GANDHI SECURITIES & INVESTMENTS P.LTD, MUMBAI V. DCIT 4(1), MUMBAI

ITA 2751/MUM/2014

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 7809 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 7 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-12-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: G
• Next Hearing Date: 31-03-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 22-04-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MRS VIDISHA KALRA
• Keywords: Business income; Transactions in derivatives; Earning of tax free income; Speculation loss; Bad and doubtful debts; Deemed dividend
• Section: 14A; 43(5)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL G , BENCH MUMBAI BEFORE SHRI R.C.SHARMA, AM & SHRI PAWAN SINGH , JM ITA NO. 2751 / MUM/20 1 4 ( ASSESSMENT YEAR : 2009 - 10 ) M/S. GANDHI SECURITIES & INVESTMENTS PVT. LTD., 9, HAJI KASAM BUILDING, 2 ND FLOOR, TAMARIN D LANE, FORT, MUMBAI 400 001 VS. DCIT, TAX - 4(1)MUMBAI 400 020 PAN/GIR NO. AAACG2133P APPELLANT ) .. RESPONDENT ) I TA NO. 3761/ MUM/20 14 ( ASSESSMENT YEAR : 2009 - 10 ) DCIT, TAX - 4(1)MUMBAI 400 020 VS. M/S. GANDHI SECURITIES & INV ESTMENTS PVT. LTD., 9, HAJI KASAM BUILDING, 2 ND FLOOR, TAMARIND LANE, FORT, MUMBAI 400 001 PAN/GIR NO. AAACG2133P APPELLANT ) .. RESPONDENT ) ASSESSEE BY SHRI J.D. MISTRY WITH SHRI MADHUR AGRAWAL REVENUE BY MRS. VIDISHA KALRA DATE OF HEARING 22/09/2017 DATE OF PRONOUNCEME NT 19 / 12 /201 7 / O R D E R PER R.C.SHARMA (A.M) : THESE ARE THE CROSS APPEALS FILED BY THE ASSESSEE AND REVENUE AGAINST THE ORDER OF CIT(A) FOR THE ASSESSMENT YEAR 2009 - 2010. 2. FOLLOWING GROUNDS HAVE BEEN TAKEN BY THE REVENUE. ITA NO. 2751 - 2014 & 3761/2014 M/S. GANDHI SECURITIES & INVESTMENTS PVT. LTD., 2 1. 'ON THE FACTS AND IN THE CIRCUMS TANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN ALLOWING MARK TO MARKET LOSS ON FUTURE CONTRACTS BEING NOTIONAL IN NATURE AMOUNTING TO RS.32,94,611/ - INSPITE OF THE FACT THAT AS PER CBDT INSTRUCTION NO. 03/2010, THE NATION LOSS ON ACCOUNT OF FUTURE C ONTRACTS OPEN ON DATE OF BALANCE SHEET CANNOT BE ALLOWED.' 2. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN DIRECTING THE AO TO DELETE THE ADDITION OF DEEMED SPECULATION LOSS OF RS.8,15,38,548/ - MADE BY THE AO UNDE R EXPLANATION TO SECTION 73 OF I.T. ACT AS THE ASSESSEE HAS WRONGLY SET OFF SPECULATIVE LOSS AGAINST NON SPECULATIVE INCOME.' 3. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN DIRECTING THE AO TO DELETE THE ADDITION MADE ON ACCOUNT OF DEEMED DIVIDEND BY THE ASSESSING OFFICER IN SPITE OF THE FACT THAT IN APPEAL THE ADDITION MADE IN THE CASE OF ANGEL BROKING, ANGEL COMMODITIES BROKING PVT. LTD. AND ANGEL SECURITIES LTD. HAS BEEN DELETED BY THE APPELLANT AUTHORITY.' 4 . 'THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY GROUND OR ADD A NEW GROUND WHICH MAY BE NECESSARY.' 3. GROUNDS TAKEN BY ASSESSEE READS AS UNDER: - 1.1 UNDER THE FACTS AND THE CIRCUMSTANCES OF THE CASE, THE HON. CIT(A) HAS NOT JUSTIFIED IN CONFIRMING T HE FURTHER DISALLOWANCE AMOUNTING TO RS. 26,48,184/- U/S 14A OF THE INCOME TAX ACT, MADE BY THE LD. ASSESSING OFFICER BY APPLYING RULE 8 D , WITHOUT CORRELATING EXPENSES TO THAT EXTENT, BEING INCURRED TO EARN THE TAX FREE DIVIDEND INCOME BY THE APPELLANT, IN SPITE OF THE FACT THAT THE APPELLANT ITSELF HAS DISALLOWED RS. 13,64,963/ - U/S. 14A OF THE INCOME TAX ACT. 1.2 UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE, THE HON. CIT(A) HAS NOT JUSTIFIED IN CONFIRMING THE DISALLOWANCE MADE BY THE LD. ASSESSING OFFIC ER TO THE EXTENT OF RS. 40,13,147/ - U/S.14A OF THE INCOME TAX ACT. 2. THE APPELLANT CRAVES LEAVE FOR ANY ADDITION, DELETION AND AMENDMENTS IN GROUND OF APPEAL, TILL THE DISPOSAL OF THE APPEAL. 4. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSED. 5. FACTS IN BRIEF ARE THAT ASSESSEE IS ENGAGED IN THE BUSINESS OF SHARE AND STOCK BROKING. DURING COURSE OF SCRUTINY ASSESSMENT AO DISALLOWED ITA NO. 2751 - 2014 & 3761/2014 M/S. GANDHI SECURITIES & INVESTMENTS PVT. LTD., 3 ASSESSEES CLAIM OF BAD DEBTS, SPECULATION LOSS, LOSS OF MARK TO MARKET. AO ALSO MADE DISALLOWANCE U/S.14A OF THE IT ACT. 6. BY THE IMPUGNED ORDER CIT(A) DELETED THE DISALLOWANCE MADE ON ACCOUNT OF MARK TO MARKET LOSS AFTER OBSERVING AS UNDER: - I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE, OBSERVATION OF THE ASSESSING OFFICER AND THE CONTENTION OF THE APPELLANT. S IMILAR ISSUE AROSE FOR MY CONSIDERATION OF MY CONSIDERATION AND MY PRE DECESSOR IN EARLIER YEAR, WHEREIN HE HELD THAT THE LOSS CLAIMED BY THE APPELLANT IS NOT A CO NTINGENT LIABILITY (APPEAL NO. IT/CIT(A) - 8/CIR .4 /158/10 - 11, DATED 04.05.2011 - A.Y2008 - 09). T HE FACTS REMAINING THE SAME, THIS GROUND OF APPEAL IS ACCORDINGLY DECIDED IN FAVOUR OF THE APPELLANT FOLLOWING MY PREDECESSORS DECISION IN A.Y.2008 - 09. THIS GROUND OF APPEAL IS ALLOWED. THE INCOME TAX APPELLATE TRIBUNAL, C - BENCH (SPECIAL BENCH) , MUMBAI IN THE CASE OF DCIT (IT) 1(1) VS. BANK OF BAHARIN & KUWAIT I. T.A NO.4404 & 1883/MUM/2004 DATED 13.08.2010 HAS HELD THAT SIMILAR LOSS ON FORWARD FOREIGN EXCHANGE CONTRACT AS ON THE BALANCE SHEET DATE IS AN ALLOWABLE LOSS. IN VIEW OF THE ABOVE DISCUSSION , THE CLAIM OF THE APPELLANT ON ACCOUNT OF LOSS ON VALUATION OF DERIVATIVE CONTRACTS ARE ALSO ALLOWABLE FOR THE FOLLOWING REASONS: - I) A BINDING OBLIGATION ACCRUED AGAINST THE ASSESSEE THE MINUTE IT ENTERED INTO DERIVATIVE FORWARD CONTRACTS. II) A CONS ISTENT METHOD OF ACCOUNTING FOLLOWED BY ASSESSEE CANNOT BE DISREGARDED ONLY ON THE GROUND THAT A BETTER METHOD COULD BE ADOPTED. III) THE ASSESSEE HAS CONSISTENTLY FOLLOWED THE SAME METHOD OF ACCOUNTING IN REGARD TO RECOGNITION OF PROFIT OR LOSS BOTH, IN RESPECT OF DERIVATIVE CONTRACTS AS PER THE RATE PREVAILING ON MARCH 31. IV) A LIABILITY IS SAID TO HAVE CRYSTALISED WHEN A PENDING OBLIGATION ON THE BALANCE SHEET DATE IS DETERMINABLE WITH REASONABLE CERTAINTY. VI) THE FORWARD DERIVATIVE CONTRACTS HAV E ALL THE TRAPPINGS OF STOCK IN - TRADE. VIII) IN THE ULTIMATE ANALYSIS, THERE IS NO REVENUE EFFECT AND IT IS ONLY THE TIMING OF TAXATION OF LOSS/PROFIT. ITA NO. 2751 - 2014 & 3761/2014 M/S. GANDHI SECURITIES & INVESTMENTS PVT. LTD., 4 BASED ON THE FACTS OF THE CASE & IN VIEW OF THE FACT THAT THE APPELLANT IS REGULARLY TRADING IN DERI VATIVE CONTRACTS, THE APPELLANT PRAYS THAT THE UNEXPIRED DERIVATIVE CONTRACTS ARE RIGHTLY HELD AS STOCK IN BUSINESS AND THE LOSS ON VALUATION OF DERIVATIVE CONTRACTS BE ALLOWED TO THE APPELLANT., WHICH EVEN THOUGH IS A NOTIONAL LOSS, IS ALLOWABLE UNDER THE GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, UNLIKE STOCKS & SHARES. FURTHER, VERY SIMILAR LOSS DISALLOWED BY THE ASSESSING OFFICER IN THE CASE OF THE APPELLANT'S OWN CASE FOR A. Y. 2008 - 09 HAS BEEN ALLOWED BY THE HON. CIT(A). COPY OF APPEAL ORDER ENCLOSED . (PAGE 302 TO 311) . HENCE THE APPELLANT SUBMITS THAT, BASED ON THE SAME RATIO AS OF A. Y. 2008 - 09, THE MARK TO MARKET LOSS SHOULD BE ALLOWED TO THE APPELLANT. THUS, FROM THE FACTS OF THE CASE AND AS PER THE ABOVE JUDICIAL DECISIONS, THE APPELLANT PRAY S YOUR HONOUR TO KINDLY DELETE THE ADDITIONS/DISALLOWANCES MADE BY THE AO.' 7. GRIEVANCE OF REVENUE RELATES TO DELETING DISALLOWANCE OF LOSS MARK TO MARKET LOSS ON FUTURE CONTRACTS. 8. LEARNED DR FAIRLY CONCEDED THAT ISSUE IS COVERED BY THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE A.Y.2008 - 09. AS THE FACTS AND CIRCUMSTANCES DURING THE YEAR UNDER CONSIDERATION ARE SAME, RESPECTFULLY FOLLOWING THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE, WE DO NOT FIND ANY REASON TO INTERFERE IN THE ORDER O F CIT(A) FOR ALLOWING MARK TO MARKET LOSS ON FUTURE CONTRACTS. 9 . WITH REGARD TO APPLICATION OF EXPLANATION TO SECTION 73 , WE FOUND THAT THE ASSESSEE IS INTER ALIA ENGAGED IN THE BUSINESS OF ARBITRAGE/JOBBING ACTIVITY. THE INCOME OF THE ASSESSEE FROM THE A RBITRAGE/JOBBING ACTIVITY IS AS UNDE R - LOSS FROM DELIVERY - BASED ARBITRAGE/JOBBING (7,75,30,988) LOSS FROM SHARE ARBITRAGE/JOBBING TRANSACTION (40,07,550) ITA NO. 2751 - 2014 & 3761/2014 M/S. GANDHI SECURITIES & INVESTMENTS PVT. LTD., 5 PROFIT FROM ARBITRAGE/JOBBING IN F&O SEGMENT 11,49,69,625 NET ARBITRAGE PROFIT 3 , 74 , 38 , 637 10 . I N THE RETURN OF INCOME FI L ED BY THE ASSESSEE FOR THE ASSESSMENT YEAR 2009 - 10, THE ASSESSEE HAS DISCLOSED INCOME FROM CAPITAL GAINS OF RS. 81,34,282/ - , DIVIDEND INCOME OF RS. 54,33,723 AND LOSS FROM BUSINESS OF RS. (7,72,45,569). 11 . THE AS SESSING OFFICER IN THE ASSESSMENT ORDER DATED 31 ST DECEMBER, 2012 HELD THAT THE LOSS OF RS. 7.75 CRORES FROM DELIVERY - BASED SHARE TRADING ACTIVITY WOULD BE REGARDED AS SPECULATION LOSS RELYING ON EXPLANATION TO SECTION 73 OF THE INCOME - TAX ACT, 1961 ('THE A CT'). THE ASSESSING OFFICER ALSO HELD THAT THE SAID LOSS IS NOT ARISING FROM ARBITRAGE/JOBBING TRANSACTIONS AS CERTAIN SCRIPTS WHICH ARE TRADED IN CASH SEGMENT ARE NOT TRADED IN F & O SEGMENT AND VICE VERSA. THE ASSESSING OFFICER, ACCORDINGLY, DISALLOWED T HE SET OFF OF THE SAID LOSS OF RS.7.75 CRORES AGAINST PROFIT FROM F & O SEGMENT. 12 . GROUND NO.3 DID NOT ARISE OUT OF THE ORDER OF CIT(A), THE SAME IS THEREFORE, DISMISSED IN LIMINI. 13 . BY THE IMPUGNED ORDER, CIT(A) ALLOWED SET - OFF AGAINST NON - SPECULATIV E INCOME, AFTER OBSERVING AS UNDER : - 5.3.8.FROM THE FOREGOING DISCUSSION, IT IS CLEAR THAT THAT THE ARBITRAGE ACTIVITY CANNOT BE BROKEN UP AND ONE LIMB OF THE SAID ACTIVITY, I.E., PURCHASE & SALE OF SHARES IN THE CASH SEGMENT BE CONSIDERED TO BE SPECULATIO N AS PER EXPLANATION AND THE OTHER LIMB, I.E. SALE AND PURCHASE OF STOCK FUTURES IN THE F & O SEGMENT BE CONSIDERED TO BE NORMAL BUSINESS ACTIVITY, ESPECIALLY WHEN THE APPELLANT COMPANY ARE NOT INDULGING IN TRADING ACTIVITY BUT ARE ENGAGED IN THE BUSINESS OF ARBITRAGE OPERATIONS. FURTHER, MY FINDINGS ARE SUPPORTED BY THE FOLLOWING JUDICIAL DECISIONS; ITA NO. 2751 - 2014 & 3761/2014 M/S. GANDHI SECURITIES & INVESTMENTS PVT. LTD., 6 F. IN CASE OF ARION COMMERCIAL PVT LTD, ITA NO. 101 0/KO1L2011, IT IS HELD THAT 'TRADING OF SHARES WHICH IS DONE BY DELIVERY TRANSACTIONS ARE NOT HIT BY SECTI ON 43(5) AS SPECULATION. SIMILARLY, DERIVATIVE TRANSACTION IN SHARES PROFIT/LOSS IS ALSO NOT HIT BY SECTION 43(5) OF THE INCOME TAX ACT, WHICH DEALS ABOUT SPECULATION TRANSACTION. AS SUCH, BOTH PROFIT / LOSS FROM ALL THE SHARE DELIVERY TRANSACTIONS & DERIV ATIVE TRANSACTIONS ARE HAVING THE SAME MEANING, SO FAR AS, SECTION 43(5) OF THE INCOME TAX ACT IS CONCERNED. IT IS FURTHER HELD THAT, ONCE THE TRANSACTIONS DONE BY DELIVERY AS WELL AS THE TRANSACTIONS OF DERIVATIVES ARE NOT HIT BY SEC. 43(5) OF THE ACT, TH E AGGREGATION OF THE SHARE TRADING LOSS AND PROFIT FROM DERIVATIVE TRANSACTIONS SHOULD BE DONE BEFORE THE APPLICATION OF EXPLANATION TO SEC. 73 OF THE I. T. ACT IS APPLICABLE. G. IN CASE OF SHREE CAPITAL SERVICES LTD VS ACIT, ITA NO. 1294(KOL) OF 2008, TH E HON. ITAT, KOLKATA, HAS HELD THAT F & 0 SHALL BE TREATED IN SAME LINE WITH CASH AND VICE VERSA. H. IN CASE OF DCIT VS LOKNATH SARAF SECURITIES LTD., ITA NO.695/KOL/2008, THE HON. ITAT HAS HELD THAT DIFFERENT TREATMENT OF TRANSACTIONS IN A COMPOSITE BUSI NESS, CANNOT BE SAID TO BE DIFFERENT BUSINESS. I. IN CASE OF CHIRAG TANNA VS. ACIT, ITA NO.4227/MUM/2010, THE HON. ITAT HAS HELD THAT, DERIVATIVES TRANSACTIONS ENTERED INTO BY THE ASSESSEE AT THE RECOGNIZED STOCK EXCHANGES ARE TO BE TREATED AS COVERED BY T HE EXCLUSION CLAUSE SET OUT IN SEC. 43(5)(D) OF THE ACT AND ALSO THE ARBITRAGE / JOBBING TRANSACTIONS CARRIED OUT BY THE ASSESSEE ARE NOT SPECULATIVE TRANSACTIONS. J. IN CASE OF ITO VS. ARENA TEXTOILES & INDUSTRIES LTD., ITA NO.1019/KOL/2011, THE HON. KOLK ATA ITAT HAS HELD THAT, TRADING OF A SHARE WHICH IS DONE BY DELIVERY TRANSACTIONS ARE NOT HIT BY SEC. 43(5) AS SPECULATION. ALSO, DERIVATIVES TRANSACTIONS IN SHARES PROFIT / LOSS IS ALSO HIT BY SEC. 43(5) W HICH DEALS ABOUT SPECULATIVE TRANSACTIONS. THE TRA NSACTIONS DONE BY DELIVERY AS WELL AS TRANSACTIONS OF DERIVATIVES ARE NOT HIT BY SEC.43(5), IT IS CONSIDERED THAT THE AGGREGATION OF SHARE TRADING LOSS AND PROFIT FROM DERIVATIVES SHOULD BE DONE BEFORE THE APPLICATION OF EXPLANATION OF SEC.73 OF THE IT ACT IS APPLICABLE. THUS, FROM THE ABOVE ITS EVIDENT THAT, ARBITRAGE / JOBBING TRANSACTIONS ARE NON - SPECULATIVE TRANSACTIONS AND SEC.73 IS NOT APPLICABLE TO THE CASE OF THE APPELLANT. 5.3. 9 . FURTHER IT IS SEEN THAT EXPLAN ATIONS TO SECTION 73 PROVIDES THAT, IF THE GROSS TOT AL INCOME CONSISTS MAINLY OF INCOME WHICH IS CHARGEABLE UNDER THE HEADS OF INTEREST ON SECURITIES, INCOME FROM HOUSE PROPERTY, CAPITAL GAINS AND INCOME FROM OTHER SOURCES OR TH E PRINCIPAL BUSINESS OF WHICH IS THE BUSINESS OF BANKING OR THE GRA NTING OF LOANS AND ADVANCES, WILL NOT BE COVERED WITHIN THE PURVIEW OF SECTION 73 OF THE ACT. LN THE PRESENT CASE OF THE APPELLANT, THE INCOME OF THE APPELLANT FROM CAPITAL GAIN IS OF RS 81,34,282/ - , DIVIDEND INCOME IS OF RS. 54,33,723/ - AND THERE IS LOSS FROM BUSINESS OF RS. ITA NO. 2751 - 2014 & 3761/2014 M/S. GANDHI SECURITIES & INVESTMENTS PVT. LTD., 7 (7,72,45,569/ - ). THUS THE INCOME OF THE APPELLANT FROM THE HEAD 'INCOME FROM CAPITAL GAIN' AND 'INCOME FROM OTHER SOURCES' IS HIGHER THAN 'INCOME FROM BUSINESS' AND HENCE THE CASE OF THE APPELLANT FALLS OUTSIDE THE PURVIEW OF PROVISION S OF SECTION 73 OF THE INCOME TAX ACT, 1961.' MY VIEW GET STRENGTH FROM TH E FOLLOWING JUDICIAL DECISIONS: - C. IN CASE OF ASSOCIATED CAPITAL MARKET MANAGEMENT PVT LTD VS JCIT, ITA' NO. 1103/MUM/2001, THE HON. MUMBAI ITAT, HAS HELD THAT, 'IF THE GROSS TOTAL INCOME OF THE ASSESSEE COMPRISES OF LOSS FROM BUSINESS AND POSITIVE INCOME FROM OTHER SOURCES, EVEN THOUGH THE FIGURE OF LOSS FROM BUSINESS IS MORE THAN THE FIGURE OF POSITIVE INCOME, THE EXPLANATION TO SEC. 73 SHALL NOT APPLY'. D. IN CASE OF COSY MERCHAN TILE LTD VS DCIT, ITA NO. 3511/MUM/2001, THE HON. MUMBAI ITAT IS OF THE SAME OPINION AS ABOVE. E. CIT VS DARSHAN SECURITIES PVT LTD, ITA NO. 2886 OF 2009. F. ACIT VS CONCORD COMMERCIALS PVT LTD, ITA NO. 5220/BOM/1994. G. CIT VS HERO TEXTILES AND TRADING LTD, ITA NO. 296 OF 2001. H. CIT VS MAANSI TRADING PVT LTD, ITA NO. 47 OF 2001. I. CIT VS HSBC SECURITIES & CAPITAL MARKETS INDIA PVT LTD , ITA NO. 657 OF 2007. J. STARLINE ISPAT AND ALLOYS LTD VS DCIT, 108 TT J 321. ' 5.3.10. I FIND THAT OUT OF THE LOSS OF RS. 7,75,30,998/ - , LOSS OF RS. 3,95,73,414 / - IS DUE TO LOSS ON VALUATION OF CLOSING STOCK. THE LD. ASSESSING OFFICER DID NOT COMMENT ON THE DETAILS PROVID ED OF THE VALUATION LOSS OF RS. 3,95,73,414 / - AND JUST STATED THAT AS IT IS VALUATION LOSS, IT IS SPECULA TIVE IN NATURE. I FIND THAT VALUING THE STOCK - IN - TRADE AS PER THE SYSTEM REGULARLY FOLLOWED, A COMPANY. LD. AO HAS NO REASONS TO DEVIATE FROM THE SYSTEM AND HAS TO VALUE THE STOCK - IN - TRADE AS PER THE SYSTEM OF VALUATION REGULARLY FOLLOWED BY IT IN THE PAST, WHICH IS GENERALLY COST OR NET REALIZABLE VALUE, WHICHEVER IS LOWER. BY FOLLOWING THE AFORESAID SYSTEM, A COMPANY SUFFERS LOSS IN SHARES DUE TO VALUATION OF SHARES AT COST OR NET REALIZABLE VALUE, WHICHEVER IS LOWER. NET REALIZABLE VALUE DEPEN DS ON THE MARKET AND IN CASE OF HEAVY FALL IN SENSEX OF SHARES A COMPANY IS BOUND TO VALUE ITS STOCK - IN - TRADE OF SHARES AT A LOWER VALUE AND THEREBY SUFFER LOSSES. THE ISSUE IS WHETHER THE AFORESAID LOSS IS TO BE TERMED AS 'SPECULATIVE' OVER WHICH THE COMP ANY DOES NOT HAVE ANY CONTROL. NO COMPANY CAN DELIBERATELY INCUR LOSS IN THE SHARES, WHICH OCCURS DUE TO VALUATION AND TO ADJUST THE SAME AGAINST PROFITS OF THE COMPANY FROM THE OTHER BUSINESS. THEN, THERE APPEARS TO BE NO VALID REASON TO TREAT SUCH LOSS A S SPECULATIVE. FURTHER, THE STOCKS ARE PURCHASED FOR JOBBING TRANSACTIONS ONLY AND AS THERE WAS NO OPPORTUNITY DURING THE YEAR TO SALE THE STOCKS AT PROFIT, THE APPELLANT HAS THUS NOT SOLD THE STOCKS. ALSO, IN THE CASE OF AMAN PORTFOLIO (P) LTD VS DY. CIT, 92 ITD 324 (DELHI) , 92 T TJ DELHI 351, IT HAS BEEN HELD THAT LOSS ARISING DUE TO VALUATION OF STOCK IN TRADE CANNOT BE HELD AS SPECULATION LOSS. THUS, ITA NO. 2751 - 2014 & 3761/2014 M/S. GANDHI SECURITIES & INVESTMENTS PVT. LTD., 8 FROM THE ABOVE IT IS EVIDENT THAT THE STOCK VALUATION LOSS ALSO CANNOT BE TREATED AS SPECULATIVE IN NATU RE. I FIND THAT THE AO RELIED ON THE DECISION OF THE HON'BLE MUMBAI HIGH COURT IN THE CASE OF PRASAD AGENTS (P) LTD. CITED IN (2009) 180 TAXMAN 178 (BOM), WHEREIN IT WAS HELD THAT IN VIEW OF CLEAR LANGUAGE OF EXPLANATION TO SEC.73, A COMPANY CARRYING ON BU SINESS OF PURCHASE AND SALE OF SHARES SHALL BE DEEMED TO BE CARRYING ON SPECULATION BUSINESS. CIRCULAR NO. 204 DATED 24.7.1976, WHICH CONTAINS EXPLANATORY NOTES TO TAXATION LAWS (AMENDMENT) ACT, 1975, MAY BE CONSIDERED TO MEAN THAT EXPLN. TO SEC. 73 ALSO I NCLUDES CASES OF GROUP COMPANIES, BUT THAT DOES NOT MEAN THAT EXPLANATION MUST BE RESTRICTED ONLY TO GROUP COMPANIES AND NOT TO OTHER COMPANIES WHO CARRY ON BUSINESS OF SALE AND PURCHASE OF SHARES EITHER HAVING NO CONTROLLING INTEREST IN OTHER COMPANIES OR PURCHASING SHARES TO CONTROL OTHER COMPANIES. EXPLN. TO SEC. 73 CANNOT BE READ TO MEAN ONLY WHEN THERE IS PURCHASE AND SALE OF SHARES IN COURSE OF A FINANCIAL YEAR, BUT IT WILL COVER BOTH, SHARES WHICH ARE STOCK - IN - TRADE AND SHARES WHICH ARE TRADED IN COU RSE OF FINANCIAL YEAR, FOR PURPOSE OF CONSIDERING LOSS AND PROFIT FOR THAT YEAR. THEREFORE, LOSS OR PROFIT ON ACCOUNT OF VALUATION OF STOCK - IN - TRADE OF SHARES WOULD AMOUNT TO REVENUE LOSS OR REVENUE RECEIPT. HOWEVER, IN THE INSTANT CASE, SINCE I HAVE HELD THAT EXPLN.TO SEC. 73 IS NOT APPLICABLE TO THE FACTS OF THE APPELLANT, THE DECISION AS RELIED UPON BY THE AO HAS NO APPLICATION. 5.3.11 WITHOUT PREJUDICE TO MY ABOVE STATED FINDINGS THAT ARBITRAGE / JOBBING TRANSACTIONS ARE NON - SPECULATIVE TRANSACTIONS AN D SEC. 73 IS NOT APPLICABLE TO THE CASE OF THE APPELLANT AS WELL AS PROVISIONS OF EXPLANATION TO SECTION 73 ARE NOT APPLICABLE TO THE APPELLANT CASE IN VIEW OF FININGS OF THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF DARSHAN SECURITIES( SUPRA), EVEN IF IT IS HELD THAT THE TRANSACTION ARE SPECULATIVE THAN ALSO PROFIT OF THE F&O TRANSACTION ARE TO BE ADJUSTED AGAINST THE LOSSES OF CASH TRANSACTIONS IN VIEW OF DECISION OF ARION COMMERCIAL PVT LTD. (SUPRA) WHEREIN IT WAS HELD THAT TRADING OF SHARES WHICH IS DONE BY DELIVERY TRANSACTIONS ARE NOT HIT BY SECTION 43(5) AS SPECULATION. SIMILARLY, DERIVATIVE TRANSACTION IN SHARES PROFIT/LOSS IS ALSO NOT HIT BY SECTION 43(5) OF THE INCOME TAX ACT, WHICH DEALS ABOUT SPECULATION TRA NSACTION. AS SUCH, BOTH PROFIT / LOSS FROM ALL THE SHARE DELIVERY TRANSACTIONS & DERIVATIVE TRANSACTIONS ARE HAVING THE SAME MEANING, SO FAR AS, SECTION 43(5) OF THE INCOME TAX ACT IS CONCERNED. IT IS FURTHER HELD THAT, ONCE THE TRANSACTIONS DONE BY DELIVERY AS WELL AS THE TRANSACTIONS O F DERIVATIVES ARE NOT HIT BY SECTION 43(5) OF THE ACT, THE AGGREGATION OF THE SHARE TRADING LOSS AND PROFIT FROM DERIVATIVE TRANSACTIONS SHOULD BE DONE BEFORE THE APPLICATION OF EXPLANATION TO SECTION 73 OF THE INCOME TAX ACT IS APPLICABLE. AS IS EVIDENT F ROM THE EXTANT PROVISIONS OF THE SECTION 43(5) OF THE ACT, THAT NONE OF THE TRANSACTIONS ARE SPECULATIVE IN NATURE AND THAT THEY ARE ALL HEDGE TRANSACTIONS BETWEEN THE TWO SEGMENTS. IF AT ALL ONE SEGMENT OF THE TRANSACTION IS TO BE CONSIDERED ITA NO. 2751 - 2014 & 3761/2014 M/S. GANDHI SECURITIES & INVESTMENTS PVT. LTD., 9 AS SPECULATIV E THEN, THE OPPOSITE SEGMENT TRANSACTION SHOULD ALSO BE CONSIDERED AS A SPECULATIVE, HERE AGAIN THE LOSS IN THE CASH SEGMENT NEED TO BE ALLOWED AS A SET OFF AGAINST THE DERIVATIVE PROFIT CONSIDERING BOTH ARE SPECULATIVE IN NATURE. SIMILAR ISSUE WAS ALSO IN VOLVED IN THE CASE OF M/S. ARENA TEXTILES & INDUSTRIES LTD., KOLKATA IN ITA NO. 1019/KOL/2011 FOR AY. 2008 - 09 BEFORE THE HON'BLE ITAT, KOLKATA. THE GROUNDS OF APPEAL RAISED BY THE REVENUE WERE AS UNDER : - 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE C ASE AND SETTLED LEGAL POSITION, THE, LD. CIT(A) IS JUSTIFIED IN HOLDING THAT TRANSACTIONS IN DERIVATIVES ARE NOT HIT BY SECTION 43(5) OF THE I.T.ACT. 2. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND SETTLED LEGAL POSITION, THE LD. CIT(A) WAS JUST IFIED ON FACTS AND IN LAW IN DELETING THE DISALLOWANCE AND ADDITION OF RS.28,95,42,845/ - TREATED AS DEEMED SPECULATION LOSS BY THE AO. 3. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND SETTLED LEGAL POSITION, THE LD. CIT(A) IS JUSTIFIED IN HOLDING THAT DELIVERY - BASED SHARE TRANSACTIONS DOES NOT FALL IN THE AMBIT OF EXPLANATION TO SECTION 73 OF THE - I.T.ACT: THE HON'BLE ITA T AFTER CO NSIDERING RIVAL SUBMISSIONS HAS OBSERVED AS UNDER : - . AFTER HEARING THE RI VAL SUBMISSIONS AND ON CAREFUL PERUSAL OF MATE RI ALS AV AILABLE ON RECORD, WE ARE OF THE VIEW THAT TRADING OF SHARES WHICH IS DONE BY DELIVERY TRANSACTIONS ARE NOT.HIT BY SECTION 43(5) AS SPECULATION. SIMILARLY, DERIVATIVE TRANSACTION IN 9 SHARES PTO F IT / L OSS IS ALSO NOT HIT BY SEC.43(5) OF THE I .T ACT, WHICH DEALS ABOUT SPECULATION TRANSACTION. AS SUCH, BOTH PROFIT/LOSS FROM ALL THE SHARE DELIVERY TRANSACTIONS AND DERIVATIVE TRANSACTIONS ARE HAVING THE SAME MEANING , SO FAR AS SEC.43(5) OF THE I. T ACT IS CONCERNED. WHEN ONCE WE HELD THAT THE TR ANSACTIONS DONE BY DELIVERY AS WELL AS THE TRANSACTIONS OF DERIVATIVES ARE NOT HIT BY SEC. 43(5) OF THE ACT IT IS IN OUR CONSIDERED VIEW THAT THE AGGREGATION OF THE SHARE TRADING LOSS AND PROFIT FROM DERIVATIVE TRANSACTIONS SHOULD BE DONE BEFORE THE APPLIC ATION OF THE EXPLANATION TO SEC. 73 OF THE I. T ACT IS APPLICABLE. ' THUS, HON'BLE ITAT IN THIS CASE HAS HELD THAT AGGREGATION OF SHARE TRADING LOSS AND PROFIT FROM DERIVATIVE TRANSACTION SHOULD BE DONE BEFORE THE APPLICATION OF EXPLANATION TO SECTION 73 OF THE I. T. ACT IS APPLICABLE. THIS POSITION IS FURTHER SUPPORTED BY THE HON'BLE DELHI HIGH COURT'S JUDGEMENT IN THE CASE OF CIT V / S DLF COMMERCIAL DEVELOPERS LTD. [ITA NO. 94/2013 VIDE ORDER DATED 11.07.2013J WHEREIN IT HAS BEEN HELD THAT DERIVATIVES WH ICH DERIVE THEIR VALUE FROM THE UNDERLYING SHARES & SECURITIES CANNOT BE EXEMPTED FROM THE MISCHIEF OF ITA NO. 2751 - 2014 & 3761/2014 M/S. GANDHI SECURITIES & INVESTMENTS PVT. LTD., 10 EXPLANATION TO SECTION 73 AND ARE THEREFORE TO BE CONSIDERED AS SPECULATIVE IN NATURE. THE HON'BLE DELHI HIGH COURT HAS HELD AS UNDER: - '9. IN THIS CONT EXT, IT WOULD BE INSTRUCTIVE TO NOTICE THAT IN RAJASHREE SUGARS AND CHEMICALS LLD (SUPRA), THE MADRAS HIGH COURT NOTICED, RATHER DRAMATICALLY, THAT - .. 'DERIVATIVES ARE TIME BOMBS AND FINANCIAL WEAPONS OF MASS DESTRUCTION' SAID WARREN BUFFETT, ONE OF THE WORLD'S GREATEST INVESTORS, WHO OVERTOOK MICROSOFT MAESTRO IN 2008 TO BECOME THE RICHEST MAN IN THE WORLD AND WHO IS KNOWN AS THE 'SAGE OF OMAHA OR ORACLE OF OMAHA'. DERIVATIVES, ACCORDING TO HIM, CAN PUSH COMPANIES ON TO A SPIRAL THAT CAN LEAD TO A CORPOR ATE MELT DOWN .... THE HIGH COURT THEN, AFTER EXAMINING THE NATURE AND CHARACTERISTICS OF DERIVATIVES TRANSACTIONS, OBSERVED THAT: '5. WHAT ARE THESE 'DERIVATIVES' WHICH HAVE GAINED SUCH A GREAT DEAL OF NOTORIETY? IN SIMPLE TERMS, DERIVATIVES ARE FINANCI AL INSTRUMENTS WHOSE VALUES DEPEND ON THE VALUE OF OTHER UNDERLYING FINANCIAL INSTRUMENTS. THE INTERNATIONAL ACCOUNTING STANDARD (IAS) 39, DEFINES 'DERIVATIVES' AS FOLLOWS: A DERIVATIVE IS A FINANCIAL INSTRUMENT: (A) WHOSE VALUE CHANGES IN RESPONSE TO T HE CHANGE IN A SPECIFIED INTEREST RATE, SECURITY PRICE, COMMODITY PRICE, FOREIGN EXCHANGE RATE, INDEX OF PRICES O R RATES, A CREDIT RATING OR CREDIT INDEX, OR SIMILAR VARIABLE (SOMETIMES CALLED THE UNDERLYING ) (B) THAT REQUIRES NO INITIAL NET INVESTMENT O R LITTLE INITIAL NET INVESTMENT RELATIVE TO OTHER TYPES OF CONTRACTS THAT HAVE A SIMILAR RESPONSE TO CHANGES IN MARKET CONDITIONS; AND (C) THAT IS SETTLED AT A FUTURE DATE. ACTUALLY, DERIVATIVES ARE ASSETS, WHOSE VALUES ARE DERIVED FROM VALUES OF UNDER LYING ASSETS. THESE UNDERLYING ASSETS CAN BE COMMODITIES, METALS, ENERGY RESOURCES, AND FINANCIAL ASSETS SUCH A~ SHARES, BONDS, AND FOREIGN CURRENCIES. 10. IT IS NO DOUBT, TEMPTING TO HOLD THAT SINCE THE EXPRESSION 'DERIVATIVES' IS DEFINED ONLY IN SECTION 43 (5) AND SINCE IT EXCLUDES SUCH TRANSACTIONS FROM THE ODIUM OF SPECULATIVE TRANSACTIONS, AND FURTHER THAT SINCE THAT HAS NOT BEEN EXCLUDED FROM SECTION 73, YET, THE COURT WOULD BE DOING VIOLENCE TO PARLIAMENTARY INTENDMENT. THIS IS BECAUSE A DEFINITION ENACTED FOR ONLY A RESTRICTED PURPOSE OR OBJECTIVE SHOULD NOT BE APPLIED TO ACHIEVE OTHER ENDS OR PURPOSES. DOING SO WOULD BE CONTRARY TO THE STATUTE. THUS CONTEXTUAL APPLICATION OF A DEFINITION OR TERM IS STRESSED; WHEREVER THE CONTEXT AND SETTING OF A PR OVISION INDICATES AN INTENTION THAT AN EXPRESSION DEFINED IN SOME OTHER PLACE IN THE ENACTMENT, CANNOT BE APPLIED, THAT INTENT PREVAILS, REGARDLESS OF WHETHER STANDARD EXCLUSIONARY TERMS (SUCH AS 'UNLESS THE CONTEXT OTHERWISE REQUIRES'') ARE USED. IN THE V ANGUARD FIRE & ITA NO. 2751 - 2014 & 3761/2014 M/S. GANDHI SECURITIES & INVESTMENTS PVT. LTD., 11 GENERAL INSURANCE CO. LTD., MADRAS V. MIS. FRASER AND ROSS & ANR AIR 1960 SC 971 IT WAS HELD THAT: LT IS WELL SETTLED THAT ALL STATUTORY DEFINITIONS OR ABBREVIATIONS MUST BE READ SUBJECT TO THE QUALIFICATION VARIOUSLY EXPRESSED IN THE DEF INITION CLAUSES WHICH CREATED THEM AND IT MAY BE THAT EVEN WHERE THE DEFINITION IS EXHAUSTIVE INASMUCH AS THE WORD DEFINED IS SAID TO MEAN A CERTAIN THING, IT IS POSSIBLE FOR THE WORD TO HAVE A SOMEWHAT DIFFERENT MEANING IN DIFFERENT SECTIONS OF THE ACT DE PENDING UPON THE SUBJECT OR THE CONTEXT. THAT IS WHY ALL DEFINITIONS IN STATUTES GENERALLY BEGIN WITH THE QUALIFYING WORDS SIMILAR TO THE WORDS USED IN THE PRESENT CASE, NAMELY, UNLESS THERE IS ANYTHING REPUGNANT IN THE SUBJECT OR CONTEXT. THEREFORE IN FIN DING OUT THE MEANING OF THE WORD ' INSURER ' IN VARIOUS SECTIONS OF THE ACT, THE MEANING TO BE ORDINARILY GIVEN TO IT IS THAT GIVEN IN THE DEFINITION CLAUSE. BUT THIS IS NOT INFLEXIBLE AND THERE MAY BE SECTIONS IN THE ACT WHERE THE MEANING MAY HAVE TO BE D EPARTED FROM ON ACCOUNT OF THE SUBJECT OR CONTEXT IN WHICH THE WORD HAS BEEN USED AND THAT WILL BE GIVING EFFECT TO THE OPENING SENTENCE IN THE DEFINITION SECTION, NAMELY, UNLESS THERE IS ANYTHING REPUGNANT IN THE SUBJECT OR CONTEXT. IN VIEW OF THIS QUALIF ICATION, THE COURT HAS NOT ONLY TO LOOK AT THE WORDS BUT ALSO TO LOOK AT THE CONTEXT, THE COLLOCATION AND THE OBJECT OF SUCH WORDS RELATING TO SUCH MATTER AND INTERPRET THE MEANING INTENDED TO BE CONVEYED BY THE USE OF THE WORDS UNDER THE CIRCUMSTANCES. SI MILARLY, I N N.K. JAIN AND ORS. V S C .K. SHAH AND ORS. AIR 1991 SG 1289, IT WAS HELD THAT: 4. THE SUBJECT MATTER AND TH E CONTEXT IN WHICH A PARTI C ULAR WORD I S USED ARE OF GREAT IMPORTANCE AND IT IS AXIOMA TIC THAT THE OBJECT UNDE RLYING THE ACT MUST ALWAYS BE KEPT IN VIEW IN CONSTRUING THE CONTEXT IN WHICH A PARTICULAR WORD IS USED ...... 11. THE STATED OBJECTIVE OF SECTION 73 - APPARENT FROM THE TENOR OF ITS LANGUAGE IS TO DENY SPECULATIVE BUSINESSES THE BENEFIT OF CARRY FORWARD OF LOSSES. EXPLANATION TO SECT ION 73 (4) HAS BEEN ENACTED TO CLARIFY BEYOND ANY SHADOW OF DOUBT THAT SHARE BUSINESS OF CERTAIN TYPES OR CLASSES OF COMPANIES ARE DEEMED TO BE SPECULATIVE. THAT IN ANOTHER PART OF THE STATUTE, WHICH DEALS WITH COMPUTATION OF BUSINESS INCOME, DERIVATIVES A RE EXCLUDED FROM THE DEFINITION OF SPECULATIVE TRANSACTIONS, ONLY UNDERLINES THAT SUCH EXCLUSION IS LIMITED FOR THE PURPOSE OF THOSE PROVISIONS OR SECTIONS. TO BORROW THE MADRAS HIGH COURT'S EXPRESSION, - DERIVATIVES ARE ASSETS, WHOSE VALUES ARE DERIVED FRO M VALUES OF UNDER L YING ASSETS // IN THE PRESENT CASE, BY ALL ACCOUNTS THE DERIVATIVES ARE BASED ON STOCKS AND SHARES, WHICH FALL SQUARELY WITHIN THE EXPLANATION TO SECTION 73 (4). THEREFORE, IT IS IDLE TO CONTEND THAT DERIVATIVES DO NOT FALL WITHIN THAT PRO VISION, WHEN THE UNDERLYING ASSET ITSELF DOES NOT QUALIFY FOR THE BENEFIT, AS THEY (DERIVATIVES - ONCE REMOVED FROM IT AND ENTIRELY DEPENDENT ON STOCKS AND SHARES, FOR DETERMINATION OF THEIR VALUE). ITA NO. 2751 - 2014 & 3761/2014 M/S. GANDHI SECURITIES & INVESTMENTS PVT. LTD., 12 12. IN THE LIGHT OF THE ABOVE DISCUSSION, IT IS HELD THA T THE TRIBUNAL ERRED IN LAW IN HOLDING THAT THE ASSESSEE WAS ENTITLED TO CARRY FORWARD ITS LOSSES; THE QUESTION FRAMED IS ANSWERED IN FAVOUR OF THE REVENUE AND AGAINST THE ASSESSEE. THE APPEAL IS, THEREFORE, ALLOWED; THERE SHALL BE NO ORDER AS TO .. ' THE REFORE, THE HON'BLE DELHI HIGH COURT HAS CATEGORICALLY OBSERVED THAT THE PROVISIONS OF SECTION 73 OF THE ACT WOULD BE APPLICABLE EVEN IN THE CASE OF DERIVATIVES TO THE EXTENT THEY ARE BACKED BY STOCK AND SHARES. THEREFORE, IF THE AO INVOKED THE PROVISION O F THE EXPLANATION OF SEC. 73, THE ENTIRE TRANSACTION OF THE APPELLANT BECOME SPECULATIVE FOR THIS PURPOSE AS PER DELHI HIGH COURT AND THE APPELLANT IS ENTITLED FOR THE SET OFF WHICH WILL MAKE THE ADDITION NULLIFIED AS MADE BY THE AO. 5.3.12. IN VIEW OF TH E FOREGOING DISCUSSION WHEREIN IN BOTH CIRCUMSTANCES OF TREATING THE TRANSACTIONS AS SPECULATIVE OR NON SPECULATIVE, THE SET OFF HAS TO BE ALLOWED, THE ADDITION MADE BY THE LD. AO CANNOT BE SUSTAINED BOTH ON FACTS AND CIRCUMSTANCES OF THE APPELLANT'S CASE, THE SAME ARE ACCORDING L Y DELETED. THIS GROUND OF APPEAL IS ALLOWED. 14. AGAINST THE ABOVE ORDER OF CIT(A), REVENUE IS IN FURTHER APPEAL BEFORE US. 15. WE HAVE CONSIDERED RIVAL CONTENTIONS AND DELIBERATED ON THE JUDICIAL PRONOUNCEMENTS REFERRED BY LOWER A UTHORITIES IN THEIR RESPECTIVE ORDERS AS WELL AS CITED BY LEARNED AR AND DR DURING THE COURSE OF HEARING BEFORE US. SET - OFF OF SPECULATION LOSS AGAINST BUSINESS INCOME WAS DECLINED BY THE AO ON THE PLEA THAT EXPLANATION TO SECTION 73 IS APPLICABLE. THE CI T(A) HAS DEALT WITH THE ISSUE THREADBARE AND REACHED TO THE CONCLUSION THAT EXPLANATION TO SECTION 73 IS NOT APPLICABLE TO TH E FACTS AND CIRCUMSTANCES OF THE PRESENT CASE IN SO FAR AS IN THE PRESENT CASE THE A SSESSEE COMES WITHIN THE EXCLUSION PROVIDED IN THE SAID EXPLANATION, THE INCOME OF THE ASSESSEE UNDER THE HEAD 'INCOME FROM CAPITAL GAINS' AND 'INCOME FROM OTHER SOURCES' IS MORE THAN INCOME UNDER THE HEAD 'INCOME FROM BUSINESS AND PROFESSION' AND, THEREFORE, THE EXPLANATION TO SECTION ITA NO. 2751 - 2014 & 3761/2014 M/S. GANDHI SECURITIES & INVESTMENTS PVT. LTD., 13 73 IS NOT APPLIC ABLE. THE BUSINESS CARRIED ON BY THE ASSESSEE IS JOBBING/ARBITRAGE. JOBBING/ARBITRAGE IS A COMPOSITE ACTIVITY OF BUYING IN ONE SEGMENT (CASH) AND SELLING IN ANOTHER SEGMENT (F&O) AND ASSESSEE WILL EARN INCOME IN ONCE SEGMENT AND INCUR LOSS IN ANOTHER SEGME NT, SUCH THAT THE INCOME WOULD ALWAYS BE MORE THAN THE LOSS. THEREFORE, THE BUSINESS IS ITSELF ARBITRAGE AND THE SAME CANNOT BE TREATED AS TWO SEPARATE BUSINESS OF TRADING IN SHARES AND DEALING IN F&O. ARBITRAGE /JOBBING AS A COMPOSITE ACTIVITY IS COVERED UNDER SECTION 43(5)(C) OF THE ACT. HENCE, EXPLANATION TO SECTION 73 OF THE ACT IS NOT APPLICABLE AS THE ASSESSEE IS NOT CARRYING ON THE BUSINESS OF PURCHASE AND SALE OF SHARE BUT BUSINESS OF ARBITRAGE. 16. THE CIT(A) ALSO RELIED ON THE DECISION OF DELHI H IGH COURT IN CASE OF DLF COMMERCIAL DEVELOPERS LTD., THE DETAILED FINDING SO RECORDED BY CIT(A) HAS NOT BEEN CONTROVERTED BY LEARNED DR BY BRINGING ANY POSITIVE MATERIAL ON RECORD, ACCORDINGLY, WE DO NOT FIND ANY REASON TO INTERFERE IN THE ORDER OF CIT(A) ON THIS ISSUE. 17 . BY THE IMPUGNED ORDER CIT(A) CONFIRMED THE DISALLOWANCE MADE BY AO U/S.14A AFTER OBSERVING AS UNDER: - 3.3. I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE, OBSERVATION OF THE ASSESSING OFFICER AND THE CONTENTION & WRITTEN SUBMISSIONS O F THE APPELLANT. IN THE INSTANT CASE, THE APPELLANT HAD SHOWN A DIVIDEND INCOME OF RS. 54,33,723/ - ON WHICH THE APPELLANT HAD SUO MOTTO DISALLOWED AN AMOUNT OF RS. 13,64,963/ - IN ITS RETURN OF INCOME AS PER RULE 80. THE ASSESSING OFFICER COMPUTED THE DISAL LOWANCE AFTER TAKING INTO CONSIDERATION 0.5% OF THE AVERAGE VALUE OF INVESTMENT AND NO OTHER DIRECT OR INDIRECT EXPENSES SUCH AS INTEREST WAS TAKEN INTO ACCOUNT FOR DISALLOWANCES. 3.3.1. THE APPELLANT DURING THE COURSE OF APPELLATE PROCEEDINGS SUBMITTED T HAT DISALLOWANCE WERE WRONG AS NO EXPENSES HAVE BEEN ITA NO. 2751 - 2014 & 3761/2014 M/S. GANDHI SECURITIES & INVESTMENTS PVT. LTD., 14 INCURRED TO EARN THE DIVIDEND INCOME AND THAT THE APPELLANT HAD NOT UTILISED ANY BORROWED FUNDS FOR ACQUISITION OF INVESTMENT. FURTHER, SINCE THE STOCK WAS HELD AS STOCK IN TRADE, ALL EXPENSES HAVE OTHER WISE WERE REQUIRED TO BE INCURRED BY THE APPELLANT, IRRESPECTIVE OF THE FACT THAT WHETHER ANY DIVIDEND INCOME IS EARNED OR NOT. IT WAS ALSO STATED BY THE APPELLANT THAT THE BURDEN IS ON THE ASSESSING OFFICER TO PROVE THE NEXUS OF EXPENSES WITH REGARD TO TH E EARNING OF THE EXEMPT INCOME. I FIND THAT THE ENTIRE ARGUMENTS OF THE AUTHORISED REPRESENTATIVE OF THE APPELLANT ARE DEVOID OF ANY MERIT. THE FACT THAT THE APPELLANT HAD SUO MOTTO DISALLOWED THE EXPENSES PROVES THAT THE EXPENSES WERE INCURRED BY THE APPE LLANT IN EARNING EXEMPT INCOME. THE QUESTION THEREAFTER ARISES IS AS TO WHAT SHOULD THE AMOUNT OF EXPENDITURE THAT NEED TO BE DISALLOWED. IN THIS REGARD, RULE 80 COMES INTO PLAY AND THE ASSESSING OFFICER HAS NO RECOURSE OTHER THAN RULE 80 TO DECIDE THE QUA NTUM OF DISALLOWANCE. 3.3.2 I FIND NO INFIRMITY IN THE ACTION OF THE ASSESSING OFFICER IN AS FAR AS COMPUTING THE DISALLOWANCE UNDER RULE 80. THE ISSUE OF DISALLOWABILITY OF EXPENSES IS NOT IN DISPUTE AS THE AUTHORISED REPRESENTATIVE OF THE APPELLANT HAS ITSELF DISALLOWED THE EXPENSES IN ITS RETURN OF INCOME. THE ADDITION MADE BY THE ASSESSING OFFICER IS ACCORDINGLY UPHELD. THIS GROUND OF APPEAL IS THUS DISMISSED . 1 8 . WE HAVE CONSIDERED RIVAL CONTENTIONS AND CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHO RITIES BELOW AND FOUND FROM RECORD THAT MOST OF THE SHARES HELD BY ASSESSEE WERE STOCK IN TRADE. IN VIEW OF THE SETTLED JUDICIAL PRONOUNCEMENTS, WE DIRECT THE AO TO EXCLUDE INVESTMENT IN SHARES HELD AS STOCK IN TRADE OUT OF AVERAGE INVESTMENT WHILE COMPUTI NG DISALLOWANCE UNDER RULE 8D(2)(III) OF THE IT ACT. WE DIRECT ACCORDINGLY. 1 9 . IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSED WHEREAS APPEAL OF THE ASSESSEE IS ALLOWED IN PART FOR STATISTICAL PURPOSES. O RDER PRONOUNCED IN THE OPEN COURT ON THIS 19 / 12 /201 7 S D/ - ( PAWAN SINGH ) S D/ - ( R.C.SHARMA ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED 19 / 12 /201 7 KARUNA SR. PS ITA NO. 2751 - 2014 & 3761/2014 M/S. GANDHI SECURITIES & INVESTMENTS PVT. LTD., 15 COPY OF THE ORDER FORWARDED TO : BY ORDER, ( ASSTT. REGISTRAR) ITAT, MUMBAI 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A), MUMBAI. 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY//