The brief facts relevant to the issue are that during the year under consideration, the assessee had carried out cash future arbitrage and earned a profit from the said 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 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 as per Explanation to section 73. After considering direct expenses incurred for the said activity, AO held the loss of Rs. 25,96,01,368/- as speculation loss. Being aggrieved by the above order of the AO, the assessee filed appeal before the CIT(A).
The Ld. CIT(A) after considering submissions of assessee held that the arbitrage transactions were excluded from the definition of speculation as per clause (d) of section 43(5). That the said clause did not refer to delivery or non delivery based transactions. He further observed that the AO had applied the proviso (d) to section 43(5) only to a part of jobbing/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.
Held by ITAT
21. We have considered the rival contentions. In this case, the peculiarity of the business of the assessee is that the assessee so manages his transactions of sale and purchase in shares in cash segment and in future segment that the final outcome will be a profit. The transactions of the assessee, therefore, cannot be segregated to arrive at profit and loss in both these transactions independently or separately. The nature of the business of the assessee is such that the transactions of the assessee in both segments are part of composite business of the assessee and the transactions are so managed that the resultant figure will be a profit. We, therefore, do not find any justification on the part of the lower authorities to interpret the provisions of the Income Tax Act to the disadvantage of the assessee and to segregate the transactions in cash and future segment which, in our view, will be against the spirit of the taxation laws. Even otherwise the case of the assessee is squarely covered by the decision of the Hon’ble Delhi High Court in the case of “CIT vs. DLF Commercial Developers’ (supra) wherein the Hon’ble Delhi High Court has categorically held that in terms of explanation to section 73, by all accounts, derivatives are based on stocks and shares which fall squarely within explanation to section 73 and therefore loss from sale-purchase of such derivatives would be speculative loss. The Hon’ble Delhi High Court has, thus, held that though under provisions of section 43(5), the transactions in derivatives at certain stock exchanges are deemed to be non-speculative, however, as per the explanation to section 73 for the purpose of computation of business loss the derivative transactions squarely fall within the scope of explanation to section 73. Under the circumstances, both the transactions i.e. the transactions in the derivative and transactions in the cash segment can be treated as speculative transactions as per explanation to section 73 and hence the profit or loss against both the segments can be adjusted or set off against each other.
22. Even otherwise as discussed above, the peculiarity of the business of the assessee is such that the transactions carried out by the assessee in cash segment and in future segment cannot be segregated. The business of the assessee survives on the ultimate resultant figure arrived at after setting off/adjusting of the profit and loss from each segment. It cannot be said that the transactions in each segment done 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, these exclusions given to the assessee cannot be allowed to be so interpreted to the disadvantage of an assessee so as to give it a different meaning and thereby denying the assessee the set off of otherwise eligible business loss from one segment as against the other segment, especially when the activity done by the assessee is a composite activity and profit and loss in one segment not only depends but the very transaction is done taking into consideration not ‘expected’ but certain future profit or loss in other segment.