Rebate u/s 88E is allowable from the business income be it speculative or not

Rebate u/s 88E is allowable from the business income be it speculative or not

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Citation of the Case: 

DCIT vs M/s. Envision Investment & Finance Pvt. Ltd. (ITAT Mumbai), Income Tax Appeal No.2138/Mum/2010, Cross Objection No.10/Mum/2010, Date of the decision 07.08.2015.

Brief of the Case: 

In the cited case, ITAT inter-alia held that the claim has been denied merely because the AO has treated the transaction as speculative loss. This cannot be any reason for declining the claim of rebate u/s. 88E of the Act as the claim is allowable from the business income be it speculative or not.

Facts of the Case: 

The assessee deals in share and security. While scrutinizing the ITR, the AO noticed that the assessee had incurred loss from trading in securities/shares as under:

Profit on sale of shares Rs. 24,25,505/-

Loss on fall in value of shares Rs. (92,46,676)/-

Net figure (-) Rs. 68,21,171/-

The assessee was asked to explain as to why this loss should not be treated as speculation loss invoking the provision of Explanation of Sec.73 of the I.T. Act, 1961. The assessee filed a detailed reply. After considering the detailed submission made by the assessee, the AO observed that the NSE and BSE were notified w.e.f. 24.01.2006 vide notification No. 2 of 2006 for the purpose of S. 43(5) proviso(d), according to which the profit/loss on derivative transaction upto 24.1.2006 is to be treated as speculative profit/loss therefore, the proviso(d) to Sec. 43(5) is inserted w.e.f. 1.4.2006 and is applicable from A.Y. 2007-08. Since the assessee’s case is for A.Y. 2006-07, therefore, is not covered by this proviso. The AO further declined to entertain the claim of the assessee to set off loss against profit on sale of shares as it was not claimed by way of a revised return. The AO further proceeded by considering the explanation to Sec. 73 of the Act and held that the assessee is carrying on business of trading in shares and does not fall in exceptions provided in Explanation to Sec. 73 of the Act therefore, the entire loss claimed by the assessee relating to share transactions as well as loss resulting on valuation of closing stock is treated as Speculation loss. The AO accordingly treated Rs. 68,21,171/-as speculative loss . The AO further denied the rebate claimed u/s. 88E of the Act holding that assessee’s income has been assessed under the head “Speculative income/loss” therefore the assessee is not entitled for rebate u/s. 88E of the Act.

These are appeal by the Revenue and cross objection by the assessee against the very same order of the Ld. CIT(A)-19, Mumbai dated 14.12. 2009` pertaining to Assessment year 2006-07. The appeal and the cross objection were heard together and are disposed of by this common order for the sake of convenience.

Grounds for Appeal:

1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that provisions of section 43(5), clause (d) is applicable from 25.01.2006 being the date of notification of Bombay Stock Exchange (BSE) & National Stock exchange(NSE) as recognized stock exchange, ignoring the fact that the provisions of section 43(5), clause (d) is inserted w.e.f. 01.04.2006.
2. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in directing the Assessing Officer to allow set off of loss from trading in shares against profit earned upto 25.01.2006 without appreciating the fact that provisions of section, 43(5)(d) was inserted w.e.f. 01.04.2006 and hence set off of loss from shares against the income, is not allowable.
3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the Assessing Officer to allow credit of Security Transaction Tax(STT) in computing rebate u/s.88E without appreciating the fact that the assessee’s income/loss from share transactions was held as speculative within the meaning of explanation to subsection 4 of section 73 of the Income tax Act, 1961.

Contention of the Revenue: 

Revenue supported the findings of the AO stated above.

Contention of the Assessee: 

The Assessee vehemently submitted that the grounds of appeal taken by the Revenue are contrary to the findings of the AO that the department is trying to improve upon the findings of the AO, which is against the settled decision of law. Referred to the decision of the Tribunal in the case of ACIT Vs Ms. Aishwarya K. Rai, 127 ITD 204, wherein it was held that Revenue can support the action of the AO with any arguments, he can rely on any case law in support of the AO’s case, but he cannot make out altogether a new case which was not the subject matter of consideration by the Assessing Officer or the Learned First Appellate authority.

Assessee submitted that Application of provision of explanation to Sec.73 in respect of fall in value of closing stock by Rs. 92,46,676/-. From the perusal of the Profit & Loss a/c. Particularly schedule 7, the following are the income from trading in securities, the break up in as under:

• Profit on sale of shares (As per Annexure 1) Rs. 24,25,505/-
• Profit on sale of Derivative Future Rs. 70,28,88,420/-
• Loss on fall in value of Share Rs. (92,46,676)/-
• Net Income Rs. 69,60,67,249/-

In this regard, it was proposed to treat Rs.92,46,676/- as speculation loss invoking the provision of explanation to section 73 of I.T. Act, 1961.

Assessee referred the provision of section 43(5), proviso (d), inserted by Finance Act, 2005, as (d)“An eligible transaction in respect of trading in derivative referred to in clause (ac) of section 2 of securities contract (Regulation) Act 1956, (42 of 1956) carried out, in a recognized Stock Exchange, shall not be deemed is to be a speculation Transaction”

Assessee submitted that derivative transaction shall not be treated as speculative, provided, the same were done on recognized Stock Exchange. Further, National Stock Exchange & Bombay Stock Exchange are notified for the purpose of section 43(5} proviso (d), only from publication of notification. The notification No.2 of 2006 Dt.25/01/2006 was notified on 25/01/2006, recognizing both the exchanges, for the purpose of S.43(5}, proviso(d) a copy notification is enclosed herewith. In other words, the Profit /Loss on derivative transaction up to 24/01/2006 was speculative Profit/loss.

Further submitted that in F&O (Derivative) transaction, up to 25/01/2006, there was Profit of Rs.49,18,10,934/- where is nothing but speculative transaction. The profit up to 25/01/2006, was speculation income and the loss due to fall in value of share, i.e. speculation, was to be set off against profit of derivative transaction vide section 73 of I.T. Act. 1961.

Assessee heavily relied upon the decision of the Hon’ble Delhi High Court in the case of DLF Commercial Developers Ltd. 261 CTR (Del) 127, wherein it was held that the loss even if it is treated as speculative loss has to be set off against the gains.

Hence, there was also profit on sale of shares, of Rs.24,25,505/- which is also in nature of speculation profit, which has to be set off against the loss in value of shares.

Held by CIT (A): 

The Ld. CIT(A) reiterated what has been stated/submitted during the course of the assessment proceedings. After considering the facts and the submissions qua the impugned notification, the Ld. CIT(A) observed that However, the fact remains that until the publication of Notification No. 2/2006 dated 25th January, 2006 the National Stock Exchange and Bombay Stock Exchange, Mumbai were not recognized for the purpose of S. 43(5) proviso (d) and hence the trading through the said Exchanges upto 25.1.2006 are in the nature of speculation. A notification comes into effect from the date of its notification. Moreover, the Act has been amended w.e.f. 1.4.2006 and hence is applicable to A.Y. 2006-07 and onwards. Hence it is held that the profit upto 25.1.2006 is in the nature of speculation and is to be set off against loss incurred in trading in shares. The AO will verify and compute the profit earned upto 25.1.2006 and to that extent the appellant shall be allowed set off against loss from trading in shares. The AO will verify and compute the profit earned upto 25.1.2006 and to that extent the appellant shall be allowed set off against loss from trading in shares.

In so far as claim of rebate u/s. 88E is concerned, the Ld. CIT(A) held that since the income from trading in securities is taxable under the head business be it speculation business or not, the assessee is entitled for the claim of rebate u/s. 88E and accordingly directed the AO to allow the rebate.

Held by ITAT: 

After examining the facts and circumstances, the ITAT observed that as no distinguishing decision has been brought on record in favour of the Revenue, following the decision of the Hon’ble High Court of Delhi stated above by the assessee and for the sake of completeness of adjudication, ITAT directed the AO to allow the set off of loss against the gains. Ground No. 1 & 2 were accordingly dismissed.

As for as the Ground No.3 was concerned, ITAT noted that the claim has been denied merely because the AO has treated the transaction as speculative loss. ITAT opined that this cannot be any reason for declining the claim of rebate u/s. 88E of the Act as the claim is allowable from the business income be it speculative or not. Therefore, ITAT declined to interfere with the findings of the Ld. CIT(A).

In the result, the appeal filed by the Revenue was dismissed.

Direct Link to download full text of the above Judgment/ Order from official website:

http://www.itatonline.in:8080/itat/upload/137528655031039295013$5%5E1REFNO2138-Envision_Investment.pdf