2018 (2) TMI 1709 - AT - Income Tax

Disallowing assessee s claim of set off of derivative loss against derivative profit treating the same as speculative loss - AO applied the provisions of sections 43(5)(d) of the Act and bifurcated the earnings for the recognized stock exchanges and non-recognized stock exchanges - Held that - We are of the view that the derivative trading in commodity is to be considered as one business and the net income from the same should be assessed as business income of speculation business, since section 43(5) does not exclude commodity trading during the year. The assessee is member of MCX and he has to carry out transaction on another exchange because on MCX there was no volume in commodity like Coper, Crude Oil, Silver etc. and also there was difference in lot size of the commodity in Lead, Gold etc. Further in MCX exchange, some time, the trading limit exhausted and hence he has to approach other brokers of other exchange to continue the activity. The assessee on ICEX exchange earned profit in Lead and Gold commodity and incurred loss in Iron Ore. Thus, the observations of the AO that the transactions carried out in the last two months of the year has no relevance to the business activity of derivative trading is of no substance. The commodity transactions are not covered by section 43(5)(d) of the Act. From the above definition it is clear that commodity derivative trading is not covered by Securities Control (Regulation) Act, 1956 and therefore the provision applied by the AO is against the facts of the case. The assessee is exclusively carrying on business of derivative trading on various exchanges and the transaction entered into derivative on various exchanges is his business activity whether considered as speculative or non speculative transaction as per section 43(5), the derivative transactions are not speculative transaction, in view of the fact that the derivative transaction is not supported or backed by deliverable commodity. The assessee is not claiming any special deduction under section 43(5)(d) for treating the profit as business profit. The nature of activity is carried throughout the year by the assessee is one and only one to trade in derivatives on various exchanges and earned profit or income which includes loss. In such facts, we are of the opinion that the assessee is eligible for set off of this loss against the profit. We reverse the orders of the lower authorities and allow the claim of the assessee. - Decided in favour of Assessee.

Summary

Issues Involved:
1. Disallowance of Assessee’s Claim of Set Off of Derivative Loss Against Derivative Profit.
2. Applicability of Section 43(5)(d) vs. Section 43(5)(e) of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Disallowance of Assessee’s Claim of Set Off of Derivative Loss Against Derivative Profit:

The primary issue in this appeal concerns the disallowance by the Assessing Officer (AO) of the assessee’s claim to set off derivative losses against derivative profits, treating the losses as speculative. The assessee, engaged in trading commodity derivatives on various exchanges, declared a net income of ?78,32,439 derived from profits and losses across different exchanges. The AO applied Section 43(5)(d) of the Income Tax Act, 1961, bifurcating earnings from recognized and non-recognized stock exchanges. The AO concluded that the losses from unrecognized exchanges were speculative and could not be set off against business profits, thereby assessing the business income at ?5,27,05,518 instead of the declared ?78,32,439.

The CIT(A) upheld the AO’s decision, distinguishing the case from Varsha Corporation Ltd. vs. DCIT, noting that the recognition of MCX as a recognized stock exchange was not in dispute for the assessment year 2012-13. The CIT(A) referenced the judgment in CIT vs. Shri Bharat R Ruia (HUF) to support the disallowance, emphasizing that speculative transactions are those settled otherwise than by actual delivery, and the provisions of Section 43(5)(d) were correctly applied.

2. Applicability of Section 43(5)(d) vs. Section 43(5)(e) of the Income Tax Act, 1961:

The assessee argued that the transactions should be considered under Section 43(5)(e), applicable from the assessment year 2014-2015, which pertains to commodity derivatives trading. However, both the AO and CIT(A) dismissed this claim, noting that Section 43(5)(e) was not applicable for the year under consideration (A.Y. 2012-13).

The Tribunal analyzed the nature of the assessee’s business, which involved exclusive trading in commodity derivatives. It was observed that Section 43(5) does not exclude commodity trading, and the assessee’s transactions should be treated as one business. The Tribunal found that the assessee had to trade on other exchanges due to limitations on MCX, such as volume constraints and trading limits. The Tribunal concluded that the AO’s reliance on Section 43(5)(d) was misplaced as commodity derivative trading is not covered by the Securities Control (Regulation) Act, 1956.

The Tribunal also referenced Board Circular No. 3 of 2006, which clarified that trading in derivatives on recognized stock exchanges is not deemed speculative from A.Y. 2006-07 onwards. However, the proviso to Section 43(5)(e), applicable from A.Y. 2014-2015, further clarified that eligible transactions in commodity derivatives on recognized associations are not speculative.

Conclusion:

The Tribunal concluded that the assessee’s business of derivative trading in commodities should be treated as one business, and the net income from such trading should be assessed as business income. The Tribunal reversed the lower authorities' orders, allowing the assessee’s claim to set off derivative losses against profits, considering the nature of the transactions and the applicable legal provisions. The appeal of the assessee was allowed, and the order was pronounced on 23-02-2018.