ACIT, Circle - 6(2), Kolkata V. M/s. Nagreeka Synthetics Pvt. Ltd., Kolkata

ITA 2566/KOL/2018

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 3569 (ITAT-KOLKATA)
• Duration Of Justice: 3 year(s) 4 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-04-2022
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 09-12-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUDIPTA GUHA
• Keywords: Reopening of assessment; Business income; Speculation loss; Speculative transactions; Set aside
• Section: 148; 28; 143(3); 43(5); 143(2); 192; 43; 73; 13

Judgement Text

1 ITA No. 2566/Kol/2018 Nagreeka Synthetics Pvt. Ltd. AY 2008-09 IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH, KOLKATA [Before Shri Sanjay Garg, Judicial Member & Shri Girish Agrawal, Accountant Member] I.T.A. No. 2566/Kol/2018 Assessment Year: 2008-09 Assistant Commissioner of Income-tax, Circle-6(2), Kolkata. Vs. M/s. Nagreeka Synthetics Pvt. Ltd. (PAN: AAACN8691D) Appellant Respondent Date of Hearing 10.03.2022 Date of Pronouncement 27.04.2022 For the Appellant Shri Sudipta Guha, CIT, DR For the Respondent Shri S. D. Verma, AR ORDER Per Girish Agrawal, Accountant Member: This is an appeal preferred by the revenue against the order of Ld. CIT(A)-4, Kolkata dated 25.07.2018 for AY 2008-09 in appeal No.1348/CIT(A)-4/2015-16 against the assessment order passed by DCIT, Circle-10(2), Kolkata u/s. 147/143(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) dated 30.11.2015. 2. This appeal of assessee is time barred by 13 days and condonation petition has been filed by the department which is on record. After perusing the same and having heard both the parties, we condone the delay and admit the appeal for hearing. 3. The revised ground of appeal raised by the revenue is as under: “Whether on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law in not appreciating the fact that the loss in purchase and sale of shares of other companies including trading in derivatives/derivative trading loss is speculation business loss in view of the explanation to the section 73 of the Income Tax Act, 1961 and said loss can only be allowed to be set off against the income of speculation profit only.” 4. Briefly stated, facts of the case are that the assessee is a private limited company engaged in the business of trading in raw cotton and cotton yarn, shares and securities and derivative transactions. E- Return of income for the A.Y 2008-09 filed on 01-10-2008 disclosing total loss of Rs.64,86,51,089/-. The assessment was completed u/s. 143(3) of the Act on 27.12.2010 at a total loss of Rs.61,16,89,249/-. In this case a notice dated 2 ITA No. 2566/Kol/2018 Nagreeka Synthetics Pvt. Ltd. AY 2008-09 30.03.2015 u/s. 148 of the Act was issued and duly served upon the assessee for the reason that the assessee company had business of trading of shares and derivative transactions which are covered by the provisions of Explanation to Section 73 of the Act but the assessee has not allocated the relevant expenditure following the provisions laid down in Explanation 2 to section 28 of the Act. In response to that, the assessee vide letter dated 27.04.2015 intimated that the original return filed on 01.10.2008 may be treated as return in response to the notice u/s. 148 of the Act. The assessee was provided a copy of reasons recorded for reopening of assessment. The assessee had raised certain objections with regard to reasons recorded for reopening of assessment vide letter dated 03.08.2015. The objections raised by the assessee had not been accepted by the AO. Thereafter, statutory notices u/s. 143(2) and 142(1) of the Act was issued and duly served on the assessee. The Assessing Officer (hereinafter in short ‘AO’) called for various details to which necessary submissions and documents were filed by the assessee. The assessee submitted that Explanation to section 73 of the Act applies only to trading in shares of the companies and not to other instruments. The AO after perusing the same held that it is clear that a part of the business of the assessee company consists in purchase and sales of shares of other companies and incurred a loss of Rs.62,55,99,127/- (Rs.62,94,40,372/- - Rs.38,41,245/-) from said purchase and sale of shares of other companies. He further observed that the gross total income of the assessee company does not consist mainly of income which is chargeable under the heads 'Interest on Securities', 'Income from House Property', 'Capital Gain' and 'Income from Other Sources' or not a company whose principal business is the business of banking or the granting of loans & advances. Hence, the purchase & sales of shares including trading in derivatives or derivative transactions is deemed to be carrying on speculation business in pursuance of Explanation to the section 73 of the Act. 5. According to AO, the total loss in respect of such speculation business is calculated at Rs. 62,55,99,127/- and the said loss is allowed only to be set off with the income of speculation profit, if any, otherwise the entire amount will be carried forward in next year for further claim as per the Act. In the present case, there is a speculative profit from share dealings of Rs. 60,332/- (as per Table No.-B) which is to be deducted from the said loss and the balance amount of speculative loss Rs. 62,55,38,795/- (Rs. 62,55,99,127/- - Rs.60,332/ - ) will be carried forward accordingly. Thereafter, according to the AO, as the loss of 3 ITA No. 2566/Kol/2018 Nagreeka Synthetics Pvt. Ltd. AY 2008-09 Rs.62,55,38,795/- from the purchase and sale of share as well as derivative transactions has been considered under the head 'Speculative Loss' in pursuance of Explanation to the section 73 of the Act and allowed to carry forward after setting off the speculative profit, the balance income of the assessee should come under the head Profit & Gains from ‘Business & Profession' and 'Income from Capital Gain'. 6. Aggrieved, assessee preferred an appeal before the Ld. CIT(A) who allowed the ground of appeal of the assessee by observing as under: “5. Ground No.11, 12 relates to treating of derivative loss as speculative loss - Fact of the case are similar to the fact in A.Y. 2009~ 10 where I have held the following- “In the reassessment order the AO has treated the entire, loss suffered from Derivative transaction as speculative in nature by invoking explanation to Sec. 73 of the Act. I have gone through the submission of the appellant and order passed by the AO. All the transactions in which the appellant has incurred loss is in relation to derivative transactions. Derivative transactions are totally different from normal share trading. Shares are the underlying assets of any derivative transaction. Explanation to Sec. 73 uses the expression "shares of any other company". These are operative word of the provision. In absence of transaction of purchase or sale of shares the said explanation cannot be triggered. The Securities Contract Regulation Act also distinguishes shares and derivative as two different products. Therefore, there seems to be basic fallacy in the understanding of the AO and consequent invocation of Explanation to see, 73 of the Act. Reference to Sec. 43(5)(d) is also worth noting in this regard which deals with derivative transaction. The view I am taking above is also supported by the decision of Delhi HC in the case of CIT - vs. DLF Commercial Developers Ltd. [ITA No. 94 of 2013] and also decision of Jurisdictional HC in the case of Asian Financial Services Ltd. – Vs. CIT (2016) (ITA No. 239 of 2015). Hence, this ground filed by the appellant is allowed and entire loss is to be allowed.” Since the fact of the case in AY 2008-09 is same as AY 2009-10 therefore, following my adjudication for Ay 2009-10 the ground is allowed.” Aggrieved, revenue is in appeal before us. 7. At the time of hearing Ld. DR vehemently supported the order of AO and urged before the bench to set aside the order of Ld. CIT(A) and confirm the action of AO. 8. Per contra, the Ld. AR of the assessee supported the order of the Ld. CIT(A) and submitted that regarding treatment of loss incurred by the assessee from trading in shares and derivatives as business loss and not as speculation loss. It was submitted that this issue is squarely covered by the decision of the coordinate bench of this tribunal in the case of ITA No. 146/Kol/2020 in Baljit Securities P. Ltd. for AY 2011-12 vide order dated 4 ITA No. 2566/Kol/2018 Nagreeka Synthetics Pvt. Ltd. AY 2008-09 15.09.2021 wherein on identical facts, derivative loss was held as business loss by virtue of exception in section 43(5) of the Act. 9. We have heard rival submissions and gone through the facts and circumstances of the case. We find that the Ld. CIT(A) treated the loss incurred by the assessee for trading in shares, Future and Options and derivatives as business loss as against the finding of the AO treating the same as speculation loss by observing that Explanation to Section 73 of the Act uses the expression ‘shares of any other company’ and that derivative transactions are totally different from normal share trading. We find that this issue is squarely covered in favour of the assessee by the decision of the coordinate bench of this tribunal in the case of ITA No. 146/Kol/2020 in Baljit Securities P. Ltd. for AY 2011-12 vide order dated 15.09.2021, wherein the Tribunal has held as under: “8. As regards ground no. 2, wherein finding of the Ld. CIT(A) treating the loss/income incurred by the assessee for trading in shares, future and Options and derivatives as business loss as against the finding of the Ld. AO treating the same as speculation loss, we find this issue has come up before this tribunal in assessee’s own case for the A.Y 2012-13 dated 24.02.2021, wherein the Tribunal after placing reliance on the judgment of the Hon’ble Jurisdictional High Court in assessee’s own case for the A.Y 2005-06 by order dated 12-03- 2014, has held that the income from derivatives, Future and Options and Share trading carried out on recognised Stock Exchange is not in the nature of speculation and it is a business income. The Tribunal vide its order dated 24-02-2021 in ITA No. 346/Kol/2017 observed as follows:- “It is noted that assessee is engaged in the business of share trading and assessee is also functions as a broker of securities and is a registered stock broker (stock exchanges i.e. NSE, BSE & forward exchange etc.). The assessee admits that it is involved in the purchase and sale of shares & securities of other companies on self account where the actual delivery is taken and given from which gross income has been shown at Rs.3,15,992/-. It is noted that the assessee is also engaged in derivative transaction [wherein the actual delivery is not taken or given] and it incurred gross loss from derivative transaction at Rs.37,48,335/- . The assessee has admitted to have earned gross income on brokerage at Rs. 1,52,68,296/-. . The assessee computed the gross income from the three businesses being composite in nature and has returned loss of Rs.2,57,18,558/-. The AO has not accepted this action of assessee and after scrutiny has accepted the assessee's income from brokerage as business income i.e. Rs.1,52,68,296/-. However, the AO apportioned some expenses and determined the business Income from brokerage as Rs.l,25,59,636/- and not Rs.l,52,68,296/-; And thereafter treated the income from share (delivery based) and derivative as speculation in nature u/s. 73 of the Act and has disallowed Rs.3,72,28,053/- (supra). Now the question is whether the action of AO is legally correct/sustainable i.e. whether the income from share trading (delivery based) and derivatives can be treated separately and the loss from it is hit by section 73 (Explanation) of the Act. For answering this question let us look at the scheme of the Act. Under Chapter IV which is titled 'Computation of Total Income' and the business receipts/income is dealt under Group "D" i.e. under the Heads of Income 'D' - Profit and gain of business which consists of section 28 to 44 DB of the Act. It is trite law that profit includes losses because loss has been construed as negative profit and we note that Explanation (2) to section 28 provides in respect of "Speculative transactions" as follows: 5 ITA No. 2566/Kol/2018 Nagreeka Synthetics Pvt. Ltd. AY 2008-09 "Explanation 2 - Where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as "speculation business") shall be deemed to be distinct and separate from any other business." 10. From a plain reading of the above Explanation (2) it can be discerned that speculative transactions carried on by an assessee may be of such a nature as to constitute a business, then such business shall be deemed to be distinct and separate from any other business. Subsection (5) of section 43 of the Act gives the defmition of speculative transaction as under: "Sec. 43 -In section 28 to 41 and in this section, unless the context otherwise requires: - 1. 2. 3. 4. (5) "speculative transaction" means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery 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; [or ] (d) an eligible transaction in respect of trading in derivatives referred to in clause [( ac) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of J 956) carried out in a recognised stock exchange; [or] (e) an eligible transaction in respect of trading in commodity derivatives carried out in a [recognised association, which is chargeable to commodities transaction tax under Chapter VII of the Finance Act, 2013 (17 of2013)J shall not be deemed to be a speculative transaction;" 11. From a perusal of the above, it can be seen that this definition of speculative transaction is only for the purpose of section 28 to 41 of the Act. From a conjoint reading of Explanation 2 to section 28 of the Act and definition in section 43(5) of the Act it is understood that when an assessee is engaged in the business of purchase or sale of any commodity including stocks and shares which are periodically or ultimately settled otherwise than by actual delivery or transfer of the commodity or scrips will be termed as speculative transaction. So, non-delivery or transfer of the commodity or scrips would be treated as 6 ITA No. 2566/Kol/2018 Nagreeka Synthetics Pvt. Ltd. AY 2008-09 speculative transaction. However, the proviso exempts the transactions or activities appearing in clauses (a) to (e) which are not to be deemed to be speculative transactions. Since in this case, the derivative transaction falls in the exemption, therefore the profit or loss from derivatives cannot be deemed to be a speculative transaction. Since the loss from derivative transaction is not a speculative loss, it can be set off with the profit and gain of business. So, in this case, the derivative loss suffered by the assessee can be set off with the assessee's income from Brokerage and trading of shares (i.e. intra-head adjustment). This view of ours gets support from the decisions the Hon'ble jurisdictional High court in Asian Financial Services Ltd. Vs. CIT-3, Kolkata reported in 240 Taxman 192 (Kol) wherein it has held that the activities covered in clause (a) to (e) of section 73 of the Act even though are not deemed as speculative business, however, these deemed businesses are distinct and separate from any other business. Thereafter, the Hon'ble High Court (supra) in similar circumstances observed that "now the question is whether the loss arising out of such being the business can be set off against the profit arising out of other business or businesses which may for clarity be called proper business. Under section 70 of the Act, the assessee is entitled to have the loss set off against his income from any other source under the same head unless otherwise provided. The question, however remains whether the explanation to sub-section (4) of section 73 relied upon by Mr. Lodh provides otherwise. A plain reading of the explanation quoted above cannot be said to have provided otherwise. In that case the irresistible conclusion is that the assessee is entitled to set off such loss arising out of deemed business against the income arising out of business proper." 8.1. On going through the above decision of this Tribunal, we find that the issue raised in the ground no. 2 of instant appeal is same and above stated decision of the Tribunal is squarely applicable on the issue raised before us in ground no.2. Ld. DR failed to controvert this fact and could not place any binding precedence in its favour. We, therefore, respectfully following the decision of this Tribunal in assessee’s own case for the AY 2012- 13, are of the considered view, the income from Share Trading in Future & Options and Derivatives earned by the assessee during the year under consideration has been rightly claimed as business income/loss. We, thus, find no infirmity in the finding of the Ld. CIT(A) on this issue. Accordingly, ground no. 2 raised by the revenue stands dismissed.” 10. In view of the above and considering the identical fact pattern in the present case, we find that this issue is squarely covered in favour of the assessee and thus we find no infirmity in the finding of the Ld. CIT(A). Accordingly, we confirm the order of the Ld. CIT(A) and dismiss this ground of appeal of the revenue. 11. In the result, the appeal of revenue is dismissed. Order is pronounced in the open court on 27 th April, 2022. Sd/- Sd/- (Sanjay Garg) (Girish Agrawal) Judicial Member Accountant Member Dated: 27.04.2022 JD, Sr. PS 7 ITA No. 2566/Kol/2018 Nagreeka Synthetics Pvt. Ltd. AY 2008-09 Copy of the order forwarded to: 1. Appellant– ACIT, Circle-6(2), Kolkata. 2. Respondent – M/s. Nagreeka Synthetics Pvt. Ltd., 6 th floor, Jain Chamber, 18, R. N. Mukherjee Road, Kolkata-700 001. 3. CIT(A)-4, Kolkata. (sent through e-mail). 4. CIT , Kolkata. 5. DR, ITAT, Kolkata, (sent through e-mail). True Copy By Order Assistant Registrar ITAT, Kolkata Bench, Kolkata