Income Tax Appellate Tribunal - Kolkata
Ito vs Gdb Share & Stock Broking Services Ltd. on 26 August, 2003
Equivalent citations: (2004)88TTJ(KOL)352
ORDER
B.K. Mitra, J.M. This is an appeal filed by the revenue against the order of the learned Commissioner (Appeals), 28-11-2000, for the assessment year 1997-98.
2. The following grounds have been taken:
(1)That the learned Commissioner (Appeals) has erred in directing the assessing officer to allow share tradings to be set off from the income of the assessee and for not treating the same speculation loss.
That the learned Commissioner (Appeals) has erred in directing the assessing officer to delete the disallowance of Rs. 13,967 from misc. expenses being penalty charges.
3. Broadly stated, the facts of the case in brief are, that the assessee filed return on 9-12-1998, showing total income of Rs. 14,44,570 which was processed under section 143(1)(a) and the returned income was accepted. Thereafter, notices under sections 143(2) and 142(1) were served on the assessee calling for certain details. In response to the notice the authorised representative for the assessee appeared from time to time and discussed the matter. The controversy arises in this case when the assessing officer invoked provisions of Explanation to section 73 of the Income Tax Act, 1961, and thereby treating a business loss of Rs. 3,97,126 as speculative loss.
4. The learned Departmental Representative strongly contended that the scrutiny of the return revealed that there was share trading account sales which were made to the extent of Rs. 1,29,54,176 and the resultant loss was arrived at Rs. 3,97,126. The assessee claimed this amount to be a trading loss in the return of income. The learned Departmental Representative further contended that it appeared from the account that loss on sale of shares of Rs. 3,97,126 is more than the total income of Rs. 2,43,854 (dividend Rs. 74,201 plus interest on fixed deposit Rs. 1,65,895 plus misc. income Rs. 3,758) under different heads. The explanation in this regard was not found satisfactory and not tenable. He has, therefore, highlighted that in view of the facts and circumstances of the instant case, provisions of Explanation to section 73 are invoked in treating the value of transactions as speculative in nature and loss thereof is speculation loss which is not allowed to be set off towards other income of the year. The learned Departmental Representative further contended that the learned Commissioner (Appeals) was not at all justified in directing the assessing officer to delete the disallowance of Rs. 13,967 from miscellaneous expenses being penalty charges.
5. The learned authorised representative, on the other hand, supported the order of the learned Commissioner (Appeals) and further added that the assessee is a registered broker of National Stock Exchange and during the course of its business activities it has to purchase and sale shares for and on behalf of various constituents and issue contract notes to its constituents after adding/ subtracting to/from executed price of purchases/sales as the case may be, for its services and the difference between the payment made/received from National Stock Exchange and its constituents for the trades executed is credited in the accounts as brokerage of the constituents. It was further stated that there was no fixed rate of service charges and it varies from customer to customer and share script to share script, In effect, the income declared under the head 'brokerage' is nothing but the difference between the purchase price for the constituents and sale price to the constituents. It was also contended that apart from that in the course of business sometimes certain constituents after placing the orders did not honour their orders and such shares have to be shown by the assessee as it is its own purchase and sale and thereafter when the occasion arises these shares are sold/purchased in the market to square up the deal. The learned counsel mentioned that in the case of such business there may be some loss or some profit and, therefore, the profit and loss in shares is part of the share brokering business. The learned counsel further highlighted the loss, if any, of the nature is, therefore, has to be treated as outgoing from brokerage income shown by the assessee. It was brought to the notice of the Bench that the balance sheet shows that the investment in the fixed deposit was to the extent of Rs. 14,77,895 and loans and advances deposits to the extent of Rs. 59,69,159. The total of these two figures comes to Rs. 74,47,055 and the total of the assets as per balance sheet is Rs. 1,35,25,102. He has, therefore, reiterated that on this account also Explanation to section 73 does not apply. It was strongly contended that the loss in shares, therefore, on this point also could not be treated to be loss in speculation business. He has, therefore, strongly contended that considering all the aforesaid facts, the loss in shares to the extent of Rs. 3,97,126 be allowed as trading loss. The learned counsel placed before us the statement of penalty point of National Stock Exchange of India Ltd. (p. 113 of the paper book and 2nd Annual Report 1996-97 of the assessee- company at p. 103, and also the bills, final receipt statement, etc., to substantiate the stand of the assessee. It was also contended that the members are the only parties to bargain and the stock exchange does not recognise as parties to any bargain in the market any parties other than its own members and the member is directly or primarily liable to every other member with whom he effects a bargain for its due fulfilment in accordance with the rules, bye-laws and regulations of the exchange whether such bargain be for account of the member effecting it or for account of a principal. The learned counsel contended that the learned Commissioner (Appeals) is quite justified in directing the assessing officer to delete the disallowance of Rs. 13,967 from miscellaneous expenses being penalty charges.
6. We have heard the rival submissions and gone through the records. We have noticed that the resultant loss in share trading was arrived at Rs. 3,97,126 which is as follows Rs.
Opening stock 33,48,175 Add : Purchase 1,60,16,554 1,93,64,729 Less : Closing stock 41,02,832 1,52,61,897 Less : Sales 1,29,54,176 23,07,721 Less : Profit in share difference 19,10,595 3,97,126 The assessee has claimed Rs. 3,97,126 to be trading loss in the return of income. The assessee is a registered broker and it has to purchase and sale shares for and on behalf of its various constituents and issue contract notes to its constituents after adding/subtracting to/from executed price for purchases/ sales as the case may be, for its services and the difference between the payment made/received from National Stock Exchange and its constituents for the trades executed is credited in the accounts as brokerage of the constituents. We have further noticed from the order of the learned Commissioner (Appeals) that there is no fixed rate of service charges and in effect the income declared under the head brokerage is nothing but the difference between the purchase price for the constituents and the sale price to the constituents. We have observed that in the course of business sometimes certain constituents after placing the order did not honour, their orders and such shares are to be shown by the assessee as its own purchase and sale and thereafter when the occasion arises these shares are sold/purchased in the market to square up the deal. The assessee in such business activity incurred some loss or some profits. We, therefore, agree with the learned Commissioner (Appeals) that the profit and loss in share is part of the share brokering business and in course of the business activity, if there is any loss that is to be treated as outgoing from the brokerage income shown by the assessee. In this connection, we have noticed from the bills, sale and purchase statement, rules and regulations of Calcutta Stock Exchange and final receipt statement of National Stock Exchange India Ltd. that the difference between the payment made/received from National Stock Exchange and its constituents from the trades executed is credited in the accounts as brokerage of the constituents. We have observed that the balance sheet shows that the investment in fixed deposits was to the extent of Rs. 14,77,895 and loans and advances deposit to the extent of Rs. 74,47,066, whereas the total asset as per the balance sheet is Rs. 1,35,25,102. The learned CIT has, therefore, rightly concluded that on this account Explanation to section 73 does not apply and the loss in shares on this point also could not be treated to be loss in speculation business. As per the Stock Exchange Rules, the assessee is responsible for purchase and sale of shares including the payment and delivery thereof even if this purchase and sale is for and on behalf of the constituents. It has been observed that the assessee is not charging the brokerage separately but consolidated sale price is mentioned in the sale bill. The CBDT in connection with the application of section 44AB has clarified that if the assessee is responsible for purchase and sale and payment thereof then such turn over win be considered his turnover. Hence, we agree with the argument of the learned authorised representative that the income shown under the head brokerage is in reality directly arising out of the business of purchase and sale of shares. Since the assessee is a reaistered broker of National Stock Exchange and in view of the arguments/reasons adduced before us, we also agree with the learned Commissioner (Appeals) that the Explanation to section 73 is not applicable in the instant case and the share trading loss is to be set off from the income of the assessee and not to treat the same as speculation loss.
7. We have carefully gone through the audited P&L a/c and the balance sheet, placed at pp. 103 to 111 of the paper book and found that the assessee has shown net profit of Rs. 15. 59 lakhs as per the P&L a/c. The assessee has shown brokerage income of Rs. 49.17 lakhs, interest income of Rs. 1.66 lakhs and dividend income of Rs. 0.74 lakh. On the other hand, the assessee had suffered loss of share dealing amounting to Rs. 3.97 lakhs 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 and 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 brokerage earned on the purchase and sale of shares. As the brokerage income is inextricably related with the said share transaction business, the net profit of which works out to (Rs. 49.19 lakhs minus Rs. 3.97 lakhs) 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.
8. In view of the above, we are of the considered view that the assessing officer was not justified in attracting Explanation to section 73 and holding that loss of Rs. 3.97 lakhs was deemed to be speculation loss.
9. Irl the result, ground No. 1 of the revenue appeal is dismissed.
10. So far as the disallowance of Rs. 13,967 from miscellaneous expenses being penalty charges are concerned, we have noticed from the details that the same have been paid to National Stock Exchange for delay in payment of the dues and for various other obligations arising out of carrying on business activities. We, therefore, agree with the learned Commissioner (Appeals) that the penalty charges cannot be said to be for infringement of any law but has been paid by the assessee to compensate for delay in payment of the dues to the National Stock Exchange and for various other obligations. We, therefore, agree with the learned Commissioner (Appeals) that the disallowance is, therefore, not justified and he has rightly directed the assessing officer to delete Rs. 13,967 from the total income.
11. In the result, the departmental appeal is dismissed.