2016 (8) TMI 75 - AT - Income Tax

Treatment to business losses - speculation loss - transaction in F&O but the same was set off against the normal business - Held that - Losses incurred prior to issue of notification on 25th January, 2006 but during the relevant previous year 2005-06 shall be treated as non-speculative normal business losses provided it satisfies other conditions as stipulated vide proviso (d) to clause (5) of Section 43 of the Act read with explanation. In our considered view, the losses incurred by the assessee i.e. ₹ 20,83,591/- which are stated to be incurred during previous year 2005-06 but prior to 25th January, 2006 i.e. the date when NSE/BSE were recognised by Central Government vide notification issued by Central Government on 25-01-2006, but within the previous year 2005-06 which was relevant to the assessment year 2006-07 should be treated as normal non-speculative business losses and are to be treated as covered by the exclusion clause set out in proviso (d) to clause (5) of Section 43 read with explanation and allowed to be carried forward as non- speculative business losses to set off against the normal business income of the instant previous year relevant to the assessment year in question, as laid down in the ratio of the decisions of the Tribunal cited before us as set out above and also as per our detailed discussions in preceding para s of this order, hence we allow the appeal filed by the assessee on this ground

Summary

Issues Involved:
1. Disallowance of ?24,907 under Section 14A of the Income Tax Act, 1961.
2. Disallowance of carried forward and set off of ?20,83,591 being speculative loss of A.Y. 2006-07 on account of F&O transactions.

Issue-Wise Detailed Analysis:

1. Disallowance of ?24,907 under Section 14A of the Income Tax Act, 1961:

The assessee contested the disallowance of ?24,907 under Section 14A of the Income Tax Act, 1961. However, during the proceedings before the Tribunal, the assessee's counsel submitted that the assessee did not wish to press this ground. Consequently, the Tribunal dismissed this ground as not being pressed, and the disallowance of ?24,907 under Section 14A was upheld.

2. Disallowance of carried forward and set off of ?20,83,591 being speculative loss of A.Y. 2006-07 on account of F&O transactions:

The assessee, a director in two companies, had shown a speculative loss of ?20,83,591 from F&O transactions in the assessment year 2006-07. The AO disallowed the set-off of this loss against normal business income for the assessment year 2009-10, treating it as a speculative loss because the transactions occurred before 25th January 2006, the date when NSE and BSE were notified as recognized stock exchanges.

The assessee argued that the proviso (d) to clause (5) of Section 43 of the Act, introduced by the Finance Act, 2005 effective from 1st April 2006, should be applied retrospectively to cover the entire previous year 2005-06. This proviso excludes eligible transactions in derivatives on recognized stock exchanges from being treated as speculative transactions. The assessee cited several Tribunal decisions supporting this interpretation, asserting that the losses should be treated as business losses and not speculative losses.

The Tribunal analyzed the relevant statutory provisions, notifications, and explanatory memoranda. It noted that the recognition of NSE and BSE as recognized stock exchanges from 25th January 2006 was a procedural requirement, as these exchanges were already technologically equipped to prevent market manipulations. The Tribunal referenced the Finance Bill, 2005, which emphasized the transparency and audit trail provided by screen-based trading systems, justifying the exclusion of eligible derivative transactions from speculative classification.

The Tribunal relied on case laws, including the Gujarat High Court's decision in Claris Lifesciences Limited v. ACIT and the Mumbai Tribunal's decision in Prem Associates Advertising & Marketing v. JCIT, which supported the retrospective application of the recognition for the entire previous year. It concluded that the losses incurred by the assessee in derivative transactions before 25th January 2006 but within the previous year 2005-06 should be treated as non-speculative business losses. Therefore, these losses were allowed to be carried forward and set off against normal business income for the assessment year 2009-10.

Conclusion:

The appeal filed by the assessee was partly allowed. The ground regarding the disallowance of ?24,907 under Section 14A was dismissed as not pressed. The ground regarding the disallowance of carried forward and set off of ?20,83,591 as speculative loss was allowed, treating the losses as non-speculative business losses eligible for set-off against normal business income. The order was pronounced in the open court on 29th July 2016.