2012 (6) TMI 82 - AT - Income Tax

Set off of loss on trading in futures and options as business loss against business income - applicability of Explanation to section 73 to transactions entered into in Future and Options i.e. derivatives transactions of NSE - Revenue contending the same to be specualtion loss - Held that - Transactions of Future and Options are not shares although underlying asset for determining prices of future and options, which are shares, commodities, currencies etc. Future and options are in themselves the items, which are traded through stock exchange and not the underlying items to which future and options relate. It means future and options are not covered by Explanation to section 73 for the reasons that this is specifically excluded by way of clause (d) to section 43(5) w.e.f 01-04-06 by the Finance Act 05. It is clear that Explanation to section 73 refers to the business of purchase and sale of shares and not the business of derivative transactions carried out by recognized stock exchange by the assessee. Therefore, CIT(A) rightly allowed the set off of loss against normal business income - Decided against the Revenue.

Summary

Issues:
- Interpretation of loss on trading in futures and options as business loss for set off against business income disregarding the explanation to section 73 of the Income-tax Act, 1961.

Analysis:
1. The appeal by revenue was against the order of CIT(A) allowing the loss on trading in futures and options as business loss for set off against business income, contrary to the explanation to section 73 of the Act. The Assessing Officer treated the loss as speculative, disallowing the set off. However, CIT(A) allowed the claim, stating that the derivatives were genuine and executed on the stock exchange as required by law.

2. The Tribunal analyzed the provisions of the Act and noted that the explanation to section 73 pertains to the purchase and sale of shares, not derivative transactions like futures and options. The Tribunal emphasized that transactions in futures and options are distinct items traded on stock exchanges, not shares themselves. The Tribunal highlighted that clause (d) of section 43(5) specifically excludes derivatives from being speculative transactions since 2006.

3. The Tribunal further explained that the Assessing Officer misinterpreted the law by failing to understand the true import of the explanation to section 73. The Tribunal clarified that the explanation deems actual share trading as speculative, but it does not extend to derivative transactions like futures and options. The Tribunal upheld CIT(A)'s decision, confirming that the loss on futures and options transactions should be allowed as a business loss against business income.

4. Ultimately, the Tribunal dismissed the revenue's appeal, affirming CIT(A)'s decision to treat the loss on trading in futures and options as a business loss eligible for set off against business income. The Tribunal's decision was based on a thorough analysis of the relevant provisions of the Act and the nature of derivative transactions in the case, concluding that the explanation to section 73 did not apply to the assessee's transactions in futures and options.