ITO, Corporate Ward-2(1), Chennai V. Euroflora Bioland Pvt Ltd, Chennai

ITA 2124/CHNY/2017

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 5724 (ITAT-CHENNAI)
• Duration Of Justice: 3 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-12-2017
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2008-2009
• Appeal Filed On: 31-08-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: N MADHAVAN ACIT
• Keywords: Business income; Speculation loss
• Section: 43(5)

Judgement Text

, C/ SMC , IN THE INCOME TAX APPELLATE TRIBUNAL C/SMC BENCH, CHENNAI . , BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER I.T.A.NO.2124 /MDS./2017 ( ASSESSMENT YEAR : 2008-09 ) THE INCOME TAX OFFICER, CORPORATE WARD 2(1), CHENNAI. VS. M/S.EUROFLORA BIOLAND PVT LTD., NO.Q-67, 16 TH STREET, ANNA NAGAR, CHENNAI-40. PAN AABCE 4830 C ( / APPELLANT ) ( / RESPONDENT ) / APPELLANT BY : MR.N.MADHAVAN,, ACIT, D.R / RESPONDENT BY : MR.S.SRIDHAR, ADVOCATE ! ' / DATE OF HEARING : 16.11.2017 #$%& ! ' /DATE OF PRONOUNCEMENT : 05.12.2017 / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: THIS APPEAL IS FILED BY THE REVENUE , AGGRIEVED BY THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX(A)-9, CHENNA I DATED 26.05.2017 PERTAINING TO ASSESSMENT YEAR 2008-09. ITA NO. 2124/MDS/2017 2 2. THE ONLY GRIEVANCE OF THE REVENUE IN ITS APPEAL IS WITH REGARD TO TREATING LOSS ON SALE OF SECURITIES OF ` 38,65,615/- AS SPECULATIVE LOSS U/S.73(1) BY THE LD. ASSESSING OFFICER AS AGAI NST BUSINESS LOSS CLAIMED BY THE ASSESSEE. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE AO NOT ICED THAT AS PER THE COMPUTATION OF INCOME, THE ASSESSEE HAS INCURRE D LOSS OF ` 5,24,494/- FROM BUSINESS AND SHORT TERM CAPITAL LOS S OR ` 15,61,126 / - FROM TRADING IN SHARES DURING THE YEAR WHICH RESU LTED IN A TOTAL LOSS OF ` 20,86,620/- WHICH HAS BEEN CARRIED FORWARD TO NEXT YEAR. THE AO FROM THE DETAILS OF TRANSACTION IN SHARES FILED BY THE ASSESSEE AND ON VERIFICATION OF FORM-10-DB ISSUED BY THE BROKER OF THE ASSESSEE M/S. RELIGARE SECURITIES LTD., NOTICED THAT THE ASSESSEE HAS SHOWN LOSS FROM DELIVERY BASED TRANSACTION OF ` 15,62,126/- UNDER THE HEAD INCOME FROM SHORT TERM CAPITAL GAINS AND LOSS FRO M NON-DELIVERY BASED TRANSACTION AND FUTURE TRADING OF ` 38,65,615/- UNDER THE HEAD INCOME FROM BUSINESS. THE AO OBSERVED THAT AS PER SECTION 73(1) ANY LOSS COMPUTED IN RESPECT OF A SPECULATION BUSIN ESS CARRIED ON BY THE ASSESSEE SHALL NOT BE SET OFF EXCEPT AGAINST PR OFITS AND GAINS IF ITA NO. 2124/MDS/2017 3 ANY OF ANOTHER SPECULATION BUSINESS. THE AO ASKED T HE ASSESSEE AS TO WHY EXPLANATION TO SECTION 73 SHOULD NOT BE INVO KED AND THE LOSS IN SHARE TRADING SHOULD NOT BE TREATED AS SPECULATI ON LOSS TO BE ADJUSTED ONLY AGAINST PROFITS AND GAINS OF SPECULAT ION BUSINESS OF CURRENT YEAR OR SUBSEQUENT EIGHT YEARS. 3.1 THE ASSESSEES AR VIDE LETTER DATED 03.11.2003 SUBMITTED BEFORE THE LD. ASSESSING OFFICER THAT THE ASSESSEE S CASE IS NOT COVED BY THE PROVISIONS OF EXPLANATION TO SECTION 7 3 AND RELIED ON CERTAIN CASE LAWS. THE AO DISTINGUISHED THE HONBLE HIGH COURT OF CALCUTTA DECISION RELIED ON BY THE ASSESSEE IN THE CASE OF CIT VS PARK VIEW PROPERTIES LTD., 261 ITR 473 BY OBSERVING THAT THE LOSS INCURRED BY THE ASSESSEE FROM SHARE TRADING OF ` 38,65,615/- IS MORE THAN THE INCOME UNDER OTHER HEADS AND THEREFORE PRO VISIONS OF SECTION 73 WOULD BE ATTRACTED IN THE ASSESSEES CAS E. THE AO ALSO OBSERVED THAT THE LOSS FROM DELIVERY BASED TRANSACT ION AMOUNTING TO ` 15,62,126/- OFFERED UNDER THE HEAD INCOME FROM SHO RT TERM CAPITAL GAINS BY THE ASSESSEE SHOULD ALSO BE TREATED UNDER THE HEAD BUSINESS. ACCORDINGLY, THE AO BY RELYING ON CERTA IN CASE LAWS, TREATED THE ENTIRE LOSS OF ` 54,27,741/- ( ` 38,65,615/- + ` 15,62,126/-) ITA NO. 2124/MDS/2017 4 AS SPECULATION LOSS FROM THE BUSINESS OF PURCHASE A ND SALE OF SHARES AS INCOME FROM BUSINESS AND ALLOWED TO BE CARRIED F ORWARD FOR FOUR ASSESSMENT YEARS TO BE ADJUSTED ONLY AGAINST SPECUL ATION PROFIT. AGGRIEVED BY THE ORDER OF LD. ASSESSING OFFICER, TH E ASSESSEE CARRIED THE APPEAL BEFORE THE LD.CIT(A). 3.2 THE LD.A.R CONTENDED BEFORE THE LD.CIT(A) T HAT IN THE ASSESSMENT ORDER, THE AO ACCEPTED THAT THE PRINCIPL E BUSINESS OF THE APPELLANT COMPANY IS IN THE BUSINESS OF TRADING IN SHARES AND THEREFORE THE PROVISIONS OF EXPLANATION TO SECTION 73 WILL NOT BE ATTRACTED. IT IS THE CONTENTION OF THE APPELLANT TH AT THE FOLLOWING HEADS OF INCOME ARE EXCLUDED IN EXPLANATION TO SECTION 73 OF THE ACT: (I) THAT THE PRINCIPLE BUSINESS OF WHICH IS IN TRAD ING IN SHARES, (II) THAT THE PRINCIPLE BUSINESS OF WHICH IS IN BAN KING OR GRANTING OF LOANS AND ADVANCES (III) THAT THE GROSS TOTAL CONSISTS MAINLY OF INCO ME WHICH IS CHARGEABLE UNDER THE HEADS INTEREST ON SECURITIES , INCOME FROM HOUSE PROPERTY, CAPITAL GAINS AND INCOME F ROM OTHER SOURCES. ITA NO. 2124/MDS/2017 5 THEREFORE, THE CONTENTION OF THE LD.A.R IS THAT BE CAUSE THE AO HIMSELF HAD ACCEPTED THAT THE ASSESSEES PRINCIPLE BUSINESS IS TRADING IN SHARES, THE EXCEPTION CLAUSE WILL APPLY AND ACCO RDINGLY THE EXPLANATION TO SECTION 73 IS NOT APPLICABLE. 3.3 ON APPEAL, THE LD.CIT(A) OBSERVED THAT THE EX CEPTION CLAUSES INCLUDED ONLY WHEREIN THE GROSS TOTAL INCOME CONSIS TED MAINLY OF INCOME WHICH IS CHARGEABLE UNDER THE HEADS INTEREST ON SECURITIES, INCOME FROM HOUSE PROPERTY, CAPITAL GAINS AND INCOM E FROM OTHER SOURCES OR THE PRINCIPLE BUSINESS IS BANKING OR GRA NTING OF LOANS AND ADVANCES. THE FINANCE ACT 2014 WITH EFFECT FROM 01. 04.2015 ALSO INCLUDED THE PRINCIPLE BUSINESS OF TRADING IN SHARE S AS ONE OF THE EXCEPTIONS. THE ASSESSMENT YEAR INVOLVED IN THE CAS E OF THE APPELLANT IS 2008-09 AND THE PROVISIONS EXISTED AT THAT TIME FOR THE ASSESSMENT YEAR 2008-09 ALONE ARE APPLICABLE. THE A MENDMENT MADE WITH EFFECT FROM 01.04.2015 IS NOT APPLICABLE FOR THE ASSESSMENT YEAR 2008-09. FOR THE ASSESSMENT YEAR 20 08-09, EVEN IF THE PRINCIPLE BUSINESS WAS TRADING IN SHARES, AL L TRANSACTIONS IN THE NATURE OF PURCHASE AND SALE OF SHARES OF OTHER COMP ANIES WAS DEEMED TO BE CONSIDERED AS SPECULATION BUSINESS AND ACCORDINGLY ITA NO. 2124/MDS/2017 6 THE AO TREATED THE ENTIRE TRANSACTIONS IN PURCHASE AND SALE OF SHARES AS SPECULATION BUSINESS. IN THE RETURN OF INCOME, T HE ASSESSEE HAD SHOWN INCOME FROM NON-DELIVERY BASED TRADING AT A L OSS OF ` 38,65,615/- UNDER THE HEAD BUSINESS INCOME AND ALSO OFFERED LOSS UNDER THE DELIVERY BASED PURCHASE AND SALE OF SHARE S AT ` 15,62,126/- UNDER THE HEAD SHORT TERM CAPITAL LOSS. 3.4 THE LOSS ON ACCOUNT OF BUSINESS OF PURCHASE AND SALE OF NON-DELIVERY BASED TRANSACTIONS ARE ADJUSTED AGAINS T THE INCOME RECEIVED FROM CONSULTATION AND NET BUSINESS INCOME OF ` 5,24,494/- WAS ARRIVED AT. AS PER THE APPELLANT, THE NON-DELIV ERY BASED TRADING IS NOT A SPECULATION BUSINESS AS PER CLAUSE (D) OF SEC TION 43(5) OF THE ACT. CLAUSE (D) PROVIDES THAT THE TRADING IN DERIVA TIVES IN A RECOGNIZED STOCK EXCHANGE IS EXCLUDED FROM THE SPECULATIVE TRA NSACTION. THEREFORE THE CONTENTION OF THE APPELLANT IS THAT B ECAUSE THE DERIVATIVE TRANSACTIONS ARE CARRIED THROUGH A RECOG NIZED STOCK EXCHANGE, THE LOSS OF ` 38,65,615/- SHOULD NOT BE TREATED AS SPECULATION LOSS AND MUST BE CONSIDERED AS BUSINESS LOSS ELIGIBLE TO BE ADJUSTED AGAINST OTHER HEADS OF INCOME. AS AGAIN ST THIS CONTENTION OF THE APPELLANT, THE AO MENTIONED IN THE ASSESSMEN T ORDER THAT THE ITA NO. 2124/MDS/2017 7 EXPLANATION TO SECTION 73 WILL HAVE PRECEDENCE OVER SECTION 43(5) BECAUSE EXPLANATION TO SECTION 73 COMES AFTER SECTI ON 43(5). THE CALCUTTA HIGH COURT IN THE CASE OF PAHARPUR COOLING TOWERS LTD., ITA NO.256 OF 2002 HELD THAT IN THE CASE OF COMPANIES, THE EXPLANATION TO SECTION 73 WHICH HAS BEEN ENACTED FOR SPECIAL PURPO SES, OVERRIDES THE OTHER PROVISIONS OF THE ACT; HOWEVER THE MEANIN G GIVEN BY THE AO THAT SECTION 73 COMES AFTER SECTION 45, THEREFORE I T WILL HAVE PRECEDENCE IS NOT A ACCEPTABLE PREPOSITION. 3.5 AS PER SECTION 43(5)(D) THE DERIVATIVE TRANSA CTION CARRIED THROUGH A RECOGNIZED STOCK EXCHANGE MUST NOT BE CLA SSIFIED AS SPECULATIVE TRANSACTION AND ACCORDINGLY THE ASSESSE E IS CORRECT IN ARRIVING AT THE BUSINESS LOSS OF ` 5,24,494/-. THE ASSESSEE ARRIVED AT BUSINESS LOSS OF ` 5,24,494/- AFTER ADJUSTING LOSS ON TRADING OF DERIVATIVES OF ` 38,65,615/- AS AGAINST THE INCOME EARNED FROM CONSULTATION BUSINESS. THE GROSS RECEIPTS FROM CONS ULTATION BUSINESS IS ` 36,04,000/- AGAINST WHICH ADMINISTRATIVE EXPENSES O F ` 2,59,629/-, PRELIMINARY EXPENSES OF RS.3,250/- AND LOSS ON SALE OF DERIVATIVES OF ` 38,65,615/- WERE ADJUSTED TO ARRIVE AT THE BUSINESS LOSS OF ` 5,24,494/-. ITA NO. 2124/MDS/2017 8 3.6 AS PER THE EXPLANATION TO SECTION 73, EVEN IF THE PROVISION AS IT EXISTED AT THAT TIME IS APPLIED, THE ASSESSEE FALLS UNDER THE EXCEPTION CLAUSE BECAUSE THE INCOME PREDOMINANTLY CONSISTS OF INCOME FROM CAPITAL GAIN AND NOT INCOME FROM BUSINESS. THE BOMB AY HIGH COURT IN THE CASE OF DARSHAN SECURITIES PVT. LTD., ITA NO .2886 OF 2009 DATED 02.02.20 12 HELD THAT: IN ORDER TO DETERMINE WHETHER THE EXCEPTION THAT I S CARVED OUT BY THE EXPLANATION APPLIES, THE LEGISLATURE HAS FIRST MAND ATED A COMPUTATION OF THE GROSS TOTAL INCOME OF THE COMPANY. THE WORDS CONSISTS MAINLY ARE INDICATIVE OF THE FACT THAT THE LEGISLATURE HAD IN ITS CONTEMPLATION THAT THE GROSS TOTAL INCOME CONSISTS PREDOMINANTLY OF INCOME FROM THE FOUR HEADS THAT ARE REFERRED TO THEREIN. OBVIOUSLY, IN COMPUTING THE GROSS TOTAL INCOME THE NORMAL PROVISIONS OF THE ACT MUST BE APPLIED AND IT IS ONLY THEREAFTER, THAT IT HAS TO BE DETERM INED AS TO WHETHER THE GROSS TOTAL INCOME SO COMPUTED CONSISTS MAINLY OF I NCOME WHICH IS CHARGEABLE UNDER THE HEADS REFERRED TO IN THE EXPLA NATION. 9. CONSEQUENTLY, IN THE PRESENT CASE THE GROSS TOTA L INCOME OF THE ASSESSEE WAS REQUIRED TO BE COMPUTED INTER ALIA BY COMPUTING THE INCOME UNDER THE HEAD OF PROFITS AND GAINS OF BUSIN ESS OR PROFESSION AS WELL. BOTH THE INCOME FROM SERVICE CHARGES IN TH E AMOUNT OF RS.2.25 CRORES AND THE LOSS IN SHARE TRADING OF RS. 2.23 CRORES, WOULD HAVE TO BE TAKEN INTO ACCOUNT IN COMPUTING THE INCO ME UNDER THE HEAD, BOTH BEING SOURCES UNDER THE SAME HEAD. THE ASSESSE E HAD A DIVIDEND INCOME OF RS.4. 7 LACS (INCOME FROM OTHER SOURCES). THE TRIBUNAL WAS JUSTIFIED, IN COMING TO THE CONCLUSION THAT THE ASSESSEE FELL WITHIN THE PURVIEW OF THE EXCEPTION CARVED OUT IN THE EXPLANATION TO ITA NO. 2124/MDS/2017 9 SECTION 73 AND THAT CONSEQUENTLY THE ASSESSEE WOULD NOT BE DEEMED TO BE CARRYING ON A SPECULATION BUSINESS FOR THE PU RPOSE OF SECTION 73(1). 3.7 THE ABOVE JUDGEMENT WAS ALSO FOLLOWED BY THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF MIDDLETON INVEST MENT & TRADING CO. LTD.; ITA NO.196 OF 1999 DATED 15.01.2014. 3.8 ACCORDING TO LD.CIT(A), IN THE PRESENT CASE, T HE INCOME FROM CAPITAL LOSS ARRIVED BY THE ASSESSEE IS ` 15,62,126/- AND THE LOSS FROM BUSINESS IS ` 5,24,494/-. THE CALCUTTA HIGH COURT IN THE CASE OF EASTERN AVIATION AND INDUSTRIES, 208 ITR 1023 HELD THAT PROFITS AND GAINS REPRESENT POSITIVE INCOME WHEREAS THE LOSSES REPRESENT NEGATIVE INCOME. SINCE IN THE CASE OF THE APPELLANT , THE NEGATIVE INCOME EARNED FROM CAPITAL GAINS IS MORE THAN THE N EGATIVE INCOME EARNED FROM BUSINESS, THE PREDOMINANT PART OF INCOM E EARNED IS FROM CAPITAL GAINS. THEREFORE THE EXCEPTION CARVED OUT I N EXPLANATION TO SECTION 73 OF THE ACT IS APPLICABLE. ACCORDINGLY, T HE PURCHASE AND SALE OF SHARES OF OTHER COMPANIES WILL NOT BE TREAT ED AS SPECULATION BUSINESS EVEN AS PER THE PROVISIONS OF EXPLANATION TO SECTION 73 OF ITA NO. 2124/MDS/2017 10 THE ACT. THEREFORE, LD.CIT(A) DELETED THE ADDITION MADE BY LD. ASSESSING OFFICER. AGAINST THE ORDER OF LD.CIT(A), NOW THE REVENUE IS IN APPEAL BEFORE US. 4. I HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL ON RECORD. IN THE PRESENT CASE, THE ASSESSEE IS ENGA GED IN THE BUSINESS OF SHARE TRADING AND I.T. ENABLES SERVICES . IN THIS COURSE OF ACTIVITIES, THE ASSESSEE EARNED THE LOSS FROM SHORT TERM CAPITAL GAINS OF (-) 15,62,126/- AND THE BUSINESS LOSS OF (-) 5,2 4,494/-. WHILE COMPUTING THE BUSINESS LOSS, THE ASSESSEE INCLUDED THE LOSS ON SALE OF SECURITIES AT ` 38,65,615/-. THE LD. ASSESSING OFFICER HAD TAKEN O UT IT FROM P&L A/C AND CONSIDERED IT AS SPECULATIVE L OSS. NOW THE CONTENTION OF THE LD.A.R IS THAT NEGATIVE INCOME E ARNED FROM CAPITAL GAINS IS MORE THAN THE NEGATIVE INCOME FROM BUSINES S, THE MAIN PART OF THE INCOME IS EARNED FROM THE CAPITAL GAINS. AC CORDING TO LD.A.R, THE EXCEPTION PROVIDED IN SEC.73 R.W.S.43(5)(D) HA S TO BE APPLIED. TO ANSWER TO THIS QUESTION, I HAVE TO GO THROUGH TH E P&L A/C PREPARED BY THE ASSESSEE AS ON 31.03.2008 WHICH REA DS AS FOLLOWS:- ITA NO. 2124/MDS/2017 11 SCH NO. CURR.YR I. INCOME SALES CONSULTATION FEES RECEIVED -- 0.00 36,04,000.00 II. EXPNENDITURE ADMINISTRATIVE EXPENSES LOSS ON SALE OF INVESTMENTS LOSS ON SALE OF SECURITIES SHORT TERM CAPITAL LOSS PRELIMINARY EXPENSES WRITTEN OFF LOSS BEFORE TAX LESS: PROVISION FOR TAX FOR FBT LOSS AFTER TAX (F) (E) 622.00 2,59,629.15 0.00 38,65,614.81 15,62,125.70 3,250.00 56,90,619.66 622.00 20,87,241.66 BALANCE C/F TO P&L A/C FROM PREVIOUS YEARS 24,37,282.36 45,24,524.02 AS SEEN FROM THE COMPUTATION OF INCOME FILED BY THE ASSESSEE ALONG WITH THE RETURN OF INCOME, ASSESSEE DECLARED THE BU SINESS INCOME AS LOSS AT ` 5,24,493/- BEFORE ADJUSTING THE LOSS AT SALE OF SECURITIES OF ` 38,65,614.81. IN MY OPINION, THE LD.CIT(A) HAS TO A RRIVE THE BUSINESS INCOME OF THE ASSESSEE BY EXCLUDING THIS AMOUNT, THEN HE HAS TO DECIDE THE MAIN BUSINESS OF THE ASSESSEE SO AS TO DECIDE WHETHER THE ASSESSEE HAS EARNED INCOME FROM CAPITAL GAINS MORE THAN THE INCOME FROM BUSINESS SO AS TO APPLY THE EX PLANATION IN SEC.73 OF THE ACT. WITHOUT CARRYING ON THIS EXERCIS E, LD.CIT(A) DIRECTLY OBSERVE THAT THE NEGATIVE INCOME EARNED FR OM THE CAPITAL ITA NO. 2124/MDS/2017 12 GAINS IS MORE THE NEGATIVE INCOME EARNED FROM THE BUSINESS, WHICH FORMS THE PREDOMINANT PART OF THE INCOME EARNED BY THE ASSESSEE. ON EXCLUSION OF THIS IMPUGNED AMOUNT OF 38,65,614.8 1 BEING LOSS ON SALE OF SECURITIES, THE BUSINESS INCOME OF ASSESSEE WOULD BE ` 33,41,120.85 ( ROUNDED OFF ` 33,41,121). BEING SO, BUSINESS INCOME OF ASSESSEE IS MORE THAN OTHER INCOME. HENCE, THERE IS NO APPLICATION OF EXEMPTION PROVIDED IN SEC.73 R.W.S. 43(5)(D) OF THE ACT. ACCORDINGLY, THE ORDER OF LD.CIT(A) IS REVERSED AND THE ORDER OF LD. ASSESSING OFFICER IS RESTORED. THEREFORE, THE GROUN DS RAISED IN APPEAL OF REVENUE STANDS ALLOWED. 5. IN THE RESULT, THE APPEAL OF REVENUE IS ALLOWED FOR STATISTICAL PURPOSES ORDER PRONOUNCED ON 05 TH DECEMBER, 2017. SD/- ( ) ( CHANDRA POOJARI ) /ACCOUNTANT MEMBER CHENNAI, DATED THE 05 TH DECEMBER, 2017 . K S SUNDARAM. ' ( )!*+ ,+%! / COPY TO: 1 . / APPELLANT 3. ' ' -! () / CIT(A) 5. +0 1 )!)23 / DR 2. / RESPONDENT 4. ' ' -! / CIT 6. 1 45 6 / GF ITA NO. 2124/MDS/2017 13