Trading in cash & derivative segment cannot be splitted as speculative & non-speculative

Brief of the case:

The ITAT bench of Mumbai in the above cited case held that simultaneous trading of shares in cash segment  and arbitrage in derivative segment  by assessee company cannot be splitted into speculative and non-speculative transactions . So, as soon as it is found that assessee is trading in shares , the entire trading activity to be treated as speculative business as per explanation to Sec 73 which clearly state that if any part of assessee’s business is trading in shares then the same trading to be treated as speculative business.

Facts of the case:

• The assessee company was engaged in the business of stock Broking, borrowing moneys, depository participants and investment in shares and securities. The assessee was dealing both in was dealing in capital segments as well as derivative segment. In Capital market segment, assessee made trading of equity shares whereas in derivative segment, future and options.
• It was noted by the AO that a future contract does not result in actual delivery. The AO invoked explanation to section 73 of the Act and queried that why loss in share trading should not be treated as speculative loss.
• AO did not accept the assessee’s reply that loss is covered u/s 43(5) and accordingly treated the same as speculative business loss as per explanation to Sec 73 and disallowed Rs 56,94,166.
• The CIT(A) held that derivative transactions were covered by 43(5)(d) and therefore, could not be held as speculative transactions. On the other hand, share trading done in the cash market is hit by explanation to section 73, and therefore, any loss/profit arising there from shall be deemed to be speculative, and could only be set off only against speculative business income of subsequent years.
• Aggrieved assessee is in appeal before ITAT Mumbai.

Contention of the Assessee:

• The learned counsel for the assessee submitted that transactions of the assessee cannot be broken into two parts i. speculative and nonm-speculative. It was submitted that ‘Future & Option segment and share trading in capital segment (i.e. position in cash) are one leg of his share transactions and therefore these cannot be broken into different parts so as to give different treatment u/s 43(5) and section 73.
• Further , since case of the assessee is hit by explanation to section 73, therefore, entire transactions of the assessee should be treated as speculative transactions.
• Reliance was placed on a no. of judgments particularly on the verdict of Kolkata bench of ITAT in the case of ITO v. Snowtex Investment Ltd. 129 DTR 203.

Held by ITAT Mumbai:

• The similar issue has been addressed by Hon’ble Calcutta HC in the case of CIT v. Baljit Securities P. Ltd. 275 CTR 335 wherein the high court held that an assessee who was a share broker trading in shares for himself and also dealing in derivatives, the assessee shall be deemed to be carrying on speculative business and therefore, entire transactions carried out by the said assessee were within the umbrella of speculation transactions, and there was no bar in setting off the losses arising out of derivatives from the income arising out of buying and selling of shares.
• In the present case both the parties agreed before us that the provisions of explanation to section 73 are applicable and therefore, it is directed that AO shall treat the entire business as speculative and shall assess the income as income from speculative business and shall grant the benefit of set off and carry forward of losses accordingly.
• In result the appeal of assessee was allowed.