Magic Share Traders Ltd., Ahmedabad V. The Dy.CIT, Circle-2(1)(2), Ahmedabad

ITA 770/AHD/2016

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 4304 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 7 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-10-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2012-2013
• Appeal Filed On: 30-03-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: S N SOPARKAR
• Keywords: Business income; Transactions in derivatives; Earning of tax free income; Retrospective amendment; Speculation loss; Speculative transactions
• Section: 143(3); 14A; 43(5); 28

Judgement Text

, C IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, AHMEDABAD BEFORE SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER & SHRI MAHAVIR PRASAD, JUDICIAL MEMEBR ./ I.T.A. NO. 770/AHD/2016 ( ASSESSMENT YEAR : 2012-13) MAGIC SHARE TRADERS LTD. 101, AKASHGANGA BUILDING, NR. GUJARAT COLLEGE ROAD, ELLIS BRIDGE, AHMEDABAD - 380006 / VS. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-2(1)(2), 1 ST FLOOR, NAVJIVAN TRUST BUILDING OFFICE, ASHRAM ROAD, AHMEDABAD - 380014 ./ ./ PAN/GIR NO. : AAECM9542L ( APPELLANT ) .. ( / RESPONDENT ) / APPELLANT BY : SHRI S. N. SOPARKAR, A.R. / RESPONDENT BY : SHRI JAMES KURIAN, SR. D.R. DATE OF HEARING 08/08/2018 !'# / DATE OF PRONOUNCEMENT 31/10/2018 / O R D E R PER PRADIP KUMAR KEDIA - AM: THE CAPTIONED APPEAL HAS BEEN FILED AT THE INSTANCE OF THE ASSESSEE AGAINST THE ORDER OF THE COMMISSIONER OF I NCOME TAX (APPEALS)-7, AHMEDABAD (CIT(A) IN SHORT), DATED 0 7.12.2015 ARISING IN THE ASSESSMENT ORDER DATED 31.12.2014 PASSED BY THE ASSESSING OFFICER (AO) UNDER S. 143(3) OF THE INCOME TAX ACT, 1961 (THE ACT) CONCERNING ASSESSMENT YEAR 2012-13. ITA NO. 770/AHD/16 [MAGIC SHARE TRADERS LTD. VS. DCIT] AY 2012-13 - 2 - 2. IN THE CAPTIONED APPEAL, THE ASSESSEE HAS FILED FOLLOWING CONCISE/MODIFIED GROUNDS OF APPEAL FOR ADJUDICATION PURPOSES: 1. LD. CIT(A) ERRED IN LAW AND ON FACTS IN CONFIRM ING ACTION OF AO TO TREAT BUSINESS LOSS OF RS.5,19,80,774/- AS SP ECULATION LOSS BY APPLYING EXPLANATION TO SECTION 73 OF THE A CT. LD. CIT(A) OUGHT TO HAVE CONSIDERED SUBMISSION OF THE A PPELLANT AND OUGHT TO HAVE TREATED BUSINESS LOSS INSTEAD OF TREATING SAME AS SPECULATION LOSS. IT BE SO HELD NOW. 2. LD. CIT(A) ERRED IN CONFIRMING ACTION OF AO IN D ISALLOWING RS.5,09,728/- U/S 14A OF THE ACT IGNORING FACT THAT APPELLANT SUO-MOTO DISALLOWED RS.1,35,183/- WITHOUT RECORDING SATISFACTION ON HIS PART. LD. CIT(A) OUGHT TO HAVE CONSIDERED THE SUBMISSION OF THE APPELLANT AND OUGHT TO HAVE D ELETED THE DISALLOWANCES. IT BE SO HELD NOW. 3. LD. CIT(A) ERRED IN LAW AND ON FACTS IN CONFIRMI NG ACTION OF AO FOR INCLUSION OF BANK CHARGES IN CALCULATING DIS ALLOWANCE U/S 14A. LD. CIT(A) OUGHT TO HAVE CONSIDERED THE S UBMISSION OF THE APPELLANT AND OUGHT NOT TO HAVE CONSIDERED S AID AMOUNT IN CALCULATION. IT BE SO HELD NOW. 3. RELEVANT FACTS RELATING TO GROUND NO.1 ARE THAT THE ASSESSEE COMPANY IS ENGAGED IN THE TRADING AND INVESTMENT IN SHARES AND SECURITIES, MUTUAL FUNDS AND FUTURE & OPTIONS I.E. F&O TRADING IN SHARES AND SECURITIES. THUS, DURING THE ASSESSMENT YEAR IN QUESTION, THE ASSESSEE HAS CARRIED OUT TRANSACTIONS IN SHARES IN CASH SEGMENT AS WELL AS IN DERIVATIVE SEGMENT. AS NOTED BY THE AO, THE ASSESSEE HAS INCURRED LOSSES OF RS.5,17,80,774/- FROM F&O BUSINE SS I.E. IN DERIVATIVE BUSINESS AND EARNED PROFITS OF RS.1,21,6 0,169/- FROM SHARE TRADING IN CASH SEGMENT. THUS, WHILE THE ASSESSEE INCURRED LOSSES IN DERIVATIVE SEGMENT, IT HAS EARNED PROFITS IN CASH S EGMENT I.E. ON ACCOUNT OF ORDINARY ACTION OF PURCHASE AND SALE OF SHARES SIMPLICITOR. ON THESE FACTS, THE AO INVOKED THE EXPLANATION TO S ECTION 73 AND HELD THAT LOSSES ARISING FROM DERIVATIVE TRANSACTIONS AR E IN THE NATURE OF SPECULATIVE LOSS AND THUS NOT ALLOWED TO BE SET O FF AGAINST OTHER STREAMS OF INCOME REPORTED IN THE RETURN OF INCOME EXCEPT INCOME ITA NO. 770/AHD/16 [MAGIC SHARE TRADERS LTD. VS. DCIT] AY 2012-13 - 3 - ARISING IN CASH SEGMENT OF SPECULATIVE NATURE. FOR DOING SO, THE AO RELIED UPON THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. DLF COMMERCIAL DEVELOPERS PVT. LTD. 35 T AXMANN.COM 280 (DEL). 4. AGGRIEVED, THE ASSESSEE PREFERRED THE APPEAL BEF ORE THE CIT(A). 5. THE CIT(A) RE-VISITED THE VARIOUS SUBMISSIONS M ADE ON BEHALF OF THE ASSESSEE BUT, HOWEVER, FOUND NO MERIT THEREIN. THE CIT(A) OBSERVED THAT THE PROVISIONS OF SECTION 43(5) OF TH E ACT WHICH PROVIDES DEFINITION OF SPECULATIVE TRANSACTION AP PLIES ONLY FOR THE PURPOSES OF SECTION 28 OF THE ACT AND DOES NOT EXTE ND TO OTHER SECTIONS OF THE ACT. ON THE CONTRARY, THE EXPLANAT ION TO SECTION 73 OF THE ACT CREATES A DEEMING FICTION BY WHICH THE ASSE SSEE, WHICH IS A COMPANY, AS INDICATED IN THE SAID EXPLANATION DEALI NG WITH THE TRANSACTION OF SHARES AND SUFFERING LOSSES, SUCH TR ANSACTIONS SHOULD BE TREATED AS SPECULATIVE TRANSACTIONS FOR THE PURPOSE S OF SET OFF WITHIN THE MEANING OF SECTION 73 OF THE ACT NOTWITHSTANDIN G THE DEFINITION OF SPECULATIVE TRANSACTION SPECIFIED IN SECTION 43(5) OF THE ACT. THE CIT(A) ACCORDINGLY SUSTAINED THE ACTION OF THE AO T OWARDS DENIAL OF SET OFF OF LOSSES ARISING IN DERIVATIVE SEGMENT FRO M INCOME ARISING IN OTHER STREAMS OF BUSINESS EXCEPT SPECULATIVE INCOME ARISING IN CASH SEGMENT. 6. FURTHER AGGRIEVED BY THE ACTION OF REVENUE AUTHO RITIES FOR TREATING THE LOSS FROM DERIVATIVE TRANSACTIONS AS S PECULATIVE LOSS FOR THE PURPOSES OF SET OFF UNDER S.73 OF THE ACT READ WITH EXPLANATION THERETO, THE ASSESSEE KNOCKED THE DOOR OF THE TRIBU NAL. 7. THE LEARNED SENIOR COUNSEL FOR THE ASSESSEE REIT ERATED THE SUBMISSIONS MADE BEFORE THE LOWER AUTHORITIES AND C ONTENDED THAT ITA NO. 770/AHD/16 [MAGIC SHARE TRADERS LTD. VS. DCIT] AY 2012-13 - 4 - BUSINESS CARRIED OUT IN DERIVATIVE SEGMENT IS CLEAR LY A NON-SPECULATIVE BUSINESS IN VIEW OF THE AMENDMENT CARRIED OUT IN SE CTION 43(5) OF THE ACT W.E.F. AY 2006-07. IT WAS THUS CONTENDED THAT WHERE THE DERIVATIVE TRANSACTIONS ARE NOT BE REGARDED AS SPE CULATIVE TRANSACTION DEFINED UNDER S.43(5) OF THE ACT, IT WOULD INEVITAB LY FOLLOW THAT EXPLANATION TO SECTION 73 OF THE ACT HAS NO APPLI CATION IN THE FACTS AND CIRCUMSTANCES OF THE CASE. ELABORATING FURTHER , IT WAS SUBMITTED THAT IN VIEW OF THE EXCLUSION MADE IN SUB-CLAUSE (D ) TO SECTION 43(5) OF THE ACT WHICH DEFINES THE EXPRESSION SPECULATIV E TRANSACTION, LOSS ARISING FROM DERIVATIVE TRANSACTIONS ARE CONCERNED, THE TRADING IN DERIVATIVES CANNOT BE DEEMED TO BE SPECULATIVE TRAN SACTION AT THE FIRST INSTANCE. CONTINUING FURTHER, THE LEARNED SENIOR C OUNSEL FOR THE ASSESSEE RAISED THREE BROAD LEGAL CONTENTIONS TO PR OP UP ITS CASE. 7.1 FIRSTLY, EXPLANATION TO SECTION 73 OF THE ACT C ANNOT APPLY TO LOSS IN F&O ACTIVITY WHICH ARE EXPRESSLY EXCLUDED FROM B EING REGARDED AS SPECULATIVE BUSINESS UNDER S.43(5)(D) OF THE ACT. FOR THIS PROPOSITION, THE LEARNED SENIOR COUNSEL RELIED UPON THE DECISION IN THE CASE OF ASIAN FINANCIAL SERVICES LTD. 293 CTR 240 ( CAL.) AND UPKAR RETAIL (P.) LTD. 94 TAXMANN.COM 450 (AHD.). 7.2 SECONDLY, EXPLANATION TO SECTION 73 OF THE ACT DOES NOT ALSO APPLY BECAUSE INCOME UNDER THE HEAD INCOME FROM BU SINESS & PROFESSION IS LESS THAN INCOME UNDER THE OTHER HEA D OF INCOME. FOR THIS LEGAL PROPOSITION, THE LEARNED SENIOR COUNSEL RELIED UPON THE DECISION RENDERED IN THE CASE OF DARSHAN SECURITIES (P.) LTD. 341 ITR 556 (BOM); HSBC SECURITIES & CAPITAL MARKETS INDIA (P.) LTD. 23 TAXMANN.COM 377 (BOM.) & A. K. CAPITAL MARKETS LTD. 65 TAXMANN.COM 62 (ITAT, DELHI). ITA NO. 770/AHD/16 [MAGIC SHARE TRADERS LTD. VS. DCIT] AY 2012-13 - 5 - 7.3 ADVERTING FURTHER, LEARNED SENIOR COUNSEL RAISE D THIRD LEGAL CONTENTION THAT AMENDMENT TO SECTION 73 OF THE ACT BY THE FINANCE ACT (NO.2), 2014 WHEREBY THE SAID EXPLANATION IS MA DE INAPPLICABLE TO THE COMPANIES WHERE PRINCIPAL BUSINESS OF THE ASSES SEE IS TRADING IN SHARES, IS ESSENTIALLY CURATIVE IN NATURE AND THERE FORE HAS RETROSPECTIVE EFFECT. FOR THIS PROPOSITION, THE DECISION OF THE CO-ORDINATE BENCH IN THE CASE OF FIDUCIARY SHARES & STOCK (P.) LTD. 159 ITD 554 (MUMBAI) & JALAN CEMENT WORKS LTD. 76 TAXMANN.COM 230 (KOL.) WAS RELIED UPON. 7.4 THE LEARNED SENIOR COUNSEL THUS SUBMITTED THAT ACTION OF THE REVENUE HAS NO LEGS TO STAND WHEN TESTED ON THE TOU CHSTONE ON EITHER OF THE LEGAL POSITION ENUMERATED ABOVE. THE LEARNE D SENIOR COUNSEL ACCORDINGLY CONTENDED THAT BOTH THE AO AS WELL AS T HE CIT(A) MISDIRECTED THEMSELVES IN FAILING TO APPLY THE POSI TION OF LAW ON THE GIVEN SET OF FACTS. THE LEARNED SENIOR COUNSEL ACC ORDINGLY SUBMITTED THE IMPUGNED ACTION OF THE REVENUE THUS REQUIRES TO BE SET ASIDE AND CLAIM OF THE ASSESSEE REQUIRES TO BE ALLOWED. 8. THE LEARNED DR, ON THE OTHER HAND, RELIED UPON T HE ORDER OF THE LOWER AUTHORITIES. 9. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS AND PERUSED THE RESPECTIVE ORDERS OF THE AO AND CIT(A). THE SU BSTANTIVE QUESTION THAT ARISES FOR ADJUDICATION IS WHETHER LOSS INCURR ED IN ELIGIBLE TRANSACTIONS I.E. DERIVATIVE TRANSACTIONS WITHIN TH E MEANING OF PROVISO (D) TO SECTION 43(5) OF THE ACT NOT INVOLVING ANY P URCHASE OR SALE OF SHARES PER SE CAN BE REGARDED AS SPECULATIVE LOSS FOR THE PURPOS ES OF SET OFF IN VIEW OF EXPLANATION TO SECTION 73 OR NOT . THE CONTROVERSY INVOLVED IN THE PRESENT CASE IS THUS ESSENTIALLY LE GAL IN NATURE. ITA NO. 770/AHD/16 [MAGIC SHARE TRADERS LTD. VS. DCIT] AY 2012-13 - 6 - 9.1 IN THE PRESENT APPEAL, THE ASSESSEE SEEKS SET O FF OF LOSSES ARISING FROM DERIVATIVE LOSSES AS NON-SPECULATIVE BUSINESS LOSS. IN CONTRAST, THE REVENUE HAS LABELED THE LOSS ARISING FROM DERIV ATIVE TRANSACTIONS AS SPECULATIVE LOSS AND HAS CONSEQUENTLY DENIED S ET OFF OF SUCH LOSSES FROM REGULAR INCOME OF NON-SPECULATIVE NATUR E ETC. BY APPLYING EXPLANATION TO SECTION 73 OF THE ACT. 9.2 WE FIRST ADVERT TO THE PIVOTAL CONTENTION ON BE HALF OF THE ASSESSEE THAT EXPLANATION TO SECTION 73 OF THE ACT CANNOT APPLY TO LOSS ARISING FROM DERIVATIVE TRANSACTIONS WHICH ARE CATE GORICALLY EXCLUDED FROM BEING REGARDED AS SPECULATIVE BUSINESS AS DEFI NED UNDER S.43(5) OF THE ACT READ WITH PROVISO (D) THERETO. IDENTICA L ISSUE AROSE BEFORE THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF ASIA N FINANCIAL SERVICES (SUPRA) RELIED UPON. THE HONBLE CALCUTTA HIGH COURT HELD THAT ONCE IT IS DEEMED TO BE A NORMAL BUSINESS LOSS ON THE BASIS OF PROVISO APPENDED TO SECTION 43(5) OF THE ACT, A QUE STION OF APPLYING SECTION 73 OF THE ACT OR THE EXPLANATION THERETO FO R THE PURPOSES OF REFUSING LOSS TO BE SET OFF AGAINST BUSINESS INCOME IS WHOLLY INCORRECT. THE HONBLE CALCUTTA HIGH COURT AFTER TAKING NOTE O F THE DECISION OF HONBLE DELHI HIGH COURT IN DLF COMMERCIAL (SUPRA) TOOK A DISTINCT STAND THAT DERIVATIVES CANNOT BE TREATED AT PAR WIT H SHARES FOR THE PURPOSES OF EXPLANATION TO SECTION 73 OF THE ACT BE CAUSE THE LEGISLATURE HAS TREATED IT DIFFERENTLY. THUS, IN V IEW OF THE AFORESAID POSITION ENUNCIATED BY THE HONBLE HIGH COURT IN AS IAN FINANCIAL SERVICES (SUPRA), WE FIND GOOD DEAL OF FORCE IN THE CASE OF ASSESSEE. THE CLAIM OF THE ASSESSEE THUS REQUIRES TO BE ALLOW ED ON THIS GROUND ALONE. 9.3 IN VIEW OF THE RESOUNDING CONCLUSION DRAWN IN F AVOUR OF THE ASSESSEE ON THE AFORESAID LEGAL POSITION, WE DO NOT CONSIDER IT ITA NO. 770/AHD/16 [MAGIC SHARE TRADERS LTD. VS. DCIT] AY 2012-13 - 7 - NECESSARY TO ADVERT TO OTHER ALTERNATIVE CONTENTION S RAISED ON BEHALF OF THE ASSESSEE. 10. IN THE RESULT, GROUND NO.1 OF THE ASSESSEES AP PEAL IS ALLOWED. 11. GROUND NOS. 2 & 3 CONCERN DISALLOWANCE UNDER S. 14A OF THE ACT. THE AO HAS DISALLOWED AN ESTIMATED EXPENSES PEGGED AT RS.5,09,728/- AS ATTRIBUTABLE TO EXEMPT INCOME BY INVOKING SECTIO N 14A OF THE ACT. THE AFORESAID ACTION OF THE AO WAS CONFIRMED BY THE CIT(A) IN FIRST APPEAL. 12. WHEN THE MATTER WAS CALLED FOR HEARING, THE LEA RNED SENIOR COUNSEL FOR THE ASSESSEE POINTED OUT THAT THE TOTAL EXEMPT INCOME BY WAY OF DIVIDEND WAS CLAIMED AT RS.6,13,133/- DURING THE YEAR. AGAINST THE AFORESAID INCOME, THE ASSESSEE HAS SUO MOTO DISALLOWED AN AMOUNT OF RS.1,35,183/- OUT OF EXPENSES INCURRED. THE AO HAS FURTHER DISALLOWED RS.5,09,728/- BY INVOKING RULE 8D OF THE INCOME TAX RULES. AS A RESULT, THE DISALLOWANCE HAS EXCEEDED THE EXEMPT INCOME ITSELF IN CONTRADICTION TO THE JUDICIAL PRECEDENTS. IN THIS REGARD, THE LEARNED SENIOR COUNSEL THEREAFTER ADVERTED OUR ATTE NTION TO THE FINANCIAL STATEMENT AND SUBMITTED THAT THE REVENUE FROM OPERATIONS OF CHARGEABLE NATURE STANDS RS.406.59 CRORES AGAINST W HICH A PALTRY EXPENSE OF ABOUT RS.9.63 LAKHS HAS BEEN INCURRED. THEREFORE, ANY FURTHER DISALLOWANCE OUT OF SUCH EXPENDITURE IS EVI DENTLY UNJUSTIFIED. 13. WHILE APPRECIATING THE FACT IN PERSPECTIVE, WE OBSERVE THAT AGAINST THE TOTAL EXPENSE OF RS.9.63 LAKHS, THE TUR NOVER OF THE ASSESSEE IN TAXABLE STREAM STANDS AT RS.406.59 CROR ES WHEREAS THE TAX FREE INCOME STANDS A MEAGER AMOUNT OF RS.6.13 LAKHS . THEREFORE, THE SUO MOTO DISALLOWANCE BY THE ASSESSEE IS PRIMA FACIE SUFFICIENT TO COVER THE POSSIBLE EXPENSE ATTRIBUTABLE TO TAX EXEM PT INCOME. ITA NO. 770/AHD/16 [MAGIC SHARE TRADERS LTD. VS. DCIT] AY 2012-13 - 8 - NEEDLESS TO SAY, THE OPERATION OF RULE 8D IS NOT AU TOMATIC. IT IS HEDGED BY RULES. LIKEWISE, SECTION 14A OF THE ACT INHERES IN IT THE CONCEPT OF REASONABLENESS. IT IS UNCONCEIVABLE TO SAY THAT ASSESSEE HAS INCURRED RS.6.44 LAKHS OUT OF TOTAL EXPENSE OF RS.9.63 LAKHS TO EARN A PALTRY DIVIDEND INCOME OF RS.6.13 LAKHS WHIL E THE REMAINING EXPENDITURE ATTRIBUTES FOR GENERATION OF SUBSTANTIA L REVENUE OF TAXABLE NATURE NOTED ABOVE. THE ACTION OF THE REVENUE IS T HEREFORE PRIMA FACIE INEXPLICABLE. CONSEQUENTLY, WE SET ASIDE AND CANCE L THE ADDITION OF RS.5,09,728/- MADE BY THE AO UNDER S.14A OF THE ACT. 14. IN THE RESULT, THE ASSESSEE GETS RELIEF AS CLAI MED IN GROUND NOS. 2 & 3 OF ITS APPEAL. 15. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D. SD/- SD/- (MAHAVIR PRASAD) (PRADIP KUMA R KEDIA) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD: DATED 31/10/2018 TRUE COPY S. K. SINHA !'#' / COPY OF ORDER FORWARDED TO:- &. / REVENUE 2. / ASSESSEE (. )*+ , / CONCERNED CIT 4. ,- / CIT (A) /. 012 33*+4 *+#4 56) / DR, ITAT, AHMEDABAD 7. 289 : / GUARD FILE. BY ORDER / 4 /5 *+#4 56) THIS ORDER PRONOUNCED IN OPEN COURT ON 31/10/20 18