2018 (1) TMI 779 - AT - Income Tax

Treatment of loss as a speculative loss and had not allowed set off of the aforesaid loss against the other income - Held that - Set off claimed by the assessee cannot be denied by relying on the Explanation to section 73 of the Act and the decision of the Hon ble Delhi High Court in the case of DLF Commercial Developers Ltd. (2013 (7) TMI 334 - DELHI HIGH COURT). The set off claimed by the assessee is therefore directed to be allowed. The appeal of the Assessee is accordingly allowed.

Issues Involved:
1. Treatment of loss from trading in derivatives as speculative or business loss.
2. Applicability of Explanation to Section 73 of the Income Tax Act, 1961.
3. Set off of losses incurred in derivative transactions prior to 25.01.2006.

Issue-wise Detailed Analysis:

1. Treatment of Loss from Trading in Derivatives as Speculative or Business Loss:
The Assessee, a non-banking finance company, incurred a loss of ?3,81,20,180/- from trading in derivatives during the previous year. The Assessing Officer (AO) observed that a portion of this loss amounting to ?1,36,90,925/- was incurred prior to 25.01.2006. According to the AO, since the notification recognizing stock exchanges for derivative trading was issued on 25.01.2006, losses incurred before this date should be considered speculative. The Assessee argued, citing the ITAT decision in Arun Kumar Saraogi's case, that all derivative trading losses from 01.04.2005 should be treated as normal business losses. The CIT(A) initially agreed with the Assessee, but later, following the Delhi High Court's decision in DLF Commercial Developers Ltd., held that the loss should be regarded as speculative for set-off purposes.

2. Applicability of Explanation to Section 73 of the Income Tax Act, 1961:
The Assessee contended that the Explanation to Section 73, which deems certain business activities as speculative, should not apply to them as their gross total income mainly comprised income from capital gains. The Tribunal examined the computation of taxable income and found that the business loss was significantly less than the income from capital gains. Citing the Bombay High Court's decision in CIT vs. Darshan Securities Pvt. Ltd. and the Calcutta High Court's decision in CIT vs. Middleton Investment & Trading Co. Ltd., the Tribunal concluded that the Assessee fell outside the purview of the Explanation to Section 73, as their income from capital gains was predominant.

3. Set Off of Losses Incurred in Derivative Transactions Prior to 25.01.2006:
The Tribunal reviewed the legal precedents and the facts of the case. It noted that the Special Bench of ITAT, Kolkata, in Shree Capital Services, and the decision in Arun Kumar Saraogi's case supported the view that Section 43(5)(d) of the Act applies from AY 2006-07. Therefore, derivative transactions should be treated as normal business losses from 01.04.2005. The Tribunal found no merit in the revenue's appeal, which argued that the loss prior to 25.01.2006 should be speculative.

Conclusion:
The Tribunal allowed the Assessee's appeal, directing that the set-off of the derivative trading loss should be permitted and treated as a normal business loss. The revenue's appeal was dismissed, affirming that the derivative transactions from 01.04.2005 are to be treated as business losses, not speculative losses.

Order Pronounced:
The order was pronounced in the open court on 01.12.2017.

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