MIHIR CHANDRAKANT GHELANI, MUMBAI V. ITO 14(3)-2, MUMBAI

ITA 5264/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 55249 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 2 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-09-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2006-2007
• Appeal Filed On: 25-06-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: VIJAY B MEHTA
• Keywords: Business income; Opportunity of being heard; Transactions in derivatives; Speculation loss
• Section: 43(5); 12

Judgement Text

1 ITA NO. 5264/MUM/2010 (ASST YEAR 2006-07) IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI B BENCH MUMBAI BENCHES, MUMBAI BEFORE SHRI R S SYAL, AM & SHRI VIJAY PAL RAO, JM ITA NO. 5264/MUM/2010 (ASST YEAR 2006-07) MIHIR CHANDRAKANT GHELANI C/O BHARATKUMAT &CO 329 GARAJ GALLY, M J MARKET MUM BAI 400 02 VS THE INCOME TAX OFFICER WARD 14(3)(2), MUMBAI (APPELLANT) (RESPONDENT) PAN NO. AACPG7986K ASSESSEE BY SHRI VIJAY B MEHTA REVENUE BY SHRI P C MAURYA DT.OF HEARING 30 TH AUG 2011 DT OF PRONOUNCEMENT 16 TH , SEPT 211 PER VIJAY PAL RAO, JM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER DATED 19.4.2010 OF THE CIT(A) FOR THE AY 2006-07. 2 THE ASSESSEE HAS RAISED THE FOLLOWING EFFECTIVE G ROUND IN THIS APPEAL: THE LD CIT(A) HAS ERRED IN LAW AND IN FACTS IN CONF IRMING THE ACTION OF THE ASSESSING OFFICER OF TREATING THE APPELLANTS SPECULA TIVE BUSINESS INCOME AS NON SPECULATIVE AND NOT ALLOWING SET OFF OF THE AP PELLANTS EARLIER YEARS SPECULATIVE LOSS. 2.1 THE ASSESSEE IS ENGAGED IN THE BUSINESS OF DEAL ING IN SHARES, SECURITIES AND COMMODITIES. THE ASSESSEE STATED TO BE A MEMBER OF BSE/NSE. THE ASSESSEE HAS SHOWN INCOME FROM THE TRADING IN CASH SEGMENTS, FUT URE & OPTION SEGMENTS OF SHARES AND COMMODITIES. AFTER ADJUSTING THE EXPEND ITURE OF RS. 9,05,146/- THE 2 ITA NO. 5264/MUM/2010 (ASST YEAR 2006-07) ASSESSEE OFFERED THE NET PROFIT OF RS. 12,74,755/- AS SPECULATIVE INCOME FOR THE YEAR UNDER CONSIDERATION, WHICH WAS SOUGHT TO BE SET OFF AGAINST THE EARLIER YEARS SPECULATIVE LOSS. THUS, THE ASSESSEE DECLARED INCO ME OF RS. 3,19,690/- IN THE RETURN OF INCOME. THE ASSESSING OFFICER ASKED THE ASSESSEE TO FURNISH THE DATE-WISE BREAKUP OF SHARES/SECURITIES PURCHASED AND SOLD TO PROVE TH E TRANSACTIONS AS TO WHETHER THE TRADING IN SHARES IS SPECULATIVE IN NATURE. THE AS SESSING OFFICER HAS ALSO ASKED THE ASSESSEE TO GIVE THE D-MAT ACCOUNT DETAILS. IN RES PONSE, THE ASSESSEE HAS SUBMITTED THAT THE ASSESSEE HAD CARRIED OUT TRANSACTION IN CA SH AND DERIVATIVE (F&O) SEGMENTS OF SECURITIES MARKET. IT WAS CONTENDED THAT IIN CAS H SEGMENT OF SECURITIES MARKET, HE HAS NOT TAKEN DELIVERY BASED TRANSACTION AND HENCE DELIVERY OF THE SECURITIES IS NOT EITHER CREDITED OR DEBITED IN HIS D-MAT ACCOUNT. A S REGARDS THE COMMODITIES MARKET, THE ASSESSEE HAS SUBMITTED THAT SUCH TRANSA CTIONS WERE CARRIED OUT WITHOUT TAKING DELIVERY AND SINCE THE NATURE OF TRANSACTION S WERE COVERED WITHIN THE AMBIT OF PROVISION OF SEC. 43(5) OF THE I T ACT, THE ASSE SSEE HAS OFFERED THE INCOME FROM SPECULATIVE BUSINESS. 2.2 HOWEVER, THE ASSESSING OFFICER WAS NOT SATISFIE D WITH THE EXPLANATION GIVEN BY THE ASSESSEE. ACCORDING TO THE ASSESSING OFFICER, I N SOME OF THE CONTRACTORS NOTES, THERE ARE NUMBER OF SHARES, WHICH WERE SOLD IN THE NEXT DAY OR WITHIN FEW DAYS OF PURCHASE, FOR WHICH THE ASSESSEE HAS TAKEN DELIVERY . HENCE, THE ASSESSING OFFICER CONCLUDED THAT THESE ARE NOT COMING UNDER THE PURVI EW OF SPECULATIVE ACTIVITIES BUT CLEARLY TRADING ACTIVITIES. ACCORDINGLY, THE PROFIT DERIVED FROM THE SALE OF SHARES/SECURITIES WAS TREATED BY THE ASSESSING OFFI CER AS BUSINESS INCOME AND DISALLOWED SETTING OF THE SAME AGAINST SPECULATIVE LOSS OF EARLIER YEARS. 3 ITA NO. 5264/MUM/2010 (ASST YEAR 2006-07) 2.3 ON APPEAL, THE CIT(A) HAS CONFIRMED THE ACTION OF THE ASSESSING OFFICER WITH REGARD TO THE SALE AND PURCHASE OF SHARES AND SECUR ITIES AS WELL AS TRADING IN COMMODITY SEGMENTS. HOWEVER, THE DERIVATIVE TRANSAC TION IN F&O SEGMENTS, IN WHICH LOSS OF RS. 85,154/- WAS DECLARED WAS DIRECTE D TO BE TREATED AS SPECULATIVE LOSS. 3 BEFORE US, THE LD AR OF THE ASSESSEE HAS SUBMITTE D THAT THE INTER-A-DAY TRADING IN SHARES AND SECURITIES ARE ADMITTED BY THE LOWER AUTHORITIES BUT THE CLAIM OF THE ASSESSEE HAS BEEN DENIED ONLY ON THE GROUND THAT TH ERE ARE SOME TRANSACTIONS OF SHARES IN WHICH THE SALE TOOK PLACE IN THE NEXT DAY OR WITHIN THE FEW DAYS OF PURCHASE. THE LD AR HAS SUBMITTED THAT WHEN THE AS SESSEE HAS NOT TAKEN THE DELIVERY OF SHARES THEN, THE TRANSACTION , WITHOUT DELIVERY, FALLS UNDER THE PROVISIONS OF SEC.43(5) AND SHOULD BE TREATED AS SPECULATIVE IN N ATURE. IN ANY CASE, THIS ASPECT HAS TO BE VERIFIED WHETHER THE DELIVERY OF SUCH SHA RES WAS TAKEN BY THE ASSESSEE OR NOT. 3.1 AS REGARDS THE COMMODITY SEGMENT, THE LD AR OF THE ASSESSEE HAS SUBMITTED THAT THESE TRANSACTIONS ARE DERIVATIVE TRANSACTIONS AND SHOULD BE TREATED AS SPECULATIVE IN NATURE FOR THE ASSESSMENT YEAR UNDER CONSIDERATION. HE HAS SUBMITTED THAT UNDER CLAUSED OF PROVISO TO SEC. 43(5), AN E LIGIBLE TRANSACTION OF TRADING IN DERIVATIVES SHALL NOT BE DEEMED TO BE A SPECULAT IVE TRANSACTION ONLY IF IT IS CARRIED OUT IN A RECOGNIZED STOCK EXCHANGE. HE HAS POINTED OUT THAT SINCE MCX STOCK EXCHANGE HAS BEEN RECOGNIZED ON 22.5.2009; THEREFOR E, DERIVATIVE TRANSACTIONS IN 4 ITA NO. 5264/MUM/2010 (ASST YEAR 2006-07) COMMODITY SEGMENTS SHALL BE TREATED AS SPECULATIVE TRANSACTIONS PRIOR TO 22.5.2009, AS FALLS UNDER THE MAIN PROVISION OF SEC. 43(5) AND NOT UNDER THE PROVISION. 3.2 ON THE OTHER HAND, THE LD DR HAS RELIED UPON TH E ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THE LOWER AUTHORITIES HAVE GIVEN A FINDING THAT SOME OF THE SHARES AND SECURITIES WERE SOLD BY THE ASSESSEE IN THE NEXT DAY OR AFTER FEW DAYS, WHICH CLEARLY SHOWS THAT THE TRADING TRANSACTION IN SHARES AND SECURITIES ARE NOT IN THE NATURE OF SPECULATIVE TRANSACTION. 4 WE HAVE CONSIDERED THE RIVAL CONTENTION AND PERUS ED THE RELEVANT MATERIAL ON RECORD AS WELL AS THE PROVISIONS OF LAW. THERE A RE TWO ASPECTS OF THE ISSUES RAISED BEFORE US REGARDING THE NATURE OF THE TRANSACTIONS. FIRST PART OF THE ISSUE IS REGARDING THE TRADING ACTIVITY IN SHARES AND SECURITIES. IT IS AN UNDISPUTED FACT THAT THE ASSESSEE WAS DOING INTER-A-DAY TRADING IN SHARES AND SECURIT IES. HOWEVER, AS NOTED BY THE LOWER AUTHORITIES THAT IN SOME OF THE CASES, THE SA LE IS EITHER IN THE NEXT DAY OR AFTER FEW DAYS AND HAVE TREATED THE TRANSACTION AS NON-S PECULATIVE ON THAT BASIS. THEREFORE, THE NATURE OF THE TRANSACTION IS HELD AS BUSINESS IN NATURE. 4.1 HAVING REGARD TO THE FACT THAT MAJORITY OF THE TRANSACTIONS WERE INTER-A-DAY THEN THE ENTIRE ACTIVITY CANNOT BE TREATED AS NON-S PECULATIVE SOLELY BECAUSE SOME ISOLATED INCIDENT OF SALE OF SHARES ON THE NEXT DAY OR AFTER FEW DAYS. THEREFORE, THE MATTER IS REQUIRED PROPER VERIFICATION AND EXAMINAT ION AT THE LEVEL OF THE ASSESSING OFFICER TO FIND OUT WHETHER IN THE CASE WHERE SALE TOOK PLACE IN THE NEXT DAY OR AFTER 5 ITA NO. 5264/MUM/2010 (ASST YEAR 2006-07) FEW DAYS THE DELIVERY WAS TAKEN BY THE ASSESSEE OR NOT. IN ANY CASE, THE BUSINESS ACTIVITY SHOULD BE TREATED ONLY TO THE EXTENT OF TH E TRANSACTIONS FOR WHICH THE DELIVERY WAS TAKEN AND THE SALE IS EITHER ON THE NE XT DAY OR AFTER FEW DAYS. ACCORDINGLY, WE SET ASIDE THE ISSUE TO THE RECORD O F THE ASSESSING OFFICER TO VERIFY WHETHER THE DELIVERY OF SUCH SHARES WERE TAKEN BY T HE ASSESSEE OR NOT AND THEN DECIDE THE ISSUE AS PER LAW AFTER ALLOWING REASONAB LE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 5 SECOND ASPECT OF THE ISSUE IS DERIVATIVE TRANSACT ION IN COMMODITY SEGMENTS. THERE IS NO DISPUTE TO THE FACT THAT THE TRANSACTIO NS WERE CARRIED OUT BY THE ASSESSEE IN THE NATURE OF DERIVATIVE AND AS PER THE PROVISIO NS OF SEC. 43(5) ALL TRANSACTIONS OF PURCHASE AND SALE OF ANY COMMODITY INCLUDING STOCK OF SHARES OTHERWISE THEN, BY ACTUAL DELIVERY SHALL BE TREATED AS SPECULATIVE TRA NSACTION. WE QUOTE SECTION 43(5) AS UNDER: SPECULATIVE TRANSACTION MEANS A TRANSACTION IN WHICH A CONTRACT FOR THE PURCHASE OR SALE OF ANY COMMODITY, INCLUDING STOCKS AND SHARES, IS PERIODICALLY OR ULTIMATELY SETTLED OTHERWISE THAN BY THE ACTUAL DEL IVERY OR TRANSFER OF THE COMMODITY OR SCRIPS: PROVIDED THAT FOR THE PURPOSES OF THIS CLAUSE ( A ) A CONTRACT IN RESPECT OF RAW MATERIALS OR MERCHAN DISE ENTERED INTO BY A PERSON IN THE COURSE OF HIS MANUFACTURING OR MERCHANTING B USINESS TO GUARD AGAINST LOSS THROUGH FUTURE PRICE FLUCTUATIONS IN RESPECT O F HIS CONTRACTS FOR ACTUAL DELIVERY OF GOODS MANUFACTURED BY HIM OR MERCHANDIS E SOLD BY HIM; OR ( B ) A CONTRACT IN RESPECT OF STOCKS AND SHARES ENTERE D INTO BY A DEALER OR INVESTOR THEREIN TO GUARD AGAINST LOSS IN HIS HOLDINGS OF ST OCKS AND SHARES THROUGH PRICE FLUCTUATIONS; OR ( C ) A CONTRACT ENTERED INTO BY A MEMBER OF A FORWARD MARKET OR A STOCK EXCHANGE IN THE COURSE OF ANY TRANSACTION IN THE NA TURE OF JOBBING OR ARBITRAGE TO GUARD AGAINST LOSS WHICH MAY ARISE IN THE ORDINARY COURSE OF HIS BUSINESS AS SUCH MEMBER; [OR] [( D ) AN ELIGIBLE TRANSACTION IN RESPECT OF TRADING IN DERIVATIVES REFERRED TO IN CLAUSE 19 [( AC )] OF SECTION 2 OF THE SECURITIES CONTRACTS (REGUL ATION) ACT, 1956 (42 OF 1956) CARRIED OUT IN A RECOGNISED STOCK EXCHANGE;] SHALL NOT BE DEEMED TO BE A SPECULATIVE TRANSACTI ON. 6 ITA NO. 5264/MUM/2010 (ASST YEAR 2006-07) [ EXPLANATION. FOR THE PURPOSES OF THIS CLAUSE, THE EXPRESSIONS ( I ) ELIGIBLE TRANSACTION MEANS ANY TRANSACTION, ( A ) CARRIED OUT ELECTRONICALLY ON SCREEN-BASED SYSTEM S THROUGH A STOCK BROKER OR SUB-BROKER OR SUCH OTHER INTERMEDIARY REGISTERED UN DER SECTION 12 OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 (1 5 OF 1992) IN ACCORDANCE WITH THE PROVISIONS OF THE SECURITIES CONTRACTS (RE GULATION) ACT, 1956 (42 OF 1956) OR THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 (15 OF 1992) OR THE DEPOSITORIES ACT, 1996 (22 OF 1996) AND THE RUL ES, REGULATIONS OR BYE-LAWS MADE OR DIRECTIONS ISSUED UNDER THOSE ACTS OR BY BA NKS OR MUTUAL FUNDS ON A RECOGNIZED STOCK EXCHANGE; AND ( B ) WHICH IS SUPPORTED BY A TIME STAMPED CONTRACT NOT E ISSUED BY SUCH STOCK BROKER OR SUB-BROKER OR SUCH OTHER INTERMEDIARY TO EVERY CLIENT INDICATING IN THE CONTRACT NOTE THE UNIQUE CLIENT IDENTITY NUMBER ALLOTTED UNDER ANY ACT REFERRED TO IN SUB-CLAUSE ( A ) AND PERMANENT ACCOUNT NUMBER ALLOTTED UNDER THIS ACT; ( II ) RECOGNIZED STOCK EXCHANGE MEANS A RECOGNIZED ST OCK EXCHANGE AS REFERRED TO IN CLAUSE ( F ) OF SECTION 2 OF THE SECURITIES CONTRACTS (REGUL ATION) ACT, 1956 (42 OF 1956) AND WHICH FULFILS SUCH CONDITIONS AS M AY BE PRESCRIBED AND NOTIFIED BY THE CENTRAL GOVERNMENT FOR THIS PURPOS E;] 5.1 FROM THE BARE READING OF SEC. 43(5) MANIFEST TH AT NON DELIVERY TRANSACTIONS OF ANY COMMODITY OR STOCK AND SHARES SHALL BE TREATED AS SPECULATIVE TRANSACTION. HOWEVER, SOME EXCEPTIONS ARE CARVED OUT IN THE PROV ISO TO SUB.SEC. 5. AS PER CLAUSED OF THE PROVISO, THE TRANSACTION OF TRADIN G IN DERIVATIVE, IF CARRIED OUT IN A RECOGNIZED STOCK EXCHANGE SHALL NOT BE TREATED AS D EEMED SPECULATIVE TRANSACTION. CLAUSE (II) OF EXPLANATION TO THE PRO VISION FURTHER CLARIFIES THAT RECOGNIZED STOCK EXCHANGE MEANS A STOCK EXCHANGE AS REFERRED TO CLAUSE F OF SEC. 2 OF THE SECURITIES CONTRACTS (REGULATION) ACT 1956. WE FURTHER NOTE THAT AS PER THE FOOT-NOTE NO.23, MCX STOCK EXCHANGE HAS BEEN R ECOGNIZED ON 22.5.2009; THEREFORE, PRIOR TO 22.5.2009, THE DERIVATIVE TRANS ACTION CARRIED OUT IN COMMODITY SEGMENTS WOULD NOT FALLS UNDER EXCEPTION AS PER CLA USE D OF PROVISO TO SEC. 43(5). THUS, WHEN THE TRANSACTION DOES NOT FALLS UNDER THE PROVISO AND THE SAME WOULD CERTAINLY FALLS UNDER THE MAIN PROVISIONS OF SEC. 4 3(5), THEN IT SHALL BE TREATED AS SPECULATIVE TRANSACTION. ACCORDINGLY, WE ALLOW THE CLAIM OF THE ASSESSEE TO THAT 7 ITA NO. 5264/MUM/2010 (ASST YEAR 2006-07) EXTANT AND SET ASIDE THE ORDER OF THE LOWER AUTHORI TIES, QUA, THE ISSUE OF DERIVATIVE TRANSACTION IN COMMODITY SEGMENTS. 6 IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE I S ALLOWED IN PART AND PARTLY ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED ON THE 16 TH DAY OF SEPT 2011. SD/ SD/- ( R S SYAL ) ACCOUNTANT MEMBER ( VIJAY PAL RAO ) JUDICIAL MEMBER PLACE: MUMBAI : DATED: 16 TH , SEPT 2011 RAJ* COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR, ITAT, MUMBAI