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Anush Shares & Securities (P.) Ltd. v/s Assistant Commissioner of Income-tex, Co. Circle I(3), Chennai

    IT Appeal No. 652 (Mds.)of 2014

    Decided On, 09 January 2015

    At, Income Tax Appellate Tribunal Chennai

    By, THE HONOURABLE MR. A. MOHAN ALANKAMONY
    By, ACCOUNTANT MEMBER & THE HONOURABLE MR. CHALLA NAGENDRA PRASAD
    By, JUDICIAL MEMBER

    For the Appellant: Y. Sridhar, CA. For the Respondent: S. Das Gupta, JCIT, DR.



Judgment Text

A. Mohan Alankamony, Accountant Member

1. This appeal is filed by the Assessee, aggrieved by the order of the Learned Commissioner of Income Tax (A)-I, Chennai, dated 31.12.2013 in ITA No.231/2013-14 passed under section 143(3) read with section 150 of the Act.

2. The Assessee has raised several elaborate and argumentative grounds in its appeal; however, the cruxes of the issues are that:-

(i) The Ld. CIT(A) has erred in facts and law by confirming the disallowance made by the AO amounting to Rs. 26,63,131/- by treating the loss incurred towards miss-deals as speculative loss.

(ii) The Ld. CIT(A) has erred in facts and law by confirming the order of the Ld. Assessing Officer, who had treated the expenditure of Rs. 28,34,440/- incurred towards interiors as capital expense and not revenue expenditure.

3. The brief facts of the case are that the assessee is a domestic company, engaged in the business of broking and trading in stocks and securities, filed its e-return of income for the relevant assessment year 2008-09 on 19.09.2008 admitting its total income as Rs. 87,41,225/-. The case was selected for scrutiny and the assessment was completed U/s. 143(3) of the Act on 24.12.2010 wherein the Ld. Assessing Officer made certain disallowances in addition to the disallowance of Rs. 26,63,131/- by treating the same as speculative loss and thereby denying the benefit of set off of business loss claimed by the assessee and an amount of Rs. 28,34,440

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/- by treating the expense incurred towards interiors as capital expense.

4.1 Ground 1 - Disallowance of Rs. 26,63,131/- by treating the loss incurred towards miss-deals as speculative loss and thereby denying the benefit of set off of business loss:-

During the course of assessment proceedings the Ld. Assessing Officer observed that an amount of Rs. 26,63,131/- was debited to the P&L account as "loss on miss-deals". On the request by the Ld. Assessing Officer, the assessee provided the details of shares purchased and sold on account of miss-deals. The Ld. Assessing Officer further observed that the assessee is a broker in shares and also engaged in the business of trading in shares. Based on the above facts, the Ld. Assessing Officer opined that loss on trading in shares is not a business loss but loss on account of speculation by virtue of Section 73 and Explanation-2 to Section 28 of the Act. The Ld. Assessing Officer further relied on the following orders:-

A. BLK Securities (P.) Ltd. v. ITO [2009] 27 SOT 142 (Delhi)

B. SPFL Securities Ltd. v. Dy. CIT [2006] 6 SOT 562 (Delhi)

C. Priyasha Meven Finance Ltd. v. ITO [2008] 24 SOT 422 (Mum.)

The Ld. Assessing Officer further observed that in all the aforesaid cases the appellant has made a plea, that in their respective business of trading in shares the securities were actually taken delivery and then sold and therefore they are not speculative transaction as provided U/s. 43(5) of the Act. However, the Tribunal in those cases did not entertain this plea of the assessee and loss incurred on trading in shares was decided to be speculative loss. The Ld. Assessing Officer further opined that the facts and circumstance of the assessee's case is similar to the case cited supra and therefore, the loss incurred by the assessee company falls under the ambit of Explanation-2 to Section-73 of the Act. Accordingly the Ld. A.O treated the amount of Rs. 26,63,131/- suffered by the assessee during the relevant assessment year as speculation loss and denied the same to be set off of against the business income of the assessee, thereby enhancing the taxable income to that extent.

4.2 On appeal, the Ld. CIT (A) confirmed the order of the Ld. Assessing Officer by observing as follows:-

"6.2 I have considered the AR's observations and the appellant's submissions in this regard. It is seen that A.O has verified the complete details with regard to the loss claimed by the appellant. On verification, A.O found that substantial quantity of shares have been purchased and sold by the appellant during the year which has resulted in loss of Rs. 26,63,131/-. The A.O has treated the said loss as speculation loss by virtue of Explanation to Section 73 and Explanation to Section 28. As the loss suffered by an assessee company on dealing its shares on its own account was a speculation loss, and therefore could not be allowed to be set off against brokerage income. In view of the above, the appellant's contentions are not accepted and the action of the Assessing Officer in this regard is upheld. As a result, the grounds raised are dismissed."

4.3 Ld. A.R submitted before us that the appellant is a stock broker and did not indulge in proprietary trading. However, he had incurred loss in purchase and sale of securities and F&O operations due to the wrong purchases made on behalf of its clients. Often client's complain that the assessee had wrongly purchased certain securities and future options, therefore the assessee was forced to sell those securities/F&O and sometimes suffered loss on account of the same. These transactions were called misdeals and it was purely a business loss incurred during the course of the business. The Ld. A.R further argued stating that even if these transactions were considered as the trading activity of the assessee, it will not amount to speculative loss by virtue of Section.43(5) of the Act. The Ld. A.R. relied in the decisions of the case of ITAT Kolkata in Dy. CIT v. Madanlal Ltd. [2012] 21 taxmann.com 444/50 SOT 188 and ITAT Chennai in Dy. CIT v. Paterson Securities (P.) Ltd. [2010] 127 ITD 386 (Chennai). On the other hand, the Ld. D.R argued in support of the Revenue and relied in the decision of ITAT Delhi in SPFL Securities Ltd. (supra)

4.4 We have heard both the parties and carefully perused the materials available on record. Before we proceed to adjudicate the issue, the relevant provisions of the Act are reproduced herein below for reference:-

'Definitions of Certain terms relevant to income from profits and gains of business or profession.

Section 43 In sections 28 to 41 and in this section, unless the context otherwise requires-

(1) to (4) ** ** **

(5) Speculative transaction means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips:

Provided that for the purposes of this clause-

(a) to (c) ** ** **

(d) an eligible transaction in respect of trading in derivatives referred to in clause (ac) of section-2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognized stock exchange;

Shall not be deemed to be a speculative transaction.

Explanation - For the purposes of this clause, the expressions -

(i) "eligible transaction" means any transaction, -

A) and (B) ** ** **

(ii) "recognized stock exchange" means a recognized stock exchange as referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfils such conditions as may be prescribed and notified by the Central Government for this purpose;

Section 73

(1) Any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business.

(2) to (4) ** ** **

Explanation - Where any part of the business of a company ([other than a company whose gross total income consists mainly of income which is chargeable under the heads "interest on securities", Income from house property", "capital gains" and "income from other sources"], or a company the principal business of which is the business of banking or the granting of loans and advances) 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 business consists of the purchase and sale of such shares.'

4.4 From the above it is clear that by virtue of Section 43(5)(d) of the Act trading in derivatives carried out in a recognized stock exchange shall not be deemed to be a speculative transaction. Further, Explanation to Section-73 only refers to the assessee being a company (other than the company whose gross total income consist mainly of income which is chargeable under the heads "Interest on securities", "Income from house property, "Capital gains", or a company the principal business is banking, granting of loans and advances) whose business consists of purchase and sale of shares of other companies shall deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of shares.

4.5 In the case before us the business of the assessee company is trading in securities, F&O operations, on behalf of its clients and thereby earning income by way of brokerage. However, with respect to certain misdeeds as explained supra the assessee was forced to sell /purchase certain securities/F&O due to which the assessee had suffered loss.

4.6 At this juncture, it is relevant to examine as to why Explanation to Section 73 was inserted by the Act with effect from 01.04.1997:-

"A tax avoidance device often resorted to by business houses controlling groups of companies is manipulation of results from dealings in shares of the companies controlled by them. In our opinion, such manipulation in share dealings for the purpose of tax avoidance can be checked effectively if the results of dealings in shares by such companies are treated for tax purposes in a manner analogous to speculation. No doubt, companies whose main business activities centre around investment in shares will have to be left out. Accordingly, we recommend that the results of dealings in shares by companies, other than investment, banking and finance companies, should be treated in a manner analogous to speculation business."

4.7 Considering the nature of the activity carried out by the assessee company the scope of Explanation to Section-73 will not be applicable because the assessee had not resorted to such device mentioned by the Wanchoo Committee. Therefore, the profit or loss derived from the purchase and sale of shares transacted by the assessee company cannot be deemed to be income from speculation business. Moreover, Section 43(5)(d) of the Act also provides that, trading in derivatives in a recognized stock exchange shall not be deemed to be speculative transaction. Thus, from the above chronology of the provisions of the Act the loss suffered by the assessee on account of misdeals or purchase and sale of shares by actual delivery, or trading in derivatives in a recognized stock exchange cannot be considered to be loss on account of speculation, conversely it has to be treated as the business loss of the assessee. More over it is pertinent to mention that misdeals happen involuntary during the course of the assessee's business activities which is beyond the control of the assessee. Purchase and sale of shares is not the business of the assessee company because all such purchase and sale of shares are made on behalf of the clients of the assessee company earning brokerage towards the same. In arriving at this conclusion, we have also drawn support from the decision cited by the assessee. Accordingly this issue is decided in favour of the assessee.

5.1 Ground No.2 - Treating the expenditure of Rs. 28,34,440/- incurred towards interiors as capital expense and not as revenue expenditure:-

"During the course of assessment proceedings, the Ld. Assessing Officer noticed that the assessee had incurred expenses towards interiors to its new rented office amounting to Rs. 30,77,279/-. The Ld. Assessing Officer after examining the nature of expenditure found that an amount of Rs. 28,34,440/- needs to be capitalized because it pertains to civil works, electrical works, carpentry works, painting, cabling etc. and accordingly disallowed the same as revenue expenditure. However, he allowed the benefit of depreciation @ 5% amounting to Rs. 1,41,722/- and made addition for Rs. 26,92,718/-(28,34,440 - 1,41,722)."

5.2 Ld. A.R. argued before us stating that this expenditure incurred by the assessee were predominantly incurred towards fixing false ceiling, painting, electrical cabling etc., and certain civil works in the rented premises. The Ld. A.R. further submitted that none of the above materials could be salvaged or recovered in the event the premise is vacated. Moreover, there were expenditures incurred towards upkeep of the premises like paintings etc. Therefore Ld. A.R. pleaded that the aforesaid expenses may be treated as revenue expenditure and not as capital expenditure as decided by the Ld. Assessing Officer which was further confirmed by the Ld. CIT (A). Ld. D.R argued in support of the orders of the Revenue.

5.3 We have heard both the parties and carefully perused the materials available on record. It is apparent from the facts of the case and it is not disputed that the expenditure were incurred towards fixing false ceiling, painting, electrical cabling and certain civil works etc., in the rented premises of the assessee. Various judicial authorities has held that in such circumstance the expenditure has to be treated as revenue expenditure. The assessee has relied in the following two cases:-

(i) CIT v. Ayesha Hospials (P.) Ltd. [2006] 292 ITR 266 (Mad.)

Held: dismissing the appeal, that the assessee had spent a sum of Rs. 1,85,557/- towards painting, re-laying of the damaged floors, partitions, etc. The co-owners were the directors of the assessee. But they were separate entities. The co-owners were admitting the rental income. They were also paying tax on the profits arising out of the hospital. The lease deed spoke of the normal requirements which the co-owners provided.

The assessee was putting the building to a special use. No landlord would ever incur or undertake to bear the expenditure. The expenditure was incurred by the assessee on a leased property and had to be allowed as revenue expenditure.

(ii) Thriu Arooran Sugars Ltd. v. Dy. CIT [2013] 350 ITR 324/213 Taxman 90/31 taxmann.com 3 (Mad.)

Held: that the temporary structure by means of false ceiling and office renovation had not resulted in any capital expenditure.

From the above decisions and the facts before us we do not have any hesitation to hold that the aforesaid expenses of Rs. 26,92,718/- has to be treated as revenue expenditure and deduction on account of the same has to be allowed. It is hereby decided accordingly.

6. In the result, the appeal of assessee is allowed.
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