Income Tax Appellate Tribunal - Mumbai
Dcit 4(1)(1), Mumbai vs Angel Securities Ltd, Mumbai on 13 December, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL " A" BENCH, MUMBAI
BEFORE SRI MAHAVIR SINGH, JM AND SRI N.K. PRADHAN, AM
ITA No. 3764/Mum/2014
(A.Y. 2009-10)
ITA No. 618/Mum/2015
(A.Y. 2010 -11)
The DCIT-Circle 4(1), Angel Global Capital Pvt.
Room No.640, 6th Floor, Ltd. (Now known as Angel
Aayakar Bhavan, M.K . Road, Broking Private Limited )
Mumbai-400 020 Vs. G-1, Akruti Trade Centre,
Road No.7, MIDC Marol,
Andheri(E),
Mumbai-400 093
Appellant .. Respondent
PAN No. AAACM6094R
ITA No. 615/Mum/2015
(A.Y. 2010-11)
The DCIT-Circle 4(1)(1), Angel Broking Ltd.
Room No.640, 6th Floor, (Now known as Angel
Aayakar Bhavan, M.K. Road, Broking Private Limited)
Mumbai-400 020 Vs. G-1, Akruti Trade Centre,
Road No.7, MIDC Marol,
Andheri(E),
Mumbai-400 093
Appellant .. Respondent
PAN No. AAACA8821G
ITA No. 617/Mum/2015
(A.Y. 2010-11)
The DCIT-Circle 4(1)(1), Angel Securities Ltd.
Room No.640, 6th Floor, G-1, Akruti Trade Centre,
Aayakar Bhavan, M.K. Road, Vs. Road No.7, MIDC Marol,
Mumbai-400 020 Andheri(E),
Mumbai-400 093
Appellant .. Respondent
PAN No. AAACA5703H
2
Revenue by : RP Meena & Rajesh Kumar
Yadav, DR
Assessee by : DV Lakhani, AR
Date of hearing: 08-11-2017 Date of pronouncement : 13-12-2017
ORDER
PER MAHAVIR SINGH, JM:
These appeals by the Revenue are arising out of different orders of Commissioner of Income Tax (Appeals)-8, Mumbai, [in short CIT(A)] in appeal No. CIT(A)-8/Cir.4/386,73,74 & 72/2011-12,2013-14 dated 25-03- 2014, 05-11-2014. The Assessments were framed by the Deputy Commissioner of Income Tax, Circle-4(1), Mumbai (in short DCIT) for the assessment years 2009-10, 2010-11 vide order dated 31-12-2011, 25-03- 2013, 26-03-2013 under section 143(3) of the Income Tax Act, 1961(hereinafter 'the Act').
2. The first issue in this appeal of Revenue in ITA No. 3764/Mum/2014 for AY 2009-10 is against the order of CIT(A) deleting the addition made by the AO of deemed speculation loss against non- speculative business income by invoking the explanation to section 73 of the Act and for this Revenue has raised following ground No.1: -
"On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to delete the addition of deemed speculation loss of 36,87,83,681/ -
made by the AO under explanation to section 73 of I.T. Act as the assessee has wrongly set off speculative loss against non-speculative income."3
3. Briefly stated facts are that the assessee company earned profit in derivative transactions at Rs. 36.87 crores (precisely Rs.36,87,83,681/-) . The assessee has set off these losses incurred in purchase and sales of shares/ securities against income earned in derivative transactions amounting to Rs. 36.42 crores (precisely Rs.36,41,73,414/-). The AO required the assessee to explained as to why explanation to section 73 of the Act should not be applied and loss incurred in purchase and sale of shares by the assessee need to be treated as deemed speculative loss of Rs. 36.87 crores and should not be disallowed? The assessee stated that it is a NBFC and principal business is of financing, including money lending/granting of loans, investment in subsidiary companies. The assessee claim that the income from money lending/granting of loans of business is Rs.7.57 crores and further interest on fixed deposit is Rs. 0.24 crores. According to assessee, such income from granting of loans and advances constituted 71.18% of the total income. Further, the assessee has deployed an average of 500 crores in business of granting of loans and advances and the profit earned from derivative segment of Rs. 36.41 crores is followed by losses in share trading amounting to Rs. 36.87 crores, which is inextricably linked with each other and hence, it requires set off. The assessee claimed finally as under: -
"2.3 It was claimed that the assessee has deployed on an average of ₹ 500 crores in the business of granting loans and advances. The profit of derivative segment of ₹ 36.41 crores is followed by loss in share trading of rs. 36.87 crores has restricted into a loss of ₹ 0.46 crores. It was further argued that if share trading loss is treated as speculative loss; than the derivative loss also needs to be treated as 'speculative loss'."' 4 But according to AO, the facts are entirely different and he brought out the facts. According to AO, the assessee incurred losses of Rs. 36.88 crores in share trading activity and earned profit in derivative transactions of Rs. 36.42 crores, which is to be treated as business losses and the combined figure of both the activities, the total turnover from this is to the tune of 73.29 crores and interest income is accordingly just 10% of the income from share trading activity. The AO finally applied explanation to section 73 of the Act and held that the assessee does not fit into any of the exceptions provided in the explanation under section 73 of the Act and therefore loss from sale of shares at Rs. 36.88 crores is to be treated as speculative loss as per explanation to section 73 of the Act and therefore, this loss is not eligible for set off against the profit earned from derivative transactions at Rs. 36.42 crores. Aggrieved, assessee preferred appeal before CIT(A), who after considering the submissions of the assessee and following various case laws, allowed the loss.
And for this, the CIT(A) observed as under: -
"2.3 I have considered the facts of the case, submission of the appellant as well as gone through the assessment order. From a perusal of the details submitted by the appellant it is clear that the appellant was mainly engaged in the business of granting of loans and advances. A bare perusal of the balance sheet revealed employed in lending activities was he appellant in money lending business on year to year to basis.
FY 2008-09 FY 2009-10 FY 2010-11
Loan Book 24.58 97.50 65.42
Interest 5.43 9.83 15.65
income from
lending
business
5
It would, therefore, be wrong to conclude on the true nature of the business of the appellant by looking at the financial numbers of the previous year 2007 -08 and 2008-09 since it takes time to build a lending business. The appellant is engaged in two types of business activity i.e. NBFC business and other than NBFC business. Majority of the expenses are pertaining to NBFC business activity. The appellant drew my attention to the segment reporting part of audited financial statements. As per the segment reporting requirement, Auditors have certified as per requirements of Accounting Standard 17 that out of total revenue of Rs. 101,813,462/ -, Rs. 54,340,193/- is contributed by Lending Activities which constituents 53% of total revenue. The assessing officer has only observed the year end numbers and ignored the other disclosure in audited financials. The appellant submitted that during the remand proceedings, the appellant has provided all the supporting and annexures to the assessing office r for verification of the facts. As per the details submitted by the appellant on February 18, 2013, it was explained to assessing officer that the explanation to section 73 is not applicable as the principle business of the appellant is granting of loans and advances. I find that details submitted by the appellant in this regard have been ignored by the Ld.AO.6
The Ld. AO has compared the total volumes of the share trading transactions with the volumes of lending business. In my opinion comparing volumes of share trading business with volumes of lending business is not desirable as these two have no correlation. Trading undertaken at the exchange on thus, one cannot conclude purely on trading volumes that share trading is the principle business of appellant. The appellant has provided a fair working of the capital deployed in lending activities vis -à- vis in trading.
2.3.1 Further, I also don't find any merit in the argument of the Ld. AO that for comparing the income from various heads for the purposes of sec tion 73 one should ignore minus sign i.e. negative income and thereafter the gross income should be compared. She has commented that the loss in cash segment amounting to Rs. 36.88 or. and profit in derivative segment Rs. 36.42 Cr. should be added ignoring the minus sign and the resultant figure i.e. Rs 73.29 or. is to be compared with interest income. As per the assessing officer, the interest income is just 10% of income from share trading activity. The two i.e. loss from cash segment and profit from deri vative segment should be set off against each other. There is no question of adding the two to arrive at a total income. The activity in cash market and derivative market are interlinked and 7 interdependent and both these activities should be considered as one and thus the loss in cash market should be adjusted against the profits in the F&O segment and therefore, to that extent, this Loss from Cash segment should be allowed as business loss as it is obvious that business profit cannot be computed without al lowing a business loss. A loss other than a capital toss which is really incidental to the trade is allowable u/s 28 of the Income Tax Act, 1961 itself on ordinary principles of commercial trading. The appellant prays that the loss suffered in cash segment is incidental to the profit earned in derivative segment. Therefore, the loss from Cash segment should be allowed as "business loss" u/s 28 of Income Tax Act, 1961 to be adjusted against profit earned from F&O segment.
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2.3.7 From the details of arbitrage transactions submitted during the remand proceedings, it is observed that, in majority of the transactions, the net quantity in cash segment and F&O segment are similar and in few transactions only the quantity differs.
The difference occurs because of non - availability of the same quantity at the same rate at that particular point of time and thus unwinding of position in the respective exchanges/segments (However, in all cases 8 net open position is maintained as Nil). The appellant has purchased 2050 shares in cash segment and sold them in the same segment and on the other hand purchased 2050 stock futures in F&O segment and sold them in F&O segment only. On the basis of her observation she concluded that the profit/loss on purchase and sale of 2050 shares in CASH segment will fall within the purview of section 73 and would be termed as speculation and on the other hand the profit/loss on purchase and sale of 2050 stock futures in F&O segment would fail within Ld. AO has failed to apprec iate the facts and the explanation given by the appellant that in arbitrage, it also happens that during the course of the day, the assessee changes his view on particular scrip and if he has purchased the scrip in a cash segment and sold in the F&O segment, he may sell the same scrip in the cash segment and purchase in the F&O segment. Ultimately, at the end of the day, he may square off all the transactions entered into cash segment as well as in the F&O segment. It is a matter of record that at each and every line item, the net position of sale and purchase was NIL, thereby reflecting an arbitrage at each stage. To arrive at a conclusion whether the appellant is engaged in the arbitrage business and the transactions executed/entered into by the appellant are in fact in the nature of 9 arbitrage transactions u/s 43(5)(c), one needs to understand first the business of arbitrage, its nature, modalities, returns and the associated risks.
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2.3.10 The observation of the Ld. Assessing officer t hat, "the assessee has purchased shares in cash segment and sold the shares in same segment, whereas on the other hand, the assessee has no corresponding transaction in F&O segment. Hence it is clear that these transactions are not arbitrage as there is no complete square off of same quantities of scrips between Cash and F&O segment". The appellant submitted that, this is nothing but selected few transactions of unwinding position of the partly initiated arbitrage transactions of the appellant which cannot be viewed in isolation. The Ld. Assessing officer, just by observing that the transactions are only in one segment and/or there being no complete square -off or the quantities do not match, has held that "the transactions selected by her cannot be termed as Arbitrage u/s 43(5)(c) of the Act". This act of the assessing officer is far from truth and the facts establish that the transactions entered into by the appellant are clearly in the nature of arbitrage. The Ld. assessing officer has also failed to apprec iate the nature of business of the appellant that 10 wherein in most of the cases, at the time of initiation of the arbitrage transaction, it is not known to the appellant whether and in which segment he. is going to earn profit and in which segment he is goi ng to incur loss. His only concern is that the profits earned in any segments should be more than the losses incurred in other segment/s. The Ld. Assessing officer has failed to appreciate and understand the nature of business of appellant and differentiat ed the F&O transactions separately as normal business activity and cash delivery transactions as speculative transactions. The Ld. assessing officer has applied sec. 43(5)(d) to the F&O transactions for holding the same as normal business transaction and ignored the provisions of Sec. 43(5'(c' of arbitraae and jobbing transactions, which according to the section sha ll normal business transactions, thereby the Ld. assessing officer has separated the pa rt of the transactions without understanding the business of the appellant.
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2.3.16 Without prejudice to the above, as observed supra in the case of CIT v. DLF Commercial Developers Ltd wherein it was held that for the purposes of Explanation to section 73, derivatives would be considered to be shares. If derivatives are considered to be shares for the purposes of 11 Explanation to section 73, the loss from purchase and sale of shares has to be set off against the profit from derivative transactions and only the net loss can be disallowed under Explanation t section 73. In this regard, reliance is also placed on the decision of the Hon'ble Bombay High Court in the case of CIT v. Lokmat Newspapers (P.) Ltd. (2010) 322 ITR 43 (Bom) where in it has been held that the explanation applied whether ther e is a profit and loss. The AO, therefore, erred on facts and in law in considering a part of the arbitrage transaction as deemed speculation loss as per Expln. To Sec. 73. In view of the facts as explained above it is held that the appellant carried on ar bitrage business and accordingly the loss on purchases and sale of shares cannot be looked in isolation and the treatment given by the AO of treating the loss on sale of shares as speculation loss as per Explanation to section 73 is incorrect.
2.3.17 Without prejudice to my above stated findings that arbitrage/jobbing transactions are non -speculative
transactions and Sec. 73 is not applicable to the case of the appellant as well as provisions of Explanation to section 73 are not applicable to the appellant case in view of finings of the Hon'ble jurisdictional High Court in the case of Darshan Securities( Supra), even if it is held that the transaction 12 are speculative than also profit of the F&O transaction are to be adjusted against the losses of cash transactions in view of decision of Anon Commercial Pvt Ltd. (supra) wherein it was held that trading of shares which is done by delivery transactions are not hit by Section 43(5) as speculation. Similarly, derivative transaction in shares profit/loss is also n ot hit by Section 43(5) of the Income Tax Act, which deals about speculation transaction. As such, both profit /loss from all the share delivery transactions & derivative transactions are having the same meaning, so far as, section 43(5) of the Income Tax Act is concerned. It is further held that, once the transactions done by delivery as well as the transactions of derivatives are not hit by Section 43(5) of the Act, the aggregation of the share trading loss and profit from derivative transactions should b e done before the application of explanation to section 73 of the Income Tax Act is applicable. As is evident from the extant provisions of the section 43(5) of the Act, that none of the transactions are speculative in nature and that they are all hedge transactions between the two segments. If at all one segment of the transaction is to be considered as speculative then, the opposite segment transaction should also be considered as a speculative, here again the loss in the cash 13 segment need to be allowed a s a set off against the derivative profit considering both are speculative in nature. Similar issue was also involved in the case of MIs. Arena Textiles & Industries Ltd., Kolkata in ITA No. 1019/KoI/201 1 for A.Y. 2008 -09 before the Hon'ble ITAT, Kolkata. The grounds of appeal raised by the Revenue were as under:-
1. Whether on the facts and circumstances of the case and settled legal position, the Ld. CIT(A) is justified in holding that transactions in derivatives are not hit by section 43(5) of the I.T. Act.
2. Whether on the facts and circumstances of the case and settled legal position, the Ld. CIT(A) was justified on facts and in law in deleting the disallowance and addition of Rs.28,95,42,8451 - treated as deemed speculation loss by the AO.
3. Whether on the facts and circumstances of the case and settled legal position, the Ld. CIT(A) is justified in holding that delivery -based share transactions does not fall in the ambit of Explanation to section 73 of the l.T. Act.
The Hon'ble ITAT after considering rival submissions has observed as under: -
14...................
Thus, Hon'ble ITAT in this case has held that aggregation of share trading loss and profit from derivative transaction should be done before the application of Explanation to Section 73 of the l.T. Act is applicable.
This position is further supported by the Hon'ble Delhi High Court's Judgement in the case of CIT v/s DLF Commercial Developers Ltd. [ITA No. 94/2013 vide order dated 11.07.2013] wherein it has been held that Derivatives which derive their val ue from the underlying shares & securities cannot be exempted from the mischief of Explanation to Section 73 and are therefore to be considered as Speculative in nature.
The Hon'ble Delhi High Court has held as under:-
9. In this context, it would be instructive to notice that in Rajshree Sugars and Chemicals Ltd (supra), the Madras High Court noticed, rather dramatically, that ―..'Derivatives are time bombs and financial weapons of mass destruction' said Warren Buffett, one of the world's greatest investor s, who overtook Microsoft Maestro in 2008 to become the richest man in the world and who is known as the 'Sage of Omaha or Oracle of Omaha'.
Derivatives, according to him, can
push companies on to a spiral that
15
can lead to a corporate melt down....‖
The High Court then, after examining
the nature and characteristics of
derivatives transactions, observed
that:
―5. What are these 'derivatives'
which have gained such a great deal
of notoriety? In simple terms,
derivatives are financial instruments whose values depend on the value of other underlying financial instruments.
The International Accounting Standard (IAS) 39, defines "derivatives" as follows:
A derivative is a financial instrument:
(a) whose value changes in response to the change in a specified inter est rate, security price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index, or similar variable (sometimes called the 'underlying');
(b) that requires no initial net investment or little initial net investment relative to other types of
contracts that have a similar response to changes in market conditions; and
(c) that is settled at a future date.
ITA 94/2013 Page 10 Actually, derivatives are assets, whose values 16 are derived from values of underlying assets. These underlying assets can be commodities, metals, energy resources, and financial assets such as shares, bonds, and foreign currencies.‖
10. It is no doubt, tempting to hold that since the expression "derivatives"
is defined only in Section 43 (5) and since it excludes such transactions from the odium of speculative transactions, and further that since that has not been excluded from Section 73, yet, the Court would be doing violence to Parliamentary intendment. This is because a definition enacted for only a restricted purpose or objective should not be applied to achieve other ends or purposes. Doing so would be contrary to the statute. Thus contex tual application of a definition or term is stressed; wherever the context and setting of a provision indicates an intention that an expression defined in some other place in the enactment, cannot be applied, that intent prevails, regardless of whether sta ndard exclusionary terms (such as "unless the context otherwise requires") are used. In The Vanguard Fire & General Insurance Co. Ltd., Madras v. M/S. 17 Fraser And Ross & Anr AIR 1960 SC 971 it was held that:
―It is well settled that all statutory definitions or abbreviations must be read subject to the qualification variously expressed in the definition clauses which created them and it may be that even where the definition is exhaustive inasmuch as the w ord defined is said to mean a certain thing, it is possible for the word to have a somewhat different meaning in different sections of the Act depending upon the subject or the context. That is why all ITA 94/2013 Page 11 definitions in statutes generally begin with the qualifying words similar to the words used in the present case, namely, unless there is anything repugnant in the subject or context.
Therefore in finding out the meaning of the word " insurer " in various sections of the Act, the meaning to be ordinarily given to it is that given in the definition clause. But this is not inflexible and there may be sections in the Act where the meaning may have to be departed from on account of the subject or context in which the word has been used and that will be giving effect to the opening sentence in the definition section, namely, unless there is anything repugnant in the 18 subject or context. In view of this qualification, the court has not only to look at the words but also to look at the context, the c ollocation and the object of such words relating to such matter and interpret the meaning intended to be conveyed by the use of the words under the circumstances.‖ Similarly, in N.K. Jain and Ors. v C.K. Shah and Ors. AIR 1991 SC 1289, it was held that:
4. The subject matter and the context in which a particular word is used are of great importance and it is axiomatic that the object underlying the Act must always be kept in view in construing the context in which a particular word is used...........‖
11. The stated objective of Section 73- apparent from the tenor of its language is to deny speculative businesses 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 ITA 94/2013 Page 12 compu tation of business income, derivatives are excluded from the definition of 19 speculative transactions, only underlines that such exclusion is limited for the purpose of those provisions or sections.
To borrow the Madras High Court's expression, ―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 to costs. "
Therefore, the Hon'ble Delhi High Court has categorically observed that the provisions of Section 73 of the Act would be applicable 20 even in the case of derivatives to the extent they are backed by stock and shares. The Hon'ble Bombay High Court in the case of CIT vs. Lok mat Newspapers (P.) Ltd. (2010) 322 ITR 43 (Born) has held that the Explanation applied whether there is a profit or loss in cash segment. In view of this decision of Hon'ble Delhi High Court and Mumbai High Court, the provisions of section 73 are applied to both profit and loss from derivative and cash segments. Therefore, if the AO invoked the provision of the explanation of Sec. 73, the entire transaction of the appellant' become speculative for this purpose as per Delhi High Court and Mumbai High Court, the appellant is entitled for the set off which will make the addition nullified as made by the AO.
2.3.18 In view of the foregoing discussion where in in both circumstances of treating the transactions as speculative or non-speculative, the set off has to be allowed, the addition made by the Ld. AO cannot be sustained both on facts and circumstances of the appellant's case, the same are accordingly de leted. This ground of appeal is allowed. "
Aggrieved, now Revenue is in second appeal before Tribunal.
4. Before us, the learned CIT Departmental Representative Shri R P Meena heavily relied on the assessment order and also read out the 21 entire order of CIT(A). The learned CIT DR also relied on AO's remand report submitted vide dated 08-03-2013 which is reproduced in the order of CIT(A) at pages 16 to 47.
5. On the other hand, the learned Counsel for the assessee first of all drew our attention to the assessee's paper book consisting of pages 1 to 290 and particularly referred to pages 51 to 53, wherein the details of income from sales of securities and arbitrage transactions after allocation of share of trading expenses is given. He has also refereed to detailed transactions as per date wise and the same is given at pages 58 to 258 of assessee's paper book. The learned Counsel for the assessee referred to the first transaction on pages 54 of the assessee paper book on 04.01.2008 of cash segment i.e. purchase of Reliance share of 250 and sold the same 250 shares. Similarly, in derivative segment also shown purchase of Reliance share on 04-01-2008 of 2025 shares and sold the same on the same date of 2025 shares. The learned Counsel took us through the entire pages and shown that there is no stock kept by the assessee and the entire derivative sale is in cash segment are sold without delivery. The learned Counsel for the assessee argued against the objection of the AO that assessee is not engaged in arbitrage and doing another activity in toto, hence, assessee's cash segments is hit by the explanation to section 73 of the Act as speculation. On the other hand, purchase and sales of shares in future are derivatives in F & O segment will be hit by section 43(5)(d) of the Act and established termed as non-speculative transaction i.e. to normal business transactions. He referred to the remand report of the AO vide Para 6.1, wherein, details of transactions of shares are given as under: -
Cash Segment Derivative Segment
Sl. Transa Scrip Name Buy Sale Quality Qunatity Buy Value Sale Quanti Quanti
N ction Value Value bought Sold Value ty ty Sold
Date Bough
t
22
1. 4/1/08 Reliance 4,782,857 4,688,900 2,050 2,050 4,631,165 4,754,614 2,025 2,025
2. 4/1/08 Essaroil 1,508,605 1,171,407 7,080 5,668 1,159,605 1,512,605 5,648 7,060
3 4.1.08 Relcapital 6,778,426 2,234,997 5,520 1,794 1,532,787 6,135,955 1,242 4,968
4. 4/1/08 IFCI 5,591,230 5,655,820 128,454 128,454 3,503,941 3,475,376 78,800 78,800
5. 4.1.08 IDFC 1,615,946 1,595,318 10,860 10,860 1,509,736 1,546,582 10,325 10,325
6. 4.1.08 CHAMBLFER 33,307 366,346 690 7,590 496,559 165,600 10,350 3,450
T
7. 4/1/08 Renuka 1,819,060 1,812,528 1,844 1,844 1,476,600 1,492,985 1,500 1,500
8. 4/1/08 RNRL 3,125,945 3,114,994 30,608 30,608 2,361,018 2,383,136 23,244 23,244
9. 4/1/08 ADLABSFIL 3,297,031 3,238,484 2,565 2,565 3,117,468 3,196,718 2,484 2,484
10 4/2/08 RELIANCE 7,048,950 7,214,347 2,965 2,965 5,658,555 5,500,038 2,325 2,325
6. According to Ld Counsel the Assessee Company had undertaken cash/future arbitrage activity as one single business activity i.e. the position in a cash segment in a particular scrip is taken on a particular date and at the same time the reverse position is taken in the same scrip in F&O segment. The transactions in cash segment and F&O segment are inextricably linked with each other and are so interwoven that it is not possible to divorce these transactions and decide the nature of the income/loss. And hence, the loss suffered in cash segment, being an integrated part of the total arbitrage activities should be allowed to be set off against income from derivative segment. It has already provided day- wise position showing the scrip-wise quantities purchased and sold in cash segment and quantities sold and purchased in F&O segment. There are approx. 13,000 line items of data showing the date-wise and scrip- wise transactions. AO had made certain observations on these 13,000 line items, wherein he pointed out difference in buy qty. in cash market and sell qty. in future market or vice-versa. Based on these differences, he concluded that as there is no exact corresponding sale/purchase in other market, such transactions cannot be termed as arbitrage under section 43(5)(d) of the Act. Sample of such observations by AO are explained below for your reference.
23As shown in the above table, in case of ESSAR OIL at Sr. No. 1, the buy quantity is 7080 in cash segment, while the sell quantity in ESSAROIL is (7060) in F&O segment. This was the bone of contention of AO for not allowing set off of loss between the two segments on account of quantity mismatch. However, in arbitrage it is not always possible to match the quantity, as it depends upon availability of shares/derivatives in respective segments. Also, due to sudden price fluctuation in any of the segment of markets, one has to continuously look at the new opportunity in order to increase profit or to reduce loss. Accordingly, the remaining portion of transactions is done in any segment keeping the net open position as always NIL thereby keeping all transaction at all point of time hedged against each other. It was explained that in cash/future (derivative) arbitrage, hedge position is created by taking delivery in cash segment and selling in F&O segment. The price in future segment will trade at premium as compared to cash segment. Thus, a stock is purchased in cash segment and sold in future segment. With course of time when position in future segment comes closer to the expiry date, the price gap between cash and future segment narrows down. In such situation, arbitrager will roll over its position in future segment from current month to next month. Therefore, in such kind of scenario one will see a trading in future segment only and not in cash segment.
7. Ld Counsel explained that FY 2008-09 was a turbulent year for securities market, wherein the BSE Sensex which stood at 15,771 on 24 01.04 2008 closed at the year end at 9708 on 31.03.2009, resulting in decline by 38%. Anyone who dealt in cash-future arbitrage in FY 2008-09 had to face loss in cash segment and profit in derivative as similar to assessee's case. Ld. Counsel explained the facts that once all the details of 13,000 transactions are considered, it resulted into profit of Rs. 2.55 crores, on net basis. On gross basis, loss in cash segment stood at Rs. 34.22 crores and profit at Rs. 36.77 crores in F&O segment. However, the transactions in both segments are linked with each other and hence one should see loss/profit on composite basis. Accordingly, he argued that it treated transactions in cash & F&O segment as one business activity and owing to this, it booked all the expenses irrespective of segment to which it pertains into one "share trading expenses account"
amounting to Rs. 9.26 crores. The loss under cash segment is disclosed at Rs.36.88 crores after accounting of the above share trading expenses. This expenditure consists of expenditure in cash segment, derivative segment (F&O) and commission paid for carrying out integrated activity of cash & F&O segment. Out of total expenditure of Rs.9.26 crores, expenditure amounting to Rs.2.59 crores was directly pertaining to trading in derivative segment and balance amount of Rs.6.67 crores was pertaining to cash segment. Once expenditure pertaining to F&O segment is reduced from the above expenses, loss in cash segment will stand reduced to Rs.34.29 crores i.e. Rs.36.88 crores - Rs.2.59 crores= 34.29 crores. Thus, almost all the loss of Rs.34.29 crores was accounted for and covered by the above 13,000 line items transactions which were to the tune of Rs.34.22 crores. Therefore, the balance amount of mismatch loss in cash segment was merely Rs.7.21 lacs only i.e. 34.29 crores - 34.22 crores. But Ld Counsel explained that on account of system constraints, it had not mapped the loss of Rs.7.21 lacs against transactions in derivative segment. However, the facts remain same and the residual loss of Rs.7.21 lacs also form part of the composite activity. In view of the above facts and circumstances of the case Ld. Counsel 25 only prayed that explanation to section 73 of the Act will not apply to the case of the assessee.
8. Alternatively also, he argued that the loss from cash segment and profit from derivative segment should be set off against each other. Loss in cash market is incidental to the profits earned in the F&O segment and therefore, to that extent, this loss from cash segment should be allowed to be set off as business loss. It is obvious that business profit cannot be computed without allowing a business loss. A loss other than a capital loss which is incidental to the trade is allowable u/s 28 of the Act itself on ordinary principles of commercial trading. He prayed that the loss suffered in cash segment is incidental to the profit earned in derivative segment. Therefore, the loss from cash segment should have to be allowed as business loss u/s 28 of the Act to be adjusted against profit earned from derivative segment.
9. Without prejudice to the above, he also argued that on account of composite nature of business i.e. trading in shares and trading in derivatives were considered as interlinked business. Hon'ble Delhi High Court order in case of CIT v. DLF Commercial Developers, ITA No 94 of 2009, categorically held that in terms of explanation to section 73, derivative based on stock and share fall squarely within explanation to section 73 and therefore, loss from purchase and sale of derivative would be speculative loss.
10. We have heard rival contentions and gone through facts and circumstances of the case. We find that the facts of the case as narrated above are undisputed. We find from the facts that the assessee had undertaken cash/future arbitrage activity as one single business activity i.e. the position in a cash segment in a particular scrip is taken on a particular date and at the same time the reverse position is taken in the same scrip in F&O segment. The transactions in cash segment and F&O 26 segment are inextricably linked with each other and are so interwoven that it is not possible to divorce these transactions and decide the nature of the income/loss. And hence, the loss suffered in cash segment, being an integrated part of the total arbitrage activities has to be allowed / set off against income from derivative segment. We find from the facts that the assessee has already provided day-wise position showing the scrip- wise quantities purchased and sold in cash segment and quantities sold and purchased in F&O segment. There are approx. 13,000 line items of data showing the date-wise and scrip-wise transactions. AO had made certain observations on these 13,000 line items, wherein he pointed out difference in buy qty. in cash market and sell qty. in future market or vice- versa. Based on these differences, he concluded that as there is no exact corresponding sale/purchase in other market, such transactions cannot be termed as arbitrage under section 43(5)(d) of the Act. But the bone of contention of AO for not allowing set off of loss between the two segments on account of quantity mismatch is without any basis because, in arbitrage it is not always possible to match the quantity, as it depends upon availability of shares/derivatives in respective segments. Also, due to sudden price fluctuation in any of the segment of markets, one has to continuously look at the new opportunity in order to increase profit or to reduce loss. Accordingly, the remaining portion of transactions is done in any segment keeping the net open position as always NIL thereby keeping all transaction at all point of time hedged against each other. In view of these facts we are of the view that in cash/future (derivative) arbitrage, hedge position is created by taking delivery in cash segment and selling in F&O segment. The price in future segment will trade at premium as compared to cash segment. Thus, a stock is purchased in cash segment and sold in future segment. With course of time when position in future segment comes closer to the expiry date, the price gap between cash and future segment narrows down. In such situation, arbitrager will roll over its position in future segment from current month 27 to next month. Therefore, in such kind of scenario one will see a trading in future segment only and not in cash segment.
11. We find that this issue is even dealt by Hon'ble Delhi High court in the case of CIT vs. DLF Commercial Developers Limited wherein it is held that in terms of explanation to section 73, derivative based on stock and share fall squarely within explanation to section 73 and therefore, loss from purchase and sale of derivative would be speculative loss.
"7. It is apparent, facially, that the term "speculative transaction" has been defined only in Section 43 (5). At the same time, it is qualified, i.e. that the scope of the definition is restricted in its application to working out the mandate of Sections 28 to 41 of the Act. In terms of the Explanation to Section 73 (4) in the case of a company, business of purchase and sale of shares is deemed to be speculation business. However, certain companies are excluded from this Explanation which are: (i) a 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'. (ii) a company, the principal business of which is the business of banking or the granting of loans and advances. 8. Section 43 defines, for the purpose of Sections 28 to 41, certain terms. These latter provisions fall in Chapter IV, in Section D, which deal with computation of business income. The said provisions provide for matters relating to computation of such income, rent taxes, insurance of buildings, repairs of plant and machinery, depreciation, reserves for shipping business, rehabilitation fund, expenditure on certain eligible 28 objects or schemes, deductions, amounts not deductible, profits chargeable to tax, etc. The assessee is no doubt correct in contending that the only definition of derivatives is to be found in Section 43 (5); yet the Court cannot ignore or overlook that the definition - to the extent it excludes such transactions from the mischief of the expression "speculative transactions" is confined in its application. Parliamentary intendment that such transactions are also excluded from the mischief of Explanation to Section 73 (4), however, is not borne out. 9. In this context, it would be instructive to notice that in Rajshree Sugars and Chemicals Ltd (supra), the Madras High Court noticed, rather dramatically, that ―..'Derivatives are time bombs and financial weapons of mass destruction' said Warren Buffett, one of the world's greatest investors, who overtook Microsoft Maestro in 2008 to become the richest man in the world and who is known as the 'Sage of Omaha or Oracle of Omaha'.
Derivatives, according to him, can push companies on to a spiral that can lead to a corporate melt down....‖ The High Court then, after examining the nature and characteristics of derivatives transactions, observed that:
5. What are these 'derivatives' which have gained such a great deal of notoriety? In simple terms, derivatives are financial instruments whose values depend on the value of other underlying financial instruments. The International Accounting Standard (IAS) 39, defines "derivatives" as follows: A derivative is a financial instrument:29
(a) whose value changes in response to the change in a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index, or similar variable (sometimes called the 'underlying'); (b) that requires no initial net investment or little initial net investment relative to other types of contracts that have a similar response to changes in market conditions; and (c) that is settled at a future date. Actually, derivatives are assets, whose values are derived from values of underlying assets. These underlying assets can be commodities, metals, energy resources, and financial assets such as shares, bonds, and foreign currencies.
10. It is no doubt, tempting to hold that since the expression "derivatives" is defined only in Section 43 (5) and since it excludes such transactions from the odium of speculative transactions, and further that since that has not been excluded from Section 73, yet, the Court would be doing violence to Parliamentary intendment. This is because a definition enacted for only a restricted purpose or objective should not be applied to achieve other ends or purposes. Doing so would be contrary to the statute. Thus contextual application of a definition or term is stressed; wherever the context and setting of a provision indicates an intention that an expression defined in some other place in the enactment, cannot be applied, that intent prevails, regardless of whether standard exclusionary terms (such as "unless the context otherwise requires") are used. In 30 The Vanguard Fire & General Insurance Co. Ltd., Madras v. M/S. Fraser And Ross & Anr AIR 1960 SC 971 it was held that:
―It is well settled that all statutory definitions or abbreviations must be read subject to the qualification variously expressed in the definition clauses which created them and it may be that even where the definition is exhaustive inasmuch as the word defined is said to mean a certain thing, it is possible for the word to have a somewhat different meaning in different sections of the Act depending upon the subject or the context. That is why all definitions in statutes generally begin with the qualifying words similar to the words used in the present case, namely, unless there is anything repugnant in the subject or context. Therefore in finding out the meaning of the word " insurer " in various sections of the Act, the meaning to be ordinarily given to it is that given in the definition clause. But this is not inflexible and there may be sections in the Act where the meaning may have to be departed from on account of the subject or context in which the word has been used and that will be giving effect to the opening sentence in the definition section, namely, unless there is anything repugnant in the subject or context. In view of this qualification, the court has not only to look at the words but also to look at the context, the collocation and the object of such words relating to such matter and 31 interpret the meaning intended to be conveyed by the use of the words under the circumstances.
Similarly, in N.K. Jain and Ors. v C.K. Shah and Ors. AIR 1991 SC 1289, it was held that:
4. The subject matter and the context in which a particular word is used are of great importance and it is axiomatic that the object underlying the Act must always be kept in view in construing the context in which a particular word is used...........
11. The stated objective of Section 73- apparent from the tenor of its language is to deny speculative businesses 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 sections. To borrow the Madras High Court's expression, ―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 32 and entirely dependent on stocks and shares, for determination of their value)."
12. Similar view was taken by the co-ordinate Bench of Kolkata in the case of DCIT vs. Baljit Securities Pvt. Ltd. in ITA No. 1183/Kol/2012 for AY 2009-10, which was subsequently affirmed by Hon'ble Calcutta High Court in GA No. 3481 of 2013 and in ITAT No. 215 of 2013 dated 12-03- 2014, wherein it is held as under:-
"It would, thus, appear that where an assessee, being the company, besides dealing in other things also deals in purchase and sale of shares of other companies, the assessee shall be deemed to be carrying on a speculation business. The assessee, in the present case, principally is a share 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 transaction carried out by the assessee, indicated above, was within the umbrella of speculative transaction. There was, as such, no bar in setting off the loss arising out of derivatives from the income arising out of buying and selling of shares. This is what the learned Tribunal has done."
13. And similarly, Hon'ble Bombay High Court in the case of CIT vs. Lokmat Newspapers Pvt. Ltd. in ITA(L) No. 3005 of 2009 dated 16-02- 2010, wherein held as under:-
"6. Subsection (1) of Section 73 provides that the loss in respect of a speculation business can be set off only against the profits and gains of another 33 speculation business. Subsection (2) of Section 73 enables an assessee to carry forward the loss arising out of a speculation business which has not been set off either wholly or partly under the provisions of subsection (1). A loss from a speculation business which has not been set off either entirely or in part, can be carried forward to the following Assessment Year and can be set off against the profits and gains, if any, of a speculation business carried on by the assessee and assessable for that Assessment Year. If the loss cannot be wholly set off, the amount of loss which is not so set off, can be carried forward to the following Assessment Year. However, a loss cannot be carried forward for more than four Assessment Years immediately succeeding the Assessment Year in which the loss was first computed.
7. The explanation to Section 73 creates a deeming fiction. The explanation postulates a situation where the assessee is a Company and where any part of the business of the Company consists of the purchase and sale of shares of other Companies. In such a case, the assessee is for the purposes of Section 73 deemed to be carrying on a speculation business, to the extent to which the business consists of the purchase and sale of shares. The explanation carves out an exception in the case of a Company whose gross total income consists mainly of income under the heads of interest on securities, income from house property, capital gains and income from other sources, or a company the principal business of which is the business of banking or the granting of loans and advances. The 34 exception carved out by the explanation, however, is not attracted to the facts of this case and its interpretation, therefore, does not call for consideration here. What is material for the purposes of this case is, that the explanation postulates a situation where any part of the business of a Company consists of the purchase and sale of shares of other Companies. Therefore, the explanation is attracted in a situation where something more than an isolated transaction involving sale and purchase of shares is involved. A business postulates a systematic course of activity or dealing. Unless the business of a Company consists of the sale and purchase of shares, the deeming fiction would not apply. However, once the requirements of the explanation are satisfied, namely, in a situation where: (i) The assessee is a Company; (ii) Any part of the business of the Company consists in the purchase and sale of shares of other Companies, the consequence which is envisaged in the explanation, as a fiction of law, is brought into existence. The legal fiction is that the assessee is deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.
8. Section 28 of the Act deals with the profits and gains of a business or profession. Explanation (2) to Section 28 provides that where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (which is to be referred to as a "speculation business") shall be deemed to be distinct and separate from any other business. Section 43 35 provides definitions of certain terms relevant to the head of income from profits and gains of business or profession. Subsection (5) of Section 43 defines the expression "speculative transaction" to mean a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. The proviso to subsection (5) then describes certain categories of transactions which shall not be deemed to be speculative transactions. The proviso will not have a bearing on these proceedings.
9. The contention of the Revenue in the present case, in essence is that the definition of the expression "speculative transaction" in Section 43(5) must be read into the provisions of Section 73, because a business cannot be a speculation business unless there is a speculative transaction and a speculative transaction is defined by the former as one, not involving an actual delivery of shares. Hence, it was submitted that a transaction which involves an actual delivery of shares would not constitute a speculative transaction and the assessee who is engaged in a business involving the actual delivery of shares, cannot be regarded as being engaged in speculation business.
10. The submission which has been urged on behalf of the Revenue, cannot be accepted, having regard to the plain meaning of the explanation to Section
73. The submission of the Revenue is that a loss which arises on account of a transaction of the sale and purchase of shares would constitute a loss from 36 a speculation business for the purposes of the explanation. But, that the profit which arises from a transaction involving the actual delivery of shares would not constitute a profit for the purposes of subsections (1) and (2) of Section 73 in respect of which a set off can be granted. To accept the submission of the Revenue would be to introduce a restriction into the scope and ambit of the deeming fiction which is created by the explanation to Section 73, which is not contemplated by Parliament. Once a deeming fiction is created by law, it must be given full and free effect, of course, in relation to the ambit within which it is intended to operate. The deeming fiction created by the explanation to Section 73 defines when an assessee is to be deemed to be carrying on a speculation business for the purposes of the Section. The deeming fiction is, therefore, one which arises specifically in the context of the provisions of Section 73 and is confined to that purpose alone. The explanation stipulates that where an assessee is a company whose business consists in any part of the purchase and sale of shares of other Companies, it shall be deemed to be carrying on a speculation business to the extent to which the business consists of purchase and sale of such shares. Whether or not it is a profit or loss that has resulted from carrying on such business, is a consideration which is alien to the meaning of what constitutes a speculation business by the explanation to Section 73. Once an assessee is deemed to be carrying on a speculation business for the purpose of Section 73, any loss computed in respect of that speculation business, can be set off 37 only against the profits and gains of an other speculation business. Similarly, for the purposes of subsection (2), the loss in respect of a speculation business which has not been set off either in whole or in part, can be carried forward and can be set off against profits and gains "of any speculation business". The expression "any speculation business" means a speculation business of the assessee in respect of which profits and gains for the Assessment Year in question have arisen and there is no justification to restrict the content of that speculation business where profits have arisen by excluding a business involving actual delivery of shares. No such restriction is found in the explanation. To impose one is a legislative function. In other words, once the assessee is carrying on a speculation business and the profits and gains have arisen from that business during the course of the Assessment Year, the assessee is entitled to set off the losses carried forward from a speculation business arising out of a previous Assessment Year."
14. In view of the above facts of the case and precedents cited above, we are of the view that both trading of shares are not coming under the preview of section 43(5) of the Act, which provides the definition of speculative transaction for the purpose of section 28 to section 41 of the Act. The fact that both delivery based transaction in shares and derivative transactions are non-speculative as per section 43(5) of the Act is concerned, it goes to confirm that both will have same treatment as regards to application of the explanation to section 73 of the Act is concerned which creates a deeming fiction. As in the present case, the assessee had undertaken cash/future arbitrage activity as one single 38 business activity i.e. the position in a cash segment in a particular scrip is taken on a particular date and at the same time the reverse position is taken in the same scrip in F&O segment. The transactions in cash segment and F&O segment are inextricably linked with each other and are so interwoven that it is not possible to divorce these transactions and decide the nature of the income/loss. And hence, the loss suffered in cash segment, being an integrated part of the total arbitrage activities has to be allowed / set off against income from derivative segment. Accordingly, we confirm the order of CIT(A) allowing loss earned by assessee on account of purchase and sale of securities against income earned in derivative transactions. The issue of Revenue's appeal is accordingly dismissed.
15. The next issue in all these appeals of Revenues in ITA Nos. 3764/Mum/2014, 615,617&618/Mum/2015 in the case of Angel Global Capital Private Limited (now known as Angel Broking Private Limited), Angel Broking Limited (now known as Angel Broking Private Limited), Angel Securities Limited is as regards to the order of CIT(A) deleing the addition made by the AO on account of loan taken by these assessee's as deemed dividend under section 2(22) of the Act. For this all the assessee's have raised identically worded grounds and the fact and circumstances are also exactly identical. The ground as raised in Angel Global Capital Private Limited in ITA No. 3764/Mum/2014 reads as under: -
"On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to delete the addition made on account of deemed dividend by the Assessing officer in spite of the fact that in appeal the addition made in the case of Angel Broking, Angel Commodities Broking Pvt. Ltd.39
and Angel Securities Ltd. has been deleted by the appellant authority.""
16. The brief facts in the present case (Angel Global Capital Private Limited) are that the assessee claimed that it was registered NBFC with RBI and into the business of granting of loans to the clients of broking subsidiaries. All the broking entities with whom transactions were in question i.e. ABL & ASL were 100% subsidiaries of the Assessee. It was contended by assessee that the Clients may trade or open account in different segments through different companies in the Angel Group, but it was considered as one entity by the clients i.e. "Angel Broking Limited'. The Assessee played the role of facilitating funds for seamless operation across all its 100% subsidiaries which includes namely ABL (registered in BSE & NSE, certificate in NSE segment was earlier held by ACDL, which was merged with ABL w. e. f. April 1, 2008), ACBPL (registered in NCDEX & MCX) & ASI. The Assessee Company also stood as corporate guarantor for the borrowing lines extended by banks to ABL & ACBPL and had declared Rs. 269 crores as contingent liabilities as on March 31, 2010. The money which was received by the Assessee Company from its subsidiaries or vice versa was on account of client-related transactions. The flow of funds from the broking subsidiaries (ABL) to NBFC (AGCPL) was for the following reasons:
'The Assessee Company being NBFC & holding company in the Angel group used to facilitate the common clients of broking companies in the group by giving funds to them for trading activities which in turn helped ABL to generate substantial brokerage and other income (demat income). As on March 31, 2010, the Assessee Company had debtors outstanding to the extent of Rs. 97.50 crores. These debtors were common clients among the Assessee Company and the broking subsidiaries.40
One of the prime considerations for clients to open accounts with any broking house is availability of all facilities under one roof i.e. trading in equity, commodity, funding by NBFC. Pertinently, clients took finance from NBFC and in turn did trading i.e. purchase and sale of shares in broking entity in the Angel group. Hence, movement of funds between group companies on account of client position was inevitable. Thus, the flow of funds between Angel group was purely and potently business transaction.
In order to facilitate its brokerage business, ABL provided credit facility to its trading clients in the normal course of business and therefore, at any given point of time, ABL had blocked substantial capital in sundry debtors which is a business requirement and incidental to its principal broking business. Same is also evident from the ARL annual report, in which debtors stood at approx Rs. 354.20 crores as on March 31, 2010. The Assessee Company was also a client of ABL. Stock in trade as on March 31, 2010 with the Assessee Company stood at Rs. 44.95 crores. The Assessee Company carried out its arbitrage activities which generated brokerage/volumes for broking subsidiaries. The Assessee Company gave business to ABL to the extent of approx. Rs. 45.84 Lacs as brokerage and Rs. 1,03,319 crores as volumes at the exchange. The Assessee Company was among the top 10 customers of Angel Broking Limited. In fact, this volume contribution enabled ABL to gain significant mileage in terms of its reputation as a broker by enabling it to win several awards for being one of the largest Broking Houses in the country. For 41 instance, for F.Y. 2009-10 alone, it was awarded as "Best Retail Broking House" and "The broker with the largest Distribution Network".
17. The learned Counsel for the assessee contended that on all the transaction interest was charged for all such transfers between the group companies and there was no profit margin on the interest cost levied by one company to another and hence was mere charge back of cost. Businesses were so integrated in the Angel group that with effect from April 1, 2012, ABL got merged with the Assessee, resulting in a new entity called Angel Broking Private Limited ("ABPL"), which is nothing but the merger of these entities into one in order to achieve synergy and optimization of operations and resources. It is therefore evident that all financial transactions among ABL and the Assessee were done in the normal course for business expediency. These transactions are nothing but commercial transactions and thus outside the purview of Deemed Dividend provisions.
18. The learned Counsel for the assessee alternatively, argued that amount received by it from ABL, ACBPL & ASL were not in the nature of loan but in the nature of inter corporate deposits hence provisions of section 2(22)(e) would not be applicable in this case. The AO rejected assessee's explanation on the transactions' nature as ICDs and considered it was an after-thought by the Assessee. It was explained that placing ICDs between group companies is a normal practice in the Angel group. The learned counsel referred the Tribunal decision in assessee's own case in various group entities and he referred to the Tribunal decision in ITA Nos. 2083 to 2086/Mum/2013 for AY 2008-09, vide order dated 26-07-2013, wherein Tribunal has considered all the aspects and deleted the addition by observing in Para 58 to 66 as under: -
"58. When we are dealing with the transactions, based on factual legality, we must remember that 42 source of law is either facts or logic and not the vise versa. Keeping this in mind, we have to First examine the nature and conduct of the assessee. In the present set of circumstance, we have seen that the assessee(s) were having miniscule share capital, as compared to the transactions entered into by them, Within the group. The huge gamut of transactions were undertaken for the sake of clients, whom the assesses were catering to. What the revenue authorities have looked into is the overall result of the impugned transaction, what the revenue authorities tiLt! not See, Was the quantum involved, which was in excess of Rs. 1,600 crores. When we look into the assessment order, we find that the intention of the AO was single, to treat the transactions as deemed dividend. The AO did look into the definition of the word dividend, as section 2, of the Income Tax Act, but because of the definition, the AG, could make an addition only to the extent of the accumulated profits and not to the extent of the loan transactions, as admitted by the assessee(s).
59. The application of deeming provisions have to be construed strictly. If at all, deeming provision, section 2(22)(e). herein above, have to be applied, it became necessary, that the AO should have added the entire loan of Rs. 609,13,08,013/- in the hands of the assessee, but, because of the definition of dividend, restricted the AO to make a restrictive addition and as it result, the addition was restricted to Rs. 35,64,34,372/• in the case of ABPL (similar additions in other cases. as well. We must not ignore the ration laid down by the Hon'ble Calcutta High Court in the case of CIT vs Bhupinder Singh 43 Atwal, wherein it was held, While interpreting the taxing stature relating to deeming provision and taxing an artificial income, fiction has to be strictly construed. In case of doubt about the interpretation or having more then, One view, then, the assessee would be entitled to the benefit of doubt.
60. We also place reliance on the decision of Hon'ble Bombay 1-11gb Court in I lie case of CIT vs Hindustan Petroleum Corporation Limited, reported in 187 LTR 1, wherein, it was held, a legal fiction has to be carried to its logical conclusion, but only within the parameters of the purpose for which this fiction is created. As far as possible, the legal fiction should not be given a meaning so as to Cause injustice to the assessee. This ratio was laid down much earlier, by the Hon'ble Supreme Court in the case of C P Sarathv Mudaliar, reported in 83 ITR
170.
61. We have also seen that inter Se transactions are to the tune of Rs. 1,600 crores, if divided by the working days would come to Rs. 15.50 crusts per day. This, in our opinion, cannot be the intention of the legislature, to turn arid treat commercial transactions, carried through the current accounts of the transacting group companies, as deemed dividend. This situation and transactions entered into by the assessee and vice versa, are thus squarely covered by the above decisions.
62. We also do not find any provision in the Act, which suggests that the assessee has to seek permission and guidance from the AO, as to how to conduct its business. The purpose of bringing in die 44 impugned provisions was to curb the mal practices, not to thwart the assessee conducting its business in a normal course. In the present cases, the AO acted on a pre conceived notion to import the provisions of section 2(22)(e) without actually examining the nature and purpose and extent of the transactions. In our opinion, the revenue authorities, erred in not looking at the circumstances from the eyes of the assessee(s) and then conclude whether the Act and various judicial decisions gave him the window to bring to tax under a legal fiction.
63. When we look from the angle of ICDs, as well, the issue before us is answered by various for a, including the decision in the case of the group's own company, Angel Infin Limited (supra). We are not inclined to accept the reasoning of the CIT(A) that charging of interest inter se, shall strike the chord to invite the mischief of section 2(22)(e) as it is only the manner to charge back to compensate in respect of transfer of funds and similarly the assessee also charged at cost, the funds transferred to ACDL. It was a management decision that all intercompany transfers were to be levied a uniform charge of 11%, because here as well, neither the group companies nor its shareholders benefitted. The mere charge back of interest cost does not vitiate the original nature of the transactions and just because interest is charged, concept of transfer of funds between companies for the purpose of business cannot be rejected. This aspect, as well, was submitted before the revenue authorities, who simply brushed aside and did not consider them, which in our opinion was an important aspect to get 45 to the bottom of the conduct of business at this stage, we cannot ignore this important aspect. In our opinion, the group companies, who were catering to its clients, would not suffer any loss, because of them. This, again, was done strictly in accordance with the procedures placed by the Companies Act, 1956, to be accordance with KYC norms. In these circumstances, we cannot place reliance on the decision of coordinate Bench at Agra, as relied upon by the DR and bring the ratio laid down by the Hon'ble Apex court and the Hon'ble Bombay High Court to a naught.
64. We cannot ignore the decision of Hon'ble Supreme Court in the case of Ashokbhai Chimanbhai, reported in 56 ITR 42, wherein, the Hon'ble Apex Court held, ".....the position of servers on the date of the transaction has to be considered. The operating profit accrues at the end of the year and does not accrue on daily basis". In the instant case(s), the AO considered the figures as 31.03.2008, had the AO considered and chased the transaction on daily basis, the AO himself would not have strode on the provisions of section 2(22)(e). Even when we take into consideration, the Special Bench decision in the case of Bhumik Colour (supra), what we find is that none of th ecorporate entities, from whom the alleged loans/ advances had been received were either registered or beneficial share holders in the assessee company.
This is besides the fact that any transaction, as undertaken by the assessee with the group companies, were purely business transactions, having commercial background.
4665. Considering the entire facts and taking into account the various decisions by the various for a, we are of the opinion that the revenue authorities erred in invoking the provisions of section 2(22)(e), on the transactions, which are purely and patently, normal business transactions, without any hidden agenda amongst the group companies to devise any tax saving measures. We, therefore, respectively, following the decisions, relied upon by the assessee and the Senior Counsel, covering the various angles, including the angle of funds used by the group company as ICDs, set aside the order of the CIT(A) and direct the AO to delete the addition made under section 2(22)(e) in the group companies, whose appeals are being dealt with by us."
19. The learned Counsel also alternatively argued that it is in the business of lending of money and lending of money was substantial part of business and for which he referred to the working as under: -
ABL ASL Capital deployed in the business of lending A 7.75 5.15 Capital deployed by way of trade receivables* in the B 234.66 0.05 lending business (Avg.) Total capital deployed in the lending business C=A+B 242.23 5.20 Average Capital Employed 1.Average share capital 12.25 5.50 2.Average Share application money 3.Average reserves 38.13 5.07 4.Avearge inter corporate deposits 2.91 1.57 5. Average trade payables 365.13 0.03 Total average capital employed D 418.42 12.16
Ratio of total capital deployed in lending business to the E=C/D 57.89% 42.72 average capital deployed in the business
20. The learned Counsel explain in view of the above, that trade receivables are the value of the shares purchased by the clients from 47 exchanges, which in turn was funded by ABL. These shares are nothing but the financial assets whose beneficial owners are clients. Therefore these trade receivables are similar to Loan against Securities ("LAS") facilities given by financial institution NBFC. We can also equate it to the transactions undertaken between bank and prospective home buyers wherein a bank lends money to the home owners by paying directly to the builders and keeps the home as a security against the loan advanced to borrowers. On similar line, in assessee's business, the learned Counsel explain that lending of money to the clients by settling their dues with exchanges. Parallel can also be drawn from the credit card business of banks, wherein advances to the customers are considered as lending activities. He explained that ABL has also earned interest income (delayed payment charges) from trade receivables amounting to Rs. 12.31 crores and Rs. 33.38 crores respectively during F.Y. 2008-09 and F.Y. 2009-10 which further increased to 57.92 crores during FY 2010-11. He stated that even if assessee exclude trade receivables from total capital employed, then also it will satisfy the Criteria that substantial part of the business of ASL was lending i.e. more than 20% of business. Accordingly, section 2(22)(e)(ii) specifically excludes from the scope of deemed dividend, the amount transferred by a company to a shareholder in the ordinary course of its business and where the lending of money is a substantial part of the business of the company.
21. In view of the above, the learned counsel for the assessee fairly stated that the issue is squarely covered in favour of assessee and against Revenue in assessee's own case or in group cases exactly on identical facts. When this was confronted to the learned CIT DR, he fairly agreed that in earlier years in assessee's own and group cases the issue has been decided in favour of assessee.
22. Accordingly, we are of the view that the issue is squarely covered in favour of assessee by co-ordinate Bench decision in assessee's own 48 case as cited above, respectfully following the same, we allow the claim of the assessee. Accordingly, the order of CIT(A) is confirmed and this issue of Revenue's appeal is dismissed.
23. Similar are the facts in other group concerns in ITA Nos. 615,617&618/Mum/2015 in the case of Angel Broking limited (now known as Angel Broking Private Limited), Angel Securities Limited & Angel Global Capital Private Limited (now known as Angel Broking Private Limited), are exactly identical to the above facts for AY 2009-10 in ITA No. 3764/Mum/2014, respectfully following the same, we confirm the order of CIT(A) and this issue of Revenue's appeals is dismissed.
24. In the result, all the appeals of Revenue are dismissed.
Order pronounced in the open court on 13-12-2017.
Sd/- Sd/-
(N.K. PRADHAN) (MAHAVIR SINGH)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai, Dated: 13-12-2017
Sudip Sarkar /Sr.PS
Copy of the Order forwarded to:
1. The Appellant
2. The Respondent.
3. The CIT (A), Mumbai.
4. CIT
5. DR, ITAT, Mumbai BY ORDER,
6. Guard file.
//True Copy//
Assistant Registrar
ITAT, MUMBAI