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2009 (7) TMI 172 - AT - Income TaxLoss on futures and options - transactions in derivative - whether the transaction in derivatives falls within the meaning of speculative transaction as provided under s. 43(5)? - Assessee is a company which is engaged in the business of financing and investments in shares and securities. During the year under consideration, the assessee suffered the loss on account of futures and options. The AO treated the same as speculation loss as per s. 43(5). CIT(A) confirmed the order of the AO on this ground. HELD THAT - In the case under appeal before us, it is admitted that the underlying asset is shares. Therefore, in our opinion, derivatives will also fall within the meaning of commodity used in s. 43(5). We may also mention that Finance Act, 2005 has provided that certain transactions in respect of trading in derivatives shall not be deemed to be speculative transactions within the meaning of s. 43(5). If the transaction in derivatives does not fall within the definition of 'speculation transaction' u/s. 43(5), then there was no question of exempting certain type of transaction in derivatives from the scope of speculative transaction u/s. 43(5). If it is held that the transaction in derivatives docs not fall in s. 43(5), it will make cl. (d) and Explanation thereto below s. 43(5) introduced by Finance Act, 2005 to be redundant. In furtherance to the above Explanation, the Central Government has also framed rules, i.e. r. 6DDA and r. 6DDB. It cannot be presumed that the Government has introduced a clause, i.e. cl. (d) as well as Explanation thereto, which was redundant and infructuous. Whether cl. (d) of s. 43(5) introduced by Finance Act, 2005 w.e.f. 1st April, 2006 is clarificatory and, therefore, retrospective in nature - The rule of reasonable construction must be applied while construing a statute. Considering the matter and relevant laws, it is evident that Expln. 2 to s. 43B itself being retrospective, the first proviso to that section is also to be considered as retrospective because the proviso supplies an obvious omission. But in the case of the assessee before us, as we have already mentioned that in the Memorandum Explaining the Provisions in the Finance Bill, 2005, which introduced cl. (d), the purpose of introduction of cl. (d) has been clearly explained. The legislature by way of Explanation to cl. (d) to s. 43(5) has clarified the term 'eligible transaction' and 'recognized stock exchange' and in rr. 6DDA and 6DDB the legislature has also prescribed the conditions which a stock exchange is required to fulfil to get notified as a recognized stock exchange for the purpose of cl. (b) of proviso to s. 43(5). Therefore, the ratio of decision of Hon'ble apex Court in the case of Allied Motors (P) Ltd. 1997 (3) TMI 9 - SUPREME COURT would not be applicable while considering cl. (d) of s. 43(5). We have found that the purpose of introduction of cl. (d) of s. 43(5) was not to clear any obvious omission, but the legislature found that due to recent systemic and technological changes introduced by stock markets there is sufficient transparency in the transactions and, therefore, the legislature decided to exempt the trading in derivatives which otherwise under certain conditions i.e. eligible transactions in trading in derivatives in recognized stock exchange, were exempt from the purview of speculative transaction under s. 43(5). The procedure has also been prescribed by way of r. 6DDA and r. 6DDB how a stock exchange can become a recognized stock exchange. From these facts it is evident that cl. (d) of s. 43(5) cannot be held to be retrospective. Therefore, We hold that cl. (d) of s. 43(5) is prospective in nature and will be effective from the date from which the legislature made it effective, i.e. 1st April, 2006 and will be applicable from asst. yr. 2006-07 onwards. We find no merit in the assessee's appeal. In the result, the assessee's appeal is dismissed.
Issues Involved:
1. Whether the losses incurred on account of futures and options are speculative in nature and cannot be regarded as business loss. 2. Whether derivative transactions in the form of futures and options are covered under the provisions of Section 43(5) of the IT Act. 3. Whether the provisions of Section 43(5)(d) are clarificatory in nature and hence retrospective in operation. Detailed Analysis: Issue 1: Speculative Nature of Losses on Futures and Options The assessee contended that the losses incurred on futures and options should not be treated as speculative losses. The Assessing Officer (AO) had treated these losses as speculation losses under Section 43(5) of the IT Act, and the Commissioner of Income Tax (Appeals) [CIT(A)] upheld this view. The Tribunal examined whether transactions in derivatives fall within the definition of speculative transactions as provided under Section 43(5). Issue 2: Applicability of Section 43(5) to Derivative Transactions The assessee argued that futures and options are a form of derivatives, which are not commodities or stocks and shares, and hence Section 43(5) should not apply. The learned counsel for the assessee cited various decisions to support this view, including R.B.K. Securities (P) Ltd. vs. ITO, Dy. CIT vs. SSKI Investors Services (P) Ltd., and C. Bharath Kumar vs. Dy. CIT. The Tribunal noted that the derivatives derive their value from underlying assets, which can be securities or commodities. It was admitted that the underlying assets in the derivatives dealt with by the assessee were shares of certain companies. The Tribunal referred to the definition of 'derivatives' under the Securities Contracts (Regulation) Act, 1956, and concluded that derivatives fall within the meaning of 'commodity' used in Section 43(5). Issue 3: Retrospective Nature of Section 43(5)(d) The assessee contended that the Finance Act, 2005, which inserted clause (d) in Section 43(5) to exclude trading in derivatives from being considered speculative transactions, should be treated as retrospective. The Tribunal examined the legislative intent and the Memorandum Explaining the Provisions in the Finance Bill, 2005, which stated that the amendment was due to systemic and technological changes in stock markets providing transparency. The Tribunal concluded that clause (d) of Section 43(5) is not clarificatory but substantive and thus prospective in nature, effective from 1st April, 2006. Conclusion The Tribunal held that: 1. The losses incurred on account of futures and options are speculative in nature under Section 43(5) of the IT Act. 2. Derivative transactions in the form of futures and options fall within the meaning of 'commodity' under Section 43(5). 3. Clause (d) of Section 43(5), introduced by the Finance Act, 2005, is prospective and not retrospective. The assessee's appeal was dismissed, and the orders of the lower authorities were upheld.
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