Income Tax Appellate Tribunal - Kolkata
Fortune Interfinance Pvt Ltd, Kolkata vs Department Of Income Tax on 18 March, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
KOLKATA BENCH "A" KOLKATA
Before Shri N.V.Vasusdevan, Judicial Member and
Shri Waseem Ahmed, Accountant Member
ITA No.841/Kol/2013 &
C.O. No.54/Kol/2013
(a/o ITA No. 841/Kol/2013)
Assessment Year :2009-10
ITO W ard-5(4) V/s. M/s Fortune Interfinance
P-7, Chowringhee Pvt. Ltd., 19, British
Squre, 6 t h Floor, India Street, Kolkata-
Kolkata-700069 700069
[ AAACF 4069 R]
M/s Fortune Interfinance V/s. ITO W ard-5(4)
Pvt. Ltd. 19, British 19, British India Street,
India Street, Kolkata-700069
Kolkata-700069
अपीलाथ /Appellant .. यथ /Respondent
आवेदक क ओर से/By Assessee Shri D.S.Damle, FCA
/राज व क ओर से/By Revenue Shri Sanjit Das, JCIT, SR-DR
सन
ु वाई क तार ख/Date of Hearing 02-02-2016
घोषणा क तार ख/Date of Pronouncement 18-03-2016
आदे श /O R D E R
PER Waseem Ahmed, Accountant Member:-
This appeal by Revenue and Cross Objection (CO) by assessee are arising out of order of Commissioner of Income Tax (Appeals)-VI, Kolkata in appeal No.221/CIT(A)-VI/Wd-5(4)/2011-12/Kol dated 02.01.2012. Assessment was framed by ITO Ward-5(4), Kolkata u/s 143(3) of the Income ITA No.841/Kol/2013 & CO 54/Kol/13 A.Y. 2009-10 ITO Wd.5(4), Kol. v. M/s Fortune Interfinance Pvt. Ltd. Page 2 Tax Act, 1961 (hereinafter referred to as 'the Act') vide his order dated 26.12.2011 for assessment year 2009-10.
First we take up Revenue's appeal ITA No.841/Kol/2013
2. Revenue has raised the following grounds:
"1. That the Ld. CIT(A) has erred, on the facts and circumstances of the case, in allowing the total disallowance of Rs.87,74,852/- to be set off with the profit earned from derivative transactions.
2. That on the facts and circumstances of the case Ld. CIT(A) erred in law in holding that the AO was not justified in making disallowance of Rs.57,20,303/- u/s 14A of the Act read with Rule 8D of the Income Tax Rules and restricting the expenses disallowed with rule 8D to the extent of Rs.38,156/- only. On proper appreciation of the facts of the case and correct construction of law, Ld. CIT should have upheld the disallowance made by the AO."
3. The issue raised in ground no. 1 in this appeal of Revenue is that Ld. CIT(A) erred in treating the speculation loss of ₹87,74,852/- as income from non-speculation business.
The facts of the case, in brief, are that the assessee in the present case is a Private Limited Company and is a Non-Banking Financial Company (NBFC) duly registered with RBI. The assessee is also a member of National Stock Exchange (NSE) and Bombay Stock Exchanges (BSE). During the course of assessment proceedings, Assessing Officer observed that has declared following sources of income under the head "business":-
(i) brokerage income of ₹22,07,895/-
(ii) income from derivative of ₹ 91,62,100/-
(iii) income from speculation business of ₹4,32,735/-
(iv)income from share trading business non-speculative (-) ₹33,30,124/-
(v) interest earned from Fixed Deposit of ₹51,30,351/-
After careful analysis of the above income the AO opined that loss arising from business of share trading for an amount of Rs.33,30,124/- is a speculative business by virtue of Explanation to 73 of the Act. As per the said ITA No.841/Kol/2013 & CO 54/Kol/13 A.Y. 2009-10 ITO Wd.5(4), Kol. v. M/s Fortune Interfinance Pvt. Ltd. Page 3 Explanation the loss from share dealing business shall be treated as speculation if the income under head from "share dealing business" is more than the income from "house property", capital gains, interest on securities and other source. In the case on hand the loss from share dealing business is of 33,30,124/- and on the other hand the income from other sources of business and capital gains are of ₹3,12,692/-. Therefore, the loss from share dealing the business was treated the loss from share speculation business. There was a loss of ₹33,30,124/- from the activity of share trading business which in the opinion of AO was also speculation loss and it can only be set off against the speculation business. Accordingly, AO called upon the assessee to explain regarding the applicability of Explanation to Sec. 73 of the Act. In response thereto assessee submitted that its business is one and single composite business although activities can be segregated in terms of operational result of different transactions. There was a complete interlocking, inter-dependent and inter-connection between capital market transactions and funds utilized in different transaction segments are interconnected and there is complete inter-leasing of funds. There is the common management and common administration with regard to all the transactions of different segments of capital market operation. The assessee also submitted that interest earned from fixed deposit for ₹51,30,351/- should also be treated as speculation income as per the different provision of IT Act.
3.1 However, AO has disregarded the plea taken by assessee and recast the share trading account for working out the loss arising from the trading of share business which stand as under :-
" Share Trading A/c (Recast)
Opening stock 20,68,975/- Sales 27,15,51,827/-
Purchase 30,19,10,750/- Closing stock 2,90,97,773/-
Transaction charges 16,83,895/-
STT 37,60,832/- Loss 87,74,852/-
30,94,24,452/- 30,94,24,452
ITA No.841/Kol/2013 & CO 54/Kol/13 A.Y. 2009-10
ITO Wd.5(4), Kol. v. M/s Fortune Interfinance Pvt. Ltd. Page 4
Accordingly, AO held that the loss of ₹87,74,852/- is arising from the activity of speculation business by virtue of the provision of Explanation to Sec. 73 of the Act. Therefore the set off of the same will be allowed only against the speculation profit.
4. Aggrieved, assessee preferred an appeal before Ld. CIT(A) where it was submitted that the assessee being the member of NSE and BSE is engaged in the business of capital market operations. For the accounting purposes the assessee has classified its sources of income under business head. The explanation to section 73 of the Act does not speak about treating the speculation loss for the shares trading activities in its own account or third party's account. It is also silent for the shares trading activity in the capital market segment or in derivative segments wherein the shares are the underlying assets. In the instant case the incomes of the assessee are from capital market operations involving shares trading such as own share trading, on behalf of client shares trading, derivative wherein underlying assets are shares. The assessee has one terminal, common bank accounts and workforce for shares trading business. However the assessee has given different nomenclature for the different sources of income for the sake of convenience. The assessee reiterated that explanation to section 73 of the Act does not make any distinction for the deeming loss on account of shares trading in assessee's own account or on behalf of the clients. So both the activities should be treated at par. As regards profit earned from derivatives it was submitted that this activity was not per se hit by Sec. 43(5) of the Income- tax Act, 1961 in applying the provisions of explanation to section 73 of the Act. The Section 43(5) of the Act does not provide that share trading activity by actual delivery is a speculative transaction but the same is treated speculative by virtue of the provisions of Sec.73 of the Act. The AO has not correctly interpreted that the profits on derivatives cannot be set off against share trading loss in accordance with the provisions of Sec. 43(5) of the Act. As per the provisions of Sec.73 of the Act the shares transactions of the assessee as ITA No.841/Kol/2013 & CO 54/Kol/13 A.Y. 2009-10 ITO Wd.5(4), Kol. v. M/s Fortune Interfinance Pvt. Ltd. Page 5 a whole should be held as speculative business. The assessee also relied in the jurisdictional Kolkata High Court in the decision of CIT (Kol-2) vs. M/s Sand Dune Trade Pvt. Ltd., 146 ITR of 2010 the profit/loss on derivate trading has arisen from the same business activity of purchase and sale of shares and it deserves to be set off against loss from share trading activity.
4.1 The assessee has incurred expenses such as STT and transactions charges which pertain to all the sources of income of the assessee but the AO has attributed all expenses towards the share trading loss claimed by the assessee. As a result the loss from deemed speculation business was inflated by Rs. 54,44,727.00 which is not correct manner for working out the income from deemed speculation business. However the ld. CIT(A) disregarded the order of the AO by observing as under :
"6. The Hon'ble ITAT "A" Bench Kolkata has taken the same view in the case of ITO vs. Rajanigandha Properties Ltd. in ITA No. 1011/Kol/2011 dated 29.12.2011 and also in M/s Arion Commercial Pvt Ltd., Kolkata in ITA No. 1010/Kol/2011 dated 29.12.2011 and held that the transaction done by delivery as well as the transaction of derivative of shares profit/loss is not hit by section 43(5) and therefore the aggregation of share trading loss and profit from derivative transactions should be done before the application of the Explanation to Section 73. Therefore, in view of the above the appellant is entitled to set off of the share trading loss with the profit earned from derivative transactions. Respectfully, following the judgment of the Hon'ble ITAT Á' Bench Kolkata, the share trading loss of Rs.33,30,124/ is allowed to be set off with the profit in F & O. therefore, this addition of Rs.33,30,124/- as speculation loss on delivery based shares is hereby deleted. The appellant is entitled to STT expenditure of Rs.37,60,832/- and Transaction charges of Rs.16,83,895/- totaling to Rs.54,44,727/- as business expenses. Therefore, the total disallowance of Rs.87,74,852/- is allowed to be set off with the profit from derivative trading."
Being aggrieved by this order of Ld. CIT(A) Revenue is in appeal before us.
Shri D.S. Damle Ld. Authorized Representative appearing on behalf of assessee and Shri Sanjit Das Ld. Departmental Representative appearing on behalf of Department.
ITA No.841/Kol/2013 & CO 54/Kol/13 A.Y. 2009-10ITO Wd.5(4), Kol. v. M/s Fortune Interfinance Pvt. Ltd. Page 6
5. We have heard rival contentions and perused the materials available on record. The ld. DR vehemently relied on the order of the AO. Before us the ld. AR submitted that the AO has misinterpreted and misapplied the provisions explanation to Sec.73 of the Act. The assessee in the present case is a share broker so the entire business of sale and purchase of shares as the activity of share business whether it was by way of trading of shares and/or by way of brokerage income on purchase and sale of shares on behalf of its clients. The ld. AR reiterated that the explanation to Sec.73 of the Act does not make any distinction between the purchase and sale of shares of companies made on own behalf and/ or on behalf of the clients. The brokerage income is derived out of the purchase and sale of shares on behalf of the clients so it should be treated within the purview of the explanation to Sec.73 of the Act. Regarding the derivative profit the ld. AR submitted that the finding of the AO that the profit on derivative cannot be set off against the share trading loss according to the provisions of Sec.43(5) is incorrect and bad in law. The provisions of Explanation to Sec.73 should be applied independently. All the incomes/ loss from trading of shares, brokerage and derivatives are intrinsically interlinked and involved under lying transactions of purchase and sale of shares, hence, the provisions of explanation to Sec.73 of the Act needs to be applied after set off of intra head adjustment. The ld. AR also submitted that the derivative transactions were made to cover the loss from the trading of shares. Finally the ld. AR relied on the order of the ld. CIT(A).
From the aforesaid discussion we find that the assessee is a member of the BSE and NSE. During the year, assessee has earned income from the source of derivative activities, brokerage income and losses from the share trading activities. The AO disallowed the loss incurred from the share trading activities by holding the same, as speculative business therefore the set off of such loss was not allowed. However, Ld. CIT(A) allowed the set off of the above loss against the income derivative income.
ITA No.841/Kol/2013 & CO 54/Kol/13 A.Y. 2009-10ITO Wd.5(4), Kol. v. M/s Fortune Interfinance Pvt. Ltd. Page 7 5.1 We find from the facts available on record, the assessee is operating in one segment i.e., dealing in shares and securities and all the activities under this segment are interrelated. In this regard, we place reliance on the following decision of the coordinate bench of this tribunal in the case of ITO s Sand Dune Credit Pvt Ltd in ITA Nos. 2075 & 2076 /Kol / 2008 for the Asst Years 2004-05 & 2005-06 dated 24.4.2009, wherein the tribunal upheld the decision of the CITA with regard to deletion of the addition under Explanation to Sec.73 by making the following observations:-
"I have carefully considered the submission of the ld.A.R. The assessing Office has added Rs.10,06,974/- being loss suffered in trading in shares which was set off against brokerage income of shares of Rs.12,90,172/-. The appellant is a share broker, registered with SEBI and its entire activity in shares is to be treated as the activity of share business whether it was by way of trading of shares and/or by way of brokerage in shares. The activity which was conducted by the appellant on a/c of other parties in which brokerage income was earned and the activity of dealing in shares in their own a/c was treated as share trading business. The entire activity has to be treated as one and as such the explanation to section 73 is not applicable in the instant case. I hold that the statute has not made a distinction between purchase and sale of shares of Companies made on own behalf and/ or behalf of others, where entire business activity of the company consist of purchase and sale of shares of other companies in which some brokerage was earned and in some other loss or profit is earned. The entire business activity is inter linked and is to be treated as same activity. I am of the opinion that the case referred by the ld. A.R being CIT Vs. Nirmal Kumar & Co. 161 ITR 413 (Cal) is fully applicable in the present case. The addition of Rs.10,06,974/- under the head deemed speculation by applying the explanation to section 73 is, therefore deleted."
"Similarly, in case of M/s. Somany Stock Broking Pvt. Ltd Vs. Assistant Commissioner of Income Tax, Kolkata, ITA No. 1914/Kol/2004, it was held that:-
"The assessee company is engaged in a composite business of share broker, share trading etc during the year under consideration. The assessee has earned income from such composite business for taxation in Income Tax Return. There is a common management inter- liaison of resources. There is a common work force as such bifurcation of such business is not possible. In this regard the reference can be made to the decision of the Supreme Court in the case of Prithvi Insurance Ltd reported in 53 ITR page 632 and 637 and in the case of Exchange Corporation Limited 77 ITR 739 (SC) in the case of Exchange Corporation Limited, it was held that the test is ITA No.841/Kol/2013 & CO 54/Kol/13 A.Y. 2009-10 ITO Wd.5(4), Kol. v. M/s Fortune Interfinance Pvt. Ltd. Page 8 unit of control and not the nature of the two line of business. Hon'ble Supreme Court held that the tribunal was right in holding share business and other business carried by the appellant company constituting the same business within the meaning of Section 24(2). As thus before the amendment in 1955 while deciding the case the Hon'ble Supreme Court has applied the ratio of decision in the case of Prithi Insurance Ltd (supra). Thus this is now accepted as principle of law that once such activity are composite in nature, the income therefrom has to be assessed as a whole. Since the share broking activity, share dealing on own account all form an integrated business of the appellant company, the profit or loss from the same is required to be computed as a whole. In the instant case of the company, it is very difficult to segregate business activities and allocate respective amount of expenditure incurred for the purpose of earning the same. Since the activities are being carried out at common work place with a work force, the work staff, the expenses incurred are also common in nature. Hence, this expenses cannot be bifurcated to arrive at profit under separate heads. As such the Explanation appended to Section 73 will not be applicable in the present case."
In case of ITO, C.W 2(2) Vs. GDB Share & Stock Broking Service Ltd ITA No.235(Cal) of 2001 it was held that "The assessee has shown brokerage income of Rs.49.17 lacs, interest income of Rs.1.66 lacs & dividend income of Rs. 0.74 lacs. On the other hand the assessee has suffered loss of share dealing amounting to Rs.3.97 lacs in respect of which assessing officer has attracted the explanation to Section 73. The brokerage income earned by the assessee is out of its business of purchase & sale of shares and not in respect of any other activity being carried on by the assessee company. As per our considered view while arriving at the total profit on account of the said share dealing business, one has to take into account not only the profit or loss on sale and purchase of shares but also the brokerage earned on the purchase & sale of shares. As the brokerage income is inextricably related with the said share transaction business, the net profit of which work out to (Rs.49.40-Rs.3.97) Rs. 45.20 Lakhs. Thus, there is no merit in the action of the assessing officer in treating the loss of Rs. 3.97 lakhs in isolation by disregarding income earned by the assessee by way of brokerage in the said share trading business itself. In view of the above, we are of the considered view that the assessing officer was not justified in attracting the explanation to Section 73 and holding that loss of Rs.3.97 Lacs was deemed to be speculation loss."
5.2 We also find that the decision of Kolkata Tribunal has been approved by the Hon'ble jurisdictional High Court in the case of CIT vs M/s Sand Dune Trade Pvt ITA No.841/Kol/2013 & CO 54/Kol/13 A.Y. 2009-10 ITO Wd.5(4), Kol. v. M/s Fortune Interfinance Pvt. Ltd. Page 9 Ltd in ITAT NO. 146 of 2010 G.A.No.1982 of 2010 and G.A.No. 1983 of 2010 dated 21.7.2010, wherein it was ordered as below:-
"The Court: Being satisfied with the explanations as have been submitted we allow the prayer for condonation. The delay is condoned.
At this juncture the matter is taken up for admission hearing.
Since we have dismissed already an appeal being ITAT 147 of 2010 which has also been impugned here on the self-same facts· and circumstances and in this case also it appears that assessing officer deleted the claim of Rs.10,06,974/· on account of loss in share trading operation. The assessee preferred appeal before the Commissioner of Income Tax(Appeal). The Commissioner of Income Tax(Appeal) held that loss incurred in the business of transaction of share would not be speculation loss and has held that explanation to Section 73 would not be applicable to the case of the assessee company.
Therefore, the Commissioner of Income Tax (Appeal)) while relying on the judgment of this Court in case of [CIT vs. Nirmal Kumar & Co.] reported in 161 ITR 413 has granted relief and held that addition of Rs.10,06,974/- under the head deemed speculation by applying the Explanation to Section 73 is deleted.
The Learned Tribunal while noting the aforesaid findings of the Commissioner of Income Tax (Appeal) recorded that during the course of hearing departmental representative has not disputed the fact stated by CIT(A) (Supra). The Learned Tribunal also observed that income of the assessee in the assessment order under consideration from brokerage income of share of Rs.12,90, 172/- is more than the loss of Rs.10,,06,974/- claimed by the assessee in respect of sale and purchase of the share by way of brokerage of share. It is recorded by the learned Tribunal further that there is no dispute to the fact that explanation to Section 73 does not apply to an investment company or a company whose principal business is banking or money lending. The learned Tribunal has, therefore, affirmed the order of the Commissioner of Income Tax (Appeal) in view of the judgment of this Court [CIT vs.Nirmal Kumar & Co.] (supra) reported in 161 ITR 413.
In view of the aforesaid findings and application of law in this matter we do not think it is a fit case for admission. It is not submitted that the decision rendered in the case of [CIT vs.Nirmal Kumar & Co.] reported in 161 ITR 413 (Supra) is not applicable in the facts and circumstances of this case nor it is argued that the said decision of this Court has been overruled.
Accordingly, the appeal is not admitted and the same is dismissed.
The application being 1982 of 2010 is disposed of.
Certified photostat copy of this order be made available to the parties, if applied for, on compliance of usual formalities."
ITA No.841/Kol/2013 & CO 54/Kol/13 A.Y. 2009-10ITO Wd.5(4), Kol. v. M/s Fortune Interfinance Pvt. Ltd. Page 10 5.3 It is pertinent to get into the Explanation to Sec.73 of the Act at this juncture:-
"Section 73 : Losses in speculation business:
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 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 consist of the purchase and sale of such shares.] We find that it is clear that in the case of a company whose business consists mainly or partly of purchase and sale of shares of other companies, it will amount to speculation business unless such company's gross total income consists mainly of income under the heads of "Interest on securities" and "Income from house property", "Capital Gains" and "Income from other sources", or where the principal business of the company is the business of banking or of granting loans and advances. Hence from this, the following points emerge:- • It applies to companies whose business consists of purchase and sale of shares of other companies.
• It applies to all purchase and sale of shares.
• It does not differentiate between 'Delivery based transactions' and 'F&O' operations.
• It applies to the entire business of purchase and sale of shares, whether such trading is delivery based or non-delivery based and whether there is profit or loss from such business deemed as "speculation".
5.4 We find that the assessee had treated the entire activity of purchase and sale of shares which comprised of both delivery based and non-delivery based trading as one composite business before the application of deeming provision contained in Explanation to Sec.73 of the Act and accordingly, claimed set off of ITA No.841/Kol/2013 & CO 54/Kol/13 A.Y. 2009-10 ITO Wd.5(4), Kol. v. M/s Fortune Interfinance Pvt. Ltd. Page 11 the loss incurred in delivery based trading with profit derived from derivative trading.
5.5 We hold that the transactions done by delivery as well as the transactions of derivatives are not hit by Sec.43(5) of the Act and hence the aggregation of the share trading loss and profit from derivative transactions should be done before application of the Explanation to Sec.73 of the Act. Reliance is placed on the following decisions:-
a) Kolkata Tribunal in the case of DCIT vs M/s Baljit Securities Private Limited in ITA No. 1183/Kol/2012 dated 21.10.2014 for the Asst Year 2009-10, wherein it was held as below:-
It is concluded that both trading of shares and derivative transactions are not coming under the purview of section 43(5) of the Act which provides definition of 'speculative transaction' exclusively for purposes of section 28 to 41 of the Act. Again, the fact that both delivery based transaction in shares and derivative transactions are non-speculative as far as section 43(5) of the Act is concerned goes to confirm that both will have same treatment as regards application of the Explanation to section 73 is concerned, which creates a deeming fiction. Now, before application of the said Explanation, aggregation of the business profit / loss is to be worked out irrespective of the fact, whether is from share delivery transaction or derivative transaction. Now, this view has been confirmed by the Hon'ble Jurisdictional High Court in assessee's own case in GA No. 3481 of 2013 and ITAT No. 215 of 2013 dated 12.3.2014, has held as under:-
"Clause (d) of Section 43(5) became effective with effect from 1st April, 2006. Therefore, prior to 1st April, 2006 any transaction in which a contract for the purchase or sale of any commodity including stocks and shares was periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrip was a speculative transaction.
Sub-section 1 of Section 73 provides as follows:
'(1)Any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business.' The resultant effect was that any loss arising out of speculative transaction could only have been set off against profits arising out of speculative transaction. In the present case, the assessee, as already indicated, has been dealing in shares where delivery was in fact taken and also in shares where delivery was not ultimately taken. In other words, the assessee has been dealing in actual selling and buying of shares as also dealing in shares only ITA No.841/Kol/2013 & CO 54/Kol/13 A.Y. 2009-10 ITO Wd.5(4), Kol. v. M/s Fortune Interfinance Pvt. Ltd. Page 12 for the purpose of settling the transaction otherwise than by actual delivery. The question arise whether the losses arising out of the dealings and transaction in which the assessee did not ultimately take delivery of the shares or give delivery of the shares could be set off against the income arising out of the dealings and transactions in actual buying and selling of shares. An answer to this question is to be found in the explanation appended to Section 73 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 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 consist of the purchase and sale of such shares"
In order to resolve the issue before us, the section has to be read in the manner as follows:
" Explanation : where any part of the business of a company........................................................................... ...................................................) consist 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 consist of the purchase and sale of shares. "
It would, thus, appear that where an assessee, being the company, besides dealing in other things also deals in purchase and sale of shares of other companies, the assessee shall be deemed to be carrying on a speculation business. The assessee, in the present case, principally is a share broker, as already indicated. The assessee is also in the business of buying and selling of shares where actual delivery was not intended to be taken or given. Therefore, the entire transaction carried out by the assessee, indicated above, was within the umbrella of speculative transaction. There was, as such, no bar in setting off the loss arising out of derivatives from the income arising out of buying and selling of shares. This is what the learned Tribunal has done."
b) Mumbai Tribunal, Special Bench in CIT vs Concord Commercial Pvt Ltd in (2005) 95 ITD 117 (Mum) (SB) , wherein it was held that :
"Before considering whether the assessee's case is hit by the deeming provision of Explanation to Section 73 of the Act, the aggregate of business profit / loss has to be worked out based on the non-speculative profits, either it is from share delivery or from share derivative."ITA No.841/Kol/2013 & CO 54/Kol/13 A.Y. 2009-10
ITO Wd.5(4), Kol. v. M/s Fortune Interfinance Pvt. Ltd. Page 13
c) Decision of Hon'ble Delhi High Court in the case of CIT vs DLF Commercial Developers Ltd in ITA No. 94/2013 dated 11.7.2013 wherein it was held that the Explanation to Section 73 does not differentiate between derivatives and delivery based shares.
"11. The stated objective of Section 73-apparent from the tenor of its language is to deny speculative business the benefit of carry forward of losses. Explanation to Section 73(4) has been enacted to clarify beyond any shadow of doubt that share business of certain types or classes of companies are deemed to be speculative. That in another part of the statue, which deals with computation of business income, derivatives are excluded from the definition of speculative transactions, only underlines that such exclusion is limited for the purpose of those provisions or sections. To borrow the Madras High Court's expression, "derivatives are assets, whose values are derived from values of underlying shares, which fall squarely within the explanation to Section 73(4). Therefore, it is idle to contend that derivatives do not fall within that provision, when the underlying asset itself does not qualify for the benefit, as they (derivatives-once removed from it and entirely dependent on stocks and shares, for determination of their value).
12. In the light of the above discussion, it is held that the Tribunal erred in law in holding that the assessee was entitled to carry forward its losses; the question framed is answered in favour of the revenue and against the assessee. The appeal is, therefore, allowed; there shall be no order as to costs."
5.6. From the provisions of section 43(5)(d) of the Act, it is clear that the definition of 'speculative transaction' as contained in section 43(5) of the Act is only for purpose of sections 28 to 41 of the Act. It does not apply to the other sections of the Act.
5.7 As per the definition of section 43(5) of the Act, trading of shares which is done by taking delivery does not come under the purview of the said section. Similarly, as per clause (d) of section 43(5), derivative transaction in shares is also not speculation transaction as defined in the said section. Therefore, both profit/loss from all share delivery transactions and derivative transactions have the same meaning as far as Section 43(5) of the Act is concerned. It thus follows that both will have the same treatment as far as application of the said section is concerned.
ITA No.841/Kol/2013 & CO 54/Kol/13 A.Y. 2009-10ITO Wd.5(4), Kol. v. M/s Fortune Interfinance Pvt. Ltd. Page 14 5.8 In view of the aforesaid facts and circumstances and judicial precedents relied upon hereinabove, we hold that the claim of the assessee for set off of loss from share dealing should be allowed from the profits from F & O in share transactions, the character of the income being the same and also hold that before application of the Explanation to section 73, aggregation of the business profit or loss is to be worked out irrespective of the fact whether it is from share delivery transaction or derivative transactions.
We also find that the similar situation arose before this Tribunal in the case of Sungrace Merchandise Pvt. Ltd. in ITA No. 1454/Kol/2006, wherein this Tribunal vide its order dated 28.09.2006 at para-12.3 has held as under:-
"now the contention of the Revenue is that Explanation to Sec. 73 would be applicable only if there is a loss in share trading business and this Explanation will not be applicable when there is profit from share trading business. We are unable to accept this contention of the Revenue. Explanation nowhere provides that the deeming provision of trading the share trading business to be speculation business would be applicable only when there is loss. In our opinion, when the conditions given in the Explanation are fulfilled the business of the assessee could be deemed to be speculative business irrespective of the result of the business."
5.9 We also find that both loss as well as profit earned from the transactions in purchase and sale of shares was not attributable to the speculative transactions as defined by Section 43(5) of the Act. while coming to such conclusion we find support from the order of this Tribunal in the case of Bhartia Stock Broking Pvt. Ltd. vs. ITO in ITA No.2058/Kol/2006, wherein it was held as under:-
"Even otherwise, if a transaction is not treated as speculative transactions it could be at par with a transaction for purchase and sale of shares when actually delivered is taken. Merely because a transaction does not fall within ht definition of "speculative transaction" under Section 43(5) would be non ground for non application of the Explanation to Section 73 the operation to Explanation to Section 73 is independent of application or non-application at transaction being a speculative transaction or not under section 43(5). In view of the above, we direct the AO to treat the profit from a future and option difference capital market trade difference etc., as profits from speculative business within the meaning of the Explanation to Section 73."ITA No.841/Kol/2013 & CO 54/Kol/13 A.Y. 2009-10
ITO Wd.5(4), Kol. v. M/s Fortune Interfinance Pvt. Ltd. Page 15 From the above analysis of the above two decision of this Tribunal and the decision of the Hon'ble jurisdictional High Court, it is apparent that los in share trading and profit in share difference are both part of the business of purchase and sale of shares to which Explanation to Section 73 is applicable and therefore loss in purchase and state of shares quality for a set off against the profit derived from the same business.
5.10 Applying the ratio of the above decision, we are of the opinion that even the brokerage income and interest income for margin money are to be considered as integral part of cash share transaction business sand come within the purview of Explanation to Section 73 as also held by this Tribunal in the case of MKM Share Broking Services Pvt. Ltd. v. ITO in ITA No. 1507/Kol/2005 dated 19.03.2007 by observing as under:-
"We have considered the aforesaid arguments of the both the sides. We find that this purchase and sale of shares with the other stock brokers and the customers constdi6tute one business of purchase and sale of shares. Our view is fortified y the decisions of the Calcutta High Court in the case of CIT vs. Arvind Investment Ltd. (supra) and of the Calcutta Bench of the ITAT in TIO vs. Share & Stock Broking Services Ltd. (supra).
As there is only one Terminal one Demat A/c one Dealer one Books of A/c one Finance, one set of staff & other things and also deeming provision of Explanation to Sec. 73 does not provide any bifurcation of business of purchase and sale of shares into two, one for brokerage and the other for own a/c treating, we hold that the entire business of the Company for purchase and sale of shares on its own account or one the account of customers with other stock brokers is one and the same business of purchase and sale of shares and Explanation to Sec. 73 and the entire business of purchase and sale of shares should be taken as "speculative" and should not be bifurcated. Hence, the Assessing Officer is directed to treat the entire transactions of purchase and sale of shares as one business and treat the entire such business as speculative business."
We also find that the similar situation arose before this Tribunal in the case of M/s Guiness Securities Ltd. v. DCIT in ITA No. 894-895/Kol/2007 dated 29.06.2007, wherein it was held as under:-
"It is apparent that loss in share in trading and profit in share difference or both part of the business of purchase and sale of shares to which Explanation ITA No.841/Kol/2013 & CO 54/Kol/13 A.Y. 2009-10 ITO Wd.5(4), Kol. v. M/s Fortune Interfinance Pvt. Ltd. Page 16 to Sec. 73 is applicable and therefore loss in purchase and sale of shares quality for a set off against the profit derived from the same business.
Applying the ratio of the above decision, we are of the opinion, that even the brokerage income and interest income for margin money are to be considered as an integral part of such share transaction business and come within the purview of Explanation to Sec. 73 of the Act.
We therefore relying on the above decision of the co-ordinate Bench are of the opinion that the above income from share trading, brokerage, derivative and interest income on margin money should be considered as income derived from purchase and sale of shares and are therefore to be treated as to profit derived from speculative business as per the provision contained under Explanation to Sec. 73. We therefore dismiss the ground of appeal of Revenue.
6. The issue in ground no. 2 raised by the Revenue in this appeal is that the ld. CIT(A) erred in restricting the addition made by the AO for an amount of Rs. 38,156/- under section 14A of the Act read with rules 8D of the IT Rule, 1962.
6.1 During the year, assessee has earned income by way of dividend for an amount of Rs.7,850/-. The AO found that the shares on which the dividend income was earned were shown as stock-in-trade. The assessee himself has disallowed an expense of Rs.38,156/- u/s 14A of the Act. However, AO without recording any dissatisfaction regarding the expenses disallowed u/s 14A of the Act has directly invoked the provision of Rule 8D of the IT Rules. The AO has disallowed the expense u/s. Rule 8D of IT Rules as under:-
i) direct expenses Rs.54,44,727/-
ii) interest expenses of Rs.1,98,165/-
iii) .5% of average value of investment of Rs.1,15,567/-
Accordingly, AO disallowed the expenses of Rs.57,08,459/- u/s 14A of the Act and added it to the total income of assessee.
ITA No.841/Kol/2013 & CO 54/Kol/13 A.Y. 2009-10ITO Wd.5(4), Kol. v. M/s Fortune Interfinance Pvt. Ltd. Page 17
7. Aggrieved, assessee preferred an appeal before Ld. CIT(A) who has deleted the addition by observing as under:-
"14. The facts relating to payment of interest of this case are same. Therefore, respectfully following the judgment of Hon'ble ITAT, Kolkata Bench in the case of DCIT v. M/s Trade Apartment Ltd. (supra), it is held that interest expenses cannot be disallowed under Rule 8D(2)(ii) in the case of the appellant. Therefore, these grounds of appeal are partly allowed by holding disallowance of Rs.38,156/- disallowed itself by the assessee in the return. The appellant gets a relief of Rs.57,20,303/-".
Being aggrieved by this order of Ld. CIT(A) Revenue is an appeal before us.
8. At the outset, we observe that the AO has invoked the provision of Sec. 14A of the Act read with Rule 8D of the IT Rules without recording the satisfaction that the assessee's books of account are not showing the correct expenditure incurred in relation to dividend income. We find that it is only if the Assessing Officer is not satisfied with the correctness of the assessee's claim under section 14A that he can assume jurisdiction to arrive at the quantum of disallowance of expenditure in accordance with the method prescribed in rule 8D. It is not open to the Assessing Officer, when he is seized with the aspect of being satisfied with the correctness of the claim of the assessee, to use the method prescribed in rule 8D or any part thereof as a benchmark. It is only if, having regard to the accounts of the assessee, he is not satisfied with the correctness of the assessee's claim, that he will have jurisdiction of taking recourse to the method prescribed under rule 8D. we are relying in the Decision of the co-ordinate bench of Kolkata Tribunal in the case of REI Agro Ltd , Kolkata vs DCIT in ITA No. 1331 / Kol / 2011 dated 19.6.2013 reported in (2013) 35 taxmann.com 404 (Kolkata-Trib.) wherein it was held that :
"6. We have considered the rival submissions. A perusal of the provisions of section 14A, more specifically sub-section (2), shows that if the AO is not satisfied with the correctness of the claim of the assessee, then the AO shall determine the amount of expenditure incurred in relation to such income, which does not form part of total income under the Act. For this the method is prescribed in rule 8D. The provision of section 14A, sub-section (3) specifies the provision of 14A(2) would also apply where the assessee makes a claim that there is no expenditure incurred. This is because if the assessee does not make a disallowance under section 14A in its computation of total income, ITA No.841/Kol/2013 & CO 54/Kol/13 A.Y. 2009-10 ITO Wd.5(4), Kol. v. M/s Fortune Interfinance Pvt. Ltd. Page 18 when filing the return, then if subsection (3) was not available, the AO might not be able to make a disallowance under section 14A. Thus, where the assessee makes a claim that only a particular amount is to be disallowed under section 14A or where the assessee does not make a disallowance under section 14A, if the AO proposes to invoke the section 14A, he is to record a satisfaction on that issue. This satisfaction cannot be a plain satisfaction or a simple note. It is to be done with regard to accounts of the assessee. In the present case, there is no satisfaction by the AO and consequently, in view of the decision of the Coordinate bench of this Tribunal in the case of Balarampur Chini ITA No.144/Kol/2013-A-AM M/s. Binani Industries Ltd 11 Mills Ltd. referred to supra, no disallowance under section 14A can be made."
From the discussion of above facts and circumstances and relying on various case laws, in our considered view, we find no infirmity in the order of Ld. CIT(A). Hence, ground of Revenue is dismissed.
9. In the result, Revenue's appeal is dismissed.
Now coming to the CO. 54/Kol/2013.
10. The assessee raised the following ground of its cross objections, which are reproduced below:-
"1. For that on the facts and in the circumstances of the case, the CIT(A) erred in not adjudicating Ground No. 4 in which the appellant had objected to AO's decision of not granting std-off for brokerage income against the loss incurred in purchase & sale of shares on proprietary account.
2. For that on the facts and in the circumstances of the case, the CIT(A) ought to have held that since the brokerage was also earned in the business which involved underlying transactions of purchase & sale of shares, such income was also covered by the provisions of Explanation to Section 73 and in that view of the matter brokerage income was eligible to be set-off against loss in purchase & sale of shares carried on proprietary account.
3. For that on the facts and in the circumstances of the case, the AO be directed to allow the set-off of brokerage income against loss incurred in purchase & sale of shares on proprietary account."
The grounds raised by assessee in its CO are supportive to the order of Ld. CIT(A). Since we have already dismissed the Revenue's appeal, so, ITA No.841/Kol/2013 & CO 54/Kol/13 A.Y. 2009-10 ITO Wd.5(4), Kol. v. M/s Fortune Interfinance Pvt. Ltd. Page 19 assessee's CO has become infructus and hence we dismiss assessee's CO as infructus.
11. In the result, appeal of Revenue appeal is dismissed and that of assessee's CO is dismissed as infructus.
Order pronounced in the open court 18/03/2016
Sd/- Sd/-
(N.V.Vasudevan) (Waseem Ahmed)
(Judicial Member) (Accountant Member)
Kolkata,
*Dkp
"दनांकः- 18/03/2016 कोलकाता ।
आदे श क
त ल प अ े षत / Copy of Order Forwarded to:-
1. आवेदक/Assessee-M/s Fortune Interfinance Pvt. Ltd., 19, British India Street, Kol-69
2. राज व/Revenue-ITO Ward-5(4), P-7, Chowringhee Square, 6th Floor, Kolkata-69
3. संब-ं धत आयकर आय/ ु त / Concerned CIT Kolkata
4. आयकर आय/ ु त- अपील / CIT (A) Kolkata
5. 2वभागीय 5त5न-ध, आयकर अपील य अ-धकरण, कोलकाता / DR, ITAT, Kolkata
6. गाड9 फाइल / Guard file.
By order/आदे श से, /True Copy/ उप/सहायक पंजीकार आयकर अपील य अ-धकरण, कोलकाता ।