2013 (7) TMI 334 - HC - Income Tax

Carry forward of losses - Speculative transactions - Derivative transaction - Benefit u/s 73 - Held that - In terms of the Explanation to Section 73 (4) in the case of a company business of purchase and sale of shares is deemed to be speculation business - Assessee is no doubt correct in contending that the only definition of derivatives is to be found in Section 43(5); yet the definition to the extent it excludes such transactions from the mischief of the expression speculative transactions is confined in its application cannot be overlooked. Since the expression derivatives is defined only in Section 43 (5) and since it excludes such transactions from the odium of speculative transactions and further that since that has not been excluded from Section 73 yet the Court would be doing violence to Parliamentary intendment. This is because a definition enacted for only a restricted purpose or objective should not be applied to achieve other ends or purposes. Doing so would be contrary to the statute - Stated objective of Section 73- apparent from the tenor of its language is to deny speculative businesses the benefit of carry forward of losses. Tribunal erred in law in holding that the assessee was entitled to carry forward its losses - Following decisions of The Vanguard Fire & General Insurance Co. Ltd. Madras v. M/S. Fraser And Ross & Anr 1960 (5) TMI 25 - SUPREME COURT and Rajshree Sugars and Chemicals Ltd. v. Axis Bank Ltd. 2008 (10) TMI 594 - MADRAS HIGH COURT - Decided in favour of the revenue.

Issues Involved:
1. Applicability of Explanation to Section 73 of the Income Tax Act, 1961.
2. Classification of derivative transactions as speculative or non-speculative under Section 43(5) of the Income Tax Act.
3. Eligibility for carry forward of losses from derivative transactions.

Detailed Analysis:

1. Applicability of Explanation to Section 73 of the Income Tax Act, 1961:
The core issue was whether the Income Tax Appellate Tribunal (ITAT) erred in not holding that the loss of Rs. 4,92,71,000/- from derivative transactions was speculative and thus entitled to the benefit of Section 73, considering the Explanation to Section 73 of the Income Tax Act. The assessee contended that the loss from trading derivatives was not speculative under Section 43(5) and should not be disallowed as speculative loss. However, the Assessing Officer (AO) and the CIT (Appeals) held that Section 73 applied independently of Section 43(5), asserting that the Explanation to Section 73 could be applied to both delivery-based sales/purchases of shares and derivative trading. The ITAT, however, accepted the assessee's contention and granted relief, prompting the revenue to appeal.

2. Classification of Derivative Transactions as Speculative or Non-Speculative under Section 43(5) of the Income Tax Act:
The revenue argued that the ITAT's reliance on the amended Section 43(5) was erroneous. Section 43(5) defines speculative transactions, excluding certain categories, including derivatives, from being speculative. However, the revenue emphasized that this exclusion was limited to Sections 28-41 and did not extend to Section 73. The revenue cited various case laws to support its stance that transactions involving the purchase and sale of shares should be deemed speculative under Section 73, regardless of their classification under Section 43(5).

3. Eligibility for Carry Forward of Losses from Derivative Transactions:
The Court examined the relevant provisions, noting that Section 73(1) restricts setting off losses from speculative businesses against profits from non-speculative businesses. The Explanation to Section 73 deems the business of purchasing and selling shares as speculative, except for certain excluded companies. The Court acknowledged that Section 43(5) excludes derivatives from speculative transactions for computing business income but emphasized that this exclusion was context-specific and did not apply to Section 73. The Court highlighted the legislative intent to deny speculative businesses the benefit of carrying forward losses, reinforcing that derivatives based on stocks and shares fall within the Explanation to Section 73.

Conclusion:
The Court concluded that the ITAT erred in law by allowing the assessee to carry forward its losses from derivative transactions. The question framed was answered in favor of the revenue, and the appeal was allowed, with no order as to costs. The judgment underscores the contextual application of statutory definitions and the legislative intent behind specific provisions, emphasizing that definitions meant for one part of the statute should not be applied broadly to achieve unintended outcomes.

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