2017 (12) TMI 1054 - AT - Income Tax

Adjustment of deemed speculation loss against non-speculative business income by invoking the explanation to section 73 - Held that - We are of the view that both trading of shares are not coming under the preview of section 43(5) of the Act, which provides the definition of speculative transaction for the purpose of section 28 to section 41 of the Act. The fact that both delivery based transaction in shares and derivative transactions are non-speculative as per section 43(5) of the Act is concerned, it goes to confirm that both will have same treatment as regards to application of the explanation to section 73 of the Act is concerned which creates a deeming fiction. As in the present case, the assessee had undertaken cash/future arbitrage activity as one single business activity i.e. the position in a cash segment in a particular scrip is taken on a particular date and at the same time the reverse position is taken in the same scrip in F&O segment. The transactions in cash segment and F&O segment are inextricably linked with each other and are so interwoven that it is not possible to divorce these transactions and decide the nature of the income/loss. And hence, the loss suffered in cash segment, being an integrated part of the total arbitrage activities has to be allowed / set off against income from derivative segment. Accordingly, we confirm the order of CIT(A) allowing loss earned by assessee on account of purchase and sale of securities against income earned in derivative transactions. The issue of Revenue s appeal is accordingly dismissed. Deemed dividend under section 2(22) - Held that - On similar line, in assessee s business, the learned Counsel explain that lending of money to the clients by settling their dues with exchanges. Parallel can also be drawn from the credit card business of banks, wherein advances to the customers are considered as lending activities. He explained that ABL has also earned interest income (delayed payment charges) from trade receivables amounting to ₹ 12.31 crores and ₹ 33.38 crores respectively during F.Y. 2008-09 and F.Y. 2009-10 which further increased to 57.92 crores during FY 2010-11. He stated that even if assessee exclude trade receivables from total capital employed, then also it will satisfy the Criteria that substantial part of the business of ASL was lending i.e. more than 20% of business. Accordingly, section 2(22)(e)(ii) specifically excludes from the scope of deemed dividend, the amount transferred by a company to a shareholder in the ordinary course of its business and where the lending of money is a substantial part of the business of the company. In view of the above, the learned counsel for the assessee fairly stated that the issue is squarely covered in favour of assessee and against Revenue in assessee s own case or in group cases exactly on identical facts. When this was confronted to the learned CIT DR, he fairly agreed that in earlier years in assessee s own and group cases the issue has been decided in favour of assessee.

Summary

Issues Involved:
1. Deemed Speculation Loss under Explanation to Section 73 of the Income Tax Act.
2. Treatment of Loans as Deemed Dividend under Section 2(22)(e) of the Income Tax Act.

Issue 1: Deemed Speculation Loss under Explanation to Section 73 of the Income Tax Act:

The first issue in this appeal of Revenue is against the order of CIT(A) deleting the addition made by the AO of deemed speculation loss against non-speculative business income by invoking the explanation to section 73 of the Act. The assessee company earned profit in derivative transactions at ? 36.87 crores and set off these losses incurred in purchase and sales of shares/securities against income earned in derivative transactions. The AO required the assessee to explain why explanation to section 73 should not be applied and loss incurred in purchase and sale of shares be treated as deemed speculative loss. The assessee claimed it is a NBFC with the principal business of financing, including money lending/granting of loans and investment in subsidiary companies, and argued that the income from money lending/granting of loans constituted 71.18% of the total income.

The AO, however, treated the loss from sale of shares as speculative loss under explanation to section 73 and disallowed the set off against profits from derivative transactions. The CIT(A), after considering the submissions and following various case laws, allowed the loss, observing that the appellant was mainly engaged in the business of granting loans and advances, and the activities in cash market and derivative market are interlinked and interdependent. The CIT(A) held that the loss from cash market should be adjusted against the profits in the F&O segment, and thus the loss from cash segment should be allowed as business loss u/s 28 of the Income Tax Act, 1961.

The Tribunal upheld the CIT(A)'s decision, noting that the transactions in cash segment and F&O segment are inextricably linked and cannot be separated. The Tribunal also referred to the Hon'ble Delhi High Court's judgment in the case of CIT v. DLF Commercial Developers Ltd., which held that derivatives are considered to be shares for the purposes of Explanation to section 73, and thus the loss from purchase and sale of shares has to be set off against the profit from derivative transactions. The Tribunal dismissed the Revenue's appeal on this issue.

Issue 2: Treatment of Loans as Deemed Dividend under Section 2(22)(e) of the Income Tax Act:

The next issue in these appeals of Revenue is regarding the order of CIT(A) deleting the addition made by the AO on account of loan taken by the assessee as deemed dividend under section 2(22)(e) of the Act. The assessee claimed that it was a registered NBFC with RBI and into the business of granting loans to the clients of broking subsidiaries. The money received by the assessee from its subsidiaries or vice versa was on account of client-related transactions. The assessee contended that these transactions were purely business transactions and thus outside the purview of deemed dividend provisions.

The learned Counsel for the assessee argued that the transactions were in the nature of inter-corporate deposits (ICDs) and not loans, and hence the provisions of section 2(22)(e) would not be applicable. The Tribunal, in assessee's own case in earlier years, had already decided in favor of the assessee, holding that the transactions were normal business transactions and not loans. The Tribunal noted that the inter se transactions were to the tune of ? 1,600 crores, and treating these as deemed dividend would not be the intention of the legislature. The Tribunal also observed that the transactions were conducted in the ordinary course of business and were not intended to benefit the shareholders.

The Tribunal upheld the CIT(A)'s decision, confirming that the transactions were commercial in nature and not loans, and thus the provisions of section 2(22)(e) were not applicable. The Tribunal dismissed the Revenue's appeal on this issue as well.

In conclusion, the Tribunal dismissed all the appeals of Revenue, upholding the CIT(A)'s orders on both issues.