CHIRAG D. TANNA, MUMBAI V. ACIT CIR 25(3), MUMBAI

ITA 4227/MUM/2010

• Counselvise Citation: 422719914 RSA 2010
• Duration Of Justice: 1 year(s) 9 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-03-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 22-02-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 25-05-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D S SUNDER SINGH
• Assessee Lawyers: RAKESH JOSHI
• Keywords: Transactions in derivatives; Speculation loss
• Section: 143(3); 43(5)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, MUMBAI BEFORE SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER, A ND SHRI R.S. PADVEKAR, JUDICIAL MEMBER ITA NO. 4227/MUM./2010 (ASSESSMENT YEAR : 2006-07 ) CHIRAG D. TANNA FLAT NO.003, UMANG B WING MATHURADAS ROAD EXTENSION KANDIVALI (W), MUMBAI 400 067 PAN ADJPT2151R .. APPELLANT V/S ASSTT. COMMISSIONER OF INCOME TAX CIRCLE-25(3), MUMBAI .... RESPONDENT ITA NO. 5027/MUM./2010 (ASSESSMENT YEAR : 2006-07 ) ASSTT. COMMISSIONER OF INCOME TAX CIRCLE-25(3), MUMBAI .. APPELLANT V/S CHIRAG D. TANNA FLAT NO.003, UMANG B WING MATHURADAS ROAD EXTENSION KANDIVALI (W), MUMBAI 400 067 PAN ADJPT2151R .... RESPONDENT ASSESSEE BY : MR. RAKESH JOSHI REVENUE BY : MR. D.S. SUNDER SINGH DATE OF HEARING 22.02.2012 DATE OF ORDER 14.03.2012 CHIRAG D. TANNA 2 O R D E R PER J. SUDHAKAR REDDY, A.M. THESE CROSS APPEALS ARE DIRECTED AGAINST THE IMPUGN ED ORDER DATED 30 TH MARCH 2010, PASSED BY THE COMMISSIONER (APPEALS)-X XXV, MUMBAI, FOR ASSESSMENT YEAR 2006-07. FACTS IN BRIEF :- 2. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF JOBBING / ARBITRAGE ACTIVITIES. HE UNDERTAKES BUSINESS OF SHARE TRADING ON HIS OWN ACCOUNT. HE FILED HIS RETURN OF INCOME ON 27 TH JULY 2006, DECLARING TOTAL INCOME OF ` 49,59,160. THE ASSESSING OFFICER COMPLETED THE ASSE SSMENT VIDE ORDER DATED 28 TH NOVEMBER 2008, PASSED UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 (FOR SHORT THE ACT ), DETERMINING THE INCOME AT ` 1,01,34,547, INTER- ALIA, MAKING ADDITIONS ON ACCOUNT OF SPECULATIVE IN COME AND INCOME FROM FORWARDS AND OPTIONS. THE ASSESSEE CARRIED THE MATT ER IN APPEAL WHEREIN THE FIRST APPELLATE AUTHORITY GRANTED PART RELIEF. AGGR IEVED, THE ASSESSEE AS WELL AS THE REVENUE ARE IN APPEAL BEFORE THE TRIBUNAL. 3. WE HAVE HEARD THE LEARNED COUNSEL, MR. RAKESH JOSHI , REPRESENTING THE ASSESSEE AND THE LEARNED DEPARTMENTAL REPRESENT ATIVE, MR. D.S. SUNDER SINGH, REPRESENTING THE REVENUE. 4. THE GROUNDS RAISED BY THE REVENUE, READS AS FOLLOWS :- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) ERRED IN DIRECTING THE A.O. TO ACCEP T THE TRANSACTION IN F & 0 PRIOR TO 25.1.2006 TO BE TREATED AS NON SPECULA TION TRANSACTION. SINCE THE ASSESSEE HAS CLAIMED LOSS OF RS 32,94,841 /- IN F & 0 BUT IT SHOULD NOT BE ALLOWED TO SET OFF FULLY HENCE AN AMO UNT OF RS 4,37,903/- OUT OF F&O TRANSACTION (UP TO 25.1.2006) IS TREATED AS SPECULATION LOSS AND IS ADDED TO ASSESSEES TOTAL I NCOME . 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) ERRED IN DIRECTING THE A.O. TO DELET E THE ADDITIONS MADE ON ACCOUNT OF F&O FOR RS.4,37,903/- WITHOUT APPRECI ATING THE FACT THAT THE JUDGMENTS RELIED UPON BY LD. CIT(A) ARE NOT APP LICABLE IN THIS CASE . CHIRAG D. TANNA 3 5. BOTH THE PARTIES CONCEDED BEFORE US THAT SIMILAR IS SUE WAS CONSIDERED BY MUMBAI J BENCH OF THE TRIBUNAL IN M/S. PREM AS SOCIATES ADVERTISING & MARKETING V/S JCIT, ITA NO.6547/MUM./2009, ORDER DA TED 17 TH SEPTEMBER 2010, WHEREIN THE TRIBUNAL, VIDE PARA-7, HELD AS FO LLOWS:- 7. WE FIND THAT IT IS UNDISPUTED POSITION THAT THE STOCK EXCHANGES, ON WHICH THE IMPUGNED TRANSACTIONS WERE CARRIED OUT, W ERE DULY NOTIFIED ON 25TH JANUARY 2006, AND THAT IN ACCORDANCE WITH T HE VIEWS OF THE CO-ORDINATE BENCH IN THE CASE OF ANAND BUILDWELL (S UPRA), AS ALSO WITH THE VIEWS OF HONBLE GUJARAT HIGH COURT IN THE CASE OF CLARIS LIFESCIENNCES (SUPRA), ONCE THE APPROVAL IS GRANTED IN THE RELEVANT PREVIOUS YEAR, AND IN THE ABSENCE OF ANYTHING INDIC ATED TO THE CONTRARY, THE APPROVAL HAS TO BE TAKEN AS EFFECTIVE FROM THE BEGINNING OF THE RELEVANT YEAR. THE ISSUE IS THUS COVERED, IN FAVOUR OF THE LINE OF REASONING ADOPTED BY THE ASSESSEE, BY DECISION OF T HE COORDINATE BENCH IN THE CASE OF ANAND BROTHERS (SUPRA) AND BY HONBLE GUJARAT HIGH COURTS JUDGMENT IN THE CASE OF CLARIS LIFESCI ENCES (SUPRA). W E RESPECTFULLY FOLLOWING THESE DECISIONS, WE UPHOLD T HE GRIEVANCE OF THE ASSESSEE AND HOLD THAT THE DERIVATE TRANSACTIONS, E NTERED INTO BY THE ASSESSEE AT THE RECOGNIZED STOCK EXCHANGES EVEN PRI OR TO THE DATE OF NOTIFICATION IN THE RELEVANT PREVIOUS YEAR, ARE TO BE TREATED AS COVERED BY THE EXCLUSION CLAUSE SET OUT IN SECTION 43(5)(D) . THE ASSESSEE GETS THE RELIEF ACCORDINGLY. 6. KEEPING IN VIEW THE AFORESAID DECISION OF THE TRIBU NAL, WE DECLINE TO INTERFERE WITH THE ORDER PASSED BY THE COMMISSIONER (APPEALS) AND DISMISS THE GROUNDS RAISED BY THE REVENUE. 7. IN THE RESULT, REVENUES APPEAL IS DISMISSED. WE NOW TAKE UP ASSESSEES APPEAL. GROUND RAISED BY THE ASSESSEE, READS AS FOLLOWS:- THE LEARNED CIT(A) ERRED IN CONFIRMING THE TREATMEN T OF THE SHARE TRADING LOSS OF ` 47,37,483 AS SPECULATIVE LOSS UNDER SECTION 43(5) OF THE ACT AND NOT ALLOWING SET OFF AGAINST OTHER SHAR E RELATED PROFITS WITHOUT APPRECIATING THE FACTS AND CIRCUMSTANCES OF THE CASE . 8. AFTER HEARING RIVAL CONTENTIONS, WE FIND THAT THE R EVENUE AUTHORITIES HAVE NOT PROPERLY UNDERSTOOD THE NATURE OF BUSINESS OF THE ASSESSEE. THE ASSESSEE SUBMITTED THE FOLLOWING NOTE TO EXPLAIN IT S NATURE OF BUSINESS:- THE APPELLANT IS ENGAGED IN THE BUSINESS OF JOBBING / ARBITRAGE ACTIVITIES. THIS JOBBING OR ARBITRAGE IS NOT DEFINE D IN THE ACT BUT REFERRED IN CLAUSE (C) OF SECTION 43(5) OF THE ACT. IN THIS ACTIVITY A CHIRAG D. TANNA 4 TRADER TAKES THE ADVANTAGE OF VARIATION OF PRICE QU OTE OF SAME SCRIP AT TWO DIFFERENT EXCHANGES I.E. THE PURCHASE OF SECURI TIES ON ONE MARKET FOR IMMEDIATE RESALE ON ANOTHER MARKET IN ORDER TO PROFIT FROM A PRICE DISCREPANCY. FOR EXAMPLE: THE TRADER PURCHASES THE SCRIP AT ONE EXCHANGE SAY BOMBAY STOCK EXCHANGE WHERE THE PRICE QUOTE IS LOWE R AND SELLS THE SAME SCRIPT ON ANOTHER EXCHANGE SAY NSE WHERE THE P RICE QUOTE IS HIGHER. LATER DURING THE SAME DAY, HE MAY GET FURTH ER OPPORTUNITY TO SQUARE OFF SUCH TRANSACTIONS IN THE PARTICULAR EXCH ANGE TO AVOID DELIVERY OF SHARES. BUT IF HE DOES NOT GET THIS OPP ORTUNITY TO SQUARE OFF IN ANY OF THE EXCHANGE THEN EITHER HAS TO TAKE THE DELIVERY OR OFFER DELIVERY OF THAT SCRIP. IN THIS ACTIVITY HE EARNS T HE DIFFERENCE BETWEEN TWO EXCHANGES. AN IMPORTANT FACTOR TO CARRY OUT SUCH TRANSACTIONS IS THAT THE TRADER SHOULD HAVE THAT SCRIP IN STOCK, SO INCASE IF HE HA S TO DELIVER THE SHARE HE CAN DO AT ONE EXCHANGE AND TAKE DELIVERY AT OTHE R EXCHANGE, IN CASE IF HE COULD NOT SQUARE OFF THIS TRANSACTION. HENCE DURING THE NORMAL COURSE OF BUSINESS, THE APP ELLANT HAD TO SETTLE SOME OF THE TRANSACTIONS ON THE SAME DAY WIT HOUT AFFECTING ANY DELIVERY, AND FOR SUCH TRANSACTIONS HE HAD ACCOUNTE D FOR THE NET AMOUNT OF PURCHASE AND SALE I.E. NET PROFIT / LOSS OF TRANSACTIONS UNDER THE HEAD JOBBING PROFIT & LOSS ACCOUNT DURING THE YEAR THE APPELLANT CARRIED OUT SUCH TRAN SACTIONS IN VARIOUS SCRIPS, WHICH HE WAS HOLDING IN STOCK, BETWEEN NSE & BSE. NOW WHEREVER HE COULD SQUARE OFF THE TRANSACTIONS, HE H AS SHOWN THE NET RESULT IN JOBBING ACCOUNT AND FOR TRANSACTIONS WHER E HE HAS TO AFFECT DELIVERY, HE SHOWN THEM UNDER SALE & PURCHASE. THE TRANSACTIONS CARRIED OUT BY THE APPELLANT CAN BE ILLUSTRATED AS FOLLOWS : SCRIP NSE BSE RESULT SCRIP 1 +100 @ 102 -100 @ 105 PROFIT OF ` 3 SCRIP 1 -100 @ 101 EXCHANGEWISE RESULT LOSS OF RE.1 PROFIT OF ` 4 (ASSUMING STOCK COST OF ` 10) IN THE ABOVE INSTANCE, THE APPELLANT IN FIRST TRANS ACTION EARNED A PROFIT OF RS. 3/-, WHICH HE HAS ACCOUNTED UNDER SALE & PUR CHASE ACCOUNT (DELIVERY TRANSACTION) BUT THE LD A 0 HAS NOT ALLOW ED SET OFF OF LOSS OF RE. 1/- (INCURRED IN SQUARING OFF THE TRANSACTION) AGAINST THE PROFIT OF RS. 3/-, WHICH IS PART OF SAME ARBITRAGE ACTIVITY A ND ENTERED WITH A MOTIVE TO HEDGE THE LOSS AGAINST THE STOCK IN HAND. THIS LOSS OF RE. 1/- IS PART OF NORMAL ARBITRAGE BUSINESS BUT SINCE THE APPELLANT HAS SHOWN IT SEPARATELY, SET OFF WAS DENIED. A SINGLE TRANSACTION CANNOT BE ACCEPTED IN PART AS SPECULATIVE TRANSACTION AND PART IN NON SPECULATIVE TRANSACTION . AT THE MOST A 0 CAN TREAT NET RESULT AS SPECULATION INCOME /LOSS AF TER SETTING OFF THE CHIRAG D. TANNA 5 OTHER LEG OF THE TRANSACTION. BUT IN THE CASE OF AP PELLANT NET RESULT IS PROFIT HENCE NO DISALLOWANCE CAN BE MADE. THEREFORE CONSIDERING THE PROVISIONS OF SECTION 43(5). YOUR HONOURS ARE REQUE STED TO KINDLY TREAT THE ENTIRE ARBITRAGE ACTIVITY AS SINGLE BUSINESS AC TIVITY AND ALLOW SET OFF OF ALL THE ARBITRAGE TRANSACTION WITH EACH OTHER. T HE LD A 0 CAN VERIFY ALL THE TRANSACTION WHICH ARE CARRIED OUT UNDER ARB ITRAGE ACTIVITY. 9. IN OUR CONSIDERED OPINION, THE ASSESSING OFFICER HA S TO CONSIDER THE COMPOSITE TRANSACTION. THE FIRST APPELLATE AUTHORIT Y WAS WRONG IN HIS FINDING ON APPLICABILITY OF EXPLANATION TO SECTION 43(5). T HUS, WE VACATE THIS FINDING. 10. AS THE NATURE OF BUSINESS HAS TO BE UNDERSTOOD IN T HE PROPER PERSPECTIVE CONSIDERING THE BUSINESS STRATEGY OF TH E ASSESSEE AND AS THE COMPOSITE TRANSACTIONS OF BOTH NSE AND BSE HAVE TO BE TAKEN INTO ACCOUNT, WE SET ASIDE THE MATTER TO THE FILE OF ASSESSING OF FICER FOR ADJUDICATION AFRESH IN ACCORDANCE WITH LAW. THIS GROUND IS, THUS, ALLOW ED FOR STATISTICAL PURPOSES. 11. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLOWED. 12. TO SUM UP, REVENUES APPEAL IS DISMISSED AND ASSESS EES APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 14 TH MARCH 2012 SD/- R.S. PADVEKAR JUDICIAL MEMBER SD/- J. SUDHAKAR REDDY ACCOUNTANT MEMBER MUMBAI, DATED: 14 TH MARCH 2012 COPY TO : (1) THE ASSESSEE; (2) THE RESPONDENT; (3) THE CIT(A), MUMBAI, CONCERNED; (4) THE CIT, MUMBAI CITY CONCERNED; (5) THE DR, C BENCH, ITAT, MUMBAI. TRUE COPY BY ORDER PRADEEP J. CHOWDHURY ASSISTANT REGISTRAR SR. PRIVATE SECRETARY ITAT, MUMBAI BENCHES, MUMBAI