ITO, New Delhi V. M/s Felex Enterprises Pvt. Ltd., New Delhi

ITA 5129/DEL/2012

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 69299 (ITAT-DELHI)
• Duration Of Justice: 11 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-09-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 22-08-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 03-10-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MRS Y KAKKAR
• Assessee Lawyers: V K JAINCA
• Keywords: Business income; Transactions in derivatives; Speculation loss
• Section: 43(5)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH B: NEW DELHI) BEFORE SHRI U. B. S. BEDI, JUDICIAL MEMBER AND SHRI T. S. KAPOOR, ACCOUNTANT MEMBER ITA NO. 5129/DEL/ 2012 (ASSESSMENT YEAR: 2007-08 ) ITO VS. FELEX ENTERPRISES PVT. LTD. WARD-11(2), ROOM NO. 321, 108, CONNAUGHT CIRCUS, C. R. BUILDING, NEW DELHI. NEW DELHI. PAN: AAACF0069K (APPELLANT) (RESPONDENT) ASSESSEE BY :SHRI V. K. JAIN,CA, REVENUE BY : MRS. Y. KAKKAR, SR..DR. ORDER PER T. S. KAPOOR, AM THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-XIII, NEW DELH I DATED 12.06.2012 FOR THE ASSESSMENT YEAR 2006-07. THE GRO UNDS TAKEN BY THE REVENUE ARE AS UNDER: 1. THE LD. CIT (A) HAS ERRED ON THE FACTS AND CIRC UMSTANCES OF THE CASE AND IN LAW IN ALLOWING THE LOSS ON F & O AMOUNTING TO RS. 1,00,45,041/- I.E. SPECULATION LOSS TO BE AD JUSTED AGAINST BUSINESS PROFIT BY APPLYING SECTION 43(5)(C) &(D) I NSTEAD OF SECTION 73 READ WITH SECTION 73(1) OF THE INCOME TA X ACT 1961. ITA NO.5129 /DEL/2012 2 2. THE LD. CIT (A) HAS ERRED ON THE FACTS AND CIRCU MSTANCES OF THE CASE AND IN LAW IN ALLOWING THE GENERAL PROV ISION OF SECTION 43(5) OVER THE SPECIAL OR PARTICULAR PROVIS ION, SECTION 73 OF THE INCOME TAX ACT 1961, WHICH IS SPECIALLY APPL ICABLE TO COMPANY ALONE IN RESPECT OF TRADING OF SHARES. 3. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, OR AME ND ANY GROUND OF APPEAL RAISED ABOVE AT THE TIME OF HEARIN G. 2. BRIEF FACTS OF THE CASE AS COMING OUT FROM ASSES SMENT ORDER ARE THAT ASSESSEE WAS ENGAGED IN THE BUSINESS OF TRADING IN SHARE FUTURES AND OPTIONS. THE RETURN OF INCOME WAS FILED ON 27.10.20 07 DECLARING A LOSS OF RS.1,80,53,696/-. THE CASE WAS SELECTED FOR SCRUTIN Y. 3. DURING ASSESSMENT PROCEEDINGS THE ASSESSEE WAS S HOW CAUSED AS TO WHY EXPLANATION TO SECTION 73 OF INCOME TAX ACT BE NOT APPLIED IN ITS CASE AS A PART OF ITS BUSINESS INCLUDED TRADING IN SHARE S. IN ITS REPLY DATED 11.12.2009, THE ASSESSEE SUBMITTED THAT IT HAS INCU RRED A LOSS ON TRADING IN SHARE FUTURES AMOUNTING TO RS.10045041/- DURING THE YEAR UNDER CONSIDERATION. IT WAS FURTHER SUBMITTED THAT SECTIO N 43(5) RELATING TO SPECULATIVE TRANSACTION WAS AMENDED WITH EFFECT FRO M 25.01.2006 WHEREIN THE LOSS OF A PERSON IN FUTURE AND OPTION WAS TO BE TREATED AS NORMAL BUSINESS LOSS IN STEAD OF SPECULATIVE LOSS. IT WAS ALSO SUBM ITTED THAT EXPLANATION TO SECTION 73 REFERS TO TRADING IN SHARES WHEREAS THE ASSESSEE HAD INCURRED LOSS IN TRADING OF SHARE FUTURES. THE ASSESSING OFFICER DID NOT ACCEPT THE ITA NO.5129 /DEL/2012 3 CONTENTIONS OF ASSESSEE AND TREATED THE LOSS INCURR ED BY ASSESSEE AS SPECULATIVE IN NATURE TO BE SET OFF ONLY AGAINST RE CEIPTS OF SIMILAR NATURE. 4. DISSATISFIED WITH THE ORDER, THE ASSESSEE FILED APPEAL BEFORE CIT (A) AND REITERATED ITS CONTENTIONS WHICH WERE BEFORE AS SESSING OFFICER. THE LD. COMMISSIONER OF INCOME TAX (APPEALS) AFTER GOING TH ROUGH THE SUBMISSIONS OF ASSESSEE DELETED THE ADDITION MADE BY ASSESSING OFFICER BY HOLDING AS UNDER: I HAVE CONSIDERED THE SUBMISSION OF THE APPELLANT AND OBSERVATION OF THE ASSESSING OFFICER. IT IS SEEN TH AT APPELLANT IS ENGAGED IN THE BUSINESS OF TRADING IN SHARES, FUTUR E AND OPTIONS. IN THE ASSESSMENT ORDER THE ASSESSING OFFICER HAS T REATED TRADING IN F & O AS SPECULATIVE IN NATURE AND THE L OSS OF THE F & O TRADING OF RS.1,00,45,041/- WAS TREATED AS SPECUL ATIVE LOSS. DURING THE COURSE OF APPELLATE PROCEEDINGS IT WAS C LAIMED BY THE AR OF THE APPELLANT THAT THE TRANSACTIONS DONE IN DERIVATIVES WERE NOT SPECULATIVE TRANSACTIONS. IN SUPPORT OF HI S CONTENTION HE RELIED UPON THE PROVISIONS OF SECTION 43(5) WHER EIN IT HAS BEEN STATED THAT THE TRANSACTIONS OF FUTURES AND OP TIONS DERIVATIVES TRADING ARE COVERED BY CLAUSE (C) AND ( D) OF SECTION 43 (5) AND SUCH TRANSACTIONS IF DONE ON THE RECOGNI ZED STOCK EXCHANGE WOULD NOT BE TREATED AS SPECULATIVE TRANSA CTIONS. IT IS CONTENDED BY THE APPELLANT THAT F& O DERIVATIVE TRA DING WERE DONE THROUGH M/S RELIGARE SECURITIES LTD., WHO IS A REGISTERED MEMBER OF NATIONAL STOCK EXCHANGE (NSE). IT IS SUBM ITTED BY THE APPELLANT THAT NSE IS A RECOGNIZED STOCK EXCHAN GE FOR DOING F&O TRANSACTIONS WHICH HAS BEEN RECOGNIZED BY CBDT CIRCULAR DATED 25.01.2006. IT IS FURTHER SUBMITTED BY THE AP PELLANT THAT ALL TRANSACTIONS WERE DONE THROUGH M/S RELIGARE SEC URITIES LTD. WHO IS A RECOGNIZED MEMBER OF NATIONAL STOCK EXCHAN GE OF INDIA. THEREFORE, THE INCOME DERIVED FROM F & O DER IVATIVE TRADING WAS A BUSINESS INCOME DURING THE YEAR UNDER CONSIDERATION. SUCH LOSS OR PROFIT HAS TO BE TREATE D AS BUSINESS ITA NO.5129 /DEL/2012 4 LOSS OR PROFIT AS THE CASE MAY BE. THE APPELLANT HA S FILED COMPLETE DETAILS OF THE TRANSACTIONS DONE IN F&O DE RIVATIVE TRADING, LIKE CONTRACT NOTES, BEFORE ASSESSING OFFI CER AND HAS ALSO FILED DETAILS OF THE TRANSACTIONS BEFORE ME. T HE SAME ARE PLACED ON RECORD. THEREFORE, THE LOSS ON F&O DERIVATIVE TRADING IS BU SINESS LOSS AND SAME IS TO BE SET OFF AGAINST THE PROFIT EARNED BY THE APPELLANT FROM OTHER BUSINESS INCOME. THE ASSESSING OFFICER WAS NOT JUSTIFIED IN TREATING THE TRANSACTIONS OF D ERIVATIVE TRADING AS SPECULATIVE. THE ACTION OF THE ASSESSING OFFICER WAS CONTRARY TO THE PROVISION OF SECTION 43(5) CLAUSE ( C) AND (D) OF THE IT ACT. ASSESSING OFFICER IS THEREFORE, DIRECTE D TO TREAT THE LOSS INCURRED ON F&O TRANSACTIONS AS BUSINESS LOSS. 5. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US. A T THE OUTSET, THE LD. DEPARTMENTAL REPRESENTATIVE TOOK US TO EXPLANATION TO SECTION 73(1) AND ARGUED THAT IN THE CASE OF A COMPANY WHERE A PART O F BUSINESS CONSIST OF SALE AND PURCHASE OF SHARES SUCH COMPANY SHALL BE D EEMED TO BE CARRYING ON SPECULATION BUSINESS TO THE EXTENT TO WHICH THE BUSINESS CONSIST OF SALE AND PURCHASE OF SUCH SHARES. SHE FURTHER ARGUED THA T FUTURE AND OPTION IS IN THE NATURE OF THE SHARES AS DEFINED UNDER SECURITIE S ACT. CONTINUING HER ARGUMENT, SHE SUBMITTED THAT SHARE FUTURES ARE DERI VATIVES OF SHARES ONLY AND IT HAS NO MEANING WITHOUT THE INHERENT VALUE OF SHARES UNDER LAYING SUCH SHARES. THEREFORE, TRADING IN SHARE FUTURE WAS EQUAL TO TRADING IN SHARES. SHE FURTHER ARGUED THAT LD. CIT (A) HAS DEL ETED THE ADDITION BY RELYING UPON A NUMBER OF CASE LAWS WHICH WERE DISTI NGUISHABLE FROM THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE. INVITI NG OUR ATTENTION TO PAPER ITA NO.5129 /DEL/2012 5 BOOK PAGE 22, SHE ARGUED THAT ASSESSEE WAS ENGAGED IN TRADING, FINANCE, INVESTMENT AND AGRICULTURE AND, THEREFORE, EXPLANAT ION TO SECTION 73 WAS APPLICABLE TO THE COMPANY. INVITING OUR ATTENTION T O PARA 3 AT PAGE 35, SHE ARGUED THAT ASSESSEE WAS TRADING IN SHARES AS WELL AS SHARE DERIVATIVES AND IN THIS RESPECT OUR ATTENTION WAS ALSO INVITED TO P APER BOOK PAGE 8 WHERE A PROFIT AND LOSS ACCOUNT OF THE COMPANY WAS PLACED I N WHICH THE ASSESSEE HAD DEBITED LOSS ON SHARE FUTURES AND INVESTMENTS. IN VIEW OF THE ABOVE ARGUMENT IT WAS ARGUED THAT EXPLANATION TO SECTION 73 WAS FULLY APPLICABLE TO THE ASSESSEE AND, THEREFORE, ASSESSING OFFICER H AD RIGHTLY DISALLOWED THE SETTING OFF THE SPECULATIVE LOSS AGAINST BUSINESS I NCOME. 6. THE LD. AR ON THE OTHER HAND READ EXPLANATION TO SECTION 73 AND ARGUED THAT THE EXPLANATION WAS APPLICABLE ONLY IN THE CASES, WHERE THERE WERE SALE AND PURCHASE OF SHARES AND IT WAS NOT APP LICABLE IN THE CASE OF LOSS DUE TO TRANSACTION IN FUTURES. OUR ATTENTION W AS INVITED TO PAPER BOOK PAGE 8 WHERE ASSESSEE HAD DEBITED AN AMOUNT OF RS.1 ,00,45,041/- ON ACCOUNT OF LOSS OF SHARE FUTURES AND ARGUED THAT I N VIEW OF AMENDMENT IN SECTION 43(5), THE LOSS INCURRED IN DERIVATIVES WAS TO BE CONSIDERED AS NORMAL BUSINESS LOSS AND NOT AS SPECULATIVE LOSS. 7. RELIANCE WAS PLACED ON THE ORDER OF DELHI BENCH IN ITA NO.2168 AND OUR ATTENTION WAS INVITED TO PARA 8 AT PAGE 77 OF PAPER BOOK. IN VIEW ITA NO.5129 /DEL/2012 6 OF THE ABOVE, IT WAS ARGUED THAT SECTION 43 (5) IS AN OVERRIDING PROVISION AND AS PER THE SECTION AFTER THE AMENDMENT THE LOSS ES IN SHARE FUTURES BY A PERSON CANNOT BE HELD TO BE SPECULATIVE LOSSES. 8. IN HER REJOINDER, THE LD. DEPARTMENTAL REPRESENT ATIVE AGAIN TOOK US TO PAPER BOOK PAGE 8 AND INVITED OUR ATTENTION TO I NCOME OF THE ASSESSEE WHICH CONSISTED OF SALE OF CROPS, DIVIDEND RECEIPT, COMMISSION RECEIPT ETC. AND AGAIN ARGUED THAT THE EXPLANATION TO SECTION 73 WAS FULLY APPLICABLE TO THE ASSESSEE. 9. WE HAVE HEARD THE RIVAL CONTENTIONS OF THE PARTI ES AND HAVE GONE THROUGH THE MATERIAL PLACED ON RECORD. WE FIND THAT THERE IS NO DISPUTE THAT ASSESSEE HAD INCURRED LOSS IN SALE OF SHARE FUTURES AND NOT IN TRADING OF SHARES. EXPLANATION TO SECTION 73 IS APPLICABLE IN THE CASES WHERE THE BUSINESS OF A COMPANY CONSISTS OF SALE AND PURCHASE OF SHARES OF OTHER COMPANIES. SHARE FUTURES ARE DIFFERENT FROM THE SHA RES AND THESE ARE MEANT ONLY FOR TRADING PURPOSES WHEREAS SHARES ARE MEANT FOR TRADING AS WELL AS FOR INVESTMENT PURPOSES. THE PURPOSE OF INVESTMENT IN SHARES IS CAPITAL APPRECIATION AS WELL AS EARNING OF DIVIDENDS WHEREA S IN THE CASE OF TRADING IN SHARE FUTURES THE ONLY PURPOSE IS TO EARN BUSINE SS INCOME. EXPLANATION TO SECTION 73 IS APPLICABLE ONLY IN THE CASE OF A COMP ANY WHEREAS SECTION ITA NO.5129 /DEL/2012 7 43(5) IS APPLICABLE TO ALL CLASSES OF PERSONS. SECT ION 43(5) DESCRIBES SPECULATIVE TRANSACTIONS AS UNDER: SPECULATIVE TRANSACTION MEANS A TRANSACTION IN WHI CH A CONTRACT FOR THE PURCHASE OR SALE OF ANY COMMODITY INCLUDING STOSCKS AND SHARES IS PERIODICALLY OR ULTIMATELY SETTLED OT HERWISE THAN BY THE ACTUAL DELIVERY OR TRANSFER OF THE COMMODITY OR SCRIPS: PROVIDED THAT FOR THE PURPOSES OF THIS CLAUSE- (A) A CONTRACT IN RESPECT OF RAW MATERIALS OR MERCH ANDISE ENTERED INTO BY A PERSON IN THE COURSE OF HIS MANUF ACTURING OR MERCHANTING BUSINESS TO GUARD AGAINST LOSS THROUGH FUTURE PRICE FLUCTUATIONS IN RESPECT OF HIS CONTRACTS FOR ACTUAL DELIVERY OF GOODS MANUFACTURED BY HIM OR MERCHANDISE SOLD BY HI M; OR (B) A CONTRACT IN RESPECT OF STOCKS AND SHARES ENTE RED INTO BY A DEALER OR INVESTOR THEREIN TO GUARD AGAINST LOSS IN HIS HOLDINGS OF STOCKS AND SHARES THROUGH PRICE FLUCTUATIONS; OR (C) A CONTRACT ENTERED INTO BY A MEMBER OF A FORWAR D MARKET OR A STOCK EXCHANGE IN THE COURSE OF ANY TRANSACTIO N IN THE NATURE OF JOBBING OR ARBITRAGE TO GUARD AGAINST LOS S WHICH MAY ARISE IN THE ORDINARY COURSE OF HIS BUSINESS AS SUC H MEMBER; OR (D) AN ELIGIBLE TRANSACTION IN RESPECT OF TRADING I N DERIVATIVES REFERRED TO IN CLAUSE OF SECTION 2 OF THE SECURITIE S CONTRACTS (REGULATION) ACT 1956 (41 OF 1956) CARRIED OUT IN A RECOGNIZED STOCK EXCHANGE; 10. CLAUSE D WAS INSERTED BY FINANCE ACT 2005 W.E.F 01.04.2006 WHICH TOOK OUT THE TRANSACTION IN SHARES DERIVATIVES OUT OF THE DEFINITION OF SPECULATIVE BUSINESS IF THE TRANSACTIONS ARE CARRIE D OUT ON A RECOGNIZED STOCK EXCHANGE. THE ASSESSEE HAS CARRIED OUT TRANSA CTIONS IN DERIVATIVES THROUGH RELIGARE SECURITIES LTD. WHICH IS A REGISTE RED BROKER OF NATIONAL ITA NO.5129 /DEL/2012 8 STOCK EXCHANGE OF INDIA. THE CALCULATION OF LOSS SU FFERED ON ACCOUNT OF TRADING IN SHARE FUTURES IS PLACED AT PAPER BOOK PA GE 37 TO 47 AND ALL THE ENTRIES NOTED ON THESE PAGES RELATES TO FUTURES AND OPTIONS. MOREOVER THE ASSESSEE HAD ALSO FILED BEFORE ASSESSING OFFICER LD . CIT (A) COPIES OF CONTRACT NOTES IN RESPECT OF TRANSACTIONS ENTERED I NTO BY IT. THE LD. DEPARTMENTAL REPRESENTATIVES ARGUMENT THAT THE CASE OF THE ASSESSEE IS HIT BY EXPLANATION TO SECTION 73 DOES N OT CARRY ANY FORCE AS IF THAT BE THE INTENTION OF LEGISLATURE, THE WHOLE PUR POSE OF AMENDING SECTION 43(5) IS DEFEATED. THE AMENDMENT WAS MEANT FOR THE DEVELOPMENT AND BENEFIT OF CAPITAL MARKETS. THEREFORE, WE ARE OF TH E VIEW THAT THE LOSS INCURRED BY ASSESSEE WAS NOT SPECULATIVE LOSS BUT W AS A NORMAL BUSINESS LOSS AND LD. CIT (A) HAS RIGHTLY DEALT WITH THE ISS UE. MOREOVER DELHI E BENCH OF DELHI TRIBUNAL IN ITA NO. 2168 HAS ALREADY DEALT WITH SIMILAR MATTER AND HAS HELD THE LOSS INCURRED ON ACCOUNT OF TRANSACTIONS IN SHARE FUTURES ON A RECOGNIZED STOCK EXCHANGE AS NORMAL BU SINESS LOSS. THEREFORE RESPECTFULLY FOLLOWING THE JUDICIAL PRONOUNCEMENT, WE ALSO HOLD THE LOSS INCURRED BY ASSESSSEE AS NORMAL BUSINESS LOSS. ITA NO.5129 /DEL/2012 9 THEREFORE, WE DO NOT FIND ANY INFIRMITY IN THE ORD ER OF CIT (A). THE APPEAL FILED BY REVENUE IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 20 TH /09/ 2013 SD/- SD/- (U. B. S. BEDI) (T.S. KAPOOR) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED THE 20 TH DAY OF SEPTEMBER, 2013 S.SINHA COPY FORWARDED TO 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. CIT(ITAT), NEW DELHI. AR,ITAT NEW DELHI.