DCIT- 4(3)(1), MUMBAI vs. JM FINANCIAL SERVICES LTD., MUMBAI

“11.The stated objective of section 73 –apparent from the tenor of its language is to deny speculative business 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 with computation of business income, derivatives are excluded from the definition of speculative transactions, only underlines that such exclusion is limited for the purpose of those provisions or section. To borrow the Madras High Court‟s expression, (a) derivatives are assets whose values are derived from values of underlying assets, in the present case, by all accounts the derivatives are based on stocks and shares, which fall squarely within the explanation to section 73(4). Therefore, it is idle to contend that derivatives do not fall within that provision, when the underlying asset itself does not qualify for the benefit, as they (derivatives – once removed from it and entirely dependent on stocks and shares, for determination of their value).

12.In the light of the above discussion, it is held that the Tribunal erred in law in holding that the assessee was entitled to carry forward its losses, the question framed is answered in favour of the revenue and against the assessee. The appeal is, therefore, allowed, there shall be no order as costs.”

th December, 2016 own case in 3660/M/2014 dated 28 for AY 2009-10, wherein the Tribunal, vide Paragraph 21 and 22, has allowed the appeal of the assessee as under:-

“21.We have considered the rival contentions. In this case, the peculiarity of the business of the assessee is that the assessee so manages his transactions of sale and purchase in shares in cash segment and in future segment that the final outcome will be a profit. The transactions of the assessee, therefore, cannot be segregated to arrive at profit and loss in both these transactions independently or separately. The nature of the business of the assessee is such that the transactions of the assessee in both segments are part of composite business of the assessee and the transactions are so managed that the resultant figure will be a profit .We, therefore, do not find any justification on the part of the lower authorities to interpret the provisions of the Income Tax Act to the disadvantage of the assessee and to segregate the transactions in cash and future segment which, in our view, will be against the spirit of the taxation laws. Even otherwise the case of the assessee is squarely covered by the decision of the Hon'ble Delhi High Court in the case of CIT vs. DLF Commercial Developers (supra) wherein the Hon'ble Delhi High Court has categorically held that in terms of Explanation to section 73, by all accounts, derivatives are based on stocks and shares which fall squarely within Explanation to section 73 and therefore loss from sale- purchase of such derivatives would be speculative loss. The Hon‟ble Delhi High Court has, thus, held that though under provisions of section 43(5), the transactions in derivatives at certain stock exchanges are deemed to be non- speculative, however, as per the Explanation to section 73 for the purpose of computation of business loss the derivative transactions squarely fall within the scope of Explanation to section 73.Underthe circumstances, both the transactions i.e. the transactions in the derivative and transactions in the cash segment can be treated as speculative transactions as per Explanation to section 73 and hence the profit or loss against both the segments can be adjusted or set off against each other.

JM Financial Services Ltd (AY 2013 & 2013-14)

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.”

17 I noted from the decision of the Tribunal in assessee‟s own case that the Tribunal has noted the fact that both the activities i.e., transactions JM Financial Services Ltd (AY 2013 & 2013-14) of sale and purchase in cash segment and also in future segment fall under speculation activity, which is not the case in the year under consideration. Hence, that ratio cannot be applied in the present assessment year. I also noted that this decision of the Tribunal for assessment year 2009-10 was carried by the Revenue before Hon‟ble Bombay High Court, and, Hon‟ble Bombay High Court in Income Tax th August, 2022, admitted the Appeal No.263 of 2018, Order dated 18 substantial question of law as under:- “4.We admit the present appeal on the following substantial questions of law:

“(2) Whether in the facts and circumstances of the present case, the Tribunal was justified in directing the Assessing Officer to delete the disallowance of Rs.21,48,928/- made u/s14A read with Rule 8D of the Income Tax Act, 1961?

(3) Whether in the facts and circumstances of the present case and in law, the Tribunal was justified in directing the Assessing Officer to delete the disallowance made towards set off of loss of cash segment against the income from Futures& Options segment as the assessee‟s business is covered by the Explanation to Section 73 of the Income Tax Act, 1961?”” During the course of hearing before me, both learned Counsel for the assessee as well as learned CIT-DR informed that this matter is pending before Hon‟ble Bombay High Court. 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 JM Financial Services Ltd (AY 2013 & 2013-14)

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 wisdom, 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 Section73,in so far as trading in shares is 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.

JM Financial Services Ltd (AY 2013 & 2013-14)

Question framed by the Bench Answer to the Question 1. Whether the Ld. CIT(A) was In the given facts and circumstances of justified in holding that the loss in the case, discussion carried above, the share trading (speculative transaction) answer to this question is in the could be setoff against the profit in negative. Future and Option (F&O) transactions (business transaction)in the facts and circumstances of the instant case, more particularly in the light of the decision of Hon'ble Supreme Court in the case of Snowtex Investment Limited v. PCIT [414 ITR 227] and decision of the Hon‟ble Madhya Pradesh High Court in the case of Diamond Securities Pvt. Ltd. [115 Taxmann.com 437]. And Consequently, expenses allocated towards share tradingconstitutes share trading loss in the facts and Circumstances of the instant case.

21 In terms of the above, I concur with the decision of learned Judicial Member allowing the appeal of the Revenue on this question. 3. In view of the majority opinion, we hold that 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.

JM Financial Services Ltd (AY 2013 & 2013-14)