Ita/829/2008 Of The Commissioner Of Income Tax v. M/S First Securities Pvt Ltd

IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THER DAY OF SEPTEMBER, 2014 PRESENT THR HON’BLE MR.JUSTICE N. KUMAR AND THR HON’BLE MRS..JUSTICK RATHNAKALA INCOME TAX APPEAL NO.829 OF 2008&INCOME TAX APPEAL NO.831 OF 2008 BRHTIWHR 1.THE COMMISSIONER OF INCOME-TAX,C R BUILDING,QUEENS ROAD,BANGALORE.|C R BUILDING,QUEENS ROAD,BANGALORE.| 2.THE ASSISTANT COMMISSIONER OF INCOME-TAX,CENTRAL CIRCLE-1(4).C.R. BUILDING,QUEENS ROAD,BANGALORE.|CENTRAL CIRCLE-1(4).C.R. BUILDING,QUEENS ROAD,BANGALORE.| ... APPBLLANTS(Common in both Appeals) (BY SRI K.V.ARAVIND, ADV.) AND: M/S. FIRST SECURITIES PVT. LTD.,405 & 406, HOUSE OF LORDS, ST.MARKS ROAD,BANGALORE — 560 OO1. .. RESPONDENT(Common in both Appeals) (BY SRI. S.PARTHASARATHI, ADV.) THRSEK INCOMB TAX APPBALS ARB FILED UNDERSECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER|DATED 28-03-2008 PASSED IN ITA NOS.905/BNG/20060 &1100/BNG/2006, FOR THE ASSESSMENT YEARS 2001-02, &2OQ0O3-200RESPECTIVELY,PRAYINGTHATTHISHON BLE COURT MAY BE PLEASED TO: 1. FORMULATE THE SUBSTANTIAL QUESTIONS OFLAW STATED THEREIN,LAW STATED THEREIN, Il.ALLOW THR APPBALS AND SBT ASIDE THR ORDERSPASSED.BY|THERINCOME-TAXAPPELLATETRIBUNAL BANGALORE IN ITA NOS.905/BNG/2006|&1100/BNG/2006, DATHD.28-03-2008RESPECTIVELY, CONFIRM THE ORDERS OF THEAPPELLATECOMMISSIONERCONFIRMINGTHE.ORDERPASSEDBY|THEASSISTANTCOMMISSIONER.OF|INCOME|TAX,CHRNTRALCIRCLE-1(4), BANGALORE.|PASSED.BY|THERINCOME-TAXAPPELLATETRIBUNAL BANGALORE IN ITA NOS.905/BNG/2006|&1100/BNG/2006, DATHD.28-03-2008RESPECTIVELY, CONFIRM THE ORDERS OF THEAPPELLATECOMMISSIONERCONFIRMINGTHE.ORDERPASSEDBY|THEASSISTANTCOMMISSIONER.OF|INCOME|TAX,CHRNTRALCIRCLE-1(4), BANGALORE.| THRSE ITAs. COMING ON FOR FINAL HEARING THIS)DAY,N.KUMAR JaJDELIVERED THR FOLLOWING: COMMON JUDGMENT The assessee in both the appeals are common andthe substantial questions of law in these two appealsare also the same, hence, both appeals are taken uptogether for consideration to dispose of in this commonjudgment. 2. The revenue has preferred these two appealsagainst the finding of the tribunal upholding the claimof the assessee on the ground that, under the proviso(c) of Section 43(5) of income Tax Act, 1961 (hereinafterreferred to as ‘the Act) the nature of jobbing and arbitrage cannot be considered as a_ speculativetransaction. 3. The assessee is a share broker and a member ofboth National Stock Exchange and Bangalore StockExchange Limited. The assessee had drawn acomposite Income and Expenditure Statement in whichthe income from various sources like brokerage,handling charges, commission, profit on sale of currentinvestments etc. are reflected. The assessee filed a'sreturn of income showing a loss of Rs.o2 lakhs for theassessment year 2001 - 2002. The remand report dated08.11.2005, shows that the transactions are in thenature of jobbing and arbitrage, done to guard againstloss which could have arisen in ordinary course ofassessees business as a member. The assessingauthority came to the conclusion that the assessee is aprivate company and not a banking company, therefore,the case falls squarely within provisions and in terms ofexplanation to Section 73 of the Act. Therefore, heldthat the specific provisions by way of explanation tosection 73 of the Act necessarily suggests that the business loss should be considered as speculationbusiness loss and loss arising therefrom needs to betreated as speculative loss. Therefore, he rejected theclaim of the assessee for set off against other businessprofits but allowed to be carried forward by setting ofthe loss from speculation business. Aggrieved by thesaid order, the assessee preferred an appeal before theCommissioner of Income Tax (Appeals), who upheld thesaid order. It is against these two orders, the assesseepreferred an appeal before the Tribunal and theTribunal on careful consideration of the provisions oflaw, the contents of the remand report and thematerials on record, held that Section 73 of the Act willcome into operation only when the transaction is foundto be a speculative transaction and not otherwise. Thetransaction must lead to a speculation business oractivity and the result must be a loss. On satisfactionof both these conditions, Section 73 of the Act, willcome into operation. However, proviso (c) to Section43(5) clearly shows that the transactions in the natureof jobbing and arbitrage are not to be considered as speculative|transaction. Therefore, whenthetransaction is not to be treated as_ speculativetransaction, the loss suffered by the transaction wouldbe a business loss. It has to be allowed as such and|therefore, the tribunal set aside the order of both theauthorities and allowed the business loss. Aggrieved bythe said order, the Revenue is in the appeal. 4. Learned Counsel for the Revenue assailing theimpugned order contended that explanation to Section73 of the Act is squarely attracted to the facts of thecase as the assessee is in the business of purchase andsale of shares of other companies and therefore, by adeeming fiction, the said business is to be treated as aspeculation business and any loss in the said businesscannot be set off against other business profit but it hasto be set off only against the profit accrued fromspeculation business and therefore, the impugned orderrequires to be set aside. >. Per contra, learned Counsel for the assesseesubmitted that before Section 73 or the explanation to section 73 of the Act is attracted, the activity carried on by the assessee should be a speculative transaction. Inthe instant case, the transaction falls under Section43(S)(c) of the Act, which is not a_e speculativtransaction and therefore, the Tribunal was justified inupholding the claim of the assessee. 6. In the light of the aforesaid facts and the rivalcontentions, the substantial question of law that arisefor our consideration is as under: “Whether the Tribunal was correct in holding|that the speculative loss incurred by the|assessee in the course of trading in shares|can be set off against income arising under|other Heads as it satisfy proviso (c) to Section|43(5) of the Act and consequently, the|explanation to Section 73 1s not attracted? 7. The speculative transaction has been defined under Sub-section 5 of Section 43 of the Act, which)reads as under:| “section 43(5) of the Income-tax Act,1961 - Speculative transactions - means a\ transaction in which a _ contract for thpurchase or sale of any commodity, including|Stocksandshares,1S|periodicallyOT|ultimately settled otherwise than by _ thactual delivery or transfer of the commodity or|SCTIPS:| Provided thatfor the purposes of this clause— (a) a contract in respect of raw materialsor merchandise entered into by a person in|theCOUTSEof|hismanufacturingOLrmerchanting business to guard against loss|through future price fluctuations in respect ofhis contracts for actual delivery of goods|manufactured by him or 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|of|StocksandSharesthroughprice|fluctuations; or (c) a contract entered into by a memberof a forward market or a stock exchange in|the course of any transaction in the nature of|jobbing or arbitrage to guard against loss which may arise in the ordinary course of his|business as such member; [or] Provided thatfor the purposes of this clause— (a) a contract in respect of raw materialsor merchandise entered into by a person in|theCOUTSEof|hismanufacturingOLrmerchanting business to guard against loss|through future price fluctuations in respect ofhis contracts for actual delivery of goods|manufactured by him or 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|of|StocksandSharesthroughprice|fluctuations; or (c) a contract entered into by a memberof a forward market or a stock exchange in|the course of any transaction in the nature of|jobbing or arbitrage to guard against loss which may arise in the ordinary course of his|business as such member; [or] l(a) an eligible transaction in respect oftrading in derivatives referred to in clause|l(ac)} of section 2 of the Securities Contracts|(Regulation) Act, 1956 (42 of 1956) carried outin a recognised stock exchange; [or]/ l(e) an eligible transaction in respect oftrading in commodity derivatives carried out|in a recognised association shall not be|deemed to be a speculative transaction.| /Explanation 1]/.—For the purposes of/this clause], 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 registered|under Section 12 of the Securities and|Exchange Board of India Act, 1992 (15 of|1992) in accordance with the provisions of the|Securities Contracts (Regulation) Act, 1956|(42 of 1956) or the Securities and Exchange| Board of India Act, 1992 (15 of 1992) or the|Depositories Act, 1996 (22 of 1996) and therules, regulations or bye-laws made_ ordirections issued under those Acts or by|banks or mutual funds on a recognised stock|exchange; and (B) which is supported by a timestamped contract note issued by such stockbroker|OYSsub-brokerOrsuchotherintermediary to every client indicating in the|contract note the unique client identity|number allotted under any Act referred to in|Sub-clause(A)andpermanentaccountnumber allotted under this Act; (i) "recognised stock exchange" means arecognised stock exchange as referred to in|clause (f) of section 2 of the Securities|Contracts (Regulation) Act, 1956 (42 of 1956)and which fulfils such conditions as may be|prescribedand.notified bythe CentralGovernmentfor this purpose;]| /Explanation 2.—For the purposes ofclause (e), the expressions— () "commodity derivative" shall have themeaning as assigned to it in Chapter VII of|the Finance Act, 2013; (i) “eligible transaction" means anytransaction,— (A) carried out electronically on screen-basedSystemsthroughmember|OLrartintermediary, registered under the bye-laws,|rules and regulations of the recognised|associationfortradingIn|commodityderivative in accordance with the provisionsof the Forward Contracts (Regulation) Act,1952 (74 of 1952) and the rules, regulations|or bye-laws made or directions issued under|that Act on a recognised association; and (B) which is supported by a timestampedcontractnoteissuedbysuchmember or intermediary to every clientindicating in the contract note, the unique|client identity number allotted under the Act,rules, regulations or bye-laws referred to in|sub-clause (A), unique trade number and|permanent account number allotted under'this Act; (ii) “recognised association" means arecognised association as_ referred to inclause (j) of section 2 of the Forward|Contracts (Regulation) Act, 1952 (74 of 1952)and which fulfils such conditions as may be|prescribed and is notified by the CentralGovernmentfor this purpose;]” (B) which is supported by a timestampedcontractnoteissuedbysuchmember or intermediary to every clientindicating in the contract note, the unique|client identity number allotted under the Act,rules, regulations or bye-laws referred to in|sub-clause (A), unique trade number and|permanent account number allotted under'this Act; (ii) “recognised association" means arecognised association as_ referred to inclause (j) of section 2 of the Forward|Contracts (Regulation) Act, 1952 (74 of 1952)and which fulfils such conditions as may be|prescribed and is notified by the CentralGovernmentfor this purpose;]” A reading of the aforesaid provisions makes it clear thatthe transaction in which a contract for the purchase orsale of any commodity including stocks and shares isperiodically or ultimately settled otherwise than by theactual delivery or transtfer of the commodity or scripts, itamounts to a speculative transaction. However, thesaid Section culls out certain exceptions. One suchexception is to be found in clause (c) to Section 43 (5) ofthe Act, which deals with a contract entered into by amember of a forward market or a stock exchange in thecourse of any transaction in the nature of jobbing andarbitrage to guard against loss which may arise in theordinary course of his business of such member, thensuch a transaction was not be deemed to be asspeculative transaction. — 8. Section 73 of the Act deals with how losses inspeculation business has to be dealt with, which readsas under: “S.73. (1) Any loss, computed in respectof a speculation business carried on by the|assessee, Shall not be set off except againstprofits|and|gains,urany,of|anotherspeculation business.| (2) Where for any assessment year anyloss computed in respect of a speculation|business has not been wholly set off under|sub-section (1), so much of the loss as is not)so set off or the whole loss where _ thassessee had no income from any_ otherspeculation business, shall, subject to the)other provisions of this Chapter, be carried|forward to the following assessment year,and— (i) it shall be set off against the profitsand gains, if any, of any speculation business|carriedon by him assessable for thatassessment year; and (i) uf the loss cannot be wholly so setoff, the amount of loss not so set off shall be|carried forward to the following assessment|year and so on. (3) In respect of allowance on account ofdepreciationOLrcapitalexpenditureOrlscientific research, the provisions of sub-section (2) of section 72 shall apply in relation|to speculation business as they apply in|relation to any other business. (4) No loss shall be carried forwardunder this section for more than _ [fourassessment years immediately succeeding|the assessment year for which the loss was|first computed. /Explanation.—Where any part of thebusiness of a company [other than a companywhose gross total income consists mainly of|income which ts chargeable under the heads|“Interest on securities”, “Income from house|property’, “Capital gains” and “Income fromother sources’/, or a company the principalbusiness 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 becarrying on a speculation business to the|extent to which the business consists of the|purchase and sale of such shares.” A reading of the aforesaid provisions makes it clear thatany loss computed in respect of a speculation businesscarried on by the assessee has to be set off only againstthe profits earned in such speculation business. Thereis a total prohibition for setting off such loss againstprofits and gains arising from any other business.However, an explanation was added by Taxation Laws(Amendment) Act, 1975, which came into effect from01.04.1977 providing for a deeming clause. other companies, such company shall, for the|purposes of this section, be deemed to becarrying on a speculation business to the|extent to which the business consists of the|purchase and sale of such shares.” A reading of the aforesaid provisions makes it clear thatany loss computed in respect of a speculation businesscarried on by the assessee has to be set off only againstthe profits earned in such speculation business. Thereis a total prohibition for setting off such loss againstprofits and gains arising from any other business.However, an explanation was added by Taxation Laws(Amendment) Act, 1975, which came into effect from01.04.1977 providing for a deeming clause. “[Explanation.—Where any part of thebusiness of a company (fother 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 @ company|the principal business of which is_ thebusiness 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 aspeculation business to the extent to which|the business consists of the purchase and|sale of such shares.” | As per the said explanation, where any part of thebusiness of a company other than a company whoseeross total income consists of mainly purchase and saleof shares of other companies, then such company shallfor the purpose of the Section 73 of the Act, that is, forsetting off the loses be deemed to be carried on as aspeculation business to the extent to which thebusiness consists of purchase and sale of such shares. 9. The High Court of Calcutta in the case ofR.P.G. Industries Ltd. Vs. Commissioner of Income Tax &Anr. Reported in 2011) 338 ITR 313,at para No.9has held as under: © “9. The statement of objects)andreasons for the added Explanation to Section| 73 and the notes on clauses appended to the|Bill explaining the proposed amendment are.also quoted below: "STATEMENT OF OBJECTS AND REASONS| The object of this Bill is to amend theIncome-tax Act, 1961, the Wealth-tax Act,1957, the GQrift-tax Act, 19585, and_ Companies (Profits) Surtax Act, 1964. Theproposals relating to the amendments to.these enactments have been formulated after|(Odetailedexaminationof|therecommendations of the Direct Taxes Enqutry|Committee (Wanchoo Committee) and theForty-seventh Report of the Law Commissionon the Trial and Punishment of Social and|Economic Offences, the latter insofar as theyrelate to direct taxes. Opportunity has been|taken to sponsor some amendments on the.basis of suggestions received from various|other quarters as well. Technical difficulties|arising in the operation of some of_ theprovisions of these enactments have alsobeen taken into account in formulating these|proposals.| woThemainobjectives|of|theamendments proposed to be made are tounearthblack-moneyand.preventits proliferation; to fight and curb tax evasion; tocheck avoidance of tax through various legal|devices, including the formation of trusts and|diversion of income or wealth to members offamily; to reduce tax arrears and to ensure.that in future, tax arrears do not accumulate;|to rationalise the exemptions and deductions|available under the relevant enactments, andto streamline the administrative set-up and|make itfunctionally efficient. ” 3. The Notes on Clauses, appended tothe Bill, explain the various’ provisionsthereof." "Treatment of losses in speculationbusiness - section 73. woThemainobjectives|of|theamendments proposed to be made are tounearthblack-moneyand.preventits proliferation; to fight and curb tax evasion; tocheck avoidance of tax through various legal|devices, including the formation of trusts and|diversion of income or wealth to members offamily; to reduce tax arrears and to ensure.that in future, tax arrears do not accumulate;|to rationalise the exemptions and deductions|available under the relevant enactments, andto streamline the administrative set-up and|make itfunctionally efficient. ” 3. The Notes on Clauses, appended tothe Bill, explain the various’ provisionsthereof." "Treatment of losses in speculationbusiness - section 73. 19.1 Section 73 of the Act provides thatany loss computed in respect of speculation|business carried on by an assessee will not|be set off except against the profits or gains, tfany, of another speculation business. Further,where any loss, computed in respect of a|speculation business for an assessment yearis not wholly set off in the above manner in|the said year, the excess shall be allowed to be.carriedforwardtothefollowingassessment year and set off against the| speculation profits, if any, in that year, andso on. The Amending Act has added andExplanation to section 73 to provide that the|business of purchase and sale of shares by|companies which are not investment orbanking companies or companies carrying on|business of granting loans or advances witllbe treated on the same footing as a|speculation business. Thus, in the case ofaforesaid companies, the losses from share|dealings will now be set off only againstprofits or gains of a speculation business.|Where any such loss for an assessment year|is not wholly set off against profits from a|speculation business, the excess will be.carried forward to the following assessment|year and set off against profits, if any, fromany speculation business. 19.2 The object of this provision is tocurb the device sometimes resorted to by|businesshouses|controllingGroups|of|companies to manipulate and reduce the.taxable income of companies under their|control. 19.3 This provision will come into forcewith effect from 1-4-1977 and will apply in| relation to the assessment year 1977-78, and|subsequent years. " 10. Therefore, it has no application to a contractentered into by a member of the NSE or BangaloreStock Exchange, whose business is in trading of shareson behalf of his clients, which is known as jobbing orarbitrage. Any loss which may arise in the course ofsuch business, shall not be deemed to be a speculativetransaction. If the nature of the transaction by theassessee is not a speculative transaction at all, then,the explanation to Section 73 of the Act has noapplication. The loss sustained by the assessee is abusiness loss which can be set off against the incomefrom the other sources. Therefore, the prohibitionunder Section 73 of the Act is attracted only to set offthe loss in a speculative business against the profit fromother business, because loss from speculation businessshould be set off only from a profit of speculationbusiness. Therefore, tribunal was justified in settingaside the order passed by the authorities and allowingthe claim oft the assessee. 11. The substantial question of law is answered in favour of the assessee and against the revenue. We donot see any merit in these two appeals. Accordingly, theappeals are dismissed.| Sd/-.JUDGE (FE Sd/-|JUDGE