KEDIA SHARES & STOCKS BROKERS LTD, MUMBAI V. JT CIT (OSD) 4(3), MUMBAI

ITA 4033/MUM/2013

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 1368 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 10 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-04-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 29-02-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 20-05-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: B S BIST
• Keywords: Business income; Rectification of order; Transactions in derivatives; Speculation loss
• Section: 143(3); 43(5); 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES A MUMBAI BEFORE SHRI MAHAVIR SINGH (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER) ITA NO. 4033/MUM/2013 ASSESSMENT YEAR: 2009-10 M/S. KEDIA SHARES & STOCKS BROKERS LTD. VS. JCIT (OSD) 4(3) 418/508 COMMERCE HOUSE, 140 AAYAKAR BHAVAN NAGAINDAS MASTER RD. MUMBAI 400020 MUMBAI - 400023 PAN NO. AAACK2528E (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI AJAY SINGH, AR REVENUE BY: SHRI B.S. BIST, DR DATE OF HEARING : 12/0 1/2017 DATE OF PRONOUNCEMENT: 07/04/2017 ORDER PER N.K. PRADHAN, AM THIS IS AN APPEAL FILED BY THE ASSESSEE. THE RELEVA NT ASSESSMENT YEAR IS 2009-10. THE APPEAL IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER (APPEALS) 8, MUMBAI AND ARISES OUT O F ORDER U/S 143(3) OF THE INCOME TAX ACT, 1961 (THE ACT). 2. THE GROUNDS OF APPEAL FILED BY THE ASSESSEE READ AS UNDER:- 1 . THE LEARNED CIT(A) ERRED IN LAW IN SUSTAINING THE A CTION OF THE LEARNED AO IN TREATING LOSS ARISING FROM SHARE ARBITRAGE / HEDGING ACTIVITY AS SPECULATIVE LOSS INSTEAD OF BUSINESS LOSS AS CL AIMED AND THEREBY NOT ALLOWING SET OFF OF LOSS OF RS. 2,10,23,490/- AROSE IN CASH SEGMENT AGAINST CORRESPONDING INCOME RS. 2,37,02,891/- AROS E IN FUTURE & OPTIONS ACTIVITY IN DERIVATIVE MARKET. ITA NO. 4033/MUM/2013 2 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 ARISIN G FROM REVERSE POSITION SIMULTANEOUSLY TAKEN IN DERIVATIVE SEGMEN T (HAVING IDENTICAL UNDERLYING SHARES) (I) IN VIEW OF EXCEPTION CARVED OUT IN S. 43(5)(B) OF THE INCOME TAX ACT READ WITH EXPLANATION 2 TO SECTION 28 OF THE ACT, A SSESSEE BEING A DEALER IN SHARES. (II) IN VIEW OF EXCEPTION CARVED OUT IN SECTION 43 (5)(C) OF THE INCOME TAX ACT READ WITH EXPLANATION 2 TO SECTION 28 OF TH E ACT, ASSESSEE ALSO BEING A MEMBER OF THE STOCK EXCHANGE. 1.2 THE LEARNED CIT(A) ERRED IN SUSTAINING THE ACTI ON OF THE AO IN TREATING THE LOSS ARISING IN CASH SEGMENT AS SPECULATIVE LOSS BY INVOKING EXPLANATION TO SECTION 73 ON THE FACE OF ESTABLISHE D FACTS THAT SUCH TRANSACTIONS IN CASH SEGMENT IS INTEGRAL PART OF CO MPOSITE ARBITRAGE / HEDGING MECHANISM AND NOT MERELY PURCHASE / SALE OF SHARES SIMPLICITOR ON STAND ALONE BASIS. 1.3 HE OUGHT TO HAVE APPRECIATED THAT EXPLANATION T O SECTION 73 HAS NO APPLICATION IN THE FACTS OF THE CASE IN VIEW OF SPE CIFIC EXCEPTIONS PROVIDED TO CERTAIN CLASS OF TRANSACTIONS NAMELY HE DGING, JOBBING, ARBITRAGE, DERIVATIVE TRANSACTIONS IN PROVISO TO SE CTION 43(5) READ WITH EXPLANATION 2 TO SECTION 28 OF THE ACT. 1.4 HE OUGHT TO HAVE FURTHER APPRECIATED THE DISTIN GUISHING FEATURES OF CASH SEGMENT TRANSACTIONS WHICH ARE NOT STAND ALONE TRANSACTIONS OF PURCHASE AND SALE OF SHARES IN THE COURSES OF REGUL AR DEALINGS TO BE COVERED WITHIN THE AMBIT OF EXPLANATION TO SECTION 73 BUT ARE ADJUNCT OF SIMULTANEOUS OPPOSITE TRANSACTIONS IN DERIVATIVE SEGMENT AND THUS INSEPARABLE IN THE BUNDLE OF ARBITRAGE TRANSACTIONS FALLING IN THE SPECIFIC EXCEPTION CLAUSE TO SECTION 43(5). 1.5 THE LEARNED CIT(A) ERRED IN NOT APPLYING EXCEPT IONS PROVIDED IN 43(5)(B) / 43(5)(C) TO ONE LEG OF TRANSACTION NAMEL Y CASH SEGMENT WHILE APPLYING EXCEPTION 43(5)(D) TO OTHER LEG OF T RANSACTION 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 E XPLANATION 2 TO SECTION 28. HE OUGHT TO HAVE APPRECIATED THAT NOTWI THSTANDING THAT THE EXPLANATION TO SECTION 73 DO NOT DISTINGUISH BE TWEEN DELIVERY AND NON-DELIVERY SHARE TRANSACTIONS, THE BENEFIT OF EXC EPTIONS CARVED OUT ITA NO. 4033/MUM/2013 3 IN SECTION 43(5) APPLICABLE TO EVEN OTHERWISE SINGU LARLY SPECULATIVE NON-DELIVERY TRANSACTIONS DO APPLY TO DELIVERY BASE D SHARE TRANSACTIONS TOO. 1.7 NOTWITHSTANDING AND WITHOUT PREJUDICE TO ABOVE, THE LEARNED CIT(A) OUGHT TO HAVE APPRECIATED THAT BOTH; DELIVERY BASED SHARE TRANSACTIONS IN CASH SEGMENT AS WELL AS DERIVATIVE TRANSACTIONS ARE EXCLUDED FROM THE DEFINITION OF SPECULATIVE TRANSACTION UNDER SEC TION 43(5) OF THE ACT AND THEREFORE AGGREGATION OF PURPORTED SHARE TRAD ING LOSS AND PROFIT FROM DERIVATIVE TRANSACTIONS SHOULD BE DONE BEFORE DEEMING FICTION IN EXPLANATION TO SECTION 73 OF THE ACT COMES INTO PLA Y. 2. THE LEARNED AO ERRED IN LAW IN NOT ADJUSTING REM AINING NON SPECULATIVE DERIVATIVE INCOME RS. 8,76,699/- [RS. 2 45.79 LACS LESS RS. 237.02 LACS (NON ARBITRAGE DERIVATIVE PORTION)] AGA INST LOSS ARISING IN DELIVERY BASED SHARE TRANSACTIONS (NON ARBITRAGE PO RTION IN CASH SEGMENT); BOTH BEING NON SPECULATIVE U/S 43(5) BEFO RE RESORTING TO EXPLANATION TO SECTION 73 OF THE ACT [ON REMAINING LOSS ARISING IN DELIVERY BASED SHARE TRANSACTIONS IN CASH SEGMENT]. 3. THE LEARNED AO FURTHER ERRED IN LAW IN NOT ADJUS TING IMPUGNED ARBITRAGE INCOME RS. 26,79,401/- (NON SPECULATIVE) AGAINST LOSS ARISING IN DELIVERY BASED SHARE TRANSACTIONS (NON A RBITRAGE PORTION IN CASH SEGMENT); BOTH BEING NON SPECULATIVE U/S 43(5) BEFORE RESORTING TO EXPLANATION TO SECTION 73 OF THE ACT [ON REMAINI NG LOSS ARISING IN DELIVERY BASED SHARE TRANSACTIONS IN CASH SEGMENT]. 4. THE LEARNED CIT(A) ERRED IN NOT GIVING ANY FINDI NGS ON THE GRIEVANCE OF THE ASSESSEE THAT WHILE DETERMINING ASSESSED INC OME, THE LEARNED A.O. HAS TAKEN RETURNED BUSINESS LOSS AT RS. 1,21,6 0,460/- PURPORTEDLY OUT OF INADVERTENT ERROR INSTEAD OF CORRECT FIGURE OF RS. 1,32,24,729/- WITHOUT ASSIGNING ANY REASON THEREOF. 5. THE APPELLANT SUBMITS THAT THE ABOVE GROUNDS AND SUB GROUNDS OF APPEAL ARE ALTERNATIVE, INDEPENDENT AND WITHOUT PRE JUDICE TO ONE ANOTHER. 3. BRIEFLY STATED, THE FACTS ARE THAT THE ASSESSEE I.E. M/S. KEDIA SHARES & STOCKS BROKERS LTD. (KSSBL) FILED ITS RETU RN OF INCOME FOR THE A.Y. 2009-10 ON 29.09.2009 DECLARING TOTAL LOSS OF RS. 13,224,729/-. THE ACTIVITIES OF THE ASSESSEE-COMPAN Y CONSISTS OF (I) TRADING IN SHARES AND DERIVATIVES (ARBITRAGE AND TR ADING), (II) BROKERAGE AND (III) DEPOSITORY SERVICES. THE ASSESS ING OFFICER (AO) ITA NO. 4033/MUM/2013 4 NOTICED THAT KSSBL HAS SHOWN LOSS ON SECURITY TRADI NG ACTIVITIES OF RS. 42,993,437/-. THIS LOSS HAS BEEN SET OFF AGAINST TH E BUSINESS INCOME WHICH HAS RESULTED IN BUSINESS LOSS OF RS. 13,224,7 29/-. THE AO CAME TO A FINDING THAT KSSBL IS HIT BY EXPLANATION TO SE CTION 73 OF THE ACT. HE ASKED THE ASSESSEE TO EXPLAIN WHY THE EXPLANATIO N TO SECTION 73 SHOULD NOT BE INVOKED AND WHY THE LOSS IN SHARE TRA DING SHOULD NOT BE TREATED AS SPECULATION LOSS. IN RESPONSE TO IT, KSSBL FILED A REVISED COMPUTATION OF INCOME ON 15.11.2011 SHOWING TOTAL I NCOME OF RS. 56,19,057/-. THE A.O. HAS PRODUCED THE EXPLANATION FILED BY THE ASSESSEE AT PAGE 2 9 OF THE ASSESSMENT ORDER. THE AO REJECTED THE EXPLANATION OF THE ASSESSEE ON THE REASONS THAT (I) THE DERIVATIVE TRANSACTION CANNOT BE COVERED UNDER EXPLANATION TO SECTION 73 AS THERE IS A SPECIFIC PROVISION IN SECTION 43(5) WHIC H HAS CATEGORISED THE DERIVATIVE TRANSACTION AS NON-SPECULATIVE, (II) THE LOSS ON PROFIT IN DERIVATIVE TRANSACTION CARRIED OUT IN RECOGNISED ST OCK EXCHANGES HAS TO BE TREATED AS NON-SPECULATIVE IN NATURE, (III) B Y 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 NON- SPECULATIVE TRANSACTION BY VIRTUE OF SECTION 43(5) AND TRANSACTION IN TRADING OF SHARES (BARRING THE EXCEPTIONS SPECIFIED ) BECOMES A SPECULATIVE TRANSACTIONS, (IV) ANY LOSS OR PROFIT I N SHARE TRADING IS REALISED ONLY ON THE SALE OF THE SHARE IN THE CASH MARKET. SIMILARLY, THE LOSS OR PROFIT IN THE F&O MARKET IS REALISED ONLY W HEN THE F&O ARE SETTLED,(V) SECTION 43(5) DEALS WITH THOSE TRANSACT IONS WHICH ARE SETTLED OTHERWISE THAN ACTUAL DELIVERY. TRANSACTION OF ARBITRAGE BETWEEN THE CASH MARKET AND F&O MARKET CANNOT BE CO VERED U/S 43(5), (VI) EVEN WHEN THE SCRIPS ARE SOLD IN THE F& O MARKET ON SO- CALLED HEDGING AGAINST THE SHARES ACQUIRED IN CASH MARKET, THE PROFIT ITA NO. 4033/MUM/2013 5 OR LOSS ON SUCH SALE WOULD BE BOOKED AS NON-SPECULA TIVE 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 EX PLANATION TO SECTION 73 WOULD BE TREATED AS SPECULATIVE LOSS, (VII) EVEN IF THE ASSESSEE HAD BEEN ABLE TO PROVE THAT IT INDULGED IN ARBITRAGE, T HE ASSESSEE BEING A COMPANY, THE PROVISIONS OF SECTION 73 WOULD OVERRID E THE PROVISIONS OF SECTION 43(5) OF THE ACT. AFTER ADDING RS. 3,04,865/- ALLOCATED AS PROPORTIO NATE EXPENSES ON SHARE TRADING, THE AO DISALLOWED THE SHARE TRADI NG LOSS OF RS. 4,32,98,302/-. THE AO STARTED WITH BUSINESS LOSS OF RS. 1,21,60,460/- AND ARRIVED AT BUSINESS INCOME OF RS.3,11,37,840/- 4. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE F ILED AN APPEAL BEFORE THE LEARNED CIT(A). WE FIND THAT THE SUBMISS IONS MADE BY THE ASSESSEE HAVE BEEN EXTRACTED BY THE LEARNED CIT(A) AT PAGE 5 11OF HIS ORDER DATED 05.03.2013. THE LEARNED CIT(A) REMA NDED THE MATTER CONCERNING PURCHASE AND SALE OF SHARES IN THE TWO S EGMENTS I.E. CASH AND F&O TO THE AO VIDE HIS OFFICE LETTER DATED 12.0 4.2012. AFTER RECEIPT OF THE REMAND REPORT FROM THE AO, THE LEARN ED 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 FIN D THAT THE LEARNED CIT(A) OBSERVED THAT (I) THE ASSESSEES MAIN INCOME IS FROM SHARE TRADING AND, THEREFORE, IS HIT BY EXPLANATION TO SE CTION 73 OF THE ACT, (II) THE TRANSACTIONS IN THE NATURE OF JOBBING OR A RBITRAGE AND IN DERIVATIVE SEGMENTS ARE NOT DEEMED TO BE SPECULATIV E TRANSACTIONS AS PROVIDED IN THE PROVISIONS (C) & (D) OF SECTION 43( 5) OF THE ACT AND THE SAME HAS BEEN SUPPORTED BY THE DECISION IN THE CASE OF DCIT VS. SSSKI INVESTORS (P) LTD. 113 TTJ 511 AND RKB SECURITIES (P) LTD . VS. ITO ITA NO. 4033/MUM/2013 6 118 TTJ 465, (III) SINCE THE ASSESSEES ENTIRE INCO ME IS FROM SHARE TRADING, THE LOSS OR PROFIT EARNED THROUGH THESE TR ANSACTIONS 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 TRAD ING WITH THE PROFITS EARNED THROUGH F&O TRANSACTIONS IN DERIVATIVES AS T HESE ARE NON SPECULATIVE IN NATURE. THUS THE LEARNED CIT(A) DISM ISSED THE APPEAL FILED BY THE ASSESSEE. 5. BEFORE US, THE LEARNED COUNSEL OF THE ASSESSEE S UBMITS A PAPER BOOK CONTAINING (I) RETURN OF INCOME ALONG WITH TAX COMPUTATION FOR A.Y. 2009-10, BALANCE SHEET AND PROFIT & LOSS ACCOU NT, (II) LETTER DATED 15.11.2011 FILED BEFORE THE AO SUBMITTING THE DETAI LS, (III) REVISED STATEMENT OF TOTAL INCOME, (IV) LETTER DATED 08.12. 2011 FILED BEFORE THE AO ALONG WITH DETAILS OF ARBITRAGE WORKING, (V) RECTIFICATION OF MISTAKE APPLICATION FILED BEFORE THE AO AND (VI) RE MAND REPORT DATED 01.09.2012. RELIANCE WAS PLACED BY HIM ON THE DECIS ION IN THE CASE OF CIT VS. 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 REL IED ON BY THE LEARNED COUNSEL OF THE ASSESSEE. IN BALJIT SECURITIES (P) LTD. (SUPRA), THE ASSESSEE, BASICALLY IS A SHARE BROKER. IT DEALS IN BUYING AND SELLING ITA NO. 4033/MUM/2013 7 OF SHARES OF ITSELF. THE ASSESSEE IS ALSO DEALING I N DERIVATIVES. DEALING IN DERIVATIVES HAS BEEN EXCLUDED FROM THE AMBIT OF SPECULATIVE TRANSACTIONS W.E.F. A.Y. 2006-07. THE ISSUE BEFORE THE HON'BLE HIGH COURT WAS WITH REGARD TO THE A.Y. 2005-06. THE QUES TION AROSE WHETHER THE ASSESSEE WAS ENTITLED TO SET OFF THE LO SS ARISING OUT OF PURCHASE AND SALE OF SHARES. THE HON'BLE HIGH COURT HELD THAT THE ASSESSEE, IN THE PRESENT CASE, PRINCIPALLY IS A SHA RE 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 TRANSAC TION CARRIED OUT BY THE ASSESSEE, INDICATED ABOVE, WAS WITHIN THE UMBRE LLA OF SPECULATIVE TRANSACTION. THERE WAS, AS SUCH, NO BAR IN SETTING OFF THE LOSS ARISING OUT OF DERIVATIVES FROM THE INCOME ARISING OUT OF B UYING AND SELLING OF SHARES. IN BALJIT SECURITIES (P) LTD. (SUPRA) THE TRIBUNAL HAS FOLLOWED THE ABOVE JUDGEMENT OF THE HIGH COURT. IN M/S. J.M. FINANCIAL SERVICES LTD. (SUPRA) , THE ASSESSEE HAD CARRIED OUT CASH FUTURE ARBITRAGE AND EARNED A PROF IT FROM THE SAID ACTIVITY. IT SUBMITTED BEFORE THE AO THAT THE ACTIV ITY OF BUYING AND SELLING OF SHARES IN CASH SEGMENT AND FUTURE SEGMEN T WAS A COMPOSITE ACTIVITY CARRIED OUT BY THE ASSESSEE. HOWEVER, THE AO WAS NOT CONVINCED WITH THE SUBMISSION OF THE ASSESSEE AND H ELD THAT FUTURE AND OPTION TRANSACTIONS WERE NON-SPECULATIVE AS PER SECTION 43(5) OF THE ACT, WHEREAS LOSS ON PURCHASE AND SALE OF SHARE S WAS TO BE CONSIDERED AS SPECULATION LOSS AS PER EXPLANATION T O 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 ITA NO. 4033/MUM/2013 8 DELHI HIGH COURT HAS HELD THAT IN TERMS OF EXPLANAT ION TO SECTION 73, BY ALL ACCOUNTS, DERIVATIVES ARE BASED ON STOCKS AN D SHARES WHICH FALL SQUARELY WITHIN EXPLANATION TO SECTION 73 AND, THER EFORE, LOSS FROM SALE PURCHASE OF SUCH DERIVATIVES WOULD BE SPECUL ATIVE LOSS. HENCE BOTH THE TRANSACTIONS I.E. THE TRANSACTIONS IN THE DERIVATIVE AND CASH SEGMENT CAN BE TREATED AS SPECULATIVE TRANSACTIONS AS PER EXPLANATION TO SECTION 73 AND THEREFORE THE PROFIT OR LOSS AGAINST BOTH THE SEGMENTS CAN BE ADJUSTED OR SET OFF AGAINS T EACH OTHER. 7.1 NOW WE DEAL WITH GROUND NO 4 OF THE APPEAL. WE FIND THAT THE ASSESSEE HAS SHOWN TOTAL LOSS OF RS. 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. HOW EVER THE AO HAS TAKEN THE BUSINESS LOSS AT RS. 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 COMMON ISSUE. WE BEGIN WI TH THE LEGAL UNDERPINNINGS OF THE ISSUE FOR CONSIDERATION. SECTI ON 73 OF THE ACT PROVIDES THAT ANY LOSS, COMPUTED IN RESPECT OF A SP ECULATION BUSINESS CARRIED ON BY THE ASSESSEE, CANNOT BE SET OFF EXCEP T AGAINST PROFITS OF ANOTHER SPECULATION BUSINESS. EXPLANATION 2 TO SECT ION 28 PROVIDES THAT WHERE SPECULATIVE TRANSACTIONS CARRIED ON BY A N ASSESSEE ARE OF SUCH A NATURE AS TO CONSTITUTE A BUSINESS, THE BUSI NESS IS DEEMED TO BE DISTINCT AND SEPARATE FROM ANY OTHER BUSINESS, AND IS REFERRED TO AS SPECULATION BUSINESS FOR THE PURPOSES OF THE ACT. SECTION 43(5) DEFINES THE TERM SPECULATIVE TRANSA CTION, AS A TRANSACTION IN WHICH A CONTRACT FOR THE PURCHASE OR SALE OF ANY ITA NO. 4033/MUM/2013 9 COMMODITY, INCLUDING STOCKS AND SHARES, IS PERIODIC ALLY OR ULTIMATELY SETTLED OTHERWISE THAN BY THE ACTUAL DELIVERY OR TR ANSFER 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 PROVIDES THAT AN ELIGIBLE TRANSACTION IN RESPECT OF TRADING IN DERIVATIVES REFERRED TO IN SECTION 2(AC) OF THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 CARRIED OUT ON A RECOGNISED STOCK EXCHANGE SHALL BE DEEMED NOT TO BE A SPECULATIVE TRANSACTION . THEREFORE, DERIVATIVES TRANSACTIONS SATISFYING THE NEEDS OF BEING TREATED AS ELIGIBLE TRANSACTIONS ARE NOT RE GARDED AS SPECULATIVE TRANSACTIONS FOR THE PURPOSES OF COMPUTING BUSINESS PROFITS U/S 28. THE EXPLANATION TO SECTION 73 PROVIDES FOR A DEEMI NG FICTION WHERE UNDER CERTAIN BUSINESS CARRIED ON BY A COMPAN Y IS DEEMED TO BE A SPECULATION BUSINESS. THIS FICTION OF EXPLANAT ION TO SECTION 73 APPLIES ONLY TO A COMPANY. IF ANY PART OF THE BUSIN ESS OF THE COMPANY CONSISTS IN THE PURCHASE AND SALE OF SHARES OF OTHE R COMPANIES, SUCH COMPANY IS DEEMED TO BE CARRYING ON A SPECULATION B USINESS TO THE EXTENT TO WHICH THE BUSINESS CONSISTS OF THE PURCHA SE AND SALE OF SUCH SHARES. CERTAIN EXCEPTIONS TO THIS FICTION ARE PROV IDED IN THIS REGARD. 7.3 DERIVATIVE IS AN INSTRUMENT WHOSE VALUE DEPEN DS UPON ITS UNDERLYING CASH OR PHYSICAL ASSET. HENCE IT MEANS T HAT THE VALUE IS DERIVED FROM THE VALUE OF THE UNDERLYING ASSETS LIK E FOREIGN EXCHANGE, CURRENCY, SECURITIES AND COMMODITIES. DERIVATIVES I NCLUDE FORWARD, FUTURE AND OPTION CONTRACTS THAT ARE OF A PRE-DETER MINED FIXED DURATION, LINKED FOR THE PURPOSE OF CONTRACT FULFIL MENT, TO THE SPECIFIED VALUE OF REAL OR FINANCIAL ASSET OR TO IN DEX OF SECURITIES. ITA NO. 4033/MUM/2013 10 7.4 AS PER THE PROFIT & LOSS ACCOUNT OF KSSBL FOR T HE YEAR ENDED 31.03.2009, THE INCOME COMPRISES OF THE FOLLOWING: BROKERAGE INCOME RS. 10,922,419.89 PROFIT ON SECURITY TRADING ACTIVITIES RS. (42,993,437.98) PROFIT ON DERIVATIVE TRADING RS. 24,579,590.40 PROFIT ON MUTUAL FUND RS. 431,575.51 CAPITAL GAIN DIVIDEND RECEIVED RS. 2,552,678.37 INTEREST RECEIVED RS. 3,032,715.45 DEPOSITORY SERVICE CHARGES RS. 1,454,618.65 OTHER INCOME RS. 696,703.81 7.5 THE HON'BLE CALCUTTA HIGH COURT IN THE CASE OF CIT VS. EUREKA STOCK & SHARE BROKING SERVICES LTD. (2016) 74 TAXMANN.COM 114 (CAL) HAS HELD THAT WHERE ASSESSEE INCURRED LOSS ON ACCOU NT OF SALE AND PURCHASE OF SHARES, WHICH HAD NO CONNECTION WITH IT S BUSINESS AS A SHARE BROKER, SAID LOSS WOULD BE TREATED AS A SPECU LATION LOSS WHICH COULD NOT BE SET OFF AGAINST BROKERAGE INCOME EARNE D AS SHARE BROKER. IN PRIYASHA MEVEN FINANCE LTD. VS. ITO (2008) 24 SOT 422 (MUM), THE ASSESSEE WAS A SHARE BROKER HAVING BROKE RAGE INCOME AND WAS ALSO TRADING IN SHARES IN ITS 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 TRA DING IN SHARES WAS CONCERNED, IT WAS A SPECULATIVE BUSINESS AND TREATE D LOSS SUFFERED FROM THIS ACTIVITY AS A SPECULATIVE LOSS AND ACCORD INGLY, DID NOT ALLOW SET OFF OF LOSS IN QUESTION FROM REGULAR BUSINESS I NCOME OF THE ASSESSEE. THE COMMISSIONER (APPEALS) FOLLOWING THE JUDGEMENT OF THE HON'BLE CALCUTTA HIGH COURT IN CIT VS. ARVIND INVESTMENT LTD . (1991) 192 ITR 365 UPHELD THE ORDER OF THE A.O. ON APPEAL, THE TRIBUNAL UPHELD THE ORDER OF THE LEARNED CIT(A). ITA NO. 4033/MUM/2013 11 IN C.D. EQUISEARCH (P) LTD. VS. DCIT (2015) 152 ITD 652(KOL.), IT HAS BEEN HELD THAT WHERE ASSESSEE, A STOCK BROKER HAVING TRANSACTIONS IN DIFFERENT SEGMENTS ON ITS OWN ACCOU NT AS WELL AS CLIENTS ACCOUNT, CLAIMED SET OFF OF LOSS IN SHARE TRADING BUSINESS AGAINST OTHER BUSINESS INCOME, IN ABSENCE OF ANY MA TERIAL ON RECORD SHOWING THAT ASSESSEE WAS DOING AN INTEGRATED BUSIN ESS 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 CONCERN ED HERE ABOUT THE ADJUSTMENT BETWEEN LOSS ON SECURITY TRADING ACT IVITY AND PROFIT ON DERIVATIVE TRADING BY KSSBL. WE TURN TO THE SUBMISS ION FILED ON 15.11.2011 ALONG WITH REVISED COMPUTATION OF INCOME BY KSSBL BEFORE THE AO. THE SAME IS PRODUCED BELOW: 1. THAT THE COMPANY HAS FILED ITS RETURN OF INCOME ON 29 TH SEPTEMBER, 2009. THE RETURNED INCOME WAS RS. NIL. 2. THAT THE ACTIVITIES OF THE COMPANY CONSISTS OF: TRADING IN SHARES AND DERIVATIVES (ARBITRAGE & TRAD ING) BROKERAGE DEPOSITORY SERVICES THE COMPANY HAS ALSO EARNED INCOME FROM DIVIDEND AN D INTEREST. 3. THAT DURING THE YEAR THE ACTIVITIES OF TRADING IN S HARES AND DERIVATIVES HAS RESULTED IN NET LOSS, THE DETAILS OF WHICH ARE AS UNDER: AMOUNT (RS) LOSS ON SECURITY TRADING ACTIVITY 4,29,93,438/ - PROFIT ON DERIVATIVE TRADING 2,45,79,590/ - A STATEMENT OF BREAK-UP OF SECURITY TRADING ACTIVIT Y INCLUDING ARBITRAGE IS ENCLOSED HEREWITH. ITA NO. 4033/MUM/2013 12 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 D EEMED 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 FILED BY THE COMPANY, THE COMPANY HAS ADJUSTED THE NET LOSS ON DEALING IN SHARES AND DERIVATIVES AGAINST OTHER INCOME AND THE BALANCE AMOUNT IS CLAIMED TO BE CARRIED FORWARD . 6. THAT THE COMPANY HAS NOW PREPARED REVISED COMPUTATI ON OF INCOME, A COPY WHEREOF IS ENCLOSED HEREWITH. IN THE REVISED COMPUTATION OF INCOME THE COMPANY HAS BIFURCATED SHARE TRADING AND DERIVATIVE TRADING INT O TWO PART VIZ. ARBITRAGE AND TRADING. I THE LOSS ON SHARE TRADING (TOTAL AMOUNT RS. 4,29, 93,438/-) IS BIFURCATED AS UNDER: LOSS ON ARBITRAGE RS. 2,10,23,490/- LOSS ON TRADING RS. 2,19,69,948/- 4,29,93,438/- THE PROFIT ON DERIVATIVES (TOTAL AMOUNT RS. 2,45,79 ,590/-) IS BIFURCATED AS UNDER: LOSS ON ARBITRAGE RS. 2,37,02,891/- LOSS ON TRADING RS. 8,76,699/- 2,45,79,590/- II THUS THE ARBITRAGE HAS RESULTED IN PROFIT OF RS. 26,79,401/- AS PER THE WORKING GIVEN HEREUNDER: DERIVATIVE PROFIT ON ARBITRAGE RS. 2,37,02,891/- LESS: LOSS (CASH MARKET) ON ARBITRAGE RS. 2,10, 23,490/- PROFIT ON ARBITRAGE RS. 26,79,401/- LESS: PROPORTIONATE EXPENSES (AS PER SEPARATE WORKING SHEET) RS. 2,76,541/- NET PROFIT ON ARBITRAGE RS. 24,02,860/- III THE LOSS ON SHARE TRADING HAS BEEN COMPUTED AS UNDER: LOSS ON TRADING (CASH MARKET) RS. 2,19,69,948/- PROFIT ON DERIVATIVE RS. 87,669/- ITA NO. 4033/MUM/2013 13 LESS ON TRADING RS. 2,10,93,240/- PROPORTIONATE EXPENSES (AS PER SEPARATE WORKING SHEET) RS. 1,6 6,594/- NET LOSS ON TRADING IN SHARES RS. 2,12,59,843/- IV THE PROFIT ON ARBITRAGE AMOUNT TO RS. 24,02,860/ - HAS BEEN ADJUSTED AGAINST LOSS ON SHARE TRADING AND THE REMAINING AMOUNT OF LOSS ON S HARE TRADING HAS BEEN DISALLOWED UNDER EXPLANATION TO SECTION 73 IN THE R EVISED STATEMENT OF TOTAL INCOME. THE CALCULATION IS AS UNDER: LOSS ON TRADING IN SHARES RS. 2,12,59,843/- PROFIT ON ARBITRAGE RS. 24,02,860/- LOSS ON TRADING IN SHARE CONSIDER AS DISALLOWABLE UNDER EXPLANATION TO SECTION 73 RS. 1,88,56,983/- 7. THAT THE COMPANY IS NOW OFFERING THE ADDITIONAL INC OME OF RS. 1,88,56,982/- AS PER REVISED COMPUTATION OF INCOME ON THE CONDITION THAT NO PENALTY PROCEEDINGS WILL BE INITIATED IN RESPECT THEREOF. WE REQUEST YOUR HONOUR TO TAKE ABOVE ON RECORD AND ACCEPT THE ADDITIONAL INCOME NOW OFFERED AS PER REVISED COMPUTATION OF INCOME. 7.7 IT IS THE CONTENTION OF KSSBL THAT (I) THE ASSESSEE IS ENTITLED TO SET OFF LOSSES ARISING FROM DELIVERY BASED SHARE PU RCHASE / SALE ACTIVITY IN CASH SEGMENT AGAINST CORRESPONDING PR OFITS ARISING FROM REVERSE POSITION SIMULTANEOUSLY TAKEN IN DERIVATIV E SEGMENT (HAVING IDENTICAL UNDERLYING SHARES), (II) SUCH TRANSACTION IN CASH SEGMENT IS INTEGRAL PART OF COMPOSITE ARBITRAGE / HEDGING MECH ANISM AND NOT MERELY PURCHASE / SALE OF SHARES SIMPLICITOR ON STA ND ALONE BASIS AND (III) THAT CASH SEGMENT TRANSACTIONS ARE ADJUNCT OF SIMULTANEOUS OPPOSITE TRANSACTIONS IN DERIVATIVE SEGMENT AND THU S INSEPARABLE IN THE BUNDLE OF ARBITRAGE TRANSACTIONS FALLING IN SPE CIFIC EXCEPTION CLAUSE TO SECTION 43(5). ONE MAY REFER TO 1.1, 1.2 AND 1.4 RESPECTIVELY ITA NO. 4033/MUM/2013 14 OF THE GROUNDS OF APPEAL. AS MENTIONED HERE-IN-ABOV E, DERIVATIVE IS AN INSTRUMENT WHOSE VALUE DEPENDS ON ITS UNDERLYING CASH OR PHYSICAL ASSET. HENCE IT MEANS THAT THE VALUE IS DE RIVED FROM THE VALUE OF THE UNDERLYING ASSET LIKE SECURITIES AND COMMODI TIES. 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), INTEGRAL PART OF COMPOSITE ARBITRAGE / HE DGING MECHANISM (1.2 / GROUNDS OF APPEAL), ADJUNCT OF SIMULTANEOUS OPPOSITE TRANSACTIONS IN DERIVATIVE SEGMENT (1.4 / GROUNDS OF APPEAL). THE ASSESSEE IS DIRECTED TO FILE THE DETAILS ON THE ABO VE BEFORE THE AO. IF AFTER VERIFICATION, THE CONTENTIONS OF THE ASSESSEE IN GROUNDS OF APPEAL 1.1; 1.2 & 1.4 ARE FOUND TO BE CORRECT THEN THE AO IS DIRECTED TO ACCEPT THE ADDITIONAL INCOME OF RS. 1,88,56,982/- OFFERED BY THE ASSESSEE AS PER REVISED COMPUTATION OF INCOME FILED ALONG WITH THE APPLICATION DATED 15.11.2011 BEFORE HIM. IN CASE THE ASSESSEE F AILS TO PROVE THE ABOVE , THEN THE AO IS DIRECTED TO ARRIVE AT BUSINE SS INCOME AS DONE IN HIS ASSESSMENT ORDER AFTER COMPLYING WITH THE DIREC TION IN PARA 7.1 HERE-IN-ABOVE. NEEDLESS TO SAY, THE AO SHALL ALLOW ADEQUATE OPPORTUNITY TO THE ASSESSEE WHILE GIVING EFFECT TO THIS ORDER. 8. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 07/04/2017 SD/- SD/- (MAHAVIR SINGH) ( N.K. PRADHAN) JUDICIAL MEMBER ACCOUNTANT MEMBE R MUMBAI: DATED: 07/04/2017 BISWAJIT, SR. P.S. ITA NO. 4033/MUM/2013 15 COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A) - 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE . BY ORDER, //TRUE COPY// (DY./ASSTT. REGISTRAR) ITAT, MUMBAI