The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) held that mere fact that the delivery contract provides for delivery of the securities to the broker is not sufficient and does not meet the requirements of Section 15 of the Securities Contract (Regulation) Act, 1956 (SCRA).
The assessee Standard Chartered Bank is a foreign corporate body being a bank incorporated by the Royal Charter under the laws of England and Wales and registered in India under the Companies Act, 1956. The Assessee was engaged in the business of banking financial services and allied activities in India and filed return of income for the Assessment Year 1993-94 declaring loss of INR 1,645.85 Crores.
During the course of assessment proceedings, on perusal of special audit report under Section 142(2A) of the Act, the Assessing Officer (AO) noted that the Assessee has entered into transactions with brokers as counterparties.
Further the AO observed that the special auditors had worked out a loss of INR 74,86,000 in the transactions in GIC Rise II Units undertaken by the assessee with C. Mackertich and Stewart & Co. According to the AO, the aforesaid transaction were hit by the provisions contained in Section 15 of the SCRA as the same were undertaken by the broker with the Appellant as a counterparty without obtaining written consent of the Appellant.
The AO concluded that the assessee was not entitled to claim loss of INR 74,86,000/- from the aforesaid transactions were not legal. According to the AO if there was an understanding that the broker were acting as a principal the deal slips should have reflected the name of the broker as counterparty which was not the case.
The AO concluded that the these transactions were undertaken by the Appellant with broker as counter party without the prior written consent of the Appellant and therefore, the same were hit by the provision of Section 15 of SCRA.
Thus the AO rejected the contention of the Appellant that as per the delivery order the securities were to be delivered to the broker himself amounted to a written understanding that the broker would be acting as counterparty. Therefore, the AO disallowed loss of INR 4,91,500 claimed by the assessee.
Being aggrieved the assessee filed an appeal before the Commissioner of Income Tax Appeals [CIT(A)], held that the provisions of Section 15 of SCRA were not applicable to the assessee and overturned the finding returned by the AO concluding that the transaction under consideration were not illegal.
The Revenue filed an appeal before the Tribunal. The Departmental Representative Soumendu Kumar Dash placed reliance on the order passed by the AO and submitted that the transactions under consideration were clearly undertaken in violation of the provisions of Section 15 of SCRA.
Further he contended that the broker was not permitted to enter into transaction with the assessee without written consent from the assessee. The deal slips were blank and did not contain the name of the broker. There was no prior written consent given by the assessee to the broker to act as a principal. Clearly the transactions were in violation of the provisions of Section 15 of SCRA.
The Authorised Representative of the assessee P. J. Pardiwala, submitted that there was no absolute bar against the broker acting as a counterparty. The fact that as per delivery contract the securities were to be delivered to the broker showed that the broker was acting as a principal under the consent of the assessee.
The Bench comprising of Prashant Maharishi, Accountant Member and Rahul Chaudhary, Judicial Member stated that Section 15 of SCRA deals with a contract between a member of a recognized stock exchange and a non-member. Therefore, the conclusion drawn by the CIT(A) that the provisions of Section 15 of SCRA shall not apply to transaction between the Assessee and broker is not correct.
The Tribunal noted that Section 15 of SCRA provides that a member of stock exchange can enter into a contract with a non-member provided such member;
(a) secures consent or authority of the non-member in writing and
(b) discloses in the note, memorandum or agreement of sale or purchase that such member is acting as a principal.
In the facts of the present case both the aforesaid conditions were not complied with. The mere fact that the delivery contract provides for delivery of the securities to the broker is not sufficient and does not meet the requirements of Section 15 of SCRA.
Therefore the Bench held that the transaction undertaken under consideration have been undertaken in violation of provisions contained in Section 15 of the SCRA. Therefore, the Assessee would not be allowed to claim benefit of loss arising from such transaction.
Hence the ground raised by Revenue was allowed.
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