ADDL CIT , PALGHAR, MUMBAI V. DHANVANTI HEMCHAND GALA, THANE

ITA 4527/MUM/2009

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 62330 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 9 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-05-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 07-05-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 03-08-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: SANJAY R PARIKH
• Keywords: Business income; Transactions in derivatives; Speculation loss; Speculative transactions
• Section: 43(5)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI D BENCH MUMBAI BENCHES, MUMBAI BEFORE SHRI VIJAY PAL RAO, JM & SHRI BILLAYA, AM ITA NO. 4527 & 4528/MUM/2009 (ASSESSMENT YEAR 2005-06 & 06-07 ) THE ASST COMMR OF INCOME TAX PALGHAR MUMBAI VS DHANVANTI HEMCHAND GALA C/O BHARAT CHEMICALS L-30 MIDC TARAPUR BOISAR TAL PALGHAR, DIST THANE (APPELLANT ) (RESPONDENT) PAN NO. AFDPG 1928H ASSESSEE BY SH SANJAY R PARIKH REVENUE BY SH K R VASUDEVAN DT.OF HEARING 7 TH MAY 2012 DT OF PRONOUNCEMENT 11 TH , MAY 2012 ORDER PER VIJAY PAL RAO, JM THESE APPEALS BY THE REVENUE ARE DIRECTED AGAINST TWO SEPARATE ORDERS BOTH DATED 4.5.2009 OF THE COMMISSIONER OF INCOME T AX(APPEALS) FOR THE ASSESSMENT YEAR N2005-06 & 2006-07 RESPECTIVELY . 2 SINCE THE REVENUE HAS RAISED COMMON GROUNDS IN TH ESE APPEALS; THEREFORE, FOR THE SAKE OF CONVEYANCE, THE GROUNDS RAISED FOR THE AY 2005-06 ARE REPRODUCED HERE UNDER: 1. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN THE LAW, THE ID. CIT((A)-LL, THANE ERRED IN TREATING THE SHORT TERM CAPITAL GAIN ON SALE OF SHARES AND NOT AS INCOME FROM BUSINE SS & PROFESSION AS ASSESSED BY THE ASSESSING OFFICER. 2. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN THE LAW, THE ID. CIT((A)-LL, THANE ERRED IN TREATING THE DIVIDEND INCOME RECEIVED FROM PORTFOLIO MANAGEMENT SCHEME AND NOT AS INCOME FROM BUSINESS & PROFESSION AS ASSESSED BY THE ASSESSING OFFICER.. DHANVANTI HEMCHAND GALA ITA NO. 4527 & 4528/MUM/2009 2 3. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN TREATING THE LOSS FROM F & O AS BUSINESS LOSS AND NOT AS A SPECULATION LOSS. 4. THE APPELLANT PRAYS THAT THE ORDER OF THE ID COM MISSIONER OF INCOME TAX(APPEALS) BE CANCELLED AND THAT OF THE ASSESSIN G OFFICER BE RESTORED. 3 GROUND NOS 1 & 2 REGARDING SHORT TERM CAPITAL GAI NS TREATED AS INCOME FROM BUSINESS AND PROFESSION. 3.1 THE ASSESSEE HAS SHOWN SHORT TERM CAPITAL GAINS AS WELL AS LONG TERM CAPITAL GAINS. THE ASSESSING OFFICER TREATED THE SAME AS BUSINESS INCOME WHILE COMPLETING THE ASSESSMENT FOR THE YEARS UNDER CONSIDERATION. 3.1 ON APPEAL, THE CIT(A) HAS REVERSED THE ORDER O F THE ASSESSING OFFICER AND ALLOWED THE CLAIM OF THE ASSESSEE AS CAPITAL GAIN O N SALE AND PURCHASE OF SHARES. 4 WE HAVE HEARD THE LD DR AS WELL AS THE LD AR OF T HE ASSESSEE AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. AT THE OUTSET, WE NOTE THAT AN IDENTICAL ISSUE IN THE SIMILAR CIRCUMSTANCES HAS CONSIDERED AND DECIDED BY THE TRIBUNAL IN THE CASE OF THE FAMILY MEMBER OF THE ASSESSEE NAMELY HEMCHAND LALJI GALA IN ITA NOS.4525 AND 4526/MUM/2009 VIDE ORDER DATED 19 TH MARCH 2012. THE TRIBUNAL IN PARA 6 OF THE SAID ORDER HAS CONSIDERED AND DECIDED THE ISSUE AS UNDER : 6 WE HAVE CONSIDERED THE RIVAL CONTENTION AS WELL A S THE RELEVANT MATERIAL ON RECORD. THE ASSESSEE HAS THOUGH RELIED UP ON VARIOUS DECISIONS INCLUDING THE DECISION OF THE COORDINATE BENCH OF TH E TRIBUNAL. HOWEVER, IT IS SETTLED PROPOSITION OF LAW THAT IN THE MATTER OF DET ERMINING THE NATURE OF TRANSACTION IN PURCHASE AND SALE OF SHARES HAS TO BE DECIDED ON THE BASIS OF THE FACT OF EACH CASE AND THE PRECEDENT/RATIO OF TH E DECISION CAN BE APPLIED ONLY WHEN THE FACTS OF THE CASE ARE SIMILAR IN NATURE. THE ASSESSEE THOUGH PRODUCED SOME DETAILS BUT IN OUR VIEW, THE DET AILS ARE NOT COMPLETE TO DECIDE THE ISSUES BECAUSE THE ASSESSEE HAS NOT F URNISHED THE HOLDING PERIOD OF EACH TRANSACTION. IN THE ABSENCE OF HOLDIN G PERIOD DECIDING THE QUESTION OF NATURE OF TRANSACTION AS INVESTMENT OR TRA DING IS NOT POSSIBLE. THE DHANVANTI HEMCHAND GALA ITA NO. 4527 & 4528/MUM/2009 3 CIT(A) HAS ADJUDICATED THE ISSUE ONLY ON THE BASIS OF SOME PRINCIPLE WITHOUT GOING INTO THE FACTS OF THE CASE IN 5 TO 5.1 AS UND ER: 5. APPELLANT IS A CHEMICAL ENGINEER AND WORKING IN CA PACITY OF PARTNER IN M/S VALIANT CHEMICAL CORPORATION. APPELLANT IS PAR TNER IN FIRM, HE LOOKS AFTER DAY TO DAY BUSINESS ACTIVITY OF THE FIRM. 5.1 APPELLANT HAS MADE INVESTMENT IN SHARES SINCE L AST 25 YEARS. APPELLANT HAS MADE INVESTME3NT IN SHARES THROUGH POR TFOLIO MANAGERS UNDER VARIOUS SCHEME OF INVESTMENT. PMS IS ONLY INVE STMENT IN SHARES & SECURITIES WITH EXPERTISE KNOWLEDGE OF PORTFOLIO MAN AGERS. PMS IS JUST LIKE MUTUAL FUND WHEREAS MUTUAL FUND, HAS A SPECIF IC EXEMPTION FOR ITS INCOME U/S 10(23DS). HENCE SHORT TERM CAPITAL GAIN FROM PMS HAS TO BE TREATED AS SHORT TERM CAPITAL GAIN AND NOT AS BU SINESS INCOME. 6 IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CAS E, WE ARE OF THE CONSIDERED OPINION THAT THIS ISSUE REQUIRES PROPER EXAM INATION OF THE FACTS AT THE LEVEL OF THE ASSESSING OFFICER AND THE ASSESSEE IS DIRECTED TO FILE THE COMPLETE DETAILS INCLUDING THE HOLDING PERIOD OF EA CH AND EVERY TRANSACTION BEFORE THE ASSESSING OFFICER. ACCORDINGLY, THIS ISS UE IS REMANDED TO THE RECORD OF THE ASSESSING OFFICER FOR FRESH EXAMINATION AND VE RIFICATION OF THE FACTS AND THEN DECIDE THE SAME AS PER LAW. 5 ACCORDINGLY, FOLLOWING THE EARLIER ORDER OF THE T RIBUNAL, WE REMIT THIS ISSUE TO THE RECORD OF THE ASSESSING OFFICER FOR FRESH EXAMI NATION AND VERIFICATION OF THE FACTS AND DECIDE THE SAME AS PER LAW. 6 GROUND NO.3 IS REGARDING TREATING THE LOSS ARISIN G FROM FUTURE & OPTION (F&O) AS SPECULATION LOSS 7 WE NOTE THAT WHILE DECIDING THE APPEAL IN THE CA SE OF HEMCHAND LALJI GALA (SUPRA), THIS ISSUE WAS ALSO CONSIDERED BY THE TR IBUNAL IN PARA 8 AS UNDER: 8 WE HAVE CONSIDERED THE RIVAL CONTENTION AND RELEV ANT MATERIAL ON RECORD. AT THE OUTSET WE NOTE THAT THIS ISSUE IS DECI DED AGAINST THE ASSESSEE BY THE DECISION OF THE HONBLE JURISDICTIONAL HIGH C OURT IN THE CASE OF CIT VS BHARAT R RUIA (HUF) REPORTED IN 241 CTR 01 (BOM). THE HONBLE HIGH COURT HAS HELD IN PARA AS UNDER: 33. THUS, THE FUTURES CONTRACTS BEING ARTICLES OF TR ADE AND COMMERCE WHICH ARE LEGALLY PERMITTED TO BE TRADED ON THE STOCK EXCHANGE, THE TRANSACTIONS IN FUTURES WOULD BE TRANSACTIONS IN A C OMMODITY AS CONTEMPLATED UNDER S. 43(5) OF THE ACT. ORDINARILY A T RANSACTION IN A DHANVANTI HEMCHAND GALA ITA NO. 4527 & 4528/MUM/2009 4 COMMODITY RELATES TO PURCHASE/SALE OF AN ASSET WHICH IS TANGIBLE AND WHICH IS CAPABLE OF BEING DELIVERED. HOWEVER, S. 18 A OF THE 1956 ACT INSERTED W.E.F. 22ND FEB., 2000 PROVIDES THAT NOTWI THSTANDING ANYTHING CONTAINED IN ANY OTHER LAW FOR THE TIME BEING IN FOR CE, CONTRACTS IN DERIVATIVE (LIKE FUTURES CONTRACTS) SHALL BE LEGAL A ND VALID IF SUCH CONTRACTS ARE TRADED ON A RECOGNIZED STOCK EXCHANGE A ND SETTLED ON THE CLEARING HOUSE OF A RECOGNIZED STOCK EXCHANGE IN ACCORDANCE WITH THE RULES AND BYE-LAWS OF SUCH STOCK EXCHANGE. THUS, BY OPERATION OF LAW, THE TRANSACTIONS IN FUTURES ARE MADE LEGAL AN D VALID EVEN IF THE UNDERLYING SECURITIES PERMITTED TO BE PURCHASED/SOLD UNDER THE FUTURES CONTRACTS ARE NOT TANGIBLE AND INCAPABLE OF ACTUAL DE LIVERY, PROVIDED SUCH TRANSACTIONS ARE TRADED ON A RECOGNIZED STOCK E XCHANGE AND SETTLED ON THE CLEARING HOUSE OF A RECOGNIZED STOCK E XCHANGE. MOREOVER, S. 43(5) OF THE ACT PROVIDES THAT A TRANSA CTION FOR PURCHASE/SALE OF ANY COMMODITY WOULD BE A SPECULATIV E TRANSACTION IF IT IS SETTLED OTHERWISE THAN BY ACTUAL DELIVERY. FO R THE PURPOSES OF S. 43(5), IT IS NOT NECESSARY THAT THE COMMODITY AGREED TO BE PURCHASED OR SOLD MUST BE CAPABLE OF ACTUAL DELIVERY. THEREFOR E, FUTURES CONTRACTS FOR PURCHASE/SALE OF AN UNDERLYING SECURITY PERMITTED T O BE TRADED ON THE STOCK EXCHANGE AND SETTLED OTHERWISE THAN BY ACT UAL DELIVERY WOULD BE SPECULATIVE TRANSACTIONS UNDER S. 43(5) OF THE ACT. 34. IT IS CONTENDED THAT THE EXPRESSION COMMODITY DOES NOT INCLUDE STOCKS AND SHARES, HOWEVER, FOR THE PURPOSES OF S. 43(5), THE EXPRESSION COMMODITY HAS BEEN EXPANDED TO INCLUDE STOCKS AND SHARES AND SINCE TRANSACTIONS IN DERIVATIVES ARE NOT S PECIFICALLY INCLUDED IN S. 43(5), THE SAME WOULD FALL OUTSIDE T HE PURVIEW OF S. 43(5). WE SEE NO MERIT IN THE ABOVE CONTENTIONS. THE EXPRES SION COMMODITY WOULD COVER ALL ARTICLES OF TRADE INCLUDING STOCKS AND SHARES. EVEN UNDER S. 43(5), THE EXPRESSION COMMODITY IS NOT EXP ANDED TO INCLUDE STOCKS AND SHARES. IN FACT, USE OF COMMA IN BETW EEN THE WORD COMMODITY AND THE WORDS INCLUDING STOCKS AND SHARE S IN S. 43(5) MAKES IT CLEAR THAT TRANSACTIONS FOR PURCHASE OF ANY C OMMODITY WOULD INCLUDE TRANSACTION FOR PURCHASE OR SALE OF STOCKS AND SHARES. IN OTHER WORDS, S. 43(5) DOES NOT SEEK TO EXPAND THE SCOPE OF EXPRESSION COMMODITY BUT MERELY EMPHASIZES THAT THE TRANSACTI ON IN COMMODITY INCLUDES TRANSACTIONS IN STOCKS AND SHARES. THEREFORE , TRANSACTIONS IN FUTURES CONTRACTS LIKE TRANSACTIONS IN STOCKS AND SHA RES WHEN SETTLED OTHERWISE THAN BY ACTUAL DELIVERY WOULD BE SPECULAT IVE TRANSACTIONS UNDER S. 43(5) OF THE ACT. 39. IN THE RESULT, WE HOLD THAT THE EXCHANGE TRADED D ERIVATIVE TRANSACTIONS CARRIED ON BY THE ASSESSEE DURING ASST. YR. 2003-04 ARE SPECULATIVE TRANSACTIONS COVERED UNDER S. 43(5) OF THE ACT AND THE LOSS INCURRED IN THOSE TRANSACTIONS IS LIABLE TO BE TREATE D AS SPECULATIVE LOSS AND NOT BUSINESS LOSS. WE FURTHER HOLD THAT CL. (D) I NSERTED TO THE PROVISO TO S. 43(5) W.E.F. 1ST APRIL, 2006 IS PROSPECTIVE I N NATURE AND THE TRIBUNAL WAS IN ERROR IN HOLDING THAT CL. (D) TO THE PROVISO T O S. 43 (5) APPLIED RETROSPECTIVELY SO AS TO APPLY TO THE TRANSACTIONS CA RRIED ON BY THE ASSESSEE DURING ASST. YR. 2003-04. DHANVANTI HEMCHAND GALA ITA NO. 4527 & 4528/MUM/2009 5 7.1 HOWEVER, THE LD AR OF THE ASSESSEE HAS SUBMITT ED THAT WHILE DECIDING THIS ISSUE, THE TRIBUNAL IN THE SAID CASE HAS NOT CONSID ERED THE FACT THAT THE AMENDMENT IN SEC 43(5) W.E.F 1.4.2006. THEREFORE, EVEN BY FOL LOWING THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS BHA RAT R RUIA (HUF) REPORTED IN 241 CTR 01 (BOM), THE F&O TRANSACTION DONE IN THE RECOGNISE D STOCK EXCHANGE CANNOT BE TREATED AS SPECULATION TRANSACTION. 8 WE NOTE THAT IN PARA 39 OF THE SAID ORDER OF THE HONBLE JURISDICTIONAL HIGH COURT HAS SPECIFICALLY OBSERVED THAT THE AMENDMENT IS PROSPECTIVE AND NOT RETROSPECTIVE AND THEREFORE, IT WAS HELD THAT IT IS NOT APPLICABLE FOR THE ASSESSMENT YEAR 2003-04. 8.1 IN VIEW OF THESE FACTS AND CIRCUMSTANCES, WE AR E OF THE VIEW THAT UNDER THE AMENDMENT PROVISIONS OF SEC. 43(5), THE F&O TRANSAC TIONS CARRIED OUT THROUGH THE RECOGNISED EXCHANGE WILL NOT BE TREATED AS SPECULAT ION. THE GOVERNMENT HAS NOTIFIED THE RECOGNISED STOCK EXCHANGE VIDE GO 89( E), DATED 25 TH JAN 2006. THEREFORE, ANY F&O TRANSACTION CARRIED OUT AFTER 25 .1.2006 WOULD BE COVERED BY THE AMENDED PROVISION OF SEC. 43(5) OF THE I T ACT. 9 IN THE RESULT, THE APPEALS FILED BY THE REVENUE A RE PARTLY ALLOWED. ORDER PRONOUNCED ON THIS 11 TH , DAY OF MAY 2012 SD/ - SD/- ( N K BILLAYA ) ACCOUNTANT MEMBER ( VIJAY PAL RAO ) JUDICIAL MEMBER PLACE: MUMBAI : DATED: 11 TH , MAY 2012 RAJ* DHANVANTI HEMCHAND GALA ITA NO. 4527 & 4528/MUM/2009 6 COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR, ITAT, MUMBAI