Mr.Girish Shah, 59, Kika Street, Gulalwadi, Mumbai-400004 Vs. The Jt. Commissioner of Income Tax (OSD), Circle-15(1), Mumbai
February, 24th 2015
IN THE INCOME TAX APPELLATE TRIBUNAL "C " BENCH, MUMBAI
BEFORE HON'BLE S/SHRI H.L. KARWA, PRESIDENT AND B.R.BASKARAN (AM)
.. , .. ,
( / Assessment Year : 2008-09)
Centrum Broking Ltd., / Asstt. Commissioner of Income
(Formerly Centrum Broking Tax,4(1),
5th Floor, Santacruz (E),
( /Appellant) .. ( / Respondent)
. / . /PAN/GIR No. :AABCA1498E
/ Appellant by Shri J D Mistry
/ Respondent by Shri Premanand J
/ Date of Hearing
/Date of Pronouncement : 20. 2.2015
/ O R D E R
Per B.R.BASKARAN, Accountant Member:
The appeal filed by the assessee is directed against the order dated
01-12-2011 passed by Ld CIT(A)-9, Mumbai and it relates to the
assessment year 2008-09.
2. The appeal is barred by limitation by 52 days. The assessee has
moved a petition requesting the bench to condone the delay. It was stated
therein that the income tax appeal matters were looked after by an official
named Mr.Hemant Agarwal, who resigned after completion of hearing with
Ld CIT(A). It was further stated that a staff named BipinKumar Pathak,
who is in-charge of delivering of letters placed the appellate order in the
table of Mr.Hemant Agarwal and hence the same remained unattended.
2 ITA. No3081/Mum/2012
Subsequently, when the director made enquiries about the appellate order,
the above facts came to light and immediately thereafter, the present
appeal has been filed. We heard Ld D.R. Having regard to the submissions
made in the affidavit, we are of the view that there was reasonable cause
for the assessee in filing this appeal belatedly. Accordingly, we condone
the delay and admit the appeal for hearing.
3. The assessee is disputing following additions confirmed by the Ld
(a) Disallowance of VSAT and Lease line charges
u/s 40(a)(ia) of the Act.
(b) Disallowance of claim of set off of Loss arising in Cash
segment against the profits in Future & Options.
(c) Disallowance of Mark to market loss on derivatives .
(d) Disallowance made u/s 14A of the Act.
4. The assessee company is a member of Bombay Stock Exchange
(BSE) and National Stock Exchange (NSE) and is engaged in the business
of Share trading and stock broking. The AO completed the assessment by
making various additions and the appeal filed by the assessee before Ld
CIT(A) was partly allowed. Still aggrieved, the assessee has filed this
appeal before us.
5. The first issue relates to the disallowance of VSAT and Lease line
charges made by the AO by invoking the provisions of sec. 40(a)(ia) of the
Act. The payment made by the assessee for VSAT and lease line charges
paid to BSE/NSE was treated as "Fee for technical services" and since the
assessee did not deduct tax at source either u/s 194C or u/s 194J, the AO
disallowed the said claim. The Ld CIT(A), by placing reliance on the
decision of Hon'ble Bombay High Court rendered in the case of CIT Vs.
Kotak Securities Ltd (340 ITR 333), held that the above said payments
would require tax deduction at source u/s 194J of the Act and accordingly
confirmed the disallowance made u/s 40(a)(ia) of the Act.
3 ITA. No3081/Mum/2012
6. At the time of hearing, the Ld A.R submitted that this issue has been
decided in favour of the assessee by the jurisdictional High Court in the
case of The CIT Vs. M/s The Stock and Bond Trading Company (ITA
No.4117 of 2010 dated 14.10.2011). A perusal of the said order shows
that the High Court has followed its earlier decision rendered in the case of
"The Income tax Commissioner, Mumbai City-4 Vs. Angel Capital & Debit
Market Ltd in Income tax Appeal (L) No.475 of 2011 dated 28-07-2011 to
hold that the there is no requirement to deduct tax at source from the
payments made to NSE/BSE towards VSAT charges and Lease line
charges. The ld. AR submitted that in the case of Kotak Securities Ltd,
the Bombay High Court did not consider VSAT and lease-line charges
issue. Accordingly, we set aside the order of Ld CIT(A) on this issue and
direct the AO to delete this addition.
7. The Ld A.R submitted that the issue relating to "Market to Market
Loss on derivatives" is also covered by the decisions rendered by the Co-
ordinate benches of Tribunal in the following cases:-
(a) DCIT Vs. Kotak Mahindra Investment Ltd
(35 taxmann.com 225)
(b) Shri Ramesh Kumar Damai Vs. Addl CIT
(c) Edelweiss Capital Ltd Vs. ITO
(8 taxmann.com 157)(Mum)
A perusal of the above said decisions would show that the Tribunal is
consistently holding that the Market to Market loss on derivatives cannot
be treated as a contingent liability and hence the same is to be allowed as
deduction. Accordingly, we set aside the order of Ld CIT(A) on this issue
and direct the AO to delete this addition.
8. With regard to the issue relating to the disallowance made u/s 14A
of the Act, the Ld A.R submitted that the assessee's own funds were far in
excess of investments and hence there is no requirement to make
4 ITA. No3081/Mum/2012
disallowance u/s 14A of the Act is required to be made. In this regard, he
placed reliance on the decision of Hon'ble Bombay High Court rendered in
the case of CIT Vs. HDFC Bank Ltd (ITA No.330 of 2012). On the
contrary, the Ld D.R submitted that the decision rendered in the case of
HDFC Bank Ltd would apply only in respect of disallowance of interest.
The Ld D.R submitted that the AO did not disallow any portion of interest
expenditure and he has disallowed only administrative expenses by
applying the provisions of Rule 8D(2)(iii) of the IT Rules.
9. Admittedly, the AO has disallowed a sum of Rs.63,848/- in respect
of Administrative expenses by applying the provisions of Rule 8D(2)(iii) of
the Act. The decision rendered by the jurisdictional High Court in the case
of HDFC Bank Ltd (supra) would cover only the interest disallowance that
is required to be made u/s 14A of the Act. Before tax authorities, it
appears that the assessee did not make any specific submissions against
disallowance made u/s Rule 8D(2)(iii) relating to administrative expenses.
Hence, we confirm the order of Ld CIT(A) on this issue.
10. The remaining issue relates to the disallowance of claim of set off of
loss incurred in cash segment against the profit earned in F & O segment.
The assessee incurred a loss of Rs.38,54,655/- in the cash segment of
equity market and claimed set off of the same against the profit earned in
Future & Options segment. The AO held that the Explanation given under
sec 73 of the Act shall override the proviso to sec. 43(5) of the Act. It is
pertinent to note that the provisions of sec. 43(5) define "Speculative
transactions" and the proviso to that section provides certain exceptions.
The Explanation to sec. 73 provides that where any part of the business of
a company consists in the purchase and sale of shares of other companies,
such company shall, for the purposes of sec. 73, be deemed to be carrying
on a speculation business to the extent to which the business consists of
5 ITA. No3081/Mum/2012
the purchase and sale of shares. The above said Explanation given in se.
73 shall not apply to the following cases:-
(a) The 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".
(b) The company whose principal business is the business of
banking or granting of loans and advances.
We have already noticed that the AO expressed the view that the
Explanation given in sec. 73 shall override the proviso sec, 43(5) of the Act
and accordingly held that the loss incurred in the Cash segment of share
trading should be treated as "Speculation loss". Accordingly, he rejected
the claim of set off claimed by the assessee.
11. The Ld CIT(A) upheld the decision of the AO by observing that the
assessee has deliberately managed the incurring of expenses in order to
reduce the business income to lower than the amount of dividend income,
even though the dividend income was offered under the head Business.
He further placed reliance on the decision of the Tribunal in the case of
KNC Shares & Securities (P) Ltd (ITA No.7420 & 6782/M/03 dated
22.8.2006), where in it was held that the assessee was not entitled to set
off loss arising from purchase and sale of shares against income from
12. The Ld A.R submitted that the loss incurred by the assessee in cash
segment is covered by the exception given in clause (c) given in the
proviso to sec. 43(5) of the Act. He further submitted that the profit
earned in F & O segment is covered by the exception given in clause (d) of
the proviso to sec. 43(5) of the Act. He further submitted that an identical
issue was considered by the Kolkatta bench of Tribunal in the case of ITO
Vs. M/s Arena Textiles & Industries Ltd (ITA No. 1019/Kol/2011 dated
29.12.2011) and the Tribunal has held that the transactions done by
delivery as well as the transactions of derivatives are not hit by section
6 ITA. No3081/Mum/2012
43(5) of the Act. The Tribunal further held that the aggregation of share
trading loss and profit from derivative transactions should be done before
the application of the Explanation to section 73 of the Act.
13. The Ld A.R further submitted that the Hon'ble Bombay High Court
has also held in the case of CIT Vs. Darshan Securities (P) Ltd that the
while computing the Gross Total Income, the normal provisions of the Act
must be applied and it is only thereafter, that it has to be determined as to
whether the gross total income so computed consists mainly of income
which is chargeable under the heads referred to in the Explanation to sec.
73 of the Act. The Ld A.R submitted that the view expressed by the
Kolkatta bench of Tribunal with regard to the application of Explanation to
sec. 73 has been thus upheld by the jurisdictional Bombay High Court.
14. Thus, we notice that the Hon'ble Bombay High Court has held that
the Explanation to sec. 73 can be applied after computing the Gross total
income, meaning thereby, the same shall not override the proviso to sec.
43(5) of the Act. Hence, as per the decision of Kolkatta bench of Tribunal
in the case of M/s Arena Textiles & Industries Ltd (supra), the loss from
cash segment can be set off against the profit from derivatives. Thus,
after computing the Gross Total Income in the above said manner, the
application of provisions of Explanation to sec.73 is required to be
15. In view of the above, the approach of the AO as well as the Ld CIT(A)
cannot be upheld. Hence, in our view, the application of Explanation to
sec. 73 needs to be examined afresh by duly considering the methodology
discussed above at the end of the AO. Before us, the Ld A.R raised a fresh
contention, viz., the transactions of purchase and sale of shares in cash
segment has been carried out merely as a hedge against the transactions
carried out in F & O segment. Accordingly, he contended that the mere
hedging cannot be considered as the business of buying and selling of
7 ITA. No3081/Mum/2012
shares. Accordingly he contended that the provisions of Explanation to
sec. 73 shall not apply to hedging transactions. We are unable to agree
with the said contentions of the Ld A.R. In our view, the Income tax Act is
not concerned with the purpose or the objective of the assessee in
carrying the transactions in Cash segment. What we see is that the
assessee has purchased and sold the shares on delivery basis. According
to the Ld A.R, the same falls in the category of "Arbitrage" and hence it
will not fall in the category of "speculative transactions" as defined in sec.
43(5) of the Act due to exception given in clause (c) of the proviso to sec.
43(5). However, Explanation to sec. 73 is a deeming provision and hence
its applicability has to be necessarily tested in the instant case.
16. Accordingly, we modify the order of Ld CIT(A) on this issue and
restore the matter of applicability of Explanation to sec. 73 to the file of
the AO with the direction to examine this matter afresh in the light of
discussions made supra.
17. In the result, the appeal filed by the assessee is treated as partly
allowed for statistical purposes.
The above order was pronounced in the open court on 20th Feb, 2015.
20th Feb, 2015
(../H.L.KARWA) (.. /B.R.BASKARAN)
/JUDICIAL MEMBER / ACCOUNTANT MEMBER
Mumbai: 20th Feb,2015.
. ../ SRL , Sr. PS
8 ITA. No3081/Mum/2012
/Copy of the Order forwarded to :
1. / The Appellant
2. / The Respondent.
3. () / The CIT(A)- concerned
4. / CIT concerned
5. , , /
DR, ITAT, Mumbai concerned
6. / Guard file.
/ BY ORDER,
, /ITAT, Mumbai