2012 (9) TMI 447 - AT - Income Tax

Disallowance of set-off loss on derivative trading - loss from speculation business - Held that - AO has treated such as a loss as speculation loss mainly on the ground that Notification number 46 of 2009, issued by the CBDT, on 22nd May 2009, recognizing MCX as recognized Stock Exchange for the purpose of section 43(5), only from the said date and has prospective effect and, therefore, such a derivative trading in commodity through MCX prior to the said date will amount to speculation business. From the combined reading of clause (d) of proviso to section 43(5), Rule 6DDA, 6DDB and Explanation (ii) to section 43(5), it would be seen that the rules which has been prescribed are only procedural in nature. When a rule or provision does not effect or empower any right or create an obligation but merely relates to procedural mechanism, then it is deemed to be retrospective unless such an inference is likely to lead to an absurdity - Once in the statute, it has been provided that w.e.f. 1st April 2006, an eligible transaction carried out in a recognized Stock Exchange will not be treated as speculation transaction, then simply because procedural mechanism has taken a long time to recognize the Stock Exchange - in favour of assessee.

Summary

Issues:
1. Treatment of loss incurred on derivative trading as speculation loss.
2. Applicability of clause (d) of proviso to section 43(5) for the assessment year 2007-08.
3. Recognition of MCX Stock Exchange as a recognized Stock Exchange for derivative trading.

Issue 1: Treatment of loss incurred on derivative trading as speculation loss:
The Revenue appealed against an order disallowing the set-off of a loss incurred on derivative trading as business loss. The Assessing Officer treated the loss as speculation loss due to derivative transactions not being carried out in a recognized stock exchange. The assessee argued that derivative transactions are part of regular business and not speculative. The Commissioner (Appeals) agreed with the assessee, allowing the claim of loss as a set-off from business income.

Issue 2: Applicability of clause (d) of proviso to section 43(5) for the assessment year 2007-08:
The dispute centered on whether the notification recognizing MCX Stock Exchange as a recognized Stock Exchange for derivative trading applied to transactions before the notification date. The Tribunal held that the notification was procedural and did not affect rights or obligations. Therefore, transactions through MCX Stock Exchange after April 1, 2006, were eligible for non-speculative treatment, upholding the Commissioner (Appeals) decision.

Issue 3: Recognition of MCX Stock Exchange as a recognized Stock Exchange for derivative trading:
The Tribunal clarified that the delay in recognizing MCX Stock Exchange did not impact the applicability of non-speculative treatment post-April 1, 2006. Various case laws supported the view that recognition by the Central Government from a later date did not bar transactions as non-speculative. Consequently, the loss incurred in derivative trading through MCX Stock Exchange for the assessment year 2007-08 was treated as normal business loss.

In conclusion, the Revenue's appeal was dismissed, and the assessee's cross objection was also dismissed as infructuous. The Tribunal upheld the decision to treat the loss from derivative trading as non-speculative business loss for the assessment year 2007-08, based on the applicability of clause (d) of proviso to section 43(5) and the recognition of MCX Stock Exchange as a recognized Stock Exchange.