M/s. Nilliampathy Tracon (P) Ltd. Vs. A.C.I.T. (ITAT Kolkata)
As far as the appeal of the revenue is concerned, we find that the issue as to whether transaction of trading in derivatives and profit or loss from such transaction should be regarded as a normal business loss from 01.04.2005 or from 25.01.2006 has been concluded by the decision of the Hon’ble Special Bench of ITAT, Kolkata in the case of Shree Capital Services 318 ITR (AT) 1 (SB) (Cal) in which it was held that the 43(5)(d) of the Act applies from AY 2006-07. The decision in the case of Arun Kumar Saraogi (supra) also supports the view taken by the CIT(A). In view of the aforesaid decisions, we are of the view that there is no merit in the appeal by the revenue.
Full Text of the ITAT Order is as follows:-
ITA No. 474/Kol/2016 is an appeal by the Assessee while ITA No. 538/Kol/2016 is an appeal by the revenue. Both these appeals are directed against the order dated 1 1.01..2016 of CIT(A)-19, Kolkata relating to A.Y.2006-07.
2. The Assessee is a non banking finance company. In the course of assessment proceedings the AO noticed that the assessee during the previous year had incurred loss of Rs. 3,81,20,180/- on account of trading in derivative transactions. Under section 43(5)(d) of the Income Tax Act, 1961 (Act) which was inserted by Finance Act, w.e.f. 01.04.2006 applicable from AY 2005-06. transactions in respect of trading in derivatives carried out in the recognized stock exchange will not be regarded as speculative transaction. The notification u/s 43(5)(d) of the Act notifying which are the recognized stock exchanges where trading in derivatives carried out by an assessee will not be regarded as speculative transaction was issued only n 25.0 1.2006. Though the law came into force w.e.f. 1.4.2006, the notification of recognized stock exchanges was operational only on 25.0 1.2006.
3. Prior to insertion of clause (d) to the proviso of section 43(5) by the Finance Act, 2005 with effect from 01-04-2006, the loss incurred in F&O transactions was treated as speculative loss and not business loss. Consequent to introduction of clause (d), a Notification No. 2 of 2006 dated 25-01-2006 was issued wherein the National Stock Exchange, Mumbai and the Bombay Stock Exchange, Mumbai were recognized as Stock Exchanges to carry out the eligible transaction in F&O shares. The recognition was granted to the two Exchanges with effect from 25-01-2006. According to the AO it is only after insertion of clause (d) to the proviso of section 43(5) by the Finance Act, 2005 with effect from 0 1-04-2006 and Notification dated 25-01- 2006 that the loss incurred on trading of derivatives was excluded from the definition of “speculative transaction”.
4. The AO was of the view that the loss derived by the assessee from trading in derivatives carried out prior to 25.01.2006 had to be regarded as a speculative transaction and therefore a speculative loss. Out of the loss of Rs. 3,81,20,180/- on account of trading in derivatives a loss of Rs. 1,36,90,925/- was loss incurred prior to 01.2006. The AO treated the aforesaid loss as a speculative loss and had not allowed set off of the aforesaid loss against the other income of the assessee. Before CIT(A) the assessee pointed out that the Hon’ble ITAT in the case of Arun Kumar Saraogi in ITA No. 2587/Kol/2009 dated 07.01.2011 took the view that all losses from trading in derivatives from 01.04.2005 should be regarded as normal business loss and not speculative loss. The following were the relevant observations of the Tribunal in this regard.
“8. After hearing the rival submissions and on careful perusal of the materials available on record, we are of the considered view that the facts of the present case are akin to the facts of the case decided by the ITAT, Mumbai Bench in ITA No. 6547/Mum/2009 whereas the facts of the issue decided by the Special Bench are not similar to the one in hand. We consider it to narrate the facts as well as the conclusion of the case decided by the ITAT, Mumbai Bench in ITA No. 6547/Mum/2009 as under:
“The material facts are not in dispute. The assessment year involved is 2006-07, and the assessee has incurred loss of Rs 18,05,525, in respect of ‘future and options’ transactions incurred on the National Stock Exchange of India on 17th, 23d and 24th January 2006, which was claimed to be a normal business loss in view of the exception carved out by insertion of clause (d) of Section 43(5) brought to statute w.e.f 1st April 2006. This claim has been rejected by the authorities below on the ground that, as on the date of transactions, the stock exchange was not notified for the purposes of Section 43(5)(d), and, therefore, even though clause (d) came into force with effect from 1st April 2006, the impugned transactions did not satisfy the requirements of Section 43(5)(d) to the effect that transactions should be entered into in a recognized stock exchange. Section 43 (5) defines ‘Speculative transaction means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. However, clause (d), which was inserted with effect from 1st April 2006, provides that an eligible transaction in respect of trading of derivatives carried out in a recognized stock exchange shall not be deemed to be a speculative transaction. There is also no dispute that the transaction fulfills the requirements of being an eligible transaction in respect of trading in derivatives. As for the requirement of stock exchange being recognized, as set out in Explanation (ii) to Section 43(5)(d), are that the stock exchange should , inter alia, ‘notified by the Central Government for this purpose’. It is an accepted position that NSE and BSE have been granted recognition, for the purpose of Section 43(5)(d), vide notification dated 25th January 2006 issued by the Central Board of Direct Taxes, and the point of dispute is confined to the question whether this recognition will also affect the transactions entered into in the related stock exchange prior to the date of recognition.”
“7. We find that it is undisputed position that the stock exchanges, on which the impugned transactions were carried out, were duly notified on 25th January 2006, and that in accordance with the views of the co-ordinate bench in the case of Anand Build well (supra), as also with the views of Hon’ble Gujarat High Court in the case of Claris Life sciences (supra), once the approval is granted in the relevant previous year, and in the absence of anything indicated to the contrary, the approval has to be taken as effective from the beginning of the relevant year. The issue is thus covered, in favour of the line of reasoning adopted by the assessee, by decision of the coordinate bench in the case of Anand Brothers (supra) and by Hon’ble Gujarat High Court’s judgment in the case of Claris Life sciences (supra). Respectfully following these decisions, we uphold the grievance of the assessee and hold that the derivative transactions, entered into by the assessee at the recognized stock exchanges even prior to the date of notification in the relevant previous year, are to be treated as covered by the exclusion clause set out in Section 43(5)(d). The assessee gets the relief accordingly.”
8.1 Keeping in view of the fact that the Ld. D.R. could not bring any contrary decision than that of the one relied on by the Ld. Counsel for the Assessee and the facts of the present case are undisputedly akin to the one decided by the Mumbai Bench of the ITAT, respectfully following the same, we set aside the orders of the revenue authorities and direct the AO to treat the loss as speculative loss.”
5. The CIT(A) agreed with the aforesaid submissions of the assessee and held that loss in derivatives incurred from 1.4.2005 should be regarded as speculative loss and not from 25.1.2006.
6. The CIT(A), however, found that the Hon’ble Delhi High Court in the case of DLF Commercial Developers Ltd. (2013) 35 taxmann 280 (Delhi) took the view that the definition of speculative transaction is applicable only in the context of section 28 to 41 dealing with computation of income and does not apply to section 73 which lays down the condition for set off of loss. Following the aforesaid decision the CIT(A) held that the claim of the assessee for set off of the loss in respect of trading in derivatives cannot be allowed and that has to be regarded as speculative loss for the purpose of set off.
7. Aggrieved by the action of CIT(A) in holding that the loss in respect of trading in derivatives carried out from 01.04.2005 should be regarded as normal business loss the revenue has preferred the appeal before the Tribunal raising the following ground of appeal:
“The Ld. CIT(A) erred in holding that the loss of Rs. 1,36,90,925/- in derivative transaction prior to the notification of the National Stock Exchange date 25.01.2006 was covered by the exclusion set out in Sec. 43(5)(d).
That the appellant craves the leaves to add, alter, modify, clued or delete any of appeal.”
8. As far as the assessee is concerned the assessee is aggrieved by the action of CIT(A) in not allowing the set off of loss in respect of trading in derivatives which were incurred by the assessee between 01.04.2005 upto 24.01.2006 by following the decision of the Hon’ble Delhi High Court in the case of DLF Commercial Developers Ltd. (supra). The grounds raised by the assesee read as follows :-
“1. For that the order of the Ld. CIT (A) is arbitrary, illegal and bad in law.
2. For that the Ld. C.I.T(A) erred in directing the AO apply the provisions of section 73 of the Income Tax Act on the derivative transaction prior to 25.1.2006 and treat the same as speculation loss and should have followed the judgement of the High Court in favour of the assessee when there were two contradictory judgements on the same issue.
3. For that on the facts and circumstances of the case the Ld AO erred in disallowing Rs. 9,52,230/ – as relatable to the speculation loss.
4. For that the assessee craves leave to add, alter or amend any around before or at the time of hearing.”
The figure of loss has been wrongly stated in the grounds of appeal raised by the assessee before the Tribunal .
9. We have considered the rival submissions. For proper adjudication of the issue raised by the assessee in its appeal it is necessary to look at the provisions of Explanation to section 73 of the Act which reads as follows :-
“Explanation.-Where any part of the business of a company [other than a .company whose gross total income consists mainly of income which is chargeable” under the heads “Interest on securities”, “Income from house property“, “Capital gains” and “Income from other sources“], or a company [the principal business of which is the business of trading in shares or banking] or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.”
10. It can been seen from the aforesaid explanation that the aforesaid explanation does not apply to a company whose gross total income comprises mainly income which is chargeable under the heads interest on securities, income from house property, capital gains and income from other sources. It was the plea of the ld. Counsel for the assessee before us that the gross total income of the assessee under the head capital gains is much more than the other heads of income. In this regard he drew our attention to the computation of taxable income of the AO in the order of assessment.
11. The ld. Counsel drew our attention to the decision of he Hon’ble Bombay High Court in the case of CIT vs M/s. Darshan Securities Pvt. Ltd. 341 ITR 556 (Bom). The Hon’ble Bombay High Court took the view that the words ‘consists mainly’ are indicative of the fact that the legislature had in its contemplation that the gross total income consists predominantly of income from the four heads that are referred to therein. Obviously, in computing the gross total income the normal provisions of the Act must be applied and it is only thereafter, that it has to be determined as to whether the gross total income so computed consists mainly of income which is chargeable under the heads referred to in the explanation.
12. The aforesaid decision was followed by the Hon’ble Calcutta High Court in the case of CIT vs Middleton Investment & Trading Co. Ltd. 196 of 1999 judgment dated 15.01.2014. Applying the ratio laid down in the aforesaid decision, we find the following factual position in the case of the assessee :
1. The assessee is out of the purview of the said Explanation to section 73 since the income from business as computed by the AO himself is loss of RS.74.43 lakhs which is much less than the income from capital gains of Rs. 3.86 crores. Therefore the assessee falls outside the mischief of Explanation to section 73.
2. Even if the computation under both the heads is compared after allowing the loss of Rs. 1.36 crores, then also the income from business would be (-74.43 lakhs + 1.36 crores) Rs. 62 lakhs which is again much less than the income from capital gains of Rs. 3.86 crores.
3. Even if the computation under both the heads is compared after allowing the loss of Rs. 1.36 crores and the loss of Rs. 2.44 crores post 25/01/2006 (which has neither been treated as speculative by the AO or the CIT(A)) ,then also the income from business would be (-74.43 lakhs + 1.36 crores + 2.44 crores) Rs. 3.06 crores which is again much less than the income from capital gains of Rs. 3.86 crores.
13. Therefore the set off claimed by the assesse cannot be denied by relying on the Explanation to section 73 of the Act and the decision of the Hon’ble Delhi High Court in the case of DLF Commercial Developers Ltd. (supra). The set off claimed by the assessee is therefore directed to be allowed. The appeal of the Assessee is accordingly allowed.
14. As far as the appeal of the revenue is concerned, we find that the issue as to whether transaction of trading in derivatives and profit or loss from such transaction should be regarded as a normal business loss from 01.04.2005 or from 25.01.2006 has been concluded by the decision of the Hon’ble Special Bench of ITAT, Kolkata in the case of Shree Capital Services 318 ITR (AT) 1 (SB) (Cal) in which it was held that the 43(5)(d) of the Act applies from AY 2006-07. The decision in the case of Arun Kumar Saraogi (supra) also supports the view taken by the CIT(A). In view of the aforesaid decisions, we are of the view that there is no merit in the appeal by the revenue.
15. In the result the appeal by the revenue is dismissed.
Order pronounced in the open Court on 01.12.2017.