A Mumbai Income-Tax Appellate Tribunal (ITAT) has permitted Bank of America (BankAm) to set off losses related to securities transactions against profits gained in similar deals, despite the Income Tax department and the Commissioner (Appeals) disallowing such a set-off on grounds that such deals were in contravention of the Securities Contracts (Regulation) Act (SCR Act).

The losses sought to be set off against profits in other transactions were around Rs 13 lakh. The I-T and Commissioner (Appeals) held that the losses could not be set off as the broker had acted as a principal and not an agent. Section 15 of the SCR Act mandates the consent of the client, if the broker has to act as a principal.

BankAm argued that the transactions it had carried out with the broker as a principal had all the required consent, and pointed to the existence of bills and receipts as proof of such consent, besides its oral consent. The ITAT, after examining the point in detail, held that proofs for the same were not in existence.

Therefore, the ITAT held that the transactions were illegal. But this did not prevent the ITAT from examining the appeal of BankAm for allowing the losses incurred in such “illegal” transactions to be set off. The ITAT said in line with a ruling by the Supreme Court (SC) allowing losses in a similar case where the party involved incurred losses in transactions on heroin, that principles of morality are different from the views of the law.

The ITAT quoted the SC judgement in the case of Dr TA Qureshi versus CIT. The apex court had held, “We fully agree with the High Court that the assessee was committing a highly immoral act in illegally manufacturing and selling heroin. However, cases are to be decided on legal principles and not on one’s own moral views. Law is different from morality, as the positivist jurists Bentham and Austin pointed out.”

In the aforesaid case, the apex court clearly stated since heroin seized was part of the stock-in-trade, it has to be allowed as business loss. The ITAT held, “In the light of the above (SC ruling), we have examined the instant case, where the assessee executed security transactions may be in violation of Section 15 of the Securities Contract Act, and the loss generated out of the said transaction, when undisputedly borne out of the books of asessee, is an allowable loss. Therefore, the said loss is eligible for set-off as claimed by the assessee.”

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