2013 (9) TMI 733 - HC - Income Tax

Benefit under Section 43(5) clause (d) speculative loss - derivative transactions - the said insertion was made by Finance Act, 2005. Rule 6 DDA and Rule DDB were subsequently enacted to prescribe conditions and procedure for notification of a recognized stock exchange. National Stock Exchange and Bombay Stock Exchange were notified vide notification dated 25th January, 2006. - Held that - Respondent is entitled to benefit, even in respect of transactions carried out with effect from 1st April, 2006. Tribunal observed that Parliament had enacted the provision with effect from the said date, and delay, if any, in the issue of Rules and notification, cannot nullify the legislative mandate of the enactment. Delay was attributable to the Central Board of Direct Taxes, who had failed to issue necessary notification within time Decided against the Revenue. However, during the course of hearing before us, learned counsel for the parties have accepted that the tribunal has not decided the other question i.e. applicability of Explanation to Section 73 of the Act. - matter remanded back to tribunal on this issue.

Summary

Issues:
Interpretation of clause (d) to Section 43(5) of the Income Tax Act 1961 for assessment year 2006-07.

Analysis:
The respondent-assessee, engaged in securities and investment business, received a management fee from Kotak Mahindra Securities. The dispute arose when the Assessing Officer considered the loss of Rs.1,90,29,988/- in derivative transactions as speculative loss under Section 73 of the Act. The Assessing Officer also noted that the derivative transactions conducted between July 2005 and September 2005 violated proviso (d) to Section 43(5), which required eligible transactions to be carried out only in recognized stock exchanges. The National Stock Exchange and Bombay Stock Exchange were later notified as recognized stock exchanges on 25th January 2006. However, the Assessing Officer disallowed the loss as the transactions predated the notification date.

The CIT (Appeals) upheld the disallowance, stating that the derivative transactions before the notification date were not eligible under Section 43(5)(d). The CIT (Appeals) also ruled out the applicability of the explanation to Section 73, as the assessee was an investment company. The Income Tax Appellate Tribunal, on further appeal, disagreed with the CIT (Appeals) and allowed the benefit under Section 43(5) proviso (d) even for transactions after 1st April 2006. The Tribunal emphasized that the delay in issuing rules and notification should not nullify the legislative mandate, attributing the delay to the Central Board of Direct Taxes.

The High Court concurred with the Tribunal, emphasizing that the delay in issuing the notification was due to administrative constraints and should not penalize the assessee, especially when transactions were conducted through a recognized stock exchange. The Court highlighted a similar Supreme Court case where rules framed subsequently did not hinder the retrospective application of the main provision. The Court distinguished another case where the delay was on the company's part, unlike in the present scenario where the delay was administrative. Consequently, the High Court upheld the Tribunal's decision, emphasizing that the delay in notification issuance should not impact the assessee's eligibility for benefits under Section 43(5).

However, the High Court noted that the Tribunal had not decided on the applicability of the Explanation to Section 73. Upon agreement from both parties, the Court remitted this issue back to the Tribunal for further examination and adjudication. The High Court framed a substantial question of law regarding the speculative loss under the Explanation to Section 73, directing the parties to appear before the Tribunal for a hearing on the matter.