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2010 (4) TMI 714 - AT - Income TaxSpeculative transaction - Whether the transactions in derivatives and futures as business (hedging) transactions or speculative transactions - In the profit and loss account the assessee had debited loss on account of Nifty hedging transactions of1, 30, 41, 270 - The Board Circular itself says that only excess of the assessee s position in forward market over actual stock held in ready market should be considered as speculative - To this extent plea of the assessee is accepted and the Assessing Officer is directed to work out speculation loss by taking excess of the assessee s position in forward market over actual stock in ready market and work out the speculative loss proportionately - Appeal is partly allowed STCG or business income - The onus will be of course on the assessee to show that the shares have been correctly so held as investments notwithstanding the fact that he is a trader in shares - The Supreme Court in its decision in the case of Karam Chand Thapar Bros. P. Ltd. Vs. CIT 1971 -TMI - 6302 (sc) has observed that the circumstances that the assessee has shown particular shares in its books as well as balance sheet as investments is a relevant factor in deciding whether the shares are investment or stock in trade - Held it is short term capital gain - Appeal of the revenue is partly allowed
Issues Involved:
1. Classification of transactions in derivatives and futures as business (hedging) transactions or speculative transactions. 2. Treatment of short-term capital gains as income under the head 'profits and gains from business and profession'. Issue-wise Detailed Analysis: 1. Classification of Transactions in Derivatives and Futures: The primary issue was whether the transactions in derivatives and futures should be classified as business (hedging) transactions or speculative transactions. The assessee, a Hindu Undivided Family (HUF) engaged in the business of dealing in shares and securities, reported a loss due to Nifty hedging transactions. The assessee argued these were hedging transactions to minimize losses from price fluctuations of shares held as stock-in-trade. The Assessing Officer (AO) considered these transactions speculative, as defined under section 43(5) of the Income Tax Act, because they were settled without actual delivery of shares. The AO analyzed 38 transactions and noted that on specific dates, the value of Nifty futures exceeded the inventory value of shares held by the assessee. The AO referred to CBDT Circular No. 23 dated 12.9.1960 and judicial precedents to conclude that hedging transactions should not exceed the inventory of shares held. The CIT(A) accepted the assessee's argument that under section 43(5)(d), introduced from 1.4.2006, eligible transactions in derivatives were not speculative. The CIT(A) relied on the Mumbai Tribunal's decision in CIT Vs. SSKI Investors Pvt. Ltd., which held the amendment as clarificatory and retrospective, and thus allowed the loss as a business loss. However, the Tribunal noted the Special Bench Kolkata's decision in Shree Capital Services Ltd., which held the amendment was not retrospective. The Tribunal upheld the AO's view that hedging transactions should be in the same stock and within the value of inventory. It directed the AO to treat the loss proportionately as speculative to the extent it exceeded the inventory value, thus partly allowing the revenue's ground. 2. Treatment of Short-Term Capital Gains: The second issue was whether the short-term capital gains of Rs. 16,02,739/- should be treated as income from business. The AO reclassified these gains as business income due to the assessee's extensive share dealings. The CIT(A) reversed this, noting that the assessee could hold shares as investments despite being a dealer. The CIT(A) cited judicial precedents supporting the dual role of dealers holding shares as investments, including decisions from the Mumbai Tribunal, Delhi Tribunal, and Chandigarh Tribunal. The CIT(A) emphasized the assessee's consistent accounting treatment and the Supreme Court's observation in Karam Chand Thapar Bros. P. Ltd. Vs. CIT that how shares are shown in books is relevant. The Tribunal upheld the CIT(A)'s decision, noting the consistency in the assessee's treatment of shares as investments and the revenue's acceptance of this in the previous year. The Tribunal dismissed the revenue's ground, affirming the CIT(A)'s order to treat the gains as short-term capital gains. Conclusion: The Tribunal partly allowed the revenue's appeal on the classification of derivative transactions, directing a proportionate treatment of speculative loss. It dismissed the revenue's appeal on the treatment of short-term capital gains, upholding the CIT(A)'s decision to treat them as capital gains.
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