TMI Blog2018 (1) TMI 657X X X X Extracts X X X X X X X X Extracts X X X X ..... more than the loss. Therefore, the business is itself arbitrage and the same cannot be treated as two separate business of trading in shares and dealing in F&O. Arbitrage /Jobbing as a composite activity is covered under section 43(5)(c) of the Act. Hence, explanation to section 73 of the Act is not applicable as the Assessee is not carrying on the business of purchase and sale of share but business of arbitrage. Disallowance u/s.14A - Held that:- As found from record that most of the shares held by assessee were stock in trade. In view of the settled judicial pronouncements, we direct the AO to exclude investment in shares held as stock in trade out of average investment while computing disallowance under Rule 8D(2)(iii) of the IT Act. We direct accordingly. - ITA No.2751/Mum/2014 And ITA No.3761/Mum/2014 - - - Dated:- 19-12-2017 - SHRI R.C.SHARMA, AM AND SHRI PAWAN SINGH, JM For The Assessee : Shri J.D. Mistry with Shri Madhur Agrawal For The Revenue : Mrs. Vidisha Kalra ORDER PER R.C.SHARMA (A.M): These are the cross appeals filed by the assessee and Revenue against the order of CIT(A) for the assessment year 2009-2010. 2. Following grounds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance u/s.14A of the IT Act. 6. By the impugned order CIT(A) deleted the disallowance made on account of mark to market loss after observing as under:- I have carefully considered the facts of the case, observation of the Assessing Officer and the contention of the appellant. Similar issue arose for my consideration of my consideration and my predecessor in earlier year, wherein he held that the loss claimed by the appellant is not a contingent liability (Appeal No. IT/CIT(A)-8/Cir.4/158/10-11, dated 04.05.2011 - A.Y2008-09). The facts remaining the same, this ground of appeal is accordingly decided in favour of the appellant following my predecessor s decision in A.Y.2008-09. This ground of appeal is allowed. The Income Tax Appellate Tribunal, C-Bench (Special Bench) , Mumbai in the case of DCIT (IT) 1(1) vs. Bank of Baharin Kuwait I. T.A No.4404 1883/Mum/2004 dated 13.08.2010 has held that similar loss on Forward Foreign Exchange Contract as on the balance sheet date is an allowable loss. In view of the above discussion, the claim of the appellant on account of loss on valuation of derivative contracts are also allowable for the following reasons:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss of arbitrage/jobbing activity. The income of the assessee from the arbitrage/jobbing activity is as under - loss from delivery-based arbitrage/jobbing (7,75,30,988) loss from share arbitrage/jobbing transaction (40,07,550) profit from arbitrage/jobbing in F O Segment 11,49,69,625 Net arbitrage profit 3,74,38,637 10. In the return of income filed by the assessee for the assessment year 2009-10, the assessee has disclosed income from capital gains of ₹ 81,34,282/-, dividend income of ₹ 54,33,723 and loss from business of Rs. (7,72,45,569). 11. The Assessing Officer in the assessment order dated 31stDecember, 2012 held that the loss of ₹ 7.75 crores from delivery-based share trading activity would be regarded as speculation loss relying on Explanation to section 73 of the Income-tax Act, 1961 ( the Act ). The Assessing Officer also held that the said loss is not arising from arbitrage/jobbing transactions as certain scripts which are traded in cash segment are not traded in F O segment and vice v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usion 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. j. In case of ITO Vs. Arena textoiles 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 hit by sec. 43(5) which deals about speculative transactions. The transactions done by delivery as well as 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 IT Act is applicable. Thus, from the above its evident that, arbitrage / jobbing transactions are non-speculative transactions and sec.73 is not applicable to the case of the appellant. 5.3.9. Further it is seen that explanations to section 73 provides that, if the gross total income consists mainly of income which is chargeable under the heads of interest on securities, income from house property, capital gains and income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o valuation of shares at cost or net realizable value, whichever is lower. Net realizable value depends on the market and in case of heavy fall in Sensex of shares a company is bound to value its stock-in-trade of shares at a lower value and thereby suffer losses. The issue is whether the aforesaid loss is to be termed as 'Speculative' over which the company does not have any control. No company can deliberately incur loss in the shares, which occurs due to valuation and to adjust the same against profits of the company from the other business. Then, there appears to be no valid reason to treat such loss as speculative. Further, the stocks are purchased for jobbing transactions only and as there was no opportunity during the year to sale the stocks at profit, the appellant has thus not sold the stocks. Also, in the case of Aman Portfolio (P) Ltd vs DY. CIT, 92 ITD 324 (Delhi) , 92 TTJ Delhi 351, it has been held that loss arising due to valuation of stock in trade cannot be held as speculation loss. Thus, from the above it is evident that the stock valuation loss also cannot be treated as speculative in nature. I find that the AO relied on the decision of the Hon'ble Mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s concerned. It is further held that, once the transactions done by delivery as well as the transactions of derivatives are not hit by Section 43(5) of the Act, the aggregation of the share trading loss and profit from derivative transactions should be done before the application of explanation to section 73 of the Income Tax Act is applicable. As is evident from the extant provisions of the section 43(5) of the Act, that none of the transactions are speculative in nature and that they are all hedge transactions between the two segments. If at all one segment of the transaction is to be considered as speculative then, the opposite segment transaction should also be considered as a speculative, here again the loss in the cash segment need to be allowed as a set 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 AY. 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adras High Court noticed, rather dramatically, that - .. 'Derivatives are time bombs and financial weapons of mass destruction' said Warren Buffett, one of the world's greatest investors, who overtook Microsoft Maestro in 2008 to become the richest man in the world and who is known as the 'Sage of Omaha or Oracle of Omaha'. Derivatives, according to him, can push companies on to a spiral that can lead to a corporate melt down .... The High Court then, after examining the nature and characteristics of derivatives transactions, observed that: 5. What are these 'derivatives' which have gained such a great deal of notoriety? In simple terms, derivatives are financial instruments whose values depend on the value of other underlying financial instruments. The International Accounting Standard (IAS) 39, defines derivatives as follows: A derivative 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 requir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... context in which the word has been used and that will be giving effect to the opening sentence in the definition section, namely, unless there is anything repugnant in the subject or context. In view of this qualification, the court has not only to look at the words but also to look at the context, the collocation and the object of such words relating to such matter and interpret the meaning intended to be conveyed by the use of the words under the circumstances. Similarly, in N.K. Jain and Ors. vs C.K. Shah and Ors. AIR 1991 SG 1289, it was held that: 4. The subject matter and the context in which a particular word is used are of great Importance and It is axiomatic that the object underlying the Act must always be kept in view in construing the context in which a particular word is used ...... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t with the issue threadbare and reached to the conclusion that Explanation to Section 73 is not applicable to the facts and circumstances of the present case in so far as in the present case the assessee comes within the exclusion provided in the said Explanation, the income of the assessee under the head 'income from capital gains' and 'income from other sources' is more than income under the head 'income from business and profession' and, therefore, the Explanation to section 73 is not applicable. The business carried on by the assessee is jobbing/arbitrage. Jobbing/arbitrage is a composite activity of buying in one segment (cash) and selling in another segment (F O) and assessee will earn income in once segment and incur loss in another segment, such that the income would always be more than the loss. Therefore, the business is itself arbitrage and the same cannot be treated as two separate business of trading in shares and dealing in F O. Arbitrage /Jobbing as a composite activity is covered under section 43(5)(c) of the Act. Hence, explanation to section 73 of the Act is not applicable as the Assessee is not carrying on the business of purchase and sale ..... X X X X Extracts X X X X X X X X Extracts X X X X
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