By TIOL News Service

KOLKATA, AUG 17, 2016: THE issue is - Whether loss incurred by the assessee in derivative transaction is liable to be assessed as loss of deemed speculation business even though for the purpose of section 43(5) the transactions in derivatives were not 'speculative transactions'. NO is the answer.

Facts of the case

The assessee carried on business of trading and dealing in shares in its capacity as member of a recognized stock exchange. In its capacity as member of recognized stock exchange, the assessee derived income in various forms. In the course of assessment proceedings u/s 143(3), the assessee was required to explain as to why the provisions of Explanation to Section 73 should not be invoked and the loss incurred in share trading be treated as loss arising from speculation business. The AO observed that the gross total income of the assessee consists of income from business, other sources and capital gains .The AO held that only the loss derived from share trading activity was in the nature of loss from speculation business under Explanation to Sec. 73 and disallowed a sum of Rs. 1,02,12,277/- in the assessment . The CITA deleted the addition. The CITA also deleted the addition on the ground that the profits derived from derivative transactions amounting to Rs. 97,70,575/- would have to be treated as speculative profits for the purpose of applying Explanation to section 73 irrespective of section 43(5)(d). He also held that profit from intra day share trading amounting to Rs. 8,76,950/- would only be speculative profit and hence that is also available for set off with the loss incurred in share trading activity. The CIT(A) also held that the share broking income derived by the assessee amounting to Rs. 60,12,948/- is also available for setting off of loss incurred in share trading . If these profit figures are considered and set off with loss on share trading of Rs. 1,02,12,277/- , there would be no resultant loss.

On Appeal before the Tribunal the D.R submitted that the assessee's case does not fall under the exceptions provided in Explanation to Section 73 and accordingly prayed for confirmation of the order of the AO. The AR submitted that the assessee's case fell squarely within the first limb of exception provided in Explanation to Section 73 and therefore the loss incurred in share trading could not be held as loss arising from speculation business. The A.R further submitted that in order to determine as to whether exception carved out in form of bracketed portion by Explanation to section 73 applies, one has to compute gross total income of company under normal provisions of Act and it is only thereafter, it has to be determined as to whether gross total income so computed consists mainly of income which is chargeable under any of heads referred to in Explanation. In the facts of the present case, the income returned under the head business was Rs.71,01,301/- whereas income from capital gains and other sources was Rs.2,35,95,198/-. The A.R also submitted that the assessee maintained one single indivisible and composite business establishment for carrying on the business transactions involving purchase & sale of shares & securities.

Having heard the parties, the tribunal held that,

++ although in the assessee's books, income was accounted under different accounting heads , each source was intrinsically related to the activity of purchase and sale of shares But for the activity of purchase and sale of shares & securities, the assessee could not have earned income / loss. Hence we do not appreciate the action of the AO in treating the loss incurred in proprietary share trading as loss of deemed speculation business, while parallely all the other transactions carried out by the assessee on the same trading platform of the NSE as profit / income earned from non-speculation business, even though the underlying transactions giving rise to these income involved purchase and sale of shares & securities. If the loss incurred in derivatives is to be loss in speculation business then by equal measure, profit derived from derivative transactions would constitute profit derived from 'speculation business'. Accordingly, the assessee is entitled to set off the loss incurred on share trading business with the profit earned from derivative transactions amounting to Rs. 97,70,575/-;

++ the assessee had derived profit from proprietary intra day share trading without taking deliveries to the tune of Rs. 8,76,950/- which would admittedly be purely speculative in nature. Hence the assessee is entitled to set off the loss incurred on share trading business with the profit from intra day share trading which is speculative income to the tune of Rs. 8,76,950/-.Once the profits are set off with the loss incurred on share trading business, there would be only resultant gain from speculative business and hence there would be no scope to apply the provisions of Explanation to Section 73 in the absence of speculation loss. In the case of a stock broker, there is a common terminal, one membership of the stock exchange, common bank account and the common work force with the help of which the business of proprietory trading as well as trading on behalf of the clients are conducted. Therefore it could be safely concluded that the entire business of the stock broker constituted as one single composite indivisible business and therefore income or loss cannot be artificially bifurcated. The provisions of Explanation to Section 73 would not be applicable in the instant case in the absence of speculation loss if consolidated business income is considered;

++ even if Explanation to section 73 is to be applied, we hold that the assessee's case falls under the exception provided in the first limb of Explanation to Section 73 where the gross total income of the assessee comprises of income from other sources which is much more than the speculation loss of Rs. 1,02,12,277/- . The provisions of Explanation to Section 73 could not be made applicable to the facts of the instant case.

(See 2016-TIOL-1463-ITAT-KOL)