TaxTMI 
TaxTMI 
2016 (4) TMI 912
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....) erred in law in holding that the AO was not justified in making disallowance of Rs. 57,20,303/- u/s 14A of the Act read with Rule 8D of the Income Tax Rules and restricting the expenses disallowed with rule 8D to the extent of Rs. 38,156/- only. On proper appreciation of the facts of the case and correct construction of law, Ld. CIT should have upheld the disallowance made by the AO." 3. The issue raised in ground no. 1 in this appeal of Revenue is that Ld. CIT(A) erred in treating the speculation loss of Rs.87,74,852/- as income from non-speculation business. The facts of the case, in brief, are that the assessee in the present case is a Private Limited Company and is a Non-Banking Financial Company (NBFC) duly registered with RBI. The assessee is also a member of National Stock Exchange (NSE) and Bombay Stock Exchanges (BSE). During the course of assessment proceedings, Assessing Officer observed that has declared following sources of income under the head "business":- (i) brokerage income of Rs.22,07,895/- (ii) income from derivative of Rs. 91,62,100/- (iii) income from speculation business of Rs.4,32,735/- (iv) income from share trading business non-specul....
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.... Rs.87,74,852/- is arising from the activity of speculation business by virtue of the provision of Explanation to Sec. 73 of the Act. Therefore the set off of the same will be allowed only against the speculation profit. 4. Aggrieved, assessee preferred an appeal before Ld. CIT(A) where it was submitted that the assessee being the member of NSE and BSE is engaged in the business of capital market operations. For the accounting purposes the assessee has classified its sources of income under business head. The explanation to section 73 of the Act does not speak about treating the speculation loss for the shares trading activities in its own account or third party's account. It is also silent for the shares trading activity in the capital market segment or in derivative segments wherein the shares are the underlying assets. In the instant case the incomes of the assessee are from capital market operations involving shares trading such as own share trading, on behalf of client shares trading, derivative wherein underlying assets are shares. The assessee has one terminal, common bank accounts and workforce for shares trading business. However the assessee has given different nomenclat....
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....to Section 73. Therefore, in view of the above the appellant is entitled to set off of the share trading loss with the profit earned from derivative transactions. Respectfully, following the judgment of the Hon'ble ITAT Á' Bench Kolkata, the share trading loss of Rs. 33,30,124/ is allowed to be set off with the profit in F & O. therefore, this addition of Rs. 33,30,124/- as speculation loss on delivery based shares is hereby deleted. The appellant is entitled to STT expenditure of Rs. 37,60,832/- and Transaction charges of Rs. 16,83,895/- totaling to Rs. 54,44,727/- as business expenses. Therefore, the total disallowance of Rs. 87,74,852/- is allowed to be set off with the profit from derivative trading." Being aggrieved by this order of Ld. CIT(A) Revenue is in appeal before us. Shri D.S. Damle Ld. Authorized Representative appearing on behalf of assessee and Shri Sanjit Das Ld. Departmental Representative appearing on behalf of Department. 5. We have heard rival contentions and perused the materials available on record. The ld. DR vehemently relied on the order of the AO. Before us the ld. AR submitted that the AO has misinterpreted and misapplied the provisions ex....
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....held the decision of the CITA with regard to deletion of the addition under Explanation to Sec.73 by making the following observations:- "I have carefully considered the submission of the ld.A.R. The assessing Office has added Rs. 10,06,974/- being loss suffered in trading in shares which was set off against brokerage income of shares of Rs. 12,90,172/-. The appellant is a share broker, registered with SEBI and its entire activity in shares is to be treated as the activity of share business whether it was by way of trading of shares and/or by way of brokerage in shares. The activity which was conducted by the appellant on a/c of other parties in which brokerage income was earned and the activity of dealing in shares in their own a/c was treated as share trading business. The entire activity has to be treated as one and as such the explanation to section 73 is not applicable in the instant case. I hold that the statute has not made a distinction between purchase and sale of shares of Companies made on own behalf and/ or behalf of others, where entire business activity of the company consist of purchase and sale of shares of other companies in which some brokerage was earned and in....
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.... such the Explanation appended to Section 73 will not be applicable in the present case." In case of ITO, C.W 2(2) Vs. GDB Share & Stock Broking Service Ltd ITA No.235(Cal) of 2001 it was held that "The assessee has shown brokerage income of Rs. 49.17 lacs, interest income of Rs. 1.66 lacs & dividend income of Rs. 0.74 lacs. On the other hand the assessee has suffered loss of share dealing amounting to Rs. 3.97 lacs in respect of which assessing officer has attracted the explanation to Section 73. The brokerage income earned by the assessee is out of its business of purchase & sale of shares and not in respect of any other activity being carried on by the assessee company. As per our considered view while arriving at the total profit on account of the said share dealing business, one has to take into account not only the profit or loss on sale and purchase of shares but also the brokerage earned on the purchase & sale of shares. As the brokerage income is inextricably related with the said share transaction business, the net profit of which work out to (Rs.49.40-Rs.3.97) Rs. 45.20 Lakhs. Thus, there is no merit in the action of the assessing officer in treating the loss of Rs. 3....
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.... to an investment company or a company whose principal business is banking or money lending. The learned Tribunal has, therefore, affirmed the order of the Commissioner of Income Tax (Appeal) in view of the judgment of this Court [CIT vs.Nirmal Kumar & Co.] (supra) reported in 161 ITR 413. In view of the aforesaid findings and application of law in this matter we do not think it is a fit case for admission. It is not submitted that the decision rendered in the case of [CIT vs.Nirmal Kumar & Co.] reported in 161 ITR 413 (Supra) is not applicable in the facts and circumstances of this case nor it is argued that the said decision of this Court has been overruled. Accordingly, the appeal is not admitted and the same is dismissed. The application being 1982 of 2010 is disposed of. Certified photostat copy of this order be made available to the parties, if applied for, on compliance of usual formalities." 5.3 It is pertinent to get into the Explanation to Sec.73 of the Act at this juncture:- "Section 73 : Losses in speculation business: Explanation- Where any part of the business of a company[other than a company whose gross total income consists mainly of income which....
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....erein it was held as below:- It is concluded that both trading of shares and derivative transactions are not coming under the purview of section 43(5) of the Act which provides definition of 'speculative transaction' exclusively for purposes of section 28 to 41 of the Act. Again, the fact that both delivery based transaction in shares and derivative transactions are non-speculative as far as section 43(5) of the Act is concerned goes to confirm that both will have same treatment as regards application of the Explanation to section 73 is concerned, which creates a deeming fiction. Now, before application of the said Explanation, aggregation of the business profit / loss is to be worked out irrespective of the fact, whether is from share delivery transaction or derivative transaction. Now, this view has been confirmed by the Hon'ble Jurisdictional High Court in assessee's own case in GA No. 3481 of 2013 and ITAT No. 215 of 2013 dated 12.3.2014, has held as under:- "Clause (d) of Section 43(5) became effective with effect from 1st April, 2006. Therefore, prior to 1st April, 2006 any transaction in which a contract for the purchase or sale of any commodity including stocks and sh....
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.... carrying on a speculation business to the extent to which the business consist of the purchase and sale of shares. " It would, thus, appear that where an assessee, being the company, besides dealing in other things also deals in purchase and sale of shares of other companies, the assessee shall be deemed to be carrying on a speculation business. The assessee, in the present case, principally is a share broker, as already indicated. The assessee is also in the business of buying and selling of shares where actual delivery was not intended to be taken or given. Therefore, the entire transaction carried out by the assessee, indicated above, was within the umbrella of speculative transaction. There was, as such, no bar in setting off the loss arising out of derivatives from the income arising out of buying and selling of shares. This is what the learned Tribunal has done." b) Mumbai Tribunal, Special Bench in CIT vs Concord Commercial Pvt Ltd in (2005) 95 ITD 117 (Mum) (SB) , wherein it was held that : "Before considering whether the assessee's case is hit by the deeming provision of Explanation to Section 73 of the Act, the aggregate of business profit / loss has to be worked ....
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....meaning as far as Section 43(5) of the Act is concerned. It thus follows that both will have the same treatment as far as application of the said section is concerned. 5.8 In view of the aforesaid facts and circumstances and judicial precedents relied upon hereinabove, we hold that the claim of the assessee for set off of loss from share dealing should be allowed from the profits from F & O in share transactions, the character of the income being the same and also hold that before application of the Explanation to section 73, aggregation of the business profit or loss is to be worked out irrespective of the fact whether it is from share delivery transaction or derivative transactions. We also find that the similar situation arose before this Tribunal in the case of Sungrace Merchandise Pvt. Ltd. in ITA No. 1454/Kol/2006, wherein this Tribunal vide its order dated 28.09.2006 at para-12.3 has held as under:- "now the contention of the Revenue is that Explanation to Sec. 73 would be applicable only if there is a loss in share trading business and this Explanation will not be applicable when there is profit from share trading business. We are unable to accept this contention of the....
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....dered the aforesaid arguments of the both the sides. We find that this purchase and sale of shares with the other stock brokers and the customers constdi6tute one business of purchase and sale of shares. Our view is fortified y the decisions of the Calcutta High Court in the case of CIT vs. Arvind Investment Ltd. (supra) and of the Calcutta Bench of the ITAT in TIO vs. Share & Stock Broking Services Ltd. (supra). As there is only one Terminal one Demat A/c one Dealer one Books of A/c one Finance, one set of staff & other things and also deeming provision of Explanation to Sec. 73 does not provide any bifurcation of business of purchase and sale of shares into two, one for brokerage and the other for own a/c treating, we hold that the entire business of the Company for purchase and sale of shares on its own account or one the account of customers with other stock brokers is one and the same business of purchase and sale of shares and Explanation to Sec. 73 and the entire business of purchase and sale of shares should be taken as "speculative" and should not be bifurcated. Hence, the Assessing Officer is directed to treat the entire transactions of purchase and sale of shares as o....
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....deleted the addition by observing as under:- "14. The facts relating to payment of interest of this case are same. Therefore, respectfully following the judgment of Hon'ble ITAT, Kolkata Bench in the case of DCIT v. M/s Trade Apartment Ltd. (supra), it is held that interest expenses cannot be disallowed under Rule 8D(2)(ii) in the case of the appellant. Therefore, these grounds of appeal are partly allowed by holding disallowance of Rs. 38,156/- disallowed itself by the assessee in the return. The appellant gets a relief of Rs. 57,20,303/-". Being aggrieved by this order of Ld. CIT(A) Revenue is an appeal before us. 8. At the outset, we observe that the AO has invoked the provision of Sec. 14A of the Act read with Rule 8D of the IT Rules without recording the satisfaction that the assessee's books of account are not showing the correct expenditure incurred in relation to dividend income. We find that it is only if the Assessing Officer is not satisfied with the correctness of the assessee's claim under section 14A that he can assume jurisdiction to arrive at the quantum of disallowance of expenditure in accordance with the method prescribed in rule 8D. It is not open to th....