Commissioner Of Income-Tax, Chennai v. M/S.sri Vasavi Gold & Bullion Pvt. Ltd

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED: 20.02.2018 CORAM: THE HONOURABLE MR.JUSTICE S.MANIKUMARandTHE HONOURABLE MRS.JUSTICE V.BHAVANI SUBBAROYAN T.C.A.No.853 of 2017 Commissioner of Income-tax,Chennai... AppellantVs. M/s.Sri Vasavi Gold & Bullion Pvt. Ltd.,137, NSC Bose Road Sowcarpet,Chennai - 600 079. .. Respondent Prayer: Tax Case Appeal is filed under Section 260A of IncomeTax Act, 1961, against the order dated 15.09.2016, made in ITANo.659/mds/2016, on the file of the Income Tax AppellateTribunal Madras "A" Bench. Preferred against the order dated16.12.2015 in ITA.No.64/CIT(A)-15/14-15 passed by theCommissioner of Income Tax (Appeal), 15, Nungambakkam, Chennai-600 034. the Assessment order dated 26.03.2014 passed by theIncome Tax Officer Company Ward No.VI(1)Chennai, for theAssessment year 2011-2012.For Appellant: Mr.TR.Senthilkumar for Mr.J.Narayanaswamy For Respondent : Mr.MP.Senthilkumar Tax Case Appeal is filed against the order, dated15.09.2016, made in ITA No.659/mds/2016, on the file of theIncome Tax Appellate Tribunal Madras "A" Bench. 2. Short facts leading to filing of the instant Tax CaseAppeal are that, the Assessing Officer, while completing theassessment found that the assessee had claimed an amount ofRs.60,66,466/- as loss in open market trading. Assessee wascarrying on commodity trading through M/s.HRIM Comtrade. The https://hcservices.ecourts.gov.in/hcservices/ Assessing Officer rejected the assessees claim to set off theloss against the normal business income, on the ground that theassessee failed to prove that transactions were done through arecognised stock exchange viz., MCX stock exchange and was notsupported by proper time stamped contract notes and that thetransaction did not qualify as an eligible transaction. Thus,the Assessing Officer rejected the assessee's claim.Alternatively, the Assessing Officer also held that even if thetransaction has to be treated as eligible speculativetransaction, the assessee will not be entitled for the claim, inview of Explanation to Section 73, as per which, the company hadto be treated as in the speculative business to the extent ofwhich the income was derived from speculative transaction. 3. Aggrieved by the assessment order, assessee filed appealbefore the Commissioner of Income Tax (Appeal), Chennai. TheCommissioner of Income Tax (Appeals), stated that thetransaction in F&O / derivative segments were to be enteredinto, with the support of contracts notices having unique clientidentity number, and that the transaction were to be carried outthrough recognised stock exchange, and therefore the transactionis an eligible transaction, under Section 43(5). TheCommissioner of Income Tax (Appeal), Chennai, held that thederivatives cannot be treated as share and therefore thetransaction is excluded from the Explanation to Section 73(4).Thereby, the Commissioner of Income Tax (Appeal), Chennai, hasdirected the Assessing Officer to delete the above disallowance. 4. Aggrieved by the above said order, the Revenue preferredan appeal in ITA.No.659/Mds/2016, before the Income TaxAppellate Tribunal 'A' Bench, Chennai. Submissions made by theRevenue, before the Income Tax Appellate Tribunal, Chennai, areas follows:- 4. Aggrieved by the above said order, the Revenue preferredan appeal in ITA.No.659/Mds/2016, before the Income TaxAppellate Tribunal 'A' Bench, Chennai. Submissions made by theRevenue, before the Income Tax Appellate Tribunal, Chennai, areas follows:- "2. Shri Shiva Srinivas, the learnedDepartmental Representative, submitted that,the only issue arises, for consideration iswith regard to addition of Rs.60,66,466/-.According to the learned departmentalrepresentative, the assessee claimed the sumof Rs.60,66,466/- as loss in open markettrading. According to the Ld. D.R., theassessee traded in Multi Commodity Exchange.The assessee claimed that the transaction isonly a business transaction. Referring toSection 43(5) of the Income-tax Act, 1961 (inshort 'the Act'), the Ld. D.R. submitted thatthe assessee could not produce necessarymaterial, before the Assessing Officer, toprove that the transaction was carried outthrough Multi Commodity Stock Exchange. No proper stamped voucher or contract note wasproduced before the Assessing Officer. Evenassuming for a moment that the transactionwas carried out through Multi Commodity StockExchange, the business was carried out by theassessee only for three months, therefore, ithas to be considered as speculative business,hence, the same cannot be set off against theother income of the assessee." 3. The Ld. Departmental Representativefurther submitted that the assessee’s mainbusiness is retail gold jewellery. Therefore,Explanation to Section 73(4) would come intooperation. Hence, the transaction of purchaseand sale of derivatives has to be construedas speculative transaction. Therefore, theloss suffered by the assessee cannot be setoff against the other income of the assessee.Referring to the order of the CIT(Appeals),the Ld. D.R. submitted that the CIT(Appeals)by referring to the Notification dated22.05.2009, found that the derivative is afinancial instrument whose value depends uponthe value of other underlying financialinstrument which requires no initial netinvestment or little initial net investmentthat would be settled at a future date,therefore, Explanation to Section 73(4) ofthe Act would come into operation. The CIT(Appeals) has also found that derivatives arenot shares, therefore, they are excluded fromthe ambit of Section 73(4) of the Act.According to the Ld. D.R., the CIT(Appeals)is not correct in allowing the claim of theassessee. 5. Before the Tribunal, the learned counsel for theassessee, made the following submissions: "4. On the contrary, Shri M.P. SenthilKumar, the Learned counsel for the assessee,submitted that admittedly, the assessee isengaged in the business of jewellery. Theassessee traded in derivatives in the MultiCommodity Stock Exchange. Referring toproviso to Section 43(5) of the Act, theLearned counsel submitted that when tradingwas made in derivatives through a recognizedStock Exchange, the same cannot be deemed to be a speculative transaction. Therefore,according to the Learned counsel, provisionsof Section 73(4) is not applicable at all." 6. After considering the rival submissions and on the factsand circumstances of the case, the Income Tax Appellate Tribunal'A' Bench, Chennai, vide order dated 15.09.2016, made in ITANo.659/mds/2016, dismissed the Revenue appeal. 7. Aggrieved by the same, the present Tax Case Appeal hasbeen filed by the Commissioner of Income Tax, Chennai, on thefollowing substantial questions of law: "1. Whether on the facts and in thecircumstances of the case and in law,Tribunal was right in not appreciating thefact that the assessee had traded thecommodity through Multi Commodity StockExchange an un recognised exchange which isa different entity from the MCX StockExchange which is a recognised exchange ? 6. After considering the rival submissions and on the factsand circumstances of the case, the Income Tax Appellate Tribunal'A' Bench, Chennai, vide order dated 15.09.2016, made in ITANo.659/mds/2016, dismissed the Revenue appeal. 7. Aggrieved by the same, the present Tax Case Appeal hasbeen filed by the Commissioner of Income Tax, Chennai, on thefollowing substantial questions of law: "1. Whether on the facts and in thecircumstances of the case and in law,Tribunal was right in not appreciating thefact that the assessee had traded thecommodity through Multi Commodity StockExchange an un recognised exchange which isa different entity from the MCX StockExchange which is a recognised exchange ? 2. Whether on the facts and in thecircumstances of the case and in law,Tribunal was right in holding thattransactions in commodity derivatives donethrough Multi Commodity Stock Exchangecannot be treated as speculative transactionas per Section 43(5) ? 3. Whether on the facts andcircumstances of the case and in law,Tribunal was right in perversely holdingthat transaction in derivatives done byassessee cannot be treated as speculativetransaction under Section 43(5) whenassessee did not comply with any of theconditions stipulated under Section 43(5)(d)by producing any evidence to satisfy theconditions ?" 8. Supporting of the above substantial questions of law, thegrounds raised in the instant appeal are that: (i) The Tribunal has erred in not appreciating the fact thatthe assessee had traded the commodity through Multi-CommodityStock Exchange an un recognised exchange which is a differententity from the MCX Stock Exchange which is a recognisedexchange. (ii) The Tribunal ought to have appreciated the Multi-Commodity Stock Exchange is not a recognised stock exchange andhad mistook the said exchange as MCX Stock Exchange which is arecognised exchange. (iii) Tribunal has erred in holding that the transaction inderivative by the assessee cannot be treated as speculativetransaction under Section 43(5) even though the assessee had notcomplied with the condition stipulated in Section 43(5)(d). (iv) The Tribunal ought to have appreciated that the openmarket trading done by the assessee is not an eligibletransaction as per Section 43(5)(d). (v) The Tribunal ought to have appreciated that the normalbusiness of the assessee is only a jewellery business and theassessee had not transacted for the purpose of the investment buthad indulged in F&O commodity trading. (vi) The Tribunal ought to have appreciated that the lossincurred by the assessee is a speculative loss and same cannot beset off against normal business loss of the assessee. (vii) The Tribunal has also erred in not considering thegrounds raised by the Revenue with respect to the Explanation toSection 73 while deciding the issue. 9. Heard the learned counsel appearing for the parties andperused all the materials available on record. 10. Main issue on which arguments were advanced before thisCourt is with regard to addition of Rs.60,66,466/- (loss on openmarket trading) made by the Assessing Officer to the income ofthe assessee. Assessment order dated 26.03.2014, reads asfollows: “The assessee company has not substantiated thatthe transactions were supported by Contract Notes andwere carried on in a recognised stock exchange i.e.,in MCX which is the recognised stock exchange as perSO 1327 (E) dated 22.05.2009. Thus the transactionscannot be considered as 'eligible transactions' as persection 43(5)(d). In view of explanation to section 73, theassessee will not be eligible for set off and carryforward of the loss of Rs.60,66,466/- irrespective ofthe fact whether the transactions are covered by thedefinition of 'eligible transaction'. Penalty proceedings under Section 271(1)(c) areinitiated for furnishing inaccurate particulars ofincome. “The assessee company has not substantiated thatthe transactions were supported by Contract Notes andwere carried on in a recognised stock exchange i.e.,in MCX which is the recognised stock exchange as perSO 1327 (E) dated 22.05.2009. Thus the transactionscannot be considered as 'eligible transactions' as persection 43(5)(d). In view of explanation to section 73, theassessee will not be eligible for set off and carryforward of the loss of Rs.60,66,466/- irrespective ofthe fact whether the transactions are covered by thedefinition of 'eligible transaction'. Penalty proceedings under Section 271(1)(c) areinitiated for furnishing inaccurate particulars ofincome. The assessed income is computed as under:Income from business as admitted: Rs.22,65,469/-Add: Loss on open market trading : Rs.60,66,466/-Assessed income : Rs.83,31,935/- Tax as per computation sheet and demand noticeenclosed should be paid.” 11. According to the Assessing Officer (i) as per Section 45(5)(d) of the Income Tax Act, the transaction carried out by theassessee cannot be considered as 'eligible transaction' and thesame has to be treated as 'speculative transaction' and (ii)irrespective of the fact whether the transactions are covered bythe definition of 'eligible transaction' and the assessee willnot be eligible for set off and carry forward of the loss ofRs.60,66,466/- in view of Explanation to Section 73 of theIncome Tax Act. 12. For better understanding of the relevant provisionsrelied on by the Assessing Officer, viz., Section 43(5)(d) andExplanation to Section 73 are extracted hereunder:“Definitions of certain terms relevant toincome from profits and gains of business orprofession.43. In sections 28 to 41 and in thissection, unless the context otherwise requires— (1) "actual cost" means ............(2) "paid" means ........... (3) "plant" includes ..........(4) (i) "scientific research" means ......(5) "speculative transaction" means atransaction in which a contract for the purchaseor sale of any commodity, including stocks andshares, is periodically or ultimately settledotherwise than by the actual delivery or transferof the commodity or scrips: Provided that for the purposes of thisclause— (a) a contract in respect of raw materialsor merchandise entered into by a person in the https://hcservices.ecourts.gov.in/hcservices/ course of his manufacturing or merchantingbusiness to guard against loss through futureprice fluctuations in respect of his contractsfor actual delivery of goods manufactured by himor merchandise sold by him; or (b) a contract in respect of stocks andshares entered into by a dealer or investortherein to guard against loss in his holdings ofstocks and shares through price fluctuations; or (c) a contract entered into by a member of aforward market or a stock exchange in the courseof any transaction in the nature of jobbing orarbitrage to guard against loss which may arisein the ordinary course of his business as suchmember; or (d) an eligible transaction in respect oftrading in derivatives referred to in clause (ac)of section 2 of the Securities Contracts(Regulation) Act, 1956 (42 of 1956) carried outin a recognised stock exchange; or (e) an eligible transaction in respect oftrading in commodity derivatives carried out in arecognised association , which is chargeable tocommodities transaction tax under Chapter VII ofthe Finance Act, 2013 (17 of 2013), shall not be deemed to be a speculativetransaction. Explanation 1.—For the purposes of clause (d),the expressions— (i) "eligible transaction" means anytransaction,— (A) carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary registeredunder section 12 of the Securities and ExchangeBoard of India Act, 1992 (15 of 1992) inaccordance with the provisions of the Securities https://hcservices.ecourts.gov.in/hcservices/ (e) an eligible transaction in respect oftrading in commodity derivatives carried out in arecognised association , which is chargeable tocommodities transaction tax under Chapter VII ofthe Finance Act, 2013 (17 of 2013), shall not be deemed to be a speculativetransaction. Explanation 1.—For the purposes of clause (d),the expressions— (i) "eligible transaction" means anytransaction,— (A) carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary registeredunder section 12 of the Securities and ExchangeBoard of India Act, 1992 (15 of 1992) inaccordance with the provisions of the Securities https://hcservices.ecourts.gov.in/hcservices/ Contracts (Regulation) Act, 1956 (42 of 1956) orthe Securities and Exchange Board of India Act,1992 (15 of 1992) or the Depositories Act, 1996(22 of 1996) and the rules, regulations or bye-laws made or directions issued under those Actsor by banks or mutual funds on a recognised stockexchange; and (B) which is supported by a time stampedcontract note issued by such stock broker or sub-broker or such other intermediary to every clientindicating in the contract note the unique clientidentity number allotted under any Act referredto in sub-clause (A) and permanent account numberallotted under this Act; (ii) "recognised stock exchange" means arecognised stock exchange as referred to inclause (f) of section 2 of the SecuritiesContracts (Regulation) Act, 1956 (42 of 1956) andwhich fulfils such conditions as may beprescribed and notifiedby the Central Governmentfor this purpose;”x x x x x“Section 73: Losses in speculative business: (1) Any loss, computed n respect of aspeculation business carried on by the assessee,shall not be set off except against profits andgains, if any, of another speculation business. (2) Where for any assessment year any losscomputed in respect of a speculation business hasnot been wholly set off under sub-section (1), somuch of the loss as is not so set off or thewhole loss where the assessee had no income fromany other speculation business, shall, subject tothe other provisions of this Chapter, be carriedforward to the following assessment year, and— (i) it shall be set off against the profitsand gains, if any, of any speculation businesscarried on by him assessable for that assessmentyear; and (ii) if the loss cannot be wholly so setoff, the amount of loss not so set off shall becarried forward to the following assessment yearand so on. (3) In respect of allowance on account ofdepreciation or capital expenditure on scientificresearch, the provisions of sub-section (2) ofsection 72 shall apply in relation to speculationbusiness as they apply in relation to any otherbusiness. (4) No loss shall be carried forward underthis section for more than four assessment yearsimmediately succeeding the assessment year forwhich the loss was first computed. Explanation.— Where any part of the businessof a company (other than a company whose grosstotal income consists mainly of income which ischargeable under the heads "Interest onsecurities", "Income from house property","Capital gains" and "Income from other sources",or a company the principal business of which isthe business of trading in shares or banking orthe granting of loans and advances) consists inthe purchase and sale of shares of othercompanies, such company shall, for the purposesof this section, be deemed to be carrying on aspeculation business to the extent to which thebusiness consists of the purchase and sale ofsuch shares.” (emphasis is ours) Explanation.— Where any part of the businessof a company (other than a company whose grosstotal income consists mainly of income which ischargeable under the heads "Interest onsecurities", "Income from house property","Capital gains" and "Income from other sources",or a company the principal business of which isthe business of trading in shares or banking orthe granting of loans and advances) consists inthe purchase and sale of shares of othercompanies, such company shall, for the purposesof this section, be deemed to be carrying on aspeculation business to the extent to which thebusiness consists of the purchase and sale ofsuch shares.” (emphasis is ours) 13. Keeping the above provisions in mind, first let usconsider whether Section 43(5) of the I.T. Act will apply to thefacts and circumstances of the case. Section 43(5) deals with'speculative transaction' and any income derived from the samewill be computed under the head “income from profits and gainsof business or profession”. Proviso (d) to Section 43(5) givesexemption to an eligible transaction in respect of trading inderivatives carried out in a recognised exchange. 14. Now, let us consider the kind of transaction, theassessee carried out in the instant case. The assessee's mainbusiness is in retail gold jewellery and for a short period oftime viz., three months i.e., from 08.08.2010 to 25.10.2010, theassessee was also trading in derivatives through recognisedMulti Commodity Stock Exchange and suffered loss to a tune of https://hcservices.ecourts.gov.in/hcservices/ Rs.60,66,466/-. The said transactions were carried out by theassessee electronically on screen based systems and throughapproved stock broker and that the same is supported by TimeStamped Contract Note, issued by the stock broker indicating theunique identification number and PAN number in the contractnote. The Authorised Representative of the assessee hasexplained and furnished the above details during assessmentproceedings. However, an adverse assessment order has beenpreferred. 15. After considering the rival submissions, in the appealfiled by the assessee, the Commissioner of Income Tax (Appeals),vide order dated 16.12.2015, held as follows: "5.1.6. For the transactions in F & Osegments to qualify for being non-speculativetransactions as per the definitions inSection 43(5) the transactions have to beeligible transactions and the transactionshave to be carried out through recognised MCXstock exchange. The appellant has enteredinto transactions which are supported bycontract notes having a unique clientidentity number. Such transactions werecarried out through a stock broker on ascreen based system. These transactions areeligible transactions. The transactions werecarried out in a recognised stock exchange.The AO has held that the appellant failed toprove that the transactions were carried outthrough MCX Stock Exchange Ltd. which gotnotified by Notification No.46/2009 dated22.05.2009. In terms of Explanation toSection 73(4) in the case of a company,business of purchase and sale of shares isdeemed to be speculative business. Aderivative is a financial instrument whosevalue depends on the value of otherunderlying financial instruments whichrequires no initial net investment or littleinitial net investment that is settled at afuture date. Explanation to Sec.73(4) hasbeen enacted to clarify beyond any doubt thatshare business of certain type or classes ofcompanies are deemed to be speculative.Since derivatives are not shares, they areexcluded from the ambit of explanation toSec.73(4). Therefore, the transactionsentered into by the appellant are eligibletransactions and the AO is directed to delete the addition of Rs.60,66,466/-. These groundsof appeal are allowed." the addition of Rs.60,66,466/-. These groundsof appeal are allowed." 16. Adverting to the submissions of the parties, extractedsupra, Income Tax Appellate Tribunal, vide order dated15.09.2016, held as follows: ""5. We have considered the rivalsubmissions on either side and perused therelevant material available on record. Inthis case, the assessee is trading inderivatives in the Multi Commodity StockExchange, which was recognized. Therefore,the same cannot be treated as speculativetransaction within the meaning of Section 43(5) of the Act. In other words, thetransaction made in derivatives through MultiCommodities Stock Exchange was exempted underproviso (d) to Section 43(5) of the Act.Therefore, this Tribunal do not find anyreason to interfere with the order of thelower authority and accordingly the same isconfirmed.6. In the result, the appeal filed bythe Revenue is dismissed." 17. On the facts and circumstances of this case, thetransaction done by the assessee is not a speculativetransaction but it only comes under provios (d) to Section 43(5)of the Act thereby it is only a non speculative transaction andthus exempt from tax. 18. Section 73 of the I.T. Act deals with "losses inspeculation business". Explanation to Section 73 categoricallystates that in the case of a company, business of purchase andsale of shares is deemed to be speculative business. Here, inthe instant case, the assessee had suffered loss in trading ofderivatives carried through Multi Commodity Stock Exchange. Asderivative transactions being separate from trading in shares,provisions of Explanation to Section 73 will not be applicableto such transactions and hence, the loss incurred by theassessee in derivative transactions through recognised stockexchange has to be set off against other business income as perprovisions of the Act. 19. In the light of the above discussions, we are of theview that the transaction carried out by the assessee is a nonspeculative transaction and thus Section 43(5) is not attractedto the facts of the instant case and likewise the assessee was https://hcservices.ecourts.gov.in/hcservices/ trading in derivatives and not in shares, so the loss sufferedby the assessee in trading in derivatives is excluded from theambit of Explanation to Section 73. 20. Therefore, we concur with the decision taken by theAppellate Tribunal as well as the Commissioner of Income Tax(Appeals) in rejecting the view taken by the Assessing Officerto add Rs.60,66,466/- as loss, on open market trading to theincome of the assessee. 21. Accordingly, substantial questions of law are answeredagainst the Revenue and instant Tax Appeal is dismissed. Nocosts. Sd/- Assistant Registrar(CS VI) //True Copy// Sub Assistant Registrardm/kkTo1.The Income Tax Appellate Tribunal,Madras "A" Bench,Chennai.2.The Commissioner of Income Tax,Chennai.3.The Commissioner of Income Tax,(Appeals)-15,121, Mahatma Gandhi Road,Nungambakkam, Chennai-600 034.4.The Income Tax Officer,Company Ward VI (1)7[th] Floor, New Block,Room No.704, 212, MG Road,Chennai 600 034+1cc to Mr.TR.Senthilkumar, Advocate, S.R.No.+1cc to Mr.Philip George, Advocate, S.R.No. T.C.A.No.853 of 2017 kj(co)cs/25/04/18