Bonafide Securites Ltd., Ahmedabad V. The ACIT., Circle-3, Ahmedabad

ITA 440/AHD/2005

• Counselvise Citation: [2009] 114 COUNSELVISE.COM (IT) 8910 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 7 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-09-2009
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 14-09-2009
• Assessment Year: 2001-2002
• Appeal Filed On: 11-02-2005
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: NEETA SHAH SENIOR
• Keywords: Source of fund; Speculation loss; Capital Gains
• Section: 192

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH 'B' (BEFORE S/SHRI P K BANSAL AND MAHAVIR SINGH) ITA NO.440/AHD/2005 (ASSESSMENT YEAR:- 2001-02) BONAFIDE SECURITIES LTD., 125, KAMDHENU COMPLEX, NR. POLYTECHNIQUE, AMBAWADI, AHMEDABAD V/S THE ASSISTANT COMMISSIONER OF INCOME- TAX, CIRCLE-3, AHMEDABAD [APPELLANT] [RESPONDENT] APPELLANT BY :- SHRI TUSHAR P HEMANI RESPONDENT BY:- SMT. NEETA SHAH, SENIOR DR O R D E R PER P K BANSAL (ACCOUNTANT MEMBER): THIS APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER OF THE CIT( A) DATED 26/10/2004 BY TAKING THE FOLLOWING EFFECTIVE GROUND OF APPEAL:- THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS I N HOLDING THAT THE TRADING LOSS OF RS.1770151/- IS A SPECULATING LOSS AND THE SAME CAN NOT BE SET OFF AGAINST BROKERAGE INCOME EARNED BY THE A PPELLANT. 2 AT THE OUTSET, THE LEARNED AR WAS FAIR ENOUGH TO CONCEDE THE POSITION THAT THIS GROUND IS COVERED BY THE DECISION OF THIS TRIBUNAL IN THE CASE OF ACIT V SPHERE STOCK HOLDING PVT. LTD. [ITA NO.3488/AHD/2003 WITH CO NO.332/AHD/2004, ORDER DATED 24-07-2009] AND THAT IN THE CASE OF ACIT V H NYALCHAND FINANCIAL SERVICES LTD. AND OTHERS [ITA NO.2631/AHD /2004 AND OTHERS], IN WHICH THIS TRIBUNAL HAS TAKEN THE VIEW AGAINST THE 2 ASSESSEE. THE LEARNED DR HAS RELIED ON THE ORDERS O F THIS TRIBUNAL IN THE AFORESAID TWO CASES. 3 WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS AND PERUSED THE MATERIAL ON RECORD. WE HAVE ALSO GO NE THROUGH THE DECISIONS AS RELIED UPON BY THE LEARNED AR BEFO RE US. WE NOTED THAT SIMILAR ISSUE HAS ARISEN IN THE CASE OF H NYALCHAND FINANCIAL SERVICES LTD. IN ITA NO.2631/AHD/2004, IN WHICH THIS TRIBUNAL HAS HELD AS UNDER:- 20 THE FACTS RELATING TO GROUND NO.1 ARE THAT THE ASSESSEE SHOWN A SUM OF RS.5,42,545/-LOSS INCURRED IN TRADING IN SHARES. THE AO INVOKED THE PROVISIONS OF SECTION 73 AND TOOK THE VIEW THAT THE SAID LOSS CANNOT BE S ET OFF AGAINST THE BROKERAGE INCOME EARNED BY THE ASSESSEE AND HAS TO BE TREATED AS SPECULATION LOSS ARISING FROM THE SPECULATION BUSINESS. WHEN THE MATTER WENT BEFORE T HE CIT(A), THE CIT(A) CONFIRMED THE ORDER OF THE AO BY OBSERVING AS UNDER: 6.2 I HAVE CONSIDERED THE ABOVE SUBMISSIONS. IT IS SEEN THAT THE APPELLANT IS ENGAGED IN THE BUSINESS OF BROKER IN R ESPECT OF PURCHASE AND SALE OF SHARES. OVER AND ABOVE THIS BUSINESS IT IS ENGAGED IN THE BUSINESS OF TRADING IN SHARES. THEREFORE, I AM OF T HE VIEW THAT EXPLANATION BELOW SECTION 73 IS APPLICABLE IN RESPE CT OF ANY PROFIT OR LOSS FROM SUCH BUSINESS. ACCORDINGLY I HOLD THAT TH E ASSESSING OFFICER WAS JUSTIFIED IN HOLDING THE ABOVE LOSS AS SPECULAT ION LOSS AND CARRYING IT FORWARD AS SUCH. THIS GROUND IS THEREFO RE, DISMISSED. 21 THE LEARNED AR BEFORE US RELIED ON THE ORDER OF THE ITAT CALCUTTA BENCH IN THE CASE OF ITO V GDB SHARE & STOCK BROKING SERVICES LTD. [2004] 88 TTJ 352 (CAL) . THE LEARNED DR, ON THE OTHER HAND, CONTENDED THAT EXPLA NATION TO SECTION 73 IS SQUARELY APPLICABLE. THE ASSESSEE HAS TWO DIFFERENT SOURCES OF INCOME, ONE IS FROM PURCHASE A ND SALE OF SHARES ON BEHALF OF THE CUSTOMERS AND THE OTHER IS TRADING IN SHARES. REFERRING TO SECTION 73 AND EXPLANATION THEREOF, IT WAS VEHEMENTLY CONTENDED THAT THE PURCHASE AND S ALE OF 3 SHARES IS ONE PART OF THE BUSINESS OF THE SHARE BRO KING BUSINESS WHILE THE OTHER PART IS A BROKERAGE RECEIV ED ON THE PURCHASE AND SALE ON BEHALF OF THE CUSTOMERS. THE T RIBUNAL WHILE DISPOSING OF THIS APPEAL HAS NOT CONSIDERED T HE DECISION OF THE CALCUTTA HIGH COURT IN THE CASE OF CIT V ARVIND INVESTMENTS LTD. (1991) 192 ITR 365 (CAL) IN WHICH IT WAS HELD THAT A PART INCLUDES ALL EVEN IF THE EN TIRE BUSINESS OF THE ASSESSEE COMPANY IS IN SHARE TRADIN G. EXPLANATION TO SECTION 73 WILL BE APPLICABLE. THUS, IT WAS CONTENDED THAT THE LOSS INCURRED ON SHARE TRADING B USINESS CANNOT BE SET OFF AGAINST THE BROKERAGE INCOME. 22. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS ALONG WITH THE ORDERS OF THE AUTHORITIE S BELOW. BEFORE DECIDING THE ISSUE BEFORE US, IT IS NECESSAR Y IN OUR OPINION TO REFER THE EXPLANATION TO SECTION 73. THE EXPLANATION TO SECTION 73 OF THE ACT STIPULATES AS UNDER: EXPLANATION. WHERE ANY PART OF THE BUSINESS OF A COMPANY ( [OTHER THAN A COMPANY, WHOSE GROSS TOTAL INCOME CONSISTS M AINLY OF INCOME WHICH IS CHARGEABLE UNDER THE HEADS INTEREST ON SE CURITIES, INCOME FROM HOUSE PROPERTY, CAPITAL GAINS AND INCOME F ROM OTHER SOURCES], OR A COMPANY THE PRINCIPAL BUSINESS OF W HICH IS THE BUSINESS OF BANKING OR THE GRANTING OF LOANS AND ADVANCES) C ONSISTS IN THE PURCHASE AND SALE OF SHARES OF OTHER COMPANIES, SUC H COMPANY SHALL, FOR THE PURPOSES OF THIS SECTION, BE DEEMED TO BE CARRY ING ON A SPECULATION BUSINESS TO THE EXTENT TO WHICH THE BUSINESS CONSIS TS OF THE PURCHASE AND SALE OF SUCH SHARES] FROM THE PLAIN READING OF THIS EXPLANATION TO SECTION 73 IT IS APPARENTLY CLEAR THAT THIS EXPLANATION IS APPLICABLE. WHERE ANY PART OF THE BUSINESS OF A COMPANY CONSISTS THE PURCHASE AND SALE OF SHARES OF OTHER COMPANIES, SUCH COMPANY SHALL, FOR THE PURPOS ES OF SECTION 73, BE DEEMED TO BE CARRYING ON THE SPECULATION BUSINES S TO THE EXTENT TO WHICH THE BUSINESS CONSISTS OF PURCHASE AND SALE OF SHARES. TWO EXCEPTIONS ARE PROVIDED UNDER THIS EXPLANATION AND WHEREVER THESE EXCEPTIONS ARE APPLICABLE, PURCHASE AND SALE OF SHA RES THE BUSINESS WILL NOT BE REGARDED TO BE THE SPECULATION LOSS. TH E FIRST EXCEPTION IS APPLICABLE TO THE COMPANY WHOSE GROSS TOTAL INCOME CONSISTS MAINLY OF INCOME CHARGEABLE UNDER THE HEADS INTEREST ON S ECURITIES, INCOME FROM HOUSE PROPERTY, CAPITAL GAINS AND INCOME FROM OTHER SOURCES. THE SECOND EXCEPTION IS APPLICABLE TO A COMPANY 4 WHERE THE PRINCIPAL BUSINESS OF THE COMPANY IS THE BUSINESS OF BANKING OR GRANTING OF LOANS AND ADVANCES.SECTION E TC. TO BE COPIED FROM ITA 3415.IN THE CASE OF CIT V ARVIND INVESTMENTS LTD. (1991) 192 ITR 365 (CAL), THE HONBLE CALCUTTA HIGH COURT HAS HELD AS UNDER:- SUB-SECTION (2) OF SECTION 73 OF THE INCOME-TAX AC T, 1961, RESTRICTS THE SCOPE OF SECTION 72 WHICH PROVIDES FOR CARRYING FORWARD AND SETTING OFF OF BUSINESS LOSSES. IF ANY LOSS COMPUTE D IN RESPECT OF A SPECULATION BUSINESS HAS NOT BEEN WHOLLY SET OFF, S UCH LOSS MAY BE CARRIED FORWARD AND SET OFF AGAINST PROFITS AND GAI NS OF ANY SPECULATION BUSINESS IN THE FOLLOWING ASSESSMENT YE ARS. THE EXPLANATION TO SECTION 73 INTRODUCES A LEGAL FICTIO N. THE SECTION APPLIES ONLY TO A COMPANY. IT DOES NOT APPLY TO IND IVIDUALS, FIRMS, HINDU UNDIVIDED FAMILIES OR ASSOCIATIONS OF PERSONS . THE EXPLANATION ALSO DOES NOT APPLY TO AN INVESTMENT COMPANY OR A C OMPANY WHOSE PRINCIPAL BUSINESS IS BANKING OR MONEY- LENDING. IF THE BUSINESS OF A COMPANY WHICH DOES NOT FALL WITHIN THE EXCLUDED CAT EGORIES CONSISTS OF PURCHASE AND SALE OF SHARES OF OTHER COMPANIES, THE N SUCH A COMPANY SHALL BE DEEMED TO BE CARRYING ON SPECULATION BUSIN ESS FOR THE PURPOSE OF SECTION 73 TO THE EXTENT TO WHICH THE BU SINESS CONSISTS OF THE PURCHASE AND SALE OF SUCH SHARES. THE PROVISIONS OF THE EXPLANATION TO SECTION 73 HAV E TO BE CONTRASTED WITH THE PROVISION OF SECTION 43(5), WHICH DEFINES SPECULATIVE TRANSACTION TO MEAN A TRANSACTION IN WHICH A CONTR ACT FOR THE PURCHASE OR SALE OF ANY COMMODITY, INCLUDING ANY ST OCKS AND SHARES, IS PERIODICALLY OR ULTIMATELY SETTLED OTHERWISE THA N BY THE ACTUAL DELIVERY OR TRANSFER OF THE COMMODITY OR SCRIPS. TH E EXPLANATION TO SECTION 73 TREATS ANY PURCHASE AND/OR SALE OF SHARE S BY CERTAIN COMPANIES TO BE SPECULATIVE FOR THE PURPOSE OF SECT ION 73 ONLY. FOR THE PURPOSE OF SETTING OFF AND CARRYING FORWARD OF LOSS, THE BUYING AND SELLING OF SHARES BY CERTAIN COMPANIES ARE REGARDED BY THE STATUTE AS SPECULATION BUSINESS, EVEN THOUGH THE TRANSACTION O F PURCHASE AND SALE WAS FOLLOWED UP BY DELIVERY OF SCRIPS AND AS S UCH CANNOT BE TREATED AS SPECULATIVE TRANSACTION AS DEFINED IN SECTION 43(5). THE OPENING WORDS OF THE EXPLANATION TO SECTION 73 ARE WHERE ANY PART OF THE BUSINESS OF A COMPANY. ANY IS A WORD WHICH E XCLUDES LIMITATION OR QUALIFICATION. A RESTRICTED MEANING S HOULD NOT BE GIVEN TO THE PHRASE ANY PART OF THE BUSINESS. THE OBJECT O F CIRCULAR NO. 204, DATED JULY 24, 1976, IS TO CURB DEVICES TO MANIPULA TE AND REDUCE THE TAXABLE INCOME OF A COMPANY UNDER THE MANAGEMENT OF A CONTROLLING 5 GROUP OF PERSONS. BUT THE CIRCULAR HAS CLEARLY STAT ED IN PARAGRAPH 19.1 THAT THE BUSINESS OF PURCHASE AND SALE OF SHA RES BY COMPANIES WHICH ARE NOT INVESTMENT OR BANKING COMPANIES OR CO MPANIES CARRYING ON BUSINESS OF GRANTING LOANS AND ADVANCES WILL BE TREATED ON THE SAME FOOTING AS SPECULATION BUSINESS. THE P HRASE IN THE EXPLANATION TO SECTION 73 TO THE EXTENT TO WHICH T HE BUSINESS CONSISTED OF PURCHASE AND SALE OF SUCH SHARES ALSO DOES NOT INDICATE THAT THE LEGISLATURE HAD SEVERAL OTHER ACTUAL AND E XISTING NON- SPECULATIVE ACTIVITIES OF BUSINESS IN MIND. IT MERE LY INDICATES THAT THE BUSINESS ACTIVITY WHICH CONSISTS OF PURCHASE AND SA LE OF SHARES WILL BE TREATED AS SPECULATION BUSINESS. IF THE ENTIRE BUSI NESS ACTIVITY OF A COMPANY CONSISTS OF PURCHASE AND SALE OF SHARES OF OTHER COMPANIES, THEN THE ENTIRE BUSINESS WILL BE TREATED AS SPECULA TION BUSINESS. BUT, IF, APART FROM PURCHASE AND SALE OF SHARES, THE COMPANY HAS OTHER BUSINESS ACTIVITIES, THEN THOSE OTHER ACTIVITIES WI LL NOT BE TREATED AS SPECULATION BUSINESS. HELD ACCORDINGLY, THAT THE EXPLANATION TO SECTION 7 3 APPLIED TO THE CASE OF THE ASSESSEE WHOSE ENTIRE BUSINESS CONSISTE D OF DEALING IN SHARES. THE LOSS INCURRED BY THE ASSESSEE WAS A SPE CULATION LOSS. 22.1. WE HAVE ALSO GONE THROUGH THE DECISION OF TH E CALCUTTA BENCH OF THIS TRIBUNAL IN THE CASE OF ITO V GDB SHARE & STOCK BROKING SERVICES LTD. [2004] 88 TTJ 3 52 (CAL) AS RELIED ON BY THE LEARNED AR. WE FIND THAT IN TH AT CASE THE TRIBUNAL ALLOWED THE SET OFF OF LOSS IN SH ARE TRADING AGAINST THE BROKERAGE INCOME AND TOOK THE VIEW THAT THE AO WAS NOT JUSTIFIED IN ATTRACTING EXPLANATION TO SEC. 73 AND HOLDING THAT THE LOSS OF RS.3.97 LACS WAS DEEMED TO BE THE SPECULATION LOSS. THE DECISION OF CALCUTTA HIGH COU RT IN THE CASE OF CIT V ARVIND INVESTMENTS LTD. (1991) 192 ITR 365 (CAL) HAS NOT BEEN CONSIDERED. EXPLANATION TO SECTION 73 INTRODUCES A LEGAL FICTION AND APPLIES TO A COMPANY SUBJECT TO EXCEPTIONS GIVEN THEREIN. THE BUSINESS OF THE AS SESSEE COMPANY DOES NOT FALL WITHIN THE EXCEPTIONS CATEGOR IZED. THE BUSINESS OF THE ASSESSEE CONSISTS OF TWO PARTS. TRADING IN SHARE ON ITS OWN ACCOUNT IS PART OF THE BUSINESS OF THE ASSESSEE WHILE PURCHASE AND SALE OF SHARES ON BEHAL F OF THE CLIENTS FOR EARNING BROKERAGE IS THE OTHER PART OF THE BUSINESS OR IN ANY OTHER WAY WE MAY SAY THAT BOTH A RE DIFFERENT SOURCES OF THE BUSINESS OF THE ASSESSEE. THE 6 HONBLE CALCUTTA HIGH COURT IN THE CASE OF CIT V ARVIND INVESTMENTS LTD. (1991) 192 ITR 365 (CAL) EVEN HAS HELD THAT PART WILL ALSO INCLUDE THE WHOLE. EVEN IF THE WHOLE BUSINESS ACTIVITY OF THE ASSESSEE CONSISTS OF PURCH ASE AND SALE OF SHARES, THE WHOLE ACTIVITY WILL BE TREATED AS A SPECULATION BUSINESS. IN THE CASE BEFORE US THE ASS ESSEE HAS TWO DIFFERENT SOURCES OF THE SHARE TRADING BUSINESS , ONE THE ASSESSEE IS ITSELF BUYING AND SELLING SHARES AND TH E OTHER THE ASSESSEE IS BUYING AND SELLING SHARES ON BEHALF OF THE CUSTOMERS ON WHICH THE ASSESSEE HAS EARNED THE BROK ERAGE. THEREFORE, TRADING IN SHARES BY THE ASSESSEE ON ITS ACCOUNT IS PART OF THE BUSINESS OF THE ASSESSEE COMPANY. TH EREFORE, IN OUR OPINION, EXPLANATION TO SECTION 73 IS CLEARL Y APPLICABLE. THE DECISION OF THE HONBLE CALCUTTA HI GH COURT IN THE CASE OF CIT V ARVIND INVESTMENTS LTD. (1991) 192 ITR 365 (CAL) HAS MORE BINDING FORCE THEN THE DECISION OF THE TRIBUNAL CALCUTTA BENCH (SUPRA) AS RELIED ON BY THE LEARNED AR AND HAS BEEN DECIDED WITHOUT CONSIDERING THE DECISION OF THE CALCUTTA HIGH COURT. WE ARE THEREFO RE OF THE VIEW THAT THE CIT(A) HAS RIGHTLY CONFIRMED THE ACTI ON OF THE AO AND ACCORDINGLY WE DISMISS GROUND NOS.1 AND 2 OF THE CROSS OBJECTION. RESPECTFULLY FOLLOWING THE AFORESAID DECISION, WE D ISMISS THE GROUND TAKEN BY THE ASSESSEE. 4 IN THE RESULT, THE ASSESSEES APPEAL IS DISMISSE D. ORDER PRONOUNCED IN THE OPEN COURT TODAY ON 25-09-2 009 SD/- SD/- (MAHAVIR SINGH) JUDICIAL MEMBER (P K BANSAL) ACCOUNTANT MEMBER DATE : 25-09-2009 7 COPY OF THE ORDER FORWARDED TO : 1. BONAFIDE SECURITIES LTD., 125, KAMDHENU COMPLEX, NR. POLYTECHNIQUE, AMBAWADI, AHMEDABAD 2. THE ACIT, CIRCLE-3, AHMEDABAD 3. CIT CONCERNED 4. CIT(A)-IX, AHMEDABAD 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER DEPUTY REGISTRAR ASSISTANT REGISTRAR ITAT, AHMEDABA