The DCIT, Circle-2, Ahmedabad V. Shri Parasharbhai Navnitbhai Patel, Ahmedabad

ITA 2043/AHD/2008

• Counselvise Citation: 204320514 RSA 2008
• Duration Of Justice: 3 year(s) 6 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-12-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 01-12-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 29-05-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: A C SHAH
• Keywords: Transactions in derivatives; Fair market value; Speculation loss
• Section: 43(5)

Judgement Text

, , , , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, AHMEDABAD .., !'# $ $ $ $ %% % &, ' ( # BEFORE SHRI G.D.AGARWAL, VICE-PRESIDENT AND SHRI MUKUL KR.SHRAWAT, JUDICIAL MEMBER $./ I.T.A. NO.2043/AHD/2008 ( * * * * / / / / ASSESSMENT YEAR : 2005-06) THE DCIT CIRCLE-2 AHMEDABAD / VS. SHRI PARASHARBHAI NAVNITBHAI PATEL 420, KALUPUR CHOKHA BAZAR AHMEDABAD '+ (, $./- $./ PAN/GIR NO. : ABRPP 6753F ( +. / // / APPELLANT ) .. ( /0+. / RESPONDENT ) +. 1 ( / APPELLANT BY : SHRI SAMIR TEKRIWAL /0+. 2 1 ( / RESPONDENT BY : SHRI A.C. SHAH % 3 2 &, / / / / DATE OF HEARING : 1/12/2011 45* 2 &, / DATE OF PRONOUNCEMENT : 2/12/2011 (6 / O R D E R PER SHRI MUKUL KR. SHRAWAT, JUDICIAL MEMBER : THIS IS AN APPEAL AT THE BEHEST OF THE REVENUE WHICH HAS EMANATED FROM THE ORDER OF LEARNED CIT(APPEALS)-VII, AHMEDAB AD DATED 26/03/2008 PASSED FOR A.Y. 2005-06. 2. GROUND NO.1 READS AS UNDER: 1. THE LD. CIT(A) HAS ERRED IN DELETING THE DISALL OWANCE OF RS.61,91,002/- BEING THE LOSS IN TRADING OF DERIVAT IVES. INSERTION OF SECTION 43(5)(D) BY FINANCE ACT, 2005 W.E.F. 01/04/2006 SHOWS THAT FOR YEAR UNDER CONSIDERATION TRADING IN DERIVATIVES WAS SPECULATIVE TRANSACTION. ITA NO. 2043/AHD/2008 DCIT VS. SHRI PARASHARBHAI NAVNITBHAI PATEL ASST.YEAR 2005-06 - 2 - 2.1. THE ASSESSEE IN INDIVIDUAL CAPACITY IS IN THE BUSINESS OF TRADING IN SHARES. IT WAS NOTED BY THE AO AS PER ORDER PASSED U/S.143(3) OF THE I.T. ACT DATED 10/12/2007 THAT THE LOSS IN F&O WAS A SPE CULATION LOSS THEREFORE COULD NOT BE ALLOWED TO BE SET OFF AGAINS T THE PROFIT EARNED FROM OTHER BUSINESS. THE ASSESSEE HAD GONE IN APPEAL AN D AFTER DETAILED DISCUSSION, IT WAS HELD AS UNDER:- 3.3. I HAVE PERUSED THE SUBMISSIONS OF THE AR OF T HE APPELLANT CAREFULLY. I HAVE ALSO CONSIDERED THE DECISION AS RELIED UPON BY THE AR AND THE OBSERVATION OF THE ASSESSING OFFICER IN THE ASSESSMENT ORDER. I AGREE WITH THE AR THAT PAYMEN T OF STT DOES NOT DECIDE THE ISSUE. THE TRADING IN DERIVATIVES D OES NOT INVOLVE SALE AND PURCHASE OF SHARES AND STOCKS. SECTION 43 (5) PROVIDES THAT ANY CONTRACT FOR PURCHASE AND SALE OF COMMODIT Y INCLUDING SHARES AND STOCKS IS SETTLED OTHERWISE THAN ACTUAL DELIVERY IS A SPECULATIVE TRANSACTION. THE CONTRACT MUST BE FOR PURCHASE AND SALE OF SHARES OR STOCKS. IT DOES NOT SPEAK OF ANY DERIVATIVES. DERIVATIVES DEFINED BY SUB-CLAUSE (AC) OF SECTION 2 OF SECURITIES CONTRACTS (REGULATION) ACT, 1956 WHICH IS REPRODUCE D AS UNDER: (AC) DERIVATIVE INCLUDES (A) A SECURITY DERIVED FROM A DEBT INSTRUMENT, SHARE LO AN, WHETHER SECURED OR UNSECURED, RISK INSTRUMENT OR CO NTRACT FOR DIFFERENCES OR ANY OTHER FORM OF SECURITY; (B) A CONTRACT WHICH DERIVES ITS VALUE FROM THE PRICES, OR INDEX OF PRICES OF UNDERLYING SECURITIES. FROM THE ABOVE, IT IS CLEAR THAT THE DERIVATIVES IS NOT SHARES OR STOCK AND THAT IT IS NOT CAPABLE OF BEING GIVEN ACT UAL DELIVERY. THEREFORE, LOSS IN TRADING OF DERIVATIVES IS NOT A SPECULATION LOSS AS HELD BY THE ASSESSING OFFICER. SUCH LOSS IS A BUSI NESS LOSS. THIS ALSO GETS SUPPORT FROM ITAT, BOMBAY BENCH IN THE CA SE OF DCIT V/S. SSKI INVESTORS SERVICES (P) LTD. 113 TTJ 511. ITA NO. 2043/AHD/2008 DCIT VS. SHRI PARASHARBHAI NAVNITBHAI PATEL ASST.YEAR 2005-06 - 3 - 3.4. FURTHER, IT IS SEEN THAT IN DERIVATIVES THE PE RSON WHO DEALS EITHER RECEIVES THE APPRECIATED VALUE OR LIABLE TO PAY ERODED VALUE ONLY. THE PERSON WHO ENTERS INTO THIS TRANSACTIONS IS LIABLE FOR THE VALUE REDUCED AND ONE WHO HAS TO PAY FOR THAT. IN CASE THERE IS AN APPRECIATION THEN THE PERSON IS ENTITLED TO GET THE DIFFERENCE IN VALUE. THEREFORE, IT APPEARS TO ME THAT THERE IS A DIFFERENCE BETWEEN DERIVATIVES AND SPECULATION OF TRANSACTION. IN SPECULATION THOUGH THERE IS A PURCHASE AND SALE OF STOCKS, SHAR E AND COMMODITY BUT THERE IS NO DELIVERY. THEREFORE, IT APPEARS TO ME THAT DERIVATIVES ARE DIFFERENT FROM THE SPECULATION . THE APPELLANT HAS DEALT IN DERIVATIVES. ACCORDINGLY I DIRECT TO TREAT THE LOSS IN TRADING OF DERIVATIVES AS BUSINESS LOSS AND THAT SA ME SHOULD BE SET OFF AGAINST THE INCOME FROM BUSINESS IN SHARES. TH E DISALLOWANCE OF RS.61,91,002 BEING THE LOSS IN TRADING OF DERIVA TIVES IS DELETED. THERE IS NO NEED TO GO INTO THE ALTERNATIVE SUBMISS ION SINCE THE DISALLOWANCE IS DELETED ON THIS GROUND. 3. ON HEARING THE SUBMISSIONS OF BOTH THE SIDES, THE ADMITTED LEGAL POSITION IS THAT NOW THIS ISSUE IS COVERED IN FAVOU R OF THE REVENUE VIDE A SPECIAL BENCH ORDER OF ITAT KOLKATA, NAMELY SHREE C APITAL SERVICES LTD. VS. ASST.CIT [2009] 121 ITD 498 (KOL.)[SB], ON E OF US, I.E. VICE- PRESIDENT/ACCOUNTANT MEMBER IS THE AUTHOR, WHEREIN IT WAS HELD THAT DERIVATIVES DO FALL WITHIN THE MEANING OF COMMOD ITY USED IN SECTION 43(5) OF I.T. ACT. IT WAS HELD THAT A LOSS ON ACC OUNT OF FEATURES AND OPTIONS, A FORM OF DERIVATIVES, HAS TO BE DISALL OWED BY INVOKING SECTION 43(5) OF THE I.T. ACT. RELEVANT PORTION IS REPRODUCED BELOW:- 5.2. .. THUS, THEIR LORDSHIPS HAVE HELD THAT DUE TO TECHNOLOGICAL ADVANCEMENT, ONE HAS TO CHANGE HIS TH INKING ABOUT VARIOUS CONCEPTS LIKE GOODS, MERCHANDISE AND ARTICL ES. THE ABOVE OBSERVATION WOULD BE SQUARELY APPLICABLE WHILE INTE RPRETING THE WORD 'COMMODITY'. IN SECTION 43(5), THE TERM 'COMMO DITY' HAS BEEN GIVEN A WIDE MEANING BECAUSE IT IS MENTIONED T HAT ANY COMMODITY INCLUDES STOCKS AND SHARES. THEREFORE, EV EN IF IN ITA NO. 2043/AHD/2008 DCIT VS. SHRI PARASHARBHAI NAVNITBHAI PATEL ASST.YEAR 2005-06 - 4 - COMMON PARLANCE THE TERM 'COMMODITY' MAY NOT INCLUD E ANY STOCKS AND SHARES, BUT THE LEGISLATURE FOR THE PURP OSE OF SECTION 43(5) PROVIDED THAT THE TERM 'COMMODITY' WOULD INCL UDE STOCKS AND SHARES. THIS MAKES THE INTENTION OF THE LEGISLA TURE CLEAR THAT THEY USED THE TERM 'COMMODITY' IN A VERY WIDE MANNE R. SECTION 43(5) WAS BROUGHT ON THE STATUTE DECADES BACK WHEN THERE WAS NO CONCEPT OF TRADING IN DERIVATIVES. THEREFORE, NATUR ALLY THE LEGIS- LATURE WILL NOT MENTION THE WORD 'DERIVATIVES' IN S ECTION 43(5). HOWEVER, IT HAS BEEN PROVIDED THAT THE TERM 'COMMOD ITY' WOULD INCLUDE STOCKS AND SHARES. THUS THE SECURITIES REPR ESENTED BY STOCKS AND SHARES ARE INCLUDED IN THE TERM 'COMMODI TY'. THE DERIVATIVES ARE ALSO SECURITIES. DERIVATIVE DERIVES ITS VALUE FROM THE UNDERLYING ASSETS. IN OTHER WORDS, THE UNDERLYI NG ASSETS ARE REPRESENTED BY DERIVATIVES. WHEN THE UNDERLYING ASS ET OF ANY DERIVATIVE IS SHARE AND STOCK FOR ALL PRACTICAL PUR POSES, THE TREATMENT GIVEN TO SUCH DERIVATIVES SHOULD BE SIMIL AR TO STOCK AND SECURITIES. IN THE CASE UNDER APPEAL BEFORE US, IT IS ADMITTED THAT THE UNDERLYING ASSET IS SHARES. THEREFORE, IN OUR O PINION, DERIVATIVES WILL ALSO FALL WITHIN THE MEANING OF 'C OMMODITY' USED IN SECTION 43(5). WE MAY ALSO MENTION THAT THE FINANCE ACT, 2005 HAS PROVIDED THAT CERTAIN TRANSACTIONS IN RESPECT OF TR ADING IN DERIVATIVES SHALL NOT BE DEEMED TO BE SPECULATIVE T RANSACTIONS WITHIN THE MEANING OF SECTION 43(5). IF THE TRANSAC TION IN DERIVA- TIVES DOES NOT FALL WITHIN THE DEFINITION OF 'SPECU LATIVE TRANSACTION' UNDER SECTION 43(5), THEN THERE WAS NO QUESTION OF EXEMPTING CERTAIN TYPE OF TRANSACTION IN DERIVATIVES FROM THE SCOPE OF SPECULATIVE TRANSACTION UNDER SECTION 43(5). IF IT IS HELD THAT THE TRANSACTION IN DERIVATIVES DOES NOT FALL IN SECTION 43(5), IT WILL MAKE CLAUSE (D) AND EXPLANATION THERETO BELOW SECTI ON 43(5) INTRODUCED BY THE FINANCE ACT, 2005 TO BE REDUNDANT . IN FURTHER- ANCE TO THE ABOVE EXPLANATION, THE CENTRAL GOVT. HA S ALSO FRAMED RULES, I.E. RULE 6DDA AND RULE 6DDB. IT CANNOT BE P RESUMED THAT THE GOVERNMENT HAS INTRODUCED A CLAUSE, I.E., CLAUS E (D) AS WELL AS EXPLANATION THERETO, WHICH WAS REDUNDANT AND INFRUC TUOUS. 5.3 IN VIEW OF THE ABOVE, WE HOLD THAT THE TERM 'DERIVA TIVES' IN WHICH UNDERLYING ASSET IS SHARES, WILL FALL WITHIN THE MEANING OF 'COMMODITY' USED IN SECTION 43(5) OF THE ACT. ITA NO. 2043/AHD/2008 DCIT VS. SHRI PARASHARBHAI NAVNITBHAI PATEL ASST.YEAR 2005-06 - 5 - 4. RESPECTFULLY FOLLOWING THE CITED DECISION, WE HE REBY REVERSE THE FINDINGS OF LD.CIT(A) AND THE ISSUE GOES IN FAVOUR OF THE REVENUE. THEREFORE, THIS GROUND IS ALLOWED. 5. GROUND NO.2 READS AS UNDER: 2. THE LD. CIT(A) ERRED IN DELETING THE DISALLOWA NCE OF INTEREST OF RS.90,900/- PAID TO MOTHER, SMT.MEENABEN N PATE L U/S 40A(2) OF THE I.T. ACT. 5.1. THE AO HAS OBSERVED THAT THE ASSESSEE HAD MADE PAYMENT OF INTEREST TO HIS MOTHER SMT.MEENABEN N.PATEL. IN TH E OPINION OF AO, EXCESS INTEREST WAS PAID. A SUM OF RS.90,000/- WAS DISALLOWED BY INVOKING THE PROVISIONS OF SECTION 40A(2) OF THE I. T.ACT. 6. THE LD.CIT(A) HAS HELD IN ASSESSEES FAVOUR AS U NDER: 5.2. I HAVE PERUSED THE SUBMISSIONS OF THE AR OF T HE APPELLANT CAREFULLY. I HAVE ALSO PERUSED THE DECISION AS REL IED UPON BY THE AR AND THE OBSERVATION OF THE ASSESSING OFFICER IN THE ASSESSMENT ORDER. THERE IS A FORCE IN THE AR'S CONTENTION TH AT THE PREVAILING MARKET RATE IS TO BE SEEN AND THAT SUCH RATE IS TO BE JUDGED ON THE BASIS OF THE CIRCUMSTANCES PREVAILING ON THE DATE O F BORROWING. THE ASSESSEE BORROWED RS.2,76,60,000 ON 14 TH MARCH, 2003 I.E. LAST DAY OF SUBSCRIPTION OF PNB IPO. ACCORDING TO THE ASSESSEE THERE WAS LIQUIDITY CRUNCH IN THE MARKET, THEREFORE THE ASSESSEE HAD TO BORROW @ 18%. THE LENDER MAY BE THE RELATIV E BUT THE QUESTION IS WHETHER IT IS THE PREVAILING MARKET RAT E. FROM THE STATEMENT OF INCOME OF MEENABEN FILED SHE PAID THE INTEREST OF RS.13,29,122 AND RECEIVED THE INTEREST OF RS.7,00,0 00. THEREFORE THERE IS A NET DEFICIT. FURTHER MEENABEN HAS SUBMI TTED THE RETURN FOR A.Y. 2005-06 DECLARING THE TOTAL INCOME AT RS.3 ,33,520. THEREFORE THERE IS NO QUESTION OF ANY FAVOUR. THE KARNATAKA HIGH COURT IN THE CASE OF DCIT V/S. MICROTEX SEPARATORS LTD. 293 ITR 451 HELD THAT IT IS NOT THE QUANTUM ALONE THAT GOVE RNS IN SUCH CASES. FAIR MARKET VALUE OF THE GOODS, SERVICES, L EGITIMATE NEEDS ITA NO. 2043/AHD/2008 DCIT VS. SHRI PARASHARBHAI NAVNITBHAI PATEL ASST.YEAR 2005-06 - 6 - OF THE BUSINESS OR PROFESSION OF THE ASSESSEE, WOUL D BE IN THE GUIDING FACTOR IN TERMS OF SECTION 40A(2). 5.3 IT IS THEREFORE, IN MY VIEW, THAT THE INTEREST @ 18% WAS PAID TO MEENABEN WAS HAVING REGARD TO THE LEGITIMATE NEE DS OF THE BUSINESS. THEREFORE, IT IS NOT EXCESSIVE. IN THE RESULT THE DISALLOWANCE OF INTEREST OF RS.90,900 PAID TO MEENA BEN IS DELETED. 7. ON DUE CONSIDERATION OF THE FACTUAL ASPECT OF TH E CASE, IN OUR OPINION, LD.CIT(A) HAS CORRECTLY HELD THAT THE INTE REST WAS PAID HAVING REGARD TO THE LEGITIMATE NEED OF THE BUSINESS AND I T WAS NOT EXCESSIVE. LD.CIT(A) HAS PLACED RELIANCE ON DCIT VS. MICROTEX SEPARATORS LTD. 293 ITR 451 (KARN.). WE HEREBY AFFIRM THE FINDINGS OF THE LD.CIT(A) AND DISMISS THIS GROUND OF THE REVENUE. 8. IN THE RESULT, APPEAL OF THE REVENUE IS PARTLY A LLOWED. SD/- SD/- ( G.D. AGARWAL ) ( MUKUL KR. SHRAWAT ) VICE PRESIDENT JU DICIAL MEMBER AHMEDABAD; DATED 02/ 12 /2011 7.. , . ../ T.C. NAIR, SR. PS (6 2 /&8 (8*& (6 2 /&8 (8*& (6 2 /&8 (8*& (6 2 /&8 (8*&/ COPY OF THE ORDER FORWARDED TO : 1. +. / THE APPELLANT 2. /0+. / THE RESPONDENT. 3. $$ & %9 / CONCERNED CIT 4. %9() / THE CIT(A)-VII, AHMEDABAD 5. 8<= /& , , / DR, ITAT, AHMEDABAD 6. = >3 / GUARD FILE. (6 % (6 % (6 % (6 % / BY ORDER, 08& /& //TRUE COPY// ! !! !/ // / $ $ $ $ ( DY./ASSTT.REGISTRAR) , , , , / ITAT, AHMEDABAD