2010 (1) TMI 874 - AT - Income Tax

assessee is a share broker and dealer in share and securities and derivative instruments - AO in the assessment proceedings disallowed the loss in trading in derivative instrument and had also disallowed proportionate expenditure attributable to speculative business also penalty levied by the Stock Exchange on the assessee for violation of margins - Held that - section 43(5)(d) is prospective in nature and loss incurred on account of futures and options in shares is speculative in nature and cannot be treated as a business loss penalty levied by the Stock Exchange for short comings in margin money cannot be held to be that which is levied for infringement of law and hence cannot be deleted appeal of the Revenue is allowed in part.

Summary

Issues:
1. Treatment of loss on derivatives transactions as speculation loss
2. Disallowance of proportionate expenditure for speculative business
3. Deletion of speculative business expenses
4. Allowance of penalty levied by Stock Exchange

Analysis:
1. The appeal addressed the treatment of loss on derivatives transactions as speculation loss. The Revenue contended that the Finance Act, 2005 specified conditions for derivatives to cease being speculative, effective from January 25, 2006. The Tribunal noted that the issue was previously decided in the case of Shree Capital Services Ltd., where it was held that losses from futures and options in shares are speculative. The Tribunal ruled in favor of the Revenue, allowing Ground Nos. 1 to 3 of the appeal.

2. The next issue involved the disallowance of proportionate expenditure for speculative business. The AO and the first appellate authority had differing calculations. The Tribunal, after reviewing the remand report, directed the AO to adopt the figure of Rs.1,03,17,491 as expenditure for derivative transactions, thereby partially allowing Ground No. 4 of the appeal.

3. Concerning the deletion of speculative business expenses, the Tribunal upheld the decision of the first appellate authority, allowing the expenses of speculative business to be deleted. This decision was based on the nature of the expenses not forming part of the assessee's business activities during the year.

4. The final issue addressed the allowance of the penalty levied by the Stock Exchange. The Tribunal referenced a previous case where it was established that penalties for margin violations were not related to legal infringements and thus cannot be deleted. Consequently, the Tribunal allowed Ground No. 5 of the Revenue's appeal.

In conclusion, the Tribunal partially allowed the Revenue's appeal, upholding certain disallowances and penalties while modifying the treatment of expenditure for speculative business.