Loss on account of intraday trading in shares settled through clearing difference bills is not speculative in nature

Issue before court:

• Whether the assessee’s loss on account of intraday trading in shares, is truly speculative in nature and liable to be treated as such?
• Whether the interest-free loans secured by the assessee to the tune of 1.55 crores were in the circumstances of the case liable to be added under Section 68 of the Act.

Brief Facts:

• The assessee engaged in trading in stocks and shares and acts as a sub-broker. Assessee claimed a sum of 66,35,210/- as business expenditure on account of clearing difference. In the AY 2007-08 it also reflected an amount of Rs. 1.55 crores as loans/advance obtained from various parties and entities.
• The assessing officer treated the Rs. 66.35 lakhs as a speculative loss and disallowed it on account of Section 73(1) and  added Rs. 1.55 Crores  under Section 68, doubting the genuineness of the transaction.
• CIT (A) as well as ITAT favoured assessee. Both the appellate bodies were of the opinion that the nature and character of the transaction was such that it did not fall within the description of speculative transaction and that given the material produced by the assessee, all the shares and scripts purchased from the broker were on firm basis.

Contention of the revenue:

• Loss on account of intra-day trading in shares settled through clearing difference bills is speculative in nature.
• The assessee could neither prove the creditworthiness of the persons giving such loans nor genuineness of the transaction of interest free unsecured loan from unrelated parties.

Contention of the assessee:

• After the introduction of online computerized trading of securities, the transactions are automatically recorded by the stock exchanges and there is no requirement of physical delivery of said certificates etc.
• The purchase and sale is routed through demat accounts and the only way to find out the profit and loss on the purchase and sales of securities made through a broker is the account statement submitted by such broker from time to time.
• Certain intraday transactions broadly described as “clearing differences”, were held over in the sense that the delivery had to be obtained. It was argued before the concerned authorities and a chart, reflecting the transactions to support the submission, was placed before those authorities.
• All the creditors had confirmed the transaction. Their creditworthiness was established in the sense that relevant documents in support of their possessing and requisite funds to advance loans to the assessee were examined.

Held by the Court:

• Both the CIT (Appeal) and the ITAT took into consideration the assessee’s explanation that certain intraday transactions – broadly described as “clearing differences”, were held over in the sense that the delivery had to be obtained.
• The assessee had also apparently argued before the concerned authorities and placed a chart reflecting the transactions to support the submission that even in respect of intraday sales, consideration had passed.
• The discussion of the assessing officer while including a sum of 66,35,210/- would show that the no rationale has been given as to whether in fact consideration flowed for the intraday purchases and sales effected by the assessee so as to take it out of the mischief.
• Having regard to these facts this Court is of the opinion that the matter should be considered afresh and express findings recorded as to whether in fact intraday purchases and sales made by the assessee were jobbing transactions and whether consideration has passed.
• If the assessing officer felt that being interest-free, certain amounts were deemed to be included as income was to do so in accordance with law rather than proceeding under Section 68 as he did.
• The mandate of the law as explained in CIT V. Lovely Exports (P) Ltd. 216 CTR 195 is that onus is upon the assessee to disclose the true identity of the creditor and the creditworthiness of the said party. In this case since the identity and creditworthiness had been established, genuineness was a matter of inference.

Conclusion:

Clearing difference has been determined on the basis of statement of purchase and sales of shares of security made on assessee’s behalf by the broker. CIT(A) decided this issue after examining the ledger accounts maintained by the assessee and contract notes issued by the broker. CIT(A) has found that the broker has actually purchased and sold the shares & securities on behalf of the assessee and necessary charges on account of STT stamp duty, another statutory dues have been debited to the assessee’s account. The second issue was decided in accordance with the finding of Hon’ble Supreme Court in the case of Lovely Exports Ltd.