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Income Tax Appellate Tribunal - Mumbai

Sajjankumar S. Agarwal, Mumbai vs Department Of Income Tax on 25 January, 2012

                  IN THE INCOME TAX APPELLATE TRIBUNAL
                         MUMBAI BENCH "J", MUMBAI

                   Before Shri P.M.Jagtap, Accountant Member
                      & Shri V. Durga Rao, Judicial Member.

                             I.T.A. No. 3783/Mum/2008.
                             Assessment Year : 2005-06.

Asstt. Commissioner of Income-tax,             Shri Sajjankumar Agarwal,
Circle-18(2), Mumbai.                    Vs.   Flat No. 1001,B-Block,
                                               Pheonix Tower, S.B. Marg,
                                               Lower Parel, Mumbai - 13.
                                               PAN ACCPA5038N.

     Appellant.                                     Respondent.

                        Appellant by : Shri D.S.Sundersingh.
                       Respondent by : Shri Hiro Rai.
                        Date of Hearing : 25-01-2012.
                       Date of pronouncement : 11-04-2012,

                                    ORDER

Per P.M. Jagtap, A.M. :

This appeal is preferred by the Revenue against the order of learned CIT(Appeals)XVIII, Mumbai dated 31-03-2008.

2. Ground No. 1 raised by the Revenue in this appeal is general seeking no specific decision from us.

3. In ground No. 2, the Revenue has challenged the action of the learned CIT(Appeals) in holding that future and options are non-speculative transactions covered by section 43(5).

4. At the time of hearing before us, the learned representatives of both the sides have agreed that the issue involved in ground No. 2 of the Revenue's appeal is squarely covered against the assessee and in favour of the Revenue by the decision of Hon'ble Bombay High Court in the case of CIT vs. Bharat R. Ruia (HUF) 337 ITR 452 wherein it was held that future contracts for purchase of shares entered into by the assessee were to be settled in cash without actual delivery of the shares and the same being transactions of speculative nature covered u/s 43(5) of the Income-tax Act, 1961, the loss incurred in those transactions was liable to be treated as speculative loss and not business loss. Respectfully following the said decision of the jurisdictional High Court, we set aside the impugned order of the learned CIT(Appeals) on this issue and restore that of the AO. Ground No. 2 of the Revenue's appeal is accordingly allowed.

5. In ground No. 3, the Revenue has challenged the action of the learned CIT(Appeals) in directing the AO to allow the set off of brokerage incentive of Rs.70,66,617/- against speculative loss of Rs.52,11,472/- from futures and options in share trading.

6. The assessee in the present case is an individual who is dealing in share, securities and derivatives. In the return of income filed for the year under consideration, loss of Rs.52,11,472/- incurred in share trading in future & options segment was set off by the assessee against income of Rs.70,66,617/- received from ICICI direct.com in the form of trading incentive. During the course of assessment proceedings, the assessee was called upon by the AO to show cause as to why such set off of speculation loss against other income should not be disallowed in view of the provisions of section 72(1). In reply, the following explanation was offered by the assessee in writing :

"1. Our client has done derivative trade with ICICI direct. Com (hereinafter referred as broker) a Subsidiary of ICICI Bank, through net trading system (E trade). The broker has variable brokerage structure, varied with the turnover done during the relevant months. In case of eligible turnover achieved, the brokerage charged in one month will be refunded as credit is give for higher brokerage charged ........................................................

2. Now, we may further submit that the brokerage charged on Derivative transaction is part of the loss, on account of derivative. Loss. The refund of brokerage is nothing but reduction of loss on account of derivative transaction. Please note that brokerage charged is inseparable part of derivative transaction and has direct link with the F & O (Derivative transaction) - The incentive i.e. refund of brokerage, is by itself not independent source of income. In other words, incentive is refund of excess brokerage charged, which was part of F&O Loss, so it is reduction of F&O Loss."

The above explanation of the assessee was not found acceptable by the AO. According to him, the trading incentive received by the assessee from ICICI direct.com was just incidental to the share trading in futures & options and it was in no way in the nature of speculative income. He held that the said incentive received by the assessee represented "other income of the assessee away from his speculation business" and, therefore, set off of speculation loss against such income as claimed by the assessee was not allowable as per the provisions of section 73(1). He, therefore, disallowed the claim of the assessee for such loss.

3. The matter was carried before the learned CIT(Appeals) by way of an appeal filed by the assessee and after considering the submissions made by the assessee as well as the material available on record, the learned CIT(Appeals) allowed the claim of the assessee for set off of speculation loss against incentive income received by the assessee from ICICI direct.com for the following reasons given in paragraph No. 7.1 of his impugned order :

"I have considered the submission made in respect of incentive brokerage received is of the same nature to which it is related. In case the F & O transactions is considered as a speculative, the brokerage charged on F & O transactions, can not have different nature of income/loss, other than the nature of the F & O Transactions. Respectfully following the Supreme Court Judgment in the case of RAJPUTANA TRADING CO LTD. vs. COMMISSIONER OF INCOME TAX (72 ITR 286) wherein it is held as under :

"Where in relation to a loss or liability of the assessee arising out of speculation transaction for which deduction had earlier been allowed, the creditor waives his right to receive the amount or payment of the debt, and the amount is brought to tax on the ground that it is deemed to be the assessee's business profits, such an amount ought to be treated as arising from 'speculation business'. While so holding in Rajputana Trading Co. Ltd. v CIT, the Supreme Court observed that it would be most illogical and irrational to treat the so-called profit as having a netural source and not springing out of the same category of 'speculation business' which led to the assessee incurring that loss or liability, and that this income could not and would not have arisen but for the fact that in the speculation business the assessee had claimed deductions on account of liabilities for speculation differences."

Considering the Supreme Court Judgement which is law of land, I hereby direct the AO to set off Brokerage Incentive received against F & O Losses."

4. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that the set off of speculation loss against incentive income received by the assessee from ICICI direct.com has been allowed by the learned CIT(Appeals) treating such incentive income as in the nature of speculative income relying on the decision of Hon'ble Supreme Court in the case of Rajputana Trading Co. Ltd. (supra). In the said decision, Hon'ble Supreme Court held that if there is a loss or liability of the assessee arising out of speculation transaction and such liability is waived, the income arising as a result of such cessation ought to be treated as arising from speculation business. Elaborating further, the Hon'ble Supreme Court observed that it would be most 5 ITA No.3783/Mum/2008 illogical and irrational to treat the so-called profit as having a neutral source and not springing out of the same category of 'speculation business' which led to the assessee incurring that loss or liability. In the present case, the loss in F&O transaction was consisting of difference between purchase and sale price plus brokerage and since the incentive received by the assessee from ICICI direct.com was on account of reduction in brokerage by way of refund of excess brokerage charged, the incentive income was liable to be treated as arising from the same category of speculation business as held by the Hon'ble Supreme Court in the case of Rajputana Trading Co. Ltd. (supra). The said income was not arising out of any independent source of income and the learned CIT(Appeals), in our opinion, was fully justified in treating the same as speculative income and allowing set off of speculation loss against the said income as claimed by the assessee. We, therefore, uphold his impugned order giving relief to the assessee on this issue and dismiss ground No. 3 of the Revenue's appeal.

5. In ground No.4, the Revenue has challenged the action of the learned CIT(Appeals) in directing the AO to treat the profit arising from sale of shares as short term capital gains instead of business income as treated by the AO.

6. The profit arising from the transactions of purchase and sale of shares was declared by the assessee in the return of income as short term capital gain. The AO, however, held for the following reasons given in the assessment order that the same was business income of the assessee chargeable to tax under the head "profits & gains of business or profession :

"The Central Board of Direct Taxes issued a Circular (Cir. No. 4/2007 dated 15.06.2007 on the subject "Sec.214 of the Income-tax Act, 1961 - Capital Asset/Trading Asset - Distinction between shares held as stock-in-trade and shares held as investment - Tests for such distinction." In this Circular, guiding principle the A.O. has to allow while deciding the issue whether the 6 ITA No.3783/Mum/2008 transaction entered into by the assessee in shares and securities amounts to trading or are in the nature of investment are enumerated. On application of the aforesaid guiding principles to the facts of the case under consideration, following conclusions can be drawn:

i) Motive of the assessee : In the case under consideration, the assessee has purchased and sold shares and the average holding of the period of these shares is short. Also during the year, there is no dividend income, which makes it clear that these shares were not purchased by the assessee for investment purpose but were purchased and sold with the sole intention of earning profit from them.

ii) Borrowed Capital : The assessee has taken loan and transacted in shares, which substantiate the point that it is solely for the business purpose as own funds are not utilized as in the case of an Invstor.

iii) The assessee is primarily dealing in Futures & Options and the transactions in shares are hence considered as part of his regular and normal course of business."

7. The matter was carried before the learned CIT(Appeals) and the following submission was made on behalf of the assessee in support of his case on this issue before him:

a. Your appellant has own capital of Rs.54,59,794/- (a capital A/c and Balance sheet filed.

b. The investment in shares, wherein your appellant earned short-term capital gain is not more than Rs.27,00,000/-.

c. The loan fund and own fund is intermixed- it is wrong to say that loan is taken for investment, rather loan is taken for F&O business. d. Your Honour would appreciate the facts that the loan is taken from your appellant's son, where no interest is paid which please note. Your Honour will appreciate that Indian culture; support the joint family, supporting making investments and overall progress of the family as whole.

e. assumed the loan is taken, it will not make the investment as business.

Your Honour would appreciate that in case of an individual buying a residential flat, takes borrowings from a Financial Institution or Bank, by this parameter then all investment/purchases of flat by individual, will become adventure in nature of trade.

8. The learned CIT(Appeals) found merit in the above submissions made by the assessee and directed the AO to treat the profit arising from sale of shares as short term capital gains for the following reasons given in paragraph No. 10 of his impugned order :

" I have considered the submission made by the AR and I find force in his submissions. I have considered the various judgment cited by the AR as well as the CBDT Circular dated 15th June, 2007 which also acknowledged that an assessee can have shares as a stock in trade as well as capital assets. Following the various judgment cited by the AR, I hereby direct the AO to treat the capital gain on sale of shares as Short term capital gain. The ground 0 3.01 does not survive in view of the relief granted for ground No. 3."

9. We have heard the arguments of both the sides and also perused the relevant material on record. As rightly submitted by the learned DR, the treatment given by the assessee to the profit arising from sale of shares as short term capital gain has been accepted by the learned CIT(Appeals) without giving any cogent or convincing reason in support. He has passed a very cryptic order without considering or discussing the reasons given by the AO for treating the profits arising to the assessee from purchase and sale of shares as business income. At the time of hearing before us, the learned counsel for the assessee has invited our attention to the details of transactions of purchase and sale of shares made by the assessee during the year under consideration given on page No. 15 of his paper book. He has contended that keeping in view the low volume of such transactions as well as other facts of the case, the assessee was rightly treated by the learned CIT(Appeals) as investor in shares and not a trader. After having perused the 8 ITA No.3783/Mum/2008 details of transactions of purchase and sale of shares furnished by the assessee, we find it difficult to accept this contention of the learned counsel for the assessee. It is observed that there were no shares held by the assessee either on the first day of the year under consideration or even on the last day of that year. There was thus no investment in shares held by the assessee either on the first day or on the last day of the year under consideration. All the shares which were purchased in that year were sold immediately and that too within a period of 3 to 4 months. Moreover, the same scripts sold by the assessee were again purchased for further sale in a very short period. For instance, 40,000 shares of Ispat Ltd. purchased by the assessee in the month of July and August, 2004 were sold in the month of November, 2004 and again 30,000 shares of said company were purchased in December, 2004 and sold in the month of February, 2005. Keeping in view all these facts of the case, we find it difficult to agree with the learned CIT(Appeals) that the assessee entered into the transactions of purchase and sale of shares as investor and not as a trader. In our opinion, the said transactions were entered into by the assessee as a trader to make profit from sale of shares and such profit was chargeable to tax under the head "profits & gains of business or profession" as rightly held by the AO. In that view of the matter, we set aside the impugned order of the learned CIT(Appeals) and restore that of the AO on this issue. Ground No. 4 of the Revenue's appeal is accordingly allowed.

10. In the result, the appeal of the Revenue is partly allowed.

Order pronounced on this 11th day of April, 2012.

            Sd/-                                         Sd/-
       (V.Durga Rao)                                 (P.M. Jagtap)
      Judicial Member                              Accountant Member
Mumbai,
Dated: 11th April, 2012.
                                   9
                                                       ITA No.3783/Mum/2008

Copy to :

   1.   Appellant
   2.   Respondent
   3.   C.I.T.
   4.   CIT(A)
   5.   DR, J-Bench.
                    (True copy)

                                                  By Order


                                      Asstt. Registrar, ITAT, Mumbai.

Wakode