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2022 (6) TMI 533 - AT - Income TaxSpeculative loss or not - Set off and carry forward of loss arising from derivative transactions in currency segment - Eligible transaction in respect of derivatives transaction - HELD THAT - Section 43(5) of the Income Tax Act defines 'speculative transaction'. As per the Scheme of the Act, a transaction of speculative nature carries a differential treatment qua the non speculative transaction in the matter of set off and carry forward of losses arising therefrom. The proviso to Section 43(5) provides for certain exceptions in varied situation and where the transactions executed fall within any of such exceptions, profit/loss arising from such transactions will not be regarded as derived from speculative business and consequently, will not be deemed to be speculative transaction for the purposes of the Act. We are presently concerned with clause (d) of such exceptions annexed to Section 43(5) of the Act. In view of the clause (d) to Section 43(5), a transaction will not be regarded as 'speculative transaction' where an eligible transaction in respect of trading in derivatives referred to in clause (ac) of Section 2 of Securities Contracts (Regulation) Act, 1956 was carried out in a recognized stock exchange. Explanation-1 to Section 43(5), in turn, defines 'eligible transaction' for the purposes of clause (d) to mean a transaction carried out electronically on screen based systems through a stock broker registered under SEBI Act 1992. In essence, an 'eligible transaction' as defined in Explanation-I to Section 43(5) in respect of derivatives transaction as defined in clause (ac) to Section 2 of Securities Contract (Regulation) Act, 1956 carried out on a recognized Stock Exchange shall not be deemed as Speculative Transaction having regard to exception provided in clause (d) to proviso to Section 43(5) of the Act. We are of the considered view that the assessee in the instant case has complied with all the conditions of clause (d) and Explanation-1 to Section 43(5) of the Act cumulatively so as to treat such currency derivative transaction as eligible transaction for the purposes of exclusion from the ambit of speculative transaction defined under Section 43(5) - This being the position, the loss arising from derivative transaction has been incorrectly disallowed by the AO for being set off and carried forward against non speculative business income in accordance with law and wrongly confirmed by the CIT(A). The action of the CIT(A) is accordingly set aside and the Assessing Officer is directed to restore the claim of the assessee to be non speculative in nature. Appeal of assessee allowed.
Issues:
Treatment of loss arising from derivative transactions in currency segment for set off and carry forward. Analysis: The appeal was filed by the Assessee against the order of the Commissioner of Income Tax (Appeals) concerning the assessment order under Section 143(3) of the Income Tax Act, 1961 for AY 2015-16. The Assessee, engaged in share broking business, claimed losses from currency derivatives as non-speculative business, seeking set off against other income. However, the Assessing Officer denied the set off, deeming the currency derivative losses as speculative under Section 43(5) of the Act. The Assessee contended that the transactions fell within exceptions to speculative transactions as per Section 43(5) and SEBI regulations. The main issue was the treatment of loss from derivative transactions in the currency segment for set off and carry forward. The Assessee argued that the currency derivative transactions were non-speculative and eligible for set off against non-speculative business income. The Tribunal examined Section 43(5) which defines speculative transactions and exceptions, particularly clause (d) related to derivatives trading on recognized stock exchanges. The Tribunal considered SEBI regulations and CBDT instructions regarding forex derivatives losses. The Tribunal analyzed the definition of derivatives under the Securities Contracts (Regulation) Act, 1956, and observed that the wide definition included currency derivatives. Referring to previous judgments, the Tribunal noted that currency derivatives were covered under derivatives and excluded from speculative transactions under Section 43(5). The Tribunal emphasized compliance with conditions under clause (d) and Explanation-1 to Section 43(5) to treat currency derivative transactions as non-speculative. In conclusion, the Tribunal found that the Assessee met the conditions to treat currency derivative transactions as non-speculative, contrary to the Assessing Officer's decision. The Tribunal set aside the CIT(A)'s confirmation of disallowing the losses and directed the Assessing Officer to treat the losses as non-speculative for set off and carry forward against non-speculative business income. The appeal of the Assessee was allowed, emphasizing compliance with legal provisions and SEBI regulations. The judgment highlighted the importance of correctly categorizing derivative transactions, ensuring compliance with statutory provisions, and considering SEBI regulations for tax treatment. The decision provided clarity on the treatment of currency derivative losses, emphasizing the distinction between speculative and non-speculative transactions under the Income Tax Act.
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