Income Tax Appellate Tribunal - Delhi
Pawan Sethi,, New Delhi vs Assessee on 12 November, 2009
IN THE INCOME TAX APPELLATE TRIBUNAL
[ DELHI BENCH "F" DELHI ]
BEFORE SHRI A. D. JAIN, JM SHRI K. D. RANJAN, AM
I. T. Appeal No. 3808 (Del) of 2009.
Assessment year : 2006-07.
Shri Pawan Sethi, Asstt. Commissioner of Income-tax,
30, Ishwar Nagar, Vs. C i r c l e : 22 (1),
N E W D E L H I - 110 065. N E W D E L H I.
P A N / G I R No. ABA PS 5736 Q.
( Appellant ) ( Respondent )
Assessee by : Shri Anil Gupta, C. A.;
Department by : Shri H. K. Lal, Sr. D. R.;
O R D E R.
PER K. D. RANJAN, AM :
This appeal by the assessee for assessment year 2006-07 arises out of the order of the ld. Commissioner of Income Tax (Appeals)-XXIII, New Delhi.
2. The grounds of appeal raised by the assessee read as follows :-
" 1. The AO and CIT (Appeals)-XXIII, New Delhi, has erred in law and on the facts of the case by not allowing the loss from eligible derivative transactions as business loss under section 43(5);2
I. T. Appeal No. 3808 (Del) of 2009.
2. The AO and CIT (Appeals)-XXIII has further erred in not allowing the setting off of the losses from derivative transactions from that of the other business income of the assessee, even if the assessee has wrongly claimed the loss as capita loss in its return of income. "
3. The only issue for consideration relates to not allowing set off of the losses from derivative transactions against other business income of the assessee. The facts of the case stated in brief are that the assessee is an Individual and during the relevant assessment year under consideration suffered loss on derivative transactions. The assessee at the time of filing the return of income treated the loss from purchase and sale of shares under derivative transactions as capital loss. During the course of assessment proceedings the assessee filed a letter dated 12/11/2009 before the assessing officer giving all the particulars of transactions under future and options. The assessee also produced broker note before the assessing officer in support of the fact that the transactions were entered into derivative transactions with NSE/ BSE. The transactions were done through electronic scheme based systems through brokers registered with SEBI. The contract notes indicated the PAN number of the assessee. It was, therefore, pleaded that as per provisions of section 43(5) of the Act where the assessee was engaged in the business and profession of derivative transactions, the loss incurred by the assessee will be treated as normal non-speculative business transaction. Therefore, the loss arising from derivative business transactions were to be set off against other business of the assessee. However, the assessing officer rejected the contention of the assessee without any discussion and treated the loss as short term capital loss without allowing the set off against the other business.
4. On appeal the ld. CIT (Appeals) observed that the assessee has not made any claim in the return of income or computation filed along with return of income with regard to losses on trading of derivative transactions. He relied on the decision of Hon'ble Supreme Court in the case of Goetz India Ltd. Vs. CIT 284 ITR 323 (SC) for the proposition that for purpose of claiming of benefit the assessee was to file the same either in the return of income or by way of revised return of income. Since it was not done so by the assessee, the claim of the assessee was not allowable. On merits, the ld. CIT (Appeals) noted that the assessee was engaged in the business of hiring of machinery used in mining and that of transporting 3 I. T. Appeal No. 3808 (Del) of 2009.
minerals like sand and stones in the name and style of Kailash Kumar and Company; and Premier Rock Products. The business of the assessee was not that of share broker or dealing in shares. This fact was discernible from the return filed by the assessee and letter dated 4/12/2008. The ld. CIT (Appeals) has also noted that the assessee had mainly been an investor apart from income from salary, dividend etc. The provisions of section 43(5) of the Act would be applicable to the assessee only if the said income or loss comes from the business of the assessee. Since the assessee was not engaged in the business of derivatives and the assessee's business was providing machinery on hire for mining operations and transportation of raw material, because of which the assessee had disclosed the trading in shares as short / long term capital gains. If the income / loss could not be assessed under the head "Income from business or profession" provisions of sub-section (5) of section 43 could not be applied to the facts of the assessee's case. Accordingly ld. CIT (Appeals) rejected the claim of the assessee.
5. Before us the ld. AR of the assessee submitted that in the return of income the assessee has claimed the loss incurred on derivative transactions. Since the assessee was engaged in dealing in shares under "future and options" the same was in the nature of business activities and hence, as per provisions of section 43(5) of the Act, the trading in shares was a normal business carried on by the assessee. He placed reliance on the decision of Special Bench in the case of Shree Capital Services Ltd. Vs. ACIT 318 ITR 81 (Kol.) (SB). On the other hand, the ld. Sr. DR submitted that the assessee was engaged in the business of transporting minerals, purchase and sale of shares was not the regular business of the assessee. The assessee had claimed in the return of income that loss on sale of derivatives as short-term capital loss and, therefore, the assessee was not entitled to set off of the loss against the other business of the assessee. Replying to the submissions made by the Revenue, the ld. AR of the assessee relying on decision of Hon'ble Supreme Court in the case of Mahalaxmi Sugar Mills Co. Ltd. Vs. 160 ITR 920 (SC) submitted that it was the duty of the assessing officer to apply the relevant provisions of the Income-tax Act, for the purpose of determining the true figure of assessee's taxable income and consequential tax liability; that the assessee failed to claim benefit of set off, cannot relieve the ITO of his duty to apply section 24 in an appropriate case. It was, therefore, submitted that the AO should have 4 I. T. Appeal No. 3808 (Del) of 2009.
applied the relevant provisions of law to arrive at the correct income of the assessee and tax payable by it.
5. We have heard both the parties and gone through the material available on record. In the return of income the assessee had claimed loss from derivatives as short term capital loss. Before the AO the assessee vide letter dated 12/11/2008 had submitted that out of loss on derivative transactions of Rs.1,15,55,570/- short term capital gain of Rs.4,44,982/- was adjusted since according to Explanation (i) to section 43(5) the derivative transactions were not speculative transactions and were taxable as normal business gains or losses, the credit for the losses incurred by the assessee on 'futures & options' were adjustable against any normal gains from business or profession. However, the assessing officer while completing assessment on 29/12/2008 had not discussed the issue at all and has taken the figure of loss under short term capital loss at Rs.1,06,11,744/-. Before the ld. CIT (Appeals) the assessee has taken a ground for setting off of losses from future and options amounting to Rs.1,15,55,517/- with other profits earned by the assessee under the head "business and profession". The ld. CIT (A) has rejected the claim of the assessee made during the course of assessment on two grounds i.e. firstly, as per decision of Hon'ble SC in the case of Goetz (India) Ltd. Vs.CIT (supra) the assessee cannot make any claim without filing revised return. Secondly, that the assessee was not engaged in the business of trading in shares and, therefore, provisions of section 43(5) of the Act were inapplicable in his case. Proviso (d) to section 43(5) of the Act was inserted by Finance Act, 2005 applicable with effect from 1/4/2006, according to which, an eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognized Stock Exchange cannot be a speculative transaction. From the plain reading of clause (d) of the proviso it is clear that the expression used is "an eligible transaction in respect of trading in derivatives." The Legislature had not used that the expression that the assessee should be engaged in the business of derivatives. Further the eligible transaction has been defined in the clause (A) of Explanation to clause (d) of section 43(5) according to which an eligible transaction means any transaction carried out electronically on scheme based system through a broker or a sub-broker or such intermediatory registered under section 12 of Securities Exchange Board of India Act, 1952 in accordance with the provisions of Securities Contacts (Regulation) Act, 1956 or Securities 5 I. T. Appeal No. 3808 (Del) of 2009.
Exchange Board of India, 1992 or depository Act, 1996 and the Rules, Regulations or by- laws made or directions issued under those Acts or by banks or mutual funds on a recognized stock exchange; and (B) which is supported by a time stamped contract not issued by such stock broker or sub-broker or such other intermediatory to every client indicating the contract note the unit client identity number allotted under any act referred to in sub clause (a) or permanent account number allotted under this Act. Therefore, an eligible transaction has to be examined in view of provisions of Explanation to proviso (d) to section 43(5) of the Act. Hon'ble Supreme Court in the case of Goetz (India) Ltd. Vs. CIT (supra) has held that the decision was restricted to the powers of the assessing authority to entertain a claim of deduction otherwise by a revised return and did not impinge on the power of the Appellate Tribunal under section 254 of the Act. Since the assessee's case has neither been examined by the AO in view of provisions of section 43(5) of the Act nor the ld. CIT (A) has dealt with the issue, we feel it proper to set aside the matter to the file of the AO to examine the claim of the assessee in the light of provisions of proviso (d) to section 43(5) whether the assessee fulfils the conditions under which the transactions of future and options carried out by the assessee are eligible to be treated as non-speculative transactions. The assessing officer will provide the assessee a reasonable opportunity of being heard.
6. In the result, the appeal filed by the assessee is allowed, for statistical purposes.
The order pronounced in the open court on : 15th January, 2010.
Sd/- Sd/- [ A. D. JAIN ] [ K. D. RANJAN ] JUDICIAL MEMBER ACCOUNTANT MEMBER Dated : 15th January, 2010. *MEHTA* 6 I. T. Appeal No. 3808 (Del) of 2009. " Copy of the order forwarded to : - 1. Appellant. 2. Respondent. 3. CIT, 4. CIT (Appeals), 5. DR, ITAT, NEW DELHI. True Copy. By Order. Assistant Registrar, ITAT. " 7 I. T. Appeal No. 3808 (Del) of 2009.