2009 (7) TMI 172 - ITAT CALCUTTA

Loss on futures and options - transactions in derivative - whether the transaction in derivatives falls within the meaning of speculative transaction as provided under s. 43(5)? - Assessee is a company which is engaged in the business of financing and investments in shares and securities. During the year under consideration, the assessee suffered the loss on account of futures and options. The AO treated the same as speculation loss as per s. 43(5). CIT(A) confirmed the order of the AO on this ground.

HELD THAT:- In the case under appeal before us, it is admitted that the underlying asset is shares. Therefore, in our opinion, derivatives will also fall within the meaning of "commodity" used in s. 43(5). We may also mention that Finance Act, 2005 has provided that certain transactions in respect of trading in derivatives shall not be deemed to be speculative transactions within the meaning of s. 43(5). If the transaction in derivatives does not fall within the definition of 'speculation transaction' u/s. 43(5), then there was no question of exempting certain type of transaction in derivatives from the scope of speculative transaction u/s. 43(5).

If it is held that the transaction in derivatives docs not fall in s. 43(5), it will make cl. (d) and Explanation thereto below s. 43(5) introduced by Finance Act, 2005 to be redundant. In furtherance to the above Explanation, the Central Government has also framed rules, i.e. r. 6DDA and r. 6DDB. It cannot be presumed that the Government has introduced a clause, i.e. cl. (d) as well as Explanation thereto, which was redundant and infructuous.

Whether cl. (d) of s. 43(5) introduced by Finance Act, 2005 w.e.f. 1st April, 2006 is clarificatory and, therefore, retrospective in nature - The rule of reasonable construction must be applied while construing a statute." Considering the matter and relevant laws, it is evident that Expln. 2 to s. 43B itself being retrospective, the first proviso to that section is also to be considered as retrospective because the proviso supplies an obvious omission. But in the case of the assessee before us, as we have already mentioned that in the Memorandum Explaining the Provisions in the Finance Bill, 2005, which introduced cl. (d), the purpose of introduction of cl. (d) has been clearly explained.

The legislature by way of Explanation to cl. (d) to s. 43(5) has clarified the term 'eligible transaction' and 'recognized stock exchange' and in rr. 6DDA and 6DDB the legislature has also prescribed the conditions which a stock exchange is required to fulfil to get notified as a recognized stock exchange for the purpose of cl. (b) of proviso to s. 43(5). Therefore, the ratio of decision of Hon'ble apex Court in the case of Allied Motors (P) Ltd. [1997 (3) TMI 9 - SUPREME COURT] would not be applicable while considering cl. (d) of s. 43(5).

We have found that the purpose of introduction of cl. (d) of s. 43(5) was not to clear any obvious omission, but the legislature found that due to recent systemic and technological changes introduced by stock markets there is sufficient transparency in the transactions and, therefore, the legislature decided to exempt the trading in derivatives which otherwise under certain conditions i.e. eligible transactions in trading in derivatives in recognized stock exchange, were exempt from the purview of speculative transaction under s. 43(5). The procedure has also been prescribed by way of r. 6DDA and r. 6DDB how a stock exchange can become a recognized stock exchange. From these facts it is evident that cl. (d) of s. 43(5) cannot be held to be retrospective.

Therefore, We hold that cl. (d) of s. 43(5) is prospective in nature and will be effective from the date from which the legislature made it effective, i.e. 1st April, 2006 and will be applicable from asst. yr. 2006-07 onwards.

We find no merit in the assessee's appeal. In the result, the assessee's appeal is dismissed.