2021 (7) TMI 1192 - AT - Income Tax

Losses in derivative segment and claim the set-off of the same as normal business loss - Set off of losses incurred in the trading activity on account of derivative segment (futures and options) against the business income during the year without appreciating the fact that AO has rightly treated the losses as speculative loss and not allowed to set off by invoking the provisions of Section 73(1) - HELD THAT - After considering the ratio of decision of Hon ble Apex Court in Snowtex Investment Ltd. 2019 (5) TMI 1165 - SUPREME COURT that the provisions of Sec.43(5) were amended by Finance Act, 2005. Prior to the amendment, Section 43(5) defined a 'speculative transaction' to mean a transaction in which a contract for the purchase or the sale of any commodity including stocks and shares is settled otherwise than by the actual delivery or transfer of the commodity or scrips. The impact of the amendment by the Finance Act, 2005 was that an eligible transaction on a recognised stock exchange in respect of trading in derivatives was deemed not to be a speculative transaction. With effect from 01/042006, by deeming fiction, trading in derivatives was not to be regarded as speculative transaction when it was carried out on a recognized stock exchange. CBDT Circular dated 27/02/2006 indicated that this amendment was occasioned by the changes which were introduced by SEBI both at the legal and technological level for bringing in greater transparency in the market for derivatives We are of the considered opinion that Ld. CIT(A) has clinched the issue in the correct perspective. The losses arising to the assessee in derivative segment are not to be considered as speculative in nature by virtue of clause (d) to sub-section (5) of Sec.43. The same are to be treated as normal business losses. This being so, the set-off of the same would be allowed in accordance with the law. Ground No.1 of the appeal stand dismissed. Earned profit in trading activity in cash segment and speculation income - There are no losses under both the segments. The ground raised by the revenue is misplaced.

Summary

Issues Involved:
1. Set-off of losses incurred in the derivative segment against business income.
2. Set-off of losses incurred in the cash segment against business income.

Detailed Analysis:

Set-off of Losses in the Derivative Segment:
The primary issue revolves around whether the losses incurred in the derivative segment (futures and options) amounting to ?27,68,41,119/- should be treated as speculative losses or normal business losses. The Assessing Officer (AO) treated these losses as speculative by invoking Section 73(1) of the Income Tax Act, 1961, and thus disallowed their set-off against business income. The assessee argued that these losses should be treated as normal business losses as per Section 43(5)(d) of the Act, which excludes derivative transactions on recognized stock exchanges from being considered speculative.

The Commissioner of Income Tax (Appeals) [CIT(A)] sided with the assessee, referencing the amendment introduced by the Finance Act, 2005, which clarified that trading in derivatives on recognized stock exchanges is not speculative. The CIT(A) also cited the Supreme Court decision in Snowtex Investment Ltd. Vs Pr. CIT (205 Taxmann.com 282), which reinforced that derivative transactions are not speculative. Consequently, the CIT(A) directed the AO to allow the set-off of these losses against business income.

The Tribunal upheld the CIT(A)'s decision, emphasizing that the derivative transactions are to be considered non-speculative due to the amendment in Section 43(5) effective from AY 2006-07. The Tribunal dismissed the revenue's appeal, affirming that the losses in the derivative segment should be treated as normal business losses and allowed for set-off.

Set-off of Losses in the Cash Segment:
The second issue concerns the set-off of losses amounting to ?5,41,879/- incurred in the cash segment against business income. The AO treated these losses as speculative under Section 73(1) and disallowed their set-off. The assessee contended that these transactions were part of their regular business activities and should not be considered speculative.

The CIT(A) noted that the assessee had earned a profit of ?389.62 Lacs in the cash segment and speculation income of ?5.41 Lacs, thus there were no net losses in these segments. The Tribunal agreed with the CIT(A), stating that the revenue's ground on this issue was misplaced as the assessee had not incurred net losses in the cash segment. Thus, the Tribunal dismissed this ground of the revenue's appeal as well.

Conclusion:
The Tribunal dismissed the revenue's appeal, affirming that the losses incurred in the derivative segment are to be treated as normal business losses and allowed for set-off against business income. Additionally, the Tribunal found no merit in the revenue's claim regarding the cash segment losses, as the assessee had net profits in that segment. The order was pronounced on 27th July 2021.