Principal Commissioner Of Income Tax 2 v. Magic Share Traders Ltd

C/TAXAP/263/2019 ORDER IN THE HIGH COURT OF GUJARAT AT AHMEDABADR/TAX APPEAL NO. 263 of 2019 ==========================================================PRINCIPAL COMMISSIONER OF INCOME TAX 2 VersusMAGIC SHARE TRADERS LTD. ========================================================== Appearance:MRS MAUNA M BHATT(174) for the Appellant(s) No. 1 for the Opponent(s) No. 1 ========================================================== CORAM: HONOURABLE MR.JUSTICE J.B.PARDIWALAand HONOURABLE MR.JUSTICE A.C. RAO Date : 09/07/2019 ORAL ORDER (PER : HONOURABLE MR.JUSTICE J.B.PARDIWALA) 1This Tax Appeal under Section 260A of the Income Tax Act, 1961 [for short, “the Act, 1961”] is at the instance of the Revenue and is directed against the order passed by the Income Tax Appellate Tribunal, Ahmedabad dated 31[st] October 2018 in the ITA No.770/Ahd/2016 for the assessment year 2012-13. 2The Revenue has proposed the following questions of law: “(A) Whether the Appellate Tribunal has erred in law and on facts in allowing set off of the loss incurred by trading in F & O against business income contrary to the explanation to Section 73 of the Income Tax Act? (B) Whether the Appellate Tribunal has erred in law and on facts in deleting the disallowance of Rs.5,09,728/- made under Section 14A of the Income Tax Act, 1961 of the Act read with Rule 8D?” 3So far as the first question, that has been proposed by the Revenue is concerned, the findings recorded by the Tribunal are as follows: “9.We have carefully considered the rival submissions and perused the respective orders of the AO and CIT(A). The substantive question that arises for adjudication is whether loss incurred in eligible transactions i.e. derivative transactions within the meaning of Proviso (d) to Section 43(5) of the Act not involving any purchase or sale of shares per se can be regarded as speculative loss for the purposes of set off in view of Explanation to Section 73 or not. The controversy involved in the present case is thus essentially legal in nature. 9.1In the present appeal, the assessee seeks set off of losses arising from derivative losses as non-speculative business loss. ln contrast, the Revenue has labeled the loss arising from derivative transactions as “speculative loss’ and has consequently denied set off of such losses from regular income of non-speculative nature etc. by applying Explanation to Section 73 of the Act. 9.2We first advert to the pivotal contention on behalf of the assessee that Explanation to Section 73 of the Act cannot apply to loss arising from derivative transactions which are categorically excluded from being regarded as speculative business as defined under S.43(5) of the Act read with proviso (d) thereto. Identical issue arose before the Hon’ble Calcutta High Court in the case of Asian Financial Services (supra) relied upon. The Hon’ble Calcutta High Court held that once it is deemed to be a normal business loss on the basis of proviso appended to Section 43(5) of the Act, a question of applying Section 73 of the Act or the Explanation thereto for the purposes of refusing loss to be set off against business income is wholly incorrect. The Hon’ble Calcutta High Court after taking note of the decision of Hon’ble Delhi High Court in DLF Commercial (supra) took a distinct stand that derivatives cannot be treated at par with shares for the purposes of Explanation to Section 73 of the Act because the legislature has treated it differently. Thus, in view of the aforesaid position enunciated by the Hon’ble High Court in Asian Financial Services (supra), we find good deal of force in the case of assessee. The claim of the assessee thus requires to be allowed on this ground alone. 9.3In view of the resounding conclusion drawn in favour of the assessee on the aforesaid legal position, we do not consider it necessary to advert to other alternative contentions raised on behalf of the assessee.” 4So far as the second question, as proposed by the Revenue, is concerned, the findings recorded by the Tribunal in para 13 are as under: “While appreciating the fact in perspective, we observe that against the total expense of Rs.9.63 Lakhs, the turnover of the assessee in taxable stream stands at Rs.406.59 Crores whereas the tax free income stands a meager amount of Rs.6.l3 ]Lakhs. Therefore, the suo mota disallowance by the assessee is prima facie sufficient to cover the possible expense attributable to tax exempt income. Needless to say, the operation of Rule 8D is not automatic. It is hedged by Rules. Likewise, Section l4A of the Act inheres in it the concept of reasonableness. It is unconceivable to say that assessee has incurred Rs.6.44 Lakhs out of total expense of Rs.9.63 Lakhs to earn a paltry dividend income of Rs.6.l3 Lakhs while the remaining expenditure attributes for generation of substantial revenue of taxable nature noted above. The action of the Revenue is therefore prima facie inexplicable. Consequently, we set aside and cancel the addition of Rs.5,09,728/made by the AO under s.14A of the Act.” 5In our opinion, no error much less an error of law could be said to have been committed by the Tribunal in recording the aforesaid findings. We do not find any substantial question of law as such involved in the present Tax Appeal. This appeal, therefore, fails and is hereby dismissed. (J. B. PARDIWALA, J) CHANDRESH (A. C. RAO, J)