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2019 (7) TMI 1217 - AT - Income TaxDerivative trading loss as business loss - AO has ignored clause (d) inserted in section 43 (5) by the Finance Act, 2005 w.e.f. 01.04.2006 and relied upon the decisions rendered prior to amendment - HELD THAT - We are of the considered view that when undisputedly assessee has entered into transaction of derivatives after 01.04.2006 in a recognised stock exchange as per Circular No.2/2006 dated 25.01.2006, loss arising in F O transaction has to be treated as business loss and not loss in speculative business. CIT (A) has rightly directed the AO to treat the derivative trading loss as business loss as per provisions contained u/s 43(5) clause (c) (d) and the same has to be allowed to be set off against the other business income received by the assessee from the trading of Alcoholic Liquor. So, we are of the considered view that the contention raised by the ld. DR that section 73 Explanation 1 is a deeming provision applicable to the facts and circumstances of the case is not tenable as it does not talk of F O transactions. The case law of CIT-I vs. Intermetal Trade Ltd. 2006 (7) TMI 130 - MADHYA PRADESH HIGH COURT relied upon by the ld. DR is also not applicable to the facts and circumstances of the case. Consequently, finding no illegality or perversity in the impugned order passed by the ld. CIT (A), present appeal filed by the Revenue is hereby dismissed.
Issues Involved:
1. Classification of derivative trading loss as business loss or speculative loss. 2. Applicability of Explanation to section 73 of the Income Tax Act in overriding section 43(5) of the Income Tax Act. Issue-wise Detailed Analysis: 1. Classification of Derivative Trading Loss as Business Loss or Speculative Loss: The primary issue in this case revolves around whether the loss incurred from Future & Option (F&O) derivative trading should be classified as a business loss or a speculative loss. The assessee company, engaged in the distribution of alcoholic liquor, reported a loss of ?2,08,52,679 from F&O derivative transactions. The Assessing Officer (AO) treated this loss as speculative in nature and did not allow it to be set off against the business income from the distribution of alcoholic liquor. Instead, the AO allowed the loss to be carried forward for adjustment against speculative profit in subsequent years. The CIT(A) reversed the AO's decision, directing the AO to treat the derivative trading loss as a business loss and allowed it to be set off against other business income. The CIT(A) relied on the amendment made by the Finance Act, 2005, effective from 01.04.2006, which introduced clause (d) to section 43(5) of the Income Tax Act. This clause states that "an eligible transaction in respect of trading in derivatives referred to in the Securities Contracts (Regulation) Act, 1956 carried out in a recognized stock exchange shall not be deemed to be a speculative transaction." The Tribunal upheld the CIT(A)'s decision, noting that the assessee conducted F&O derivative trading through a recognized stock exchange, as per the CBDT Circular No.2/2006 dated 25.01.2006. The Tribunal cited several precedents, including the case of G.K. Anand Bros. Buildwell (P.) Ltd. vs. ITO, which supported the view that derivative trading through a recognized stock exchange should not be considered speculative trading. The Tribunal concluded that the loss from F&O transactions should be treated as a business loss and not a speculative loss. 2. Applicability of Explanation to Section 73 of the Income Tax Act: The Revenue contended that the Explanation to section 73 of the Income Tax Act, which is a deeming provision, overrides section 43(5) and should be applied to the assessee's case. The Revenue argued that the assessee created an artificial loss by selling and repurchasing the same shares at the same price, which no prudent businessman would do. The Tribunal rejected this argument, stating that section 73 Explanation 1 does not specifically address F&O transactions. The Tribunal emphasized that the amendment to section 43(5) by the Finance Act, 2005, which introduced clause (d), explicitly excludes eligible derivative transactions from being classified as speculative transactions if conducted through a recognized stock exchange. The Tribunal noted that the AO relied on decisions rendered prior to the 01.04.2006 amendment, which were not applicable to transactions conducted after this date. The Tribunal further supported its decision by referencing additional case laws, such as R.B.K. Securities (P.) Ltd. vs. ITO and Gajendra Kumar T. Agarwal vs. ITO, which reinforced the position that losses from derivative trading should be treated as business losses and not speculative losses. Conclusion: The Tribunal concluded that the CIT(A) correctly directed the AO to treat the derivative trading loss as a business loss and allowed it to be set off against other business income. The Tribunal dismissed the Revenue's appeal, finding no illegality or perversity in the CIT(A)'s order. The Tribunal emphasized that the amendment to section 43(5) and the relevant CBDT circulars clearly supported the classification of F&O derivative trading losses as business losses.
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