2012 (8) TMI 483 - AT - Income Tax

Disllowance of set off of losses - loss from transactions in futures & options against short term capital gain derived from transactions in shares and mutual fund units - Held that - As a result of the amendment in Section 43(5) with effect from 1st April 2006, losses incurred in derivative trading are held to be eligible for being set off against normal business profits, as derivate trading itself is treated as a non- speculative business, and losses of any non- speculative businesses can be adjusted profits of any non-speculative business - the case of the assessee is squarely covered by the amendment in the Act As decided in CIT Vs. Shri Bharat R.Ruia 2011 (4) TMI 37 - BOMBAY HIGH COURT future & option are one of the categories of derivatives and loss suffered by the assessee during future & option transactions is not a speculative loss thus, the same can be set off against short term capital gains by the assessee during the relevant assessment year - in favour of assessee.

Summary

Issues:
Appeals against disallowance of loss from futures & options transactions for assessment years 2006-07 and 2007-08.

Analysis:
The appeals were filed by the Revenue challenging the order of the CIT(A) which allowed the loss suffered by the assessee in futures & options transactions to be adjusted with other short term capital gains during the respective years. The Revenue contended that futures & options transactions are speculative in nature, relying on a judgment from the Hon'ble Calcutta High Court. On the other hand, the assessee argued that futures & options are derivatives and not speculative transactions, citing a judgment from the Hon'ble Bombay High Court and circulars from the CBDT. The Tribunal examined the relevant provisions of the Finance Act, 2005, specifically section 43(5)(d) which excludes eligible transactions in derivatives from being deemed speculative transactions. The Tribunal noted that the amendment was applicable from the assessment year 2006-07 onwards, covering the transactions in question. The Tribunal also referred to a Mumbai Tribunal case which held that derivative trading is treated as non-speculative business, allowing losses to be set off against profits of any non-speculative business. The Tribunal concluded that the loss from futures & options transactions was not speculative and could be set off against short term capital gains, upholding the order of the CIT(A) and dismissing the appeals of the Revenue.

In summary, the Tribunal upheld the CIT(A)'s decision, ruling in favor of the assessee and allowing the adjustment of losses from futures & options transactions with short term capital gains. The Tribunal's analysis focused on the legislative amendments, judicial precedents, and the nature of derivative transactions to determine the tax treatment of the losses incurred by the assessee.