2015 (2) TMI 361 - HC - Income Tax

Jobbing and arbitrage - whether be considered as a speculative transaction? - Losses in speculation business - assessee is a share broker and a member of both National Stock Exchange and Bangalore Stock Exchange Ltd - Held that - Section 73 has no application to a contract entered into by a member of the NSE or Bangalore Stock Exchange, whose business is in trading of shares on behalf of his clients, which is known as jobbing or arbitrage. Any loss which may arise in the course of such business, shall not be deemed to be a speculative transaction. If the nature of the transaction by the assessee is not a speculative transaction at all, then, the Explanation to section 73 of the Act has no application. The loss sustained by the assessee is a business loss which can be set off against the income from the other sources. Therefore, the prohibition under section 73 of the Act is attracted only to set off the loss in a speculative business against the profit from other business, because loss from speculation business should be set off only from a profit of speculation business. Therefore, the Tribunal was justified in setting aside the order passed by the authorities and allowing the claim of the assessee. - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the transactions in the nature of jobbing and arbitrage can be considered speculative transactions under section 43(5) of the Income-tax Act, 1961.
2. Applicability of Explanation to section 73 of the Income-tax Act, 1961, to the transactions carried out by the assessee.
3. Whether the loss incurred by the assessee in the course of trading in shares can be set off against income arising under other heads.

Detailed Analysis:

Issue 1: Nature of Jobbing and Arbitrage Transactions
The Tribunal upheld the claim of the assessee that under proviso (c) of section 43(5) of the Income-tax Act, 1961, the nature of jobbing and arbitrage cannot be considered as a speculative transaction. Section 43(5) defines speculative transactions as those settled otherwise than by actual delivery. However, proviso (c) excludes transactions in the nature of jobbing and arbitrage by a member of a forward market or stock exchange from being considered speculative. The Tribunal concluded that since the transactions were in the nature of jobbing and arbitrage, they were not speculative transactions and thus, the losses incurred were business losses.

Issue 2: Applicability of Explanation to Section 73
The assessing authority and the Commissioner of Income-tax (Appeals) had initially concluded that the assessee's business fell within the purview of Explanation to section 73, deeming it a speculation business. This meant the losses were to be treated as speculative losses, which could only be set off against speculative profits. However, the Tribunal found that section 73 applies only when the transaction is speculative. Since the transactions in question were jobbing and arbitrage, falling under proviso (c) to section 43(5), they were not speculative. Therefore, Explanation to section 73 was not applicable.

Issue 3: Set Off of Losses
The Tribunal held that the losses incurred by the assessee in jobbing and arbitrage transactions were business losses, not speculative losses. Consequently, these losses could be set off against income from other heads. The Tribunal set aside the orders of the assessing authority and the Commissioner of Income-tax (Appeals) and allowed the business loss to be set off against other business profits. The High Court affirmed this view, stating that the prohibition under section 73 applies only to speculative business losses and not to business losses from transactions that are not deemed speculative.

Conclusion:
The High Court dismissed the Revenue's appeals, affirming the Tribunal's decision that the losses from jobbing and arbitrage transactions are business losses and can be set off against other business profits. The substantial question of law was answered in favor of the assessee, confirming that the transactions in question were not speculative and thus, Explanation to section 73 did not apply.