2010 (5) TMI 606 - AT - Income Tax

Set-off of loss against transaction in derivatives segment Held that - By Finance Act 2005 -the transactions of futures segment w.e.f. 01/4/2006 would not be treated as speculation transactions. Therefore for Assessment Year 2006-07 the loss incurred under derivates segment was business loss which was to be set off against the profit earned against cash segment - Since we have held that the transactions in derivatives will be treated as business income no expenditure can be allocated towards speculative business. Supermacy of Parliament over CBDT Notifications - Held that - where recognition to stock Exchange was given from 25.01.2006 and transaction in future segment as normal business income from A/Y 2006-07 it was concluded that income from all transaction during P/Y 2005-2006 shall be deemed to be non speculative.

Summary

Issues:
1. Treatment of loss from derivative transactions as speculative transactions.
2. Allocation of expenses related to speculative transactions.

Analysis:

Issue 1: Treatment of loss from derivative transactions as speculative transactions
The case involved the assessee's appeal for Assessment Year 2006-07 regarding the treatment of loss from derivative transactions as speculative transactions. The Assessing Officer disallowed the set-off of the loss incurred on share trading in the futures segment against the profit earned from sale and purchase of shares on a delivery basis. The Assessing Officer relied on the notification by the C.B.D.T. dated 25/1/2006, which specified that transactions in derivatives after this date could not be treated as speculative transactions. The Assessing Officer treated the loss incurred before this date as speculation business loss, disallowing its set-off against non-speculation business income. The CIT(A) upheld this decision, stating that only transactions after the notification date would be considered business income. However, the assessee argued that the provisions of sec. 43(5)(d) inserted by the Finance Act, 2005, from 01/4/2006, deemed transactions in derivatives as business transactions. The Tribunal, following the decision in a similar case, held that transactions in derivatives for the relevant year would be eligible for the benefit of sec. 43(5)(d). Therefore, the loss from derivative transactions could be set off against profits from share trading on a delivery basis.

Issue 2: Allocation of expenses related to speculative transactions
As the Tribunal determined that derivative transactions were to be treated as business income, it concluded that no expenditure could be allocated towards speculative business. Consequently, the ground raised by the assessee regarding the allocation of expenses was allowed in favor of the assessee.

In conclusion, the Tribunal allowed the appeal filed by the assessee, holding that the loss from derivative transactions could be set off against profits from share trading on a delivery basis. The decision was based on the interpretation of sec. 43(5)(d) and the notification by the C.B.D.T., ensuring that transactions in derivatives for the relevant year were considered business income.