2009 (10) TMI 633 - AT - Income Tax

Disallowance of loss on F O transaction carried at the stock exchange - Speculative transactions or not? - assessee is in business as builder, developer and contractor - AO held, that the transactions are carried on at National Stock Exchange and Bombay Stock Exchange. Bombay Stock Exchange Ltd. and National Stock Exchange of India Ltd. are recognized Stock Exchanges as per Notification dated 25-1-2006. Therefore the transactions in F O segment prior to 25-1-2006 are regarded as speculative loss - CIT(A) hold that the appellant s derivative transaction up to and including 24-1-2006 for the year under appeal should be construed as speculative transaction within the meaning of section 43(5) HELD THAT - The recognized stock exchange means a recognized stock exchange as notified by the Central Government for this purpose. Therefore, even if the notification is from a particular date, as per clause ( d ) inserted, the same will apply to all the transactions in relation to assessment year 2006-07 and onwards. Clause ( d ) does not mention that unless the recognized stock exchange is notified, the transaction will not be deemed to be a speculative transaction. The power to notify the stock exchange is granted under the statute and hence once the recognized stock exchange is notified, the same will apply in respect of all eligible transactions carried out in relation to financial year relevant to assessment year 2006-07 and onwards. The Special Bench in the case of Shree Capital Services Ltd. 2009 (7) TMI 172 - ITAT CALCUTTA held that clause ( d ) of section 43(5) is prospective in nature and will be effective from the date from which the Legislature made it effective, i.e., 1-4-2006 and will be applicable to assessment year 2006-07 onwards . The notification is by way of a subordinated Legislation but cannot override the principal Legislation enacted by the Parliament. It only clarifies but will not override unless statutorily so prescribed. Since there is no dispute to the fact that the transactions in the present case in F O segment are the eligible transactions carried out in a recognized stock exchange, loss in such transactions cannot be deemed to be transaction in speculation business. The same being considered as regular business transaction, loss incurred in the same is to be treated as business loss and not loss in speculation business. In the result, the appeal is allowed.

Summary

Issues:
1. Disallowance of loss on future and option transaction as speculation business loss.

Analysis:
The appeal was against the disallowance of a loss on future and option transactions treated as speculation business loss. The assessee, engaged in construction business, also traded in shares through future and option transactions, resulting in a loss. The Assessing Officer considered the loss as speculation loss under section 43(5) and the Explanation to section 73. However, the assessee argued that the transactions were conducted through a registered broker at recognized stock exchanges, which should not be deemed speculative transactions as per the Proviso to section 43(5). The insertion of clause (d) in the Proviso by the Finance Act, 2005, effective from 1-4-2006, clarified that transactions in derivatives at recognized stock exchanges are not speculative. The Commissioner (Appeals) held that transactions up to 24-1-2006 were speculative, based on the Notification No. 2/2006 dated 25-1-2006.

The Tribunal considered the contention that clause (d) of section 43(5) is prospective from 1-4-2006 and applicable from assessment year 2006-07 onwards. Transactions in derivatives at recognized stock exchanges are not speculative as per the Proviso to section 43(5(d), regardless of the date of notification of the stock exchanges. The Tribunal held that the notification is subordinate legislation and cannot override the principal legislation. Since the transactions in the case were eligible transactions at recognized stock exchanges, the loss incurred should be treated as a business loss, not a speculation loss. The Tribunal followed the decision of the Special Bench in a similar case, emphasizing that clause (d) of section 43(5) is prospective and effective from 1-4-2006.

In conclusion, the Tribunal allowed the appeal, ruling in favor of the assessee. The loss on future and option transactions at recognized stock exchanges was not to be considered as speculation business loss. The Tribunal upheld that such transactions were regular business transactions, and the loss incurred should be treated as a business loss, not a speculation loss.