CHILAMILIKA HARIANI, MUMBAI V. ITO WD 6(3)(1), MUMBAI

ITA 630/MUM/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 3675 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 3 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-05-2013
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 25-04-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 31-01-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: ROOPAK KUMAR
• Assessee Lawyers: JITENDRA SANGHARI
• Keywords: Capital asset; Business income; Transactions in derivatives
• Section: 143(3); 2(14); 43(5)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH C, MUMBAI BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER AND SHRI D. KARUNAKARA RAO, ACCOUNTAT MEMBER I.T.A. NO. 630/MUM/2012 ASSESSMENT YEAR: 2007-2008 CHILAMILIKA HARIANI C/O. G.R. ENGG. P. LTD 202-A, POONAM CHAMBES, DR. A.B. RD, WORLI, MUMBAI PIN- 400018 PAN: AAAPG7884B VS. ITO WD 6(3)(1) AAYAKAR BHAVAN MUMBAI - PIN : 400020 (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI JITENDRA SANGHARI & AMIT KHATIWALA RESPONDENT BY : SHRI ROOPAK KUMAR, DR DATE OF HEARING: 25.04.2013 DATE OF OR DER: 08.05.2013 O R D E R PER D. KARUNAKARA RAO, AM: THIS IS APPEAL BY THE ASSESSEE AGAINST THE ORDER OF THE CIT(A) DATED 03.11.2011 FOR THE ASSESSMENT YEAR 2007-08. 2. GROUNDS ARE GIVEN AS UNDER: 1. THE LEARNED CIT(A) ERRED IN CONFIRMING THE ORDE R OF THE ASSESSING OFFICER TREATING THE INCOME FROM DERIVATIVES TRANSACTIONS OF RS. 5,98,411/- AS BUSINESS INCOME AGAINST THE SAME BEING OFFERED TO TAX AS SHORT TERM CAPITAL GAIN. YOUR APPELLANT SUBMITS THAT UNDER THE FACTS AND IN THE CIRCUMSTANCES OF YOUR APPELLANTS CASE THE CIT(A) OUGHT TO HAVE H ELD THAT THE INCOME FROM DE3RIVATIVES IS TAXABLE AS SHORT TERM CAPITAL GAINS. 2. YOUR APPELLANT CRAVES LEAVES TO ADDTO, ALTER, AM END OR VARY ALL OR ANY OF THE AFORESAID GROUND OF APPEAL AS THEY/TH EIR REPRESENTATIVE MAY DEEM FIT. 2 ITA NO. 630/MU M/2012 CHILAMILIKA HARIANI 3. BRIEFLY STATED RELEVANT FACTS OF THE CASE ARE TH AT THE ASSESSEE IS A DIRECTOR OF M/S G.R. ENGINEERING WORKS LTD. AND IS ALSO ENGAGED IN DEALING WITH THE DERIVATIVES TRANSACTIONS. DURING THE YEAR, ON ACCOUNT OF DERIVA TIVES TRANSACTIONS, ASSESSEE OFFERED PROFITS AMOUNTING TO RS. 5,98,411/- AND OF FERED THE SAME AS SHORT TERM CAPITAL GAIN. IN SUPPORT OF SUCH CLAIM, ASSESSEE R ELIED ON A COMBINED READING OF SECTION 2(14) OF THE INCOME TAX ACT AND SECTION 2(A A) OF SCRA ACT WHICH DENOTES THAT THE DERIVATIVES ARE PROPERTY WITH VALUE AND AR E THEREFORE, CAPITAL ASSETS. DURING THE ASSESSMENT PROCEEDINGS U/S 143(3) OF THE ACT TR EATED THE SAID PROFIT AS INCOME FROM BUSINESS. AO STATED THAT THE DERIVATIVES IN QU ESTION ARE NEVER DELIVERY-BASED AND THEREFORE, THESE ARE TRANSACTIONS ONLY IN NATUR E OF SPECULATION. HE ACCORDINGLY INVOKED THE PROVISIONS OF CLAUSE (D) OF THE PROVISO TO SECTION 43(5) OF THE ACT. THUS, AO HELD THAT THE DERIVATIVES RELATED TRANSACTION HA VE TO BE DECIDED IN THE LIGHT OF THE PROVISIONS OF CLAUSE (D) TO THE PROVISO TO SECTION 43(5) OF THE ACT. RELEVANT PORTIONS FROM THE ASSESSMENT ORDER READ AS UNDER:- FROM THE PLAIN READING OF THE SECTION IT IS VERY M UCH CLEAR THAT WHEN THERE IS NON DELIVERY OF SHARES THEN THE TRANSACTION IS REFE RRED TO AS SPECULATION TRANSACTION. THE ASSESSEE HAS HIMSELF ADMITTED THAT THE DELIVERY OF THE SECURITIES HAS NOT BEEN MADE WHICH MEANS THAT THE T RANSACTION IS SPECULATIVE IN NATURE. HOWEVER, THE PROVISO D TO SECTION 43(5 ) HAS BEEN INSERTED BY THE FINANCE ACT 2005 WITH EFFECT FROM 1/4/2005 CLEARLY STATES THAT TRANSACTION IN RESPECT OF TRADING IN DERIVATIVES IS NOT A SPECULAT IVE TRANSACTION. THE ASSESSEE HAS DELIBERATELY SHOWN THE TRANSACTION AS STCG TO E SCAPE THE HIGHER RATE OF TAX AS STCG IS TAXED AT SPECIAL RATE OF 10%. ACCORD INGLY, THE PROFIT DERIVED ON TRADING IN DERIVATIVES IS TREATED AS BUSINESS INCOM E OF THE ASSESSEE. 4. AGGRIEVED WITH THE ABOVE CONCLUSIONS OF THE AO, ASSESSEE FILED THE APPEAL BEFORE THE CIT(A). DURING THE PROCEEDINGS BEFORE HI M, THE ASSESSEE SUBMITTED THAT THE CLAIM OF THE ASSESSEE FOR TREATING THE SAID INC OME AS CAPITAL GAINS IS PROPER AND IT DOES NOT CALL FOR ANY CHANGES. FURTHER, HE MENTI ONED THAT DERIVATIVES IN PRINCIPLE ALWAYS DOES NOT INVOLVE DELIVERY-BASED TRANSACTIONS . THEREFORE, AOS LOGIC IS PATENTLY ERRONEOUS. HOWEVER, THE CIT(A) CONSIDERED THE ABOVE SUBMISSIONS AND FINALLY UPHELD THE AOS CONCLUSIONS AND REJECTED THE ARGUME NTS OF THE ASSESSEE. IN PARA-5 OF HIS ORDER, CIT(A) MENTIONED THAT ANY PROFIT ARIS ING OUT OF ANY NON-DELIVERY BASED TRANSACTIONS INVOLVING DERIVATIVES CONSTITUTES NON SPECULATIVE BUSINESS AND THE SAME 3 ITA NO. 630/MU M/2012 CHILAMILIKA HARIANI IS RIGHTLY TREATED AS BUSINESS OF THE ASSESSEE. IN THIS REGARD, LD CIT(A) DERIVED LEGAL SUPPORT FROM THE PROVISIONS OF SECTION 43(5)(D) OF THE ACT. 5. AGGRIEVED WITH THE SAME CONCLUSION, THE ASSESSEE FILED THE PRESENT APPEAL BEFORE US. DURING THE PROCEEDINGS, LEARNED COUNSEL FOR THE ASSESSEE MENTIONED THAT UNDISPUTEDLY, THE ASSESSEE HAS DONE THE IMPUGNED TR ANSACTIONS INVOLVING DERIVATIVES AND IN PRINCIPLE, THERE IS NO CONCEPT OF DELIVERY B ASED DERIVATIVES IN SUCH TRANSACTIONS. ASSESSEE ENGAGED THE PROFESSIONAL BRO KERS FOR THIS PURPOSE AND OF COURSE, ASSESSEE HIMSELF IS DIRECTLY INVOLVED IN DE CISION MAKING PROCESS OF THE PURCHASE/SALE OF THE SAID DERIVATIVES. OTHERWISE, H E RELIED ON THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE THE INCOME-TAX AUTHORITIES I N FAVOUR OF THE ARGUMENT THAT THE CLAIM OF THE ASSESSEE FOR TREATING THE IMPUGNED AS CAPITAL GAIN. FURTHER, HE MENTIONED THAT THE ACTIVITY OF THE DERIVATIVES BASE D TRANSACTIONS ARE UNIQUE TO THE YEAR UNDER CONSIDERATION. FINALLY, HE PRAYED FOR R EVERSING THE ORDERS OF THE REVENUE AUTHORITIES PER CONTRA , LD. DR FOR THE REVENUE RELIED ON BOTH THE ORDERS OF THE AO AND CIT(A). 6. WE HEARD BOTH THE PARTIES, PERUSED THE ORDERS OF THE REVENUE IN GENERAL AND THE CONTENTS OF PARA-5 OF THE CIT(A) ORDER IN PARTI CULAR THE SAID PARA READS AS UNDER:- 5. I HAVE CAREFULLY CONSIDERED THE ORDER OF THE AO AND THE SUBMISSION OF THE APPELLANT AND I FIND THAT I AM IN AGREEMENT WIT H THE ORDER OF THE AO. I FIND THAT THE AO HAS RELIED MAINLY ON SECTION 43(5) OF THE I.T. ACT, WHEREIN IT HAS CLEARLY BEEN HELD THAT NON-DELIVERY OF SHARES W OULD TERM A TRANSACTION AS A SPECULATIVE TRANSACTION AND AS THE APPELLANT HAS HERSELF STATED THAT THERE HAS BEEN NO DELIVERY OF SECURITIES, IT WOULD MEAN T HAT THIS TRANSACTION WAS SPECULATIVE IN NATURE AND THEREFORE, NO FALLING UND ER THE HEAD CAPITAL GAINS AT ALL. HOWEVER, THE PROVISION (D) OF SECTION 43(5) WHICH HAS BEEN INSERTED BY THE FINANCE ACT, 2005 WITH EFFECT FROM 1/4/2005 CLE ARLY STATES THAT THE TRANSACTION IN RESPECT OF TRADING IN DERIVATIVES IS NOT A SPECULATIVE TRANSACTION. UNDER THE CIRCUMSTANCES, AS THERE IS NO DELIVERY OF SHARES AND AS THE TRANSACTION DOES NOT FORM A PART OF THE SPECULATIVE TRANSACTION, THE PROFIT DERIVED FROM TRADING IN DERIVATIVES IS TO BE CONSID ERED AS PROFITS FROM BUSINESS OF THE APPELLANT. AS THE APPELLANT HAS OFF ERED NOTHING TO ACTUALLY REBUT THE FINDING OF THE AO EXCEPT FOR WHAT IT HAD STATED BEFORE THE AO, I FIND THAT THE ACTION OF THE AO IS TO BE UPHELD AS IT IS BEING TAKEN KEEPING THE LEGAL POSITION IN MIND AND AS PER THE PROVISIONS OF THE I NCOME TAX ACT, 1961. THE 4 ITA NO. 630/MU M/2012 CHILAMILIKA HARIANI ACTION OF THE AO IS, THEREFORE, UPHELD AND THE GROU ND OF APPEAL DISMISSED. 7. IT IS AN UNDISPUTED FACT THAT THE ASSESSEE IS IN VOLVED IN DAY TO DAY PURCHASE OF THE DERIVATIVES TRANSACTIONS. SUCH TRANSACTION I NHERENTLY DOES NOT INVOLVE DELIVERY OF THE SECURITIES. FURTHER, IT IS ALSO A FACT, THAT THE MANNER OF TREATMENT OF DERIVATIVES TRANSACTIONS ARE PROVIDED IN INCOME TAX ACT, 1961 BY WAY OF THE PROVISIONS OF SECTION 43(5)(D) WITH EFFECT FROM 1/4 /2006. THE SAID PROVISIONS STATES THAT THE TRADING IN DERIVATIVES IS NOT A SPECULATIV E TRANSACTIONS. 5. 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 B Y 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 MERCHANDI SE ENTERED INTO BY A PERSON IN THE COURSE OF HIS MANUFACTURING OR MERCHA NTING BUSINESS TO GUARD AGAINST LOSS THROUGH FUTURE PRICE FLUCTUATION S IN RESPECT OF HIS CONTRACTS FOR ACTUAL DELIVERY OF GOODS MANUFACTURED BY HIM OR MERCHANDISE SOLD BY HIM; OR (B) A CONTRACT IN RESPECT OF STOCKS AND SHARES ENTERED INTO BY A DEALER OR INVESTOR THEREIN TO GUARD AGAINST LOSS IN HIS HOLDI NGS OF STOCKS AND SHARES THROUGH PRICE FLUCTUATIONS. OR (C) A CONTRACT ENTERED INTO BY A MEMBER OF A FORWARD MA RKET 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 ((AC)) OF SECTION 2 OF THE SECURITIES CONTRA CTS (REGULATION) ACT, 1956 (42 OF 1956) CARRIED OUT IN A RECOGNIZED STOCK EXCHANGE;) SHALL NOT BE DEEMED TO BE A SPECULATIVE TRANSACTION . 8. THUS ABOVE CLAUSE (D) OF THE PROVISO TO SECTION 43(5), AN ELIGIBLE TRANSACTION IN RESPECT OF TRADING IN DERIVATIVES SHALL NOT BE DEEMED TO BE A SPECULATIVE TRANSACTION. THE EXPRESSION ELIGIBLE TRANSACTION HAS BEEN DEFINED VIDE THE EXPLANATION GIVEN BELOW THE SAID PROVISO AND IT COV ERS THE IMPUGNED TRANSACTION CARRIED OUT ELECTRONICALLY ON SCREEN BASED SYSTEM T HROUGH A STOCK BROKER INVOLVING THE RECOGNIZED STOCK EXCHANGES. THEREFORE, SUCH TRA DING ACTIVITY HAS TO BE DEEMED AS NON SPECULATIVE BUSINESS ACTIVITY IN OTHER WORDS , IT IS A NORMAL BUSINESS ACTIVITY. 5 ITA NO. 630/MU M/2012 CHILAMILIKA HARIANI NOTHING IS BROUGHT TO OUR NOTICE, THAT THE IMPUGNED TRANSACTIONS ARE NOT ELIGIBLE TRANSACTIONS AND NOT TRADED IN STATED STOCK EXCHANGE VIDE THE P ROVISIONS OF THE SAID CLAUSES CITED ABOVE. THEREFORE, THE FINDING OF CIT( A) GIVEN IN PARA 5 EXTRACTED ABOVE, DOES NOT CALL FOR ANY INTERFERENCE. 9. ACCORDINGLY, GROUNDS RAISED BY THE ASSESSEE ARE DISMISSED. 10. IN THE RESULT, APPEAL OF THE ASSESSEE IS DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON THIS 08 TH DAY OF MAY, 2013. SD/- SD/- (I.P. BANSAL) (D. KARUN AKARA RAO) JUDICIAL MEMBER ACC OUNTANT MEMBER DATE : 08.05.2013 AT :MUMBAI SK COPY TO : 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT (A), CONCERNED. 4. THE CIT CONCERNED. 5. THE DR C, BENCH, ITAT, MUMBAI. 6. GUARD FILE. // TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI