RAJEN C. SHETH, MUMBAI V. C.I.T.(A) IV, MUMBAI

ITA 4731/MUM/2008

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 8687 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 6 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-01-2011
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 11-03-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 17-07-2008
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: JI TENDRA YADAV
• Assessee Lawyers: FAROOKH IRANI
• Keywords: Transactions in derivatives; Speculation loss

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH D, MUMBAI BEFORE SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER AND SHRI. V. DURGA RAO,JUDICIAL MEMBER. I.T.A. NO. 4731/MUM/2008. ASSESSMENT YEAR : 2004-05. M/S RAJEN C. SHETH, THE INCOME-TAX OFFICER, C/O RAJEN CHANDRAKANT, VS. 4(2)(1), MUMBAI. 47, TAMRIND LANE, FORT, MUMBAI 400 001. PAN ABWPS 4554Q APPELLANT. RESPONDENT. I.T.A. NOS. 4565/MUM/2008 ASSESS MENT YEAR : 2004-05 AND I.T.A.N O.4229/MUM/2009. ASSESSM ENT YEAR : 2006-07. ASSTT./DY. COMMISSIONER OF SHRI RAJEN C. SHETH, INCOME-TAX-4(2), MUMBAI. VS. MUMBAI. APPELLANT. RESPONDENT. ASSESSEE BY : SHRI FAROOKH IRANI. DEPARTMENT BY : SHRI JITENDRA YADAV. O R D E R PER J. SUDHAKAR REDDY, A.M. : THESE ARE CROSS APPEALS FOR THE ASSESSMENT YEAR 20 04-05 AND A REVENUE APPEAL FOR THE ASSESSMENT YEAR 2006-07 AND ARE DIRE CTED AGAINST THE ORDER OF THE CIT(APPEALS)-IV, MUMBAI DATED 24-04-2008 FOR THE AS SESSMENT YEAR 2004-05 AND THE ORDER OF THE CIT(APPEALS)-IV, MUMBAI DATED 29- 04-2009 FOR THE ASSESSMENT 2 YEAR 2006-07. AS ALL THE APPEALS PERTAIN TO THE SAM E ASSESSEE, FOR THE SAKE OF CONVENIENCE THEY ARE HEARD TOGETHER AND DISPOSED OF BY WAY OF THIS COMMON ORDER. 2. FACTS IN BRIEF : THE ASSESSEE IS AN INDIVIDUAL AND IS A SHARE BROKE R. HE IS A MEMBER OF THE BOMBAY STOCK EXCHANGE. WE FIRST TAKE THE CROSS APPE ALS FOR THE ASSESSMENT YEAR 2004-05. 3. SHRI FAROOKH IRANI, THE LEARNED COUNSEL FOR THE ASSESSEE, SUBMITTED THAT THE ASSESSEE DOES NOT PRESS ITS APPEAL IN ITA NO. 4731/ MUM/2008 FOR THE ASSESSMENT YEAR 2004-05 WHICH IS ON THE ISSUE OF DISALLOWANCE U/S 14A. THE LEARNED DR HAS NO OBJECTION FOR THE SAME. IN VIEW OF THE ABOVE SUB MISSIONS, WE DISMISS THE APPEAL OF THE ASSESSEEIN ITA NO. 4731/MUM/2008 FOR THE ASS ESSMENT YEAR 2004-05 AS NOT PRESSED. 4. COMING TO THE REVENUE APPEAL IN ITA NO. 4665/MUM /2008, THE GROUNDS ARE AS FOLLOWS : 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LD. CIT(A) ERRED IN IGNORING THE DECISION OF JURISDICTIONAL IT AT IN THE CASE OF VIMAL B. SHAH WHEREIN THE DISALLOWANCE OF PENALTY H AS BEEN UPHELD BY THE TRIBUNAL. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS.6,06,822/- ON ACCOUNT OF SPECULATION LOSS AND ESTIMATED EXPENSES INCURRED FO R THE SAME OF RS.93,191/- OVERLOOKING THE FACT THAT THE EXPLANATO RY NOTES TO THE FINANCE ACT, 2005 CLEARLY STATED THAT TRANSACTIONS IN DERIVATIVES SHALL SEIZE TO BE SPECULATIVE ONLY FROM THE DAY THE STOCK EXCHANGES FULFILL THE CONDITIONS TO BE PRESCRIBED BY THE CENTRAL GOVT . AND IT WAS ONLY W.E.F. 25 TH JANUARY, 2006 THAT THE NOTIFICATION TO THAT EFFECT WAS ISSUED. 3 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LD. CIT(A) HAS ERRED IN DIRECTING THE AO TO VERIFY THE DISALLO WANCE AS PER CBDT NOTIFICATION NO. 45/2008 DATED 24.03.08 WITHOUT APP RECIATING THE FACT THAT THE PROVISION OF THE SAID NOTIFICATION ARE APP LICABLE ONLY W.E.F. 24.03.08 AND DOES NOT APPLY TO THE ASSESSMENT YEAR UNDER CONSIDERATION. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE IMPUGNED ORDER OF THE LD. CIT(A) IS CONTRARY TO LAW AND CONSEQUENTLY ON MERITS TO BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED. 5. WE HAVE HEARD MR. JITENDRA YADAV, THE LEARNED DR , AND SHRI FAROOKH IRANI, LEARNED COUNSEL FOR THE ASSESSEE. 6. ON A CAREFUL CONSIDERATION OF THE FACTS AND CIRC UMSTANCES OF THE CASE AND A PERUSAL OF THE PAPERS ON RECORD AND THE ORDERS OF THE AUTHORITIES BELOW, WE HOLD AS FOLLOWS. 7. GROUND NO. 1 IS AGAINST THE DELETION OF PENALTY BY THE CIT(APPEALS) AMOUNTING TO RS.25,000/-. THE FACTS ARE THAT THE BO MBAY STOCK EXCHANGE HAS LEVIED A PENALTY OF RS.25,000/- ON THE ASSESSEE FOR CARRYING OUT MODIFICATION IN CLIENTS CODES. THE PENALTY WAS ADMITTEDLY LEVIED, WHEN THE ASSESSEE SEEKS RECTIFICATION OR CORRECTION OF THE CLIENTS CODES F OR REASONS THAT MAY BE WRONG FEEDING OF CLIENTS CODE ETC. SUCH MODIFICATION OF CLIENTS CODES IS A ROUTINE MATTER AND PENALTY LEVIED FOR THE SAME CANNOT BE CONSIDERE D AS ONE WHICH IS LEVIED FOR INFRINGEMENT OF LAW. THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE BY THE DECISION OF THE CHANDIGARH A-BENCH O F THE TRIBUNAL IN THE CASE OF MASTER CAPITAL SERVICES LTD. VS. DCIT (2008) 23 SOT 60 (CHD.) (URO). RESPECTFULLY FOLLOWING THE SAME, WE DISMISS THIS GR OUND OF THE REVENUE. 4 8. GROUND NOS. 2 AND 3 ARE ON ACCOUNT OF DELETION O F ADDITION OF RS.6,06,822/- ON ACCOUNT OF SPECULATION LOSS. THE LEARNED DR SUBM ITTED THAT THE LOSS IN QUESTION IS NEITHER JOBBING NOR ARBITRAGE AND HENCE IS NOT COVERED U/S 43(5)(C). THUS HE SUBMITS THAT THE TRANSACTIONS FALL CLEARLY U/S 43(5 )(D) AND HENCE THE JUDGMENT OF THE SPECIAL BENCH OF THE KOLKATTA TRIBUNAL IN THE CASE OF SHREE CAPITAL SERVICES LTD. VS. ACIT 121 ITD 498 (KOL.)(SB) IS APPLICABLE. HE FURTHER SUBMITTED THAT THE EXPENDITURE ATTRIBUTABLE TO SPECULATION INCOME WAS ESTIMATED AT RS.93,191/-, BEING 2% OF EXPENSES AND THIS HAS ALSO BEEN RIGHTLY DISAL LOWED BY THE AO. THUS THE LEARNED DR SUBMITTED THAT THE ORDER OF THE FIRST AP PELLATE AUTHORITY ON THE ISSUE HAS TO BE REVERSED AND GROUND NOS. 2 AND 3 ARE TO BE AL LOWED. 9. THE LEARNED COUNSEL FOR THE ASSESSEE FAIRLY ADMI TTED THAT THE ISSUE NOW STANDS COVERED AGAINST THE ASSESSEE BY THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF SHREE CAPITAL SERVICES LTD . (SUPRA). IN VIEW OF THE ABOVE SUBMISSIONS, WE RESPECTFULLY FOLLOW THE JUDGMENT OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF SHREE CAPITAL SERVICSS LTD. 121 ITD 498 AND ALLOW GROUND NOS. 2 AND 3 OF THE REVENUE. 10. THE FACT THAT THE SPECULATION LOSS IN QUESTION DOES NOT ARISE OUT OF JOBBING OR ARBITRAGE TRANSACTION, IS CLEAR FROM PAGES 5 AND 6 OF THE ASSESSMENT ORDER. 11. IN THE RESULT, GROUND NO. 2 AND 3 OF THE REVENU E ARE ALLOWED. 12. GROUND NO. 4 AND 5 ARE GENERAL IN NATURE. 13. IN THE RESULT, THE APPEAL OF THE REVENUE IS ALL OWED IN PART. 14. ITA NO. 4229/MUM/2009 IS A REVENUE APPEAL FOR T HE ASSESSMENT YEAR 2006- 07 AND IT IS ON THE FOLLOWING GROUNDS : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) ERRED IN DELETING PENALTY OF RS.30,000/- LEV IED ON ACCOUNT OF SHORT MARGIN. 5 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LA, THE LD. CIT(A) ERRED IN DIRECTING TO TREAT THE LOSS OF RS.1 7,59,268/- AS BUSINESS LOSS AGAINST SPECULATION LOSS HELD BY THE A.O. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE IMPUGNED ORDER OF THE LD. CIT(A) IS CONTRARY TO LAW AND CONSEQUENT LY MERITS TO BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED . 15. GROUND NOS. 1 AND 2 ARE ON THE ISSUE OF CIT(APP EALS) DELETING THE ADDITION MADE BY THE AO BEING PENALTY LEVIED BY THE STOCK EX CHANGE ON SHORT MARGINS. THE ISSUE STANDS COVERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE BY THE DECISION OF THE CHANDIGARH A-BENCH OF THE TRIBUNAL IN THE CASE OF MASTER CAPITAL SERVICES LTD. VS. DCIT (2008) 23 SOT 60 (CHD.) (URO ) AND ITO VS. VRM SHARE BROKING (P) LTD. 27 SOT 469 (MUM.). NO DISALLOWANCE CAN BE MADE AS THERE IS NO INFRINGEMENT OF LAW. THUS GROUND NO.1 & 2 ARE DISMI SSED. 16. ON GROUND NO. 2, THE LEARNED DR, MR. JITENDRA Y ADAV, SUBMITTED THAT THE TRANSACTIONS IN THIS CASE, ARE DERIVATIVES AND ARE HEDGING TRANSACTIONS. WHILE SUBMITTING THAT THE PAPERS FILED BY THE ASSESSEE BY WAY OF A PAPER BOOK ARE NOT BEFORE THE LOWER AUTHORITIES AND HENCE COULD NOT BE REFERRED TO, MR. YADAV DREW THE ATTENTION OF THE BENCH TO PARA 5 PAGE 6 OF THE ORDER OF THE AO AND SUBMITTED THAT THE LOSS IN QUESTION WAS ON ACCOUNT OF JOBBING , ARBITRAGE, HEDGING LOSSES. HE FURTHER REFERRED TO SECTION 43 SUB-SECTION (5) CLAU SE (C) AND SUBMITTED THAT, THE SAME IS ATTRACTED ONLY WHEN A CONTRACT IS ENTERED I NTO, TO GUARD AGAINST LOSS, WHICH MAY ARISE IN THE ORDINARY COURSE OF BUSINESS. HE RE FERRED TO THE PAPER BOOK FILED BY THE ASSESSEE AND SUBMITTED THAT THE ASSESSEE HAS NO T ABLE TO ESTABLISH DURING THE COURSE OF ASSESSMENT PROCEEDINGS, AS TO HOW TRANSAC TIONS HELPED HIM TO GUARD AGAINST LOSS. HE POINTED OUT THAT THE ASSESSEE HIMS ELF IN HIS REPLY BEFORE THE AO WHICH IS EXTRACTED AT PARA 5.2 PAGE 6 AND 7 OF THE ASSESSMENT ORDER, THAT THE LOSS IS ON ACCOUNT OF JOBBING/HEDGING/ARBITRAGE. THUS HE CO NTENDS THAT THE LOSS IN QUESTION 6 DOES NOT FALL WITHIN THE AMBIT OF SECTION 43(5)(C) BUT HAS TO BE CONSIDERED U/S 43(5)(D) OF THE ACT. REFERRING TO THE CIT(APPEALS) ORDER, HE FOUND FAULT WITH THE FINDING THAT THE LOSSES IN 4 SCRIPTS CONSTITUTE 98 .7% OF THE TOTAL LOSS AND THAT THE PURCHASES AND SALE TRANSACTIONS IN THESE 4 SCRIPTS CONSTITUTE 95.3% AND 95% RESPECTIVELY AND DISPUTED THE FINDING THAT THESE TR ANSACTIONS ARE TO BE CONSIDERED AS THAT WHICH ARE UNDERTAKEN IN THE ORDINARY COURSE OF BUSINESS. 17. THE LEARNED COUNSEL FOR THE ASSESSEE, MR. FAROO KH IRANI, ON THE OTHER HAND, SUBMITTED THAT SECTION 43(5)(C) DEALS WITH ONLY JOB BING AND ARBITRAGE AND DOES NOT DEAL WITH HEDGING. HE POINTED OUT THAT THE ASSESSEE HAS ALSO ENTERED INTO FUTURE OPTION TRANSACTIONS AND THIS RESULTED IN A PROFIT O F RS.486/- AND WHEREAS THE JOBBING LOSSES WERE RS.17,59,268/- AND WHAT WAS CLAIMED WAS ONLY JOBBING LOSSES. HE TOOK THIS BENCH THROUGH THE DEFINITION OF JOBBING LOSSES AND ALSO POINTED OUT THAT SEBI HAD APPOINTED AN EXPERT COMMITTEE FOR INTERPRETATIO N OF TURNOVER UNDER THE CHAIRMANSHIP OF SHRI R.S. BHAT AND THE COMMITTEE RE COMMENDED THAT ALL TRANSACTIONS WHICH ARE SQUARED OF, DURING THE SAME DAY AND WHICH HAVE NOT BEEN UNDERTAKEN BY THE BROKER ON BEHALF OF THE CLIENTS, SHOULD BE CLASSIFIED AS JOBBING TRANSACTIONS. HE POINTED OUT THAT THE SUPREME COURT VIDE JUDGMENT DATED 01-02- 2001, DIRECTED SEBI TO ACCEPT THE MEANING AND DEFIN ITION OF JOBBING AS GIVEN BY THE EXPERT COMMITTEE REPORT HEADED BY SHRI R.S. BHA T. HE TOOK THIS BENCH THROUGH PAPER BOOK SPECIFICALLY PAGE 9 ONWARDS AND SUBMITTE D THAT THE SQUARED UP TRANSACTION WAS DONE TO MINIMIZE LOSSES AND SUCH AC TION OF SQUARING UP IS ONE WHICH IS UNDERTAKEN TO SAFEGUARD ANY LOSS THAT MAY OCCUR. HE RELIED ON THE ORDER OF THE CIT(APPEALS). 18. RIVAL CONTENTIONS HEARD. THE ASSESSEE IN THIS C ASE HAS ENTERED INTO BOTH FUTURE AND OPTION TRANSACTIONS AS WELL AS JOBBING TRANSACTIONS. IN FUTURE AND OPTIONS THE ASSESSEE HAS EARNED A PROFIT OF RS.486/ -. IN THE JOBBING TRANSACTIONS THE 7 ASSESSEE HAS INCURRED A NET LOSS OF RS.17,95,527/-. THE ASSESSEE MAINLY DEALT IN 4 SCRIPT I.E. WHIRL POOL, VIJAYA BANK, TINPLATE AND L ANCO INDUSTRIES. IN FACT EVEN IN THE DELIVERY BASED TRANSACTIONS, THE ASSESSEE MAINL Y CONCENTRATED ON THESE 4 SCRIPTS. THE LOSS IN QUESTION PERTAINS TO JOBBING TRANSACTIO NS. THE FIRST APPELLATE AUTHORITY HAS, IN OUR CONSIDERED OPINION, RIGHTLY ARRIVED AT A CONCLUSION, BASED ON THE MATERIAL BEFORE HIM, THAT THE TRANSACTIONS IN QUEST ION ARE JOBBING TRANSACTIONS, AS FAR AS THE LOSS OF RS.17,59,527/- IS CONCERNED AND FALL U/S 43(5)(C) OF THE ACT AND HENCE NOT SPECULATION TRANSACTION. AT PARA 3.6 PAGE 8, THE FIRST APPELLATE AUTHORITY HELD AS FOLLOWS : 3.6 IT IS SEEN THAT THE APPELLANT HAS BEEN TRADING EXTENSIVELY IN THE 4 SCRIPTS OF WHIRL POOL, VIJAYA BANK, TINPLATE AND LA NCO INDUSTRIES AND PROFIT FOR THE PERIOD 2002-03 TO 2007-08 IS AT RS.2.87 CRO RES AND LOSS IN TRADING IS RS.55.14 LAKHS AND THE LOSS OF JOBBING IN THE 4 SCR IPTS IS AT RS.83.57 LAKHS. THROUGH DETAILED SUBMISSION AND ANALYSIS, THE APPEL LANT HAS DEMONSTRATED THAT THE JOBBING ACTIVITY WAS CARRIED OUT TO GUARD AGAINST THE LOSS WHICH MAY ARISE IN THE ORDINARY COURSE OF BUSINESS. THUS, THE JOBBING ACTIVITY OF THE APPELLANT FALLS WITHIN SECTION 43(5)(C) AND THE LOS S OF RS.17,59,268/- IS, THEREFORE, NOT A SPECULATION LOSS. THE A.O. IS DIRE CTED TO TREAT THE LOSS OF RS.17,59,268/- AS BUSINESS LOSS. GROUND NO. 3 IS AL LOWED.. WE AGREE WITH HIS FINDING AND DISMISS GROUND NO. 2 OF THE REVENUE. 19. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH JANUARY , 2011. SD/- SD/- (V. DURGA RAO)) (J. SUDHAK AR REDDY) JUDICIAL MEMBER. A CCOUNTANT MEMBER MUMBAI, DATED: 28 TH JANUARY, 2011. 8 WAKODE COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, D-BENCH (TRUE COPY) BY ORDER ASSTT. REGISTRA R, ITAT, MUMBAI BENCHES, MUMBAI.