2018 (9) TMI 1170 - AT - Income Tax

Set off of derivative loss - maintainability of loss arising from derivative transactions against the regular income - allowability of derivative loss in terms of Section 43(5)(d) - Held that - The payment made to the share broker towards such losses is not in dispute. The specific order number and trade time is available on record. It is not the case of the Revenue that no transaction has been executed against the order number specified in the contract. Therefore, in these circumstances, it will be difficult to draw inference against the assessee for allowability of derivative loss in terms of Section 43(5)(d) of the Act. As relying on CIT vs. M/s. Sri Vasavi Gold & Bullion Pvt. Ltd. 2018 (4) TMI 802 - MADRAS HIGH COURT we find merit in the case of the assessee with reference to the derivative loss arising in the equity segment and commodity segment. As regards, loss of ₹ 19, 678/-, it is claimed on behalf of the assessee, the correct loss stands at ₹ 23, 86, 040/- as against ₹ 23, 66, 362/- assumed by the AO in the commodity segment. Considering the smallness of amount and having regard to the documentary evidences, we do not see any warrant to differ with the version of the assessee. Therefore, the loss claimed by the assessee in the derivative segment is found to be covered by the exception provided under s. 43(5) of the Act and consequently, such loss requires to be allowed for set off against the regular income of the assessee. - Decided in favour of assessee

Summary

Issues Involved:
1. Denial of set-off of losses from derivative transactions against other income.
2. Classification of derivative losses as eligible transactions under Section 43(5)(d) of the Income Tax Act, 1961.
3. Treatment of commodity trading losses under the definition of eligible transactions.
4. Verification and substantiation of the derivative transactions by the assessee.
5. Applicability of Explanation to Section 73 of the Income Tax Act regarding speculative transactions.

Detailed Analysis:

1. Denial of Set-off of Losses from Derivative Transactions Against Other Income:
The assessee challenged the CIT(A)'s decision to deny the set-off of losses from derivative transactions amounting to ?99,35,507 against other income of ?1,04,29,469. The AO had disallowed the set-off on the grounds that the transactions were not substantiated adequately and were not eligible under Section 43(5)(d) of the Income Tax Act.

2. Classification of Derivative Losses as Eligible Transactions Under Section 43(5)(d):
The AO questioned the authenticity of the derivative transactions in shares, citing issues with the contract notes and the lack of confirmation from the NSE. However, the Tribunal found that the contract notes provided by the assessee were compliant with SEBI guidelines, containing relevant details such as unique client identity number, time, order number, and trade time. The Tribunal also noted that the production of original bills should not lead to adverse inferences and that the Stock Exchange's inability to provide details based on the PAN number did not invalidate the transactions.

3. Treatment of Commodity Trading Losses Under the Definition of Eligible Transactions:
The AO had also disallowed the loss of ?23,66,362 from commodity trading, arguing that trading of sac on NMCEX was not an eligible transaction under Section 43(5)(d). However, the Tribunal referred to the Madras High Court's judgment in CIT vs. M/s. Sri Vasavi Gold & Bullion Pvt. Ltd., which clarified that such transactions on recognized exchanges are non-speculative and eligible for set-off. The Tribunal concluded that the commodity trading losses were indeed eligible transactions.

4. Verification and Substantiation of the Derivative Transactions by the Assessee:
The Tribunal noted that the assessee had provided sufficient documentary evidence, including contract notes and ledger accounts from the stock broker, to substantiate the transactions. The Tribunal criticized the AO's approach of questioning the transactions without proper inquiry and emphasized that the payment to the share broker and the specific order numbers and trade times were not disputed.

5. Applicability of Explanation to Section 73 Regarding Speculative Transactions:
The Tribunal addressed the AO's application of Explanation to Section 73, which deems certain share transactions as speculative. The Tribunal, referencing the Madras High Court's decision, clarified that derivative transactions are distinct from share trading and are excluded from the ambit of Explanation to Section 73. Consequently, the losses from derivative transactions should be set off against other business income.

Conclusion:
The Tribunal found merit in the assessee's case, holding that the derivative losses in both the equity and commodity segments were covered by the exceptions provided under Section 43(5) of the Act. The Tribunal allowed the set-off of these losses against the regular income of the assessee, thereby reversing the decisions of the AO and CIT(A).

Order:
The appeal of the assessee was allowed, and the Tribunal pronounced this order in open court on 17/09/2018.