2010 (2) TMI 22 - HC - Income Tax

Speculative transaction Section 43(5) - The Assessing Officer as well as the Commissioner of Income Tax (Appeals) held that the sum of Rs 13,33,688/-, which was treated by the assesee as a loss incurred on bargain settlement, amounted to a speculative transaction falling within the meaning of Section 43(5) of the Income Tax Act, 1961. Consequently, the Assessing Officer as well as the Commissioner of Income Tax (Appeals) disallowed the claim of set off to the extent of Rs 13,33,688/-. - according to the Tribunal, the loss had been incurred by the assessee in the regular course of business with regard to breach of contract. The Tribunal directed that the loss, as claimed by the assessee, be set off against the regular business income. held that - even if we assume for the sake of argument that the said transactions amounted to speculative transactions as defined in Section 43(5), the same would be of no help to the revenue inasmuch as Section 43(5) is merely a definitional clause defining as to what a speculative transaction is for the purposes of Section 28 to Section 41 of the said Act. It is only when the speculative transaction, as defined in Section 43(5), matures into a speculative business as appearing in Explanation 2 to Section 28 that any effects would flow from the said definition. In case the speculative transaction, as defined in Section 43(5) of the said Act, matures into a speculative business, then the loss in such a transaction can only be set off against the gains or profits of a speculative business in terms of Section 73 of the said Act.

Summary

Issues:
1. Whether the sum treated as a loss on bargain settlement qualifies as a speculative transaction under Section 43(5) of the Income Tax Act, 1961.
2. Whether the Tribunal's decision to allow the set off of the claimed loss against regular business income is justified.
3. Whether the transactions in question constitute a speculative business under Section 73 of the Income Tax Act.

Analysis:
1. The appeal before the Delhi High Court concerned the classification of a sum of Rs 13,33,688 as a loss incurred on a bargain settlement, deemed to be a "speculative transaction" under Section 43(5) of the Income Tax Act, 1961. Both the Assessing Officer and the Commissioner of Income Tax (Appeals) disallowed the set off claim based on this classification. The Tribunal, however, found that the loss was incurred in the regular course of business due to breaches of contract, not falling under speculative transactions. The High Court upheld the Tribunal's decision, emphasizing that the transactions were not speculative but resulted from contract breaches.

2. The High Court further clarified that even if the transactions were considered speculative under Section 43(5), it would not benefit the revenue unless they matured into a speculative business as defined in Explanation 2 to Section 28. Citing the Bombay High Court's ruling in CIT v. Kamani Tubes Limited, the High Court highlighted the distinction between a speculative transaction and a speculative business. Since there was no finding that the transactions constituted a speculative business, the revenue's claim was dismissed, and no substantial question of law arose for consideration.

3. Ultimately, the High Court dismissed the appeal, affirming the Tribunal's decision to allow the set off of the claimed loss against regular business income. The judgment emphasized the importance of distinguishing between speculative transactions and speculative businesses under the Income Tax Act, providing clarity on the treatment of profits and losses in such scenarios. The decision was delivered by Hon'ble Mr. Justice Badar Durrez Ahmed and Hon'ble Mr. Justice Siddharth Mridul on February 15, 2010.