High Court Upholds Tribunal's Deduction Calculation for Securities Transactions

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Case Name:

Commissioner of Income Tax vs. Manish D. Innani (High Court of Bombay)

Income Tax Appeal No.250 of 2013

Date: 9th January 2015

Key Takeaways

- The High Court upheld the Tribunal's decision to allow a rebate of Rs. 1.01 crores under Section 88E (of Income Tax Act, 1961), as opposed to the Rs. 75.07 lakhs allowed by the Assessing Officer.

- The court emphasized that the deduction under Section 88E (of Income Tax Act, 1961) should be computed based on the income from taxable securities transactions without considering brought forward losses.

- The decision clarifies the application of Section 88E (of Income Tax Act, 1961), ensuring that the rebate is calculated correctly according to the average rate of income tax on such transactions.

Issue

Was the Tribunal justified in allowing a rebate of Rs. 1.01 crores under Section 88E (of Income Tax Act, 1961), against the Rs. 75.07 lakhs allowed by the Assessing Officer?

Facts

- The assessment year in question is 2008-09.

- Manish D. Innani, the Assessee, is engaged in derivative trade in shares and investment.

- The Assessee filed a return declaring a total income of Rs.5,94,71,620 and claimed a rebate under Section 88E (of Income Tax Act, 1961) amounting to Rs.1,01,87,300.

- The Assessing Officer allowed a rebate of only Rs.75,07,274, considering brought forward losses from the previous year.

- The Tribunal corrected this computation, allowing the full rebate claimed by the Assessee.

Arguments

- Revenue's Argument:

The Tribunal erred in allowing a higher rebate and should have upheld the Assessing Officer's calculation, which considered brought forward losses.

- Assessee's Argument:

The rebate should be calculated based on the income from taxable securities transactions without considering brought forward losses, as per Section 88E (of Income Tax Act, 1961).

Key Legal Precedents

- Oasis Securities Ltd.:

The Tribunal referenced this case to support its decision.

- Ashika Stock Broking Ltd. (44 SOT 556):

Another case cited by the Tribunal to justify its computation method.

Judgement

The High Court dismissed the Revenue's appeal, upholding the Tribunal's decision. The court found that the Tribunal correctly applied Section 88E (of Income Tax Act, 1961), which does not require considering brought forward losses when calculating the rebate. The Tribunal's order was deemed to have no error or perversity.

FAQs

Q1: What is Section 88E (of Income Tax Act, 1961)?

A1: Section 88E (of Income Tax Act, 1961) allows a deduction from the amount of income tax on income arising from taxable securities transactions, calculated by applying the average rate of income tax on such income.

Q2: Why did the Assessing Officer reduce the rebate?

A2: The Assessing Officer reduced the rebate by considering brought forward losses from the previous year, which the Tribunal and High Court found to be incorrect.

Q3: What was the final decision of the High Court?

A3: The High Court upheld the Tribunal's decision to allow a rebate of Rs.1.01 crores, dismissing the Revenue's appeal.

Q4: Does this case set a precedent for future cases?

A4: Yes, it clarifies the correct method for calculating deductions under Section 88E (of Income Tax Act, 1961), ensuring that brought forward losses are not considered.

Q5: What impact does this decision have on the Assessee?

A5: The Assessee benefits from a higher rebate, reducing their taxable income for the assessment year 2008-09.

1) The Tribunal's order dated 1st August, 2012 in Income Tax Appeal No. 861/Mum/2012 is challenged by the Revenue in this Appeal. The Assessment year is 2008­-09.

2) Mr. Malhotra appearing for the Revenue submits that the substantial question of law is that the Tribunal was not justified in allowing the rebate of Rs.1.01 crores under section 88E (of Income Tax Act, 1961) against the rebate of Rs.75.07 lacs allowed by the Assessing Officer.

3) The facts pertaining to this ground and question have been

noted in both, the Memo of Appeals before the Commissioner of Income

Tax and the Tribunal as also in this Court. The Assessee is individually

engaged in the business of derivative trade in shares and investment.

The return of income was filed by the Assessee for the previous year

ended on 31st March, 2008. The Assessee declared total income at

Rs.5,94,71,620/­. He claimed rebate under section 88E (of Income Tax Act, 1961) at

Rs.1,01,87,300/­. He also furnished the working of disallowance under

section 14A (of Income Tax Act, 1961) during the assessment proceedings. The assessment was

completed under section 143(3) (of Income Tax Act, 1961) by order

dated 28th December, 2010 determining total income at

Rs.27,17,31,090/­.

4) The Assessing Officer made addition and we are concerned

in this case with the calculation of the rebate under section 88E (of Income Tax Act, 1961) of the

Income Tax Act, 1961 at Rs.75,07,274/­. The argument of the Assessee

before the Commissioner as also the Tribunal was that the rebate in

respect of securities transaction tax and admissible under section 88E (of Income Tax Act, 1961)

has not been granted in terms of the section and the entitlement of the

Assessee thereunder. The Assessee's representative contended that the

deduction under section 88E (of Income Tax Act, 1961) in accordance with the formula prescribed

under sub­section (2) of section 88E (of Income Tax Act, 1961) does not rule out brought forward

loss of Rs.1,62,36,858/­ from assessment year 2007­08. That is set off

against the income from taxable securities of Rs.4,95,93,132/­ earned

during the assessment year 2008­09. It was submitted that the taxable

securities transactions, meaning thereby the tax on the securities

transactions, which are taxable, will have to be computed on this entire

figure. Therefore, the benefit in terms of section 88E (of Income Tax Act, 1961) ought to be

granted in full and there was no warrant for taking into consideration

the brought forward loss for the earlier assessment year. The Assessing

Officer erroneously took that into account and consideration and

reduced the rebate accordingly. The Commissioner dealt with this

argument and in para 5.4 held that the Assessing Officer has rightly

worked the average rate of tax as per section 88E (of Income Tax Act, 1961). He upheld the

working by the Assessing Officer and dismissed the Assessee's Appeal.

5) The matter was carried to the Tribunal and in paras 5 and 6

of the Tribunal's order, a reference was made to the decision of the

Tribunal in the case of Oasis Securities Ltd. in Income Tax Appeal No.

2534/Mum/2009 for assessment year 2006­07 rendered on 30th

September, 2010. The other order relied upon was in the case of Ashika

Stock Broking Ltd. (44 SOT 556).

6) Mr. Malhotra submits that when the Tribunal distinguished

its co­ordinate Bench decision in the case of Oasis Securities Ltd.

(supra), then, the calculations made by the Assessing Officer and his

order deserve to be upheld, and there was no scope for allowing partly

the ground, which was raised by the Assessee. He therefore submits

that para 7 of the Tribunal's order contains reasons, which cannot be

sustained in the light of the clear language of section 88E (of Income Tax Act, 1961). He has faulted the Tribunal for having held that the surplus from share dealing of market segment/future and option

segments is not there but there is net income after setting off of losses.

He submits that the Tribunal's order contains something which is not

subject matter of section 88E (of Income Tax Act, 1961).

Consequently, the Appeal be admitted.

7) On the other hand, Mr. Shah appearing for the Respondent

would submit that the language of section 88E (of Income Tax Act, 1961) is clear and

unambiguous. It does not warrant any interpretation. Sub­section (1)

thereof states that where the total income of the Assessee in a previous

years includes any income, chargeable under the head “profit and gains

of business or profession” arising from taxable securities transactions,

he shall be entitled to a deduction from the amount of income tax on

such income arising from such transactions, namely taxable securities

transactions and the deduction is to be computed in terms of sub-

section (2). Mr. Shah would submit that the Tribunal has done nothing

but applied the language of this section and granted the necessary

deduction. The Appeal therefore does not raise any substantial question

of law. There was no warrant for bringing down the quantum of the

deduction or the figure concerned by relying upon some lossess, which

have been brought forward by the Assessee from the prior assessment

year. Mr. Shah would submit that it is the income from the taxable

securities transactions in the previous year relevant to the assessment

year, which enables the deduction to be claimed. If it is claimed in that manner and its computation is in terms of sub­section (2) of section

88E, then, the present Appeal does not raise any substantial question of

law. The Tribunal's order cannot be said to be erroneous or vitiated by

perversity either. He therefore submits that the Appeal be dismissed.

8) The Tribunal had before it a ground relating to rebate in

respect of securities transaction tax under section 88E (of Income Tax Act, 1961). The

working of the rebate was a matter before the Assessing Officer. The

Assessee was asked to submit the working of rebate claimed in respect

of securities transaction tax amounting to Rs.1,01,87,300/­. The

Assessing Officer found that though the Assessee had applied average

rate on income but the average rate was adopted before setting off

business loss of earlier years. The assessing Officer held that the total income of the Assessee is Rs.5,94,71,620/­, which includes

Rs.3,34,49,474/­ (after setting of business loss of Rs.1,62,36,858/­

brought forward from the year 2007­08), which is chargeable under the

head “profits and gains of business or profession” arising from taxable

securities transactions. He therefore held that the Assessee is entitled to get rebate under section 88E (of Income Tax Act, 1961) on the income of Rs.3,34,49,474/­, but not on Rs.4,95,93,132.

9) To our mind, all that the Tribunal has done is to take into

account the volume of the securities transactions and which were

taxable. The total income of the Assessee in the previous year included

the income from taxable security transactions. The requirement under

sub­section (1) of section 88E (of Income Tax Act, 1961) on this count was fully satisfied. The

only issue was how this deduction and in terms of the provision has to

be computed. The Assessing Officer has ignored completely the

quantum of income from taxable securities transactions, the tax that is

leviable thereon and which has to be deducted in terms of sub­section

(2) of section 88E (of Income Tax Act, 1961). So long as the stipulation under sub­section (2) is

adhered to and followed, namely the amount of income tax on the

income arising from the taxable securities transactions referred to in

sub­section (1), shall be equal to the amount calculated by applying the

average rate of income on such income, the deduction deserves to be

granted. Therefore, the clear language of the section has been taken

into consideration. The total income in a previous year if includes any

income arising from taxable security transactions, then, the Assessee is

entitled to deduction from the amount of income tax on such income

arising from such transactions. That is because the income from taxable

securities transactions has already been subjected to tax. The security

transactions are taxable. Therefore, from the amount of income tax on

such income arising from such transactions, the deduction has to be

computed and that is an amount equal to the securities transaction tax

paid by the Assessee in respect of the taxable securities transactions

entered into in the course of his business during that previous year.

The proviso contemplates that deduction can be allowed only if the Assessee furnishes, along with the return of income, evidence of payment of securities transaction tax in the prescribed form. There is no dispute before us that the Assessee has complied with the proviso and the second proviso as well, namely that the amount of deduction under this sub­section shall not exceed the amount of income tax on taxable

securities transactions computed in the manner provided in sub­section

(2). To our mind, the Tribunal committed no error when it corrected

the computation or calculation of deduction. There was no warrant in

the light of the clear language of this provision then to take into

consideration the brought forward losses. It is the taxable securities

transaction, the income derived from such taxable securities

transactions and they being taxable, the tax paid thereon, which has to

be deducted. That is how the section has been understood and applied

to the given facts and circumstances. We do not think that any larger

controversy arises for determination and consideration in this Appeal.

We are not in agreement with Mr. Malhotra that the decision of the

Tribunal's co­ordinate Bench in Oasis Securities Ltd. (supra) has been

distinguished but still the deduction has been granted. In para 6.1, the

Tribunal concluded that the Assessee is entitled to rebate of Rs.1.01

crores under section 88E (of Income Tax Act, 1961) as against the

rebate of Rs.75.07 lakhs allowed by the Assessing Officer. The Tribunal

may have distinguished its order and decision of the co­ordinate Bench

rendered in the case of Oasis Securities Ltd. (supra), but, pertinently, it was held that the surplus from share dealing of market/future and

option segment may not be there, but there is net income after setting

off of losses. There was an over all profit for the assessment year under consideration and the rebate had to be allowed. Before the Assessing Officer or the Commissioner as well, the issue was not as much of admissibility of rebate in terms of section 88E (of Income Tax Act, 1961), but the manner of its computation. The deduction has to be computed in the manner

specified in sub section (2) of section 88E (of Income Tax Act, 1961). We do not think that there is any basis for the argument and in the given facts and circumstances that the average rate was applied on income before setting off business loss of earlier year.

10) In these circumstances and when the income from the

securities transactions is taxable and offered to tax, the deduction

insofar as that sum is concerned or quantum has been granted. We do

not think that the Tribunal's order can be interfered with. The

Tribunal's view is imminently possible in the backdrop of the facts and

circumstances peculiar to the Assessee. In any event by sub­section (3)

of section 88E (of Income Tax Act, 1961) it has been clarified that no deduction under section 88E (of Income Tax Act, 1961)

shall be allowable in, or after, the assessment year beginning on the 1st day of April, 2009 i.e. because a deduction which is contemplated by

this provision has been now made admissible elsewhere. In these

circumstances, the Appeal raises no substantial question of law. It is

dismissed. More so when the Tribunal's order has been given effect to

by the Assessing Officer. He has followed his view taken in the

assessment year 2006­07, which is also following the Tribunal's order.

No costs.

(S.P.DESHMUKH, J.) (S.C.DHARMADHIKARI, J.)