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TMI Blog2017 (1) TMI 49X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO directing it to be decided in the light of the decision of the Hon'ble Supreme Court in the case of “ICDS v. CIT” (2013 (1) TMI 344 - SUPREME COURT ) . Following the same line, the tribunal in assessee’s appeal relating to AY -2008-09 vide order dated 28.2.2014 has again restored the matter to the file of the AO with direction to decide the same as per the directions given by the Tribunal in order dated 28. 06 2013 for AY 2007-08. Since the issue involved and the material facts relevant thereto are identical in nature, hence this issue accordingly with same directions as given by the Tribunal for AY 2007-08, is restored to the file of the AO for decision a fresh. Additional disallowance u/s. 14A - Held that:- A perusal of the assessment order in the case in hand reveals that the AO has not followed the guidelines of objective satisfaction as laid down by the Hon’ble Bombay high Court in the case of Godrej & Boyce (2010 (8) TMI 77 - BOMBAY HIGH COURT ) while making the disallowance. He without recording any reasoning for his dissatisfaction with regard to the working/claim of the assessee, straightway applied Rule 8D against the mandate of the provisions of section 14A of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MEMBER For The Assessee : Shri K. Shivaram, A.R. For The Revenue : Shri Alok Johri, D.R. ORDER Per Sanjay Garg, Judicial Member: The above titled appeals, one by the assessee and the other by the Revenue, have been preferred against the order dated 27.03.2014 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 2009-10. 2. The assessee has taken the following grounds of appeal: A) The learned Commissioner of Income Tax (Appeal s ) - 8. Mumbai [CIT(A)] erred on facts and in law in directing the Joint Commissioner of Income Tax (OSD) -4(3), Mumbai (AO) to allow the claim of depreciation on intangible assets and at the same time disallow the depreciation on other intangible assets without appreciating that in A.Y. 2008 09 there was a specific direction to allow depreciation on intangible assets on ₹ 4.25 crores and disallow the claim of depreciation on ₹ 1.75 crores of the value of other intangible assets. B) Disallowance of lease rentals paid on motor vehicles - ₹ 32,54,995/- 2) The learned CIT(A) erred on facts and in law in upholding the order of the AO making a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . However, with respect to other intangible assets, depreciation was allowed on ₹ 4.25 crores out of the total intangible assets of ₹ 6 crores. CIT(A) accordingly directed the AO to allow depreciation on intangible assets as in past on ₹ 4.25 crors. Aggrieved by the order of the CIT(A) in not allowing depreciation on BSE and NSE membership rights, assessee is in appeal before us. 4. The Ld. AR of the assessee has submitted that as the CIT(A) has directed the AO to allow depreciation on other intangible assets amounting to ₹ 4.25 crores, which the AO has already allowed while giving effect to order of CIT(A), hence no directions or order is required with respect to ₹ 7,97,774/-. As depreciation has been allowed by ITAT on BSE and NSE Membership rights in A.Y. 2007 - 08 and 2008 09. It has however been submitted that depreciation on BSE and NSE cards has been allowed by the tribunal in the to AY- 2007-08 and AY 2008-09. It has therefore been requested that depreciation of ₹ 2,68, 428/- on BSE membership rights and of ₹ 2,61,528/- on NSE membership rights be directed to be allowed. 5. We have gone through the order 28.2.2014 of the ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt in the case of ICDS v. CIT (2013) 350 ITR 527 (SC) . Following the same line, the tribunal in assessee s appeal relating to AY -2008-09 vide order dated 28.2.2014 has again restored the matter to the file of the AO with direction to decide the same as per the directions given by the Tribunal in order dated 28. 06 2013 for AY 2007-08. Since the issue involved and the material facts relevant thereto are identical in nature, hence this issue accordingly with same directions as given by the Tribunal for AY 2007-08, is restored to the file of the AO for decision a fresh. Ground (C) Additional disallowance u/s. 14A - ₹ 21,48,928/- 8. During the year under consideration, assessee had earned dividend income of ₹ 3,46,00,697/-, which was exempt from tax. Assessee had suomoto made a disallowance u/s. 14A of ₹ 7,92,939. The AO however, computed the disallowance as per Rule 8D of the I.T. Rules at ₹ 29,41,867/-. As assessee had already disallowed ₹ 7,92,939/-, hence, the AO made additional disallowance of ₹ 21,48,928/-. 9. In appeal, the Ld. CIT(A) confirmed the said disallowance following the order of his predecessor in A.Y. 2008 - 09. Ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income Tax Rules for determining the amount of expenditure in relation to exempt income, if, the AO is not satisfied with the correctness of the claim made by the assessee in respect of such expenditure. The satisfaction of the Assessing Officer has to be arrived at, having regard to the accounts of the assessee. Sub section (2) does not ipso facto enable the Assessing Officer to apply the method prescribed by the rules straightaway without considering whether the claim made by the assessee in respect such expenditure is correct. The satisfaction of the Assessing Officer must be arrived at on an objective basis. In a situation where the accounts of the assessee furnish an objective basis for the Assessing Officer to arrive at a satisfaction in regard to the correctness of the claim of the assessee, there would be no warrant for taking recourse to the method prescribed by the rules. An objective satisfaction contemplates a notice to the assessee, an opportunity to the assessee to place on record all the relevant facts including his accounts and recording of reasons by the Assessing Officer in the event that he comes to the conclusion that he is not satisfied with the claim of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d activity. During course of assessment proceedings, AO asked assessee to give break up of Cash and Future arbitrage, which was duly furnished by the assessee. AO thereafter sought an explanation as to why the loss from cash segment should not be disallowed as per Explanation to section 73. Assessee vide letter dated 19th December. 2011 submitted that the activity of buying and selling of shares in cash segment and future segment was a composite activity carried out by the assessee. The transactions are so managed that if there will be loss in one segment, there will be profit in the other segment, however, after netting off of the corresponding losses and profits from both the segments, the resultant figure will be a positive figure i.e. in the end, the assessee will get profits only. The assessee also filed 20 samples of cash future arbitrage with the AO. However the AO was of the view that futures and option transactions were non-speculative as per section 43(5). However, loss on purchase and sale of shares was to be considered as speculative loss as per Explanation to section 73 of the Act. He accordingly considered the loss in purchase and sale of shares as speculative loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /arbitrage activity i.e. F O segment and that such selective application was not permissible. That the assessee had entered in business of arbitrage to take advantage of price difference between the cash and F O segment. That there was a complete matching of purchase in cash segment along with simultaneous sale in derivative segment of the same or similar quantity. That the transactions were so managed that the final position in arbitrage would always be a profit. Considering only loss in cash segment but not considering simultaneous profit in the derivatives segment or vice a- - versa would result in a view contrary to principles of arbitrage/jobbing business. The relevant part of the order of the CIT(A) is reproduced as under: 2.2.8. Considering the facts of the case, remand report of the AO, rejoinder of the appellant, supplementary remand report rejoinder thereof and submissions made by the appellant, the additional evidences submitted under Rule 46A of the I.T. Rules, 1962 are admitted in order to impart justice in the present case. 2.3.1 I have carefully considered the facts of the case and the submission offered by the appellant. On going through the remand re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Ld. AO has no rationale to hold that the Cash Segment and F O Segment have to be treated separately as they have different characters. Now, neither as per the BSE / NSF rules and regulation nor under the commercial parlance nor even as per the provisions of the Act, this can be the criteria for deciding whether a transaction is arbitrage transaction or not. 2.3.4 I find that Ld. AO has not analysed the transaction of the appellant properly, if analysed it revealed that appellant has bought a position in a scrip in Cash segment and within fraction of time i t is simultaneously takes sell position in the same scrip contract in the derivatives segment (F O) for the same or similar (subject to the Lot Size) quantity. There is a difference in price of a security in Cash segment and Derivatives segment which starts reducing towards the expiry of the contract in F O Segment which is the last Thursday of every month. On the expiry day, the closing price is taken and the position in Cash and Derivatives segment is squared off on notional basis. 2.3.5 The arbitrageur loses in one segment and gains in the other due to exactly opposite positions in both the segments. The basic featur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Since then the price never recovered and the company eventually sold out majority of its holdings in October, 2010. The overall loss made by the company from these shares of Reliance Power is ₹ 2,98,91,923/- . 2.3.8 A very important and peculiar feature is that the final ultimate position is generally in prof it i.e. loss if any in cash segment is always less than the prof it in derivatives segment or vice and versa. Therefore, considering only the loss on the cash segment, but not considering the simultaneous profit incurred in the derivatives segment or vice-a-versa would result in a view contrary to the Principles of Arbitrage/ Jobbing Business. The Appellant being in Arbitrage business, purchases shares in one segment and simultaneously sell the same shares in the other segment and when the price parity reduces, the transactions is reversed in both the segments which is a normal hedging practice. All the four legs of the transaction have to be consolidated and then only the prof it / loss can be derived which is the essential Ingredient of the Arbitrage/Jobbing transactions. It is a matter of fact and record that the AO has considered only one leg of the arbitrage t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these case also almost all the net open positions remain at Nil. The appellant enclosed in the submission to assessing officer, the summary as well as day-wise position showing the scrip wise quantities purchased and sold in cash segment and quantities sold and purchased in F O segment. There were approx. 13,000 line items data showing the date-wise and scrip wise transactions. The appellant by submitting these details showed that it has undertaken the business activity in the cash segment and F O segment as part of one single business activity. 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 its income/loss. The assessee submitted that both the activities should be treated as one and only one activity and the net result of the same should be treated as business income/loss. The appellant respectfully submitted that the loss suffered in a cash segment, being an integrated part of the total arbitrage activities, should be allowed to be set off against income from derivative segment. 2.3.10 Dimensions of arbitrage / jobbing business can be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the position in Cash and Derivatives segment is squared off on notional basis. Iv The arbitrageur loses in one segment and gains in the other due to exactly opposite positions in both the segments. v. The basic feature of arbitrage is to hedge the buy position in cash segment with a sell position in Derivatives segment in the same security and to earn the differential in the prices in both the segments which starts reducing towards expiry. It is purely hedge position and not any kind of investment. vi. The jobber takes a position in liquid scrips with good price movement in anticipation of profit and encashes the profit or loss immediately within a very less time gap in small price difference to earn profits. He takes generally quantitative positions in scrips and the buy-sell price margin is not much. vii. While Arbitrage is concerned with working with the difference in prices of same shares or other financial instruments/products within two segments of exchanges such as It may be BSE cash to NSE cash/NSE F O It is also done on Call Put. 11. The benefits of carrying out the arbitrage can be Listed as follows: i. It is an attempt to profit by expl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... At times opportunities exist where he can buy in derivative market and sell in cash market or vice versa. The appellant has provided all the details of arbitrage transactions submitted which clearly shows the transactions in cash segment and F O segment carried out by the appellant company comprises off Arbitrage activity. Looking to all these transactions, your goodself will find that all the transactions are carried out in 2 segments i.e., cash and F O and at all point of time, the transactions and position is hedged against corresponding reverse position of buy/sell. Once the sale/purchase order are placed in different segment which are hedged against each other, the appellant finds opportunity of earning any profit in any of the segment due to price fluctuation at that particular point of time. The appellant further makes the transaction in that segment for the same quantity, number of times, keeping reverse position intact hedged in other segment. Due to this, the total quantity traded in cash and F O segment varies. However, at all point of time, the transactions are hedged and the net open position is kept at Nil. There are instances, where the arbitrage transactions is init ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may not materialize. In such an event, the appellant carry out the reverse transaction. However, this is also part of the arbitrage operations and it is only on account of corresponding quantities not being available in the opposite segment, the appellant are forced to carry out the reverse transaction. In fact, this clearly shows that the appellant s intention was always to take positions in different markets. It is seen that the in the second leg of the transaction, the appellant sell the shares in the cash segment and correspondingly buy the shares in the derivative/futures segment. The net effect of the purchase/sale in cash segment and derivative/futures segment is assessee's gain from arbitrage operations. The AO has also made a reference to the fact that the purchase and sale of shares are not squared off on the same day. It is seen that when the appellant takes positions, purchase in cash segment is countered by corresponding sale in derivatives/futures segment. These transactions are always simultaneous, which fact can be ascertained from the detailed paper book filed before me. Further, this position is maintained till expiry or such time as the appellant consider a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the cash segment, there is corresponding sale in the derivative/future segment. If that be the case, it cannot be id that the appellant s transactions are in the nature of speculation transactions. It is seen from the remand report, the AO held that there was a one to one correspondence between the purchase and sale in the cash and derivative/future segment and one to one correspondence between the sale and purchase in cash and derivative/future segment. In this regard, the relevant extracts from the remand report dated 16/1/2013 are reproduced hereunder for reference: From page 2 of Remand report :- It is submitted that the AO had never disputed over the transactions done by the Assessee in purchase of shares on the cash segment with a simultaneous sale in derivative/future segments, From page 3 of Remand report:- ..The AO never had a dispute over the Assessee's transactions of purchase in cash segment with simultaneous sale in future segment. 2.3.14 A bare perusal of the explanation to section 73 revealed that the said Explanation is for the purpose of section 73 of the Act and applies to those company whose business consists of purchase and sale of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h is done by delivery transactions are not hit by Section 43(5) as speculation. Similarly, derivative transaction in shares profit/loss is also not hit by Section 43(5) of the Income Tax Act, which deals about speculation transaction. As such, both profit floss from all the share delivery transactions derivative transactions are having the same meaning, so far as, section 43(5) of the Income Tax Act is concerned. It is further held that, once the transactions done by delivery as well as the transactions of derivatives are not hit by Section 43(5) of the Act, the aggregation of the share trading loss and profit from derivative transactions should he done before the application of explanation to section 73 of the Income Tax Act is applicable. b. In case of Shree Capital Services Ltd. Vs. ACIT, ITA No.1294 (Kol) of 2008, the Hon. ITAT, Kolkata, has held that F O shall be treated in same line with cash and vice versa. c. In case of DCIT vs. Loknath Saraf Securities Ltd., ITA No.695/Kol/2008, the Hon. ITAT has held that different treatment of transactions in a composite business, cannot be said to be different business. d. In case of Chirag Tanna Vs ACIT, ITA No. 4227/Mum/2010, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sses in speculation business. Accordingly, for the purpose of application of the Explanation, inter alia, it is necessary to find out whether any part of the business of the company consists of the sale and purchase of shares of other companies. If the business does not consist of the sale and purchase of shares of other companies, obviously, the Explanation cannot apply. The appellant is in the business of arbitrage operations and not in the business of purchase and sale of shares. The arbitrage operations include not only the purchase of a particular script in one segment and but its simultaneous sale in the other segment. Both these activities form part of the common transaction i.e. arbitrage operations. One cannot divide the two activities which form part of one composite transaction. In pure trading operations, one can suffer an overall loss, however, in arbitrage operations, one cannot suffer an overall loss as the operation is carried out with a view to gain from the price differences in the two segments or markets i.e. cash and future segments. Accordingly, there would always be a profit in arbitrage operations. Accordingly, the business of arbitrage operations cannot b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the intention of the Appellant while entering into the transaction. The purchase and sale in the cash segment and the future options segment in this case, were not a standalone transactions but only an arbitrage transaction. Hence, both the transactions should be viewed as an integral transaction. 2.3.18 The proviso c to section 43(5) itself shows that in case of composite transactions in arbitrage, the character of individual legs comprised in the said transaction would not decide the character of the entire transaction taken as a whole, i.e. even the non-delivery based leg in an arbitrage transaction will not be treated as a speculative transaction if undertaken to guard against loss in ordinary course of business as a member of a forward market or a stock exchange. For the proposition that it is only the net or combined result of all activities/transactions in an integrated business such as arbitrage business, which has to be looked at, to determine the character and the head of income, reliance is placed on the following decisions: Miss Dhun Dadabhoy Kapadia v CIT [1967] 63 ITR 651 (SC) CIT v UP State Industrial Development Corporation [1997) 225 ITR 703 (SC) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... speculation. Similarly, derivative transaction in shares profit/loss is also not hit by Section 43(5) of the Income Tax Act, which deals about speculation transaction. As such, both profit/loss from all the share delivery transactions derivative transactions are having the same meaning, so far as, section 43(5) of the Income Tax Act is concerned. It is further held that, once the transactions done by delivery as well as the transactions of derivatives are not hit by Section 43(5) of the Act, the aggregation of the share trading loss and profit from derivative transactions should be done before the application of explanation to section 73 of the Income Tax Act is applicable. As is evident from the extant provisions of the section 43(5) of the Act, that none of the transactions are speculative in nature and that they are all hedge transactions between the two segments. If at all one segment of the transaction is to be considered as speculative then, the opposite segment transaction should also be considered as a speculative, here again the loss in the cash segment need to be allowed as a set off against the derivative profit considering both are speculative in nature. Similar issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rities cannot be exempted from the underlying shares securities cannot be exempted from the mischief of Explanation to Section 73 and are therefore to be considered as Speculative in nature. The Hon ble Delhi High Court has held as under: 9. In this context, it would be instructive to notice that in Rajashree Sugars and Chemicals Ltd (supra), the Madras High Court noticed, rather dramatically, that 'Derivatives are time bombs and financial weapons of mass destruction' said Warren Buffett, one of the world's greatest investors, who overtook Microsoft Maestro in 2008 to become the richest man in the world and who is known as the 'Sage of Omaha or Oracle of Omaha'. Derivatives, according to him, can push companies on to a spiral that can lead to a corporate melt down.... The High Court then, after examining the nature and characteristics of derivatives transactions, observed that: 5. What are these 'derivatives' which have gained such a great deal of notoriety? In simple terms, derivatives are financial instruments whose values depend on the value of other underlying financial instruments. The International Accounting Standard (IAS) 39, defines d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ject or context. Therefore in finding out the meaning of the word insurer in various sections of the Act, the meaning to be ordinarily given to it is that given in the definition clause. But this is not inflexible and there may be sections in the Act where the meaning may have to be departed from on account of the subject or context in which the word has been used and that will be giving effect to the opening sentence in the definition section, namely, unless there is anything repugnant in the subject or context. In view of this qualification, the court has not only to look at the words but also to look at the context, the collocation and the object of such words relating to such matter and interpret the meaning intended to be conveyed by the use of the words under the circumstances. Similarly, in N.K. Jain and Ors. v C.K. Shah and Ors. AIR 1991 SC 1289, it was held that: 4. The subject matter and the context in which a particular word is used are of great importance and it is axiomatic that the object underlying the Act must always be kept in view in construing the context in which a particular word is used........... 11 The stated objective of Section 73- apparent fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s speculative or non speculative, the set off has to be allowed, the addition made by the Ld. AO cannot be sustained both on facts and circumstances of the appellant s case, the same are accordingly deleted. This ground of appeal is allowed. 2.3.22 As regards allocation expenditure towards speculation loss, in this regard, I have carefully considered the arguments of the AO, submissions of the appellant. Since I have held that the transactions of sale and purchase in cash segment and transactions in F 0 are not speculative in nature and need to be set off before invoking the provision of Sec. 73 of the Act, this ground of appeal is to be held in favour of the appellant. However, in case, the AO found that the resultant figure is a loss after such set off, then such figure may be taken for proportionate disallowance of expenses. With these observations, this ground of appeal is disposed of. 18. Aggrieved by said order of the CIT(A), Revenue has come in appeal before us. 19. We have heard the Ld. Representatives of the parties. The Ld. D.R. has submitted that under the provisions of the Income Tax Act the speculative business is deemed to be a distinct and separate busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed out of delivery based share transactions. He, in this respect, has strongly relied upon the decision of the Hon ble Kolkata High Court in the case of Paharpur Cooling Towers Ltd. vs. CIT (2011) 338 ITR 295 (Cal) to contend that when any purchase or sale of shares by certain companies would be speculative transaction for the purpose of section 73, the loss arising there from cannot be set off or carried forward by treating the same as non-speculative as section 43(5) of the Act excludes the delivery based share transactions from the preview of speculative business. He has further contended the Hon ble Kolkata High Court, has held that the explanation added to section 73 is for the special purposes and for that section only and that the provision of section 73 with the Explanation overrides the provisions of section section 43(5). To stress his point, the Ld. D.R. has further relied upon the following case laws to stress upon the point that section 73 overrides the provisions of section 43(5) and what is considered as speculative in nature under section 73, section 43(5) cannot be applied to exclude those transactions from the preview of speculative transactions. He finally h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, the resultant figure will always be a positive figure. In other words both the transactions are taken as a composite business where the loss in one segment will result into profit in another segment and vice -a-versa and ultimate the net result will be a profit. Therefore, the action of the AO in treating the business having composite transactions in cash segment and future segment as under different heads and thereby not allowing the set off of profit and loss from one segment against another segment is not justified. The Ld. Counsel, in this respect, has relied upon various case laws which are detailed as under: 1) J.G.A. Shah Share Brokers P. Ltd. [ITA No.4053/Mum/2013] 2) ITO v. M/s. Arion Commercial Ltd. [ITA No.1010/Kol/2011] 3) ITO v. M/s. Arena Textiles Industries Ltd. [ITA No.1019/Kol/2011] 4) ITO v. M/s. Rajanigandha Properties Ltd. [ITA No.1011/Kol/2011] 5) DCIT v. Baljit Securities Pvt. Ltd. [ITA No.1183/Kol/2012] 6) CIT v. Lokmat Newspapers (P.) Ltd. (2010) 322 ITR 43 (Bom) 7) DLF Commercial Developers Ltd. (2013) 261 CTR 127 (Del) 21. We have considered the rival contentions. In this case, the peculiarity of the business of the assessee i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee are independent of each other. Before parting we would like to further add that certain exceptions have been carved out under section 43(5) vide which certain transactions in derivative named as eligible transactions, done on a recognized stock exchange, subject to fulfillment of certain requirements, are deemed to be non-speculative. The said provisions have been inserted in the Act for the benefit of the assessees keeping in view the fact that in such type transactions on recognized stock exchange, the chance of manipulating and thereby adjusting the business profits towards speculative losses by the assessee is negligible because such transactions are done on recognized stock exchange and there are less chances of manipulation of figures of profits and losses. These provisions have been inserted for the benefit of the assessee so that the assessee may be able to set off and adjust his profit and losses from derivatives in commodities against the normal business losses. These provisions are intended to ease out the assessee from the difficulties faced due to the stringent provisions separating the speculative transactions from the normal transactions. However, t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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