DCIT 4 (3)(1), MUMBAI vs. J M FINANCIAL SERVICES LTD., MUMBAI
Income Tax Appellate Tribunal, Mumbai “F” Bench, Mumbai.
Before: Shri Narender Kumar Choudhry(JM)& Shri Prabhash Shankar (AM)
Per Narender Kumar Choudhry (JM) :-
This appeal has been preferred by the Revenue-Department against the order dated 13.8.2019 impugned herein passed by the Learned Commissioner of Income Tax (Appeals)-9, Mumbai (in short
Ld. Commissioner) under section 250 of the Income Tax Act, 1961 (in short “Act”) for A.Y. 2014-15. 2. In the instant case, two issues/additions are involved. First addition pertains to disallowance made by the Assessing Officer towards set off of loss of cash segment against income from futures and options segment, to the tune of 67,20,64,675/- under section 73
of the Act.
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During the year under consideration, the Assessee had shown income/net profit of Rs. 6,79,03,147/- from trading operations in following heads:
a)
Cash future arbitrage b)
Index Arbitrage c)
Options Trading d)
Diminution in value of securities and e)
Bond Trading
The composition of income from the various activities was asunder: -
The Assessing Officer splitted the said income from trading operations of Rs. 6,79,03,147/- consisting of cash future trading diminution in value of securities and bond trading between income from „cash segment‟ and income from „future and option segment‟ and thus considering the fact that the Assessee hasa loss in the cash segment and by invoking provisions of Explanation to section 73 of the Act and rejecting the Assessee‟s argument for delivery based transaction of shares were linked with futures and options based transaction and formed contingent of testing of the transaction of the nature of arbitrage option, disallowed the same accordingly.
The Ld. Commissioner by considering peculiar facts that identical issue is recurring and has been decided by Hon'ble Mumbai
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ITAT in Assessee‟s own case for A.Y. 2009-10 vide order dated
28.12.2016 in favour of the Assessee and since there is no change in the facts and circumstances of the case, he has no reason to defer with the view taken by the ITAT in Assessee‟s own case, deleted the addition of Rs. 67,20,64,675/-as made by the Assessing Officer.
Both the parties before this Court has claimed that Hon'ble Tribunal in the order pertaining to A.Y. 2009-10 has held that the transaction of the Assessee cannot be segregated to arrive at profit and loss in both these transactions were independently or separately. Further the Tribunal in A.Y. 2011-12 case has followed the aforesaid order for A.Y. 2009-10, against which the appeal is pending before Hon'ble High Court.
However subsequently, in the cases pertaining to A.Ys. 2012- 13 and 2013-14, the Hon'ble Judicial Member, vide „split verdict‟ decided the issue in favour of the Revenue and against the Assessee, whereas the Hon'ble Accountant Member decided the issue vide order dated 22.2.2022 in favour of the Assessee and therefore the matter was referred to the Third Member, who vide order dated 18.8.2025 concurred with the decision of Hon'ble Judicial Member and ultimately held that he is of the opinion that future and options income has to be treated as business income and loss derived from delivery based shares trading has to be treated as speculative loss and accordingly set off is not allowed. For brevity and ready reference, conclusion drawn by Third Member is reproduced herein below: -
I have heard both the sides and gone through the facts and circumstances of the case. The facts are admitted and there is no dispute about the same. The Assessing Officer, while completing assessment, segregated the two segments and J.M. Financial Services Ltd.
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as there was loss in the cash schemes of Rs. 134,66,95,811/-, he considered the same as speculative loss as per
Explanation to Section 73 of the Act. The Assessing Officer finally held that while the F&O income has to be treated as business income, the loss derived from delivery based share trading has to be treated as speculation loss. It is further worthwhile to mention here that the assessee when asked about the nature of arbitrage transactions for the shares held as delivery based shares, it submitted that on the same date he enters first with a transaction in F&O segment and then with the cash segment. Even though, according to Assessing Officer, by virtue of aforementioned discussion, it is held that loss from delivery based transaction is treated as speculation loss. Further, it was noted by the Assessing
Officer that it is. noteworthy to mention that if first F&O purchase was made and then the case purchase was made, it cannot be treated as arbitrage under Section 43(5) of the Act. So, in sum, the loss on delivery based transactions is treated as speculation loss and set-off is not allowed. The Assessing Officer held accordingly.
I noted that the assessee has set off the delivery based transaction of share are linked with F&O based transactions and they form a continuum of string of transactions of the natureof arbitrage operations. The assessee's arguments are considered but are not tenable because Section 43(5) of the Act lists out the circumstances in which certain transactions are to be treated as speculation and also the case where such speculation transactions have been treated as business transactions when some conditions are satisfied. The assessee's argument that it is doing arbitrage with respect to F&O cuts no ice because the undersigned is in agreement with the assessee that F&O transactions are to be treated as business transaction by virtue of provisions (d) of Section 43(5) of the Act. The assessee's argument makes sense if Revenue was to treat as transactions as speculation with respect to F&O. Post amendment to Section 43(5) of the Act vide the insertion of the proviso, it is clear that income from F&O transactions are to be treated as business income: Now, having treated F&O transactions as business transactions, while setting off loss arrived from delivery based transactions, the AO has to look into the chapter which provides the methodology for set off and carry forwardof loss. Here, Section 73 of the Act operates independently of any other provisions. As per explanation to Section 73 of the Act, any company whose primary business is dealing in shares and upon fulfilling certain conditions, which is the fact in the instant case, loss determined from such share trading has to be deemed as speculation loss and can be set off against speculation income. In the current case, the assessee derives loss from delivery based
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share trading and fulfills conditions mentioned in Explanation to Section 73 of the Act and hence, the loss cannotbe allowed to be set off against F&O loss, even though it is specifically treated as business income by virtue of Section 43(5) of the Act. In similar facts, Hon’ble High Court of Delhi has rendered its decision with respect to Explanation to Section 73 of the Act treating the loss arising from such transactions as loss from F&O has to be treated
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(Delhi) is as follows:-
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18. I further noted that Hon'ble Supreme Court in the case of Snowtex Investment Ltd. (supra) categorically noted in Paragraph
30 and 31 that the latter amendment was intended to take effect from the date stipulated by Parliament and there is no reason to hold either that it was clarificatory or that the intent of Parliament was to give it retrospective effect. Hon'ble Supreme Court also discussed the facts of that case that the consequence is that in assessment year 2008-09, the loss which occurred to the assessee as a result of its activity of trading in shares was not capable of being set off against the profits which it had earned against the business of future and options, since the latter did not constitute profits and gains of a speculative business. Hon'ble Supreme Court finally held as under:-
*30. In conclusion, we therefore, hold that the amendment which was brought by Parliament to the Explanation to Section 73 by the Finance (No 2) Act 2014 was with effect from 1 April 2015. In its legislative wi om, the Parliament amended Section 43(5) with effect from 1 April 2006 in relation to the business of trading in derivatives, Parliament brought about a specific amendment in the Explanation to Section 73, insofar as trading in shares in concerned, with effect from 1 April 2015. The latter amendment was intended to take effect from the date stipulated by Parliament and we see no reason to hold either that it was clarificatory or that the intent of Parliament was to give it retrospective effect.
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31. The consequence is that in A.Y. 2008-09, the loss which occurred to the assessee as a result of its activity of trading in shares (a loss arising from the business of speculation) was not capable of being set off against the profits which it had earned against the business of futures and options since the latter did not constitute profits and gains of a speculative business."
From the above discussion, facts of the present case, I am of the opinion that while the F&O income has to be treated as business income, the loss derived from delivery based share trading has to be treated as speculation loss and accordingly, the set-off is not allowed.
Thus, in view of the decision of Hon'ble Third Member, both the parties have claimed that the appeal of the Revenue on this aspect/addition/issue may be allowed as, as on today, the decision of Third Member and/or majority decision pertaining to A.Ys. 2012-13 and 2013-14, is in favour of the Revenue.
Thus, considering the peculiar facts mentioned above, the decision of Commissioner in allowing claim of the Assessee, while following the decision of the Tribunal in A.Y. 2009-10, is reversed and accordingly addition of Rs. 67,20,64,675/- as made by the Ld. Assessing Officer is restored, by allowing respective ground of appeal raised by the Revenue-Department.
Coming to the second issue/addition/disallowance of Rs. 19,74,517/-qua lease rental of vehicle, the Assessee has claimed that it had entered into lease agreement with M/s. Oasis Auto Financial Services Ltd., whereby it had taken certain vehicle on lease for the use of its employees. The assets to be purchased i.e. motor vehicles were new vehicles. And as per Accounting Standard 17, the assessee had capitalized the value of such vehicles in the books of J.M. Financial Services Ltd.
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account and had shown the same under the head “fixed asset” without claiming any depreciation on the said vehicles for the income tax purposes.
Further in the computation of total income, the Assesseehad added back an amount of Rs. 6,33,672/- to the profits of the business, as finance charge on leased assets, which was debited to the profit and loss account and reduced lease rentals amounting to Rs. 19,74,517/- from the income.
However, the Ld. Assessing Officer following the judgment of Hon'ble Apex Court in the case of Asea Brown Boveri Ltd. Vs. IFCL,
56IFCL 21, held that these rentals paid by the Assessee was nothing but purchase of assets and the payments made as lease rentals in reality were payments in installments towards repayment of loans obtained for the purchase assets shown, as finance leased assets and thus he accordingly disallowed deduction of Rs. 19,74,517/- which was claimed as leased rental of vehicle and added back to the total income of the Assessee.
The Assessee being aggrieved also challenged this disallowance of addition before Ld. Commissioner, who while considering determination made by the Ld. Assessing Officer and arguments/contentions raised by the Assessee, ultimately deleted the said addition/disallowance of Rs. 19,74,517/- by observing and held as under:
“4.3.4 The principal arguments taken by the assessee against the findings of the AO are discussed below:
i) The AO while concluding that the capitalization of value of leased rentals as fixed assets as correct position of law ignored the Central Board of Direct Taxes vide Instruction
No. 1978 dated 31st December, 1999 (F.No. 225/190/98/1TA
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II): In order to appreciate the argument, it would be useful to see the text of the relevant portion. The concerned paragraph of the instruction is reproduced below:
"It has come to the notice of the Board that the new accounting standard on 'Leases'issued by The Institute of Chartered Accountants of India require capitalization of the asset by the lessees in financial lease transaction. By itself, the accounting standard will have no implication on the allowance of depreciation on assets under the provisions of the Income tax Act"
It appears that the AO has heavily relied upon the accounting treatment given to the transactions of finance lease by the assessee while deciding the matter. It would be helpful to see the relevant provisions of the Indian Accounting Standard (Ind AS)
17in this regard. The paragraph 20 of the standard is reproduced below:
“As the commencement of the lease term, lessees shall recognise finance leases as assets and liabilities in their balance sheets at amounts equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments, each determined at the inception of the lease. The discount rate to be used in calculating the present value of the minimum lease payments is the interest rate implicit in the lease, if this is practicable to determine; if not, the lessee's incremental borrowing rate shall be used. Any 9 initial direct costs of the lessee are added to the amount recognised as an asset."
The standard prescribes the method in which the lessee has to recognise financial leases as assets. It is also evident that the assessee has followed the method by considering itself as the lessee in this transaction. The AO, in this regard, comments that the capitalisation of value of vehicles as fixed assets by the assessee was thecorrect position of law. Considering essence of the CBDT instruction and the accounting standard for the finance lease, the stand taken by the AO is contrary to the direction given in the instruction issued by the CBDT.
ii) The reliance placed by the AO on the decision of the hon'ble Supreme Court in the case of Asea Brown Boveri
Limited v. IFCI (2005) 56 SCL 21 while disallowing the lease rentals is erroneous: The basic and essential fact in the case of Asea Brown Boveri Ltd was that the transaction of J.M. Financial Services Ltd.
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finance lease was not genuine. The ratio of the decision would not become applicable unless it is proved that the finance lease transaction under discussion was not genuine. However, the AO has not given such finding in the assessment order. Reliance placed by the AO on the decision of Hon'ble Supreme Court without doubting the genuineness of the lease transaction is thus erroneous and not tenable.
iii)
The observation of the AO that the facts of the case of ICDS vs CIT" (2013 350ITR 527 (SC) were different and therefore the issue cannot be decided in view of the said decision was incorrect: It would be useful to reproduce the relevant portion of the assessment order in order to examine the argument.
"The Hon'ble ITAT has given its directions to decide the issue afresh in the light of decision of Hon'ble Supreme
Court in the case of "ICDS vs CIT" (2013 350 ITR 527 (SC).
The crux or gist of the aforesaid decision is that where assessee is engaged in the business of hire purchase, leasing etc having purchased vehicles from manufacturers, instead of customers, it was entitled to claim depreciation in respect of vehicles so leased out. In other words, it may be said that the lessor can claim the depreciation on theleased vehicles inspite of not using the same by itself but the same is used by the lessee.
3.4 Whereas in the instant case, the assessee has taken vehicles on lease rentals meaning thereby the assessee is a lessee not entitled to depreciation. Therefore, the facts of the instant case are not identical to the facts of the above mentioned case therefore the issue cannot be decided in view of the aforesaid decision."
A plain reading of the above excerpt shows the acrobatic reasoning adopted by the AO leading to wrong conclusion. The decision is applicable to any genuine and normal transaction of finance lease. There is no reason why the decision would not be applicable if the assessee happens to be the lessee in such a transaction.
3.5 It is clear from the above discussion that the AO has neither questioned the genuineness of the finance lease transaction nor has challenged that the assessee was the lessee in the said transaction. The AO erroneously assumed that the J.M. Financial Services Ltd.
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accounting treatment given by the assessee to the lease transaction was as per law and was binding on the assessee for Income Tax purposes. The AO refused to consider the facts of the case in the light of the decision of Hon'ble Supreme Court in the case of ICDS vs CIT" [2013 350 ITR 527 (SC) due to misconceived reasoning. The disallowance of lease rentals by the AO was thus based on erroneous assumptions and incorrect appreciation of the facts.
3.6 I have gone through various clauses of the lease agreement in order to verify the ownership of the vehicles in light of the decision of the Hon'ble Supreme Court in the case of ICDS vs CIT" [2013 350 ITR 527 [SC]. It is evident from various clauses such as clause No 8 (Ownership). 10 (Inspection], 15 (Surrender) that the ownershipof the vehicles was vested with the lessor and not with the lessee, i.e. the assessee. Therefore in view of the facts that there was nothing on record to prove that the transaction was not genuine, the ownership lied with the lessor and the assessee was lessee, the ratio of the decision of Hon'ble Supreme Court in the case of ICDS vs GIT" (2013 350 ITR 527 (SC) is squarely applicable to the case of the assessee. The disallowance of lease rentals of Rs.19,74,517/- by the AO was uncalled for and is hereby deleted. The ground B of the appeal is allowed.
Thus, the Revenue-Department being aggrieved has also challenged the decision of Ld. Commissioner in deleting the aforesaid disallowance/addition of Rs. 1974517/- as uncalled for.
We observe that the identical disallowance has also been made in the earlier year i.e. A.Y. 2007-08, which has been affirmed by the then Ld. CIT(A).
However, the Hon'ble Tribunal on appeal, set aside the issue, qua lease rental, to the file of Ld. Assessing Officer. The order of the Tribunal later on, also followed in subsequent cases pertains to assessment years 2012-13 and 2013-14. J.M. Financial Services Ltd.
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Thus, the Ld. Assessing Officer, while giving effect to the orders of the Tribunal for A.Y. 2007-08 to 2010-11, once again reiterated the disallowance of lease rental and also did not allow deduction of depreciation on the leased asset and financial charges.
Subsequently on appeal, Ld. CIT(A) granted relief to the Assessee in the said cases pertaining to A.Y. 2007-08 to 2010-11. 18. As the tax effect in the aforesaid appeals decided by the then Ld. CIT(A) for A.Y. 2007-08 to 2010-11, was less than Rs. 50 lakh, therefore as per parties‟ knowledge, the Department has not filed any appeal, against the said orders before the Tribunal.
However, in the case pertaining to A.Y. 2015-16, which is under consideration, the AO again disallowed the lease rental expenses, vide order dated 5.12.2017 under section 143(3) for A.Y. 2015-16, which has subsequently, been reversed by the Ld. Commissioner, vide impugned order dated 30.4.2019 for A.Y. 2015- 16. 20. Subsequently, in the case pertaining to A.Y. 2022-23, the Assessing Officer himself allowed the identical claim of the Assessee and has not made any disallowance on account of lease rental and therefore the Assessee has claimed that on the aforesaid factual aspects, the issue is now settled by Ld. CIT(A) and as per the order of the Assessing Officer for A.Y. 2022-23 and the aforesaid series of sequences and such claim lodged by the Assessee is not in denial by the Revenue-Department.
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Even otherwise, we could not find any reason or material to contradict the findings of the Ld. Commissioner in deleting the disallowance of Rs. 19,74,517/- on account of lease rental. Therefore, in the peculiar facts and circumstances of the case in totality as demonstrated above, the ground raised by the Assessee concerning the issue qua lease rental, is dismissed.
In the result, Revenue‟s appeal is partly allowed.
Order pronounced in the open Court on 24/12/2025. (Prabhash Shankar)
JUDICIAL MEMBER
Copy of the Order forwarded to :
The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file.
BY ORDER,
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(Asstt.