2014 (1) TMI 195 - AT - Income Tax

Nature of loss Loss from Speculative transaction or not u/s 43(5) of the Act - Actual delivery of the shares not taken Share transaction settled otherwise than actual delivery Held that - Relying upon Dy. CIT v. Paterson Securities (P.) Ltd. 2010 (2) TMI 683 - ITAT, CHENNAI - After going through the definition of stock exchange, it would be proper to refer the issue back to the AO to find out the stock exchanges in which the transactions were carried out by the assessee - After ascertaining the names of the stock exchange, then the AO is expected to examine whether those stock exchanges have fallen within the definition of stock exchange as given in the Securities Contracts (Regulation) Act - The AO is then also required to verify that the Security as mentioned in the contract note by the share-broker falls within the definition of derivative or securities as defined under the Act - the AO is satisfied that the transaction of those shares/securities/derivatives is within the parameters Decided in favour of Revenue.

Summary

Issues:
1. Whether the loss from share transactions, settled without actual delivery, is speculative and can be set off against normal business income.
2. Interpretation of section 43(5) of the IT Act regarding speculative transactions and exceptions.
3. Determining the eligibility of share transactions for set off against normal business income based on the provisions of the Securities Contracts (Regulation) Act.

Issue 1:
The appeal concerned the classification of a loss of Rs. 10,08,407 from share trading as speculative. The Assessing Officer (AO) disallowed the loss, considering the transactions as speculative due to no actual delivery of shares. The Appellant claimed to set off this loss against normal business income, leading to the matter being brought before the CIT(A). The CIT(A) held that the transactions were carried out on a recognized stock exchange and thus not speculative under section 43(5)(d) of the IT Act. The Revenue argued that the transactions were speculative due to the absence of delivery, questioning the reliability of the share-broker's statements supporting the claim.

Issue 2:
Section 43(5) defines a speculative transaction as one settled without actual delivery or transfer of the commodity or scripts. However, an exception is provided for trading in derivatives under section 2(ac) of the Securities Contracts (Regulation) Act, 1956, conducted on a recognized stock exchange. The Appellant's representative cited relevant definitions from the Securities Contracts (Regulation) Act to support the contention that the transactions were not speculative. The Tribunal analyzed the definitions of "derivative," "securities," and "recognized stock exchange" under the Act to determine the applicability of the exception to the share transactions in question.

Issue 3:
The Tribunal referred to previous judgments and legal provisions to ascertain the eligibility of the share transactions for set off against normal business income. While acknowledging the exceptions to speculative transactions, the Tribunal directed the AO to investigate the stock exchanges where the transactions occurred, verify the nature of securities traded, and examine the settlement process. The AO was instructed to ensure compliance with the definitions under the Securities Contracts (Regulation) Act before making a final determination on the classification of the transactions and the allowance of the loss against normal business income.

This detailed analysis of the judgment highlights the interpretation of relevant legal provisions, the arguments presented by both parties, and the Tribunal's directions for further investigation and decision-making by the Assessing Officer.