Income Tax Appellate Tribunal - Kolkata
Arena Textiles & Industries Ltd., ... vs Department Of Income Tax on 28 November, 2011
आयकर अपीलीय अधीकरण, Ûयायपीठ - "ए ", कोलकाता,
IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH "A", KOLKATA
(सम¢)Before ौी एन.
एन.ǒवजयकुमारन,
मारन, Ûयायीक एवं/and
सदःय,
Shri N.Vijayakumaran, Judicial
Member.
ौी सी.
सी.डȣ.
डȣ.राव, लेखा सदःय
Shri C.D.Rao, Accountant Member
आयकर अपील संÉया /
ITA No.1019/Kol/2011
िनधॉरण वषॅ/Assessment Year : 2008-09
-वनाम-
(अपीलाथȸ/APPELLANT ) - (ू×यथȸ/RESPONDENT)
I.T.O., Ward-4(3), Kolkata Versus- M/s. Arena Textiles &
. Industries Ltd., Kolkata
(PAN : AAECA 4281 G )
अपीलाथȸ कȧ ओर से/ For the Appellant: Shri D.R.Sindhal
ू×यथȸ कȧ ओर से/For the Respondent: Shri A.K.Tulsiyan
सुनवाई कȧ तारȣख/Date of Hearing : 28.11.2011.
घोषणा कȧ तारȣख/Date of Pronouncement : 29.12.2011.
आदे श/ORDER
(सी.
सी.डȣ.
डȣ.राव)
राव), लेखा सदःय
Per Shri C.D.Rao, AM
This appeal is filed by Revenue against the order dated 25.03.2011 of the ld. CIT(A)-IV, Kolkata pertaining to A.Yr. 2008-09.
2. The grounds of appeal raised by the Revenue read as under :-
1. Whether on the facts and circumstances of the case and settled legal position, the Ld. CIT(A) is justified in holding that transactions in derivatives are not hit by section 43(5) of the I.T. Act.
2. Whether on the facts and circumstances of the case and settled legal position, the Ld. CIT(A) was justified on facts and in law in deleting the disallowance and addition of Rs.28,95,42,845/- treated as deemed speculation loss by the A.O. 2
3. Whether on the facts and circumstances of the case and settled legal position, the Ld. CIT(A) is justified in holding that delivery-based share transactions does not fall in the ambit of Explanation to section 73 of the I.T. Act.
4. Whether on the facts and circumstances of the case and settled legal position, the Ld. CIT(A) is justified in holding that no expenses were required to be incurred in relation to earning dividend income and thereby deleting the addition of Rs.4,50,325/- made under section 14A read with Rule 8D.
5. That the appellant craves for leave to add, delete or modify any of the grounds of appeal before or at the time of hearing."
3. The brief facts relating to ground nos. 1 to 3 raised by the revenue are that while doing the scrutiny assessment Assessing Officer observed that during the year the assessee company was engaged in the business of dealing in shares, unit, derivatives and financing. From the details filed by the assessee in course of hearing, it is seen that the income of the assessee consisted of the following :
Rs.
Profit/(Loss) from Share Dealing (27,78,95,129)
Profit/(Loss) from Dealing in Units of Mutual funds 23,761
Profit/(Loss) from Derivatives (i.e. F&O) 31,22,63,790
Share Difference Income 97,54,403
Interest Income 18,493
Dividend 60,52,475
5,02,17,793
Less:
Interest 4,29,76,612
Operative Expenses 20,77,481
Preliminary Expenses 35,000
4,50,89,093
Profit before tax as P&L Account 51,28,700
3.1. From the above summary in can be seen that the assessee company has incurred a loss on the non-derivative section of its business which has been set off against the profits arising out of the derivative segment of its operations." 3.2. Thereafter, the A.O made a discussion regarding Explanation to Sec.73 vis-à-
vis the provision in Sec.43(5)(d) of the I. Tax Act, 1961 and he arrived at the following conclusion:
"Thus, from the above it is clear that even though section 73 of the Income Tax Act, 1961 deems purchase and sale of shares of other companies as a speculation business, section 43(5)(d) of the Income Tax Act, 1961, which has been introduced subsequent to section 73 of the Act caries out an exception to 3 the deeming provision of Section 73 of the Act and lays down trading in derivatives i.e. futures and options would not be deemed to be speculative transaction.
Hence, it is seen that the Income Tax act, 1961 has vide explanation to section 73 has deemed purchase and sale of shares under certain condition of deemed speculative business but at the same time has by a subsequent amendment has excluded from its ambit trading in derivatives under section 43(5)(d)."
Then he concluded that "In view of this, losses incurred in respect of non- derivative share transaction which are deemed to be speculative in nature cannot be set off against profits and gains earned from derivative transaction, which are not deemed to be speculative transaction u/s 43(5)(d)"
3.3. After coming to the above conclusions the Ld.A.O referred to decision in the case of Appollo Tyres Ltd. CIT (2002) 255 ITR 273 (SC), wherein it has been held that units of UTI are not shares as contemplated in the Explanation to Sec.73. According to the Apex Court "the legislature had contemplated making the units also a deemed share then it would have stated so. In the absence of any such specific deeming provisions in regard to the units as shares it would be erroneous to extend the provision of section 32(3) of the UTI Act to the units of the U71 for the purpose of holding that the unit is a share."
3.4. The decision of Hon'ble Supreme Court that units are different from shares is the basis to arrive at the conclusion by the A.O as under:
"By the same analogy, derivatives are different from shares since they have been so expressedly defined by the Securities Contracts (Regulation) Act, 1956."
3.5. Further, Mumbai ITA T in the case of DCIT Vs SSKI Investors services (P) Ltd. 113 7T7 (Mumbai,) 511 and of Bangalore Tribunal in the case of C. Bharath Kumar Vs DCIT (2005) 4 SOT 593 (Bang,),held that dealing in derivative is a separate kind of transaction, which does not involve any purchase and sale o( shares and therefore, loss thereof cannot be treated as speculation loss. 3.6. Further by making long discussions as recorded in pages 7 to 12 the A.O came to the following conclusion:
"As Share Dealing and Dealing in F&O are covered under Special Provision, I am unable to accept the contention of the assessee that the said businesses are inseparable and loss from one business can be set off with profit from other. As per Section 43(5)(d) r/w Notification No. 2/2006 dated 25.01.2006, 4 loss from dealing in derivative on BSE and NSE, are assessable as normal business loss and in view of Explanation to Section 73 w. e. f 01.04.1997 loss from share dealing is assessable as Speculation Business Loss"
"Therefore, Explanation to Section 73 dearly applies in the case of the assessee company and invoking the same I hold loss from. Dealing (as computed hereunder) as Loss from Business & this loss cannot be set off against profit earned from Derivatives.
3.7. Therefore, the assessee has claimed the following expenses only as deductible expenses.
Rs.
Interest 4,29,76,612
Administrative Expenses 35,000
Advance 20,77,481
4,50,89,093
3.8. Considering the above expenses, profit/(loss) from various activities are computed as under allocating the expenses in proportion of profit/loss from various activities.
Nature of income Profit/(Loss) Proportionate Profit/(Loss)
Expenses Net
Share Dealing (27,78,95,129) 2,06,76,358 (29,85,71,487)
Dealing in Units 23,761 1,768 21,993
Share Difference 97,54,403 7,25,761 90,28,642
F & O Difference 31,22,63,789 2,32,33,505 28,90,30,284
Interest 18,493 1,376 17,117
Dividend 60,52,474 4,50,325 56,02,150
Total 5,02,17,792 4,50,89,093 51,28,699
It is necessary to state that while allocating expenses, Profit / (Loss) i.e. (+) / (-) signs are ignored. According to which the totals of Profit/(Loss) comes to Rs. 60,60,08,050/- and corresponding expenses are 4,50,89,093/- which are approximately 7.44%.
Based on above calculation, income of the assessee from Speculation Business is computed as under:
Profit/ (Loss) from Share Dealing (29,85,71,487)
5
Proflt/ (Loss) from Share Speculation 90,28,642
(28,95,42,845)
3.9. Aggrieved by this assessee went in appeal before the ld. CIT(A).
3.10. At the time of hearing before the ld. CIT(A) the ld. Counsel appearing on behalf of assessee submitted the written submissions which were forwarded by the ld. CIT(A) for Remand Report and after taking into consideration of the Remand Report and the comments of the ld. Counsel on the Remand Report the ld. CIT(A) has directed AO to aggregate the share delivery loss with share derivatives profit and the net should be considered as the income of assessee for the year by observing as under
:
2.5. I have carefully considered the assessment order, submission made by the assessee and the details filed. During the year, the assessee is in the business of shares, in which it has trading of shares, having derivative in shares and speculation in shares. As per assessment order, the following is the result profit / (Loss):-
Profit/ (Loss) from Share Dealing (27,78,95,129)
Proflt/ (Loss) from Derivatives (i.e. F & 0) 31,22,63,790
Share Difference Income 97,54,403
Profit 4,41,23,064
2.6. As per the A.O, the profit from the derivative transactions of the shares is not a speculative loss in view of the special provisions of Sec.43(5)(d) of the I. Tax Act and trading loss in shares is hit by the Explanation to Sec.73 of the I. Tax Act and hence the share dealing loss, which is a deemed speculation loss can not be adjusted with profit from derivatives transaction.
2.7. The Ld.A/R of the assessee has mainly relied that the aggregation of the share trading loss and profit from derivative transactions should be done before it is seen whether Explanation to Sec.73 is applicable. In my opinion, trading of shares which is done by delivery transactions are not hit by Sec.43(5) as speculation. Similarly, derivative transaction in shares profit/loss is also not hit by Sec.43(5) of the I. T. Act, which deals about speculation transaction. As such, both profit/loss from all the share delivery transactions and derivative transactions are having the same meaning, so far as, Sec.43(5) of the I. T. Act is concerned. I fully agree that net result of the assessee is a profit hence question of application of Sec.73 does not arise. Assessee's case is supported by the Hon'ble ITAT, Special Bench decision in the case of CIT Vs Concord Commercial Pvt. Ltd. (2005) 95 lTD 117 (Mum) (SB), in which it is held that before making application of Explanation to Sec.73 of the I. T Act, set off of all business income should be allowed. The same principle laid down has been followed by the Hon'ble ITAT, Kolkata, in the case of ITO, Wd-3(1)/Kol Vs Lotus Homes Ltd. in ITA No.1192/Kol/2004.
2.8. The Hon'ble Bombay High Court has held in the case of Lokmat News Papers (P) Ltd. (2010) 322 ITR 43 that Transactions in purchase and sale of shares by 6 company. Deeming fiction of Explanation to Sec.73 attracted and business in shares deemed to be speculation business. Brought forward speculation loss can be set off against profit from sale of shares. Business involving actual delivery of shares is not excluded from the content of speculation business. Once an assessee is deemed to be carrying on a speculation business for the purpose of s.73, any loss computed in respect of that speculation business can be set off only against the profit and gals of another speculation business, Assessee entitled to set off the losses carried forward from a speculation business against profit from sale of delivery based shares.
2.9. I fully agree with the A/R that the decision of Hon'ble Kolkata 1TAT, Special Bench, in the case of Shree Capital Services Ltd. Vs ACIT (2009) 121 lTD 498 (Kol), relied by the A.O has no impact on the present case. As the same is relating to Asst. Year 2004-05 & deals whether the amendment made by Finance Act by inserting Cl.(d) to Sec.43(5) will be applicable to Asst. Year 2008-09. As such, Cl.(d) to Sec.43(5) applies to assessee. Assessee claimed both loss on share delivery and profit on derivative transactions are not hit by Sec.43(5) of the I. Tax Act. Both the transactions are non-speculative so far as Sec.43(5) is concerned. Further, when both are considered in the light of Explanation to Sec.73 will have the same treatment. 2.10. Assessee's case is fully covered by the above decision. Firstly, assessee is having profit from the share derivative transaction and loss from share trading (delivery). Both are to be treated as speculatwe before applying deeming fiction as per Explanation to Sec.73 of the I. T. Act. Section 73 of the I. T. Act deals with carry forward of the speculation loss. Before considering whether it is hit by the deeming provision of Explanation to Sec.73 of the I. Tax Act, the aggregate of the business profit / loss has to be worked out based on the non-speculative profits; either it is from share delivery or from share derivative. The net of the same is profit as such question of applying the deeming fraction of Explanation to Sec.73 of the I. T. Act does not arise. The assessee's case is fully covered by the decision of ITAT, Kolkata, in the case of ITO, Wd-3(1)/Kol Vs Lotus Homes Ltd. (supra) as well as the decision of the Hon'ble Bombay High Court in the case of Lokmat News Papers (P) Ltd. (supra)."
4. At the time of hearing the ld. DR appearing on behalf of the Revenue submitted that in paragraph no.2.7 of his order the ld. CIT(A) has held that transactions of delivery based share trading is not hit by section 43(5) of the Act and similarly trading in derivatives is also not hit by section 43(5). The ld. CIT(A) has failed to appreciate the fact that the AO has not applied the provisions of section 43(5) to the transactions of delivery based share trading, in which the assessee incurred losses. In fact, the loss of Rs.28,95,42,845/- suffered in share trading has been treated by the AO as deemed speculation loss in terms of Explanation to section 73 of the Act. Further, if the contention of the ld. CIT(A) is that derivative transactions are not hit by section 43(5) is accepted, then clause (d) of section 43(5) becomes redundant.
74.1. He further submitted that the assessee carried out two different sets of businesses dealing in two different articles/commodities, namely, (i) trading in shares and (ii) trading in derivatives. There cannot be any dispute on the fact that shares are not derivatives. In fact, the Hon'ble ITAT, Spl. Bench, Kolkata has clearly held in the case of Shree Capital Services Ltd. (121 ITD 498) that derivatives will fall within the meaning of 'commodity' used in section 43(5) of the Act. The Bench also held that eligible transactions in derivatives will be exempted from the purview of section 43(5) and will fall under the proviso (d) of that section and hence cannot be held as speculative transactions. The ld. CIT(A) failed to appreciate this fact and the settled legal position while holding at para 2.9 of his order is that the decision of ITAT, Spl.Benc, Kolkata in the case (supra) has no impact on the present case. The ld. CIT(A) failed to appreciate the fact that if the facts and circumstances of this case are considered in the light of the decision given by the ITAT, Special Bench (supra) the transactions to derivatives would indisputably fall under the proviso (d) to section 43(5) and hence would be treated as non-speculative.
4.2. He further referred to the provisions of Explanation to section 73 which reads as under :-
"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 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 consists of the purchase and sale of such shares."
There cannot be any dispute after a plain reading of the above provisions that if a part of the business of an assessee consists of purchases and sale of shares of other companies, the said assessee will be deemed to be carrying on speculation business to the extent of purchase and sale of such shares. The AO in this case, has taken exactly the same view and treated the share trading loss as deemed speculative in nature.
8Thus, the above conclusion of the AO is clearly in tune with the above quoted provisions.
4.3. He further submitted that the reliance put by the ld. CIT(A) on the decision of ITAT, Special Bench, Mumbai appears to be erroneous and misplaced one in view of the fact that once a particular profit/income is held as non-speculative in nature, it cannot be set off against any loss which is speculative in nature. This view is well supported by the decision of the Hon'ble Calcutta High Court in the case of CIT vs Parkview Properties (P) LTd reported in 261 ITR 473 (2003). In the instant case, once the AO held that profits earned by the assessee in the derivative transactions to be normal and non-speculative in terms of section 43(5)(d) and the profits earned from deliver based share transactions to be deemed speculative in nature there was no scope/feasibility under the law to allow adjustment of such loss against the aforesaid income from derivatives.
4.4. He further stated that the case laws relied by the assessee and ld. CIT(A) were related to assessment years prior to the date of notification dated 25/01/2006 and income have got the little relevance and applicability for the year under consideration. At the stage of assessment proceedings, the A/R of the assessee argued that the F&O income resulted out of hedging transactions and therefore such income is adjustable with the share trading loss. Surprisingly the assessee did not take such ground below the appellate authority. On the contrary, a different line of argument was taken before the ld. CIT(A) as it is clearly stated in the Assessment Order that loses are mainly on unquoted shares which cannot be hedged through transactions in F&O.
5. On the other hand, the ld. Counsel for assessee has relied on the observations made by the ld. CIT(A) and the written submissions which were forwarded by the ld. CIT(A) to Assessing Officer for the Remand Report. Therefore he requested to upheld the action of the ld. CIT(A).
6. After hearing the rival submissions and on careful perusal of materials available on record we are of the view that trading of shares which is done by delivery transactions are not hit by Sec.43(5) as speculation. Similarly, derivative transaction in 9 shares profit/loss is also not hit by Sec.43(5) of the I. T. Act, which deals about speculation transaction. As such, both profit/loss from all the share delivery transactions and derivative transactions are having the same meaning, so far as, Sec.43(5) of the I. T. Act is concerned.
6.1. When once we held that the transactions done by delivery as well as the transactions of derivatives are not hit by section 43(5) of the Act it is in our considered view that the aggregation of the share trading loss and profit from derivative transactions should be done before the application of the Explanation to section 73 of the IT Act is applicable.
6.2. It is further observed that the ld. CIT(A) has properly concluded that the decision of the Hon'ble Kolkata Special Bench in the case of Shree Capital Services Ltd. (Supra) is not applicable to the present facts of the case.
6.3. In view of the above findings we are in agreement with the observations made by ld. CIT(A) at paras 2.7 to 2.10 and therefore we upheld the action of the ld. CIT(A) on this issue.
7. In the result ground no.1 to 3 of the revenue's appeal are dismissed.
8. The issue raised by the Revenue in ground no.4 is relating to deletion of addition of Rs.4,50,325/- made u/s 14A of the IT Act with Rule 8D of IT Rules.
9 The brief facts of this issue is that while doing the scrutiny assessment the AO has disallowed an amount of Rs.4,50,325/- by observing as under :-
"In course of the assessment proceedings, the assessee was asked to give details of expenses related to exempt income. In response to the same the assessee relying on the decision of Hon'ble Kerala High Court in the case of CIT vs Leena Ramchandran (2010) 235 CTR 512 (Ker) held that Rule 8D r/w Section 14A applies only on shares held as investments and not in case where shares are held as stock in trade.
However, I am unable to accept the contention of the assessee company that no expenses have been incurred to earn dividend which is exempt income. I, 10 therefore, disallow Rs.4,50,325/- as computed hereinbefore as expenses relatable to exempt income."
Which was recorded by us at para 3.8 against dividend income.
9.1. On appeal the ld. CIT(A) has deleted the same by observing as under :-
"3.7. On perusal of the balance sheet of the assessee, it has been found that no shares are held as investment. All the shares are stock-in-trade as assessee is engaged in the trading in shares. Assessee's case is fully covered by the proposition laid down by the Hon'ble Kerala High Court in the case of CIT vs Leena Ramchandran (210) 235 CTR 512 (Ker.) In view of this, no provision of the expenditure can be apportioned for earning exempt income as dividend income which is received out of all the shares held as stock-in-trade. All the expenses are relating to business activity and should be allowed as business expenditure. Nowadays, dividends are received and directly credited into the bank A/C of the shareholder through electronics clearance. So, it can't be said that for receipt of dividend, assessee has to incur any expenditure. The addition made, therefore, of Rs.4,50,325/- is deleted."
10. After hearing the rival submissions and on careful perusal of materials available on record, though Rule 8 D of IT Rules is applicable to Assessment Year under consideration in this case the allocation made by AO is not based on any nexus drawn in between the dividend income and the expenditure involved. At the same time it is observed that the ld. CIT(A) is also not justified to delete the same by observing the application of the decision of the Hon'ble Kerala High Court in the case of CIT Vs Leena Ramachandra (supra) wherein their observations are related to the interest expenditure. In this case AO has not disallowed any expenditure on account of interest. Therefore, respectfully following the decision of the Hon'ble Bombay High Court in the case of Godrej and Boyce Mfg. Pvt. Ltd. (supra) we consider it to set aside this issue to the file of AO and direct the AO to determine the disallowance u/s 14A of the IT Act after giving a reasonable opportunity of being heard to assessee. The assessee is also at liberty to establish whether there is any nexus of the expenditure issue and the exempted dividend income.
11. In the result ground no.4 of the revenue's appeal is allowed for statistical purposes.
1112 In the result the appeal of the Revenue is allowed in part for statistical purposes.
Order pronounced in the court on 29.12.2011.
Sd/- Sd/-
एन.
एन.ǒवजयकुमारन,
मारन, Ûयाियक सदःय सी.
सी.डȣ.
डȣ.राव,
राव, लेखा सदःय,
सदःय
N.Vijayakumaran, Judicial Member C.D.Rao, Accountant Member.
(तारȣख)
तारȣख)Date: 29.12.2011.
R.G.(.P.S.)
आदे श कȧ ूितिलǒप अमेǒषतः-
Copy of the order forwarded to:
1. M/s.Arena Textiles & Industries Ltd., 8, Camac Street, Shantiniketan Building, Kolkata-700017..
2 The I.T.O., Ward-4(3), Kolkata.
3. The CIT, 4. The CIT(A)-IV, Kolkata.
5. DR, Kolkata Benches, Kolkata स×याǒपत ूित/True Copy, आदे शानुसार/ By order, Deputy /Asst. Registrar, ITAT, Kolkata Benches