Total Securities Ltd Vs ACIT (ITAT Chennai)
ITAT Chennai held that provisions of section 73 doesn’t apply in view of specific exclusions of the arbitrage/jobbing transactions from the purview of speculative transaction u/s 43(5) of the Income Tax Act.
Facts- The present appeal is filed by the appellant contending that CIT(A) has erred in confirming the addition made by the assessing officer by treating the loss of income as speculation loss.
AO held that the assessee set-off share trading loss on equity based transactions against income from derivative trading. The income from derivative trading, in terms of Clause (d) of Sec. 43(5) was non-speculative in nature. Since the assessee was engaged in the business of share trading, the explanation to Section 73 would apply which provide that any income or loss arising from such transactions is deemed to be speculative in nature. Therefore, the losses thus arising could be set-off only from speculative income only whereas the assessee has set-off share trading losses against non-speculative income from derivative trading which is impermissible.
Conclusion- We find that the trading business of the assessee constitutes only profit / loss in arbitrage / jobbing which are normal business transactions for the assessee. In the case of the assessee, the entire transaction of purchase and sale of securities constitutes arbitrage & jobbing transactions as a whole and hence, these transactions are outside the purview of the speculative transaction. The explanation to Sec.73 would not apply to the case of the assessee in view of specific exclusions of the arbitrage/jobbing transactions from the purview of speculative transaction u/s 43(5) of the Income Tax Act.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
1. Aforesaid appeal by assessee for Assessment Year (AY) 2009-10 arises out of order of learned Commissioner of Income Tax (Appeals)- 11, Chennai [CIT(A)] dated 19-03-2019 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s.143(3) of the Act on 21-12- 2011. The grounds taken by the assessee read as under: –
“1. The order of the Commissioner of Income tax (Appeals) is contrary to law and facts and circumstances of the case.
2. The Commissioner of Income tax (Appeals) has erred in confirming the order of the Assessing Officer that disallowed expenses amounting to Rs.3,86,697/ u/s 14A of Income tax Act, applying rule 8D, without correlating any expenses being incurred to earn the tax free dividend income by the appellant, in spite of the fact that appellant itself has disallowed Rs.1 ,83,029/- u/s 14A of the Income Tax Act.
3. The Commissioner of Income tax (Appeals) has further erred in confirming the order of the Assessing Officer that ignored the applicability of Sec. 43(5) of Income tax Act and applying the provisions of sec. 73 of Income tax Act to the arbitrage/jobbing transactions, deeming the cash market delivery based trading loss in arbitrage activity as speculative loss.
4. The Commissioner of Income Tax (Appeals) has further erred in sustaining the order of the Assessing Officer which is not justified in treating the loss in cash market delivery based transactions of arbitrage activity of Rs.3,85,05,712/- as speculative loss.
5. The Commissioner of Income tax (Appeals) has further erred in confirming the order of the Assessing Officer which is not justified in making addition of 56,64,235/- treating the same as speculation loss u/s 73 of Income tax Act.
6. For these grounds and such other grounds that may be adduced at the time of hearing, the order of the Commissioner of Income tax (Appeals) confirming the order of the Assessing Officer may be reversed and the additions made may be deleted.”
As is evident, the grievance of the assessee is two-fold i.e. (i) disallowance u/s 14A; (ii) Losses incurred by the assessee have been treated as speculative losses.
Having heard rival submissions and upon perusal of case records, the appeal is disposed-off as under. The assessee being resident corporate assessee is stated to be engaged in trading of securities and providing share brokerage services.
2. Disallowance u/s 14A
2.1 The assessee earned exempt dividend income of Rs.30.20 Lacs and offered suo-motu disallowance u/s 14A for Rs.1 .83 Lacs in the return of income. However, Ld. AO, applying Rule 8D(2)(iii), computed additional disallowance of Rs.3.86 Lacs. The Ld. CIT(A) confirmed the same against which the assessee is in further appeal before us.
2.2 It could be seen that the assessee has offered suo-motu disallowance in the return of income. However, Ld. AO, without recording any objective satisfaction as to why said disallowance was not acceptable, straightway applied Rule 8D(2) which run contrary to statutory provisions of Sec.14A r.w.r.8D(2). In our considered opinion, before applying the said rule, it was incumbent upon Ld. AO to record an objective satisfaction rejecting the computations made by the assessee. In the absence of such an exercise, the additional disallowance made by Ld. AO could not be sustained in law. We order so. This ground stand allowed.
3. Treatment of Losses as Speculative Losses
3.1 The assessee credited jobbing income of Rs.1799.10 Lacs which was computed as under: –
