2022 (5) TMI 682 - AT - Income Tax

Trading in derivatives on recognised stock exchanges - Securities / shares derivative transactions treated as speculative transactions in terms of Sec.73 - set-off of the same has been denied from normal business income earned by the assessee - HELD THAT - We find that Hon ble Apex Court in Snowtex Investment Ltd. Vs Pr. CIT 2019 (5) TMI 1165 - SUPREME COURT has observed 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 recognized stock exchange in respect of trading in derivatives was deemed not to be a speculative transaction. With effect from 01/04/2006, by deeming fiction, trading in derivatives was not to be regarded as speculative transaction when it was carried out on a recognized stock exchange.The 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. In the present case before us, the assessee has incurred losses in derivative segment and claims the set-off of the same from normal business income. It is undisputed fact that the derivative transactions are eligible transactions carried out on recognized stock exchange and the same are eligible transactions which are deemed to be non-speculative in nature. This is as per amendment brought in by Sec.43(5) w.e.f. AY 2006-07 which provide that the derivative income / losses are to be deemed as non-speculative in nature. The trading in derivatives in shares could not be held to be at par with trading in shares since the legislatures has intended to treat them differently. The above case law of Hon ble Supreme Court clearly supports the case of the assessee. Therefore, there is no hindrance for the assessee to claim the set-off of losses of impugned eligible transactions from normal business income. We direct Ld. AO to allow the set-off and re-compute assessee s income.

Summary

Issues:
1. Treatment of loss from trading in shares and securities derivatives as speculative in nature.
2. Condonation of delay in filing the appeal.

Issue 1: Treatment of loss from trading in shares and securities derivatives as speculative in nature

The appellant contested the order of the Commissioner of Income Tax (Appeals) regarding the treatment of a loss of Rs.45,05,705 from trading in shares and securities derivatives as speculative and hence not allowable for set off against business income. The appellant argued that the applicable section in the case was Section 43(5)(d) and not Section 73 of the Act. The appellant relied on the judgment of the Calcutta High Court in Asian Financial Services Ltd. Vs CIT, which held that loss from derivatives should be deemed business loss under the proviso to Section 43(5) and not speculative loss. The appellant further contended that the Explanation to Section 73 was not applicable in their case as it pertained to the purchase and sale of shares, not derivatives. The appellant also argued that as an individual, the provisions of Section 73 of the Act did not apply to them. The Tribunal found that the derivative transactions were eligible transactions carried out on a recognized stock exchange, making them non-speculative in nature as per the amendment to Section 43(5) from AY 2006-07. The Tribunal relied on a Supreme Court case to support the appellant's claim for set-off of losses from eligible transactions against normal business income. Consequently, the Tribunal directed the Assessing Officer to allow the set-off and re-compute the appellant's income, thereby allowing the appeal.

Issue 2: Condonation of delay in filing the appeal

The registry noted a delay of 246 days in filing the appeal, which the appellant sought to condone due to the lockdown situation arising from the Covid-19 pandemic. The impugned order was received during the lockdown period, leading to the delay. Despite opposition from the Learned Deputy Commissioner, the Tribunal, considering the circumstances, condoned the delay and proceeded with the adjudication of the appeal on its merits.

In conclusion, the Appellate Tribunal ITAT Chennai, in the judgment delivered by Hon'ble Shri V. Durga Rao and Hon'ble Shri Manoj Kumar Aggarwal, allowed the appellant's appeal regarding the treatment of losses from trading in shares and securities derivatives as speculative in nature. The Tribunal emphasized the non-speculative nature of the derivative transactions carried out on a recognized stock exchange, in line with the amendment to Section 43(5) from AY 2006-07. Additionally, the Tribunal condoned the delay in filing the appeal due to the Covid-19 lockdown situation, ensuring a fair adjudication of the case.