2009 (6) TMI 676 - AT - Income Tax

Transactions in derivatives - set off of speculation loss, jobbing loss and brought forward speculation loss against the profit of future and option (F O) income - Nature of F O transaction ''speculative or derivatives'' - whether the provisions of clause (d) of section 43(5) are clarificative in nature and have retrospective application? - admittedly, the transactions in future entered into by the assessee are derivative transactions. AO held that F O transactions were speculative transactions in terms of definition of such transaction in section 43(5) and amendment by the Finance Act, 2005 had only clarified the position. Thus the amended provisions were applicable to the assessment year 2004-05. Accordingly he disallowed the claim of the assessee. CIT(A) agreed with the submission of the assessee that F O transactions were also without delivery and therefore such transactions were speculative in nature. CIT(A) also agreed that amended provisions of section 43(5)( d ) had only prospective application from assessment year 2006-07. HELD THAT - We find that the same issue has already been considered by the Jaipur Bench of the Tribunal in case of P.S. Kapur v. Asstt. CIT. 2008 (7) TMI 463 - ITAT JAIPUR-A , The Tribunal noted that in order that a transaction be speculative within the meaning of the definition in section 43(5), the following three ingredients should be satisfied ( a )It should be transaction in purchase/sale of commodity. Commodity would include stock and share. ( b )The transaction envisages delivery/transfer. ( c )The transaction is settled otherwise than by delivery or transfer. The transactions in derivative are thus not speculative as these lack the basic ingredients of speculative transactions. The Tribunal also held that clause ( d ) of section 43(5) inserted by the Finance Act, 2005 deeming the transactions in derivative as non-speculative was clarificatory in nature as it only clarified the existing position. It has therefore retrospective application. Thus transactions in derivative were held to be non-speculative. We therefore hold that the subject transactions are not speculative transactions and thus the income from such transactions cannot be set off against the speculation loss. The order of CIT(A) therefore cannot be sustained. The same is set aside and the order of AO is upheld.

Summary

Issues:
1. Whether F&O transactions can be considered as speculative transactions.
2. Whether the provisions of clause (d) of section 43(5) have retrospective application.

Analysis:
1. The dispute in this appeal revolves around whether F&O transactions qualify as speculative transactions. The definition of speculative transactions under section 43(5) involves contracts for purchase or sale settled without actual delivery. The Finance Act, 2005 introduced clause (d) in section 43(5) deeming trading in derivatives as non-speculative. The key question is whether F&O transactions fall under this definition and if the clause has retrospective application.

2. The Tribunal examined the nature of derivative products, noting their intangible quality, making them incapable of delivery or transfer. It was established that derivative transactions lack the essential elements of speculative transactions as defined in section 43(5). The Tribunal held that clause (d) of section 43(5) was clarificatory and had retrospective effect, deeming derivative transactions as non-speculative. The argument that the transactions were not eligible under clause (d) was dismissed due to lack of evidence. Even if not strictly eligible, the transactions were in derivative products, deemed non-speculative by the Tribunal. Therefore, the income from such transactions cannot be set off against speculation losses.

3. The Jaipur Bench's decision in a similar case supported the view that derivative transactions are not speculative. The Tribunal's ruling emphasized the retrospective application of clause (d) of section 43(5). The judgment highlighted that even if procedural violations occurred, transactions in derivative products remain non-speculative under the statutory definition. Consequently, the order of the CIT(A) allowing the set off of speculation losses against F&O income was overturned, and the Assessing Officer's decision was upheld.

4. In conclusion, the Tribunal determined that F&O transactions are not speculative as per the statutory definition, and the provisions of clause (d) of section 43(5) have retrospective application. The appeal by the revenue was allowed, setting aside the CIT(A)'s order and upholding the Assessing Officer's decision regarding the treatment of F&O income and speculation losses.