M/s L.D.K. Shares and Securities Pvt. Ltd., Delhi v. I.T.O., Ward-4(3), Delhi

ITA 1050/AGR/2008 | 2003-2004
Pronouncement Date: 21-11-2011 | Result: Allowed

Appeal Details

RSA Number 105020314 RSA 2008
Assessee PAN AAACL6604Q
Bench Agra
Appeal Number ITA 1050/AGR/2008
Duration Of Justice 3 year(s) 8 month(s) 1 day(s)
Appellant M/s L.D.K. Shares and Securities Pvt. Ltd., Delhi
Respondent I.T.O., Ward-4(3), Delhi
Appeal Type Income Tax Appeal
Pronouncement Date 21-11-2011
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted DB
Tribunal Order Date 21-11-2011
Date Of Final Hearing 18-11-2011
Next Hearing Date 18-11-2011
Assessment Year 2003-2004
Appeal Filed On 20-03-2008
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL AGRA BENCH AGRA BEFORE SHRI H.S. SIDHU JUDICIAL MEMBER AND SHRI B.P. JAIN ACCOUNTANT MEMBER ITA NO.1050/DEL/2008 ASSESSMENT YEAR: 2003-04 M/S. L.D.K. SHARES & SECURITIES PVT. LTD. VS. I NCOME TAX OFFICER 195 PATPARGANJ INDUSTRIAL AREA WARD 4(3) NE W DELHI. DELHI. (PAN: AAACL 6604 Q). (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SUSHIL MAHESHWARI C.A. RESPONDENT BY : SHRI A.K. SHARMA JR. D.R. DATE OF HEARING : 18.11.2011 DATE OF PRONOUNCEMENT : 21.11.2011 ORDER PER BENCH : THIS APPEAL OF THE ASSESSEE ARISES FROM THE ORDER O F LD. CIT(A)-VII NEW DELHI DATED 08.01.2008 FOR THE ASSESSMENT YEAR 2003 -04 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL :- 1. THAT THE LEARNED CIT(A) ERRED IN HOLDING THAT A SSESSING OFFICER HAS RIGHTLY ISSUED NOTICE UNDER SECTION 148 OF THE ACT AND COMPLETED THE PROCEEDINGS UNDER SECTION 148/147 WITHOUT APPRE CIATING THE FACTS ITA NO.1050/DEL/2008 A.Y. 2003-04 2 AND CIRCUMSTANCES OF THE CASE AND CASE LAWS RELIED UPON BY THE APPELLANT. 2. THAT THE LEARNED CIT(A) ERRED IN UPHOLDING THAT LOSS OF RS.13 41 565/- IS IN THE NATURE OF SPECULATIVE LOSS NOT AVAILABLE FOR SET OFF AGAINST BUSINESS INCOME WITHOUT APPRECIATING TH E FACTS AND CIRCUMSTANCES OF THE CASE AND THE LEGAL POSITION. 3. THAT THE LEARNED CIT(A) ERRED IN HOLDING THAT EX PENDITURE OF RS.24 480/- INCURRED ON INSTALLATION OF V-SAT AT TH E LOCATIONS OF SUB- BROKERS IS IN THE NATURE OF CAPITAL EXPENDITURE HAV ING ENDURING EFFECT WITHOUT APPRECIATING THE FACTS AND CIRCUMSTANCES OF THE CASE. 3. GROUND NO.1 OF THE ASSESSEE HAS NOT BEEN PRESSED BY THE LD. AUTHORISED REPRESENTATIVE APPEARING FOR THE ASSESSEE. THE SAM E IS DISMISSED AS NOT PRESSED. 4. AS REGARDS GROUND NO.2 THE BRIEF FACTS AS APPEA RING AT PAGE NOS.1 2 & 3 OF THE ASSESSMENT ODER ARE AS UNDER :- THE MAIN BUSINESS OF THE ASSESSEE IS THAT OF SHARE S BROKERS. THE COMPANY IS A MEMBER OF NATIONAL STOCK EXCHANGE MUMBAI AND ACTS AS A BROKER BETWEEN ITS CLIENTS AND THE NSE FO R BUYING AND SELLING SHARES ON THEIR BEHALF AND ITS OWN. AS PER PROFIT & LOSS ACCOUNT FILED BY THE ASSESSEE ALONG WITH RETURN OF INCOME THE ASSESSEE HAS INCURRED A LOSS OF RS.13 97 068/- IN T RANSACTIONS FOR PURCHASE AND SALE OF SHARES ON ITS OWN BEHALF. VIDE THIS OFFICE LETTER DATED 29.08.2005 THE ASSES SEE WAS ASKED TO EXPLAIN AS TO WHY THE LOSS OF RS.13 97 068/- ON ACCOUNT OF TRANSACTIONS IN SHARES ON ITS OWN BEHALF BE NOT DEE MED TO BE A SPECULATION LOSS IN VIEW OF THE EXPLANATION OF SECT ION 73 OF THE ITA NO.1050/DEL/2008 A.Y. 2003-04 3 INCOME TAX ACT 961. VIDE LETTER DATED 05.10.2005 (PAGE NO.121) FILED IN THIS OFFICE IT HAS BEEN SUBMITTED AS UNDER :- THE ASSESSEE HAS INCURRED A LOSS OF RS.13 41 565/- ON ACCOUNT OF HEDGING IN FUTURE AND OPTIONS. SINCE FUTURES AND OPTIONS OF ANY COMPANY ARE NOT SHARE CAPITAL IN A COMPANY AND THE HOLDER OF FU TURES AND OPTIONS DOES NOT BECOME THE SHARES HOLDER IN A COMPANY THEREFORE DEALING IN FUTURES AND OPTIONS C AN NOT BE EQUATED WITH DEALING IN SHARES BY ANY STRETC H OF IMAGINATION. I HAVE CAREFULLY CONSIDERED THE SUBMISSION OF THE A SSESSEE. THE TRANSACTION OF HEDGING IN FUTURE AND OPTIONS ARE NO THING BUT ARE THE TRANSACTION OF SALES AND PURCHASE OF SHARES ON ITS OWN BEHALF MADE BY THE ASSESSEE DURING THE YEAR. AFTER GOING THROUGH THE SECTION 73 AND ITS EXPLANATIONS IT IS SEEN THAT THE ASSESSEES CL AIM IS MISCOUNTED. THE DEFINITION OF SPECULATIVE TRANSACTION IN SECT ION 43(5) HAS BEEN CONSIDERABLY DILUTED BY THE ADDITION OF AN EXPLANAT ION TO SECTION 73 BY THE TAXATION LAWS (AMENDMENT) ACT 1975 W.E.F. 01.04.1977. THE SCOPE AND SWEEP OF SPECULATION BUSINESS WAS EXTENDE D BY INSERTION OF EXPLANATION TO SECTION 73 OF THE I.T. ACT WHICH ST ATES AS UNDER :- 73. LOSSES IN SPECULATION BUSINESS EXPLANATION WHERE ANY PART OF THE BUSINESS OF A C OMPANY OTHER THAN A COMPANY WHOSE GROSS TOTAL INCOME CONSI STS MAINLY OF INCOME WHICH IS CHARGEABLE UNDER THE HEADS INTERES T ON SECURITIES INCOME FROM HOUSE PROPERTY CAPITAL GAIN AND IN COME FROM OTHER SOURCES OR A COMPANY THE PRINCIPAL BUSINESS OF WHICH IS THE BUSINESS OF BANKING OR THE GRANTING OF LOANS AND AD VANCES) 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 A SPECULATION BUSINESS TO THE EXTENT TO WHICH THE BUS INESS CONSIST OF THE PURCHASE AND SALE OF SUCH SHARES. ITA NO.1050/DEL/2008 A.Y. 2003-04 4 SPECULATIVE TRANSACTION AS DEFINED IN THE I.T. ACT MEANS A TRANSACTION IN WHICH A CONTRACT FOR THE PURCHASE AN D SALE OF ANY COMMODITY INCLUDING ANY STOCKS AND SHARES IS PERIO DICALLY OR ULTIMATELY SETTLED OTHERWISE THAN BY THE ACTUAL DEL IVERY OR TRANSFER. THE EXPLANATION TO SECTION 73 GOES A STEP FURTHER B Y EXTENDING THE DEFINITION OF SPECULATIVE TRANSACTION BY TREATING A NY PURCHASE AND/OR SALE OF SHARES BY CRETIN COMPANIES TO BE SPECULATIV E. IT SPECIFIES THAT PURCHASE AND SALE OF SHARES BY COMPANIES WITH FEW EXEMPTION WILL BE DEEMED TO BE SPECULATIVE IN NATURE EVEN IF THERE HAS BEEN ACTUAL DELIVERY OF SHARES AND WHICH THEREFORE DO NOT FALL WITHIN THE SPECULATION TRANSACTIONS AS DEFINED IN SECTION 45(5 ). EVEN IF THE SALE/PURCHASE TRANSACTIONS IN SHARES ARE NOT COVERE D BY SECTION 43(5) BUT THE DEEMING PROVISIONS OF EXPLANATION TO SECTIO N 73 SQUARELY COVERS BY LOSS REGISTERED BY THE ASSESSEE ON ACCOUN T OF TRANSACTIONS IN SHARES ON ITS OWN BEHALF. THE PROVISION CONTAINED IN EXPLANATION 2 TO SECTION 28 HAS BEEN INCORPORATED IN THE I.T. ACT TO MAKE THE OPERATION OF SECTION 73 EFFECTIVE. EXPLANATION 2 TO SECTION 28 STATES THAT IF AN ASSESSEE CARRIES ON A SPECULATIVE TRANSACTION OF SU CH A NATURE AS TO CONSTITUTE A BUSINESS SUCH BUSINESS SHOULD BE DEEM ED DISTINCT AND SEPARATE FROM ANY OTHER BUSINESS. A PERUSAL OF THE P&L ACCOUNT FILED ALONG WITH THE R ETURN OF INCOME REVEALS THAT THE COMPANY IS NOT A COMPANY WH OSE GROSS TOTAL INCOME CONSISTS MAINLY OF INCOME CHARGEABLE UNDER T HE HEADS INTEREST ON SECURITIES INCOME FROM HOUSE PROPER TY CAPITAL GAIN AND INCOME FROM OTHER SOURCES. IT IS ALSO AN UNDISPUTED FACT THAT THE COMPANY IS NOT IN THE BUSINESS OF BAN KING OR GRANTING OF LOANS AND ADVANCES AND THAT THE BUSINESS OF THE COM PANY CONSISTS IN THE PURCHASE AND SALE OF SHARES OF OTHER COMPANIES. THUS THE BUSINESS OF THE ASSESSEE CLEARLY ATTRACTS THE DEEMI NG PROVISION OF EXPLANATION TO SECTION 73 OF THE I.T. ACT 1961. A S A RESULT THE LOSS OF RS.13 97 068/- FROM TRADING IN SHARES IS TO BE DEEM ED TO BE DISTINCT AND SEPARATE FROM ANY OTHER BUSINESS AND IS TO BE A SSESSED AS LOSS FROM SPECULATION BUSINESS CARRIED OUT BY THE ASSESS EE. THE CASE OF THE ASSESSEE IS ALSO SQUARELY COVERED B Y THE DECISION OF THE ITAT DELHI BENCH IN SRJ SECURITIES LIMITED VS. ACIT (2003) 86 ITD 583 (DELHI) WHERE IT WAS HELD THAT WH EN THE LEGISLATURE MANDATES THAT A COMPANY ENTERING INTO S ALE AND PURCHASE OF SHARES IS DEEMED TO BE INTO SPECULATIVE BUSINESS LOSS SUFFERED HAS ITA NO.1050/DEL/2008 A.Y. 2003-04 5 TO BE ADJUSTED AGAINST PROFITS OF SPECULATIVE BUSIN ESS AND NOT AGAINST AND OTHER BUSINESS WHERE BUSINESS CARRIED ON BY TH E ASSESSEE COMPANY CONSISTS OF BUSINESS OF SHARES BROKING AS W ELL AS SHARE DEALING THE SAME CANNOT BE TREATED AS COMPOSITE BU SINESS LOSS SUFFERED BY THE ASSESSEE ON ACCOUNT OF PURCHASE OF SHARES ON HIS OWN ACCOUNT DEEMED TO BE SPECULATIVE BUSINESS IN TERMS OF SECTION 73 CANNOT BE SET OFF AGAINST RECEIPTS OF BROKERAGE EAR NED FROM ACTIVITY OF SALES AND PURCHASE OF SHARES ON BEHALF OF ITS CLIEN TS OR ANY OTHER INCOME DECLARED BY ASSESSEE UNDER HEAD CAPITAL GA IN OR INCOME FROM OTHER SOURCES. IN VIEW OF THE ABOVE THE LOSS OF RS.13 97 068/- FR OM TRADING IN SHARES ON ITS OWN ACCOUNT SHALL BE TREATED AS SPEC ULATION LOSS. SINCE THE ASSESSEE HAS NO OTHER SPECULATION BUSINESS AND THIS LOSS CAN ONLY BE SET OFF AGAINST PROFITS AND GAINS IF ANY OF AN OTHER SPECULATION BUSINESS CARRIED ON BY THE ASSESSEE THIS LOSS SHAL L BE CARRIED FORWARD TO THE FOLLOWING ASSESSMENT YEAR AS PER THE PROVISI ONS OF SUB-SECTION (2) OF SECTION 73 OF THE I.T. ACT 1961. 5. THE LD. CIT(A) CONFIRMED THE ACTION OF THE A.O. 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. SPECULATIVE TRANSACTIONS HAVE BEEN DEFINED IN SECTI ON 43(5) OF THE INCOME TAX ACT TO MEAN A TRANSACTIONS FOR THE PURCHASE OR SALES OF ANY COMMODITY INCLUDING STOCK AND SHARES. IT IS EVIDENT FROM THE DEFINITIO N ITSELF THAT DEALING IN ONLY THREE KINDS OF GOODS IS COVERED UNDER THE AMBIT OF THE DE FINITION. TRANSACTIONS UNDER REFERENCE ARE NOT THE TRANSACTIONS OF PURCHASE OR S ALES OF ANY COMMODITY. ALSO AS AFORESAID TRANSACTIONS OF FUTURE & OPTIONS ARE TRAN SACTIONS IN DERIVATIVES WHICH ARE RIGHT TO PURCHASE OR SALE AND NOT IN SHARES OR SECU RITIES AS SUCH. THEREFORE AS PER ITA NO.1050/DEL/2008 A.Y. 2003-04 6 THE EXHAUSTIVE DEFINITION OF SPECULATIVE TRANSACTI ONS GIVEN IN SECTION 43(5) OF THE ACT SAME ARE NOT SPECULATIVE TRANSACTIONS. REL IANCE IN THIS REGARD IS PLACED ON THE DECISION OF CHENNAI BENCH OF ITAT IN THE CASE O F DEPUTY COMMISSIONER OF INCOME TAX COMPANY CIRCLE V(1) CHENNAI VS. PATERSO N SECURITIES PVT. LTD. 127 ITD 386. THE DECISION IN THIS CASE IN PARAGRAPH NO .3 OF THE ORDER IS REPRODUCED AS UNDER FOR THE SAKE OF CLARITY: 3. WE HAVE HEARD THE RIVAL SUBMISSIONS THE AVAILA BLE MATERIAL ON RECORD AND HAVE ALSO CAREFULLY TREATED THROUGH THE RELEVANT PROVISIONS OF THE ACT AND RELATED PRECEDENTS THEREOF. BEFORE WE VENTURE TO DECIDE THE CONTROVERSIAL ISSUE WE HAVE TO UNDERSTAND AS T O WHAT EXACTLY DERIVATIVE MEANS AND WHAT IS EXACT MEANING OF TRANS ACTION IN RESPECT OF TRADING IN DERIVATIVE IN SO FAR AS INCOME-TAX IS CONCERNED. AFTER CLEARLY UNDERSTANDING THE ACTUAL LEGAL MEANIN G OF THE DERIVATIVE TRADING VIS-A-VIS THE SPECULATIVE TRANSA CTION WE CANNOT RESIST OURSELVES TO ARRIVE AT THE SAME CONCLUSION O N WHICH THE ID. CIT(A) HAS ACTUALLY ARRIVED. A DERIVATIVE IS A FIN ANCIAL INSTRUMENT THE PRICE OF WHICH HAS A STRONG CORRELATION WITH AN UNDERLYING COMMODITY CURRENCY ECONOMIC VARIABLE OR FINANCIAL INSTRUMENT. THE DIFFERENT TYPES OF DERIVATIVES ARE FUTURE CONTRACT S FORWARD SWAPS AND OPTIONS. THEY ARE TRADED ON DERIVATIVES MARKET S OVER THE COUNTER (OTC). THE MARKET TRADED DERIVATIVES ARE STANDARD BUT THE OTC TRADES CAN BE CUSTOMIZED WITH REGARD TO MATURITY Q UANTITY OR PRICING STRUCTURE FOR A PARTICULAR CLIENT. THE DISCLOSURE O F DERIVATIVES IN FINANCIAL STATEMENTS IS REQUIRED BY FINANCIAL REPO RTING STANDARD- 13. A SPECULATIVE TRANSACTION AS PER SECTION 43(5) MEANS A TRANSACTION IN WHICH THE CONTRACT FOR THE PURCHASE OR SALE OF ANY COMMODITY INCLUDING STOCKS AND SHARES IS PERIODIC ALLY OR ULTIMATELY SETTLED OTHERWISE THAN BY ACTUAL DELIVERY OR TRANSF ER OF COMMODITY OR SCRIP. A DERIVATIVE CAN ALSO BE TRADED ON THE VALUE OF THE UNDERLYING SHARES BUT ARE NOT A TRADE IN ANY ACTUAL STOCK. IT DOES NOT HAVE A ITA NO.1050/DEL/2008 A.Y. 2003-04 7 PHYSICAL EXISTENCE. DERIVATIVES ARE NOT A CONTRACT FOR PURCHASE OR SALE OF ANY PHYSICAL COMMODITY AS SUCH. SO THESE A RE NOT SPECULATIVE TRANSACTIONS IN THE STRICT SENSE OF TERMS OF SECTIO N 43(5). FOR THE DEFINITION OF DERIVATIVES SECTION 2(AC) OF THE SECU RITIES CONTRACT (REGULATION) ACT 1956 CAN BE CONSULTED. IT DERIVE S ITS VALUE FROM THE PRICES OR INDEX OF PRICES OF THE UNDERLYING SECURI TIES. 4. THE MUMBAI BENCH OF THE ITAT IN I.T.A. NO.3182/M UM./2004 HAS HELD THAT TRADING IN DERIVATIVES CANNOT BE CONSIDER ED AS A SPECULATIVE TRANSACTION. THEREFORE SET-OFF OF LOSS OF DERIVATI VE TRADING AGAINST THE PROFITS OF THE SHARE TRADING BUSINESS IS PERMISSIBL E. HENCE WE CONFIRM THE IMPUGNED FINDING OF THE LD. CIT(A) AND DISMISS THE SOLE GROUND OF THIS APPEAL. 7. EVEN IF THE SAID FUTURES AND OPTIONS ARE CONSIDE RED TO BE COMMODITIES SHARES AND SECURITIES THEN PROVISO (B) AND (C) TO SECTION 43(5) OF THE INCOME TAX ACT SPECIFICALLY EXCLUDE TRANSACTION OF HEDGING JOBBIN G ETC. ENTERED INTO BY A DEALER IN SHARES AND PARTICULARLY MEMBER OF A STOCK EXCHANGE. IN THIS REGARD THE ASSESSEE HAS PLACED RELIANCE ON THE DECISION OF HONBLE ALLA HABAD HIGH COURT IN THE CASE OF CIT VS. SHRI SHARWAN KUMAR AGARWAL 249 ITR 233. DE PARTMENTS SLP IN THIS CASE HAS BEEN DISMISSED BY HONBLE SUPREME COURT WHICH I S REPORTED AT 292 ITR 3. IN SUCH CIRCUMSTANCES AND FACTS OF THE CASE WE DIRECT THE A.O. TO ALLOW THE CLAIM OF THE ASSESSEE. THEREFORE ORDER OF LD. CIT(A) IS RE VERSED ON THE ISSUE. THUS GROUND NO.2 OF THE ASSESSEE IS ALLOWED. ITA NO.1050/DEL/2008 A.Y. 2003-04 8 8. AS REGARDS GROUND NO.3 THE BRIEF FACTS OF THE C ASE AS PER THE ASSESSING OFFICERS ORDER AT PAGE NO.4 ARE AS UNDER :- THE ASSESSEE HAS DEBITED RS.24 480/- IN PROFIT & L OSS ACCOUNT UNDER THE HEAD INSTALLATION CHARGE (V. SAT). THE A SSESSEE WAS ASKED TO EXPLAIN WHY THESE EXPENSES SHOULD NOT BE DISALLO WED BEING OF CAPITAL NATURE. THE ASSESSEE HAS EXPLAINED THAT V. SAT IS A TERMINAL WHICH IS INSTALLED AT THE PREMISES OF SUB-BROKERS A ND THE ASSESSEE HAS TO BEAR PART OF THESE INSTALLATION CHARGES. SINCE THESE EXPENSES ARE INCURRED ON INSTALLATION OF V. SAT AND ARE OF CAPI TAL NATURE THE SAME ARE DISALLOWED AND ADDED IN THE TOTAL INCOME OF TH E ASSESSEE 9. THE LD. CIT(A) CONFIRMED THE ACTION OF THE ASSES SING OFFICER. 10. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSE D THE FACTS OF THE CASE. WE ARE CONVINCED WITH THE ARGUMENTS OF THE LD. A.R. OF THE ASSESSEE THAT DURING THE COURSE OF CARRYING OF THE BUSINESS THE APPELLANT CO MPANY APPOINTS SUB-BROKERS TERMINAL IS REQUIRED TO BE INSTALLED AT THE PLACE O F THE SUB-BROKER. INSTALLATION OF V- SAT TERMINAL INVOLVES SUBSTANTIAL COST. THE APPELL ANT COMPANY HAS INCURRED EXPENDITURE ON INSTALLATION OF V-SAT AT THE LOCATIO NS OF SUB-BROKERS. COST OF V-SAT HOWEVER WAS MET BY THE SUB-BROKERS. THIS EXPENDITU RE IS OF REVENUE NATURE AS THE APPELLANT COMPANY HAD NOT ACQUIRED ANY CAPITAL ASSE T. THEREFORE EXPENSES INCURRED BY THE APPELLANT COMPANY AMOUNTING TO ` 22 480/- IS ALLOWABLE AS BUSINESS EXPENDITURE. WE ACCORDINGLY DIRECT THE A.O. TO ALLOW THE CLAIM OF THE ITA NO.1050/DEL/2008 A.Y. 2003-04 9 ASSESSEE. THE ORDER OF THE LD. CIT(A) IS REVERSED. THUS GROUND NO.3 OF THE ASSESSEE IS ALLOWED. 11. IN THE RESULT APPEAL OF THE ASSESSEE IN ITA NO .1050/DEL/2008 IS ALLOWED. (ORDER PRONOUNCED IN THE OPEN COURT ON 21.11.2011) SD/- SD/- (H.S. SIDHU) (B.P. JAIN) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE: 21 ST NOVEMBER 2011 PBN/* COPY OF THE ORDER FORWARDED TO: APPELLANT/RESPONDENT/CIT CONCERNED/CIT(APPEALS) CO NCERNED/D.R. ITAT AGRA BENCH AGRA/GUARD FILE. BY ORDER ASSISTANT REGISTRAR INCOME-TAX APPELLATE TRIBUNAL AGRA TRUE COPY