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TMI Blog2017 (12) TMI 1054X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n derivative transactions at ₹ 36.87 crores (precisely ₹ 36,87,83,681/-) . The assessee has set off these losses incurred in purchase and sales of shares/ securities against income earned in derivative transactions amounting to ₹ 36.42 crores (precisely ₹ 36,41,73,414/-). The AO required the assessee to explained as to why explanation to section 73 of the Act should not be applied and loss incurred in purchase and sale of shares by the assessee need to be treated as deemed speculative loss of ₹ 36.87 crores and should not be disallowed? The assessee stated that it is a NBFC and principal business is of financing, including money lending/granting of loans, investment in subsidiary companies. The assessee claim that the income from money lending/granting of loans of business is ₹ 7.57 crores and further interest on fixed deposit is ₹ 0.24 crores. According to assessee, such income from granting of loans and advances constituted 71.18% of the total income. Further, the assessee has deployed an average of 500 crores in business of granting of loans and advances and the profit earned from derivative segment of ₹ 36.41 crores is followed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 97.50 65.42 Interest income from lending business 5.43 9.83 15.65 It would, therefore, be wrong to conclude on the true nature of the business of the appellant by looking at the financial numbers of the previous year 2007-08 and 2008-09 since it takes time to build a lending business. The appellant is engaged in two types of business activity i.e. NBFC business and other than NBFC business. Majority of the expenses are pertaining to NBFC business activity. The appellant drew my attention to the segment reporting part of audited financial statements. As per the segment reporting requirement, Auditors have certified as per requirements of Accounting Standard 17 that out of total revenue of ₹ 101,813,462/-, ₹ 54,340,193/- is contributed by Lending Activities which constituents 53% of total revenue. The assessing officer has only observed the year end numbers and ignored the other disclosure in audited financials. The appellant submitted that during the remand proceedings, the appellant has provided all the supporting and annexures to the assessing officer for verificatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from Cash segment should be allowed as business loss u/s 28 of Income Tax Act, 1961 to be adjusted against profit earned from F O segment. .. 2.3.7 From the details of arbitrage transactions submitted during the remand proceedings, it is observed that, in majority of the transactions, the net quantity in cash segment and F O segment are similar and in few transactions only the quantity differs. The difference occurs because of non-availability of the same quantity at the same rate at that particular point of time and thus unwinding of position in the respective exchanges/segments (However, in all cases net open position is maintained as Nil). The appellant has purchased 2050 shares in cash segment and sold them in the same segment and on the other hand purchased 2050 stock futures in F O segment and sold them in F O segment only. On the basis of her observation she concluded that the profit/loss on purchase and sale of 2050 shares in CASH segment will fall within the purview of section 73 and would be termed as speculation and on the other hand the profit/loss on purchase and sale of 2050 stock futures in F O segment would fail within Ld. AO has fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egments should be more than the losses incurred in other segment/s. The Ld. Assessing officer has failed to appreciate and understand the nature of business of appellant and differentiated the F O transactions separately as normal business activity and cash delivery transactions as speculative transactions. The Ld. assessing officer has applied sec. 43(5)(d) to the F O transactions for holding the same as normal business transaction and ignored the provisions of Sec. 43(5'(c' of arbitraae and jobbing transactions, which according to the section shall normal business transactions, thereby the Ld. assessing officer has separated the part of the transactions without understanding the business of the appellant. . 2.3.16 Without prejudice to the above, as observed supra in the case of CIT v. DLF Commercial Developers Ltd wherein it was held that for the purposes of Explanation to section 73, derivatives would be considered to be shares. If derivatives are considered to be shares for the purposes of Explanation to section 73, the loss from purchase and sale of shares has to be set off against the profit from derivative transactions and only the net ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment 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 was also involved in the case of MIs. Arena Textiles Industries Ltd., Kolkata in ITA No. 1019/KoI/201 1 for A.Y. 2008-09 before the Hon ble ITAT, Kolkata. The grounds of appeal raised by the Revenue were as under:- 1. Whether on the facts and circumstances of the case and settled legal position, the Ld. CIT(A) is justified in holding that transactions in derivatives are not hit by section 43(5) of the I.T. Act. 2. Whether on the facts and circumstances of the case and settled legal position, the Ld. CIT(A) was justified on facts and in law in deleting the disallowance and addition of ₹ 28,95,42,8451- treated as deemed speculation loss by the AO. 3. Whether on the facts and circumstances of the case and settled legal position, the Ld. CIT(A) is justified in holding that delivery-based share transactions does not fall in the ambit of Explanation to section 73 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ually, derivatives are assets, whose values are derived from values of underlying assets. These underlying assets can be commodities, metals, energy resources, and financial assets such as shares, bonds, and foreign currencies.‖ 10. It is no doubt, tempting to hold that since the expression derivatives is defined only in Section 43 (5) and since it excludes such transactions from the odium of speculative transactions, and further that since that has not been excluded from Section 73, yet, the Court would be doing violence to Parliamentary intendment. This is because a definition enacted for only a restricted purpose or objective should not be applied to achieve other ends or purposes. Doing so would be contrary to the statute. Thus contextual application of a definition or term is stressed; wherever the context and setting of a provision indicates an intention that an expression defined in some other place in the enactment, cannot be applied, that intent prevails, regardless of whether standard exclusionary terms (such as unless the context otherwise requires ) are used. In The Vanguard Fire General Insurance Co. Ltd., Madras v. M/S. Fraser And Ross Anr AIR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mited for the purpose of those provisions or sections. To borrow the Madras High Court's expression, ―derivatives are assets, whose values are derived from values of underlying assets‖; in the present case, by all accounts the derivatives are based on stocks and shares, which fall squarely within the explanation to Section 73 (4). Therefore, it is idle to contend that derivatives do not fall within that provision, when the underlying asset itself does not qualify for the benefit, as they (derivatives - once removed from it and entirely dependent on stocks and shares, for determination of their value). 12. In the light of the above discussion, it is held that the Tribunal erred in law in holding that the assessee was entitled to carry forward its losses; the question framed is answered in favour of the revenue and against the assessee. The appeal is, therefore, allowed; there shall be no order as to costs. Therefore, the Hon'ble Delhi High Court has categorically observed that the provisions of Section 73 of the Act would be applicable even in the case of derivatives to the extent they are backed by stock and shares. The Hon'ble Bombay High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned Counsel for the assessee argued against the objection of the AO that assessee is not engaged in arbitrage and doing another activity in toto, hence, assessee s cash segments is hit by the explanation to section 73 of the Act as speculation. On the other hand, purchase and sales of shares in future are derivatives in F O segment will be hit by section 43(5)(d) of the Act and established termed as non-speculative transaction i.e. to normal business transactions. He referred to the remand report of the AO vide Para 6.1, wherein, details of transactions of shares are given as under: - Cash Segment Derivative Segment Sl N Transa ction Date Scrip Name Buy Value Sale Value Quality bought Qunatity Sold Buy Value Sale Value Quanti ty Bought Quanti ty Sold 1. 4/1/08 Reliance 4,782,857 4,688,900 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,565 2,565 3,117,468 3,196,718 2,484 2,484 10 4/2/08 RELIANCE 7,048,950 7,214,347 2,965 2,965 5,658,555 5,500,038 2,325 2,325 6. According to Ld Counsel the Assessee Company 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 should be allowed to be set off against income from derivative segment. It has already provided day-wise position showing the scrip-wise quantities purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egment and profit in derivative as similar to assessee s case. Ld. Counsel explained the facts that once all the details of 13,000 transactions are considered, it resulted into profit of ₹ 2.55 crores, on net basis. On gross basis, loss in cash segment stood at ₹ 34.22 crores and profit at ₹ 36.77 crores in F O segment. However, the transactions in both segments are linked with each other and hence one should see loss/profit on composite basis. Accordingly, he argued that it treated transactions in cash F O segment as one business activity and owing to this, it booked all the expenses irrespective of segment to which it pertains into one share trading expenses account amounting to ₹ 9.26 crores. The loss under cash segment is disclosed at ₹ 36.88 crores after accounting of the above share trading expenses. This expenditure consists of expenditure in cash segment, derivative segment (F O) and commission paid for carrying out integrated activity of cash F O segment. Out of total expenditure of ₹ 9.26 crores, expenditure amounting to ₹ 2.59 crores was directly pertaining to trading in derivative segment and balance amount of ₹ 6.67 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and circumstances of the case. We find that the facts of the case as narrated above are undisputed. We find from the facts that 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. We find from the facts that the assessee has already provided day-wise position showing the scrip-wise quantities purchased and sold in cash segment and quantities sold and purchased in F O segment. There are approx. 13,000 line items of data showing the date-wise and scrip-wise transactions. AO had made certain observations on these 13,000 line items, wherein he pointed out difference in buy qty. in cash market and sell q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e excluded from this Explanation which are: (i) a company whose gross total income consists mainly of income which is chargeable under the heads 'Interest on securities', 'Income from house property', 'Capital gains' and 'Income from other sources'. (ii) a company, the principal business of which is the business of banking or the granting of loans and advances. 8. Section 43 defines, for the purpose of Sections 28 to 41, certain terms. These latter provisions fall in Chapter IV, in Section D, which deal with computation of business income. The said provisions provide for matters relating to computation of such income, rent taxes, insurance of buildings, repairs of plant and machinery, depreciation, reserves for shipping business, rehabilitation fund, expenditure on certain eligible objects or schemes, deductions, amounts not deductible, profits chargeable to tax, etc. The assessee is no doubt correct in contending that the only definition of derivatives is to be found in Section 43 (5); yet the Court cannot ignore or overlook that the definition to the extent it excludes such transactions from the mischief of the expression speculative transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Doing so would be contrary to the statute. Thus contextual application of a definition or term is stressed; wherever the context and setting of a provision indicates an intention that an expression defined in some other place in the enactment, cannot be applied, that intent prevails, regardless of whether standard exclusionary terms (such as unless the context otherwise requires ) are used. In The Vanguard Fire General Insurance Co. Ltd., Madras v. M/S. Fraser And Ross Anr AIR 1960 SC 971 it was held that: ―It is well settled that all statutory definitions or abbreviations must be read subject to the qualification variously expressed in the definition clauses which created them and it may be that even where the definition is exhaustive inasmuch as the word defined is said to mean a certain thing, it is possible for the word to have a somewhat different meaning in different sections of the Act depending upon the subject or the context. That is why all definitions in statutes generally begin with the qualifying words similar to the words used in the present case, namely, unless there is anything repugnant in the subject or context. Therefore in finding out the mean ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for AY 2009-10, which was subsequently affirmed by Hon ble Calcutta High Court in GA No. 3481 of 2013 and in ITAT No. 215 of 2013 dated 12-03-2014, wherein it is held as under:- It would, thus, appear that where an assessee, being the company, besides dealing in other things also deals in purchase and sale of shares of other companies, the assessee shall be deemed to be carrying on a speculation business. The assessee, in the present case, principally is a share broker, as already indicated. The assessee is also in the business of buying and selling of shares for self where actual 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. This is what the learned Tribunal has done. 13. And similarly, Hon ble Bombay High Court in the case of CIT vs. Lokmat Newspapers Pvt. Ltd. in ITA(L) No. 3005 of 2009 dated 16-02-2010, wherein held a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany consists of the sale and purchase of shares, the deeming fiction would not apply. However, once the requirements of the explanation are satisfied, namely, in a situation where: (i) The assessee is a Company; (ii) Any part of the business of the Company consists in the purchase and sale of shares of other Companies, the consequence which is envisaged in the explanation, as a fiction of law, is brought into existence. The legal fiction is that the assessee 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. 8. Section 28 of the Act deals with the profits and gains of a business or profession. 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 (which is to be referred to as a speculation business ) shall be deemed to be distinct and separate from any other business. Section 43 provides definitions of certain terms relevant to the head of income from profits and gains of business or profession. Subsection (5) of Section 43 defines the expression speculative transaction to mean ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The explanation stipulates that where an assessee is a company whose business consists in any part of the purchase and sale of shares of other Companies, it shall be deemed to be carrying on a speculation business to the extent to which the business consists of purchase and sale of such shares. Whether or not it is a profit or loss that has resulted from carrying on such business, is a consideration which is alien to the meaning of what constitutes a speculation business by the explanation to Section 73. Once an assessee is deemed to be carrying on a speculation business for the purpose of Section 73, any loss computed in respect of that speculation business, can be set off only against the profits and gains of an other speculation business. Similarly, for the purposes of subsection (2), the loss in respect of a speculation business which has not been set off either in whole or in part, can be carried forward and can be set off against profits and gains of any speculation business . The expression any speculation business means a speculation business of the assessee in respect of which profits and gains for the Assessment Year in question have arisen and there is no justificat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dition made by the AO on account of loan taken by these assessee s as deemed dividend under section 2(22) of the Act. For this all the assessee s have raised identically worded grounds and the fact and circumstances are also exactly identical. The ground as raised in Angel Global Capital Private Limited in ITA No. 3764/Mum/2014 reads as under: - On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to delete the addition made on account of deemed dividend by the Assessing officer in spite of the fact that in appeal the addition made in the case of Angel Broking, Angel Commodities Broking Pvt. Ltd. and Angel Securities Ltd. has been deleted by the appellant authority. 16. The brief facts in the present case (Angel Global Capital Private Limited) are that the assessee claimed that it was registered NBFC with RBI and into the business of granting of loans to the clients of broking subsidiaries. All the broking entities with whom transactions were in question i.e. ABL ASL were 100% subsidiaries of the Assessee. It was contended by assessee that the Clients may trade or open account in different segments through different co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od at ₹ 44.95 crores. The Assessee Company carried out its arbitrage activities which generated brokerage/volumes for broking subsidiaries. The Assessee Company gave business to ABL to the extent of approx. ₹ 45.84 Lacs as brokerage and ₹ 1,03,319 crores as volumes at the exchange. The Assessee Company was among the top 10 customers of Angel Broking Limited. In fact, this volume contribution enabled ABL to gain significant mileage in terms of its reputation as a broker by enabling it to win several awards for being one of the largest Broking Houses in the country. For instance, for F.Y. 2009-10 alone, it was awarded as Best Retail Broking House and The broker with the largest Distribution Network . 17. The learned Counsel for the assessee contended that on all the transaction interest was charged for all such transfers between the group companies and there was no profit margin on the interest cost levied by one company to another and hence was mere charge back of cost. Businesses were so integrated in the Angel group that with effect from April 1, 2012, ABL got merged with the Assessee, resulting in a new entity called Angel Broking Private Limited ( ABPL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 59. The application of deeming provisions have to be construed strictly. If at all, deeming provision, section 2(22)(e). herein above, have to be applied, it became necessary, that the AO should have added the entire loan of ₹ 609,13,08,013/- in the hands of the assessee, but, because of the definition of dividend, restricted the AO to make a restrictive addition and as it result, the addition was restricted to ₹ 35,64,34,372/ in the case of ABPL (similar additions in other cases. as well. We must not ignore the ration laid down by the Hon ble Calcutta High Court in the case of CIT vs Bhupinder Singh Atwal, wherein it was held, While interpreting the taxing stature relating to deeming provision and taxing an artificial income, fiction has to be strictly construed. In case of doubt about the interpretation or having more then, One view, then, the assessee would be entitled to the benefit of doubt. 60. We also place reliance on the decision of Hon'ble Bombay 1-11gb Court in I lie case of CIT vs Hindustan Petroleum Corporation Limited, reported in 187 LTR 1, wherein, it was held, a legal fiction has to be carried to its logical conclusion, but only within t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , concept of transfer of funds between companies for the purpose of business cannot be rejected. This aspect, as well, was submitted before the revenue authorities, who simply brushed aside and did not consider them, which in our opinion was an important aspect to get to the bottom of the conduct of business at this stage, we cannot ignore this important aspect. In our opinion, the group companies, who were catering to its clients, would not suffer any loss, because of them. This, again, was done strictly in accordance with the procedures placed by the Companies Act, 1956, to be accordance with KYC norms. In these circumstances, we cannot place reliance on the decision of coordinate Bench at Agra, as relied upon by the DR and bring the ratio laid down by the Hon ble Apex court and the Hon ble Bombay High Court to a naught. 64. We cannot ignore the decision of Hon ble Supreme Court in the case of Ashokbhai Chimanbhai, reported in 56 ITR 42, wherein, the Hon ble Apex Court held, ..the position of servers on the date of the transaction has to be considered. The operating profit accrues at the end of the year and does not accrue on daily basis . In the instant case(s), the AO c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.20 12.25 5.50 38.13 5.07 2.91 1.57 365.13 0.03 D 418.42 12.16 E=C/D 57.89% 42.72 20. The learned Counsel explain in view of the above, that trade receivables are the value of the shares purchased by the clients from exchanges, which in turn was funded by ABL. These shares are nothing but the financial assets whose beneficial owners are clients. Therefore these trade receivables are similar to Loan against Securities ( LAS ) facilities given by financial institution NBFC. We can also equate it to the transactions undertaken between bank and prospective home buyers wherein a bank lends money to the home owners by paying directly to the builders and keeps the home as a security against the loan advanced to borrowers. On s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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