2011 (6) TMI 136 - AT - Income Tax

Set off of loss - business transactions or speculative transaction - whether profit arising from derivative transactions at Rs. 23,62,290 should be treated as non-speculative and accordingly available to be set off against regular business income - The only issue involved in this appeal is whether by virtue of notification from CBDT dated 25-1-2006 in S.O.(89E) recognizing National Stock Exchange and Bombay Stock Exchange for the purpose of derivative transactions would make the application of clause (d) of section 43(5) effective only from 25-1-2006 or this provision will remain in effect from 1-4-2006 when the clause (d) of sub-section (5) was brought into statute - with effect from 1-4-2006 amendments were made in section 43(5) and the transactions involved in derivatives were taken out of definition of speculative transactions - Therefore, in our considered view if transactions are carried out through stock exchanges from 1-4-2005 to 25-1-2006 which are recognized by notification issued by CBDT on 25-1-2006 would be eligible for being treated as non-speculative within the meaning of clause (d) of proviso to section 43(5) - 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 - Appeal is dismissed

Issues Involved:
1. Whether derivative transactions should be treated as speculative or non-speculative for the purpose of set-off against regular business income.

Detailed Analysis:

Issue 1: Treatment of Derivative Transactions
The primary issue in this appeal is whether the profit arising from derivative transactions amounting to Rs. 23,62,290 should be treated as non-speculative and thus available to be set off against regular business income.

Facts of the Case:
The assessee, engaged in the wholesale business of iron and steel and also involved in daily transactions in shares, reported a loss from derivative transactions amounting to Rs. 23,62,290 for the assessment year in question. The Assessing Officer disallowed the claim for set-off against normal business income, citing that the Government notification treating income/loss from derivative transactions as regular business income/loss was issued on 25-1-2006 under Explanation to section 43(5). Therefore, such loss could not be treated as from non-speculative transactions.

CIT(A) Decision:
The CIT(A) allowed the claim, stating that the Assessing Officer did not provide valid grounds for treating the loss as speculative. The CIT(A) referenced previous judicial pronouncements, including the assessee's own case for the assessment year 2005-06 and the ITAT Jaipur Bench's decision in P.S. Kapur v. ACIT, which supported treating derivative transactions as non-speculative. Consequently, the CIT(A) directed the Assessing Officer to allow the set-off of the loss against regular business income.

Revenue's Argument:
The Revenue argued that as per clause (ii) of the Explanation below section 43(5), the notification for recognizing stock exchanges for derivative transactions was issued on 25-1-2006. Therefore, transactions prior to this date should be considered speculative and the loss from such transactions should not be set off against normal business income.

Assessee's Argument:
The Assessee contended that the notification was clarificatory in nature, and recognized stock exchanges existed even before 25-1-2006. The Assessee relied on the Special Bench decision of the Tribunal, Kolkata in Shree Capital Services Ltd. v. Asstt. CIT, which held that clause (d) of section 43(5) is prospective and effective from 1-4-2006.

Tribunal's Analysis:
The Tribunal examined section 43(5) and its provisos, including clause (d) introduced by the Finance Act, 2005, effective from 1-4-2006. The Tribunal noted that prior to this amendment, all derivative transactions were treated as speculative. Post-amendment, such transactions were excluded from the definition of speculative transactions.

The Tribunal referenced the Special Bench decision in Shree Capital Services Ltd., which held that clause (d) of section 43(5) is prospective and effective from 1-4-2006. This view was upheld by the Bombay High Court in CIT v. Shri Bharat R. Ruia (HUF), which clarified that transactions in derivatives carried out in recognized stock exchanges from 1-4-2006 are non-speculative.

Conclusion:
The Tribunal concluded that the notification dated 25-1-2006 is procedural and does not curtail the applicability of clause (d) of section 43(5). Transactions in derivatives carried out through recognized stock exchanges during the assessment year 2006-07 should be treated as non-speculative. The Tribunal dismissed the Revenue's appeal and upheld the CIT(A)'s decision to allow the set-off of the loss from derivative transactions against regular business income.

Judgment:
The appeal filed by the Revenue is dismissed, and the Assessing Officer is directed to treat the profit/loss on derivatives as non-speculative business profits effective from 1-4-2006.

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