ANUP BAGCHI, MUMBAI V. ADDL CIT CIR 26(1), MUMBAI

ITA 4983/MUM/2010

• Counselvise Citation: 498319914 RSA 2010
• Duration Of Justice: 1 year(s) 7 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-01-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 22-11-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 15-06-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: P K B MENON
• Assessee Lawyers: SANTOSH PARAB
• Keywords: Capital asset; Business income; Transactions in derivatives; Speculative transactions

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH: MUMBAI BEFORE SHRI G.E. VEERABHADRAPPA, PRESIDENT AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER ITA NO.4983/MUM/2010 (ASSESSMENT YEAR: 2007-08) ANUP BAGCHI, A-801, EL DARADO HEIGHTS, KASHINATH DHURU ROAD, PRABHADEVI, MUMBAI -400 025 ...... APPELLANT VS ADDL. COMMISSIONER OF INCOME-TAX, CIRCLE -26(1), CHARNI ROAD, MUMBAI -400 025 ..... RESPONDENT PAN: AAAPB 6317 P APPELLANT BY: SHRI SANTOSH PARAB RESPONDENT BY: SHRI P.K.B. MENON DATE OF HEARING: 22.11.2011 DATE OF PRONOUNCEMENT: 25.01.2012 O R D E R PER R.S. PADVEKAR, JM THIS APPEAL IS FILED BY THE ASSESSEE CHALLENGING TH E IMPUGNED ORDER OF THE LD. CIT (A)-28, MUMBAI FOR THE A.Y. 20 07-08 DATED 31.03.2010. THE ASSESSEE HAS TAKEN THE FOLLOWING E FFECTIVE GROUND IN THE APPEAL: THE LEARNED CIT (A) ERRED IN CONFIRMING THE ACTIO N OF THE ASSESSING OFFICER OF TREATING THE SHORT TERM CAPITA L GAINS EARNED ON DERIVATIVE TRANSACTIONS AMOUNTING TO RS 64,33,875 AS BUSINESS INCOME. HE OUGHT TO HAVE APPRECIATED THE FACTS THAT THE ASSESSEE HAD NOT UND ERTAKEN ANY BUSINESS ACTIVITY AND THE TRANSACTIONS MADE WER E PURELY IN THE NATURE OF INVESTMENTS. ITA 4983/MUM/2010 ANUP BAGCHI 2 2. THE FACTS PERTAINING TO THE ISSUE IN CONTROVERSY ARE AS UNDER. THE ASSESSEE IS AN EMPLOYEE IN ICICI BANK LTD. THE ASSESSEE FILED THE RETURN OF INCOME DECLARING THE SHORT-TERM CAPITAL G AINS ON THE SHARE TRANSACTIONS WHICH WERE MAINLY ON ACCOUNT OF STOCK OF OPTION SHARES OF ICICI BANK LTD. IN WHICH THE ASSESSEE IS WORKING . THE ASSESSEE ALSO EARNS RS.64,33,875/- FROM THE DERIVATIVE TRANSACTIONS FROM THE STOCK MARKET. THE ASSESSEE CLAIMED THE SAID AMOUNT AS SHORT-TERM CAPITAL GAINS. THE ASSESSEE CONTENDED THAT DUE TO THE AMENDMENT OF SUB-SEC. (5) OF SEC.43 FROM THE A.Y. 2006-07, THE DERIVATIVE TRANSACTIONS ARE NO MORE SPECULATIVE TRANSACTIONS A ND HENCE, THE PROFIT/GAIN FROM SAID TRANSACTIONS SHOULD BE TREATE D AS SHORT-TERM CAPITAL GAINS. THE ASSESSEE RELIED ON THE CBDT CIR CULAR NO.4 OF 2007 FOR THE PROPOSITION THAT THE ASSESSEE IS PERMITTED TO MAINTAIN DIFFERENT PORTFOLIOS. THE A.O. TREATED THE PROFIT DERIVED FR OM THE DERIVATIVE TRANSACTIONS AS A BUSINESS INCOME AND BROUGHT TO TA X. 3. THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT (A) BY TAKING THE DIFFERENT CONTENTIONS BUT WITHOUT SUCCESS. THE LD. CIT (A) WAS OF THE OPINION THAT THE DERIVATIVES TRANSACTIONS INDUL GE BY THE ASSESSEE ARE IN VERY LARGE NUMBER AND THE ASSESSEE IS VERY W ELL ENGAGED IN THE BUSINESS OF SHARES & STOCKS. SO FAR AS DERIVATIVE TRANSACTIONS ARE CONCERNED, IT CANNOT BE SAID THAT THE ASSESSEE ENGA GED IN THE DERIVATIVE TRANSACTIONS WITH THE INTENTION TO EARN A DIVIDEND. THE LD. CIT (A) RELIED ON THE FOLLOWING PRECEDENTS AND HELD THAT THE ASSESSEE IS ENGAGED IN THE ADVENTURE IN THE NATURE OF TRADE S O FAR AS DERIVATIVE TRANSACTIONS ARE CONCERNED AND THE A.O. WAS JUSTIFI ED IN ASSESSING THE WHOLE INCOME FROM DERIVATIVE TRANSACTION AS INCOME FROM THE BUSINESS. THE LD. CIT (A) HAS RELIED ON THE FOLLO WING PRECEDENTS: (I) RAJA BAHADUR KAMAKHYA NARAIN SINGH VS. CIT -77 ITR 253 (SC) (II) AMIRTHAM AMMAL VS. CIT -74 ITR 739 (M AD.) (III) CIT VS. S.P. BALASUBRAMANIAM -250 ITR 127 (MAD) (IV) RAJPUTANA TEXTILE (AGENCIES) LTD. VS. CIT -24 ITR 46 (BOM) (V) ITO VS. RANI RATNESH KUMARI -123 ITR 3 43 (ALL) (VI) CIT VS. NARASIMHA REDDYM -1 50 IR 347 (KAR) ITA 4983/MUM/2010 ANUP BAGCHI 3 NOW, THE ASSESSEE IS IN APPEAL BEFORE US. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS OF THE PARTI ES AND PERUSED THE RECORDS. THE CONTROVERSY RAISED BEFORE US IS I N A NARROW COMPASS. THE LD. COUNSEL REITERATED THE ARGUMENTS WHICH WERE MADE BEFORE THE AUTHORITIES BELOW. SUM AND SUBSTANCE OF THE ARGUME NT OF THE LD. COUNSEL IS THAT THE ASSESSEE HAS DEALT IN THE DERI VATIVE TRANSACTIONS AND ACQUIRED RIGHT IN DERIVATIVE CONTRACT AND SAID RIGHTS PARTAKE CHARACTER OF A CAPITAL ASSET WITHIN THE MEANING OF SEC.2(14) AS THE DEFINITION OF CAPITAL ASSET IS VERY MUCH WIDE ENO UGH TO COVER RIGHT IN ANY FORM OR CHARACTER. SECONDLY, HE ARGUES THAT, O THERWISE ALSO THE ASSESSEE IS WORKING WITH THE ICICI BANK LTD. AND IT CANNOT BE SAID THAT HE HAS ALSO INDULGED INTO THE ORGANISE TRADING IN THE SHARES. IN THE PRESENT CASE, THE A.O. HAS ACCEPTED THE SHORT-T ERM CAPITAL GAINS DECLARED BY THE ASSESSEE ON ITS INVESTMENT. THE SH ORT-TERM CAPITAL GAINS ARE IN RESPECT OF THE SALE OF THE STOCK OPTIO NS SHARES OF ICICI BANK LTD. 5. THERE IS NO DISPUTE ABOUT THE FACT THAT THE ASS ESSEE HAS EARNED THE PROFIT OF RS.64,33,875/- FROM THE TRADING IN TH E DERIVATIVE TRANSACTIONS. THE TERM DERIVATIVE INDICATES THAT IT HAS NO INDEPENDENT VALUE I.E. ITS VALUE ENTIRELY DERIVED F ROM THE VALUE OF THE UNDERLYING ASSETS. THE UNDERLYING ASSETS CAN BE SE CURITIES, COMMODITIES, BULLION, CURRENCY, LIVE STOCK OR ANYTH ING ELSE. IN OTHER WORDS, DERIVATIVE MEANS FORWARD, FUTURE, OPTION O R ANY OTHER HYBRID CONTRACT OF PRE-DETERMINED, FIXED DURATION, LINK FO R THE PURPOSE OF CONTRACT FULFILMENT TO THE VALUE OF SPECIFIED, REAL OR FINANCIAL ASSET TO AN INDEX OF SECURITIES. THE TERM DERIVATIVE HAS BEEN DEFINED IN SECURITIES CONTRACT (REGULATION ACT). AS PER THE D EFINITION DERIVATIVE INCLUDES A SECURITY DERIVED FROM A DEBT INSTRUMENT, SHARE, LOAN WHETHER SECURED OR UNSECURED, RISK INSTRUMENT OR CO NTRACT OF DIFFERENCES OR ANY OTHER FORM OF SECURITY AND ALSO CONTRACT WHICH ITA 4983/MUM/2010 ANUP BAGCHI 4 DERIVES ITS VALUE FROM THE PRICES OR INDEX OF PRICE S OF THE UNDERLYING SECURITIES. FUTURE CONTRACT MEANS A LEGALLY BINDIN G AGREEMENT TO BUY AND SELL THE UNDERLYING SECURITY ON A FUTURE DATE. FUTURE CONTRACTS ARE THE ORGANISE CONTRACTS IN TERMS OF QUANTITY, Q UALITY (IN CASE OF COMMODITIES), DELIVERY, TIME AND PLACE OF SETTLEMEN T ON ANY DATE IN FUTURE. THE CONTRACT EXPIRES ON A PRE-SPECIFIED DA TE WHICH IS CALLED THE EXPIRY DATE OF THE CONTRACT. ON EXPIRY, FUTUR ES CAN BE SETTLED BY DELIVERY OF THE UNDERLYING ASSET OR CASH. SO FAR A S OPTION CONTRACT IS CONCERNED, WHICH IS A TYPE OF DERIVATIVE CONTRACT, GIVES THE BUYER/HOLDERS OF THE CONTRACTS THE RIGHT, BUT NOT T HE OBLIGATION TO BUY /SELL THE UNDERLYING ASSET AT A PRE-DETERMINED PRIC E WITHIN OR AT THE END OF THE SPECIFIED PERIOD. THE BUYER OF THE OPT ION PURCHASES A RIGHT FROM THE SELLER FOR A CONSIDERATION WHICH IS CALLED A PREMIUM. AN OPTION TO BUY IS CALLED A CALL OPTION AND OPTION TO SELL IS CALLED PUT OPTION. AS IN THE CASE OF FUTURE CONTRACTS, OPTI ON CONTRACTS CAN ALSO BE SETTLED BY DELIVERY OF THE UNDERLYING ASSET OR C ASH. HOWEVER, UNLIKE FUTURE CASH SETTLEMENT IN THE OPTION CONTRACT ENTAI LS DOING/ RECEIVING THE DIFFERENCE BETWEEN THE STRIKE PRICE / EXERCISE PRICE AND THE PRICE OF THE UNDERLYING ASSET EITHER AT THE TIME OF THE EXPI RY OF THE CONTRACT OR AT THE TIME OF EXERCISES / ASSIGNMENT OF THE OPTION CONTRACT. THE DERIVATIVE PLAYS A VITAL ROLE IN RISK MANAGEMENT OF BOTH FINANCIAL AND NON-FINANCIAL INSTITUTION. IN SUM AND SUBSTANCE, T HE TERM DERIVATIVE INDICATES THAT IT HAS NO INDEPENDENT VALUE I.E. ITS VALUE IS ENTIRELY DERIVED FROM THE VALUE OF THE UNDERLYING ASSETS. TH E DERIVATIVE TRANSACTIONS IS HAVING TRAPPING OF THE BUSINESS. 6. IN THE PRESENT CASE, THOUGH IT IS CLAIMED THAT T HE ASSESSEE HAS NO ORGANISED ACTIVITY BUT THE FACT REMAINED THAT TH E DERIVATIVE TRANSACTION ITSELF HAS A TRAPPING OF THE BUSINESS. IN OUR OPINION, THOUGH THE ASSESSEE HAS NO BIG INFRASTRUCTURE TO DO THE DERIVATIVE TRANSACTIONS, BUT, AT THE SAME TIME, AS RIGHTLY HEL D BY THE LD. CIT (A), THE DERIVATIVES CAN BE TREATED AS ADVENTURE IN THE NATURE OF THE TRADE . IN OUR OPINION, AS THE VERY NATURE OF THE TRANSACTI ON ITSELF IS A DECISIVE ITA 4983/MUM/2010 ANUP BAGCHI 5 TO DECIDE THE NATURE OF THE INCOME EARNED, THE RELI ANCE PLACED BY THE LD. COUNSEL ON THE INSERTION OF CLAUSE (D) TO SUB-S ECTION (5) OF SEC.43 IS WITHOUT MERIT. WE FIND NO REASON TO INTERFERE W ITH THE ORDER OF THE LD. CIT (A). ACCORDINGLY, THE SAME IS CONFIRMED. 7. IN THE RESULT, ASSESSEES APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS DAY OF 25TH JANUARY, 2012 SD/- ( G.E. VEERABHADRAPPA ) PRESIDENT SD/- ( R.S. PADVEKAR ) JUDICIAL MEMBER MUMBAI, DATE : 25TH JANUARY, 2012 COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A)-28, MUMBAI. 4) THE CIT-26, MUMBAI. 5) THE D.R. A BENCH, MUMBAI. BY ORDER / / TRUE COPY / / ASSTT. REGISTRAR I.T.A.T., MUMBAI *CHAVAN