ITAT Mumbai held that Where assessee is involved in arbitrage activities, the transactions of shares in cash segment and future segment cannot be segregated to calculate profit and loss from each segment separately.
The Ld. D.R. has submitted that under the provisions of the Income Tax Act the speculative business is deemed to be a distinct and separate business than the normal business or profession as defined under section 28 of the Act. The Ld. D.R. has further submitted that as per the provisions of section 43(5) of the Income Tax Act some transactions, though, are otherwise speculative transactions but have been deemed not to be speculative transactions and therefore the profit and loss arising out of such transaction is to be computed/set off as that of a normal business. He has further contended that however, the transactions which are not specifically excluded under the provisions of section 43 of the Act, those transactions result into speculative profit or loss which cannot be adjusted or set off from the profit and loss of normal business transactions. He has further invited our attention to section 73 of the Act and has submitted that though as per the provisions of section 43(5), the delivery based transaction in shares are not deemed to be speculative transactions; however, the section 73 carves an exception to it wherein subject to certain exceptions, the profit or loss from business of purchase and sale of shares by the companies is to be treated as speculative profit or loss which cannot be set off or carried forward towards the loss from other/normal business. The Ld. D.R. has further has further invited our attention to the provisions of section 43(5) of the Income Tax Act, 1961 to submit that certain transactions in derivatives of commodities and securities, though otherwise are speculative transactions, but because of the provisions of section 43(5) of the Act are to be treated as normal business transactions. He has therefore submitted that certain transactions such as hedging transactions, jobbing and arbitrage in commodities and securities are excluded from the preview of speculative transactions for the purpose of section 43(5) of the Act. However, explanation to section 73 covers the share transactions done by a company, subject to certain exceptions, as speculative transactions. He, therefore, has contended that the assessee’s profit or loss from future arbitrage in derivatives are to be computed separately as normal business transactions, whereas, the transaction done by the assessee in cash segment in shares are to be treated as speculative transactions. Therefore, the loss or profit earned in derivative/future arbitrage cannot be adjusted or set off against the profit and loss arrived out of delivery based share transactions. He, in this respect, has strongly relied upon the decision of the Hon’ble Kolkata High Court in the case of “Paharpur Cooling Towers Ltd. vs. CIT” (2011) 338 ITR 295 (Cal) to contend that when any purchase or sale of shares by certain companies would be speculative transaction for the purpose of section 73, the loss arising there from cannot be set off or carried forward by treating the same as non-speculative as section 43(5) of the Act excludes the delivery based share transactions from the preview of speculative business. He has further contended the Hon’ble Kolkata High Court, has held that the explanation added to section 73 is for the special purposes and for that section only and that the provision of section 73 with the Explanation overrides the provisions of section 43(5).
To stress his point, the Ld. D.R. has further relied upon the following case laws to stress upon the point that section 73 overrides the provisions of section 43(5) and what is considered as speculative in nature under section 73, section 43(5) cannot be applied to exclude those transactions from the preview of speculative transactions. He finally has stressed that since the transactions in derivatives is non-speculative because of the exclusion given under section 43(5) of the Act whereas the assessee’s business in shares is to be treated as speculative as per the provisions of section 73 of the Act. That the explanation to section 73 does not cover the transactions in derivatives and therefore the provisions of section 43(5) will come into operation and therefore the income from derivatives is to be treated as normal business income and can not be adjusted or setoff against income from speculative transactions.
“1. CIT vs. Lokmat Newspaper (P) Ltd. – (2010) 322 ITR 43
2. CIT vs. Arvind Investments Ltd. – (1991) 192 ITR 365
3. Araksa Diamond Pvt. Ltd. vs. ACIT 5(1), Mumbai – ITA No.5631/M/12 for A.Y. 2009-10 (ITAT-Mumbai)
4. ACIT vs. Sucham Finance & Investment – (2007) 290 ITR 379 (ITAT Mum.)
5. Shree Capital Services Ltd. vs. ACIT (2009) 121 ITD 498 (Kol. ITAT) (SB)
6. C. Bharath Kumar vs. DCIT (2005) 4 SOT 593 (Bang.) (ITAT)
7. DCIT vs. Sski Investors Services (P) Ltd. – (2008) 113 TTJ 511 (ITAT) (Mum)
8. Apollo Tyres Ltd. vs. CIT (2002) 255 ITR 273 (SC)”
The Ld. Counsel for the assessee, on the other hand, has submitted that the assessee is in the business of cash future arbitrage. The assessee takes benefit in the price difference in the two different market/segments. The assessee in his business buys a particular scrip in the cash segment and simultaneously sells the same scrip in the future segment. Though, while purchasing the scrip in cash segment, the assessee has to pay the price and take delivery of the shares; however, on simultaneously selling the scrip in future segment at a higher rate, the assessee on the stipulated date of conclusion of contract is not required to receive any payment towards the price of the shares but receive the margin between the price difference as on the date of entering into the contract and date of maturity of the contract. The assessee at a later date would sell the shares purchased in the cash segment and buy the shares in the future market. The difference in the price of the cash and future segment is the profit of the assessee. The Ld. Counsel by way of an example has explained that the assessee so manages these transactions that when the profit and loss from both the transactions is taken together and set off against each other, the resultant figure will always be a positive figure. In other words both the transactions are taken as a composite business where the loss in one segment will result into profit in another segment and vice -a-versa and ultimate the net result will be a profit. Therefore, the action of the AO in treating the business having composite transactions in cash segment and future segment as under different heads and thereby not allowing the set off of profit and loss from one segment against another segment is not justified. The Ld. Counsel, in this respect, has relied upon various case laws which are detailed as under:
1) J.G.A. Shah Share Brokers P. Ltd. [ITA No.4053/Mum/2013]
2) ITO v. M/s. Arion Commercial Ltd. [ITA No. 1010/Kol/2011]
3) ITO v. M/s. Arena Textiles & Industries Ltd. [ITA No. 1019/Kol/2011]
4) ITO v. M/s. Rajanigandha Properties Ltd. [ITA No.1011/Kol/2011]
5) DCIT v. Baljit Securities Pvt. Ltd. [ITA No.1183/Kol/2012]
6) CIT v. Lokmat Newspapers (P.) Ltd. (2010) 322 ITR 43 (Bom)
7) DLF Commercial Developers Ltd. (2013) 261 CTR 127 (Del)
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.
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.