The Income Tax Appellate Tribunal (ITAT), Mumbai Bench deleted the disallowance on account of loss on share trading as not supported by a reasonable basis.
The assessee, M/s. UBS Securities India filed its return of income for the Assessment Year 2003-04 declaring total income. The assessee is a part of the UBS group and is a securities broking company and was incorporated in India. The assessee is a leading broking house in India, servicing the needs of FIIs and domestic mutual funds.
The assessee is an indirectly owned 100% subsidiary of UBS Switzerland and hence, all its transactions with the other group entities of UBS fall under the category of international transactions. During the previous year 2002-03 relevant to the Assessment Year 2003-04, the assessee has entered into transactions with Swiss Finance Corporation and UBS AG long-term India investment fund. Both these entities are Foreign Institutional Investors (FIIs) based in Mauritius.
The AO in his order has stated that the trading of shares by the assessee-company comes within the ambit of the Explanation to section 73 and accordingly disallowed the trading loss of Rs.40,82,623/-.
In the appeal, the CIT(A), allowed the appeal filed by the assessee on the disallowance on the grounds that the Appellant is a share broker and has purchased and sold the shares on behalf of its clients. From the evidence gathered during the course of the hearing, the loss has occurred on account of dealing errors or some mistake in carrying out the instructions of the client such as specific limit instructions of the client are overlooked, orders canceled by the client are not entered into the system or overlooked by dealer, etc. The Appellant itself is not engaged in the business of share trading. The loss suffered by the appellant on account of errors in the scripts traded by the appellant on behalf of the clients, which comes to approx 0.79% of the turnover of the appellant cannot be termed as excessive.
The Coram of Vikas Awasthy and N.K.Pradhan noted that Explanation to section 73 referred by the AO is not applicable as the assessee is not engaged in “business” of purchase/sale of shares of other companies. The loss was incurred on account of error trades in respect of dealings of clients and not on own account and the loss incurred in course of carrying on share broking business is in line with accepted market practices.
The tribunal found that the expenditure has been incurred by the assessee in respect of error trades. In such a situation, disallowance of Rs. 35,82,623 on account of loss on share trading and ad-hoc disallowance of Rs.5,00,000, not supported by any reasonable basis has been rightly deleted by the CIT(A).
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