Income Tax Appellate Tribunal - Mumbai
Varsha Corporation Ltd, Mumbai vs Assessee
„ ,
IN THE INCOME TAX APPELLATE TRIBUNAL "F", BENCH MUMBAI
BEFORE SHRI I.P.BANSAL & SHRI D.KARUNAKARA RAO, AM
ITA No.6534/Mum/2012
( Assessment Years :2009-10)
M/s Varsha Corporation Ltd., Vs. DCIT (OSD)-9(1),
Varsha 13 Adarsh Society, Mumbai-20
Ramchandra Lane Extension,
Malad (West), Mumbai-64
PAN/GIR No. : AABCV 2293 E
( Appellant) .. ( Respondent)
/Assessee by : Mr. Jitendra Jain &
Mr. Ravikant S. Pathak
/Revenue by : Mr. Ravi Prakash
Date of Hearing : 31-12-2013 & 17-01-2014
Date of Pronouncement : 17th January, 2014
ORDER
PER I.P.BANSAL (J.M.) :
This appeal is filed by the assessee against the order dated 16- 8-2012, passed by the learned CIT(A)-19, Mumbai for the assessment years 2009-10.
2. The grounds of appeal in appeal of the assessee are as under:-
"1. The Commissioner of Income Tax (Appeals)-19, Mumbai erred in confirming the action of the AO in treating the loss of Rs.21,04,331/- incurred on trading in futures & options on MCX, as speculation loss instead of business loss.
The appellant submits that the transaction entered into by the appellant with MCX Stock Exchange, a Recognized Stock Exchange, was for the purpose of minimizing the risk of price fluctuation by hedging the gold in MCX Stock Exchange and the transaction is not a speculative transaction and the loss there from shall be assessed as business loss."2 ITA No.6534/2012
3. During the course of assessment proceedings, it was found by the AO that the assessee had incurred a loss of Rs.21,04,331/- on account of futures & options from MCX trading and such loss was treated by the assessee as speculative loss in the original return. In the revised return also the assessee considered such loss as speculation loss. Subsequently, in re-revised return filed on 30-6-2010, the said loss was treated as business loss. The AO asked the assessee to explain the same. It was submitted that the assessee company is engaged in the business of trading in gold. The company had obtained gold from State Bank of India, Opera House Branch as gold loan for which the price was unfixed and having regard to the price fluctuation for non-fixed date i.e. 90 days. In such transaction risk was involved according to price fluctuation for non-fixed quality of gold and in order to minimize such risk the assessee company hedge the gold in MCX. The transaction entered into by the assessee company through MCX is derivative transaction, in which it has incurred a loss of Rs.21,04,331/-. The assessee also denied applicability of Section 43(5), which defines "speculative transaction". It was submitted that the MCX is now recognized as Stock Exchange for the purpose of Section 43(5) vide Notification No.46/09, dated 22-5-2009, issued by CBDT, copy of which was furnished before the AO. Reference was made to provisions of Section 43(5)(d) to contend that such transaction could not be treated as speculative transaction. After considering the reply of the assessee, the AO did not accept the contention of the assessee as according to 3 ITA No.6534/2012 the AO Proviso to Section 43(5) states that the trading in derivatives carried out in a recognized exchange will not be deemed to be speculative transaction. According to the AO the words "recognized stock exchange" is dealt within the Explanation (ii) to Clause (d) of sub- section (5) of Section 43, which reads as under :-
"(ii) "recognized stock exchange" means a recognized stock exchange as referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfils such conditions as may be prescribed and notified by the Central Government for this purpose."
4. Referring to the aforementioned Explanation, the AO observed that the exchange namely MCX is not a recognized stock exchange during the year under consideration. The notification on which the assessee had relied upon is issued on 22-5-2009, which pertained to financial year 2009-10 and not to assessment year 2009-10. In this manner, learned AO has held that the assessee is not eligible to consider the said loss as normal business loss. Another reason given by the AO is that in the audit report, which was attached with the return, the auditor of the assessee did not place a note that such loss is to be treated as business loss. It is in this manner the aforementioned loss of Rs.21,04,331/- was treated as speculation loss. Aggrieved, the assessee filed an appeal before the CIT(A).
5. The submissions made before the AO were reiterated. After considering the submissions, learned CIT(A) has observed that there is a difference between stock exchange and commodity exchange. The 4 ITA No.6534/2012 provisions of Section 43(5)(d)(ii) talks of recognized exchanges by SEBI and are applicable only in the cases, which deals in share trading. The assessee had dealt in commodity trading. MCX is a commodity exchange and it is recognized exchange by FMC who are regulators of commodity trading in country. Section 43(5)(d)(ii) does not encompass within its ambit exchanges recognized by FMC. MCX being not a recognized stock exchange by SEBI, therefore the AO was right in treating the loss as speculative loss. He has also distinguished the case laws relied upon by the assessee. The assessee being aggrieved has filed aforementioned grounds of appeal.
6. After narrating the facts and reiterating the arguments, learned counsel submitted that this position of law has been explained by Mumbai ITAT in the case of ACIT Vs. Arnav Akshay Mehta, (2012) 53 SOT 581 (Mum), copy of which has also been placed on record and also given to the learned DR. In the said decision it has been held that according to the provisions under Section 43(5)(d)(ii) w.e.f. 1-4-2006, an eligible transaction carried out in a recognized Stock Exchange will not be treated as speculative transaction. Such provision is procedural mechanism and in the process if a longtime is taken to recognize the stock exchange, then it will not lead to an inference that the same would be applicable from the date when the stock exchange has been recognized by the Central Government. The transaction carried through MCX stock exchange after 1-4-2006 would be eligible to be treated as non-speculation within the meaning of section 43(5)(d). It 5 ITA No.6534/2012 was held that the assessee's derivative trading through MCX Stock Exchange in the assessment year 2007-08 is non-speculation transaction and loss incurred was to be treated as normal business loss. The recognition by CBDT of the stock exchange from a later date will not debar the transaction as non-speculation, especially after 1-4- 2006.
7. Reliance was placed on another decision of the Hon'ble Delhi High Court in the case of CIT Vs. Nasa Finelease P Ltd., passed in ITA No.647/2012 vide order dated 6-9-2013, copy of which has also been placed on record and was given to the learned DR. In that case, a loss of Rs.1.90 crores was shown in derivative transaction. The AO disallowed the said loss under Section 73 of the Act. Secondly, the derivative transactions were during the period from July, 2005 to September, 2005. Considering the provisions of proviso (d) to sub- section 5 of Section 43, it was held by the AO that the same were violated. They were inserted in the statute w.e.f 1-4-2006, stipulating that eligible transaction should be conducted/carried out only in recognized stock exchange to be notified. The said insertion was made by the Finance Act, 2005. Rule 6 DDA and Rule DDB were subsequently enacted to prescribe conditions and procedure for notification of a recognized stock exchange. Accordingly, the National Stock Exchange and Bombay Stock Exchange were notified vide Notification dated 25th January, 2006 and the transactions carried out by the assessee were with National Stock Exchange. Notification dated 6 ITA No.6534/2012 25th January, 2006 did not state or specify the date from which the National Stock Exchange and Bombay Stock Exchange were recognized. However, the Memorandum stipulated that transactions in respect of trading in derivatives in the aforementioned two stock exchanges w.e.f. 25-1-2006, shall not be deemed to be speculative transaction. The AO relying upon explanatory memorandum, held that the transactions entered into by the assessee between July 2005 to September, 2005 being before 25th January, 2006 and derivative loss arising therefrom was not eligible under proviso (d) to Section 43(5) of the Act and, hence, disallowed the loss.
7.1 In an appeal filed before the CIT(A), it was held that Section 43(5)(d) was operative in the assessment year 2006-07 but Rule 6DDA & DDB were notified on 1st July, 2005 and subsequently the two stock exchanges, namely, National Stock Exchange and Bombay Stock Exchange were notified w.e.f. 25th January, 2006, therefore, derivative transactions between July, 2005 to September, 2005, were not eligible. Learned CIT(A) also held that Explanation to Section 73 was not applicable as the assessee was an investment company and, thus, assessee was not entitled to set off the said loss from derivative transaction. However, the Tribunal accepted the proposition laid down by the assessee that the assessee is entitled to avail the benefit under Section 43(5)(d), even in respect of impugned transaction w.e.f. 1-4- 2006. It was observed that the Parliament had enacted the provision w.e.f. the said date and the delay, if any, for the issue of Rules and 7 ITA No.6534/2012 Notification, cannot nullified the legislative mandate of the enactment. Delay was attributable to the CBDT, who had failed to issue necessary notification within time. Such findings of the Tribunal were confirmed by the Hon'ble High Court, following the decision of Hon'ble Supreme Court in the case of S.A.L. Narayan Row and another Vs. Ishwarlal Bhagwandas and another, (1965) 57 ITR 149.
8. Learned AR further referred to the Notification dated 29-11-2013 issued by CBDT vide which MCX was notified as a "recognized association" under the provisions of clause (iii) of the Explanation to clause (e) of proviso to clause 5 of Section 43 of the Income Tax Act read with sub-rule 4 of Rule 6DDD of the Income Tax Rules, 1962. For the sake of convenience, the said notification is reproduced below :-
"[TO BE PUBLISHED IN THE GAZETTE OF INDIA, EXTRAORDINARY, PART II, SECTION 3, SUB-SECTION (ii)] GOVERNMENT OF INDIA MINISTRY OF FINANCE DEPARTMENT OF REVENUE CENTRAL BOARD OF DIRECT TAXES NOTIFICATION New Delhi, the 29th November, 2013 INCOME-TAX S.O.3539 (E).- In exercise of the powers conferred by clause
(iii) of the Explanation 2 of clause (e) of the proviso to clause (5) of section 43 of the Income-tax Act, 1961 (43 of 1961) read with sub-
rule (4) of rule 6DDD of the Income-tax Rules, 1962, the Central Government hereby notifies the Multi Commodity Exchange of India Limited, Mumbai as a recognised association for the purposes of clause (e) of the proviso to clause (5) of the said section, with effect from the date of publication of this notification in the Official Gazette.
2. The Central Government may withdraw the recognition of Multi Commodity Exchange of India Limited, Mumbai if any of the 8 ITA No.6534/2012 conditions specified in rule 6DDC of the Income -tax Rules, 1962, is violated.
3. This notification shall remain in force until the approval granted by the Forward Markets Commission is withdrawn or expires, or the notification is rescinded by the Central Government under sub-rule (5) of rule 6DDD of the Income-tax Rules, 1962.
[Notification No.9212013] [F. No. 14213112013-TPL] [Ashis Mohanty] Under Secretary to the Govt. of India"
9. It was submitted by learned AR that since now vide Notification dated 29-11-2013, the MCX through which the assessee has conducted the transactions, has been notified as "recognized association", the transaction entered into by the assessee through MCX even prior to the Notification, should be held to be transaction of the nature of non-speculative transactions in accordance with the provisions of clause (iii) of the Explanation to clause (e) of proviso to clause 5 of Section 43 of the Income Tax Act.
10. On contrary, it was submitted by the learned DR that the transactions entered into by the assessee through MCX, are to be treated as speculative transactions in view of the main provisions of Section 43(5) of the Act. He further submitted that it has clearly been brought out by the learned CIT(A) that Section 43(5)(d) referred to the eligible transactions, which are carried out in a recognized stock exchange. MCX is not a stock exchange, hence, on the basis of clause
(d) of Section 43(5), relief cannot be granted to the assessee.
Therefore, learned DR vehemently pleaded that the assessee does not deserve any relief.
9ITA No.6534/2012
11. We have given our thoughtful consideration to the submissions advanced at the hands of the learned counsel for the assessee as well as learned DR for the department. Admittedly, MCX, through which the assessee has carried out the transactions, is not a recognized stock exchange as required under the provisions of Section 43(5)(d) of the Act. As it can be seen from the abovementioned Notification dated 29- 11-2013, which has been relied upon by the learned AR, which has also been reproduced in the above part of this order, the MCX, through which the assessee has carried out the transactions, is notified as a "recognized association" for the purposes of clause (e) of proviso to clause 5 of Section 43 of the Act. Clause (e) of proviso to sub-section (5) of Section 43 has recently been inserted by the Finance Act, 2013 w.e.f. 1st April, 2014, which reads as under :-
"(e) an eligible transaction in respect of trading in commodity derivatives carried out in a recognized association, shall not be deemed to be a speculative transaction."
Therefore, the exemption to the transactions given by the statute is w.e.f. 1-4-2014 and this is inserted by the Finance Act, 2013. In pursuance of the amendment, Notification No.51, dated 4-7-2013 has been issued by the CBDT, vide which Rule 6DDD is inserted in the Income Tax Rules. The said notification read as under :-
INCOME-TAX (NINTH AMENDMENT) RULES, 2013 -INSERTION OF RULES 6DDC, 6DDD AND FORM NO. 3BC NOTIFICATION NO.51/2013 [F.NO.142114/2013-TPL]/SO 2017(E), DATED 4-7-2013 10 ITA No.6534/2012 In exercise of the powers conferred by clause (e) of the proviso to clause (5) of section 43 read with section 295 of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby makes the following rules further to amend the Income-tax Rules, 1962, namely:-
1. (1) These rules may be called the Income-tax (9th Amendment) Rules, 2013.
(2) They shall come into force on the date of their publication in the Official Gazette.
2. In the Income-tax Rules, 1962, in Part II, in sub-part C, after rule 6DDB, the following rules shall be inserted, namely :-
"6DDC. Conditions that a recognized association is required to fulfill to be notified as a recognized association for the purposes of clause (e) of the proviso to clause (5) of section 43. - For the purposes of clause (e) of the proviso to clause (5) of section 43, a recognized association shall fulfill the following conditions in respect of trading in derivatives, namely:-
(i) the recognized association shall have the approval of the Forward Markets Commission established under the Forward Contracts (Regulation) Act, 1952 (74 of 1952) in respect of trading in derivatives and shall function in accordance with the guidelines or conditions laid down by the Forward Markets Commission;
(ii) the recognized association shall ensure that the particulars of the client (including unique client identity number and P AN) are duly recorded and stored in its databases;
(iii) the recognized association shall maintain a complete audit trail of all transactions (in respect of derivative market) for a period of seven years on its system;
(iv) the recognized association shall ensure that transactions (in respect of derivative market) once registered in the system are not erased;
(v) the recognized association shall ensure that the transactions (in respect of derivative market) once registered in the system are modified only in cases of genuine error and maintain data regarding all transactions (in respect of derivative market) registered in the system which have been modified and submit a monthly statement in Form No. 3BC to the Director General of Income-tax (Intelligence and Criminal Investigation), New Delhi within fifteen days from the last day of each month to which such statement relates.
6DDD. Notification of a recognized association for the purposes of clause (e) of the proviso to clause (5) of section 43.- (1) An application for notification of a recognized association (as per clause (j) of section 2 of the Forward Contracts (Regulation) Act, 1952) as a recognized association for the purposes of clause (e) of 11 ITA No.6534/2012 the proviso to clause (5) of section 43 may be made to the Member (Legislation), Central Board of Direct Taxes, North Block, New Delhi.
(2) The application referred to in sub-rule (1) shall be accompanied with the following documents, namely :-
(i) approval granted by Forward Markets Commission for trading in derivatives;
(ii) up-to-date rules, bye-laws and trading regulations of the recognized association;
(iii) confirmation regarding fulfilling the conditions referred to in clause (ii) to clause (v) of rule 6DDC;
(iv) such other information as the recognized association may like to place before the Central Government.
(3) The Central Government may call for such other information from the applicant as it deems necessary for taking a decision on the application.
(4) The Central Government, after examining the information furnished by the recognized association under sub-rule (2) or sub-
rule (3), shall notify the recognised1ssociation as a recognized association for the purposes of clause (e) of the proviso to clause (5) of section 43 or issue an order rejecting the application before the expiry of four months from the end of the month in which the application is received.
(5) The notification referred to in sub-rule (4) shall be effective until the approval granted by the Forward Markets Commission is withdrawn or expired, or the notification is rescinded by the Central Government."
3. In the said rules, in Appendix-II, after Form No. 3BB, the following Form shall be inserted, namely:-
"FORM NO. 3BC [See rule 6DDC] Monthly statement to be furnished by a recognized association in respect of transactions in which client codes have been modified after registering in the system for the month of _______________"
In pursuance to the aforementioned Notification, the MCX has been notified as "recognized association" vide Notification dated 29-11-2013, which is also reproduced above. If the assessee is seeking benefit of 12 ITA No.6534/2012 clause (e) of proviso to Section 43(5), then such benefit can be extended to assessee only in respect of assessment year 2014-2015 as the provisions of clause (e) of proviso to Section 43(5) are inserted by the Statute w.e.f. 1-4-2014. However, in the present case, the transactions done by the assessee relate to financial year 2008-09. For these transactions, there was no provisions in the statute to give the benefit to the assessee in respect of transactions of commodities, which are ultimately settled otherwise then by actual delivery or transfer of the commodity as per Section 43(5) of the Act.
12. The case relied upon by the assessee also do not support the case of the assessee. In case of ACIT Vs. Arnav Akshay Mehta (supra), the transactions relate to stock exchange of India, which is MCX stock exchange, which was notified on 22-5-2009 and the transactions were governed by clause (d) of the proviso to Section 43(5), which was inserted by the Finance Act, 2005 w.e.f. 1-4-2006. Therefore, for the transactions, which were under consideration in that case, were held to be not of speculative nature under the provisions of clause (d) of the proviso to Section 43(5) of the Act and the said case relates to assessment year 2007-08. The transactions entered into by the assessee after insertion of clause (d) of the proviso to Section 43(5), were held to be of non-speculative nature as there was a provision on the statute. However, in the present case, when the assessee carried out these transactions, there was no existing 13 ITA No.6534/2012 provision in the statute in the shape of clause (e) of the proviso to Section 43(5).
13. In the case of CIT Vs. Nasa Finelease Pvt. Ltd. (supra), the case relates to proviso (d) to sub-section 5 of Section 43 of the Act and the said insertion was made by the Finance Act, 2005 and the National Stock Exchange and Bombay Stock Exchange, through which the assessee in that case had carried out the transaction were notified on 25th January, 2006. It was the case of the assessee that the transaction conducted by it from July 2005 to September, 2005, cannot be rejected for the benefit of proviso (d) to sub-section 5 of Section 43(5) as there was a provision on the statute in the shape of clause (d). The lapse in the issue of notification etc. was only on account of delay by CBDT. It is in these circumstances, the Hon'ble High Court has upheld the order of the Tribunal vide which the relief was given to the assessee. Thus, in that case, there was a provision on the statute under which the assessee sought the benefit. However, in the present case, as mentioned earlier, provisions of clause (e) of the proviso to Section 43(5) did not exist during the period when the assessee carried out the transactions.
In view of above discussion, we hold that assessee is not entitled to claim the benefit of clause (e) of the proviso to Section 43(5) of the Act.
14ITA No.6534/2012
14. No other issue was raised before us, except the arguments which are recorded above.
15. In the result, the appeal filed by the assessee is dismissed.
Order pronounced in the open court on this 17th Jan, 2014.
17th Jan, 2014
Sd/- Sd/-
( ) ( )
(D.KARUNAKARA RAO) (I.P.BANSAL)
/ ACCOUNTANT MEMBER / JUDICIALMEMBER
Mumbai; Dated 17/01/2014
/pkm, PS
Copy of the Order forwarded to :
1. / The Appellant
2. / The Respondent.
3. / The CIT(A)-X, Mumbai.
4. / CIT
5. / DR, ITAT, Mumbai
6. Guard file.
//True Copy//
/ BY ORDER,
(Asstt. Registrar)
/ ITAT, Mumbai