Where the assessee's gross total income mainly consists of income from house property, capital gains and other sources, loss on derivative transactions need to be construed only as regular business loss incurred by assessee and eligible for set off of same against other income as mandated in law.

This appeal in ITA No.398/Mum/2016 for A.Y.2011-12 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-9, Mumbai in appeal No.CIT(A)-9/Cir.4/312/2013-14 dated 01/10/2015 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 06/02/2014 by the Income Tax Officer-4(2)(4),Mumbai (hereinafter referred to as ld. AO).

2. The first issue to be decided in this appeal is as to whether the ld. CIT(A) was justified in confirming the action of the ld. AO in disallowing the loss of Rs.63,47,155/- incurred by the assessee on F & O (Future and Options) derivative transactions as “speculative loss” and consequently disallowing the set off of the said loss against other business income. The inter connected issue involved therein is as to whether the ld. CIT(A) was justified in confirming the action of the ld. AO in apportioning the expenditure of Rs.16,55,463/- as expenditure incurred for the F & O transactions. Yet another interconnected issue to be decided herein is as to whether the ld. CIT(A) was justified in observing that the F & O transactions carried out by the assessee were not genuine in the facts and circumstances of the instant case.

2.1. The assessee company is engaged in the business of developing real estate, leasing of different properties and trading in derivatives. During the year under consideration, the assessee company suffered loss of Rs.63,47,155/- on derivative transactions which was set off by the assessee against other business income earned by it. The said derivative transaction loss was treated by the ld. AO as speculative loss by applying the provisions of Explanation to Section 73 of the Act. The ld. AO accordingly, disallowed the said loss of Rs.63,47,155/- by treating the same as speculative loss to be set off only against speculative income and not against regular business income earned by the assessee. The ld. AO further disallowed Rs.16,55,463/- by apportioning the expenditure attributable to the derivative transactions as speculative in nature. This action was upheld by the ld. CIT(A) in first appeal.

2.2. Aggrieved, the assessee is in appeal before us on the following grounds:-

I. Disallowance of loss in F&O transactions:

1) The Commissioner (Appeals) erred in holding that the loss of Rs.63,47,155/- incurred on F&O Derivative transactions was speculative loss and consequentially erred in disallowing the setting off of the loss incurred on F&O Derivative transactions against other business income .

2) The Commissioner (Appeals) erred in not appreciating that derivative transactions cannot be said to be purchase and sale of shares and therefore, Explanation to section 73 cannot be invoked.

3) The Commissioner (Appeals) failed to consider that the principal business of the assessee is trading in Derivatives and therefore, it falls under the exception provided in amended Explanation to section 73 of the Act.

4) The Commissioner (Appeals) erred in apportioning the expenditures of Rs.16,55,463/- as expenditure incurred for the F&O transactions.

5) The Commissioner (Appeals) erred in observing that the transactions in F&O were not genuine as the same is contrary to the facts on record.

2.3. We have heard rival submissions and perused the materials available on record. The short point that arises for our consideration is whether the loss incurred by the assessee on derivative transactions would fall within the ambit of explanation to Section 73 of the Act so as to be treated as speculation loss therein and other interconnected issues as detailed in the grounds of appeal of the assessee. For the purpose of adjudication of this ground, it would be relevant to detail the various sources of income derived by the assessee as per Income Tax return filed by it as under:- Source of Income Amount (Rs.)

a) Income from House Property 8,05,055/-

b) Income from Capital Gains

i) Short term Capital gains of shares

ii) Net profit of mutual funds 8,97,248/- 42,210/-

c) Income from other source 37,585/-

Total a+b+c 17,82,098/-

d) Income from business or profession 7,98,431/-

Gross Total Income (a+b+c+d) 25,80,529/-

2.4. From the above components of gross total income, it could be seen that the assessee company had derived income from house property, income from capital gains and income from other source of Rs.17,82,098/- which collectively represented 69% of gross total income of the assessee company. This clinching fact and evidence, which remains undisputed by the revenue before us, goes to prove that the assessee’s gross total income mainly consists of income from house property, capital gains and other sources and accordingly, the case of the assessee squarely falls in the first exception provided in Explanation to Section 73 of the Act. For the sake of convenience, the relevant provisions of Section 73 of the Act are reproduced below:

“Losses in speculation business.

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) Where for any assessment year any loss computed in respect of a speculation business has not been wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee had no income from any other speculation business, shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and—

(i) it shall be set off against the profits and gains, if any, of any speculation business carried on by him assessable for that assessment year; and

(ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on.

(3) In respect of allowance on account of depreciation or capital expenditure on scientific research, the provisions of sub-section (2) of section 72 shall apply in relation to speculation business as they apply in relation to any other business.

(4) No loss shall be carried forward under this section for more than four assessment years immediately succeeding the assessment year for which the loss was first computed.

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 trading in shares or 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.” (emphasis supplied by us)

2.5. Hence, it could be safely concluded that the case of the assessee would fall outside the ambit of provisions of Explanation to Section 73 of the Act. Accordingly, the loss on derivative transactions of Rs.63,47,155/- need to be construed only as regular business loss incurred by the assessee and eligible for set off of the same against other income as mandated in the law. We find that the ld. AR had rightly placed reliance on the following decisions of Hon’ble Jurisdictional High Court:-

a) CIT vs. Darshan Securities (P) Ltd., reported in 18 Taxmann.com 142

b) CIT vs. HSBC Securities and Capital Markets India (P) Ltd., reported in 23 Taxmann.com 377

2.6. We find that the ld. DR vehemently argued before us that assessee had not filed any documentary evidences for incurrence of the aforesaid derivative loss and the manner in which such losses were worked out. We find that this argument of the ld. DR was refuted by the ld. AR by referring to the affidavit filed by the Director of the assessee company dated 27/01/2016 before this Tribunal wherein it had been categorically affirmed that the said Director Mr. Ghansham Hemdev had appeared in person before the ld. AO on various occasions and had filed the following documents on 15/01/2013, 24/01/2014, 29/01/2014 and 05/02/2014:-

a) All contract files for F & O derivative transactions

b) Copies of Demat accounts of all the brokers namely India Infoline

Ltd., Enam Securities Ltd., and Kotak Securities Ltd.,

c) Global statements / confirmations of all the brokers

2.7. The aforesaid affidavit dated 27/01/2016 also contain the affirmation of the Director Mr. Ghansham Hemdev that he had even appeared before the ld. CIT(A) alongwith his Advocate and had explained the entire manner of incurrence of the loss on derivative transactions carried out by him and had also filed the following documents before the ld. CIT(A) on 22/07/2015:-

a) Global statement of F & O derivative transactions carried out by the assessee company with M/s. Kotak Securities Ltd.,

b) Profit and loss account and relevant schedules thereto for the year end 31/03/2010 to show that assessee company had earned profit from derivative transactions of Rs.20,25,089/- in A.Y.2010-11 and paid taxes thereon.

c) Demat statement with M/s. Kotak Securities in the books of M/s. Kotak Securities Ltd for the year ending 31/03/2011.

2.8. The Director had further affirmed that on 27/07/2015, he had filed the following documents before the ld. CIT(A) in response to certain queries raised by the ld. CIT(A) during the course of personal hearing on 22/07/2015 :-

a)Statement of M/s. India Infoline Ltd., and M/s. Enam Securities Ltd.,

b)Two specimen copies of the contract notes issued by M/s. India Infoline Ltd., and two copies of contract cum bill of Enam Securities Ltd., and M/s. Kotak Securities Ltd., in respect of F & O transactions during the year ended 31/03/2011.

c) A note explaining the evidence produced before the AO in respect of loss from derivative transactions.

2.9. We find from the said affidavit dated 27/01/2016 that the ld. CIT(A) not being satisfied with the aforesaid documentary evidences filed by the assessee before him as well as before the ld. AO, had asked the Director of the assessee company to file the details of derivative transactions in the proforma prepared by the ld. CIT(A) and also the confirmation of the derivative transactions from the stock exchange. In response there to, the Director had appeared in person before the ld. CIT(A) and replied that the requisite details in the proforma given by the ld. CIT(A) could not be furnished as the said proforma is not in vogue and not practiced in the capital market industry and the said form is also not prescribed format by SEBI and accordingly, the brokers were not having the details in the said format / proforma. However, the Director had explained to the ld. CIT(A) that the requisite details are otherwise available in the contract notes issued by the brokers which are already placed on record. We find that the contents of the aforesaid affidavit dated 27/01/2016 were not rebutted by the revenue before us by furnishing any contrary evidence. Hence, we hold that the contents in the said affidavit dated 27/01/2016 are presumed to be true and correct. Reliance in this regard is placed on the decision of the Hon’ble Supreme Court in the case of Mehta Parikh & Co. vs CIT reported in 30 ITR 181 (SC). From the aforesaid various documentary evidences filed by the assessee company before the ld. AO as well as before the ld. CIT(A), we do not find any justifiable reason for the ld. CIT(A) to come to a conclusion that the transactions in F & O carried out by the assessee as not genuine. We hold that this conclusion of the ld. CIT(A) is contrary to the facts and evidences on record.

2.10. We also find that the provisions of Section 43(5) define the expression “speculation transaction”. There is no dispute that the derivative transaction carried out by the assessee were carried out in recognised stock exchange through a registered stock broker registered with SEBI. As per Section 43(5) of the Act “Speculative transaction” is defined to mean a transaction in which the contract for the purchase or sale of any commodity, including the stocks and shares is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrip. Clause (d) of proviso to Section 43(5) provides that for the purpose of Section 43(5) of the Act, ‘eligible transaction’ in respect of any trading in derivatives referred to in Section 2(ac) of the Securities Contracts (Regulation) Act, 1956 carried out in recognised stock exchange shall not be deemed to be a speculative transaction. It is not in dispute that the derivative transaction carried out by the assessee falls within the expression of “eligible transaction” as defined in Section 43(5) of the Act.

Hence, it could be safely concluded that the loss in derivative transactions incurred by the assessee could be treated as speculation loss in the facts and circumstances of the instant case.

2.11. Moreover, we also find that similar losses were incurred by the assessee in the A.Y.2009-10 and 2012-13 which were allowed by the ld. AO as regular business loss. We also find that assessee had earned profit from F & O transactions in A.Y.2010-11 which was duly taxed by the ld. AO as regular business income. During the year, there is no change in the facts or there is no emergence of any fresh development in the case of the assessee company, enabling the ld AO to take a divergent view. Hence, revenue is not justified in taking a divergent view for the year under consideration alone. Following the principle of consistency as decided by the Hon’ble Supreme Court in the case of Radhasaomi Satsang reported in 193 ITR 321 (SC), the loss of Rs.63,47,155/- incurred by the assessee on derivative transactions deserves to be allowed as regular business loss during the year under consideration and consequently eligible to be set off against other income as per law.

2.12. With regard to disallowance of apportioning of expenditure of Rs.16,55,463/- on loss from derivatives, we find that the ld. AO had apportioned the employee cost and administration expenses in proportion of the loss of derivatives to the total receipts and arrived at the figure of Rs.16,55,463/- as part of speculation loss. In view of the aforesaid decision that the loss incurred on derivative transactions is not speculative loss and rather need to be treated as regular business loss, we direct the ld. AO to delete the disallowance of Rs.16,55,463/- towards apportionment of expenditure. Accordingly, the ground No. I raised by the assessee is allowed.

3. The next issue to be decided in this appeal is with regard to disallowance of expenditure u/s.14A of the Act.

3.1. We have heard rival submissions and perused the materials available on record. We find that the assessee had claimed dividend income as exempt of Rs.16,33,798/- and had not disallowed any expenditure for the purpose of earning such exempt income in the return filed. The ld. AO observed that assessee had claimed interest expenses of Rs.5,31,274/- as deduction but on the other hand also had lot of liquid assets in the form of mutual funds to the tune of Rs.4,19,87,830/-. The ld. AO observed that no prudent person will hold liquid assets of Rs.4.20 Crores and pay interest of Rs.5,31,274/- on the borrowings. The ld. AO presumed that borrowed funds were utilised for making investment in mutual funds and shares. The ld. AO proceeded to make disallowance u/s.14A of the Act by applying second and third limb of Rule 8D(2) of the rules and arrived at the disallowance of Rs.4,28,713/- in the assessment. This disallowance was upheld by the ld. CIT(A).

3.2. We find that the ld. AR had submitted that in the instant case, there were no borrowings made by the assessee in order to make payment of interest thereon. The total interest of Rs.5,31,274/- was paid for delayed delivery of flat to buyer. He submitted that the assessee company in the course of business of developing real estate had constructed a building at Navi Mumbai and sold certain flats and shops, out of which one premises was sold to Mr. Sushil Mahesh alias Maheshwari, Proprietor of M/s. S.R.S. Investment, who had preferred a complaint against the assessee company to the Consumer Court. Eventually, the said matter was referred to Maharashtra State Consumer Disputes Reddressal Commission. The ld. AR before us referred to pages 34-39 of the paper book filed before the ld. CIT(A) by the assessee which are also enclosed in pages 12 to 17 of the paper book filed before us wherein the attention of the ld. CIT(A) was drawn to the order of the Members of Maharashtra State Consumer Disputes Reddressal Commission dated 07/07/2010. As per the said order, the assessee was directed to refund a sum of Rs.4,64,200/- with interest @9% per annum from the respective dates of deposits within a period of four weeks from the date of the order. Accordingly, the assessee company paid a sum of Rs.9,95,474/- on 03/08/2010 which included interest of Rs.5,31,274/-.

This interest of Rs.5,31,274/- was claimed as deduction by the assessee company. We find from the aforesaid fact, the interest paid by the assessee has got absolutely no nexus or bearing with the investment in mutual funds and shares made by the assessee company. Even though the fact of existence of dispute before the Maharashtra State Consumer Disputes Reddressal Commission (MSCDRC) are not emanating from the orders of the lower authorities below, we find that the existence of the said dispute and the copy of the order dated 07/07/2010 passed by the MSCDRC was duly brought to the notice of the ld. CIT(A) by the assessee during the appellate proceedings and copy of order of MSCDRC was indeed placed before the ld. CIT(A) in pages 34-39 of the paper book filed before the ld. CIT(A). We find that the ld. CIT(A) had lost sight of this fact in his appellate order and had not made any mention thereon while addressing the issue of disallowance u/s.14A of the Act. We find that these facts were duly brought on record by the assessee in written submission before the ld. CIT(A) which are enclosed in page 220 of the paper book filed before the ld. CIT(A) in the form of additional evidence with a prayer to admit the same for better adjudication of the primary facts placed on record and the issue involved therein. We find that the ld. CIT(A) despite written submissions being available on record containing additional evidence did not bother to even address the same much less give his finding on the admission of additional evidence. We find that the ld. DR before us merely relied on the order of the ld. AO with regard to this disallowance u/s.14A of the Act. In these circumstances, we deem it fit not to remand this matter to the file of the lower authorities as all the evidences were already placed on record before the ld. CIT(A) and accordingly, proceed to adjudicate the same on merits at our level. From the perusal of the various documentary evidences placed on record, we hold that the interest payment of Rs.5,31,274/- was paid by the assessee company as per the directions of the Maharashtra State Consumer Disputes Reddressal Commission for delayed delivery of flat to one of the buyers and the said payment of interest has got absolutely nothing to do with the investment activity carried out by the assessee. Hence, there cannot be any proportionate disallowance of interest in terms of second limb of Rule 8D(2) of the rules. Accordingly, the disallowance of interest in the sum of Rs.2,42,158/- in Rule 8D(2)(ii) is hereby directed to be deleted.

3.3. With regard to disallowance of administrative expenses under third limb of Rule 8D(2) of the Rules, the ld. AR was not able to make any substantial argument in support of his claim. We find that assessee had indeed earned exempt income in the form of dividend of Rs.16,33,798/- and had not made any disallowance of expenses incurred for the purpose of earning such income in the return of income. The entire expenditure has been debited for composite business carried out by the assessee. The basic purpose for introduction of provisions of Section 14A of the Act in the statute is to address this grievance of the revenue. For want of any plausible evidence, we hereby confirm the disallowance made in the sum of Rs.1,86,555/- under third limb of Rule 8D(2) of the Rules by the lower authorities. Accordingly, the ground No.II raised by the assessee is partly allowed.

4. It is pertinent to mention here that this order is pronounced after a period of 90 days from the date of conclusion of the hearing. In this regard, we place reliance on the decision of co-ordinate bench of this Tribunal in the case of JSW Ltd in ITA Nos. 6264 & 6103/Mum/2018 dated 14.5.2020, wherein this issue has been addressed in detail allowing time to pronounce the order beyond 90 days from the date of conclusion of hearing by excluding the days for which the lockdown announced by the Government was in force. The relevant observations of this tribunal in the said binding precedent are as under:-

7. However, before we part with the matter, we must deal with one procedural issue as well. While hearing of these appeals was concluded on 7th January 2020, this order thereon is being pronounced today on 14th day of May, 2020, much after the expiry of 90 days from the date of conclusion of hearing. We are also alive to the fact that rule 34(5) of the Income Tax Appellate Tribunal Rules 1963, which deals with pronouncement of orders, provides as follows:

(5) The pronouncement may be in any of the following manners :—

(a) The Bench may pronounce the order immediately upon the conclusion of

the hearing.

(b) In case where the order is not pronounced immediately on the conclusion of the hearing, the Bench shall give a date for pronouncement.

(c ) In a case where no date of pronouncement is given by the Bench, every endeavour shall be made by the Bench to pronounce the order within 60 days from the date on which the hearing of the case was concluded but, where it is not practicable so to do on the ground of exceptional and extraordinary circumstances of the case, the Bench shall fix a future day for pronouncement of the order, and such date shall not ordinarily (emphasis supplied by us now) be a day beyond a further period of 30 days and due notice of the day so fixed shall be given on the notice board.

8. Quite clearly, “ordinarily” the order on an appeal should be pronounced by the bench within no more than 90 days from the date of concluding the hearing. It is, however, important to note that the expression “ordinarily” has been used in the said rule itself. This rule was inserted as a result of directions of Hon’ble jurisdictional High Court in the case of Shivsagar Veg Restaurant Vs ACIT [(2009) 317 ITR 433 (Bom)] wherein Their Lordships had, inter alia, directed that “We, therefore, direct the President of the Appellate Tribunal to frame and lay down the guidelines in the similar lines as are laid down by the Apex Court in the case of Anil Rai (supra) and to issue appropriate administrative directions to all the benches of the Tribunal in that behalf. We hope and trust that suitable guidelines shall be framed and issued by the President of the Appellate Tribunal within shortest reasonable time and followed strictly by all the Benches of the Tribunal. In the meanwhile (emphasis, by underlining, supplied by us now), all the revisional and appellate authorities under the Income-tax Act are directed to decide matters heard by them within a period of three months from the date case is closed for judgment”. In the ruled so framed, as a result of these directions, the expression “ordinarily” has been inserted in the requirement to pronounce the order within a period of 90 days. The question then arises whether the passing of this order, beyond ninety days, was necessitated by any “extraordinary” circumstances.

9. Let us in this light revert to the prevailing situation in the country. On 24th March, 2020, Hon’ble Prime Minister of India took the bold step of imposing a nationwide lockdown, for 21 days, to prevent the spread of Covid 19 epidemic, and this lockdown was extended from time to time. As a matter of fact, even before this formal nationwide lockdown, the functioning of the Income Tax Appellate Tribunal at Mumbai was severely restricted on account of lockdown by the Maharashtra Government, and on account of strict enforcement of health advisories with a view of checking spread of Covid 19. The epidemic situation in Mumbai being grave, there was not much of a relaxation in subsequent lockdowns also. In any case, there was unprecedented disruption of judicial wok all over the country. As a matter of fact, it has been such an unprecedented situation, causing disruption in the functioning of judicial machinery, that Hon’ble Supreme Court of India, in an unprecedented order in the history of India and vide order dated 6.5.2020 read with order dated 23.3.2020, extended the limitation to exclude not only this lockdown period but also a few more days prior to, and after, the lockdown by observing that “In case the limitation has expired after 15.03.2020 then the period from 15.03.2020 till the date on which the lockdown is lifted in the jurisdictional area where the dispute lies or where the cause of action arises shall be extended for a period of 15 days after the lifting of lockdown”. Hon’ble Bombay High Court, in an order dated 15th April 2020, has, besides extending the validity of all interim orders, has also observed that, “It is also clarified that while calculating time for disposal of matters made time-bound by this Court, the period for which the order dated 26th March 2020 continues to operate shall be added and time shall stand extended accordingly”, and also observed that “arrangement continued by an order dated 26th March 2020 till 30th April 2020 shall continue further till 15th June 2020”. It has been an unprecedented situation not only in India but all over the world. Government of India has, vide notification dated 19th February 2020, taken the stand that, the coronavirus “should be considered a case of natural calamity and FMC (i.e. force majeure clause) maybe invoked, wherever considered appropriate, following the due procedure...”. The term ‘force majeure’ has been defined in Black’s Law Dictionary, as ‘an event or effect that can be neither anticipated nor controlled’ When such is the position, and it is officially so notified by the Government of India and the Covid-19 epidemic has been notified as a disaster under the National Disaster Management Act, 2005, and also in the light of the discussions above, the period during which lockdown was in force can be anything but an “ordinary” period.

10.In the light of the above discussions, we are of the considered view that rather than taking a pedantic view of the rule requiring pronouncement of orders within 90 days, disregarding the important fact that the entire country was in lockdown, we should compute the period of 90 days by excluding at least the period during which the lockdown was in force. We must factor ground realities in mind while interpreting the time limit for the pronouncement of the order. Law is not brooding omnipotence in the sky. It is a pragmatic tool of the social order. The tenets of law being enacted on the basis of pragmatism, and that is how the law is required to interpreted. The interpretation so assigned by us is not only in consonance with the letter and spirit of rule 34(5) but is also a pragmatic approach at a time when a disaster, notified under the Disaster Management Act 2005, is causing unprecedented disruption in the functioning of our justice delivery system.

Undoubtedly, in the case of Otters Club Vs DIT [(2017) 392 ITR 244 (Bom)], Hon’ble Bombay High Court did not approve an order being passed by the Tribunal beyond a period of 90 days, but then in the present situation Hon’ble Bombay High Court itself has, vide judgment dated 15th April 2020, held that directed “while calculating the time for disposal of matters made time-bound by this Court, the period for which the order dated 26th March 2020 continues to operate shall be added and time shall stand extended accordingly”. The extraordinary steps taken suo motu by Hon’ble jurisdictional High Court and Hon’ble Supreme Court also indicate that this period of lockdown cannot be treated as an ordinary period during which the normal time limits are to remain in force. In our considered view, even without the words “ordinarily”, in the light of the above analysis of the legal position, the period during which lockout was in force is to excluded for the purpose of time limits set out in rule 34(5) of the Appellate Tribunal Rules, 1963. Viewed thus, the exception, to 90-day time-limit for pronouncement of orders, inherent in rule 34(5)(c), with respect to the pronouncement of orders within ninety days, clearly comes into play in the present case. Of course, there is no, and there cannot be any, bar on the discretion of the benches to refix the matters for clarifications because of considerable time lag between the point of time when the hearing is concluded and the point of time when the order thereon is being finalized, but then, in our considered view, no such exercise was required to be carried out on the facts of this case.

11. To sum up, the appeal of the assessee is allowed, and appeal of the Assessing Officer is dismissed. Order pronounced under rule 34(4) of the Income Tax (Appellate Tribunal) Rules, 1962, by placing the details on the notice board.

4.1. Respectfully following the aforesaid judicial precedent, we proceed to pronounce this order beyond a period of 90 days from the date of conclusion of hearing.

5. In the result, appeal of the assessee is partly allowed.

Order pronounced as per Rule 34(5) of ITAT Rules and by placing the pronouncement list in the notice board on 19/06/2020.