF SECTION 43(5) OF THE ACT AND IF THE SAME IS IN THE NATURE TO CONSTITUTE A BUSINESS THEN THE SAME HAS T O BE TREATED AS SPECULATION BUSINESS AND HAS TO BE TREATED AS DISTI NCT AND SEPARATE FROM ANY OTHER BUSINESS AS PER EXPLANATION 2 TO SECTION 28 OF THE ACT. THE AO STATED THAT SECTION 73 OF THE ACT GOVERNS TH E PROVISION OF ALLOWANCE OF SET OFF OF LOSS OF SPECULATION BUSINES S AND SAME STIPULATES AS UNDER :- ITA NO.1530/AHD/2011 ALONG WITH CO NO.190/AHD/2011 ASST. YEAR 2007-08 9 ANY LOSS, COMPUTED IN RESPECT OF A SPECULATION BUS INESS CARRIED ON BY THE ASSESSEE SHALL NOT BE SET OFF EXCEPT AGAINST PR OFITS AND GAINS IF ANY, OF ANOTHER SPECULATION BUSINESS THE AO OBSERVED BY VIRTUE OF SECTION 73 OF THE ACT, LOSS OF SPECULATION BUSINESS CAN ONLY BE ALLOWED TO BE SET OFF AGAINST THE PROFITS AND GAINS, IF ANY, FROM ANOTHER SPECULATION BUSINESS, I.E. THE LO SS OF SPECULATION BUSINESS CANNOT BE ALLOWED TO BE SET OFF AGAINST AN Y NON-SPECULATION BUSINESS. THE AO FURTHER STATED THAT EXPLANATION TO SECTION 7 3 OF THE ACT PROVIDES THAT FOR THE PURPOSE OF SECTION 73 OF THE ACT, IN T HE CASE OF A COMPANY, IF THE SAME ARE NOT FALLING UNDER EXCEPTIONS MENTIONED THEREIN, IF PART OF THE BUSINESS OF COMPANY CONSISTS IN THE PURCHASE AND SA LE OF SHARES OF OTHER COMPANIES, SUCH COMPANY FOR THE PURPOSE OF SECTION 73 OF THE ACT WILL BE DEEMED TO CARRYING ON A SPECULATION BUSINESS, TO TH E EXTENT TO WHICH BUSINESS CONSISTS OF THE PURCHASE AND SALE OF SUCH SHARES. FROM THE PROVISIONS OF EXPLANATION TO SECTION 73 OF THE ACT, IT CAN BE SEEN THAT THE SAME IS A DEEMING PROVISION APPLICABLE TO ONLY ONE CLASS OF ASSESSEE, I.E. A COMPANY, AND FOR THE PURPOSE OF SECTION 73 OF THE ACT, IF SUCH COMPANY HAS INCURRED OVERALL LOSS FROM THE BUSINESS OF SALE AND PURCHASE OF SHARES, THEN THE SAME WILL BE DEEMED TO BE SPECULATIVE LOSS , IRRESPECTIVE OF THE FACTS THAT SUCH SHARE TRANSACTIONS ARE NOT SPECULAT IVE TRANSACTIONS WITHIN THE MEANING OF PROVISIONS OF SECTION 43(5) OF THE A CT. IN OTHER WORDS, EVEN IN THE CASE WHERE ANY ASSESSEE, BEING COMPANY HAS ENTERED INTO DELIVERY BASED TRANSACTIONS AND HAS INCURRED OVERAL L LOSS FROM SUCH SHARE TRANSACTIONS, THEN FOR THE PURPOSE OF SECTION 73 OF THE ACT, SUCH LOSS WILL BE CONSIDERED AS SPECULATION LOSS. THE PROVISIONS O F SECTION 73 OF THE ACT HAVE NO APPLICATION WHERE THERE IS PROFIT FROM SPEC ULATION BUSINESS. FURTHER FOR THE PURPOSE OF EXPLANATION TO SECTION 7 3 OF THE ACT, ONLY ITA NO.1530/AHD/2011 ALONG WITH CO NO.190/AHD/2011 ASST. YEAR 2007-08 10 OVERALL LOSS HAS TO BE SEEN AND NOT THE LOSS OF ANY INDIVIDUAL TRANSACTION, WHEREAS AS PER THE PROVISIONS OF SECTION 43(5) OF T HE ACT EACH TRANSACTION HAS TO BE ANALYZED TO ASCERTAIN WHETHER THE SAME IS SPECULATIVE TRANSACTION OR NOT. FURTHER THE PROVISIONS OF EXPLA NATION TO SECTION 73 OF THE ACT DO NOT OVERRIDE THE PROVISIONS OF SECTION 4 3(5) OF THE ACT. THE PROVISION OF SECTION 43(5) OF THE ACT, WHICH IS APP LICABLE TO INDIVIDUAL TRANSACTIONS, OPERATES INDEPENDENT TO PROVISIONS OF EXPLANATION TO SECTION 73 OF THE ACT. THE AO STATED THAT FROM ABOVE IT CAN BE SEEN THAT T HE PROVISIONS OF SECTION 43(5) OF THE ACT IS APPLICABLE TO INDIVIDUA L TRANSACTIONS AND EACH TRANSACTION NEED TO BE VERIFIED IN THE LIGHT OF THE PROVISIONS OF SECTION 43(5) OF THE ACT TO DETERMINE WHETHER A PARTICULAR TRANSACTION IS SPECULATIVE TRANSACTIONS OR NOT, IF ANY INDIVIDUAL TRANSACTION IS SETTLED WITHOUT DELIVERY/TRANSFER THEN SUCH TRANSACTION HAS TO BE TREATED AS SPECULATIVE TRANSACTIONS, IRRESPECTIVE OF THE FACT WHETHER THERE IS PROFIT OR LOSS FROM SUCH TRANSACTION AND THE PROVISIONS OF SE CTION 73 OF THE ACT WILL BE APPLICABLE ONLY WHEN THERE IS OVERALL LOSS FROM SUCH SPECULATIVE BUSINESS. FURTHER THE EXPLANATION TO SECTION 73 OF THE ACT WILL BE APPLICABLE ONLY WHEN THE ASSESSEE IS COMPANY NOT FA LLING UNDER EXCEPTIONAL CATEGORY MENTIONED THEREIN AND IT HAS O VERALL LOSS FROM SALE AND PURCHASE OF SHARES. HENCE THE PROVISIONS OF SEC TION 43(5) AND SECTION 73 OF THE ACT OPERATE INDEPENDENT TO EACH OTHER. IN VIEW OF ABOVE, THE AO STATED THAT THE LOSS OF RS .10,47,117/- IS TREATED AS LOSS ARISING OUT OF SPECULATIVE BUSINESS AND T HE SAME CANNOT BE ALLOWED TO BE SET OFF AGAINST THE PROFIT ARISING OU T OF NON-SPECULATIVE BUSINESS OF RS.84,93,734/- IN VIEW OF THE PROVISION S OF SECTION 71(1) OF THE ACT. ITA NO.1530/AHD/2011 ALONG WITH CO NO.190/AHD/2011 ASST. YEAR 2007-08 11 4.3 THE ASSESSEE WENT IN APPEAL BEFORE THE FIRST AP PELLATE AUTHORITY WHEREIN IT REITERATED THE SUBMISSIONS MADE BEFORE T HE AO. THE ASSESSEE ARGUED THAT HONBLE BOMBAY HIGH COURT IN THE CASE O F LOKMAT NEWSPAPERS (P) LTD. DECIDED ON 16/02/2010 HELD THAT BY VIRTUE OF DEEMING FICTION CREATED BY EXPLANATION TO SECTION 7 3, A BROUGHT FORWARD SPECULATION LOSS CAN BE SET OFF AGAINST DELIVERY BA SED PROFITS EARNED BY THE ASSESSEE COMPANY FROM SALE AND PURCHASE OF SHARES. THE ASSESSEE ALSO STATED THAT AS PER THE DECISION OF ITAT MUMBAI IN T HE CASE OF NINE INTERNATIONAL SECURITIES (P) LTD. DECIDED ON 10/11/ 2010 IN MANU/IU/0648/2010, THE EXPLANATION TO SECTION 73 AP PLIES TO THE BUSINESS CARRIED ON BY THE ASSESSEE COMPANY WHICH IS IN PURC HASE AND SALE OF SHARES AND THEREFORE BOTH PROFIT AND A LOSS IN SUCH BUSINESS HAVE TO BE TREATED AS SPECULATIVE INCOME OR LOSS AND ACCORDING LY THE SPECULATIVE LOSS INCURRED UNDER SECTION 43(5) IS ALLOWED TO BE SET O FF AGAINST PROFIT EARNED BY THE COMPANY ON TRADING OF SHARES CONSIDERING THE SAME AS SPECULATION PROFIT. THE LD. CIT(A) CONSIDERING THE SUBMISSIONS OF ASSESSEE AND OBSERVATION OF THE AO DECIDED THE ISSUE BY OBSERVIN G AS UNDER :- 2.1.3 I HAVE CONSIDERED THE SUBMISSION MADE BY THE APPELLANT AND OBSERVATION OF THE AO. THE ARGUMENT OF THE APPELLAN T THAT IT HAS ENTERED INTO HEDGING TRANSACTIONS IS NOT AT ALL CORRECT BEC AUSE THE HEDGING TRANSACTION INVOLVES A CORRESPONDING SALE/PURCHASE BY DELIVERY. HOWEVER, ARGUMENT OF THE APPELLANT THAT AS PER EXPL ANATION BELOW SECTION 73 ALL TRANSACTIONS SHOULD BE TREATED AS SP ECULATIVE TRANSACTION IS CORRECT BECAUSE THE EXPLANATION IS APPLICABLE TO TH E COMPANY, WHERE ANY PART OF THE BUSINESS OF THE COMPANY (OTHER THAN A C OMPANY WHOSE GROSS TOTAL INCOME CONSISTS MAINLY OF INCOME WHICH IS CHA RGEABLE UNDER THE HEAD INTEREST ON SECURITIES, INCOME FROM HOUSE PROP ERTY, CAPITAL GAIN AND INCOME FROM OTHER SOURCES OR THE COMPANY THE PRINCI PAL BUSINESS OF WHICH IS THE BUSINESS OF BANKING OR GRANTING OF LOA NS AND ADVANCES) CONSISTS IN THE PURCHASE AND SALE OF SHARES OF OTH ER COMPANIES, SUCH COMPANY SHALL, FOR THE PURPOSE OF THIS SECTION BE D EEMED TO BE CARRYING ON SPECULATION BUSINESS TO THE EXTENT TO WHICH THE BUSINESS CONSISTS IN THE ITA NO.1530/AHD/2011 ALONG WITH CO NO.190/AHD/2011 ASST. YEAR 2007-08 12 PURCHASE AND SALE OF SUCH SHARES. IN THIS REGARD RE LIANCE IS PLACED ON THE DECISION OF HONBLE MUMBAI ITAT IN THE CASE OF METR OPOLITAN TRADERS (P) LTD. 33 SOT 168 WHEREIN THE HONBLE ITAT DECIDE D AS UNDER :- AS PER THE EXPLANATION TO SECTION 28 THE BUSINESS WHICH COMPRISES OF SPECULATIVE TRANSACTION IS TO BE TREATED AS DISTINC T AND SEPARATE FROM OTHER BUSINESS. IN LINE WITH THIS, SEPARATE PROVISI ONS HAVE BEEN MADE FOR SET OFF OF LOSSES IN SECTION 72 AND SECTION 73. THEREFORE, IT CANNOT BE SAID THAT SECTION 73 IS LIMITED ONLY TO SUCH CASES WHERE THERE IS LOSS IN SPECULATIVE TRANSACTION. THE PURPOSE OF SECTION 73 IS SET OFF OF CARRIED FORWARD SPECULATIVE LOSS AGAINST INCOME FROM SPECUL ATIVE TRANSACTION. (PARA 10) A BARE READING OF THE EXPLANATION TO SECTION 73 WOU LD REVEAL THAT IF THE FOLLOWING INGREDIENTS ARE FULFILLED THEN THE EXPLAN ATION TO SECTION 73 WOULD BE ATTRACTED AND SECONDLY, THE TRANSACTIONS W OULD BE TREATED AS SPECULATIVE TRANSACTIONS (I) THE PART OF THE BUSINESS OF A COMPANY CONSISTS OF P URCHASE AND SALE OF SHARES OF OTHER COMPANIES; (II) THE GROSS TOTAL INCOME OF THE COMPANY DOES NOT CONS IST MAINLY OF INCOME WHICH IS CHARGEABLE UNDER THE HEADS INTE REST ON SECURITIES, INCOME FROM HOUSE PROPERTY, CAPITAL GAINS AND INCOME FROM OTHER SOURCES. (III) THE PRINCIPAL BUSINESS OF THE COMPANY IS NOT THAT O F BANKING OR GRANTING OF LOANS AND ADVANCES.(PARA 11) THE LEGISLATURE ITSELF HAS USED THE PHRASE PURCHAS E AND SALE OF SHARES IN THE EXPLANATION WITHOUT ANY QUALIFICATION IN CON TRADISTINCTION TO THE TERM USED IN SECTION 43(5) WHERE IT IS SPECIFICALLY STATED THAT THE TRANSACTIONS ARE SETTLED OTHERWISE THAN BY WAY OF A CTUAL DELIVERY. THUS, THE TERM PURCHASE AND SALE HAS TO BE GIVEN FULL E FFECT AND ITS MEANING CANNOT BE RESTRICTED ONLY WITH REFERENCE TO SUCH TR ANSACTION WHERE DELIVERY OF SHARES HAS NOT BEEN TAKEN. ANY SUCH ATT EMPT WOULD IMPLY DOING VIOLENCE WITH THE STATUTE, WHICH IS NOT PERMI SSIBLE. THE COMMISSIONER (APPEAL) IN HIS ORDER HAD REFERRED TO THE CBDT CIRCULAR NO.204 DATED 24.7.1976 AND HAD POINTED OUT THAT AS PER THIS CIRCULAR THE OBJECT OF THE PROVISIONS WAS TO CURB DEVICE BEI NG RESORTED TO BY SOME BUSINESS PEOPLE TO MANIPULATE AND REDUCE THE T AXABLE INCOME BY BOOKING SPECULATIVE LOSSES. THEREFORE, THE PURPOSE OF INTRODUCTION OF THE EXPLANATION WAS TO COVER LOSSES. THIS CIRCULAR DOES NOT DEAL WITH THE AMBIT OF THE EXPLANATION. THE LEGISLATURE CONSC IOUSLY DID NOT QUALIFY THE WORDS PURCHASE AND SALE IN ORDER TO C OVER ALL KINDS OF CONTINGENCIES WHICH A COMPANY COULD POSSIBLY RESORT TO IN ORDER TO MANIPULATE ITS INCOME BY WAY OF LOSS BEING BROUGHT INTO BUSINESS BY ANY DEVICE.(PARA 12) ITA NO.1530/AHD/2011 ALONG WITH CO NO.190/AHD/2011 ASST. YEAR 2007-08 13 THE REVENUES CONTENTION THAT ONLY DELIVERY-BASED T RANSACTIONS AS CONTEMPLATED UNDER SECTION 43(5) WERE TO BE CONSIDE RED AS SPECULATIVE TRANSACTION WAS DEVOID OF ANY MERIT, BECAUSE THEN T HERE WAS NO NECESSITY OF INCORPORATING THE EXPLANATION TO SECTI ON 73. THE EXPLANATION TO SECTION 73 ENLARGES THE AMBIT OF SPE CULATIVE TRANSACTION IN CASE OF SUCH COMPANY WHERE PART OF ITS BUSINESS IS TO DEAL IN SHARES.(PARA 13) THEREFORE IN CASE OF A COMPANY, IF PART OF ITS BUSINESS CONSISTS OF DEALING IN SHARES, THEN ALL TYPES OF TRANSACTIONS, WHETHER DELIVERY-BASED OR NON- DELIVERY-BASED, WILL BE TREATED AS SPECULATIVE TRAN SACTIONS.(PARA 14) THEREFORE THE APPEAL OF THE ASSESSEE WAS TO BE ALLOWED. 2.3.2 IN VIEW OF THE ABOVE, I AGREE WITH THE APP ELLANT THAT THE ENTIRE BUSINESS TRANSACTIONS HAVE TO BE TREATED AS SPECULA TIVE AND THEREFORE, THE ENTIRE BUSINESS LOSS AS WELL AS PROFIT WILL HAVE TO BE TREATED AS SPECULATIVE. THE DISALLOWANCE OF LOSS IS THEREFORE DELETED AND THIS GROUND OF APPEAL IS ALLOWED. AGAINST THIS ORDER OF THE LD. CIT(A) THE REVENUE HA S COME IN APPEAL BEFORE THE TRIBUNAL. 5. THE LD. DR MAINLY SUPPORTED THE ORDER OF AO AND SUBMITTED THAT THE PROVISIONS OF SECTION 43(5) OF THE ACT IS APPLI CABLE TO INDIVIDUAL TRANSACTIONS AND EACH TRANSACTION NEED TO BE VERIFI ED IN THE LIGHT OF THE PROVISIONS OF SECTION 43(5) OF THE ACT TO DETERMINE WHETHER A PARTICULAR TRANSACTION IS SPECULATIVE TRANSACTIONS OR NOT, IF ANY INDIVIDUAL TRANSACTION IS SETTLED WITHOUT DELIVERY/TRANSFER THEN SUCH TRAN SACTION HAS TO BE TREATED AS SPECULATIVE TRANSACTIONS, IRRESPECTIVE OF THE FA CT WHETHER THERE IS PROFIT OR LOSS FROM SUCH TRANSACTION AND THE PROVISIONS OF SECTION 73 OF THE ACT WILL BE APPLICABLE ONLY WHEN THERE IS OVERALL LOSS FROM SUCH SPECULATIVE BUSINESS. FURTHER THE EXPLANATION TO SECTION 73 OF THE ACT WILL BE APPLICABLE ONLY WHEN THE ASSESSEE IS COMPANY NOT FA LLING UNDER EXCEPTIONAL CATEGORY MENTIONED THEREIN AND IT HAS O VERALL LOSS FROM SALE AND PURCHASE OF SHARES. HENCE THE PROVISIONS OF SEC TION 43(5) AND SECTION 73 OF THE ACT OPERATE INDEPENDENT TO EACH OTHER. TH E AO HAS TREATED THE ITA NO.1530/AHD/2011 ALONG WITH CO NO.190/AHD/2011 ASST. YEAR 2007-08 14 LOSS OF RS.10,47,117/- AS ARISING OUT OF SPECULATI VE BUSINESS AND THE SAME CANNOT BE ALLOWED TO BE SET OFF AGAINST THE PR OFIT ARISING OUT OF NON- SPECULATIVE BUSINESS OF RS.84,93,734/- IN VIEW OF T HE PROVISIONS OF SECTION 71(1) OF THE ACT. THE AO HAS PASSED A DETA ILED ORDER AND GIVING VALID REASONS FOR MAKING THIS ADDITION. THE LD. CIT (A) WAS NOT JUSTIFIED IN DELETING THE SAME. THEREFORE, THE ORDER OF LD. CIT( A) BE SET ASIDE AND THAT OF THE AO BE RESTORED. 6. ON THE OTHER HAND THE LD. COUNSEL OF THE ASSESSE E HAS RELIED ON THE ORDER OF THE LD. CIT(A) AND SUBMITTED THAT THE ISSU E IS NOW COVERED BY THE DECISION OF THE TRIBUNAL MUMBAI BENCH B IN THE C ASE OF METROPOLITAN TRADERS (P) LTD. VS. ITO (2009) 33 SOT 168 (MUM) WH ICH HAS ALSO BEEN FOLLOWED BY THE LD. CIT(A). A COPY OF THE ORDER OF THE TRIBUNAL MUMBAI BENCH B IS PLACED ON RECORD. THEREFORE, HE SUBMIT TED THAT THE LD. CIT(A) HAS RIGHTLY DELETED THE IMPUGNED ADDITION. H IS ORDER MAY KINDLY BE UPHELD. 7. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND GOIN G THROUGH THE MATERIAL ON RECORD, WE FIND THE ISSUE INVOLVED IN T HIS APPEAL IS REGARDING WRONGLY CONSIDERING SPECULATIVE PROFIT OF RS.84,93, 734/- AS BUSINESS INCOME INSTEAD OF CONSIDERING THE SAME AS SPECULATI ON PROFIT UNDER EXPLANATION TO SECTION 73 AND THEREBY NOT ALLOWING SET OFF OF SPECULATION LOSS OF RS.10,47,117/- BY THE AO. THE LD. CIT(A) HA S GIVEN RELIEF TO THE ASSESSEE BY FOLLOWING THE DECISION OF THE TRIBUNAL MUMBAI B BENCH IN THE CASE OF METROPOLITON TRADERS (P) LTD. (SUPRA), WHEREIN IT WAS HELD THAT IN CASE OF A COMPANY IF PART OF ITS BUSINESS CONSIS TS OF DEALING IN SHARES THEN ALL TYPES OF TRANSACTIONS WHETHER DELIVERY BAS ED OR NON-DELIVERY BASED WOULD BE TREATED AS SPECULATIVE BUSINESS. AT THE TIME OF HEARING NO CONTRARY DECISION WAS RELIED ON BY THE REVENUE ON T HIS ISSUE. THEREFORE, ITA NO.1530/AHD/2011 ALONG WITH CO NO.190/AHD/2011 ASST. YEAR 2007-08 15 WE HAVE NO HESITATION IN CONFIRMING THE ORDER OF LD . CIT(A). WE UPHOLD THE SAME. THE GROUND RAISED BY THE REVENUE IS DISMI SSED. 8. AT THE TIME OF HEARING THE LD. COUNSEL OF THE AS SESSEE DID NOT PRESS THE CROSS OBJECTION AND HENCE THE SAME IS DISMISSED AS NOT PRESSED. 9. IN THE RESULT, THE APPEAL FILED BY THE REVENUE A ND THE CROSS OBJECTION FILED BY THE ASSESSEE ARE DISMISSED. SD/- SD/- (A. K. GARODIA) (D. K. TYAGI) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD, MAHATA/- COPY OF THE ORDER FORWARDED TO :- 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD 1.DATE OF DICTATION 20/9/11. 2.DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE TH E DICTATING MEMBER 28/9/11. /OTHER MEMBER. 3.DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P.S./P.S. 4.DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT.. 5.DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR .P.S./P.S 6.DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 7.DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8.THE DATE ON WHICH THE FILE GOES TO THE ASSTT. REG ISTRAR FOR SIGNATURE ON THE ORDER 9.DATE OF DESPATCH OF THE ORDER..