Asstt.CIT Cir.4, Pune V. M/s. P. P. Holding Pvt. Ltd., Pune

ITA 809/PUN/2009

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9712 (ITAT-PUNE)
• Duration Of Justice: 3 year(s) 1 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2012
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2005-2006
• Appeal Filed On: 08-07-2009
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: ANN KAPTHUAMA
• Keywords: Business income; Speculation loss; Futures and options; Speculative transactions
• Section: 43(5); 2

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI SHAILENDRA KUMAR YADAV JUDICIAL MEMBER AND SHRI R.K. PANDA ACCOUNTANT MEMBER ITA NO. 809/PN/2009 (ASSESSMENT YEAR 2005-06) ACIT CIRCLE (4), PUNE .. APPELLANT VS. M/S. P.P. HOLDING PVT. LTD., 9, VEE NIMBKAR SOC., BANER ROAD, PUNE. .. RESPONDENT PAN NO.AABCP 1267C ASSESSEE BY : SRI SUNIL GANOO DEPARTMENT BY : MS. ANN KAPTHUAMA DATE OF HEARING : 07-08-2012 DATE OF PRONOUNCEMENT : 28 -08-2012 ORDER PER R.K. PANDA, AM : THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINS T THE ORDER DATED 24-04- 2009 OF THE CIT(A)-II, PUNE RELATING TO ASSESSMENT YEAR 2005-06. 2. FACTS OF THE CASE IN BRIEF ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF SHARE TRADING, LEASING ETC. DURING THE COURSE OF A SSESSMENT PROCEEDINGS THE AO NOTED THAT THE ASSESSEE COMPANY HAS SHOWN TOTAL INC OME AT RS.1,68,89,998/-. AFTER CLAIMING AN EXPENDITURE OF RS.6,42,38,574/- THE ASS ESSEE HAS SHOWN NET LOSS OF RS.4,73,48,576/-. THE AO NOTED FROM THE PROFIT & L OSS ACCOUNT THAT THE ASSESSEE HAS SHOWN LOSS ON DERIVATIVE TRADING AT RS.5,24,49, 729/-. ACCORDING TO THE AO DERIVATIVE LOSS IS A LOSS SUFFERED BY THE ASSESSEE COMPANY WHICH IS A SPECULATIVE LOSS. THE TRANSACTIONS SHOWN BY THE ASSESSEE IN TH E P&L ACCOUNT ARE IN THE NATURE OF SPECULATIVE TRANSACTIONS AS DEFINED IN SECTION 4 3(5) OF THE INCOME TAX ACT. THEREFORE, THE ASSESSEES TRANSACTIONS DO NOT FALL IN ANY OF THE EXEMPTIONS GIVEN IN PROVISO TO SECTION 43(5). 2 3. THE AO ANALYSED THE PROVISO TO SECTION 43(5) AND CAME TO THE CONCLUSION THAT THE ASSESSEES TRANSACTIONS DO NOT FALL IN ANY OF THE EXEMPTIONS GIVEN IN PROVISO TO SECTION 43(5). THE ASSESSEE HAS ACCEPTE D THAT THE TRANSACTIONS OF PURCHASE AND SALE OF SHARES APPEARING IN P&L ACCOUN T ARE SPECULATIVE TRANSACTIONS. THE SAME HAS ALSO BEEN CONFIRMED BY THE BROKER OF THE ASSESSEE. REFERRING TO A FEW DECISIONS THE AO NOTED THAT EVEN IF THE ORIGINAL INTENTION WAS NOT TO GAMBLE IN DIFFERENCE, IF INFACT THE CONTRACT IS SETTLED BY PAYMENT OF DIFFERENCE, IT IS A SPECULATIVE TRANSACTION FOR THE PURPOSE OF THE ACT. THEREFORE, THE PROVISIONS OF SECTION 73(1) AND 73(2) OF THE INCOME TAX ACT ARE APPLICABLE TO THE ASSESSEE COMPANY. HE HELD THAT IN VIEW OF THE EXPL ANATION TO SECTION 73 THE LOSS OF RS.5,24,49,729/- CANNOT BE SET OFF AGAINST ANY O THER INCOME EXCEPT SPECULATION INCOME. HE ACCORDINGLY DISALLOWED THE SPECULATIVE LOSS OF RS. 5,24,49,729/-. HE HOWEVER HELD THAT THE SAME IS ALLOWED TO BE CARRIED FORWARD TO THE SUBSEQUENT YEARS. 4. BEFORE THE CIT(A) IT WAS SUBMITTED THAT THE ASSE SSEE COMPANY HAS DONE TRADING IN FUTURES AND OPTIONS IN SHARES POPULARLY KNOWN AS DERIVATIVES THROUGH AUTHORISED SHARE BROKERS IN RECOGNISED STOCK EXCHAN GES AND SUFFERED A LOSS OF RS.5,24,49,729/- WHICH HAS BEEN DISCLOSED IN THE P& L ACCOUNT AND HAS BEEN SET OFF AGAINST OTHER BUSINESS INCOME AND OTHER INCOME OF THE COMPANY. THE ASSESSEE HAS TRADED IN INDEX BASED TRADABLE SECURITIES POPUL ARLY KNOWN AS DERIVATIVES HAVING NO PHYSICAL FORM IN ITSELF AND THEREFORE THE SE ARE NOT CAPABLE OF PHYSICAL DELIVERY/TRANSFER. THE AO HAD MISCONSTRUED THE PROV ISIONS OF SECTION 43(5) AND HAS ERRED IN HOLDING THAT THE LOSS SUFFERED IN DERI VATIVES IS A SPECULATIVE LOSS. RELYING ON A COUPLE OF DECISIONS IT WAS ARGUED THAT THE LOSS SUFFERED IN TRADING AND DERIVATIVES IS OUTSIDE THE SCOPE AND PURVIEW OF SPE CULATION AS DEFINED IN SECTION 43(5) OF THE INCOME TAX ACT. IN ITS ALTERNATIVE CO NTENTION IT WAS ARGUED THAT SECTION 43(5)(D) WHICH HAS BEEN INSERTED W.E.F. 01- 04-06 BEING CLARIFICATORY IN 3 NATURE HAS RETROSPECTIVE OPERATION FROM THE DATE. RELYING ON A COUPLE OF DECISIONS IT WAS ARGUED THAT THE AO SHOULD BE DIRECTED TO ALL OW THE SET OFF THE SAID LOSS AGAINST THE BUSINESS INCOME AND OTHER INCOME OF THE ASSESSEE COMPANY. 5. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE AND RELYING ON THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF DCIT VS. S.S.K.I. INVESTMENT SERVICES PVT. LTD. REPORTED IN113 TTJ 51 1 AND R.B.K. SECURITIES (P) LTD. VS. ITO REPORTED IN 118 TTJ 465 WHEREIN IT HA S BEEN HELD THAT LOSS ON ACCOUNT OF THE DERIVATIVE TRADING CANNOT BE TREATED AS SPECULATIVE LOSS, ALLOWED THE CLAIM OF THE ASSESSEE. HE FURTHER HELD THAT THE PR OVISIONS OF EXPLANATION TO SECTION 73 ARE NOT APPLICABLE TO THE FACTS OF THE PRESENT C ASE. 5.1 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE REV ENUE IS IN APPEAL BEFORE US WITH THE FOLLOWING GROUNDS : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LD. CIT(A) HAS ERRED IN HOLDING THAT THE DERIVATIVE TRADING DOES N OT AMOUNT TO SPECULATION BUSINESS. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LD. CIT(A) HAS ERRED IN RELYING ON DECISIONS OF THE ITAT, MUMBAI B ENCH IN THE CASES OF : 1. DY. CIT VS. S.S.K.I. INVESTMENT SERVICES LTD. 11 3 TTJ 511 TBOM. 2. M/S. R.B.K. SECURITIES PVT. LTD., VS. ITO 118 TT J 422 TJAI. IN WHICH IT WAS HELD THAT DERIVATIVE TRANSACTIONS A RE SEPARATE TYPE OF TRANSACTIONS AND LOSS ON SUCH TRANSACTIONS CANNOT BE HELD AS SPECULA TIVE TRANSACTIONS. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LD. CIT(A) HAS ERRED IN NOT CONSIDERING THE ISSUE THAT THE AMENDME NT BROUGHT INTO STATUTE BY INSERTION OF PROVISO (D) TO SECTION 43(5) W.E.F. 01-04-2006 IS N OT A CLARIFICATORY IN NATURE AND HAS A PROSPECTIVE OPERATION. 4. THE ORDER OF THE LD. CIT(A)-II, PUNE MAY BE VACA TED AND THAT OF THE AO BE RESTORED. 5. THE APPELLANT CRAVES LEAVE TO ADD, AMEND OR ALTE R ANY OF THE GROUND OF APPEAL. 5.2 THE REVENUE HAS ALSO TAKEN THE FOLLOWING ADDITI ONAL GROUNDS : 1. WHETHER IN THE PRESENT FACTS AND CIRCUMSTANCE O F THE CASE, THE CIT(A) WAS CORRECT IN HOLDING THAT THE APPELLANT WAS A NON-BANKING COM PANY WHOSE PRINCIPLE BUSINESS IS GRANTING LOANS AND THEREBY COVERED BY EXCEPTION PRO VIDED IN THE EXPLANATION TO SEC.73 OF THE I.T. ACT. 2. WHETHER IN THE PRESENT FACTS AND CIRCUMSTANCE OF THE CASE, THE CIT(A) WAS CORRECT IN ACCEPTING A RULING THAT THE ASSESSEE WAS NOT ENG AGED IN SPECULATION BUSINESS ON THE GROUND THAT EXPLANATION TO SECTION 73 OF THE INCOME TAX ACT WAS NO TAPPLICABLE. 4 6. AFTER HEARING BOTH THE SIDES, THE ADDITIONAL GRO UNDS RAISED BY THE REVENUE ARE ADMITTED FOR ADJUDICATION. 7. THE LEARNED CIT DR FILED A COPY OF THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. BHARAT R. RUIA VIDE IT A NO. 1539/2010 ORDER DATED 18-04-2011 AND DREW THE ATTENTION OF THE BENCH TO P ARA 39 OF THE ORDER WHICH READS AS UNDER : 39. IN THE RESULT, WE HOLD THAT THE EXCHANGE TRADE D DERIVATIVE TRANSACTIONS CARRIED ON BY THE ASSESSEE DURING A.Y. 2003-04 ARE SPECULATIVE TRANSACTIONS COVERED UNDER SECTION 43(5) OF THE ACT AND THE LOSS INCURRED IN THOSE TRA NSACTIONS ARE LIABLE TO BE TREATED AS SPECULATIVE LOSS AND NOT BUSINESS LOSS. WE FURTHER HOLD THAT CLAUSE (D) INSERTED TO THE PROVISO TO SECTION 43(5) WITH EFFECT FROM 01-04-200 6 IS PROSPECTIVE IN NATURE AND THE ITAT WAS IN ERROR IN HOLDING THAT CLAUSE (D) TO THE PROVISO TO SECTION 43(5) APPLIED RETROSPECTIVELY SO AS TO APPLY TO THE TRANSACTIONS CARRIED ON BY THE ASSESSEE DURING A.Y. 2003-04. HE ACCORDINGLY SUBMITTED THAT THE ORDER OF THE CIT( A) BE SET-ASIDE THE THAT OF THE AO BE RESTORED. 8. THE LEARNED COUNSEL FOR THE ASSESSEE ON THE OTHE R HAND SUBMITTED THAT THE ASSESSEE HAS GOT STOCK DERIVATIVES AND INDEX DERIVA TIVES. THE ISSUE RELATING TO STOCK DERIVATIVES IS AGAINST THE ASSESSEE. HOWEVER , THE ISSUE RELATING TO THE LOSS ON INDEX DERIVATIVES HAS NOT BEEN DECIDED BY THE HONB LE HIGH COURT. THEREFORE, TO THIS EXTENT THE CLAIM OF THE ASSESSEE SHOULD BE ALL OWED. HE ALSO RELIED ON THE FOLLOWING DECISIONS TO THE PROPOSITION AS HOW TO R EAD THE DECISION OF A HIGHER COURT: 1. THE STATE OF ORISSA VS. SUDHANSU SEKHAR MISRA AN D OTHER REPORTED IN 1970- (001)-LLJ-0662-SC. 2. UNION OF INDIA AND OTHERS VS. DHANWANTI DEVI AND OTHERS REPORTED IN 1196- (SUP)-SCR-0032-SC. 3. CIT VS. GAGAN TRADING CO. LTD. VIDE ITA NO. 1434 OF 2010 ORDER DATED 18-04- 2011 (BOMBAY HIGH COURT). 9. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY B OTH THE SIDES, PERUSED THE ORDERS OF THE AO AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECI SIONS RELIED ON BY BOTH THE 5 SIDES. FROM THE ORDER OF THE HONBLE HIGH COURT FI LED BY THE LEARNED DR WE FIND THE HONBLE HIGH COURT HAS CATEGORICALLY HELD THAT EXCHANGE TRADED DERIVATIVE TRANSACTIONS CARRIED ON BY THE ASSESSEE ARE SPECULA TIVE TRANSACTIONS COVERED U/S.43(5) OF THE ACT AND THE LOSS INCURRED IN THOSE TRANSACTIONS ARE LIABLE TO BE TREATED AS SPECULATIVE LOSS AND NOT BUSINESS LOSS. THE HONBLE COURT HAS NOT DISTINGUISHED THE DIFFERENCE BETWEEN STOCK DERIVATI VES AND INDEX DERIVATIVES. SIMILARLY IT HAS BEEN HELD THAT CLAUSE (D) INSERTED TO THE PROVISO TO SECTION 43(5) W.E.F.01-04-06 IS PROSPECTIVE IN NATURE AND DO NOT APPLY TO THE TRANSACTIONS CARRIED OUT BY THE ASSESSEE PRIOR TO THAT. SINCE THE ASSES SMENT IN THE INSTANT CASE RELATES TO A.Y. 2005-06, THEREFORE, IN VIEW OF THE BINDING DEC ISION OF THE JURISDICTIONAL HIGH COURT IT HAS TO BE HELD THAT THE DERIVATIVE TRADING LOSS AMOUNT TO SPECULATION BUSINESS AND THE AMENDMENT BROUGHT INTO STATUTE BY INSERTION OF CLAUSE (D) TO SECTION 43(5) W.E.F. 01-04-06 IS PROSPECTIVE IN NAT URE. THE GROUNDS RAISED BY THE REVENUE ARE ACCORDINGLY ALLOWED. 10. SO FAR AS THE ADDITIONAL GROUNDS ARE CONCERNED WE FIND WE HAVE ALREADY HELD THAT THE EXCHANGE TRADED DERIVATIVE TRANSACTIONS CA RRIED ON BY THE ASSESSEE ARE SPECULATIVE TRANSACTIONS COVERED U/S.43(5) OF THE I NCOME TAX ACT AND THE LOSS INCURRED IN THOSE TRANSACTIONS ARE LIABLE TO BE TRE ATED AS SPECULATIVE LOSS AND NOT BUSINESS LOSS. IN VIEW OF THE ABOVE THE EXPLANATIO N TO SECTION 73 ARE CLEARLY APPLICABLE TO THE ASSESSEE COMPANY. THEREFORE, THE ADDITIONAL GROUNDS RAISED BY THE REVENUE ARE ALLOWED. 11. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS THE 28 TH DAY OF AUGUST 2012 SD/- SD/- (SHAILENDRA KUMAR YADAV) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE DATED: THE 28 TH AUGUST 2012 SATISH 6 COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE 2. DEPARTMENT 3. CIT(A) I PUNE 4. CCIT, PUNE, 5. ADDL. CIT, RANGE-4, PUNE 6. THE D.R, A PUNE BENCH 7. GUARD FILE BY ORDER // TRUE COPY // SENIOR PRIVATE SECRETARY ITAT, PUNE BENCHES, PUNE