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TMI Blog2017 (1) TMI 49X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and at the same time disallow the depreciation on other intangible assets without appreciating that in A.Y. 2008 09 there was a specific direction to allow depreciation on intangible assets on Rs. 4.25 crores and disallow the claim of depreciation on Rs. 1.75 crores of the value of other intangible assets. B) Disallowance of lease rentals paid on motor vehicles - Rs. 32,54,995/- 2) The learned CIT(A) erred on facts and in law in upholding the order of the AO making a disallowance of lease rentals paid on motor vehicles taken on lease amounting to Rs. 32,54,995/- by holding that the lease rentals paid by the assessee were not the liability of the assessee but that of their employees and also holding that there is no genuine lease between the lessor and lessee. 3) The appellant prays that the disallowance of lease rentals paid on motor vehicles taken of lease amounting to Rs. 32,54,995/- as made by the AO and as confirmed by the CIT(A) may be deleted. 4) Without prejudice to the above, the learned CIT(A) erred in not allowing depreciation on leased assets amounting to Rs. 12,61,373/- and finance charges amounting to Rs. 9,14,252/- included in the lease rent. 5) The appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 - 09. It has however been submitted that depreciation on BSE and NSE cards has been allowed by the tribunal in the to AY- 2007-08 and AY 2008-09. It has therefore been requested that depreciation of Rs. 2,68, 428/- on BSE membership rights and of Rs. 2,61,528/- on NSE membership rights be directed to be allowed. 5. We have gone through the order 28.2.2014 of the ITAT in the own case of the assessee for AY 2008-09. We notice that the Tribunal has allowed the similar claim of the assessee for depreciation on BSE/ NSE cards following the decision of the Hon'ble Supreme Court in the case of 'Tecno Shares and Stock ltd'. reported in 327 ITR 323(SC) . Respectfully following the decision of the Co- ordinate bench of the Tribunal in the own case of the assessee, we allow this issue in favour of the assessee. Ground B: Disallowance of lease rentals paid on motor vehicles During the year under consideration, the assessee had paid lease rentals to M/s. Orix Infrastructure Services Private Limited for cars taken on lease from them. The assessee had capitalized the value of vehicles in the books of accounts in accordance with the requirements of Accounting Standards 'AS-19' issued by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mputed the disallowance as per Rule 8D of the I.T. Rules at Rs. 29,41,867/-. As assessee had already disallowed Rs. 7,92,939/-, hence, the AO made additional disallowance of Rs. 21,48,928/-. 9. In appeal, the Ld. CIT(A) confirmed the said disallowance following the order of his predecessor in A.Y. 2008 - 09. Aggrieved by said order, assessee is in appeal before us. 10. Before us, the Ld. AR of the assessee has submitted that the working of disallowance suo- moto made by assessee was duly explained to the AO that the 50% of time of employees was devoted in this respect and accordingly, 50% of their salary was disallowed. Assessee also attributed indirect expenses of Rs. 2,74,998/- towards this activity. Accordingly, total disallowance of Rs. 7,92,939/ was made. It has been contended that no satisfaction was recorded by the AO before discarding disallowance suo- moto made by assessee. The Ld. AR in this respect has placed reliance on the decision of the Hon'ble Bombay High Court in the case of 'Godrej & Boyce Mfg. Co. Ltd. v. DCIT' 328 ITR 81 (Bom). He has further submitted that similar disallowance made in Assessment Year 2007 - 08 was deleted by ITAT on the ground that AO and CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tisfaction contemplates a notice to the assessee, an opportunity to the assessee to place on record all the relevant facts including his accounts and recording of reasons by the Assessing Officer in the event that he comes to the conclusion that he is not satisfied with the claim of the assessee. We may further observe that the Hon'ble Delhi High Court in a recent decision has further given a similar view in the case of "CIT vs. Taikisha engineering India Ltd." (supra) has held that the AO having regard to the accounts of the assessee is required to record his satisfaction that the self or voluntarily expenditure offered by the assessee or claim that no expenditure has been incurred by the assessee in relation to earning of exempt income was not correct or the same was unsatisfactory on examination of the accounts of the assessee. Without recording such a satisfaction he cannot proceed to apply Rule 8D for the computation of disallowance under section 14A. 13. However, a perusal of the assessment order in the case in hand reveals that the AO has not followed the guidelines of objective satisfaction as laid down by the Hon'ble Bombay high Court in the case of Godrej & Boyce (supra) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sactions 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). 16. Before the ld. CIT(A), assessee also filed additional evidences under Rule 46A showing that in respect of the sale in derivative segment, an equal number of shares were purchased in cash segment. The assessee also filed details of corresponding sale in cash segment and purchase in derivative segment. The Ld. CIT(A) vide letter dated 9/10/2012 called for Remand Report from AO asking him to verify whether on the basis of the details submitted by the assessee, the transactions constituted arbitrage transactions and whether the transactions were correct or not ? The AO vide letter dated 16/1/2013 submitted Remand Report and informed CIT(A) that transactions cannot be co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evidences submitted under Rule 46A of the I.T. Rules, 1962 are admitted in order to impart justice in the present case. 2.3.1 I have carefully considered the facts of the case and the submission offered by the appellant. On going through the remand report, I find that the remand report essentially reiterate the findings given in the assessment order. When appellant purchases a share in cash market and sells the same scrip in F&O market, then one leg of the transaction, i.e. purchase in the cash market is accompanied by delivery and in case of sale in cash market & purchase in F & 0, the sale is accompanied by delivery. Hence one leg of the transaction is delivery based and as a result, it automatically falls out of the ambit of Section 43(5). Arbitrage simply means buying and selling of the same commodity in different market to take advantage of price difference but in Cash segment and F&O segment scrip of the same company will have different character. One is delivery based and another is non-delivery based. This position has been accepted by the AO in his remand report. The assessee contended that the AO has accepted the fact and agreed with the appellant's submission that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... closing price is taken and the position in Cash and Derivatives segment is squared off on notional basis. 2.3.5 The arbitrageur loses in one segment and gains in the other due to exactly opposite positions in both the segments. The basic feature of arbitrage is to hedge the buy position in cash segment with a sell position in Derivatives segment in the same security and to earn the differential in the prices in both the segments which starts reducing towards expiry. It is purely hedge position and not any kind of investment. While a jobber takes a position in liquid scrips with good price movement in anticipation of prof it and encashes the prof it or loss immediately within a very less time gap in small price difference to earn profits. He takes generally quantitative positions in scrips and the buy-sell price margin is not much. 2.3.6 It is submitted that considering only the loss in the cash segment, but not considering the simultaneous profit incurred in the derivates segment or vice-a-versa would result in a view that is absolutely divorced from the facts and contrary to the Principles of Arbitrage/ Jobbing Business. The Appellant being in Arbitrage business, purchases share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and then only the prof it / loss can be derived which is the essential Ingredient of the Arbitrage/Jobbing transactions. It is a matter of fact and record that the AO has considered only one leg of the arbitrage transaction i.e. the Transaction of the Cash segment ignoring that the Derivative Segment (F & O) i.e. the other side of the Transaction. 2.3.9 During the course of carrying on its business of proprietary trading in shares and securities, as a measure of risk mitigation, the appellant executes transactions in cash segment for purchase/sale of share and also entered into transactions in derivative segment. Both the activities are interlinked and part of the same business activity of trading in securities. The appellant during the remand proceedings has explained the nature of these transactions to the assessing officer and also submitted few annexures before assessing officer. As per the submission given by the appellant, it was engaged in arbitrage activities wherein the position in cash segment in 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. Arbitrage activity envisage that an assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in a cash segment, being an integrated part of the total arbitrage activities, should be allowed to be set off against income from derivative segment. 2.3.10 Dimensions of arbitrage / jobbing business can be summarized as under- .- "Sometimes the price of a stock in the cash market is lower or higher than it should be, in comparison to its price in the derivatives market. Arbitrageurs exploit these imperfections and inefficiencies to their advantage Arbitrage trade low risk trade where-simultaneous purchase of securities is done in one market and a corresponding sale is carried out in another market. These are clone when the same securities are being quoted at different prices in two markets. To understand this proposition, let us have an example of XYZ Ltd., suppose the cash market price is Rs. 1000 per share, it may be quoting at Rs. 1010 in the futures market. An arbitrageur would purchase 100 shares of XYZ Ltd. at Rs. 1000 in the cash market and simultaneously, sell 100 shares at Rs. 1010 per share in the futures market, thereby gaining Rs. 10 per share, on the day that the futures contract expires this is because in the Indian markets, there is no delivery of shares in or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O It is also done on Call & Put. 11. The benefits of carrying out the arbitrage can be Listed as follows: i. It is an attempt to profit by exploiting price differences of identical or similar financial instruments, on different markets or in different forms which results in risk less business. ii. Profiting from differences in prices or yields in different markets, 'Arbitrageurs' buy a commodity, currency, security or any other financial instrument in one place and immediately sell it at a higher price to a ready buyer at another place completing both ends of the transaction usually within a time span. Arbitrage is a risk-free transaction because it involves dealings where returns and prices are definite, fixed, and known. iii. The simultaneous purchase and sale of an asset in order to profit from a difference in the price. It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets or in different forms. iv. Arbitrage refers to the opportunity of taking advantage between the price difference between two different markets for that same stock or commodity A very important and peculiar feature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions are hedged and the net open position is kept at Nil. There are instances, where the arbitrage transactions is initiated in 1 segment and after buying/selling in 1 segment, due to price fluctuations or liquidity, the same quantity is not available in other segment and thus the arbitrager has to unwind the transaction, to minimize/cut off the loss. In the situation, in certain instances, the transactions in 1 segment only, may it be cash/F & O or partly executed. However, in this case also, in almost all, the net open positions remain at Nil. It is to be borne in mind that no arbitrage is absolutely perfect as it is not possible to complete each and every leg of a transaction at one instance. Many a times, it so happens that the execution of a complete arbitrage trade does not take place fully and within that short period of time, the arbitrageur has to take a decision on whether to complete the arbitrage trade anyhow regardless of price or square-up the position initiated till now of such incomplete arbitrage trade. Various reasons such as constant changing of prices, high competition, lack of depth, etc. are responsible for such an eventuality. Due to the same, the arb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etailed paper book filed before me. Further, this position is maintained till expiry or such time as the appellant consider appropriate. In the second leg, as explained above, the appellant sell the shares in the cash segment and an equal number of futures are bought in the derivatives/futures segment. It is seen that this sale and corresponding purchase in the derivatives/futures segment is also done simultaneously. Accordingly, the purchase and corresponding sale of shares in the cash segment is usually not on the same day. Similarly, the purchase and corresponding sale of futures in the derivatives/futures segment is also not on the same day. The AO has also commented that the appellant has purchased shares on various dates and clubbed them together and has sold it on a single day, which clearly certifies that the purchase and sale of the scripts are not done simultaneously. In this respect, the appellant stated that on numerous occasions, it is not possible to execute the order on the same day. For example, if the appellant want to purchase 10,00,000 shares of Tata Steel, the entire purchase may not be executed on the same day on account of the non availability of the stock in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for the purpose of section 73 of the Act and applies to those company whose business consists of purchase and sale of shares subject to conditions specified therein then only, it shall be deemed to be speculation business to the extent to which the business consists of the purchase and sale of shares. The appellant has earned profit in one segment and incurred loss in the other segment but overall considering all the aspects, the net is normally always in profit. Considering the figure of only one segment without offsetting the result of the transactions on the other segment would result in absurdity. If so, the opposite segment transaction should also be considered as a speculation. A script wise summary data for both the segments reflecting profit in one segment vis-à-vis loss in another segment in the same scripts which is a typical phenomenon of arbitrage has been placed on record and verified by the undersigned revealed the exact nature of assessee business. The appellant in this case has earned profit in one segment and incurred loss in the other segment but considering the overall picture, i.e. all the aspects of the Arbitrage Activity, the net is normally always in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... composite business, cannot be said to be different business. d. In case of Chirag Tanna Vs ACIT, ITA No. 4227/Mum/2010, the Hon. ITAT has held that, derivatives transactions entered into by the assessee at the recognized stock exchanges are to be treated as covered by the exclusion clause set out in Sec. 43(5)(d) of the act and also the arbitrage / jobbing transactions carried out by the assessee are not speculative transactions. e. In case of ITO Vs Arena textiles & Industries Ltd, ITA No. 1019/Kol/2011 the Hon. Kolkata ITAT has held that, trading of a share which is done by delivery transactions are not hit by sec. 43(5) as speculation. Also, derivatives transactions in shares profit /loss is also not hit by sec. 43(5), which deals about speculative transactions. The transactions done by delivery as well as the transactions of derivatives are not hit by sec. 43(5), it is considered that the aggregation of share trading loss and profit from derivatives should be done before the application of Explanation of Sec. 73 of the I T Act is applicable. Thus, from the above it is evident that arbitrage/jobbing transactions are non- speculative transactions and sec. 73 is not applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would always be a profit in arbitrage operations. Accordingly, the business of arbitrage operations cannot be considered to be the business of purchase and sale of shares as envisaged in Explanation to section 73 of the Income Tax Act. 2.3.17 Further, the transaction of selling in the futures segment is carried out by the assessee to hedge against the price movement of the share in the cash segment. Accordingly, the simultaneous sale of shares in the futures segment would have to be excluded from the definition of "speculative transaction". The same principle would equally apply in the context of Explanation to section 73. This view finds support from the decision of the Hon'ble Bangalore Tribunal in the case of JSW Steel Ltd. v. ACIT (2010) 5 ITR (Trib) 31 (Bang.). In the said case, the assessee had taken a foreign currency loan for purchase of plant and machinery. In order to hedge against the fluctuation in foreign exchange, the assessee had entered into foreign exchange forward contracts. Assessee had claimed that the loss incurred on account of settlement of foreign exchange forward contracts be adjusted to the cost of asset u/s. 43A: The AO disallowed the said loss. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T [1967] 63 ITR 651 (SC) * CIT v UP State Industrial Development Corporation [1997) 225 ITR 703 (SC) * CIT v Nirmal Kumar & Co. [1986] 161 ITR 413 (Cal) * Dr. Rajesh M. Parikh v ITO [2006] 8 SOT 61 (Mum ITAT) * ChiragTanna v ACIT (ITA No 4227 and 5027/Mum/2010) In view of the above the loss on purchase and sale of shares independently but to consider it is an integral part of the arbitrage operations. As there in no loss from arbitrage operations, the question of applying section 43(5) or Explanation to section 73 does not arise. 2.3.19 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 of f against the prof it from derivative transactions and only the net loss can be disallowed under Explanation to section 73. In this regard, reliance is also placed on the decision of the Hon'ble Bombay High Court in the case of CIT v. Lokmat Newspapers (P.) Ltd. (2010) 322 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t off against the derivative profit considering both are speculative in nature. Similar issue was also involved in the case of M/s. Arena Textiles & Industries Ltd., Kolkata in ITA No.1019/Kol/2011 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 Rs. 28,95,42,845/- 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 the I.T. Act. The Tribunal after considering rival submissions has observed as under: "* After hearing the rival submissions and on careful perusal of materials available on record, we are of the view that trading of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial instruments. The International Accounting Standard (IAS) 39, defines "derivatives" as follows: A derivate is a financial 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. 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 beca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ....... 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 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). 12. In the light of the above discussion, it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eview 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)" 20. The Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 squar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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