Income Tax Appellate Tribunal - Mumbai
Dcit 4 (1)(1), Mumbai vs Dharamshi Securities P Ltd., Mumbai on 27 July, 2021
1 आयकर अपीलीय अधिकरण "डी" न्यायपीठ मुंबई में।
IN THE INCOME TAX APPELLATE TRIBUNAL "D" BENCH, MUMBAI माननीय श्री महावीर स िंह, उपाध्यक्ष एवुं माननीय श्री मनोज कुमार अग्रवाल ,लेखा दस्य के मक्ष।
BEFORE HON'BLE SHRI MAHAVIR SINGH, VP AND HON'BLE SHRI MANOJ KUMAR AGGARWAL, AM (Hearing Through Video Conferencing Mode) आयकर अपील िं./ I.T.A. No.6789/Mum/2019 (धििाारण वर्ा / Assessment Year: 2014-15) DCIT-4(1)(1) M/s Dharamshi Securities Limited 6th Floor, 640, Aaykar Bhawan बनाम/ 1073, Quest, Behind Beau Monde Towers M.K.Road, Mumbai - 400 020 Vs. Rajabhau Desai Marg, Prabhadevi Mumbai - 400 025 PAN No.: AAACD-3924-G (अपीलाथी/Appellant) : (प्रत्यथी / Respondent) Assessee by : Shri Paresh Shaparia- Ld. AR Revenue by : Shri Sunil Jha- Ld. CIT-DR ुनवाई की तारीख/ : 25/05/2021 Date of Hearing घोषणा की तारीख / : 27/07/2021 Date of Pronouncement आदे श / O R D E R Manoj Kumar Aggarwal (Accountant Member)
1. Aforesaid appeal by revenue for Assessment year (AY) 2014-15 contest the order of Ld. Commissioner of Income Tax (Appeals)-9, Mumbai [in short CIT(A)] dated 20/08/2019 on following grounds of appeal: -
(i) On the facts and on the circumstances of the case and in law, the Ld. CIT(A) has erred in directing the AO to allow the set off of losses of Rs.27,68,41,119/-
incurred in the trading activity on account of derivative segment (futures and options) against the business income during the year without appreciating the fact 2 that AO has rightly treated the losses as speculative loss and not allowed to set off by invoking the provisions of Section 73(1) of the Income Tax Act, 1961.
(ii) On the facts and on the circumstances of the case and in law, the Ld. CIT(A) has erred in directing the AO to allow the set off of losses of Rs.5,41,879/- incurred in the trading activity in cash segment against the business income during the year without appreciating the fact that AO has rightly treated the losses as speculative loss and not allowed to set off by invoking the provisions of Section 73(1) of the Income Tax Act, 1961.
2. After hearing rival arguments, our adjudication to the subject matter of appeal would be as given in succeeding paragraphs.
Assessment Proceedings 3.1 The material facts are that the assessee being resident corporate assessee stated to be engaged as share-broker was assessed for the year under consideration u/s 143(3) on 15/12/2016. During assessment proceedings, it transpired that the assessee incurred losses of Rs.3163.45 Lacs in trading activity in derivative segment and earned profit of Rs.389.62 Lacs in trading activity in cash segment. It also earned speculation income of Rs.5.41 Lacs. On net basis, the assessee incurred net loss of Rs.2768.41 Lacs in trading activity in cash segment and derivative segment. In AY 2013-14, Ld. Ld. AO, invoking the provisions of Section 73(1), disallowed business loss after treating the same as speculation loss. On similar lines, Ld. AO proceeded to disallow the same in this year also.
3.2 The assessee submitted that no loss was incurred on transactions in cash segment for daily square-off. The other losses were in derivative segment which were to be treated as normal business loss as per Sec. 43(5)(d) of the Act. As a result, the provision of Sec.73 would not apply to the case of the assessee, 3.3 However, considering the explanation to Section 73 which provide that where any part of the business of the company consist in the sale 3 and purchase of shares then such company shall be deemed to be carrying on a speculation business to the extent to which such business consist of purchase and sale of shares and relying upon the decision of Hon'ble Delhi High Court in CIT V/s DLF Commercial Developers Ltd. (261 CTR 126) which held that stock derivative value is dependent on shares and therefore, the explanation to Sec. 73 would apply, Ld. AO opined that the explanation to Sec. 73 was applicable and the losses were speculative in nature. Consequently, the assessee was not entitled for set-off of the losses. Further, the assessee was not covered under any of the exceptions as provided in explanation to Sec. 73. Finally, the net loss of Rs.2768.41 Lacs was held to be speculative in nature which would not be available for set-off against the business income. As a consequence, transaction charges of Rs.84.07 Lacs as paid by the assessee for executing the transactions at exchange were also held to be speculative in nature. However, the same could be carried forward to next year for set-off. Finally, the income was determined at Rs.430.95 Lacs which was allowed to be set-off against business losses of AY 2013-14.
Appellate Proceedings 4.1 Before Ld. CIT(A), the assessee submitted that the sole business of the assessee was to trade in cash segment and derivative segment and to earn business income. The explanation to Sec.73 would not apply to the assessee since as per Sec.43(5), the losses in derivative (F&O) segment are expressly excluded from being regarded as speculative in nature u/s 43(5)(d). Hence, the losses in derivative segment were to be treated as normal business losses and allowed to be set-off against income under cash segment. Since the assessee was covered under 4 this clause, the losses in derivative segment were to be treated as normal business losses and not speculation losses. As per the amendment introduced by Finance Bill, 2005, the distinction between speculative and non-speculative transactions, particularly relating to derivatives, was no more required. Reliance was placed on various judicial decisions to support the submissions that derivative losses was to be treated as normal business losses. The said income / losses in assessment orders for AY 2009-10 as well as AY 2013-14 were accepted by Ld.AO as normal business income while framing assessment u/s 143(3). In fact, in AY 2009-10, the Tribunal held that loss from cash segment could be set-off against the profit of the derivative segment and vice versa. It was held that activities of derivative and cash segment go hand in hand and alike treatment is required to be given for setting of losses of derivative segment against cash segment and vice versa. The amendment to explanation 73 as inserted by Finance Act, 2014 was to be applied retrospectively from the date of its insertion to explanation to Section 73 whereby the income from derivative and cash segment was require to be treated as business only. In the said background, the assessee also pleaded for allowance of transaction charges as normal business expenditure.
4.2 The ld. CIT(A), in the light of assessee's submissions, noted the decision of Hon'ble Calcutta High Court in the case of Asian Financial Services Ltd. V/s CIT (70 Taxmann.com 9). This decision, after considering the aforesaid decision of Hon'ble Delhi High Court in DLF Commercial Developers Ltd. (supra) held that the loss in derivatives would be a business loss and not speculative loss.
5The Ld. CIT(A) also observed that this controversy has finally been settled down by Hon'ble Supreme Court in the case of Snowtex Investment Ltd. Vs Pr. CIT (205 Taxmann.com 282) which held that as per the provisions of Sec.43(5), the profit / loss from derivative trading was not to be treated as speculative in nature. Therefore, the action of Ld. AO in denying the set-off of these losses as well as denying allowance of expenditure could not be upheld.
Aggrieved as aforesaid, the revenue is in further appeal before us. Our findings & Adjudication
5. After considering the ratio of decision of Hon'ble Apex Court in Snowtex Investment Ltd. Vs Pr. CIT (205 Taxmann.com 282), as observed by Hon'ble Court that the provisions of Sec.43(5) were amended by Finance Act, 2005. Prior to the amendment, Section 43(5) defined a 'speculative transaction' to mean a transaction in which a contract for the purchase or the sale of any commodity including stocks and shares is settled otherwise than by the actual delivery or transfer of the commodity or scrips. The impact of the amendment by the Finance Act, 2005 was that an eligible transaction on a recognised stock exchange in respect of trading in derivatives was deemed not to be a speculative transaction. With effect from 01/042006, by deeming fiction, trading in derivatives was not to be regarded as speculative transaction when it was carried out on a recognized stock exchange. The CBDT Circular dated 27/02/2006 indicated that this amendment was occasioned by the changes which were introduced by SEBI both at the legal and technological level for bringing in greater transparency in the market for derivatives. Explaining the reason for the amendment, the Circular stated as under: -
6"3.10 Excluding 'trading in derivatives' on recognised stock exchanges from the ambit of 'speculative transactions' Existing provisions of clause (5) of section 43 define 'speculative transaction' to mean a transaction in which a contract for the purchase or sale of any commodity including stocks and shares is settled otherwise than by the actual delivery or transfer of the commodity or scrips. The proviso to section 43(5) lists out certain transactions which are not deemed to be speculative transactions.
Systemic and technological changes introduced by SEBI have resulted in sufficient transparency in the stock markets and have to a large extent curbed the scope for generating fictitious losses through artificial transactions or shifting of incidence of loss from one person to another. The screen based computerized trading provides for audit trail. In the wake of these developments, the present distinction between speculative and non-speculative transactions, in respect of trading in derivatives of securities is losing relevance.
The Finance Act, 2005 has, accordingly, amended section 43(5) to provide that an eligible transaction in respect of trading in derivatives of securities carried out on a recognised stock exchange shall not be deemed as speculative transaction. The notification prescribing the rules and the conditions to be fulfilled by a stock exchange to be recognized by the Central Government for the purposes of section 43(5) [i.e., Rules 6DDA and 6DDB of the Income-tax Rules, 1962] has been published in the Official Gazette on 1st July, 2005 vide S. O. No. 932(E).
Applicability: From A.Y. 2006-07 onwards."
6. In the aforesaid case before Hon'ble Supreme Court, the assessee sought set-off of losses arising out of trading in shares from derivative income. The same was in view of the assertion that amendment to Explanation to Sec.73 by Finance Act, 2014 was retrospective in nature. However, rejecting the same, Hon'ble Court held that the amendment to Explanation to Sec.73 was prospectively effective only from 01/04/2015 and therefore, the speculation losses arising out of share trading activity could not be allowed to be set-off from income from trading in derivatives since the derivative income, as per amendment made by Finance Act, 2005 was deemed not to be a speculative transaction.
7. In the present case before us, the assessee has incurred losses in derivative segment and claim the set-off of the same as normal business loss. It is undisputed fact that the derivative transactions are eligible 7 transactions carried out on recognized stock exchange. Therefore, keeping in view the amendment brought in by Sec.43(5) w.e.f. AY 2006- 07, the derivative income / losses are to be deemed as non-speculation in nature.
8. We find that Ld. AO, relying on the decision of Hon'ble Delhi High Court in CIT V/s DLF Commercial Developers Ltd. (261 CTR 126), held that stock derivative value is dependent on shares and therefore, the explanation to Sec. 73 would apply and losses would be speculative in nature. However, this decision has been considered by Hon'ble Calcutta High Court in the cited decision of Asian Financial Services Ltd. V/s CIT (70 Taxmann.com 9) which has already been referred to by Ld. CIT(A) while adjudicating the issue.
9. The Hon'ble Bombay High Court in the case of CIT V/s Shri Bharat R.Ruia (HUF) (10 Taxmann.com 265; 18/04/2011) held as under: -
23. Plain reading of clause (d) to section 43(5) makes it clear that with effect from 1-4-2006, only those eligible transaction in derivatives referred to under section 2(ac) of 1956 Act which are carried out in a recognized stock exchange shall not be deemed to be a speculative transaction. It is only because, the transactions in derivatives referred to under section 2(ac) of the Act carried out in a recognized stock exchange were covered under section 43(5) of the Act, the Legislature could exclude those transactions from the purview of section 43(5) with effect from 1-4-2006. In other words, unless the transactions referred in clause (d) were covered under section 43(5), there would be no question of excluding those transactions from the purview of section 43(5).
24. It is however contended on behalf of the assessee that the derivative transactions carried out at the stock exchanges were not at all covered under section 43(5) of the Act and that clause (d) has been inserted to the proviso to section 43(5) as and by way of clarification and hence it would apply retrospectively so as to make it clear that the exchange traded derivative transactions carried out in a recognized stock exchange were always outside the scope of section 43(5). The question, therefore to be considered is, whether the derivative transactions fell outside the scope of main section 43(5) of the Income-tax Act.
25. Chapter IV of the Act contains provisions relating to the computation of profits and gains of business or profession. Section 28 in Chapter IV of the Act inter alia provides that the profits and gains of any business or profession which are carried on by the assessee at any time during the previous year shall be chargeable to income-tax under the head 'Profits & gains of business or profession'. Explanation 2 to section 28 provides that where speculative transactions carried on by an assessee are of such a nature as to constitute a business, then 8 such speculation business shall be deemed to be distinct and separate from any other business. Section 72 of the Act provides for set-off of the carried forward business losses not being a loss sustained in a speculation business. Section 73 provides that the carried forward losses in speculation business shall not be set off except against profits and gains, in any other speculation business. The assessee claims that the losses incurred in derivative transactions are business losses which could be set off against profits and gains of any other business/any other heads of income, whereas the revenue contends that the losses incurred by the assessee in derivative transactions are speculative transactions covered under section 43(5) of the Act which could be set off only against profits of speculation business.
26. Section 43(5) of the Act defines the expression 'speculative transaction' to mean a transaction in which a contract for the purchase or sale of any commodity including stocks and shares is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips.
27. The question, therefore to be considered is, whether the transactions in futures contracts carried on by the assessee through a broker of the recognized stock exchange which is ultimately settled otherwise by actual delivery, constitutes transactions or contracts for the purchase and sale of any commodity under section 43(5) of the Act?
28. The expression 'commodity' is not defined under the Act. Therefore, the expression 'commodity' in section 43(5) has to be given meaning as understood in common parlance. As per Black's Dictionary (Eighth Edition) the expression 'commodity' means an article of trade or commerce which are tangible in nature. As per "THE MAJOR LAW LEXICON' by Pramantha Aiyer (4th Edition) the expression 'commodity' has two meanings (one) in economics, it is any tangible goods that is traded and (two) it is raw materials and goods, especially such goods as cocoa, coffee, jute, potatoes, tea, etc. which may also be traded.
Thus, in common parlance, the expression commodity means an article of trade or commerce which are tangible in nature.
29. In the present case, the assessee had entered into futures contracts for purchase of shares of certain companies at a specified future date and at a specified price, which were to be settled in cash without actual delivery of the shares. Such a contract, whether constitutes a contract for purchase of a commodity is the question.
30. As per the 'Hand Book on Derivatives Trading' published by the National Stock Exchange of India Limited ("NSE' for short), a futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. There are various types of futures available for trading at the NSE. An investor can trade the 'entire stock market' by buying index futures instead of buying individual securities with the efficiency of a mutual fund. The advantages of trading in index futures as per the Hand Book on Derivatives Trading published by the NSE are :--
"The contracts are highly liquid. Index Futures provide higher leverage than any other stocks. It requires low initial capital requirement. It has lower risk than buying and holding stocks. It is just as easy to trade the short side as the long side. Only have to study one index instead of 100's of stocks. Settled in cash and therefore all problems related to bad delivery, forged, fake certificates, etc. can be avoided."
31. Futures contracts in both index as well as stocks can be bought and sold through the trading members of recognized stock exchange. Futures contracts expire on the last Thursday of the expiry month. All futures contracts are settled in cash either on a daily basis or at the expiry of the respective contracts as the case may be. Clients/Trading members are not required to hold any stock of the underlying for dealing in the Futures Market. There are presently 53 stocks which can be traded under the Futures/Options Contracts.
32. To illustrate, suppose the share value of a company 'X' in the Stock Exchange on 1st January is Rs. 100 per share. If an investor considers that the shares of Company 'X' are 9 likely to shoot up in the next three months, then he may, if he has funds, purchase 100 shares of company 'X' on 1st January itself by paying Rs. 10,000 at the rate of Rs. 100 per share. In the alternative, he may enter into a futures contract on 1st January itself to purchase 100 shares of company 'X' on 29th March at Rs. 12,000 inclusive of brokerage charges, etc. In such a case, the assessee is not required to make payment on 1st January. If on 29th March the value of 100 shares of company 'X' on the Stock Exchange are Rs. 13,000 then the assessee would be making profit of Rs. 1,000 by setting the futures contract at Rs. 12,000. If the value of 100 shares of company 'X' on 29th March on the stock exchange are Rs. 11,000 then by paying Rs. 12,000 under the futures contract, the assessee would incur loss of Rs. 1,000.
33. Thus, the futures contracts being articles of trade and commerce which are legally permitted to be traded on the stock exchange, the transactions in futures would be transactions in a commodity as contemplated under section 43(5) of the Act. Ordinarily a transaction in a commodity relates to purchase/sale of an asset which is tangible and which is capable of being delivered. However, section 18A of the 1956 Act inserted with effect from 22-2-2000 provides that notwithstanding anything contained in any other law for the time being in force, contracts in derivative (like futures contracts) shall be legal and valid if such contracts are traded on a recognized stock exchange and settled on the clearing house of a recognized stock exchange in accordance with the rules and bye-laws of such stock exchange. Thus, by operation of law, the transactions in futures are made legal and valid even if the underlying securities permitted to be purchased/sold under the futures contracts are not tangible and incapable of actual delivery, provided such transactions are traded on a recognized stock exchange and settled on the clearing house of a recognized stock exchange. Moreover, section 43(5) of the Act provides that a transaction for purchase/sale of any commodity would be a speculative transaction if it is settled otherwise than by actual delivery. For the purposes of section 43(5), it is not necessary that the commodity agreed to be purchased or sold must be capable of actual delivery. Therefore, future contracts for purchase/sale of an underlying security permitted to be traded on the stock exchange and settled otherwise than by actual delivery would be speculative transactions under section 43(5) of the Act.
34. It is contended that the expression 'commodity' does not include 'stocks & shares', however, for the purposes of section 43(5), the expression 'commodity' has been expanded to include 'stocks & shares' and since transactions in derivatives are not specifically included in section 43(5), the same would fall outside the purview of section 43(5). We see no merit in the above contentions. The expression 'commodity' would cover all articles of trade including stocks & shares. Even under section 43(5), the expression 'commodity' is not expanded to include 'stocks & shares'. In fact, use of 'comma' in between the word 'commodity' and the words 'including stocks & shares' in section 43(5) make it clear that transactions for purchase of any commodity would include transaction for purchase or sale of stocks & shares. In other words, section 43(5) does not seek to expand the scope of expression 'commodity' but merely emphasizes that the transaction in commodity includes transactions in stocks & shares. Therefore, transactions in futures contracts like transactions in stocks & shares when settled otherwise than by actual delivery would be speculative transactions under section 43(5) of the Act.
35. The argument that section 43(5) refers to contracts which are capable of settlement by actual delivery whereas the transactions in futures are incapable of settlement and therefore, transactions in futures would fall outside the scope of section 43(5) is also without any merit, because, the very object of section 43(5) is to treat transactions which are settled otherwise than by actual delivery as speculative transactions. As noted earlier, section 43(5) refers to contracts for purchase/sale of any commodity and it is not restricted to contracts which are 10 capable of performance by actual delivery. Therefore, the fact that the futures contracts are settled otherwise than actual delivery cannot be a ground to hold that the futures contracts are not speculative transactions under section 43(5) of the Act.
36. The exceptions enumerated in the proviso to section 43(5) clearly provide that where speculative transactions are carried out with a view to guard against loss in respect of contracts for actual delivery in cases referred to in clauses (a), (b) and (c) of the proviso, then, such speculative transactions shall not be deemed to be speculative transactions. So far as the transactions covered under clause (d) are concerned, they are deemed not to be speculative transactions only with effect from 1-4-2006. Therefore, the transactions covered under clause (d) would not be treated as speculative transactions only with effect from 1-4- 2006.
37. The argument advanced on behalf of the assessee that clause (d) inserted to the proviso to section 43(5) by Finance Act, 1995 with effect from 1-4-2006 is clarificatory and hence retrospective in nature, cannot be accepted, because, firstly, the Legislature by Finance Act, 1995 has specifically provided that clause (d) to the proviso to section 43(5) shall come into operation prospectively with effect from 1-4-2006. Secondly, insertion of clause (d) was not necessitated on account of the fact that the provisions of section 43(5) were unworkable or interpretation of section 43(5) resulted in unintended consequences. Thirdly, even after insertion of clause (d), all transactions in derivatives are not taken outside the purview of section 43(5). It is only those derivative transactions which are covered under clause (d) are taken outside the purview of section 43(5) and the rest of the transactions in derivatives would continue to be covered under section 43(5) of the Income-tax Act. In these circumstances, the argument that clause (d) inserted to the proviso to section 43(5) has retrospective effect cannot be accepted.
38. We do not consider it necessary to deal with various decisions relied upon by the Counsel for the assessee, as in our opinion, all those decisions are distinguishable on facts. However, we may note that the decision of the Calcutta High Court in the case of Nirmal Trading Co. (supra) wherein it is held that the 'letters of renunciation' are neither transactions in commodity nor transactions in shares, has no relevance to the facts of the present case, because, firstly, the letters of renunciation cannot be treated on par with futures contracts and secondly letters of renunciation are not articles of trade, whereas futures contracts are articles traded on the stock exchange. Various decisions of the ITAT wherein it is held that the derivative transactions are not speculative transactions, in our opinion, do not correctly interpret section 43(5) of the Income-tax Act. Similarly, various decisions of the Apex Court relied upon by the counsel for the assessee in support of the contention that insertion of clause (d) to the proviso to section 43(5) of the Income-tax Act is retrospective in nature are also distinguishable on facts as the ratio laid down therein have no relevance in interpreting the provision of section 43(5) of the Income-tax Act. The futures contracts cannot be equated with insurance contract, because, unlike futures contract, the insurance contract is not an article of trade which can be traded. Thus, the futures contract being an article of trade created by an authority under the 1956 Act, the transactions in futures contracts would constitute transaction in commodity under section 43(5) of the Income-tax Act.
39. In the result, we hold that the exchange traded derivative transactions carried on by the assessee during assessment year 2003-04 are speculative transactions covered under section 43(5) of the Act and the loss incurred in those transactions are liable to be treated as speculative loss and not business loss. We further hold that clause (d) inserted to the proviso to section 43(5) with effect from 1-4-2006 is prospective in nature and the ITAT was in error in holding that clause (d) to the proviso to section 43(5) applied retrospectively so as to apply to the transactions carried on by the assessee during assessment year 2003-04.
1140. For all the aforesaid reasons, we allow the appeal filed by the Commissioner of Income- tax by answering the questions raised in the appeal in the above terms with no order as to costs.
In para-36, it is the observation of Hon'ble Court that so far as the transactions covered under clause (d) are concerned, they are deemed not to be speculative transactions with effect from 01/04/2006.
10. Going by the ratio of above binding judicial precedents, we are of the considered opinion that Ld. CIT(A) has clinched the issue in the correct perspective. The losses arising to the assessee in derivative segment are not to be considered as speculative in nature by virtue of clause (d) to sub-section (5) of Sec.43. The same are to be treated as normal business losses. This being so, the set-off of the same would be allowed in accordance with the law. Ground No.1 of the appeal stand dismissed. Ground no.2 would stand dismissed in view of the fact that the assessee has earned profit of Rs.389.62 Lacs in trading activity in cash segment and speculation income of Rs.5.41 Lacs. There are no losses under both the segments. The ground raised by the revenue is misplaced.
11. Resultantly, the appeal stand dismissed in terms of our above order.
Order pronounced on 27th July 2021
Sd/- Sd/-
(Mahavir Singh) (Manoj Kumar Aggarwal)
उपाध्यक्ष / Vice President लेखा दस्य / Accountant Member
मुिंबई Mumbai; सदनािं क Dated : 27/07/2021
Sr.PS, Jaisy Varghese
12
आदे शकीप्रधिधलधपअग्रेधर्ि/Copy of the Order forwarded to :
1. अपीलाथी/ The Appellant
2. प्रत्यथी/ The Respondent
3. आयकरआयुक्त(अपील) / The CIT(A)
4. आयकरआयुक्त/ CIT- concerned
5. सवभागीयप्रसतसनसध, आयकरअपीलीयअसधकरण, मुिंबई/ DR, ITAT, Mumbai
6. गार्ड फाईल / Guard File आदे शािसार/ BY ORDER, उप/सहायक पुंजीकार (Dy./Asstt.Registrar) आयकरअपीलीयअधिकरण, मुिंबई / ITAT, Mumbai.