Market to market loss on derivatives allowed as deduction under section 37(1)

By | October 3, 2015

There is no requirement to deduct tax at source from payments made to NSE/BSE towards VSAT charges and lease line charges under section 194J

Market to market loss on derivatives could not be treated as contingent liability and hence, same was to be allowed as deduction under section 37(1)

IN THE ITAT MUMBAI BENCH ‘C’

Centrum Broking Ltd.

v.

Assistant Commissioner of Income-tax

H.L. KARWA, PRESIDENT
AND B.R. BASKARAN, ACCOUNTANT MEMBER

IT APPEAL NO. 3081 (MUM.) OF 2012
[ASSESSMENT YEAR 2008-09]

FEBRUARY  20, 2015

J.D. Mistry for the Appellant. Premanand J. for the Respondent.

ORDER

B.R. Baskaran, Accountant Member – The appeal filed by the assessee is directed against the order dated December 1, 2011 passed by the learned Commissioner of Income-tax (Appeals)-9, Mumbai and it relates to the assessment year 2008-09.

2. The appeal is barred by limitation by 52 days. The assessee has moved a petition requesting the Bench to condone the delay. It was stated therein that the income-tax appeal matters were looked after by an official named Mr. Hemant Agarwal, who resigned after completion of hearing with the learned Commissioner of Income-tax (Appeals). It was further stated that a staff named Bipin Kumar Pathak, who is incharge of delivering of letters placed the appellate order in the table of Mr. Hemant Agarwal and hence the same remained unattended. Subsequently, when the director made enquiries about the appellate order, the above facts came to light and immediately thereafter, the present appeal has been filed. We heard learned Departmental representative. Having regard to the submissions made in the affidavit, we are of the view that there was reasonable cause for the assessee in filing this appeal belatedly. Accordingly, we condone the delay and admit the appeal for hearing.

3. The assessee is disputing the following additions confirmed by the learned Commissioner of Income-tax (Appeals) :

(a) Disallowance of VSAT and lease line charges under section 40(a)(ia) of the Act.
(b) Disallowance of claim of set off of loss arising in cash segment against the profits in future and options.
(c) Disallowance of market to market loss on derivatives.
(d) Disallowance made under section 14A of the Act.

4. The assessee-company is a member of the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) and is engaged in the business of Share trading and stock broking. The Assessing Officer completed the assessment by making various additions and the appeal filed by the assessee before the learned Commissioner of Income-tax (Appeals) was partly allowed. Still aggrieved, the assessee has filed this appeal before us.

5. The first issue relates to the disallowance of VSAT and lease line charges made by the Assessing Officer by invoking the provisions of section 40(a)(ia) of the Act. The payment made by the assessee for VSAT and lease line charges paid to BSE/NSE was treated as “fees for technical services” and since the assessee did not deduct tax at source either under section 194C or under section 194J, the Assessing Officer disallowed the said claim. The learned Commissioner of Income-tax (Appeals), by placing reliance on the decision of the hon’ble Bombay High Court rendered in the case of CIT v. Kotak Securities Ltd. [2012] 340 ITR 333 held that the abovesaid payments would require tax deduction at source under section 194J of the Act and accordingly confirmed the disallowance made under section 40(a)(ia) of the Act.

6. At the time of hearing, the learned authorised representative submitted that this issue has been decided in favour of the assessee by the jurisdictional High Court in the case of CIT v. Stock & Bond Trading Co. (I.T. A. No. 4117 of 2010, dated 14-10-2011). A perusal of the said order shows that the High Court has followed its earlier decision rendered in the case of CIT v. Angel Capital & Debit Market Ltd. [Income-tax Appeal (L) No. 475 of 2011, dated 28-7-2011] to hold that there is no requirement to deduct tax at source from the payments made to NSE/BSE towards VSAT charges and lease line charges. The learned authorised representative submitted that in the case of Kotak Securities Ltd. case (supra) the Bombay High Court did not consider VSAT and lease line charges issue. Accordingly, we set aside the order of the learned Commissioner of Income-tax (Appeals) on this issue and direct the Assessing Officer to delete this addition.

7. The learned authorised representative submitted that the issue relating to “market to market loss on derivatives” is also covered by the decisions rendered by the co-ordinate Benches of the Tribunal in the following cases :

(a) Dy. CIT v. Kotak Mahindra Investment Ltd. [2013] 59 SOT 4
(b) Ramesh Kumar Damai v. Addl. CIT (I. T. Appeal No. 1443/Mum/2009)
(c) Edelweiss Capital Ltd. v. ITO 

8. A perusal of the abovesaid decisions would show that the Tribunal is consistently holding that the market to market loss on derivatives cannot be treated as a contingent liability and hence the same is to be allowed as deduction. Accordingly, we set aside the order of the learned Commissioner of Income-tax (Appeals) on this issue and direct the Assessing Officer to delete this addition.

9. With regard to the issue relating to the disallowance made under section 14A of the Act, the learned authorised representative submitted that the assessee’s own funds were far in excess of investments and hence there is no requirement to make disallowance under section 14A of the Act is required to be made. In this regard, he placed reliance on the decision of the hon’ble Bombay High Court rendered in the case of CIT v. HDFC Bank Ltd. [2014] 366 ITR 505 On the contrary, the learned Departmental representative submitted that the decision rendered in the case ofHDFC Bank Ltd. (supra) would apply only in respect of disallowance of interest. The learned Departmental representative submitted that the Assessing Officer did not disallow any portion of interest expenditure and he has disallowed only administrative expenses by applying the provisions of rule 8D(2)(iii) of the Income-tax Rules.

10. Admittedly, the Assessing Officer has disallowed a sum of Rs. 63,848 in respect of administrative expenses by applying the provisions of rule 8D(2)(iii) of the Act. The decision rendered by the jurisdictional High Court in the case ofHDFC Bank Ltd. (supra) would cover only the interest disallowance that is required to be made under section 14A of the Act. Before tax authorities, it appears that the assessee did not make any specific submissions against disallowance made under rule 8D(2)(iii) relating to administrative expenses. Hence, we confirm the order of the learned Commissioner of Income-tax (Appeals) on this issue.

11. The remaining issue relates to the disallowance of claim of set off of loss incurred in cash segment against the profit earned in futures and options segment. The assessee incurred a loss of Rs. 38,54,655 in the cash segment of equity market and claimed set off of the same against the profit earned in future and options segment. The Assessing Officer held that the Explanation given under section 73 of the Act shall override the proviso to section 43(5) of the Act. It is pertinent to note that the provisions of section 43(5) defines “speculative transactions” and the proviso to that section provides certain exceptions. The Explanation to section 73 provides that where any part of the business of a company consists in the purchase and sale of shares of other companies, such company shall, for the purposes of section 73, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of shares. The abovesaid Explanation given in section 73 shall not apply to the following cases :

(a) The company whose gross total income consists mainly of income which is chargeable under the heads “Interest on securities”, “Income from house property”, “Capital gains” and “Income from other sources”.
(b) The company whose principal business is the business of banking or the granting of loans and advances.

12. We have already noticed that the Assessing Officer expressed the view that the Explanation given in section 73 shall override the proviso to section 43(5) of the Act and accordingly held that the loss incurred in the cash segment of share trading should be treated as “speculation loss”. Accordingly, he rejected the claim of set off claimed by the assessee.

13. The learned Commissioner of Income-tax (Appeals) upheld the decision of the Assessing Officer by observing that the assessee has deliberately managed the incurring of expenses in order to reduce the business income to lower than the amount of dividend income, even though the dividend income was offered under the head “Business”. He further placed reliance on the decision of the Tribunal in the case of KNC Shares & Securities (P.) Ltd. [I.T. Appeal Nos. 7420 and 6782/M/03, dated 22-8-2006], wherein it was held that the assessee was not entitled to set off loss arising from purchase and sale of shares against income from brokerage.

14. The learned authorised representative submitted that the loss incurred by the assessee in cash segment is covered by the exception given in clause (c) given in the proviso to section 43(5) of the Act. He further submitted that the profit earned in F and O segment is covered by the exception given in clause (d) of the proviso to section 43(5) of the Act. He further submitted that an identical issue was considered by the Kolkata Bench of the Tribunal in the case of ITO v.Arena Textiles & Industries Ltd. [I. T. Appeal No. 1019/ Kol/2011, dated 29-12-2011] and the Tribunal has held that the transactions done by delivery as well as the transactions of derivatives are not hit by section 43(5) of the Act. The Tribunal further held that the aggregation of share trading loss and profit from derivative transactions should be done before the application of the Explanation to section 73 of the Act.

15. The learned authorised representative further submitted that the hon’ble Bombay High Court has also held in the case of CIT v. Darshan Securities (P.) Ltd. [2012] 341 ITR 556 that while computing the gross total income, the normal provisions of the Act must be applied and it is only thereafter, that it has to be determined as to whether the gross total income so computed consists mainly of income which is chargeable under the heads referred to in the Explanation to section 73 of the Act. The learned authorised representative submitted that the view expressed by the Kolkata Bench of the Tribunal with regard to the application of the Explanation to section 73 has been thus upheld by the jurisdictional Bombay High Court.

16. Thus, we notice that the hon’ble Bombay High Court has held that the Explanation to section 73 can be applied after computing the gross total income, meaning thereby, the same shall not override the proviso to section 43(5) of the Act. Hence, as per the decision of the Kolkata Bench of the Tribunal in the case of Arena Textiles & Industries Ltd. (supra), the loss from cash segment can be set off against the profit from derivatives. Thus, after computing the gross total income in the abovesaid manner, the application of provisions of the Explanation to section 73 is required to be examined.

17. In view of the above, the approach of the Assessing Officer as well as the learned Commissioner of Income-tax (Appeals) cannot be upheld. Hence, in our view, the application of the Explanation to section 73 needs to be examined afresh by duly considering the methodology discussed above at the end of the Assessing Officer. Before us, the learned authorised representative raised a fresh contention, viz., the transactions of purchase and sale of shares in cash segment has been carried out merely as a hedge against the transactions carried out in F and O segment. Accordingly, he contended that the mere hedging cannot be considered as the business of buying and selling of shares. Accordingly he contended that the provisions of Explanation to section 73 shall not apply to hedging transactions. We are unable to agree with the said contentions of the learned authorised representative. In our view, the Income-tax Act is not concerned with the purpose or the objective of the assessee in carrying the transactions in cash segment. What we see is that the assessee has purchased and sold the shares on delivery basis. According to the learned authorised representative, the same falls in the category of “arbitrage” and hence it will not fall in the category of “speculative transactions” as defined in section 43(5) of the Act due to exception given in clause (c) of the proviso to section 43(5). However, Explanation to section 73 is a deeming provision and hence its applicability has to be necessarily tested in the instant case.

18. Accordingly, we modify the order of the learned Commissioner of Income-tax (Appeals) on this issue and restore the matter of applicability of Explanation to section 73 to the file of the Assessing Officer with the direction to examine this matter afresh in the light of discussions made supra.

19. In the result, the appeal filed by the assessee is treated as partly allowed for statistical purposes.

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