Whether rule 8D(ii) & 8D(iii) applies to shares held as stock-in-trade and loss arising out of derivatives from the income arising out of buying and selling of shares?

IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH: KOLKATA

Before Shri Mahavir Singh, JM & Shri Shamim Yahya, AM

I.T.A No.1183/Kol/2012

Assessment Year: 2009-10

Deputy Commissioner of Income-tax,

Circle-8, Kolkata.

(Appellant)

Vs.

 M/s. Baljit Securities Private Limited

(PAN: AABCB0779P)

(Respondent)

Date of hearing: 13.10.2014

Date of pronouncement: 21.10.2014

For the Appellant: Shri Ravi Jain, CIT, DR

For the Respondent: Shri S. K. Tulsiyan, Advocate

ORDER

Per Shri Mahavir Singh, JM :

This appeal by revenue is arising out of order of CIT(A)-VIII, Kolkata in Appeal No. 58/CIT(A)-VIII/Kol/11-12 dated 18.05.2012. Assessment was framed by DCIT, Circle-8, Kolkata u/s. 143(3) of the Income-tax Act, 1961 (herein after referred to as “the Act”) for Assessment Year 2009-10 vide his order dated25.07.2011.

2. The first issue in this appeal of revenue is against the order of CIT(A) in holding that delivery based share trading loss do not come under the ambit of Explanation to sec. 73 of the Act. For this, revenue has raised following groundno.1:

“1. That on the facts and circumstances of the case and in law, the Ld.CIT(A) erred in interpreting law to hold that delivery based share trading loss do not come under the ambit of explanation to Sec. 73 of the Act i.e. this is not deemed speculative loss as per explanation to Sec. 73 of the Act. Thereby Ld. CIT(A) erred in allowing relief to the assessee by setting off of share trading loss which is deemed speculative loss with derivative income and other business income.”

3. Briefly stated facts are that the assessee is engaged in the business of trading in shares on self-account, derivative transactions and share broking activity. According to AO, there is no material difference or any deviation in the nature of business carried on by the assessee during the year vis-a-vis preceding years. Forthis, the AO recorded this fact that “There has been no material difference or any deviation in the nature of business carried on by the assessee during the year vis-à-vis the preceding year. Having regard to the accounts of the assessee and the nature of business for the year under consideration, issues emanating from the applicability of section 73, income earned from surrendering certain key man insurance policies, income from derivative transactions, income from brokerage, interest on FD/margin deposits”. The AO noted from the accounts of the assesse that the assessee has incurred loss of Rs.7,29,56,706/- in respect of business of purchase and sale of shares on account as under:

“Opening Stock of shares- Rs.19,05,19,828/-

Purchase of shares- Rs.14,62,02,483/-

Rs.33,67,22,311/-

Less: Sale of shares- Rs.12,23,58,673/-

Closing stock of shares- Rs.14,14,06,932/-

Rs.26,37,65,605/-

Loss:  Rs. 7,29,56,706/-“

The AO treated the aforesaid loss arising from purchase and sale of shares on self-account as normal business loss to be set off against other business income i.e. brokerage, interest, derivative profits and receipts of key man insurance.

4. Aggrieved, assessee preferred appeal before CIT(A), who after considering the submissions of the assessee deleted the addition by observing as under:

“I have carefully considered the submissions of the appellant along with the details and the case laws relied upon, perused the observations of the Assessing Officer in the impugned assessment order including the facts of the case and the other materials on record. It submitted that the appellant derived business income by way of brokerage from share broking activity as well as earned profit/loss in purchase and sale of shares (both delivery based and non-delivery based) and in the relevant A.Y. it incurred net loss ofRs.2,16,75,441/- in purchase and sale of shares (delivery based loss ofRs.7,29,56,706/- and non-delivery based profit of Rs.5,12,81,265/-). Thus, it is noted that the appellant is primarily engaged in the composite business of share trading which involves the activities of (i) stock and share broking, (ii)purchase and sale of delivery based shares and (iii) purchase and sale of non-delivery based shares i.e. derivative tradíng.

The I.T Act, 1961 has been amended by Finance Act, 2005 w.e.f 1.4.2005 and by clause Proviso of sub- Section 5 of Section 43 it has been provided that trading in derivative carried out in the recognized stock exchange should not be considered as speculative business. I find that the Hon’ble jurisdictiona1ITAT A Bench in the case of ITO vs. Arena Textiles & Industries Ltd. in ITAno. 1019/Kol/2011 dated 29.12.2011 has held that the transaction done by delivery as well as the transaction of derivative of shares profit / loss is not hit by Section 43(5) and therefore held that the aggregation of share trading loss and profit from derivative transactions should be done before the application of the explanation to section 73. The Hon’ble ITAT A Bench Kolkata has taken the same view in the case of ITO vs. Rajanigandha Properties Ltd. in ITA no. 1011/Kol/2011 and also in Arion Commercial Pvt.Ltd. Kolkata in ITA no. 1010/Kol/2011 and held that the transaction done by delivery as well as the transaction of derivative of shares, profit/loss is not hit by Section 43(5) and therefore the aggregation of share trading loss and profit from derivative transactions should be done before the application of the Explanation to Section 73. Therefore, in view of the above the appellant is entitled to set off of the share trading loss with the profit earned from derivative transactions. My attention is also drawn to the appellate order passed by the CIT(A)-VI, Kolkata in Appeal No.147/CIT(A)-VI/R-6/Kol/10-11 vide order dated 30.03.2012 has decided the identical issue in favour of the assessee on similar facts of the case. Thus. keeping in view the entire facts of the case and the legal position as above and respectfully following the judgment of the Hon’ble ITAT A Bench Kolkata, it is held that the share trading loss of Rs 7,29,56,706/- is to be allowed to be set off with the profit in Derivative transactions amounting to Rs 5,12,81,265/-.

As regards the receipts of Rs 7,72,77,900/- on account of Keyman Insurance, it is stated that the appellant being engaged in various forms of capital market transactions had taken insurance coverage on few of its directors. The primary reason for subscribing to Keyman Insurance Policy was to safeguard its business interest against future uncertainties resulting in huge financial losses. It is further argued that under the policy, the company is the beneficiary of the plan and pays the insurance policy premiums and with these intention only the appellant had subscribed to Keyman Insurance Policy and has been paying the premiums every year out of profit derived

from the business of purchase and sale of shares. In support of this contention, the appellant furnished the P & L A/c copies of the appellant for the preceding assessment years (vide pages 74- 122of the Paper Book).During the relevant assessment year, it is explained that the appellant surrendered the Keyman Insurance Policy to overcome the loss incurred in the business of purchase and sale of delivery based shares. After examining the chart furnished by the appellant ( page no 73 of PB) depicting the net result in a summarized manner of the composite business of the appellant of the preceding AYs , it is found that the premiums of the Keyman Insurance Policy were actually paid out of the profits derived from business of purchase and sale of shares. It is also seen that all these premiums having been paid out of the business of purchase and sale of shares were claimed as business expenditure as per provision of sec.37 being laid out exclusively for the purpose of business and were duly allowed by the Assessing officer while completing the assessment of the respective previous assessment years.

The A/R argued that during the relevant year under consideration, the appellant having incurred such huge loss while dealing in delivery based transactions decided to surrender the Keyman Insurance Policy in order to protect its business interest and on surrender of the same, an amount ofRs.7,72,77,900/- was received as realizable value the same was correctly treated by the appellant as a business receipt as relatable to the business of purchase and sale of shares. Accordingly, the said business receipt forming part of the business of purchase and sale of shares was adjusted against the loss in the said business which remained after set-off of profit deríved from F&O (derivative) operations. However, the AO has not allowed the same to be set off which should have been allowed. Considering the entire facts of the case, I agree with the contention of the AR of the appellant. It is apparent from above that considering the effect of all the aforesaid receipts and losses, the appellant arrived at net business income in the business of purchase and sale of shares. Therefore, in my opinion, the receipt from the surrender of the Keyman Insurance Policy has to be assessed as income from Business and be allowed for set off with the loss from business under the same head.”

Aggrieved, revenue came in appeal before us.

To read the full judgment, please find the attached file:

Attached file:

http://www.itatonline.in:8080/itat/upload/-529787565022394184513$5%5E1REFNOITA_No.1183_of_2012_Baljit_Securities_Pvt._Ltd..pdf