2015 (8) TMI 70 - AT - Income Tax

Disallowance of loss incurred on trading in commodity derivatives - Held that - If the amendment is made in procedural mechanism, it will apply to all the proceedings pending or to be initiated. Once in the statute, it has been provided that w.e.f. 1.4.2006, an eligible transaction carried out in a recognized Stock Exchange will not be treated as speculative transaction, then simply because procedural mechanism has taken a long time to recognize the Stock Exchange, it will not lead to an inference that the same would be applicable from the date when the Stock Exchange has been recognized by the Central Govt. The notification issued under Rule 6DDB, does not empower any right or create obligation but only recognizes what is already provided in statute. Thus, the transactions carried out through MCX Stock Exchange after 1.4.2006, would be eligible for being treated as non-speculative derivates within the meaning of clause (d) of proviso to section 43(5). In view of the above, the Assessing Officer is directed to delete the disallowance of loss incurred by assessee company on trade in commodity derivatives. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of expenditure incurred in connection with Public Issue.
2. Disallowance of loss incurred on trading in commodity derivatives.

Issue-wise Detailed Analysis:

1. Disallowance of expenditure incurred in connection with Public Issue:
At the outset of the hearing, the learned AR did not press Ground No. 1. Hence, this ground was dismissed as not pressed.

2. Disallowance of loss incurred on trading in commodity derivatives:
The primary issue in this appeal was the disallowance of a loss amounting to Rs. 4,82,270 incurred by the assessee company on trading in commodity derivatives. The Assessing Officer (AO) disallowed this loss by categorizing it as a speculative loss rather than a regular business expenditure. The AO observed that, according to the provisions of the Act, if a contract is settled otherwise than by the actual delivery of the commodity, it is regarded as a speculative transaction. The proviso to Section 43(5) of the Income Tax Act, 1961, carves out certain exceptions, deeming certain transactions as business transactions rather than speculative ones, provided they are carried out in a recognized Stock Exchange as notified by the Central Government.

The AO referenced Notification No. SO 1327(E), dated 22.05.2009, which recognized MCX Stock Exchange Ltd. as a recognized stock exchange effective from the date of publication of the notification. Since the transactions in question occurred before 22.05.2009, the AO treated them as speculative transactions and disallowed the set-off of the loss against normal business income, allowing only the carry forward of the speculation loss.

The matter was then carried before the Commissioner of Income Tax (Appeals) [CIT(A)], who upheld the AO's decision. The CIT(A) noted that the appellant failed to provide evidence to support the claim that the transactions were hedging transactions aimed at safeguarding against price fluctuations of raw materials. The CIT(A) emphasized that for a transaction to be considered a hedging transaction, there must be a demonstrable nexus between the actual purchase and the transactions in the futures markets, which the appellant failed to establish.

Before the Tribunal, the learned AR cited the ITAT Mumbai 'A' Bench decision in the case of Assistant Commissioner of Income Tax, Mumbai Vs. Arnav Akshay Mehta, which held that the procedural mechanism for recognizing a stock exchange is retrospective and applies from the date specified in the statute, i.e., 01.04.2006. The Tribunal noted that the rules prescribed under Rule 6DDA and 6DDB are procedural and do not affect or create any rights or obligations. Therefore, the transactions carried out through MCX Stock Exchange after 01.04.2006 should be treated as non-speculative transactions, regardless of the date of the notification.

In conclusion, the Tribunal directed the AO to delete the disallowance of the loss incurred by the assessee company on trading in commodity derivatives, treating it as a normal business loss. The appeal of the assessee was partly allowed.