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M/s. Kedia Shares and Stocks Brokers Ltd. Versus JCIT (OSD) 4 (3) , Mumbai

2017 (4) TMI 868 - ITAT MUMBAI

Adjustment between loss on security trading activity and profit on derivative trading by KSSBL - Held that:- As mentioned here-in-above, ‘Derivative’ is an instrument whose value depends on its underlying cash or physical asset. Hence it means that the value is derived from the value of the underlying asset like securities and commodities. In view of the above, the order of learned CIT(A) is set aside and the AO is directed to verify ‘having identical underlying shares’ (1.1/ grounds of appeal), .....

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ion of income filed along with the application dated 15.11.2011 before him. In case the assessee fails to prove the above , then the AO is directed to arrive at business income as done in his assessment order after complying with the direction in para 7.1 here-in-above. - ITA No. 4033/MUM/2013 - Dated:- 7-4-2017 - SHRI MAHAVIR SINGH (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER) For The Assessee : Shri Ajay Singh, AR For The Revenue : Shri B.S. Bist, DR ORDER PER N.K. PRADHAN, AM Th .....

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and thereby not allowing set off of loss of ₹ 2,10,23,490/- arose in cash segment against corresponding income ₹ 2,37,02,891/- arose in Future & Options activity in derivative market. 1.1. He ought to have appreciated that the assessee is entitled to set of losses arising from delivery based share purchase / sale activity in cash segment against corresponding profits arising from reverse position simultaneously taken in derivative segment (having identical underlying shares) (i) .....

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3 on the face of established facts that such transactions in cash segment is integral part of composite arbitrage / hedging mechanism and not merely purchase / sale of shares simplicitor on stand alone basis. 1.3 He ought to have appreciated that Explanation to Section 73 has no application in the facts of the case in view of specific exceptions provided to certain class of transactions namely hedging, jobbing, arbitrage, derivative transactions in proviso to Section 43(5) read with Explanation .....

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ed CIT(A) erred in not applying exceptions provided in 43(5)(b) / 43(5)(c) to one leg of transaction namely cash segment while applying exception 43(5)(d) to other leg of transaction in derivative segment which is ex-facie arbitrary , unjust and contrary to law and judicial pronouncements. 1.6 The learned CIT(A) erred in law in not making harmonious construction between provisos to Section 43(5) and Explanation to Section 73 for computing speculation income under Explanation 2 to Section 28. He .....

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ell as derivative transactions are excluded from the definition of speculative transaction under Section 43(5) of the Act and therefore aggregation of purported share trading loss and profit from derivative transactions should be done before deeming fiction in Explanation to Section 73 of the Act comes into play. 2. The learned AO erred in law in not adjusting remaining non speculative derivative income ₹ 8,76,699/- [Rs. 245.79 lacs less ₹ 237.02 lacs (non arbitrage derivative portio .....

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th being non speculative u/s 43(5) before resorting to Explanation to Section 73 of the Act [on remaining loss arising in delivery based share transactions in cash segment]. 4. The learned CIT(A) erred in not giving any findings on the grievance of the assessee that while determining assessed income, the learned A.O. has taken returned business loss at ₹ 1,21,60,460/- purportedly out of inadvertent error instead of correct figure of ₹ 1,32,24,729/- without assigning any reason thereo .....

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epository services. The Assessing Officer (AO) noticed that KSSBL has shown loss on security trading activities of ₹ 42,993,437/-. This loss has been set off against the business income which has resulted in business loss of ₹ 13,224,729/-. The AO came to a finding that KSSBL is hit by Explanation to Section 73 of the Act. He asked the assessee to explain why the Explanation to Section 73 should not be invoked and why the loss in share trading should not be treated as speculation los .....

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loss on profit in derivative transaction carried out in recognised stock exchanges has to be treated as non-speculative in nature, (iii) by virtue of Explanation to Section 73, the loss in trading of shares by a company which is otherwise a non-speculative transaction is deemed to be speculative in nature, thus the transaction in F&O becomes nonspeculative transaction by virtue of section 43(5) and transaction in trading of shares (barring the exceptions specified) becomes a speculative tra .....

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es acquired in cash market, the profit or loss on such sale would be booked as non-speculative profit / loss. In the cash market, when the same underlying scrips are sold at a later date at a loss, the said loss by virtue of Explanation to Section 73 would be treated as speculative loss, (vii) even if the assessee had been able to prove that it indulged in arbitrage, the assessee being a company, the provisions of section 73 would override the provisions of section 43(5) of the Act. After adding .....

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T(A) remanded the matter concerning purchase and sale of shares in the two segments i.e. cash and F&O to the AO vide his office letter dated 12.04.2012. After receipt of the remand report from the AO, the learned CIT(A) sent a copy to the assessee for comment. After receipt of the remand report, the assessee filed a submission before the learned CIT(A) which has been extracted at page 12 - 18 of his order. We find that the learned CIT(A) observed that (i) the assessee s main income is from s .....

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ng, the loss or profit earned through these transactions is deemed to be speculative transactions as per Explanation to Section 73 of the Act. In view of the above, the learned CIT(A) held that the assessee is not entitled to set off the losses in share trading with the profits earned through F&O transactions in derivatives as these are non speculative in nature. Thus the learned CIT(A) dismissed the appeal filed by the assessee. 5. Before us, the learned counsel of the assessee submits a pa .....

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s. Baljit Securities (P) Ltd. (2014) 368 ITR 470 (Cal), DCIT vs. Baljit Securities (P) Ltd. (2015) 68 SOT 82 (Kolkata - Trib.) (URO) and DCIT vs. M/s. J.M. Financial Services Ltd. (ITA No. 3660/Mum/2014) - ITAT J Bench, Mumbai. 6. Per contra, the learned DR relied on the order of the learned CIT(A). 7. We have heard the rival submissions and perused the relevant material on record. We begin with the decisions relied on by the learned counsel of the assessee. In Baljit Securities (P) Ltd. (supra) .....

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he present case, principally is a share broker, as already indicated. The assessee is also in the business of buying and selling of shares for self where actual delivery is taken and given and also in buying and selling of shares where actual delivery was not intended to be taken or given. Therefore, the entire transaction carried out by the assessee, indicated above, was within the umbrella of speculative transaction. There was, as such, no bar in setting off the loss arising out of derivatives .....

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vinced with the submission of the assessee and held that future and option transactions were non-speculative as per section 43(5) of the Act, whereas loss on purchase and sale of shares was to be considered as speculation loss as per Explanation to Section 73 of the Act. The Tribunal held that (i) in the case of CIT vs. DLF Commercial Developers Ltd. (2013) 35 taxmann.com 280 (Delhi), the Hon'ble Delhi High Court has held that in terms of Explanation to Section 73, by all accounts, derivativ .....

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hat the assessee has shown total loss of ₹ 1,32,24,728/- in the return of income filed for the impugned assessment year. The AO has mentioned it at page 1 of the assessment order. However the AO has taken the business loss at ₹ 1,21,60,460/- in his computation of income at page 12 of the assessment order. As this is mistake apparent from record, the AO is directed to verify the same and rectify it. 7.2 We now turn to the other grounds of appeal and take them together as the address a .....

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ss, and is referred to as speculation business for the purposes of the act. Section 43(5) defines the term speculative transaction , as a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. Proviso to section 43(5) lists certain exceptions to the speculative transactions , vide clauses (a) to (e). Clause (d) of the proviso provide .....

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ion where under certain business carried on by a company is deemed to be a speculation business. This fiction of explanation to section 73 applies only to a company. If any part of the business of the company consists in the purchase and sale of shares of other companies, such company is deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares. Certain exceptions to this fiction are provided in this regard. 7.3 Derivativ .....

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for the year ended 31.03.2009, the income comprises of the following: Brokerage Income ₹ 10,922,419.89 Profit on Security Trading Activities Rs. (42,993,437.98) Profit on Derivative Trading ₹ 24,579,590.40 Profit on Mutual Fund ₹ 431,575.51 Capital Gain Dividend Received ₹ 2,552,678.37 Interest Received ₹ 3,032,715.45 Depository Service Charges ₹ 1,454,618.65 Other Income ₹ 696,703.81 7.5 The Hon'ble Calcutta High Court in the case of CIT vs. Eureka .....

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ts own name. For the A.Y. 2002-03, it filed its return of income showing share trading loss suffered from sale and purchase of shares and claimed same to be set off against its brokerage income. The AO held that in so far as trading in shares was concerned, it was a speculative business and treated loss suffered from this activity as a speculative loss and accordingly, did not allow set off of loss in question from regular business income of the assessee. The Commissioner (Appeals) following the .....

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material on record showing that assessee was doing an integrated business giving rise to different classes of income, its claim for set off being in contravention to section 73, was to be rejected. 7.6 Having discussed the above, we are only concerned here about the adjustment between loss on security trading activity and profit on derivative trading by KSSBL. We turn to the submission filed on 15.11.2011 along with revised computation of income by KSSBL before the AO. The same is produced below .....

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y Trading Activity 4,29,93,438/- Profit on Derivative Trading 2,45,79,590/- A statement of break-up of security trading activity including arbitrage is enclosed herewith. 4. As per Explanation to Section 73 of the Income Tax Act, the net loss arising on purchase and sale of shares of other companies is deemed to be loss arising out of a speculation business and, therefore, it can be set off against profit and gains of another speculation business. 5. That inadvertently in the return of income fi .....

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as under: Loss on Arbitrage ₹ 2,10,23,490/- Loss on Trading ₹ 2,19,69,948/- 4,29,93,438/- The profit on derivatives (total amount ₹ 2,45,79,590/-) is bifurcated as under: Loss on Arbitrage ₹ 2,37,02,891/- Loss on Trading ₹ 8,76,699/- 2,45,79,590/- II Thus the arbitrage has resulted in profit of ₹ 26,79,401/- as per the working given hereunder: Derivative Profit on Arbitrage ₹ 2,37,02,891/- Less: loss (cash market) on arbitrage ₹ 2,10,23,490/- Profi .....

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ount to ₹ 24,02,860/- has been adjusted against loss on share trading and the remaining amount of loss on share trading has been disallowed under explanation to section 73 in the revised statement of total income. The calculation is as under: Loss on trading in shares ₹ 2,12,59,843/- Profit on arbitrage ₹ 24,02,860/- Loss on trading in share consider As disallowable under Explanation to Section 73 ₹ 1,88,56,983/- 7. That the company is now offering the additional income o .....

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