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TMI Blog2017 (4) TMI 868X X X X Extracts X X X X X X X X Extracts X X X X ..... ery based share purchase / sale activity in 'cash segment' against corresponding profits arising from reverse position simultaneously taken in 'derivative segment' (having identical underlying shares) (i) in view of exception carved out in S. 43(5)(b) of the Income Tax Act read with Explanation 2 to Section 28 of the Act, assessee being a dealer in shares. (ii) in view of exception carved out in Section 43(5)(c) of the Income Tax Act read with Explanation 2 to Section 28 of the Act, assessee also being a member of the Stock Exchange. 1.2 The learned CIT(A) erred in sustaining the action of the AO in treating the loss arising in 'cash segment' as 'speculative loss' by invoking Explanation to Section 73 on the face of established facts that such transactions in cash segment is integral part of composite arbitrage / hedging mechanism and not merely purchase / sale of shares simplicitor on stand alone basis. 1.3 He ought to have appreciated that Explanation to Section 73 has no application in the facts of the case in view of specific exceptions provided to certain class of transactions namely hedging, jobbing, arbitrage, derivative transactions in proviso to Section 43(5) read with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eculative) against loss arising in delivery based share transactions (non arbitrage portion in cash segment); both being non speculative u/s 43(5) before resorting to Explanation to Section 73 of the Act [on remaining loss arising in delivery based share transactions in cash segment]. 4. The learned CIT(A) erred in not giving any findings on the grievance of the assessee that while determining assessed income, the learned A.O. has taken returned business loss at Rs. 1,21,60,460/- purportedly out of inadvertent error instead of correct figure of Rs. 1,32,24,729/- without assigning any reason thereof. 5. The appellant submits that the above grounds and sub grounds of appeal are alternative, independent and without prejudice to one another. 3. Briefly stated, the facts are that the assessee i.e. M/s. Kedia Shares & Stocks Brokers Ltd. (KSSBL) filed its return of income for the A.Y. 2009-10 on 29.09.2009 declaring total loss of Rs. 13,224,729/-. The activities of the assessee-company consists of (i) trading in shares and derivatives (arbitrage and trading), (ii) brokerage and (iii) depository services. The Assessing Officer (AO) noticed that KSSBL has shown loss on security trading ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... portionate expenses on share trading, the AO disallowed the share trading loss of Rs. 4,32,98,302/-. The AO started with business loss of Rs. 1,21,60,460/- and arrived at business income of Rs. 3,11,37,840/- 4. Aggrieved by the order of the AO, the assessee filed an appeal before the learned CIT(A). We find that the submissions made by the assessee have been extracted by the learned CIT(A) at page 5 - 11of his order dated 05.03.2013. The learned CIT(A) remanded the matter concerning purchase and sale of shares in the two segments i.e. cash and F&O to the AO vide his office letter dated 12.04.2012. After receipt of the remand report from the AO, the learned CIT(A) sent a copy to the assessee for comment. After receipt of the remand report, the assessee filed a submission before the learned CIT(A) which has been extracted at page 12 - 18 of his order. We find that the learned CIT(A) observed that (i) the assessee's main income is from share trading and, therefore, is hit by Explanation to Section 73 of the Act, (ii) the transactions in the nature of jobbing or arbitrage and in derivative segments are not deemed to be speculative transactions as provided in the provisions (c) & (d) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctual delivery is taken and given and also in buying and selling of shares where actual delivery was not intended to be taken or given. Therefore, the entire transaction carried out by the assessee, indicated above, was within the umbrella of speculative transaction. There was, as such, no bar in setting off the loss arising out of derivatives from the income arising out of buying and selling of shares". In Baljit Securities (P) Ltd. (supra) the Tribunal has followed the above judgement of the High Court. In M/s. J.M. Financial Services Ltd. (supra), the assessee had carried out cash future arbitrage and earned a profit from the said activity. It submitted before the AO that the activity of buying and selling of shares in cash segment and future segment was a composite activity carried out by the assessee. However, the AO was not convinced with the submission of the assessee and held that future and option transactions were non-speculative as per section 43(5) of the Act, whereas loss on purchase and sale of shares was to be considered as speculation loss as per Explanation to Section 73 of the Act. The Tribunal held that (i) in the case of CIT vs. DLF Commercial Developers Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, derivatives transactions satisfying the needs of being treated as 'eligible transactions' are not regarded as speculative transactions for the purposes of computing business profits u/s 28. The Explanation to section 73 provides for a deeming fiction where under certain business carried on by a company is deemed to be a speculation business. This fiction of explanation to section 73 applies only to a company. If any part of the business of the company consists in the purchase and sale of shares of other companies, such company is deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares. Certain exceptions to this fiction are provided in this regard. 7.3 "Derivative" is an instrument whose value depends upon its underlying cash or physical asset. Hence it means that the value is derived from the value of the underlying assets like foreign exchange, currency, securities and commodities. Derivatives include forward, future and option contracts that are of a pre-determined fixed duration, linked for the purpose of contract fulfilment, to the specified value of real or financial asset or to index of securi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ative trading by KSSBL. We turn to the submission filed on 15.11.2011 along with revised computation of income by KSSBL before the AO. The same is produced below: 1. That the company has filed its return of income on 29th September, 2009. The returned income was Rs. Nil. 2. That the activities of the company consists of: * Trading in shares and derivatives (arbitrage & trading) * Brokerage * Depository services The company has also earned income from dividend and interest. 3. That during the year the activities of trading in shares and derivatives has resulted in net loss, the details of which are as under: Amount (Rs) Loss on Security Trading Activity 4,29,93,438/- Profit on Derivative Trading 2,45,79,590/- A statement of break-up of security trading activity including arbitrage is enclosed herewith. 4. As per Explanation to Section 73 of the Income Tax Act, the net loss arising on purchase and sale of shares of other companies is deemed to be loss arising out of a speculation business and, therefore, it can be set off against profit and gains of another speculation business. 5. That inadvertently in the return of income filed by the company, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ased share purchase / sale activity in 'cash segment' against corresponding profits arising from reverse position simultaneously taken in 'derivative segment' (having identical underlying shares), (ii) such transaction in cash segment is integral part of composite arbitrage / hedging mechanism and not merely purchase / sale of shares simplicitor on stand alone basis and (iii) that cash segment transactions are adjunct of simultaneous opposite transactions in derivative segment and thus inseparable in the bundle of arbitrage transactions falling in specific exception clause to section 43(5). One may refer to 1.1, 1.2 and 1.4 respectively of the grounds of appeal. As mentioned here-in-above, 'Derivative' is an instrument whose value depends on its underlying cash or physical asset. Hence it means that the value is derived from the value of the underlying asset like securities and commodities. In view of the above, the order of learned CIT(A) is set aside and the AO is directed to verify 'having identical underlying shares' (1.1/ grounds of appeal), 'integral part of composite arbitrage / hedging mechanism' (1.2 / grounds of appeal), 'adjunct of simultaneous opposite transactions in d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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