TaxTMI 
TaxTMI 
2017 (12) TMI 1054
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.... 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 and for this Revenue has raised following ground No.1: - "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 of deemed speculation loss of 36,87,83,681/- made by the AO under explanation to section 73 of I.T. Act as the assessee has wrongly set off speculative loss against non-speculative income." 3. Briefly stated facts are that the assessee company earned profit in derivative transactions at Rs. 36.87 crores (precisely Rs. 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 Rs. 36.42 crores (precisely Rs. 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 Rs. 36.87 crores and should not be disallowed? The assessee stated that it is a NBFC and p....
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....sion of the appellant as well as gone through the assessment order. From a perusal of the details submitted by the appellant it is clear that the appellant was mainly engaged in the business of granting of loans and advances. A bare perusal of the balance sheet revealed employed in lending activities was he appellant in money lending business on year to year to basis. FY 2008-09 FY 2009-10 FY 2010-11 Loan Book 24.58 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 Rs. 101,813,462/-, Rs. 54,340,1....
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.... cannot be computed without allowing a business loss. A loss other than a capital toss which is really incidental to the trade is allowable u/s 28 of the Income Tax Act, 1961 itself on ordinary principles of commercial trading. The appellant prays that the loss suffered in cash segment is incidental to the profit earned in derivative segment. Therefore, the loss 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 ....
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....ions entered into by the appellant are clearly in the nature of arbitrage. The Ld. assessing officer has also failed to appreciate the nature of business of the appellant that wherein in most of the cases, at the time of initiation of the arbitrage transaction, it is not known to the appellant whether and in which segment he. is going to earn profit and in which segment he is going to incur loss. His only concern is that the profits earned in any segments 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. ..................
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....ne 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 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 sect....
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....instrument: (a) whose value changes in response to the change in a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index, or similar variable (sometimes called the 'underlying'); (b) that requires no initial net investment or little initial net investment relative to other types of contracts that have a similar response to changes in market conditions; and (c) that is settled at a future date. ITA 94/2013 Page 10 Actually, 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 objecti....
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....14; 11. The stated objective of Section 73- apparent from the tenor of its language is to deny speculative businesses the benefit of carry forward of losses. Explanation to Section 73 (4) has been enacted to clarify beyond any shadow of doubt that share business of certain types or classes of companies are deemed to be speculative. That in another part of the statute, which deals with ITA 94/2013 Page 12 computation of business income, derivatives are excluded from the definition of speculative transactions, only underlines that such exclusion is limited 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). ....
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....ssessee's paper book. The learned Counsel for the assessee referred to the first transaction on pages 54 of the assessee paper book on 04.01.2008 of cash segment i.e. purchase of Reliance share of 250 and sold the same 250 shares. Similarly, in derivative segment also shown purchase of Reliance share on 04-01-2008 of 2025 shares and sold the same on the same date of 2025 shares. The learned Counsel took us through the entire pages and shown that there is no stock kept by the assessee and the entire derivative sale is in cash segment are sold without delivery. The learned 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 Segm....
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....ased 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 qty. in future market or vice-versa. Based on these differences, he concluded that as there is no exact corresponding sale/purchase in other market, such transactions cannot be termed as arbitrage under section 43(5)(d) of the Act. Sample of such observations by AO are explained below for your reference. As shown in the above table, in case of ESSAR OIL at Sr. No. 1, the buy quantity is 7080 in cash segment, while the sell quantity in ESSAROIL is (7060) in F&O segment. This was the bone of contention of AO for not allowing set off of loss between the two segments on account of quantity mismatch. However, in arbitrage it is not always possible to match the quantity, as it depends upon availability of shares/derivatives in respective segments. Also, due to sudden price fluctuation in any of the segment of markets, one has to continuously look at the new opportunity in order to increase profit or to reduce loss. Accordingly, the remaining ....
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....om the above expenses, loss in cash segment will stand reduced to Rs. 34.29 crores i.e. Rs. 36.88 crores - Rs. 2.59 crores= 34.29 crores. Thus, almost all the loss of Rs. 34.29 crores was accounted for and covered by the above 13,000 line items transactions which were to the tune of Rs. 34.22 crores. Therefore, the balance amount of mismatch loss in cash segment was merely Rs. 7.21 lacs only i.e. 34.29 crores - 34.22 crores. But Ld Counsel explained that on account of system constraints, it had not mapped the loss of Rs. 7.21 lacs against transactions in derivative segment. However, the facts remain same and the residual loss of Rs. 7.21 lacs also form part of the composite activity. In view of the above facts and circumstances of the case Ld. Counsel only prayed that explanation to section 73 of the Act will not apply to the case of the assessee. 8. Alternatively also, he argued that the loss from cash segment and profit from derivative segment should be set off against each other. Loss in cash market is incidental to the profits earned in the F&O segment and therefore, to that extent, this loss from cash segment should be allowed to be set off as business loss. It is obvious t....
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....se in other market, such transactions cannot be termed as arbitrage under section 43(5)(d) of the Act. But the bone of contention of AO for not allowing set off of loss between the two segments on account of quantity mismatch is without any basis because, in arbitrage it is not always possible to match the quantity, as it depends upon availability of shares/derivatives in respective segments. Also, due to sudden price fluctuation in any of the segment of markets, one has to continuously look at the new opportunity in order to increase profit or to reduce loss. Accordingly, the remaining portion of transactions is done in any segment keeping the net open position as always NIL thereby keeping all transaction at all point of time hedged against each other. In view of these facts we are of the view that in cash/future (derivative) arbitrage, hedge position is created by taking delivery in cash segment and selling in F&O segment. The price in future segment will trade at premium as compared to cash segment. Thus, a stock is purchased in cash segment and sold in future segment. With course of time when position in future segment comes closer to the expiry date, the price gap between cas....
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....xplanation to Section 73 (4), however, is not borne out. 9. In this context, it would be instructive to notice that in Rajshree 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 "derivatives" as follows: A derivative is a financial instrument: (a) whose value changes in response to the change in a specified interest rate, security price,....
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....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 from the tenor of its language is to deny speculative businesses the benefit of carry forward of losses. Explanation to Section 73 (4) has bee....
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....eculation business can be set off only against the profits and gains of another speculation business. Subsection (2) of Section 73 enables an assessee to carry forward the loss arising out of a speculation business which has not been set off either wholly or partly under the provisions of subsection (1). A loss from a speculation business which has not been set off either entirely or in part, can be carried forward to the following Assessment Year and can be set off against the profits and gains, if any, of a speculation business carried on by the assessee and assessable for that Assessment Year. If the loss cannot be wholly set off, the amount of loss which is not so set off, can be carried forward to the following Assessment Year. However, a loss cannot be carried forward for more than four Assessment Years immediately succeeding the Assessment Year in which the loss was first computed. 7. The explanation to Section 73 creates a deeming fiction. The explanation postulates a situation where the assessee is a Company and where any part of the business of the Company consists of the purchase and sale of shares of other Companies. In such a case, the assessee is for the purp....
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....ding stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. The proviso to subsection (5) then describes certain categories of transactions which shall not be deemed to be speculative transactions. The proviso will not have a bearing on these proceedings. 9. The contention of the Revenue in the present case, in essence is that the definition of the expression "speculative transaction" in Section 43(5) must be read into the provisions of Section 73, because a business cannot be a speculation business unless there is a speculative transaction and a speculative transaction is defined by the former as one, not involving an actual delivery of shares. Hence, it was submitted that a transaction which involves an actual delivery of shares would not constitute a speculative transaction and the assessee who is engaged in a business involving the actual delivery of shares, cannot be regarded as being engaged in speculation business. 10. The submission which has been urged on behalf of the Revenue, cannot be accepted, having regard to the plain meaning of the explanation to Section 73. The submiss....
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....arisen by excluding a business involving actual delivery of shares. No such restriction is found in the explanation. To impose one is a legislative function. In other words, once the assessee is carrying on a speculation business and the profits and gains have arisen from that business during the course of the Assessment Year, the assessee is entitled to set off the losses carried forward from a speculation business arising out of a previous Assessment Year." 14. In view of the above facts of the case and precedents cited above, 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. ....
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....nts i.e. "Angel Broking Limited'. The Assessee played the role of facilitating funds for seamless operation across all its 100% subsidiaries which includes namely ABL (registered in BSE & NSE, certificate in NSE segment was earlier held by ACDL, which was merged with ABL w. e. f. April 1, 2008), ACBPL (registered in NCDEX & MCX) & ASI. The Assessee Company also stood as corporate guarantor for the borrowing lines extended by banks to ABL & ACBPL and had declared Rs. 269 crores as contingent liabilities as on March 31, 2010. The money which was received by the Assessee Company from its subsidiaries or vice versa was on account of client-related transactions. The flow of funds from the broking subsidiaries (ABL) to NBFC (AGCPL) was for the following reasons: 'The Assessee Company being NBFC & holding company in the Angel group used to facilitate the common clients of broking companies in the group by giving funds to them for trading activities which in turn helped ABL to generate substantial brokerage and other income (demat income). As on March 31, 2010, the Assessee Company had debtors outstanding to the extent of Rs. 97.50 crores. These debtors were common clients....
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.... optimization of operations and resources. It is therefore evident that all financial transactions among ABL and the Assessee were done in the normal course for business expediency. These transactions are nothing but commercial transactions and thus outside the purview of Deemed Dividend provisions. 18. The learned Counsel for the assessee alternatively, argued that amount received by it from ABL, ACBPL & ASL were not in the nature of loan but in the nature of inter corporate deposits hence provisions of section 2(22)(e) would not be applicable in this case. The AO rejected assessee's explanation on the transactions' nature as ICDs and considered it was an after-thought by the Assessee. It was explained that placing ICDs between group companies is a normal practice in the Angel group. The learned counsel referred the Tribunal decision in assessee's own case in various group entities and he referred to the Tribunal decision in ITA Nos. 2083 to 2086/Mum/2013 for AY 2008-09, vide order dated 26-07-2013, wherein Tribunal has considered all the aspects and deleted the addition by observing in Para 58 to 66 as under: - "58. When we are dealing with the transactions, based....
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....fiction should not be given a meaning so as to Cause injustice to the assessee. This ratio was laid down much earlier, by the Hon'ble Supreme Court in the case of C P Sarathv Mudaliar, reported in 83 ITR 170. 61. We have also seen that inter Se transactions are to the tune of Rs. 1,600 crores, if divided by the working days would come to Rs. 15.50 crusts per day. This, in our opinion, cannot be the intention of the legislature, to turn arid treat commercial transactions, carried through the current accounts of the transacting group companies, as deemed dividend. This situation and transactions entered into by the assessee and vice versa, are thus squarely covered by the above decisions. 62. We also do not find any provision in the Act, which suggests that the assessee has to seek permission and guidance from the AO, as to how to conduct its business. The purpose of bringing in die impugned provisions was to curb the mal practices, not to thwart the assessee conducting its business in a normal course. In the present cases, the AO acted on a pre conceived notion to import the provisions of section 2(22)(e) without actually examining the nature and purpose and extent....
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.... daily basis, the AO himself would not have strode on the provisions of section 2(22)(e). Even when we take into consideration, the Special Bench decision in the case of Bhumik Colour (supra), what we find is that none of th ecorporate entities, from whom the alleged loans/ advances had been received were either registered or beneficial share holders in the assessee company. This is besides the fact that any transaction, as undertaken by the assessee with the group companies, were purely business transactions, having commercial background. 65. Considering the entire facts and taking into account the various decisions by the various for a, we are of the opinion that the revenue authorities erred in invoking the provisions of section 2(22)(e), on the transactions, which are purely and patently, normal business transactions, without any hidden agenda amongst the group companies to devise any tax saving measures. We, therefore, respectively, following the decisions, relied upon by the assessee and the Senior Counsel, covering the various angles, including the angle of funds used by the group company as ICDs, set aside the order of the CIT(A) and direct the AO to delete the add....
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....tal 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. 21. 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. 22. Accordingly, we are of the view that the issue is squarely covered in favour of assessee by co-ordinate Bench decision in assessee's own case as cited above, respectfully following the same, we allow the claim of the assessee. Accordingly, the order of CIT(A) is confirmed and this issue of Revenue's appeal is dismissed. 23. Similar are the facts in other group concerns in ITA Nos.....