2019 (9) TMI 610 - AT - Income Tax

Loss from Future and Options and Loss from Equity share Trading - loss incurred in eligible transactions viz. derivative transactions - business loss OR speculation loss - HELD THAT - As decided in own case 2018 (11) TMI 551 - ITAT AHMEDABAD once it is deemed to be a normal business loss on the basis of proviso appended to Section 43(5) of the Act, a question of applying Section 73 or the Explanation thereto for the purposes of refusing loss to be set off against business income is wholly incorrect. Thus the claim of the assessee towards ordinary business loss is allowed in so far as the loss from derivative transactions is concerned. Eligibility of set off of trading loss from purchase sale of shares in cash segment - whether loss arising from delivery based trading in shares is covered by certain exceptions provided in Explanation to sec. 73 or not and consequentially, whether the loss from share trading is to be regarded as non-speculative business loss for the purposes of set off under sec. 72 and sec. 73? - HELD THAT - the business loss clearly exceeds the aggregate of income/loss arising under non-business heads. In the case of Eastern Aviation and Industries Ltd. vs. CIT 1993 (7) TMI 41 - CALCUTTA HIGH COURT has held that the expression income or profits and gains should be understood as including loss also so that in one sense profits and gains represent positive income whereas losses represent negative income. While judging the relative composition of GTI, one has to consider the absolute quantum of loss as against the other positive income. As per the decision, what one needs to consider and compare are the relative figures of loss and income. The ratio when applied, the chargeable amount under the head business income far exceeds the chargeable amount aggregated under non-business head. Thus, the shelter in the form of first exception is not available to the assessee. ' Scope of amendment - Alternative contention that the business of the assessee being mainly trading in shares and thus covered under third exception in view of the clarificatory amendment by Finance (No. 2) Act 2014 is also apparently bereft of any merits. The interpretation given by the Co-ordinate Bench in Fiduciary Shares and Stocks and Pvt. Ltd. 2016 (5) TMI 814 - ITAT MUMBAI is no longer a good law in view of the recent decision rendered by Hon ble Supreme Court in the case Snowtex Investment Ltd. vs. PCIT judgment 2019 (5) TMI 1165 - SUPREME COURT as held that amendment to Explanation sec. 73 by Finance (No. 2) Act 2014 w.e.f. 01.04.2015 is not clarificatory or retrospective. The view expressed by the Co-ordinate Bench is thus overturned. Consequently, loss occurred to the assessee as a result of its activity of trading in shares is a loss arising from business of speculation and is not capable of being set off against the profits which it had earned from non-speculative business. No infirmity in the order of the CIT(A) to the extent it has concluded that loss amounting to ₹ 22,89,758/- arising from transactions of purchase and sale of shares as speculation loss for the purposes of sec. 73 of the Act. The case made out by the assessee that such loss should be treated as non speculative business loss as per its claim is thus without any force. We decline to interfere with the order of the CIT(A) to this extent.

Summary

Issues Involved:
1. Classification of business loss from derivatives and equity share trading as speculative loss.
2. Eligibility of set off of trading loss from purchase and sale of shares in cash segment.

Issue-wise Detailed Analysis:

1. Classification of Business Loss from Derivatives and Equity Share Trading as Speculative Loss:

The primary issue addressed is whether a company dealing in derivatives can be considered as engaged in speculative business by virtue of Explanation to Section 73 of the Income Tax Act, 1961. The assessee argued that the loss from derivatives should be treated as business loss and not speculative loss. The Tribunal had previously adjudicated in favor of the assessee for A.Y. 2012-13, holding that derivative transactions, as defined under Proviso (d) to Section 43(5) of the Act, are not speculative transactions. The Tribunal referenced the Hon'ble Calcutta High Court's decision in Asian Financial Services, which stated that once a transaction is deemed normal business loss under Section 43(5), applying Section 73 to refuse set off against business income is incorrect. Consequently, the Tribunal allowed the assessee's claim for the derivative loss amounting to ?44,46,409/- to be treated as ordinary business loss.

2. Eligibility of Set Off of Trading Loss from Purchase and Sale of Shares in Cash Segment:

The second issue pertains to the eligibility of set off of trading loss of ?22,89,758/- from purchase and sale of shares in the cash segment. The assessee contended that the loss from delivery-based transactions should not be treated as speculative loss under Explanation to Section 73. The assessee argued that their principal business is trading in shares, and thus, the Explanation to Section 73 should not apply. The Tribunal noted that, according to Section 43(5), delivery-based trading in shares is not speculative business. However, the Explanation to Section 73 introduces a deemed fiction, treating such losses as speculative for company assessees unless exceptions apply.

The assessee claimed two exceptions:
1. The aggregate income from non-business heads exceeded business income.
2. The principal business was trading in shares, invoking the amendment by Finance (No.2) Act, 2014.

The Tribunal found that the first exception did not apply as the business loss exceeded the non-business income. Regarding the second exception, the Tribunal referenced the Hon'ble Supreme Court's decision in Snowtex Investment Ltd., which held that the amendment to Explanation to Section 73 by Finance (No. 2) Act 2014 is not retrospective. Consequently, the loss from trading in shares was treated as speculative loss, and the Tribunal upheld the CIT(A)'s order, denying the set off against non-speculative business income.

Conclusion:

The Tribunal allowed the appeal in part, treating the derivative loss as business loss but upheld the classification of the equity share trading loss as speculative loss, thus denying its set off against non-speculative business income. The decision was pronounced in Open Court on 11/09/2019.