2010 (9) TMI 1143 - AT - Income Tax

Summary

Issues Involved:
The judgment involves the treatment of derivative losses as speculative transactions u/s 43(5) of the Income Tax Act, 1961 for the assessment year 2006-07.

Derivative Loss Treatment:
The assessee incurred a derivative loss of Rs. 41,92,859 and adjusted it against other income. The Assessing Officer (AO) raised the issue of treating pre-26th January 2006 derivative losses as speculative. The assessee argued that derivative contracts are not commodities and do not fall under the definition of speculative transactions u/s 43(5). The AO disagreed, stating that derivative transactions are covered under speculative transactions. The CIT(A) held that derivative transactions should be treated as non-speculative based on previous judgments and the Finance Act, 2005 amendment. The ITAT Mumbai confirmed the CIT(A)'s decision, citing a Delhi High Court ruling for the assessment year 2006-07.

Business Expenditure Disallowance:
The AO disallowed business expenditure of Rs. 15,99,813 as speculative business expenditure. The CIT(A) directed the AO to treat derivative transactions as non-speculative, rendering the disallowance infructuous. The revenue appealed against the CIT(A)'s decision, challenging the treatment of derivative transactions and the disallowance of business expenditure.

Judicial Interpretation and Decision:
The ITAT Mumbai referred to a Delhi High Court decision, affirming that derivative transactions at recognized stock exchanges are not speculative transactions u/s 43(5). The ITAT upheld the CIT(A)'s decision to delete the addition of speculation loss and business expenditure, dismissing the revenue's appeal.