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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 ..... the assessee fails to prove the above , then the AO is directed to arrive at business income as done in his assessment order after complying with the direction in para 7.1 here-in-above. - ITA No. 4033/MUM/2013 - - - Dated:- 7-4-2017 - SHRI MAHAVIR SINGH (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER) For The Assessee : Shri Ajay Singh, AR For The Revenue : Shri B.S. Bist, DR ORDER PER N.K. PRADHAN, AM This is an appeal filed by the assessee. The relevant assessment year is 2009-10. The appeal is directed against the order of the Commissioner (Appeals) 8, Mumbai and arises out of order u/s 143(3) of the Income Tax Act, 1961 (the Act ). 2. The grounds of appeal filed by the assessee read as under:- 1. The learned CIT(A) erred in law in sustaining the action of the learned AO in treating loss arising from share arbitrage / hedging activity as speculative loss instead of business loss as claimed and thereby not allowing set off of loss of ₹ 2,10,23,490/- arose in cash segment against corresponding income ₹ 2,37,02,891/- arose in Future Options activity in derivative market. 1.1. He ought to have appreciated that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... delivery and non-delivery share transactions, the benefit of exceptions carved out in Section 43(5) applicable to even otherwise singularly speculative non-delivery transactions do apply to delivery based share transactions too. 1.7 Notwithstanding and without prejudice to above, the learned CIT(A) ought to have appreciated that both; delivery based share transactions in cash segment as well as derivative transactions are excluded from the definition of speculative transaction under Section 43(5) of the Act and therefore aggregation of purported share trading loss and profit from derivative transactions should be done before deeming fiction in Explanation to Section 73 of the Act comes into play. 2. The learned AO erred in law in not adjusting remaining non speculative derivative income ₹ 8,76,699/- [Rs. 245.79 lacs less ₹ 237.02 lacs (non arbitrage derivative portion)] 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]. 3. The learned AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ading of shares by a company which is otherwise a non-speculative transaction is deemed to be speculative in nature, thus the transaction in F O becomes nonspeculative transaction by virtue of section 43(5) and transaction in trading of shares (barring the exceptions specified) becomes a speculative transactions, (iv) any loss or profit in share trading is realised only on the sale of the share in the cash market. Similarly, the loss or profit in the F O market is realised only when the F O are settled,(v) section 43(5) deals with those transactions which are settled otherwise than actual delivery. Transaction of arbitrage between the cash market and F O market cannot be covered u/s 43(5), (vi) Even when the scrips are sold in the F O market on socalled hedging against the shares acquired in cash market, the profit or loss on such sale would be booked as non-speculative profit / loss. In the cash market, when the same underlying scrips are sold at a later date at a loss, the said loss by virtue of Explanation to Section 73 would be treated as speculative loss, (vii) even if the assessee had been able to prove that it indulged in arbitrage, the assessee being a company, the provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arbitrage working, (v) rectification of mistake application filed before the AO and (vi) remand report dated 01.09.2012. Reliance was placed by him on the decision in the case of CIT vs. Baljit Securities (P) Ltd. (2014) 368 ITR 470 (Cal), DCIT vs. Baljit Securities (P) Ltd. (2015) 68 SOT 82 (Kolkata Trib.) (URO) and DCIT vs. M/s. J.M. Financial Services Ltd. (ITA No. 3660/Mum/2014) ITAT J Bench, Mumbai. 6. Per contra, the learned DR relied on the order of the learned CIT(A). 7. We have heard the rival submissions and perused the relevant material on record. We begin with the decisions relied on by the learned counsel of the assessee. In Baljit Securities (P) Ltd. (supra), the assessee, basically is a share broker. It deals in buying and selling of shares of itself. The assessee is also dealing in derivatives. Dealing in derivatives has been excluded from the ambit of speculative transactions w.e.f. A.Y. 2006-07. The issue before the Hon'ble High Court was with regard to the A.Y. 2005-06. The question arose whether the assessee was entitled to set off the loss arising out of purchase and sale of shares. The Hon'ble High Court held that the assessee, in the pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and rectify it. 7.2 We now turn to the other grounds of appeal and take them together as the address a common issue. We begin with the legal underpinnings of the issue for consideration. Section 73 of the Act provides that any loss, computed in respect of a speculation business carried on by the assessee, cannot be set off except against profits of another speculation business. Explanation 2 to section 28 provides that where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business is deemed to be distinct and separate from any other business, and is referred to as speculation business for the purposes of the act. Section 43(5) defines the term speculative transaction , as a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. Proviso to section 43(5) lists certain exceptions to the speculative transactions , vide clauses (a) to (e). Clause (d) of the proviso provides that an eligible transaction in respect of trading in derivatives referred to in se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s on account of sale and purchase of shares, which had no connection with its business as a share broker, said loss would be treated as a speculation loss which could not be set off against brokerage income earned as share broker. In Priyasha Meven Finance Ltd. vs. ITO (2008) 24 SOT 422 (Mum), the assessee was a share broker having brokerage income and was also trading in shares in its own name. For the A.Y. 2002-03, it filed its return of income showing share trading loss suffered from sale and purchase of shares and claimed same to be set off against its brokerage income. The AO held that in so far as trading in shares was concerned, it was a speculative business and treated loss suffered from this activity as a speculative loss and accordingly, did not allow set off of loss in question from regular business income of the assessee. The Commissioner (Appeals) following the judgement of the Hon'ble Calcutta High Court in CIT vs. Arvind Investment Ltd. (1991) 192 ITR 365 upheld the order of the A.O. On appeal, the Tribunal upheld the order of the learned CIT(A). In C.D. Equisearch (P) Ltd. vs. DCIT (2015) 152 ITD 652(Kol.), it has been held that Where assessee, a stock b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 2,10,23,490/- Loss on Trading ₹ 2,19,69,948/- 4,29,93,438/- The profit on derivatives (total amount ₹ 2,45,79,590/-) is bifurcated as under: Loss on Arbitrage ₹ 2,37,02,891/- Loss on Trading ₹ 8,76,699/- 2,45,79,590/- II Thus the arbitrage has resulted in profit of ₹ 26,79,401/- as per the working given hereunder: Derivative Profit on Arbitrage ₹ 2,37,02,891/- Less: loss (cash market) on arbitrage ₹ 2,10,23,490/- Profit on Arbitrage ₹ 26,79,401/- Less: Proportionate Expenses (As per separate working sheet) ₹ 2,76,541/- Net profit on arbitrage ₹ 24,02,860/- III The loss on share trading has been computed as under: Loss on trading ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 derivative segment (1.4 / grounds of appeal). The assessee is directed to file the details on the above before the AO. If after verification, the contentions of the assessee in grounds of appeal 1.1; 1.2 1.4 are found to be correct then the AO is directed to accept the additional income of ₹ 1,88,56,982/- offered by the assessee as per revised computation of income filed along with the application dated 15.11.2011 before him. In case the assessee fails to prove the above , then the AO is directed to arrive at business income as done in his assessment order after complying with the direction in para 7.1 here-in-above. Needless to say, the AO shall allow adequate opportunity to the assessee while giving effect to this order. 8. In the result, the appeal is partly allowed. Order pronounced in the open Court on 07/04/2017 - - TaxTMI - TM ..... X X X X Extracts X X X X X X X X Extracts X X X X
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