2015 (5) TMI 706 - AT - Income Tax

Loss from transactions in foreign currency futures - Applicability of clause (d) of the proviso to section 43(5) of the Income Tax Act, 1961 - Business loss or Speculation loss - Derivative indicates that it has no independent value, i.e. its value is entirely derived from the value of the underlying asset. The underlying asset can be securities, commodities, bullion, currency, live stock or anything else - Held that - It can be seen that the derivatives also includes securities. The definition of eligible transaction mentioned herein above clearly show that the transaction must have been carried out electronically in accordance with the provisions of Securities Contracts (Regulation) Act and the Rules and Regulations or bye laws made or directions issued under this Act or by banks or mutual funds on a recognized stock exchange and which is supported by time stamped contract note issued by such stock broker or sub-broker or intermediary to every client indicating in the contract note the unique client identity number and permanent account number. It would be pertinent to consider the decision of Hon ble Madras High Court in the case of Rajshree Sugar & Chemicals Ltd. vs. Axis Bank Ltd. 2008 (10) TMI 594 - MADRAS HIGH COURT , wherein the term derivative has been defined to include foreign currency as an underlying security of the derivative. Further, the SEBI website in its section frequently asked questions has explained the meaning of derivative. It explains - The term Derivative indicates that it has no independent value, i.e. its value is entirely derived from the value of the underlying asset. The underlying asset can be securities, commodities, bullion, currency, live stock or anything else. In other words, Derivative means a forward, future option or any other hybrid contract of pre determined fixed duration, linked for the purpose of contract fulfilment to the value of a specified real or financial asset or to an index of securities. With Securities Laws (Second Amendment) Act,1999, Derivatives has been included in the definition of Securities. Considering the relevant provisions of the relevant Acts, discussed herein above in the light of Hon ble Madras High Court and the answers given to frequently asked questions by the SEBI and the incorporation of exchange traded currency derivative from August, 2008, there remain no iota of doubt that the transaction of the assessee cannot be treated as speculative transaction. We have also gone through the copies of the contract notes incorporated in the paper book filed before us. A perusal of the contract note shows that the assessee has either entered into call option or put option and on the settlement day the transaction has been settled by delivery, either the assessee has paid US dollar on the settlement day or has taken delivery of US dollar.To sum up, the derivatives include foreign currency and call option/ put option, are transactions of derivative markets and cannot be termed as speculative in nature. Considering the totality of the facts and in the light of the judicial discussion herein above, we have no hesitation in setting aside the order of Ld. CIT(A). - Decided in favour of assessee.

Summary

Issues:
1. Interpretation of section 43(5) of the Income Tax Act, 1961 regarding speculative transactions.
2. Determination of whether loss from foreign currency futures transactions is speculative in nature.
3. Application of proviso (d) of section 43(5) and section 2(ac) of the Securities Contracts (Regulation) Act, 1956 to the case.
4. Analysis of relevant judicial decisions and SEBI guidelines on derivatives.
5. Examination of whether foreign currency and call option/put option transactions qualify as speculative transactions.

Analysis:
1. The appeal concerned the interpretation of section 43(5) of the Income Tax Act, 1961, defining speculative transactions. The assessee contested that the loss from foreign currency futures transactions was not speculative. The AO disallowed the loss based on section 43(5) and section 2(ac) of the Securities Contracts (Regulation) Act, 1956.

2. The assessee, an Investment Management Consultant, argued that the loss on foreign currency futures was not speculative. The Ld. CIT(A) upheld the AO's decision, considering the nature of the transactions and the applicability of proviso (d) to section 43(5). The assessee appealed, claiming the contracts were settled by delivery of Forex, not speculative in nature.

3. Proviso (d) of section 43(5) excludes certain transactions from being speculative, including trading in derivatives under section 2(ac) of the Securities Contracts (Regulation) Act, 1956. The Tribunal analyzed the definition of derivatives, including securities, and considered relevant judicial precedents and SEBI guidelines on derivatives.

4. Referring to the Hon'ble Madras High Court decision and SEBI's explanation of derivatives, the Tribunal concluded that foreign currency and call option/put option transactions are not speculative. The Tribunal reviewed contract notes showing settlement by delivery of US dollars, supporting the non-speculative nature of the transactions.

5. Ultimately, the Tribunal allowed the appeal, determining that the foreign currency and call option/put option transactions did not qualify as speculative under section 43(5). The order of the Ld. CIT(A) disallowing the loss was set aside, emphasizing the non-speculative nature of the transactions based on legal provisions and judicial interpretations.

This detailed analysis of the legal judgment showcases the thorough examination of the issues involved and the application of relevant legal provisions and precedents to arrive at a well-reasoned decision.