D.C.I.T., Circle-4, Kolkata, Kolkata V. M/s MPS Securities Ltd., Kolkata

ITA 2723/KOL/2013

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 4550 (ITAT-KOLKATA)
• Duration Of Justice: 2 year(s) 7 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-07-2016
• Appeal Filed By: Department
• Bench Allotted: B
• Assessment Year: 2010-2011
• Appeal Filed On: 05-12-2013
• Court: TRIBUNAL
• Department Lawyers: K K TRIPATHI
• Assessee Lawyers: D S DAMLE
• Keywords: Business income; Transactions in derivatives; Speculation loss
• Section: 143(3); 260A; 43(5)

Judgement Text

1 ITA NO. 2723/KOL/2013 MPC SECURITIES LTD., AY 2010-11 IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH: KOL KATA [BEFORE SHRI N. V. VASUDEVAN, JM & SHRI M. BALAGAN ESH, AM] I.T.A NO.2723/KOL/2013 ASSESSMENT YEAR: 2010-11 DEPUTY COMMISSIONER OF INCOME-TAX, VS. M/S. MPC SECURITIES LTD. CIRCLE-4, KOLKATA. (PAN: AACCM1049E) ( APPELLANT ) ( RESPONDENT ) DATE OF HEARING: 10.06.2016 DATE OF PRONOUNCEMENT: 08.07.2016 FOR THE APPELLANT: SHRI K. K. TRIPATHI, JCIT, SR. DR FOR THE RESPONDENT: SHRI D. S. DAMLE, AR ORDER PER SHRI M. BALAGANESH, AM: THIS APPEAL BY REVENUE IS ARISING OUT OF ORDER OF C IT(A)-IV, KOLKATA VIDE APPEAL NO. 95/CIT(A)-IV/12-13 DATED 16.07.2013. ASSESSMENT WAS FRAMED BY DCIT, CIRCLE-4, KOLKATA U/S. 143(3) OF THE INCOME TAX ACT, 1961 (HE REINAFTER REFERRED TO AS THE ACT) FOR AY 2010-11 VIDE HIS ORDER DATED 04.03.2013. 2. AT THE OUTSET, WE FIND THAT THERE IS A DELAY OF 18 DAYS IN FILING THE APPEAL BEFORE US BY THE REVENUE FOR WHICH A CONDONATION PETITION HAS BEEN DULY FILED BY THE REVENUE. THE LD AR FAIRLY CONCEDED TO CONDONE THE DELAY. AC CORDINGLY THE DELAY IN FILING THE APPEAL BY THE REVENUE IS CONDONED AND APPEAL IS ADM ITTED HEREIN FOR ADJUDICATION. 3. THE ONLY ISSUE TO BE DECIDED IN THIS APPEAL IS AS TO WHETHER THE LD CITA IS JUSTIFIED IN DELETING THE ADDITION OF RS . 1,02,12, 277/- TREATED AS DEEMED SPECULATION LOSS U/S 73 OF THE ACT IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 4. THE BRIEF FACTS OF THIS ISSUE IS THAT THE ASSES SEE CARRIED ON BUSINESS OF TRADING AND DEALING IN SHARES IN ITS CAPACITY AS MEMBER OF A RE COGNIZED STOCK EXCHANGE. IN ITS CAPACITY AS MEMBER OF RECOGNIZED STOCK EXCHANGE, TH E ASSESSEE DERIVED INCOME IN VARIOUS FORMS AND FOR ACCOUNTING PURPOSES THE INCOM E WAS CLASSIFIED UNDER FOLLOWING DIFFERENT SEGMENTS SUCH AS: 2 ITA NO. 2723/KOL/2013 MPC SECURITIES LTD., AY 2010-11 A) STOCK BROKING B) DERIVATIVE TRADING C) SPECULATIVE TRADING INVOLVING NON DELIVERY D) TRADING INVOLVING DELIVERIES IN THE COURSE OF ASSESSMENT PROCEEDINGS U/S 143(3), THE ASSESSEE WAS REQUIRED TO EXPLAIN AS TO WHY THE PROVISIONS OF EXPLANATION TO SECTION 73 SHOULD NOT BE INVOKED AND THE LOSS INCURRED IN SHARE TRADING BE TREATED AS LOSS ARISIN G FROM SPECULATION BUSINESS. THE LD AO OBSERVED THAT THE GROSS TOTAL INCOME OF THE ASSESSE E CONSISTS OF INCOME FROM BUSINESS, OTHER SOURCES AND CAPITAL GAINS AS UNDER:- INCOME FROM BUSINESS: A) BROKERAGE 60,12,948/- B) FUTURE & OPTION 97,70,575/- C) TRADING IN SHARE SPECULATION 8,76,950/- D) SHARE TRADING LOSS (-) 1,02,12,277/- TOTAL BUSINESS INCOME (-) 2,68,72,750/- INCOME FROM CAPITAL GAIN & OTHER SOURCES: A) SHORT TERM CAPITAL GAIN 1,04,37,642/- B) LONG TERM CAPITAL GAIN 60,336/- C) INTEREST RECEIVED 98,27,423/- D) DIVIDEND INCOME 32,69,797/- 2,35,95,198/- THE AO HOWEVER, HELD THAT ONLY THE LOSS DERIVED FRO M SHARE TRADING ACTIVITY WAS IN THE NATURE OF LOSS FROM SPECULATION BUSINESS UNDER EXPL ANATION TO SEC. 73 OF THE ACT AND DISALLOWED A SUM OF RS. 1,02,12,277/- IN THE ASSESS MENT . 5. THE LD. CITA DELETED THE ADDITION BY OBSERVING FROM ONE ANGLE AS UNDER:- 8. THE AO'S ACTION OF AGGREGATING ABSOLUTE NUMERIC VALUES' OF ALL THE SOURCES; ASSESSABLE UNDER THE HEAD 'BUSINESS' WAS THEREFORE NOT IN CONFORMITY WITH EITHER THE DECISION OF THE JURISDICTIONAL CALCUTTA HIGH COURT IN THE CASE OF PARKVIEW PROPERTIES (P) LIMITED (SUPRA) OR WITH THE DECISION OF THE BOM BAY HIGH COURT IN THE CASE OF DARSHAN SECURITIES PVT. LTD (SUPRA). IT IS SETTLED LEGAL PROPOSITION THAT A DEEMING PROVISION LIKE THE EXPLANATION TO SEC 73 MUST BE ST RICTLY CONSTRUED AND SHOULD NOT TO BE CONSTRUED LIBERALLY. IN THE PRESENT CASE THE AO INV OKED EXPLANATION TO SEC 73 BY PLACING RELIANCE ON THE JUDGMENT OF THE CALCUTTA HI GH COURT IN THE CASE OF EASTERN AVIATION INDUSTRIES LTD. (208 ITR 1023). HOWEVER TH E FACTS OF THAT CASE WERE CONSIDERABLY DIFFERENT FROM THE APPELLANT'S CASE. O N THE CONTRARY THE FACTS OF THE 3 ITA NO. 2723/KOL/2013 MPC SECURITIES LTD., AY 2010-11 APPELLANT'S CASE WERE ANALOGOUS TO THE DECISIONS IN THE CASES OF PARKVIEW PROPERTIES (P) LIMITED & DARSHAN SECURITIES PVT. LTD (SUPRA). IN BOTH THESE CASES THE APPELLANT BESIDES EARNING NEGATIVE SHARE TRADING INCOME HAD E ARNED SUBSTANTIAL POSITIVE INCOME FROM OTHER BUSINESS SOURCES AND ALSO INCOME FROM OT HER SOURCES. THE CALCUTTA HIGH COURT IN THE CASE OF PARKVIEW PROPERTIES (P) LIMITE D WHILE DETERMINING APPLICABILITY OF THE EXPLANATION TO SEC 73 HOWEVER COMPARED ONLY THE LOSS OR NEGATIVE INCOME INCURRED IN SHARE TRADING BUSINESS WITH INCOME ASSESSED UNDE R THE HEAD 'OTHER SOURCES' AND FOUND THAT NEGATIVE INCOME OF RS.8,98,799/- WAS HIG HER THAN 'OTHER SOURCES' INCOME OF RS.5,73,701/- AND THEREFORE HELD THAT THE EXPLANATI ON TO SEC. 73 WAS APPLICABLE. 9. IF THE PRINCIPLE LAID DOWN IN THE DECISION OF TH E JURISDICTIONAL HIGH COURT IS APPLIED TO THE FACTS OF THE APPELLANT'S CASE THEN IT IS NOT ED THAT APPELLANT'S NEGATIVE INCOME IN SHARE TRADING WAS RS.L,02,12,277/- WHEREAS THE GROS S RECEIPTS FROM SOURCES OTHER THAN 'BUSINESS' WERE COMPUTED BY THE AO HIMSELF AT RS.2, 35,95,198/- THIS INTER ALIA INCLUDED SHORT TERM CAPITAL GAIN OF RS.L,04,37,642/ - AND DIVIDEND OF RS.32,69,797/-. ADMITTEDLY INCOME CHARGEABLE UNDER THE HEADS OTHER THAN 'PROFITS & GAINS' WAS THEREFORE HIGHER THAN THE NEGATIVE INCOME DERIVED F ROM SHARE TRADING. APPLYING RATIO LAID DOWN BY THE CALCUTTA HIGH COURT IN THE CASE OF CIT VS. PARKVIEW PROPERTIES (P) LIMITED (261 ITR 473) I FIND THAT EXPLANATION TO SE C 73 WAS NOT APPLICABLE. I THEREFORE HOLD THAT EXPLANATION TO SEC 73 WAS NOT APPLICABLE TO THE APPELLANT'S CASE AND ACCORDINGLY LOSS IN PROPRIETARY SHARE TRADING WAS N OT ASSESSABLE BY WAY OF LOSS IN DEEMED SPECULATION BUSINESS. THE AO IS DIRECTED TO MODIFY HIS ASSESSMENT ORDER AND RECOMPUTE THE ASSESSED TOTAL INCOME. GROUND NOS. 1 & 2 ARE TREATED AS ALLOWED. 5.1. THE LD. CITA ALSO DELETED THE ADDITION ON TH E GROUND THAT THE PROFITS DERIVED FROM DERIVATIVE TRANSACTIONS AMOUNTING TO RS. 97,70 ,575/- WOULD HAVE TO BE TREATED AS SPECULATIVE PROFITS FOR THE PURPOSE OF APPLYING EXP LANATION TO SECTION 73 IRRESPECTIVE OF SECTION 43(5)(D). HE ALSO HELD THAT PROFIT FROM IN TRA DAY SHARE TRADING AMOUNTING TO RS. 8,76,950/- WOULD ONLY BE SPECULATIVE PROFIT AND HEN CE THAT IS ALSO AVAILABLE FOR SET OFF WITH THE LOSS INCURRED IN SHARE TRADING ACTIVITY. THE LD CITA ALSO HELD THAT THE SHARE BROKING INCOME DERIVED BY THE ASSESSEE AMOUNTING TO RS. 60,12,948/- IS ALSO AVAILABLE FOR SETTING OFF OF LOSS INCURRED IN SHARE TRADING . IF THESE PROFIT FIGURES ARE CONSIDERED AND SET OFF WITH LOSS ON SHARE TRADING OF RS. 1,02, 12,277/- , THERE WOULD BE NO RESULTANT LOSS AND HENCE THE PROVISIONS OF EXPLANATION TO SEC TION 73 OF THE ACT AT ALL. 6. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US ON THE FOLLOWING GROUNDS :- 3. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CAS E THE LD. CIT(A) HAS ERRED IN LAW IN DELETING THE ADDITION OF RS.1,02,12,277/- TREATED A S DEEMED SPECULATION LOSS U/S. 73 OF THE INCOME TAX ACT, 1961 WITHOUT CONSIDERING THE FA CT THAT THE INSTANT CASE IS DISTINCT FROM THE CASE OF CIT VS. PARK VIEW PROPERTIES PVT. LTD. (261 ITR 473) CITED UPON BY THE LD. CIT(A) AND THAT THE LD. CIT(A). 4. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE , THE LD. CIT(A) HAS ERRED IN LAW IN NOT APPRECIATING THE FACT THAT THE ASSESSEE HAS A H IGHER BUSINESS INCOME THAN AGGREGATE INCOME OF OTHER SOURCES AND CAPITAL GAINS. 4 ITA NO. 2723/KOL/2013 MPC SECURITIES LTD., AY 2010-11 7. THE LD DR ARGUED THAT THE FACTS OF THE ASSESSEE S CASE DOES NOT FALL UNDER THE EXCEPTIONS PROVIDED IN EXPLANATION TO SECTION 73 OF THE ACT AND ACCORDINGLY PRAYED FOR CONFIRMATION OF THE ORDER OF THE LD AO. IN RESPONS E TO THIS, THE LD AR ARGUED THAT THE ASSESSEE'S CASE FELL SQUARELY WITHIN THE FIRST LIMB OF EXCEPTION PROVIDED IN EXPLANATION TO SECTION 73 AND THEREFORE THE LOSS INCURRED IN SHARE TRADING COULD NOT BE HELD AS LOSS ARISING FROM SPECULATION BUSINESS. THE FIRST LIMB O F EXCEPTION EXCLUDES THE COMPANY WHOSE GROSS TOTAL INCOME PRIMARILY CONSISTS OF INCO ME BY WAY OF CAPITAL GAINS, INTEREST ON SECURITIES AND INCOME FROM HOUSE PROPERTY. THE A SSESSEE SUBMITS THAT IN ORDER TO DETERMINE AS TO WHETHER EXCEPTION CARVED OUT IN FOR M OF BRACKETED PORTION BY EXPLANATION TO SECTION 73 APPLIES, ONE HAS TO COMPU TE GROSS TOTAL INCOME OF COMPANY UNDER NORMAL PROVISIONS OF ACT AND IT IS ONLY THERE AFTER, IT HAS TO BE DETERMINED AS TO WHETHER GROSS TOTAL INCOME SO COMPUTED CONSISTS MAI NLY OF INCOME WHICH IS CHARGEABLE UNDER ANY OF HEADS REFERRED TO IN EXPLANATION. IN T HE FACTS OF THE PRESENT CASE, THE INCOME RETURNED UNDER THE HEAD BUSINESS WAS RS.71,0 1,301/- WHEREAS INCOME FROM CAPITAL GAINS AND OTHER SOURCES WAS RS.2,35,95,198/ -. APPLYING THE RATIO LAID DOWN BY THE BOMBAY HIGH COURT IN THE DECISION RENDERED IN T HE CASE OF CIT VS DARSHAN SECURITIES PRIVATE LIMITED (341 ITR 556) THE ASSESS EE FELL WITHIN THE PURVIEW OF THE FIRST LIMB OF EXCEPTION CARVED OUT IN THE EXPLANATION TO SECTION 73 AND ACCORDINGLY THE ASSESSEE COULD NOT BE DEEMED TO BE CARRYING ON A SP ECULATION BUSINESS. THE ASSESSEE FURTHER SUBMITS ALL TRANSACTIONS ARE S HARES ACTIVITIES WERE CONDUCTED BY THE ASSESSEE ON THE COMMON PLATFORM OF NATIONAL STOCK EXCHANGE/ BOMBAY STOCK EXCHANGE OF WHICH THE ASSESSEE WAS HOLDING MEMBERSH IP. THE ASSESSEE MAINTAINED ONE SINGLE INDIVISIBLE AND COMPOSITE BUSINESS ESTABLISH MENT FOR CARRYING ON THE BUSINESS TRANSACTIONS INVOLVING PURCHASE & SALE OF SHARES & SECURITIES. EVEN THOUGH FOR THE PURPOSE OF ACCOUNTING DIFFERENT NOMENCLATURES AND S EGMENT HEADS OF ACCOUNTS WERE USED; YET THE UNDERLYING TRANSACTIONS GIVING RISE T O INCOME CHARGEABLE UNDER THE HEAD PROFITS & GAINS OF BUSINESS INVOLVED PURCHASE & SAL E OF SHARES. QUA THE STOCK EXCHANGES; TRANSACTIONS INVOLVING PURCHASE & SALES OF SHARES WERE CARRIED OUT BY THE ASSESSEE. DELIVERIES FOR SHARES TRANSACTED BY THE A SSESSEE WERE GIVEN AND TAKEN IN THE DEMAT ACCOUNT OF THE ASSESSEE. ACCORDINGLY FOR TAXA TION PURPOSES TRANSACTIONS CARRIED OUT IN DIFFERENT CAPITAL MARKET SEGMENTS BUT INVOLV ING UNDERLYING TRANSACTIONS OF 5 ITA NO. 2723/KOL/2013 MPC SECURITIES LTD., AY 2010-11 PURCHASE & SALE OF SHARES SHOULD HAVE BEEN REGARDED BY THE AO TO BE OF THE SAME CHARACTER AND NO DIFFERENTIATION COULD BE MADE BY T HE AO. IN THE IMPUGNED ORDER THE AO OBSERVED THAT IN THE A CTIVITY OF PURCHASE & SALE OF SHARES (INVOLVING DELIVERY OF SHARES) THE ASSESSEE HAD INCURRED LOSS OF RS.1,02,12,278/ -. ENTIRE SUCH LOSS WAS TREATED BY THE AO TO BE LOSS I NCURRED IN 'SPECULATION BUSINESS' WITHIN THE MEANING OF EXPLANATION TO SEC 73. THE AS SESSEE SUBMITS THAT THE ASSESSEE CONDUCTED TRANSACTIONS IN SHARES BOTH IN CASH SEGME NT AND FUTURES SEGMENT. AS PER THE PRUDENT PRACTICE FOLLOWED BY SHARE TRADERS, THE TRA DING BETS ARE HEDGED BY THE TRADERS BY TAKING CONTRARY OR OPPOSITE POSITIONS IN CASH AND F UTURE SEGMENTS. BY SIMULTANEOUSLY EXECUTING THE TRADES IN THE SHARES/SECURITIES OF TH E SAME COMPANY IN CASH AND FUTURES SEGMENTS, A TRADER HEDGES HIS TRADING RISKS BY TAK ING OPPOSITE POSITION IN THE TWO MARKET SEGMENTS. HOWEVER THE TRANSACTION IN CASH AN D FUTURES SEGMENTS ARE INTRINSICALLY RELATED TO EACH OTHER BECAUSE THE SHARE / SECURITY TRANSACTED IN CASH SEGMENT FORMS OR CONSTITUTES UNDERLYING SECURITY FOR THE TRANSACTION CARRIED OUT IN THE FUTURES MARKET. THE TRANSACTIONS IN THE FUTURES SEGMENT ARE CARRIED OUT BY THE TRADERS AS 'HEDGE' FOR THE RISKS TAKEN IN THE CASH SEGMENT. IT IS FOR THIS REASON IT WAS CLAIMED BEFORE THE AO THAT THE ASSESSEE'S TRADING TRANSACTIONS AND DERIVATIVE TRAN SACTIONS COULD NOT BE CONSIDERED IN ISOLATION OF EACH OTHER. IT WAS SUBMITTED THAT FOR TAX PURPOSES THE CHARACTER OF TRADING TRANSACTIONS IN BOTH CASH AND FUTURES SEGMENTS SHOU LD BE CONSIDERED CUMULATIVELY. ONCE THE INCOME/LOSS EARNED IN CASH AND FUTURES SEGMENT IS CONSIDERED ON AGGREGATE BASIS, THE EXPLANATION TO SEC 73 WILL HAVE NO APPLICATION TO T HE ASSESSEE'S CASE IN A.Y. 2010-1L. IT WAS FURTHER EXPLAINED BEFORE THE AO THAT IN RESPECT OF SHARE BROKING ACTIVITY, THE UNDERLYING TRANSACTIONS GIVING RISE TO INCOME INVOL VED PURCHASE & SALE OF SHARES. EXPLANATION TO SEC 73 OF THE I T ACT IS APPLICABLE NOT TO INCOME OR LOSS. THE SAID EXPLANATION DEFINES THE TERMS 'SPECULATION BUSINESS ' TO MEAN THAT PART OF THE ASSESSEE'S BUSINESS WHICH CONSISTS OF PURCHASE & SALE OF SHARE S. SINCE THE ASSESSEES BUSINESS OF STOCK BROKING CONSISTED 'PURCHASE & SALES OF SHARES ', THE INCOME ARISING FROM THE SAID ACTIVITY WAS LIABLE TO BE CONSIDERED AS PROFIT OR L OSS ARISING FROM DEEMED SPECULATIVE BUSINESS AND THEREFORE THE INCOME ARISING FROM STOC K BROKING WAS ALSO INTEGRAL PART OF ASSESSEES DEEMED SPECULATIVE BUSINESS ENTITLED FOR SET OFF AGAINST LOSS ARISING DEEMED SPECULATION BUSINESS. THE LD AR FURTHER SUBMITTED THAT DURING THE YEAR, THE ASSESSEE 6 ITA NO. 2723/KOL/2013 MPC SECURITIES LTD., AY 2010-11 ALSO EARNED PROFIT OF RS.8,76,950 / - FROM SHARES S PECULATIVE BUSINESS. NO SET OFF FOR THE SAID INCOME WAS ALLOWED BY THE AO WITHOUT ASSIGNING ANY REASONS. HE SUBMITTED THAT THE AO OUGHT TO HAVE TREATED ALL THE TRANSACTIONS O F THE ASSESSEE IN SHARES AS PART OF ITS DEEMED SPECULATION BUSINESS. ACCORDINGLY, THE NET I NCOME THEREFROM, WHICH HAPPENED TO BE PROFIT, SHOULD HAVE BEEN ASSESSED AS INCOME O F THE ASSESSEE FROM SPECULATION BUSINESS. THE AO, HOWEVER, WRONGLY ASSESSED LOSS OF RS.1,02, 12,277/ - AS LOSS INCURRED IN DEEMED SPECULATION BUSINESS AND REFUSED ITS SET OFF. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. WE FIND THAT THE FOLLOWING FACTS ARE UNDISP UTED AND INDISPUTABLE:- (I ) THE ASSESSEE IS A MEMBER OF NATIONAL STOCK EXC HANGE AND CONDUCTS TRADING IN LISTED SHARES AND SECURITIES. (II ) THE ASSESSEES TRANSACTIONS ON THE PLATFORM O F THE SAID EXCHANGE ARE BOTH ON PROPRIETARY ACCOUNT AND ON BEHALF OF ITS CLIENTS. (III ) TRANSACTIONS IN SHARES ARE BOTH IN CASH AND DERIVATIVE SEGMENTS AND THESE ARE CONDUCTED BOTH ON PROPRIETARY AND CLIENTS ACCOUNT. (IV) IN PROPRIETARY SHARE TRADING , THE ASSESSEE IN CURRED LOSS OF RS. 1,02,12,277/- , WHEREAS, IN PROPRIETARY DERIVATIVE TRADING, THE ASS ESSEE EARNED PROFIT OF RS. 97,70,575/-. IN ADDITION, THE ASSESSEE ALSO EARNE D PROFIT OF RS. 8,76,950/- IN ITS INTRA DAY SHARE TRADING AND FURTHER EARNED SHARE BROKING INCOME OF RS. 60,12,947/-. WE FIND THAT ALTHOUGH IN THE ASSESSEES BOOKS, SUCH INCOME WAS ACCOUNTED UNDER DIFFERENT ACCOUNTING HEADS , EACH SOURCE WAS INTRIN SICALLY RELATED TO THE ACTIVITY OF PURCHASE AND SALE OF SHARES BUT FOR THE ACTIVITY O F PURCHASE AND SALE OF SHARES & SECURITIES, THE ASSESSEE COULD NOT HAVE EARNED INCO ME / LOSS. HENCE WE DO NOT APPRECIATE THE ACTION OF THE LD AO IN TREATING THE LOSS INCURRED IN PROPRIETARY SHARE TRADING AS LOSS OF DEEMED SPECULATION BUSINESS, WHI LE PARALLELY ALL THE OTHER TRANSACTIONS CARRIED OUT BY THE ASSESSEE ON THE SAME TRADING PLA TFORM OF THE NSE AS PROFIT / INCOME EARNED FROM NON-SPECULATION BUSINESS, EVEN THOUGH T HE UNDERLYING TRANSACTIONS GIVING RISE TO THESE INCOME INVOLVED PURCHASE AND SALE OF SHARES & SECURITIES. 7 ITA NO. 2723/KOL/2013 MPC SECURITIES LTD., AY 2010-11 8.1. WE FIND THAT THE LD CITA OBSERVED THAT FROM TH E DETAILS OF SCRIP WISE STATEMENT SUBMITTED BY THE ASSESSEE, THAT IN MANY INSTANCES, THE ASSESSEE SIMULTANEOUSLY CONDUCTED TRANSACTIONS IN SHARES OF THE SAME COMPAN IES BOTH IN CASH AND DERIVATIVE SEGMENTS, SO THAT RISK OF PRICE FLUCTUATION IN ONE SEGMENT WAS HEDGED BY TRANSACTING IN THE OTHER. HE FURTHER OBSERVED THAT IN THE OVERALL ANALYSIS, THE ASSESSEE INCURRED LOSS IN SHARE TRADING IN CASH SEGMENT WHEREAS EARNED NET PR OFIT IN DERIVATIVE SEGMENT. THE ASSESSEES PROPRIETARY TRADING TRANSACTIONS IN CASH AND DERIVATIVE SEGMENTS WERE FOUND TO BE INTER LINKED AND INTER CONNECTED AND THEREFOR E THE TRANSACTIONS IN CASH SEGMENT COULD NOT BE CONSIDERED IN ISOLATION. THE PROPRIETA RY TRANSACTIONS IN DERIVATIVE SEGMENTS INVOLVED PURCHASE AND SALE OF FUTURES WHERE THE UND ERLYING SECURITY WAS THE SHARES OF THE SAME COMPANIES WHICH WERE TRANSACTED BY THE ASS ESSEE IN CASH SEGMENT. BASED ON THIS FACT, HE HELD THAT FOR THE PURPOSE OF APPLYING EXPLANATION TO SECTION 73 , TRANSACTIONS IN DERIVATIVE SEGMENT COULD NOT BE KEP T OUTSIDE THE AMBIT OF THE SAID EXPLANATION. THIS PROPOSITION WAS ENDORSED BY THE CO-ORDINATE BENCH DECISION OF THIS TRIBUNAL IN ARION COMMERICAL PRIVATE LIMITED & OTHE RS IN ITA NO. 1010 & 1011/KOL/2011 DATED 28.11.2011 . 8.2. WE FIND THAT SIMILAR ISSUE WAS ALSO ADJUDICAT ED BY THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS DLF COMMERCIAL DEVELOPERS LTD RE PORTED IN (2013) 35 TAXMANN.COM 280 (DEL HC) WHEREIN IT WAS HELD THAT THE EXPLANATION TO SECTION 73 DOES NOT DIFFERENTIATE BETWEEN DERIVATIVES AND DELIVERY BASE D SHARES. PLACING RELIANCE ON CLAUSE (D) OF EXPLANATION TO SECTION 43(5) , IT WAS THE ASSESSEES PLEA THAT THE DERIVATIVE TRADING TRANSACTIONS WERE NOT SPECULATIVE TRANSACTI ONS AND THEREFORE THE LOSS INCURRED COULD NOT BE ASSESSED BY WAY OF SPECULATION BUSINES S LOSS UNDER THE EXPLANATION TO SECTION 73. THE TRIBUNAL ACCEPTED THE ASSESSEES P LEA AND HELD THE LOSS TO BE NON- SPECULATION BUSINESS LOSS. ON APPEAL U/S 260A HOWE VER THE DELHI HIGH COURT HELD THAT EVEN THOUGH IN TERMS OF CLAUSE (D) OF EXPLANATION T O SECTION 43(5), THE DERIVATIVE TRANSACTIONS COULD NOT BE CONSIDERED TO BE SPECULAT IVE TRANSACTIONS ; YET UNDER EXPLANATION TO SECTION 73 , THE LOSS INCURRED IN SU CH TRANSACTIONS COULD BE CONSIDERED TO BE SPECULATION BUSINESS LOSS. THE HIGH COURT NOTED THAT THE DERIVATIVES WERE ASSETS WHOSE VALUES WERE DERIVED FROM THE UNDERLYING ASSET S. DERIVATIVES WERE TRANSACTED 8 ITA NO. 2723/KOL/2013 MPC SECURITIES LTD., AY 2010-11 WHERE THE UNDERLYING ASSETS WERE SHARES OF OTHER BO DIES CORPORATE. THE HIGH COURT HELD THAT IF THE LOSS INCURRED IN PURCHASE AND SALE OF UNDERLYING ASSETS WAS HIT BY PROVISIONS OF EXPLANATION TO SECTION 73 , THEN BY E QUAL MEASURE, LOSS INCURRED IN THE DERIVATIVE TRANSACTIONS WHERE SHARES CONSTITUTED TH E UNDERLYING ASSETS, WERE EQUALLY HIT BY THE EXPLANATION TO SECTION 73. THE HIGH COURT A CCORDINGLY HELD THAT LOSS INCURRED BY THE ASSESSEE IN DERIVATIVE TRANSACTION WAS LIABL E TO BE ASSESSED AS LOSS OF DEEMED SPECULATION BUSINESS EVEN THOUGH FOR THE PURPOSE OF SECTION 43(5) THE TRANSACTIONS IN DERIVATIVES WERE NOT SPECULATIVE TRANSACTIONS . AT THIS STAGE IT IS PERTINENT TO NOTE THAT SECTION 73 PROVIDES THAT THE SPECULATION BUSINESS LOSS CAN BE SET OFF ONLY AGAINST PROFIT EARNED FROM ANY OTHER SPECULATION BUSINESS. A BUSINESS WHICH FALLS WITHIN THE SCOPE OF SPECULATI ON BUSINESS UNDER THE EXPLANATION TO SECTION 73, REMAINS SO, IRRESPECTIVE OF THE FACT WH ETHER THE ASSESSEE INCURS LOSS OR EARNS INCOME IN SUCH BUSINESS. IN THE CIRCUMSTANCES, IF T HE LOSS INCURRED IN DERIVATIVES IS HELD BY THE DELHI HIGH COURT TO BE LOSS IN SPECULATION B USINESS THEN BY EQUAL MEASURE, PROFIT DERIVED FROM DERIVATIVE TRANSACTIONS WOULD CONSTITU TE PROFIT DERIVED FROM SPECULATION BUSINESS. ACCORDINGLY, THE ASSESSEE IS ENTITLED TO SET OFF THE LOSS INCURRED ON SHARE TRADING BUSINESS WITH THE PROFIT EARNED FROM DERIVA TIVE TRANSACTIONS AMOUNTING TO RS. 97,70,575/-. 8.3. WE FIND THAT THE ASSESSEE HAD DERIVED PROFIT F ROM PROPRIETARY INTRA DAY SHARE TRADING WITHOUT TAKING DELIVERIES TO THE TUNE OF RS. 8,76,9 50/- WHICH WOULD ADMITTEDLY BE PURELY SPECULATIVE IN NATURE. HENCE THE ASSESSEE IS ENTIT LED TO SET OFF THE LOSS INCURRED ON SHARE TRADING BUSINESS WITH THE PROFIT FROM INTRA DAY SHA RE TRADING WHICH IS SPECULATIVE INCOME TO THE TUNE OF RS. 8,76,950/-. 8.4. WE FIND THAT THE ASSESSEE HAD DERIVED SHARE B ROKING INCOME TO THE TUNE OF RS. 60,12,948/- WHICH IS ALSO AVAILABLE FOR SET OFF AGA INST THE LOSS INCURRED ON SHARE TRADING. RELIANCE IN THIS REGARD IS PLACED ON THE CO-ORDINATE BENCH DECISION OF THIS TRIBUNAL IN THE CASE OF GUINESS SECURITIES LIMITED VS DCIT IN I TA NO. 894 & 895 /KOL/2007 DATED 29.6.2007 . THIS TRIBUNAL RELIED ON THE DECISION OF THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF ARVIND INVESTMENT LTD VS CIT REPORTED I N 192 ITR 365 (CAL) FOR ARRIVING AT 9 ITA NO. 2723/KOL/2013 MPC SECURITIES LTD., AY 2010-11 THE CONCLUSION THAT THE SHARE BROKING BUSINESS INCO ME ALSO COME WITHIN THE AMBIT OF EXPLANATION TO SECTION 73 OF THE ACT. THE TRIBU NAL AFTER ANALYZING THE NATURE OF BUSINESS CARRIED ON BY THE MEMBERS OF THE RECOGNIZE D STOCK EXCHANGES , HELD THAT BOTH IN SHARE BROKING AS WELL AS IN PROPRIETARY SHARE TR ADING, THE UNDERLYING BUSINESS TRANSACTIONS GIVING RISE TO INCOME INVOLVED ONLY PU RCHASE AND SALE OF SHARES OF OTHER COMPANIES AND THEREFORE IN TERMS OF EXPLANATION TO SECTION 73 OF THE ACT, THE ENTIRE BUSINESS OF THE STOCK BROKER ASSESSEE CAME WITHIN T HE AMBIT OF EXPLANATION TO SECTION 73 OF THE ACT . WE FIND THAT ONCE THESE PROFITS (I.E 97,70,575 + 8,76,950 + 60,12,948) ARE SET OFF WITH THE LOSS INCURRED ON SHARE TRADING BUS INESS, THERE WOULD BE ONLY RESULTANT GAIN FROM SPECULATIVE BUSINESS AND HENCE THERE WOUL D BE NO SCOPE TO APPLY THE PROVISIONS OF EXPLANATION TO SECTION 73 OF THE ACT IN THE ABSENCE OF SPECULATION LOSS. 8.5. WE ARE IN AGREEMENT WITH THE ARGUMENTS ADVANC ED BY THE LD AR THAT IN THE CASE OF A STOCK BROKER, THERE IS A COMMON TERMINAL, ONE MEM BERSHIP OF THE STOCK EXCHANGE, COMMON BANK ACCOUNT AND THE COMMON WORK FORCE WITH THE HELP OF WHICH THE BUSINESS OF PROPRIETORY TRADING AS WELL AS TRADING ON BEHALF OF THE CLIENTS ARE CONDUCTED. THEREFORE IT COULD BE SAFELY CONCLUDED THAT THE ENT IRE BUSINESS OF THE STOCK BROKER CONSTITUTED AS ONE SINGLE COMPOSITE INDIVISIBLE BUS INESS AND THEREFORE INCOME OR LOSS CANNOT BE ARTIFICIALLY BIFURCATED. 8.6. WE ALSO DEEM IT NECESSARY AT THIS JUNCTURE TO UNDERSTAND THE INTENTION BEHIND THE WORDS USED IN THE EXPLANATION TO SECTION 73. WE F IND THAT THE LEGISLATURE HAS CONSCIOUSLY NOT USED THE EXPRESSION SHARE TRADING OR SHARE DEALING BUSINESS IN THE SAID EXPLANATION. THE LANGUAGE CONSCIOUSLY USED BY THE LEGISLATURE PROVIDES THAT WHERE ANY PART OF THE BUSINESS OF A COMPANY ASSESSEE CONS ISTS OF PURCHASE AND SALE OF SHARES OF OTHER COMPANIES THEN FOR THE PURPOSES OF SECTION 73 SUCH AN ASSESSEE SHALL BE DEEMED TO BE CARRYING ON SPECULATION BUSINESS TO THE EXTEN T IT CONSISTS OF PURCHASE AND SALE OF SUCH SHARES . THE LANGUAGE EXPRESSLY USED THEREFORE SHOWS THA T WHEREVER ANY PART OF COMPANY ASSESSEES BUSINESS CONSISTS OF PURCHASE AN D SALE OF SHARES OF OTHER COMPANIES, THEN FOR THE PURPOSES OF SECTION 73, THAT PART OF T HE ASSESSEES BUSINESS INVOLVING PURCHASE AND SALE OF SHARES IS DEEMED TO BE SPECULA TION BUSINESS. THE VERY REFERENCE TO THE EXPRESSION PART OF THE BUSINESS CONNOTES THAT THE ASSESSEES BUSINESS ITSELF NEED NOT 10 ITA NO. 2723/KOL/2013 MPC SECURITIES LTD., AY 2010-11 BE THAT OF SHARE TRADING. THE ASSESSEE MAY CARRY O N ANY BUSINESS OR RANGE OF BUSINESSES NOT AMOUNTING TO TRADING IN SHARES. IN SUCH A CAS E, ANY INCOME OR LOSS WHICH IS RELATABLE TO THE ACTIVITY OF PURCHASE AND SALE OF S HARES IS DEEMED TO BE THE INCOME OR LOSS DERIVED FROM DEEMED SPECULATION BUSINESS. 8.7. ONE MORE EXCRUCIATING EVIDENCE THAT WAS FILED BY THE ASSESSEE BEFORE THE LD.CITA WHICH THE LD CITA HAD DULY APPRECIATED WAS THE CERT IFICATE ISSUED BY THE NATIONAL STOCK EXCHANGE WHICH CERTIFIED TOTAL TURNOVER RECORDED IN THE ASSESSEES NAME FOR THE FINANCIAL YEAR 2009-10. THE LD CITA OBSERVED FROM THE CERTIFI CATE THAT TOTAL TURNOVER RECORDED IN THE ASSESSEES NAME BY THE SAID STOCK EXCHANGE IN R ESPECT OF ASSESSEES TRANSACTIONS IN CASH SEGMENT AMOUNTED TO RS. 680,26,47,142/- , WHER EAS THE ASSESSEES OWN TRADING TURNOVER IN CASH SEGMENT WAS ONLY RS. 191,41,25,976 /-. WITH REFERENCE TO SUCH TURNOVER, TRANSACTION CHARGES WERE COLLECTED FROM T HE ASSESSEE BY THE EXCHANGE. IT THEREFORE TRANSPIRED FROM THE TRANSACTIONAL DOCUMEN TS THAT AS PER THE STOCK EXCHANGE REGULATIONS, PURCHASE AND SALE OF SHARES BOTH ON PR OPRIETARY AND CLIENTS ACCOUNT WERE REGARDED TO BE ASSESSEES OWN TRADING TURNOVER AND ACCORDINGLY TRANSACTION CHARGES WERE COLLECTED FROM THE ASSESSEE THEREBY PROVING BEYOND DOUBT, THAT BOTH IN RESPECT OF PROPRIETARY SHARE TRADING AND TRADING ON BEHALF OF THE CLIENTS, THE ASSESSEES BUSINESS CONSISTED OF PURCHASE AND SALE OF SHARES OF OTHER C OMPANIES. IN TERMS OF EXPLANATION TO SECTION 73, SUCH BUSINESS WAS THE SPECULATION BUSIN ESS AND THEREFORE EVERY INCOME AND ACCRETION AS ALSO EVERY EXPENDITURE, OUTGOING OR LO SS IN RELATION TO SUCH BUSINESS HAD CHARACTER OF INCOME OR LOSS DERIVED FROM SPECULATI ON BUSINESS ASSESSABLE IN TERMS OF SECTION 73 OF THE ACT. 8.8. FROM THE AFORESAID FINDINGS AND THE RATIO LAI D DOWN IN THE AFORESAID JUDICIAL PRECEDENTS RELIED UPON, IT COULD BE SAFELY CONCLUDE D THAT THE PROVISIONS OF EXPLANATION TO SECTION 73 OF THE ACT WOULD NOT BE APPLICABLE IN THE INSTANT CASE IN THE ABSENCE OF SPECULATION LOSS IF CONSOLIDATED BUSINESS INCOME IS CONSIDERED. 8.8.1. ALTERNATIVELY, EVEN IF EXPLANATION TO SECTI ON 73 IS TO BE APPLIED, WE HOLD THAT THE ASSESSEES CASE FALLS UNDER THE EXCEPTION PROVIDED IN THE FIRST LIMB OF EXPLANATION TO SECTION 73 OF THE ACT WHERE THE GROSS TOTAL INCOME OF THE ASSESSEE COMPRISES OF INCOME 11 ITA NO. 2723/KOL/2013 MPC SECURITIES LTD., AY 2010-11 FROM OTHER SOURCES WHICH IS MUCH MORE THAN THE SPEC ULATION LOSS OF RS. 1,02,12,277/- . RELIANCE IN THIS REGARD IS PLACED ON THE DECISION O F THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS MIDDLETON INVESTMENT & TRADING CO LTD IN ITA NO. 196 OF 1999 DATED 15.1.2014 WHEREIN IT WAS HELD THAT:- THE LEARNED TRIBUNAL HELD AS FOLLOWS: ' ... THE NET LOSS UNDER THE HEAD 'PROFITS AND GAIN S OF BUSINESS OR PROFESSION' WOULD BE RS.8,72,972/- WHEREAS, THE INCOME SHOWN BY THE ASSESSEE UNDER THE HEAD 'INCOME FROM OTHER SOURCES' IS TO THE TUNE OF RS.10,13,798/-. WE ARE, THEREFORE, OF THE OPINION THAT THE ASSESSEE'S GROSS TOTAL INCOME CONSISTED MAINLY OF INCOME ASSESSABLE UNDER THE HEAD 'INCOME FROM OT HER SOURCES'. IT THEREFORE, FOLLOWS THAT THE LOSS IN SHARE TRADING HAS TO BE TR EATED AS BUSINESS LOSS. WE DIRECT THE A.O. ACCORDINGLY.' AGGRIEVED BY THE ORDER OF THE LEARNED TRIBUNAL, THE REVENUE HAS COME UP IN APPEAL. AT THE TIME OF HEARING, MR. SARAF, LEARNED ADVOCATE VE RY FAIRLY DREW OUR ATTENTION TO THE JUDGMENT IN THE CASE OF CIT VS. DARSHAN SECURITIES (P) LTD. REPORTED IN 341 ITR 556 WHEREIN THE FOLLOWING VIEW WAS TAKEN: 'THE AMBIT OF SUB-SECTION (1) OF SECTION 73 IS ONLY TO PROHIBIT THE SETTING OFF OF A LOSS WHICH HAS RESULTED FROM A SPECULATION BUSINESS , SAVE AND EXCEPT AGAINST THE PROFITS AND GAINS OF ANOTHER SPECULATION BUSINESS. IN ORDER TO DETERMINE WHETHER THE EXCEPTION THAT IS CARVED OUT BY THE EXPLANATION APPLIES, THE LEGISLATURE HAS FIRST MANDATED A COMPUTATION OF THE GROSS TOTAL INC OME 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. OBVIOU SLY, 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 DETERMINED AS TO WHET HER THE GROSS TOTAL INCOME SO COMPUTED CONSISTS MAINLY OF INCOME WHICH IS CHARGEA BLE UNDER THE HEADS REFERRED TO IN THE EXPLANATION. CONSEQUENTLY, IN THE PRESENT CASE, THE GROSS TOTAL INCOME OF THE ASSESSEE WAS REQUIRED TO BE COMPUTED, INTER ALIA, BY COMPUTING T HE INCOME UNDER THE HEAD OF PROFITS AND GAINS OF BUSINESS OR PROFESSION AS WELL . BOTH THE INCOME FROM SERVICE CHARGES IN THE AMOUNT OF RS.2.25 CRORES AND THE LOS S IN SHARE TRADING OF RS.2.23 CRORES, WOULD HAVE TO BE TAKEN INTO ACCOUNT IN COMP UTING THE INCOME UNDER THAT HEAD, BOTH BEING SOURCES UNDER THE SAME HEAD. THE A SSESSEE HAD A DIVIDEND INCOME OF RS.4.7 LAKHS (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 SECTION 73 AND THAT CONSEQUENTLY THE ASSESSEE WOULD NOT BE DEEMED TO BE CARRYING ON A SP ECULATION BUSINESS FOR THE PURPOSE OF SECTION 73(1).' THE JUDGMENT CITED BY MR. SARAF IS DIRECTLY ON THE POINT SOUGHT TO BE AGITATED BY THE REVENUE. THERE IS NOTHING TO SHOW THAT THE VIEW TAK EN BY THE BOMBAY HIGH COURT IS ERRONEOUS. WE ARE, AS SUCH, OF THE OPINION THAT THE APPEAL MUST FAIL AND IS HEREBY DISMISSED. 8.9. HENCE ON BOTH THE COUNTS, WE HOLD THAT THE PR OVISIONS OF EXPLANATION TO SECTION 73 OF THE ACT COULD NOT BE MADE APPLICABLE TO THE F ACTS OF THE INSTANT CASE AND 12 ITA NO. 2723/KOL/2013 MPC SECURITIES LTD., AY 2010-11 ACCORDINGLY WE FIND NO INFIRMITY IN THE ORDER PASSE D BY THE LD CITA ON THIS ISSUE. ACCORDINGLY THE GROUNDS RAISED BY THE REVENUE ARE D ISMISSED. 9. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. ORDER IS PRONOUNCED IN THE OPEN COURT ON 08.07.201 6 SD/- SD/- (N. V. VASUDEVAN) (M. BALAGANESH) JUDICIAL MEMBER ACCOUNTAN T MEMBER DATED : 8 TH JULY, 2016 JD.(SR.P.S.) COPY OF THE ORDER FORWARDED TO: 1 . APPELLANT DCIT, CIR-4, KOLKATA. 2 RESPONDENT M/S. MPC SECURITIES LTD., 41/2B, SARAT BOSE ROAD, KOLKATA-700 020. 3 . THE CIT(A), KOLKATA 4. 5. CIT , KOLKATA DR, KOLKATA BENCHES, KOLKATA / TRUE COPY, BY ORDER, ASSTT. REGISTRAR .