The DCIT, Circle-2(1)(2), Ahmedabad V. Magic Share Traders Ltd., Ahmedabad

ITA 209/AHD/2019

AI Insights

The case revolves around the treatment of losses incurred by Magic Share Traders Ltd. from trading in Futures and Options (F&O) during the assessment year 2015-16. The Assessing Officer initially treated these losses as speculative losses under Explanation to section 73 of the IT Act, which would restrict the set-off of such losses against non-speculative income. However, the CIT(A) reversed this decision, recognizing the losses as business losses based on the proviso to section 43(5) of the IT Act, which excludes such losses from being considered speculative if the trading is conducted on recognized stock exchanges. The Department appealed this decision to the ITAT, which upheld the CIT(A)'s decision, referencing several precedents that supported the assessee's position.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 131380 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-02-2023
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 12-12-2022
• Assessment Year: 2015-2016
• Appeal Filed On: 11-02-2019
• Other Referred Cases: M/s. DLF Commercial Developers Pvt. Ltd. 35 taxman.com 280 (Delhi High Court), Fiduciary Share and Stock Pvt. Ltd. Vs. ACIT, Cir. 4(2) in ITA No.321 /MUM/2013 dated 13/05/2016, Asian Financial Services, Blue Berry Trading Co. (P.) Ltd. [2022] 143 taxmann.com 140 (Mumbai - Trib.), Magic Share Traders Ltd. [2018] 100 taxmann.com 42 (Ahmedabad - Trib.)
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Transactions in derivatives; Speculation loss; Speculative transactions
• Section: 43(5); 143(2); 43; 73; 101

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “B” BENCH Before: Ms. Annapurna Gupta, Accountant Member And Shri Siddhartha Nautiyal, Judicial Member Th e Dy. CIT, Circle-2 (1 )(2), Ah medabad (Appellant) Vs Mag ic Share Traders Ltd. 101 , Akash gang a, Gu jarat College Ro ad, Bodak dev, Ellisbridge, Ah med abad PAN: AAECM9542L (Resp ondent) Asses see b y : None Revenue by : Shri Rake sh Jh a, Sr. D. R. Date of hearing : 13-12 -2022 Date of pronouncement : 24-02 -2023 आदेश/ORDER PER : SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER:- This is an appeal filed by the Revenue against the order of the ld. Commissioner of Income Tax (Appeals)-2, Ahmedabad in Appeal no. CIT(A)-2/10274/AC. Cir. 2(1)(2)/2017-18, in proceeding u/s. 143(2) vide order dated 22/11/2018 passed for the assessment year 2015-16. ITA No. 209/Ahd/2019 Assessment Year 2015-16 I.T.A No. 209/Ahd/2019 A.Y. 2015-16 Page No. DCIT vs. Magic Share Traders Ltd. 2 2. The Department has taken the following grounds of appeal:- “1. The Ld.CIT(A) has erred in law and on facts in allowing the F&O loss of Rs 3,74,54,163/-as business loss contrary to explanation to Section 73 of the IT Act. 2. The appellant craves leave to amend alter any ground or add a new ground, which may be necessary” 3. The brief facts of the case are that during the year under consideration, the assessee carried transactions in shares, F&O and has earned brokerage income and interest income. The assessee has shown losses of Rs. 3,74,54,163/- from Future and Options (F&O) business, income of Rs. 1,07,51,347/- from share trading and profit of Rs. 6,36,861/- from Mutual Funds. In the assessment, the Assessing Officer relied upon case of M/s. DLF Commercial Developers Pvt. Ltd. 35 taxman.com 280 (Delhi High Court) and held that the loss incurred by the assessee in trading in F&O should treated as speculation loss for the purpose of Explanation to section 73 of the Act and accordingly the Assessing Officer did not allow set off of such losses incurred by the assessee from F & O operations. 4. The assessee filed appeal against the aforesaid order before ld. CIT(A), who allowed the appeal of the assessee on the ground that the assessee has shown the above loss as business loss from trading in derivatives which has been conducted on recognized stock exchange and accordingly as per proviso (d) to section 43(5), the F & O loss is not speculative loss. Further, the ld. CIT(A) also observed that the issue I.T.A No. 209/Ahd/2019 A.Y. 2015-16 Page No. DCIT vs. Magic Share Traders Ltd. 3 involved is squarely covered in favour of the assessee by the decision of Hon’ble ITAT in assessment year 2012-13 in assessee’s own case on similar facts and issues. While allowing the appeal of the assessee, the ld. CIT(A) observed as under:- “Decision: 2.3. I have carefully considered the facts of the case, assessment order and submission of the appellant. The AO has not allowed the set off of F & O loss of Rs.3,74,54,163/- on the ground that loss on F & O is a speculative loss as per explanation to Section 73 of the Act. The AO has relied upon the order of CIT(A) in the preceding year in which the learned CIT(A) relying upon the decision of Delhi High Court in the case of M/s. DLF Commercial Developers Pvt. Ltd. has held the loss to be speculative. 2.4. Appellant on the other hand has submitted that it is engaged in the business of share trading and shown loss in trading in derivatives as a business loss in accordance with proviso to section 43(5) of the Act. The appellant has further submitted that business loss shown on trading in derivatives has been conducted on the recognised stock exchange as per proviso (d) to section 43(5). The appellant has contended that the AO has invoked explanation to section 73 and relied upon the case of DLF Com. Dev Pvt. Ltd. in treating the business loss in derivative as a speculation loss. Appellant has submitted that the AO has not considered the fact that Explanation to section 73 has been amended subsequently whereby the explanation is not applicable in the case of company principal business of which is the business of trading in share and the Honourable ITAT 'F' Bench, Mumbai in the case of Fiduciary Share and Stock Pvt. Ltd. Vs. ACIT, Cir. 4(2) in ITA No.321 /MUM/2013 dated 13/05/2016 has considered the similar issue and decided in favour of the appellant. The appellant has also contended that the similar disallowance was made by the AO in Assessment Year 2012-13 and the Honourable ITAT vide its order in ITA No.770/Ahd/2016 dated 31/10/2018 relying upon the decision of Honourable Kolkata High Court in the case of Asian Financial I.T.A No. 209/Ahd/2019 A.Y. 2015-16 Page No. DCIT vs. Magic Share Traders Ltd. 4 Services has held that the F & O loss is not a speculation loss as under:- "9. We have carefully considered the rival submissions and perused the respective orders of the AO and CIT(A). The substantive question that arises for adjudication is whether loss incurred in eligible transactions i.e. derivative transactions within the meaning of Proviso (d) to Section 43(5) of the Act not involving any purchase or sale of shares per se can be regarded as speculative loss for the purposes of set off in view of Explanation to Section 73 or not. The controversy involved in the present case is thus essentially legal in nature. 9.1 In the present appeal, the assessee seeks set off of losses arising from derivative losses as non-speculative business loss. In contrast, the Revenue has labeled the loss arising from derivative transactions as 'speculative loss' and has consequently denied set off of such losses from regular income of non-speculative nature etc. by applying Explanation to Section 73 of the Act. 9.2 We first advert to the pivotal contention on behalf of the assessee that Explanation to Section 73 of the Act cannot apply to loss arising from derivative transactions which are categorically excluded from being regarded as speculative business as defined under s.43(5) of the Act read with proviso (d) thereto. Identical issue arose before the Hon'ble Calcutta High Court in the case of Asian Financial Services (supra) relied upon. The Hon'ble Calcutta High Court held that once it is deemed to be a normal business loss on the basis of proviso appended to Section 43(5) of the Act, a question of applying Section 73 of the Act or the Explanation thereto for the purposes of refusing loss to be set off against business income is wholly incorrect. The Hon'ble Calcutta High Court after taking note of the decision of Hon'ble Delhi High Court in DLF Commercial (supra) took a distinct stand that derivatives cannot be treated at par with shares for the purposes of Explanation to Section 73 of the Act because the legislature has treated it differently. Thus, in view of the aforesaid position I.T.A No. 209/Ahd/2019 A.Y. 2015-16 Page No. DCIT vs. Magic Share Traders Ltd. 5 enunciated by the Hon'ble High Court in Asian Financial Services (supra), we find good deal of force in the case of assessee. The claim of the assessee thus requires to be allowed on this ground alone. 9.3 In view of the resounding conclusion drawn in favour of the assessee on the aforesaid legal position, we do not consider it necessary to advert to other alternative contentions raised on behalf of the assessee. 10. In the result, Ground No. l of the assessee's appeal is allowed." 2.5. As the issue involved is squarely covered by the decision of Honourable IT AT, Ahmedabad in A. Y. 2012-13 in appellant's case on exactly same facts and issue, the addition made by AO on account of F & O loss not allowed to be set off of Rs.3,74,54,163/- is deleted. The ground of appeal is accordingly allowed.” 5. The Department is in appeal before us against the aforesaid order passed by ld. CIT(A) allowing relief to the assessee. The ld. Departmental Representative placed reliance on the observations made by the Assessing Officer in the assessment order at para 4.3 of the assessment order. In response, the counsel for the assessee submitted that similar disallowances were made in assessment years 2012-13 and 2013-14 and on the same facts the ITAT, Ahmedabad decided the issue in favour of the assessee for assessment year 2012-13 (ITA No. 770/Ahd/2016 vide order dated 31-10- 2018) and assessment year 2013-14 (ITA No. 624/Ahd/2018 vide order dated 26-06-2019) and accordingly the case of the assessee is squarely covered by the aforesaid orders. The counsel for the assessee further relied upon the Ahmedabad ITAT decision in the case of Fiduciary Shares and Stocks in ITA No. 321/Mum/2013 dated 13-05-2016 in which case the similar issue was decided in favour of the assessee. I.T.A No. 209/Ahd/2019 A.Y. 2015-16 Page No. DCIT vs. Magic Share Traders Ltd. 6 6. We have heard the rival contentions and perused the material on record. In the case of Asian Financial Services Ltd. [2016] 70 taxmann.com 9 (Calcutta) where the assessee dealing in settlement of future and option derivatives, incurred substantial loss. The assessee contended that such loss was to be treated as a business loss under proviso to section 43(5) and once it was treated as such, question of applying section 73 or Explanation thereto for purpose of refusing loss to be set off against business income was palpably wrong. The Assessing officer, however, observed that sub-section (5) of section 43 is a general provision whereas provision contained in section 73 is specific in nature and he concluded that loss was speculation loss and could not be set off against business income as Explanation to section 73 would apply. The High Court held that loss incurred on account of derivatives would be deemed business loss under proviso to section 43(5) and not speculation loss and, hence, Explanation to section 73 could not be applied and as such, loss would be allowed to be set off against income arising out of proper business because derivatives were treated differently within meaning of Explanation to section 73(4) and not at par with shares. In the case of Blue Berry Trading Co. (P.) Ltd. [2022] 143 taxmann.com 140 (Mumbai - Trib.), the ITAT held that where assessee executed futures and options transactions in recognized stock exchange through SEBI registered share broker, said transactions would fall under exception provided in definition of speculative transactions in terms of section 43(5)(d), and loss incurred on same was to be treated as regular business loss. In the assessee’s own case of Magic Share Traders Ltd. [2018] 100 taxmann.com 42 (Ahmedabad - Trib.), the ITAT held that Loss incurred on account of derivatives would be deemed business loss I.T.A No. 209/Ahd/2019 A.Y. 2015-16 Page No. DCIT vs. Magic Share Traders Ltd. 7 under proviso to section 43(5) and not speculation loss and, hence, Explanation to section 73 could not be applicable; and such loss would be set off against income from business. In our considered view, we observe that various courts, including the ITAT in assessee’s own case for assessment year 2012-13 and assessment year 2013-14 has decided the issue on identical facts in favour of the assessee. In view of the above position, we find no infirmity in the order of ld. CIT(A) so as to call for any interference. 7. In the result, the appeal of the Department is dismissed. Order pronounced in the open court on 24-02-2023 Sd/- Sd/- (ANNAPURNA GUPTA) (SIDDHARTHA NAUTIYAL) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad : Dated 24/02/2023 आदेश क त ल प अ े षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/ आदेश से, उप/सहायक पंजीकार आयकर अपील य अ धकरण, अहमदाबाद