In a landmark decision, the Mumbai Bench of Income Tax Appellate Tribunal (ITAT) has held that provisions of the Income-tax Act cannot be interpreted to the disadvantage of the assessee and segregating transactions in cash and future segment is against the spirit of the taxation law.
"...the peculiarity of the business of the assessee is such that the transactions carried out by the assessee in cash segment and in future segment cannot be segregated. The business of the assessee survives on the ultimate resultant figure arrived at after setting off/adjusting of the profit and loss from each segment. It cannot be said that the transactions in each segment done by the assessee are independent of each other," the ITAT Bench of GS Pannu and Sanjay Garg said in on order dated 28 December 2016.
ITAT was hearing a case related with JM Financial Services Ltd and the Joint Commissioner of I-T for Assessment Year 2009-10. The Assessing Officer (AO) has refused to allow deemed speculation loss of Rs25.96 crore saying that JM Financial has wrongly set off a speculation loss against a non-speculative income. The Commissioner of Income Tax (Appellate) (CIT (A) had asked the AO to delete the addition of this deemed speculation loss.
During the course of assessment proceedings, the AO had asked JM Financial to give a break up of cash and future arbitrage, which was duly furnished by JM Financial. The AO thereafter sought an explanation as to why the loss from cash segment should not be disallowed as per Explanation to section 73.
JM Financial vide letter dated 19 December 2011 submitted that the activity of buying and selling of shares in cash segment and future segment was a composite activity carried out by it. The transactions are so managed that if there is a loss in one segment, there is a profit in the other segment. However, after netting off of the corresponding losses and profits from both the segments, the resultant figure will be a positive figure. That is, in the end, JM Financial will get profits, it added.
JM Financial also filed 20 samples of cash and future arbitrage with the AO. The AO was of the view that futures and option transactions were non-speculative as per section 43(5). However, he considered loss on purchase and sale of shares as speculative loss as per Explanation to section 73 of the Act. After considering direct expenses incurred for the said activity, the AO held the loss of Rs25.96 crore as speculation loss. Being aggrieved by the above order of the AO, JM Financial filed an appeal before the CIT (A).
JM Financial filed additional evidences under Rule 46 A showing that in respect of the sale in derivative segment, an equal number of shares were purchased in cash segment. JM Financial also filed details of corresponding sale in cash segment and purchase in derivative segment.
The AO vide letter dated 16 January 2013 submitted Remand Report and informed the CIT(A) that transactions cannot be considered to be arbitrage transactions as ‘arbitrage’ means buying or selling in the same commodity in different markets to take advantage of price difference. But in cash segment and futures & options (F&O) segment, the scrip of same company will have different character. One is delivery based and another is non-delivery based.
The AO vide letter dated 12 March 2014 stated that there were many instances where purchase and sale were not squared off on the same date. JM Financial submitted that there were instances when a scrip was purchased in the cash segment but the required quantity was not available on futures segment or vice versa. In such circumstances, the purchase was squared off to match the purchase in cash segment against sale in futures segment. It was also submitted that at times, purchase of huge quantity may not be available either in cash segment or futures segment on the same day. Accordingly, purchase/sale had to be done in instalments carried on to the next day/days, JM Financial said.
After considering the submissions of JM Financial, the CIT (A) held that arbitrage transactions were excluded from the definition of speculation as per clause (d) of section 43(5). It also held that the said clause did not refer to delivery or non-delivery based transactions. He further observed that the AO had applied the proviso (d) to section 43(5) only to a part of jobbing/ arbitrage activity i.e. ‘F&O’ segment, and that such selective application was not permissible.
However, this matter then reached the ITAT Bench.
According to the appellate bench, if JM Financial manages its transactions of sale and purchase of shares in the cash segment and in the futures segment as a composite business, the transactions cannot be segregated to arrive at profit or loss in each segment separately.
It noted that JM Financial is in the arbitrage business and purchases shares in one segment and simultaneously sells the same shares in the other segment and when the price parity reduces, the transactions is reversed in both the segments, which is a normal hedging practice. "All the four legs of the transaction have to be consolidated arid then only the profit/loss can be derived which is the essential ingredient of the arbitrage/ jobbing transactions," the Bench observed.
"...certain exceptions have been carved out under section 43(5) vide which certain transactions in derivative named as ‘eligible transactions,’ done on a recognised stock exchange, subject to fulfilment of certain requirements, are deemed to be non-speculative. The said provisions have been inserted in the Act for the benefit of the assessees keeping in view the fact that in such type of transactions on recognised stock exchange, the chance of manipulating and thereby adjusting the business profits towards speculative losses by JM Financial is negligible because such transactions are done on recognised stock exchange and there are less chances of manipulation of figures of profits and losses."
"These provisions have been inserted for the benefit of the assessee so that the assessee may be able to set off and adjust his profit and losses from derivatives in commodities against the normal business losses. These provisions are intended to ease out the assessee from the difficulties faced due to the stringent provisions separating the speculative transactions from the normal transactions. However, these exclusions given to the assessee cannot be allowed to be so interpreted to the disadvantage of an assessee so as to give it a different meaning and thereby denying the assessee the set off of otherwise eligible business loss from one segment as against the other segment, especially when the activity done by the assessee is a composite activity and profit and loss in one segment not only depends but the very transaction is done taking into consideration not ‘expected’ but certain future profit or loss in other segment," the Bench said in its order.