2010 (2) TMI 683 - AT - Income Tax

Derivative trading - trading in derivatives cannot be considered as a speculative transaction - set-off of loss of derivative trading against the profits of the share trading business is permissible - appeal of the Revenue dismissed

Summary

Issues:
1. Whether the loss from derivative trading is speculative in nature for assessment year 2004-05.
2. Whether the refusal to permit set off of loss of derivative trading against profits of share trading business is correct.
3. Whether the amendment to exclude trading in derivatives from speculative transactions has retrospective effect.

Analysis:
1. The case involved determining if the loss from derivative trading was speculative for the assessment year 2004-05. The Assessing Officer contended that trading in derivatives is speculative under section 43(5) of the Income-tax Act, 1961. The appellant argued that as a member of the Derivative (Forward) Market of the National Stock Exchange, the loss incurred in derivative trading should be allowed. The ld. CIT(A) accepted the appellant's contention, citing the Finance Act, 2005, which excluded eligible transactions in derivatives from speculative transactions. The amendment was deemed clarificatory and retrospective from 1-4-2006. The appellate tribunal upheld the CIT(A)'s decision, confirming that derivative trading did not involve actual purchase or sale of shares, thus not falling under speculative transactions.

2. The issue of permitting set off of loss from derivative trading against profits of share trading business was raised. The Revenue argued against the CIT(A)'s decision, stating that the amendment classifying derivative trading as non-speculative only applied from the assessment year 2006-07. However, the tribunal referred to the Mumbai Bench of the ITAT's decision, which held that trading in derivatives was not speculative. Consequently, the tribunal confirmed the CIT(A)'s finding, allowing the set-off of the loss from derivative trading against share trading profits.

3. The retrospective effect of the amendment excluding trading in derivatives from speculative transactions was also debated. The Revenue contended that the amendment only applied from the assessment year 2006-07 and could not have a retroactive impact. However, the tribunal upheld the CIT(A)'s decision, emphasizing that derivatives were not speculative transactions as per section 43(5) and were distinct from actual stock trades. The tribunal dismissed the Revenue's appeal, affirming the applicability of the amendment and the allowance of the loss from derivative trading.

In conclusion, the appellate tribunal upheld the CIT(A)'s decision, ruling in favor of the appellant regarding the speculative nature of derivative trading, the permissibility of set-off against share trading profits, and the retrospective effect of the amendment excluding derivative trading from speculative transactions.