Explanation to section 73 to be applied after setting off share trading loss against derivative income – Kol ITAT


DCIT v M/s. Baljit Securities Private Limited /I.T.A No.1183/Kol/2012 (Kol ITAT) dated 21.10.14

Background:

The assessee is engaged in the business of trading in shares on self account, derivative transactions and share broking activity. During the course of assessment proceedings, the AO noted that the assessee has incurred it incurred net loss of Rs.2,16,75,441/- in purchase and sale of shares (delivery based loss of Rs.7,29,56,706 and non-delivery based profit of Rs.5,12,81,265). The assessee treated the entire activity of purchase and sale of shares which comprised of both delivery based and non-delivery based trading, as one, before application of the deeming provision contained in explanation to section 73 of the Act and accordingly, claimed set off of the loss incurred in delivery based trading with the profit derived from derivative trading. The AO applied explanation of Section 73 of the Act and denied the claim of set off of loss from dealing of shares with profit from F & O operations. The CIT(A) allowed the claim of the assessee by holding that share trading loss is to be allowed to be set off with the profits earned in derivative transactions. The Department filed an appeal before the ITAT against the CIT(A) order. 

 HELD:

  • The provisions of section 43(5) of the Act, which contains the definition of ‘speculative transaction’, only applied for purposes of Sec. 28 of the Act i.e., it does not apply to the other sections of the Act.
  • On the contrary, Explanation to Sec. 73 of the Act creates a deeming fiction by which among the assessee, who is a company, as indicated in the said Explanation dealing with the transaction of share and suffer loss, such transaction should be treated to be speculative transaction within the meaning of Sec. 73 of the Act notwithstanding the fact that according to the definition of speculative transaction mentioned in Sec. 43(5) of the Act, the transaction is not of that nature as there has been actual delivery of the scrips of share. 
  • Profit / loss from all the share delivery transactions and derivative transactions are having the same meaning, so far as Sec. 43(5) of the Act is concerned.
  • Again, in view of the fact that both delivery based transactions and derivative transaction are non-speculative as far as Sec. 43(5) is concerned, it follows that both will have the same treatment as far as application of Explanation to Sec. 73 is concerned. Therefore aggregation of the share trading loss and profit from derivative transactions should be done before the Explanation to Section 73 of the Act, is applied. 
  • Reliance is placed on  Special Bench of this Tribunal, Mumbai Bench, in the case of CIT v. Concord Commercial Pvt. Ltd. (2005) 95 ITD 117 (Mum) (SB). This view has also been confirmed by the Hon’ble jurisdictional High Court in assessee’s own case in GA No.3481 of 2013 and ITAT No. 215 of 2013 dated 12th March, 2014.
Other Issue: Disallowance under section 14A is not applicable in case where shares are held as stock-in-trade:
 
Rule 8D(2)(ii) and (iii) can only be applied, in the situations, wherever share are held as an investment and this rule will not have any application when the shares are held as stock in trade. This view is reiterated in the Kolkata Tribunal’s decision in the case of DCIT Vs. Gulshan Investment Co. Ltd. (2013) 31 Taxman.com 113 and Hon’ble Karnataka High Court in the case of CCI Ltd. Vs. JCIT in ITA No. 359 of 2011 dated 28.02.2012 

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