SAMRUDDHI FINSTOCK LTD, MUMBAI V. DCIT 4(2), MUMBAI

ITA 5101/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 55040 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 2 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-08-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: H
• Next Hearing Date: 23-08-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 18-06-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V V SHASTRI
• Assessee Lawyers: M SUBRAMANIAN
• Keywords: Transactions in derivatives; Speculation loss
• Section: 43(5)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL H BENCH: MUMBAI BEFORE SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER ITA NO.5101/MUM/2010 (ASSESSMENT YEAR: 2006-07) SAMRUDDHI FINSTOCK LTD., 66/1, HANSA VILLA, BHAUDAJI CROSS ROAD, MATUNGA C.R., MUMBAI -400 019 ....... APPELLANT VS ITO14(3), 6 TH FLOOR, EARNEST HOUSE, NARIMAN POINT, MUMBAI -400 021 ..... RESPONDENT PAN: AACCS 3742 C APPELLANT BY: SHRI M. SUBRAMANIAN RESPONDENT BY: SHRI V.V. SHASTRI DATE OF HEARING: 23.08.2011 DATE OF PRONOUNCEMENT: 30.08.2011 O R D E R PER R.S. PADVEKAR, JM: IN THIS APPEAL THE ASSESSEE HAS CHALLENGED THE IMPU GNED ORDER OF THE LD. CIT (A)-8, MUMBAI DATED 22.04.2010 FOR T HE A.Y. 2006-07. THE ASSESSEE HAS TAKEN THE FOLLOWING EFFECTIVE GROU NDS:- 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT (A) HAS ERRED IN CONFIRMING ADDITION MA DE BY THE ASSESSING OFFICER AMOUNTING TO RS 8,00,298/- ON ACCOUNT OF TREATING DERIVATIVES TRANSACTION LOSS PR IOR TO 25/1/2006 AS SPECULATION LOSS. ITA 5101/MUM/2010 SAMRUDDHI FINSTOCK LTD . 2 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW THE LEARNED CIT (A) HAS ERRED IN CONFIRMING RS 3,16,132 /- AS SPECULATION EXPENSES ALLOCATION TOWARDS SPECULATION INCOME. 2. THE FACTS IN CONTROVERSY ARE IN NARROW COMPASS. THE ASSESSEE- COMPANY IS ENGAGED IN THE BUSINESS OF SHARE BROKING . IT WAS NOTICED BY THE A.O. THAT THE ASSESSEE HAS CLAIMED THE TRADI NG LOSS IN FUTURE AND OPTIONS (F & O) SEGMENT OF ` 70,88,356/- AND PROFIT OF ` 10,90,173/- IN THE CASH SEGMENT OF THE MARKET. AS PER NOTIFICATION NO.89(E) DATED 25.01.2006 THAT DERIVATIVE TRANSACT IONS AFTER 25.01.2006 SHALL NOT BE DEEMED TO BE SPECULATIVE IF THEY ARE ELIGIBLE TRANSACTIONS CARRIED OUT ON NOTIFIED RECOGNIZED STO CK EXCHANGE. THE A.O., THEREFORE, MADE ALLOCATION OF THE LOSS PRIOR TO 25.01.2006 AND AFTER 25.01.2006. THE LOSS ATTRIBUTABLE TO THE PRI OR PERIOD I.E. 1.4.2005 TO 25.1.2006 OF ` 8,00,299/- WAS TREATED AS SPECULATION LOSS. THE A.O. ALSO ALLOCATED THE EXPENDITURE CLAIMED BY THE ASSESSEE TREATING PARTLY ATTRIBUTABLE TO THE SPECULATION TRA NSACTIONS AND PARTLY ATTRIBUTABLE TO THE TRADING TRANSACTIONS. THE A.O. DISALLOWED F&O BY WAY OF REDUCING THE SAME FROM TRADING PROFIT AND TO THE EXTENT OF ` 3,16,132/- AND AFTER ALLOCATING THE ESTIMATED EXPEN DITURE THE EXPENSES ATTRIBUTABLE TO THE SPECULATION BUSINESS, THE A.O. WORKED OUT THE SPECULATION LOSS TO BE CARRIED FORWARD AT ` 25,717/-. THE ASSESSEE CARRIED THE ISSUE IN APPEAL BEFORE THE LD. CIT (A) BUT WITHOUT SUCCESS. THE OPERATIVE PART OF THE ORDER OF THE LD . CIT (A) IS AS UNDER:- 4.1 THE SPECIAL BENCH OF ITAT, KOLKATA IN CASE OF SHREE CAPITAL SERVICES PVT. LTD. VS. ACIT IN ITA NO.1294(KOL) OF 2008 FOR A.Y. 2004-05 DATED 31.07.2009 HAS HELD THAT THE LOSS ON DERIVATIVE TRANSACTION IS TO BE TREATED AS SPECULATIVE LOSS PR IOR TO INSERTION OF CLAUSE (D) OF SECTION 43(5) BY THE FINANCE ACT, 200 5 WITH EFFECT FROM 01/04/2006 AND THE AMENDMENT IS PROSPECTIVE IN NATURE ITA 5101/MUM/2010 SAMRUDDHI FINSTOCK LTD . 3 AND IT APPLICABLE FROM A.Y. 2006-07. THE ITAT C BENCH, MUMBAI HAS FOLLOWED THE SAID JUDGMENT IN CASE OF ITO -4(2) (1) VS. PAS SECURITIES LTD. ITA NO.4880/MUM/2008 FOR A.Y. 2005- 06. THE AMENDMENT BY THE FINANCE ACT, 2005 PROVIDES THAT TH E DERIVATIVE TRANSACTION SHALL NOT BE TREATED TO BE SPECULATIVE TRANSACTION IN CASE THE SAME IS CARRIED OUT IN RECOGNIZED STOCK EX CHANGE. THE NATIONAL STOCK EXCHANGE OF INDIA LTD., MUMBAI AND T HE BOMBAY STOCK EXCHANGE LTD., MUMBAI HAS BEEN NOTIFIED AS RE COGNIZED STOCK EXCHANGE FOR THE PURPOSE OF CLAUSE (II) IN EX PLANATION TO CLAUSE (D) TO PROVISO TO CLAUSE (5) OF SECTION 43 V IDE NOTIFICATION NO.80(18 I)(E) DATED 25.01.2006. THUS, F&O ARE DER IVATIVE TRANSACTIONS PRIOR TO 25.01.2006 IS REQUIRED TO BE TREATED AS SPECULATIVE TRANSACTION. GROUND NO.4. IS, THEREFOR E, DISMISSED. 3. WE HAVE HEARD THE PARTIES. NOW, THIS ISSUE STAN DS COVERED BY THE DECISION OF THE CO-ORDINATE BENCHES IN THE FOLL OWING CASES:- I) ACIT CIR. 2 BHAVNAGAR VS. HIREN JASWANTRAI SHAH 46 SOT 276 (AHD.) II) G.K. ANAND BROS. BUILDWELL (P.) LTD. VS. ITO- 34 SOT 439(DELHI) 4. IN THE CASE OF G.K. ANAND BROS. BUILDWELL (P.) L TD. (SUPRA) WHILE EXPLAINING THE SCOPE OF AMENDMENT AS WELL AS NOTIFI CATION, IT IS HELD AS UNDER:- 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. SECT ION 43(5) DEFINED SPECULATIVE TRANSACTION MEANS A TRANSACTI ON IN WHICH A CONTRACT FOR THE PURCHASE OR SALE OF ANY CO MMODITY INCLUDING STOCKS AND SHARES IS PERIODICAL OR ULTIMA TELY SETTLED OTHERWISE THAN BY THE ACTUAL DELIVERY OR TH E TRANSFER OF COMMODITY OR SCRIPS. PROVISO BELOW SECTION 43(5) CRAVES OUT EXCEPTIONS TO SECTION 43(5). AS PER CLAUSE (D) OF THE SAID PROVISO AN ELIGIBLE TRANSACTION IN RESPECT OF TRAD ING IN DERIVATIVES REFERRED IN SECURITIES CONTRACTS (REGUL ATION) ACT, 1956 CARRIED OUT IN RECOGNIZED STOCK EXCHANGE SHALL NOT BE ITA 5101/MUM/2010 SAMRUDDHI FINSTOCK LTD . 4 DEEMED TO BE A SPECULATIVE TRANSACTION. CLAUSE (D ) IN THE PROVISO WAS INSERTED BY FINANCE ACT, 2005 WITH EFFE CT FROM 1.4.2006. THEREFORE, IF A TRANSACTION FALLS WITHIN CLAUSE (D) OF THE PROVISO WILL NOT BE DEEMED TO BE A SPECULATI VE TRANSACTION IN RESPECT OF TRANSACTION PERTAINING TO ASSESSMENT YEAR 2006-07. UNDER CLAUSE (D) OF THE P ROVISO, A TRANSACTION IS NOT A SPECULATIVE TRANSACTION PROV IDED IT IS AN ELIGIBLE TRANSACTION WITHIN THE MEANING OF CLAUS E (I) OF EXPLANATION AND IT IS CARRIED ON AT RECOGNIZED STOC K EXCHANGE AS EXPLAINED IN CLAUSE (II) OF THE SAID EX PLANATION BELOW PROVISO TO SECTION 43(5)(D). THE RECOGNIZED STOCK EXCHANGE MEANS A RECOGNIZED STOCK EXCHANGE AS NOTIF IED BY THE CENTRAL GOVERNMENT FOR THIS PURPOSE. THEREF ORE, EVEN IF THE NOTIFICATION IS FROM A TRANSACTIONS IN RELATION TO ASSESSMENT YEAR 2006-07 AND ONWARDS. CLAUSE (D) DO ES NOT MENTION THAT UNLESS RECOGNIZED STOCK EXCHANGE I S NOTIFIED, THE TRANSACTION WILL NOT BE DEEMED TO BE A SPECULATIVE TRANSACTION. THE POWER TO NOTIFY THE S TOCK EXCHANGE IS GRANTED UNDER THE STATUTE AND HENCE, ON CE THE RECOGNIZED STOCK EXCHANGE IS NOTIFIED, THE SAME WIL L APPLY IN RESPECT OF ALL ELIGIBLE TRANSACTIONS CARRIED OUT IN RELATION TO FINANCIAL YEAR RELEVANT TO ASSESSMENT YEAR 2006- 07 AND ONWARDS. THE SPECIAL BENCH OF TRIBUNAL IN THE CASE OF SHREE CAPITAL SERVICES LTD. (SUPRA) IN PARA 7 HELD THAT CLAUSE (D) OF SECTION 43(5) IS PROSPECTIVE IN NATU RE AND WILL BE EFFECTIVE FROM THE DATE FROM WHICH THE LEGISLATU RE MADE IT EFFECTIVE, I.E. 1.4.2006 AND WILL BE APPLICABLE TO ASSESSMENT YEAR 2006-07 ONWARDS. THE NOTIFICATION IS BY WAY OF A SUBORDINATED LEGISLATION BUT CANNOT OVERRI DE THE PRINCIPAL LEGISLATION ENACTED BY THE PARLIAMENT. IT ONLY CLARIFIES BUT WILL NOT OVERRIDE UNLESS STATUTORILY SO PRESCRIBED. SINCE THERE IS NO DISPUTE TO ELIGIBLE TRANSACTIONS CARRIED OUT IN A RECOGNIZED STOCK EXCH ANGE, ITA 5101/MUM/2010 SAMRUDDHI FINSTOCK LTD . 5 LOSS IN SUCH TRANSACTIONS CANNOT BE DEEMED TO BE TRANSACTION IN SPECULATION BUSINESS. THE SAME BEIN G CONSIDERED AS REGULAR BUSINESS TRANSACTION, LOSS IN CURRED IN THE SAME IS TO BE TREATED AS BUSINESS LOSS AND N OT LOSS IN SPECULATION BUSINESS. 5. WE THEREFORE HOLD THAT CLASSIFICATION OF TRANSAC TION PRIOR TO & AFTER 25/01/06 IS NOT CORRECT AND ALL F & O TRANSAC TIONS ARE TO BE TREATED AS BUSINESS TRANSACTIONS W.E.F. 01/04.06. A CCORDINGLY, GROUND NO.1 TAKEN BY THE ASSESSE IS ALLOWED. 6. SO FAR AS GROUND NO.2 IS CONCERNED THE SAME IS C ONSEQUENTIAL HENCE, THE SAME IS ALSO ALLOWED. 7. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS DAY OF 30TH AUGUST 2011. SD/- SD/- ( PRAMOD KUMAR ) ACCOUNTANT MEMBER ( R.S. PADVEKAR ) JUDICIAL MEMBER MUMBAI, DATE: 30TH AUGUST 2011 COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A)8, MUMBAI. 4) THE CIT -4, MUMBAI. 5) THE D.R. H BENCH, MUMBAI. BY ORDER / / TRUE COPY / / ASSTT. REGISTRAR I.T.A.T., MUMBAI *CHAVAN ITA 5101/MUM/2010 SAMRUDDHI FINSTOCK LTD . 6 SR.N. EPISODE OF AN ORDER DATE INITIALS CONCERNED 1 DRAFT DICTATED ON 24.08.2011 SR.PS 2 DRAFT PLACED BEFORE AUTHOR 25.08.2011 SR.PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5 APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6 KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7 FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER