TaxTMI 
TaxTMI 
2017 (2) TMI 723
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.... any case, order of Ld. CIT (A) in confirming the action of Ld. AO, in making the impugned addition by denying the set off of the loss aggregating to Rs. 27,63,30,230/- (Rs. 17,27,16,630/- loss on account of trading in derivatives, Rs. 10,10,75,192/- loss on account of trading in shares and Rs. 25,38,408/- loss on account of intraday trading in shares) and framing the impugned assessment order, is bad in law and against the facts and circumstances of the case. 3. That the appellant craves the leave to add, modify, amend or delete any of the grounds of appeal at the time of hearing and all the above grounds are without prejudice to each other." 2. Facts in brief of the case are that the assessee was engaged in the business of trading of shares and securities etc. as well as execution of works contract. For the year under consideration, the assessee filed return of income on 21/09/2009 declaring loss of Rs. 25,94,45,470/-. The case was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961 (in short 'the Act') was issued and complied with. In the course of scrutiny proceedings, the Assessing Officer observed that the assessee claimed loss of Rs.....
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....rms the business of such company, the provision of Explanation to section 73 come into play. According to the Assessing Officer, the provision of section 73 are specific and relevant for the limited purpose of setoff of the business. In view of the observations, the Assessing Officer disallowed claim of setoff of the losses of Rs. 27,63,30,230/- and addition was made accordingly. Before the learned Commissioner of Income-tax (Appeals), the assessee contested loss of Rs. 10,10,75,192/- on account of delivery based purchase and sale of shares and loss of Rs. 17,27,16,630/- on account of derivative trading. After considering the various judicial pronouncements mentioned in the impugned order, the learned Commissioner of Income- tax (Appeals) upheld the finding of the Assessing Officer on the issue in dispute. 3.3 Before us, the learned counsel of the assessee submitted that as far as losses from the derivative transactions was concerned the issue in dispute has been decided in favour of Revenue in the case of DLF Commercial Developers Ltd. by the Hon'ble Delhi High Court, reported in 261 CTR 126, whereas same issue in dispute has been decided by the Hon'ble Calcutta High Court in t....
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....set of against business income or not. Second issue before us is whether loss from the purchase and sale of shares can be set of against the business income in terms of section 73 of the Act. 3.7.1 Regarding the first issue, the assessee has shown loss on derivatives trading on NSE/BSE Rs. 17,27,16,630/- and claimed to set off the same against business income. The learned CIT(DR) submitted that issue in question is covered by the decision of the Hon'ble Delhi High Court in the case of CIT Vs. DLF Commercial Developers Ltd.(supra). We find that the Hon'ble High court referred to both Section 73 and Section 43 of the Income-tax Act and decisions available on the issue in dispute and held that loss from the derivative transactions was speculative for the purpose of section 73 of the Act and, therefore, could not be adjusted against business profit. The relevant finding of the Hon'ble High Court is reproduced as under: "6. Before a discussion on the merits of the appeal, it would be essential to extract the relevant provisions of the Income Tax Act. Section 73 (with explanation), to the extent it is relevant, reads as follows: "Losses in speculation business.....
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....r ultimately settled otherwise than by 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 merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations 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 holdings of stocks 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 nature 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 Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognized stock exchange;] Shall not be deemed to be a speculative transac....
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....s, insurance of buildings, repairs of plant and machinery, depreciation, reserves for shipping business, rehabilitation fund, expenditure on certain eligible objects or schemes, deductions, amounts not deductible, profits chargeable to tax, etc. The assessee is no doubt correct in contending that the only definition of derivatives is to be found in Section 43(5); yet the Court cannot ignore or overlook that the definition - to the extent, it excludes such transactions from the mischief of the expression "speculative transactions" is confined in its application. Parliamentary intendment that such transactions are also excluded from the mischief of Explanation to Section 73 (4), however, is not borne out. In this context, it would be instructive to notice that in Rajshree Sugars and Chemicals Ltd (supra), the Madras High Court noticed, rather dramatically, that "..'Derivatives are time bombs and financial weapons of mass destruction' said Warren Buffett, one of the world's greatest investors, who overtook Microsoft Maestro in 2008 to become the richest man in the world and who is known as the 'Sage of Omaha or Oracle of Omaha'. Derivatives, according to h....
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....ification variously expressed in the definition clauses which created them and it may be that even where the definition is exhaustive inasmuch as the word defined is said to mean a certain thing, it is possible for the word to have a somewhat different meaning in different sections of the Act depending upon the subject or the context. That is why all definitions in statutes generally begin with the qualifying words similar to the words used in the present case, namely, unless there is anything repugnant in the subject or context. Therefore in finding out the meaning of the word " insurer " in various sections of the Act, the meaning to be ordinarily given to it is that given in the definition clause. But this is not inflexible and there may be sections in the Act where the meaning may have to be departed from on account of the subject or context in which the word has been used and that will be giving effect to the opening sentence in the definition section, namely, unless there is anything repugnant in the subject or context. In view of this qualification, the court has not only to look at the words but also to look at the context, the collocation and the object of such words relat....
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....,76,185/- incurred in eligible transaction within the meaning of proviso (d) to section 43(5) not involving any purchase/sale of shares as such was speculation loss ? 3.7.3 The Hon'ble High Court of Calcutta disagreed with the decision of the Hon'ble Delhi High Court and held as under: "It would appear that the activities appearing in Clauses (a) to (e) are not to be deemed to be speculative transactions. Therefore, this comes within the category of deemed business which is however distinct and separate from any other business. Now, the question is, whether loss arising out of such deemed business can be set off against the profit arising out of other business or businesses which may for clarity be called proper business. Under Section 70 of the Act, the assessee is entitled to have the loss set off against his income from any other source under the same head unless otherwise provided. Therefore answer to the question is that the assessee is entitled to have the loss arising out of deemed business set off against the income arising out of business proper unless otherwise provided. The question however remains whether the explanation to Sub-Section (4) of Section 73 reli....
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....ature to step in and remove the absurdity. On the other hand, if two reasonable constructions of a taxing provision are possible, that construction which favours the assessee must be adopted. This is a well-accepted rule of construction recognised by this Court in several of its decisions. Hence, all that we have to see is, what is the true effect of the language employed in s. 271(1)(a)(i). If we find that language to be ambiguous or capable of more meanings than one, then we have to adopt that interpretation which favours the assessee, more particularly so because the provision relates to imposition of penalty." 3.7.6 Respectfully following the above decision of the Hon'ble Supreme Court in the case of Vegetable Product Ltd. (supra), we are inclined to follow the decision of the Hon'ble Calcutta High Court on the issue in dispute. Accordingly, we hold that the loss incurred on derivative transaction was not a speculative loss and is allowed to be adjusted against business income. 4. On the second issue whether the loss of Rs. 10,10,75,192/- from the activity of trading in shares, i.e., purchase and sale of shares is a speculation loss in terms of explanation to section 73(4....
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....ns or income from other sources and assessee not being in the business of banking or granting of loans and advances, and the business of share broker and share dealer being separate and distinct businesses, the loss could not be set off against commission earned from brokerage business. The relevant finding of the Tribunal is reproduced as under: "32. The next question that arises for consideration is whether the business carried on by the assessee-company on the one hand carries on the sale and purchase of shares on behalf of his clients and on the other hand purchase and sale of shares on his own can be said to be a speculative business as suggested by the appellant. When we examine this in the light of the Explanation attached to the Section, the answer to this question is given in the statute itself. The statute lays down in the Explanation that where the business of the company consists in purchase and sale of shares of other companies (other companies (assessee-company) emphasis supplied) shall be deemed to be carrying on speculation business to the extent to which the business consists of business of purchase and sale of shares. A bare look at the Explanation leaves....