2020 (9) TMI 1042 - AT - Income Tax

Disallowance of commodity derivative loss - appellant is carrying on derivative trading in commodity as exclusive business activity - As per AO losses incurred form commodity derivatives trading on National Multi Commodity Exchange, Ahmadabad a non recognized association as per Explanation 2 to clause (d) of sub-section (5) of section 43 cannot be allowed to be set off against profit derived from commodity derivatives trading on Multi Commodity Exchange, because profit or loss earned from trading on MCX is a trading profit and same cannot be set off against speculative profit - HELD THAT - MCX, as well as NMCE, Ahmadabad, both are recognized stock exchanges by the Ministry of Consumer Affairs, Food and Public Distribution as a recognized association/exchange u/s 5 of the Forward Contracts (Regulation) Act, 1952. In fact, NMCE, Ahmadabad has been recognized by way of notification, dated 10/01/2003 in consultation with the Forward Market Commission under section 5 of the Forward Contracts (Regulation) Act, 1952. MCX is also a recognized association under section 5 of the Forward Contracts (Regulation) Act, 1952. The only difference is MCX has been notified by the CBDT u/s 43(5)(d) w.e.f. AY 2014-15, whereas NMCE, Ahmadabad is not notified for the purpose of section 43(5)(e). Otherwise, both are recognized associations/exchanges for online trading in commodity derivatives. It is incorrect to differentiate business carried out by the assessee in commodity derivatives on two exchanges only for the reasons that the one exchange is not notified by the CBDT u/s 43(5)(e) of the Act, more particularly when said exchange or association is a recognized association u/s 5 of the Forward Contracts (Regulation) Act, 1952. Loss incurred from derivatives trading on NMCE, cannot be considered as different from profit earned from MCX only on the basis of notification issued by the CBDT for the purpose of section 43(5)(d) because the law requires recognition of Association/exchange from Govt. of India, but it does not specifically requires notification from CBDT u/s 43(5) - NMCE, Ahmadabad is a recognized association like MCX, Mumbai and profit or loss incurred from both exchanges is a business profit and consequently, any loss incurred from one exchange can be set off against profit earned from another exchange. Assessee is engaged in one and only business of derivative trading in different commodity exchanges and such business needs to be considered as one business for the purpose of taxation and any profit or loss derived from different exchanges shall be aggregated by allowing losses to be set off. AO and Ld.CIT(A) without appreciating these facts has disallowed loss incurred form derivative trading on NMCE, Ahmadabad as speculation loss against profit earned from derivative trading in MCX by holding that profit earned from MCX is not speculative profit. We direct the Ld. AO to delete additions made towards disallowances of loss incurred from NMCE, Ahmadabad and allowed said loss to be set off against profit derived from derivative trading on MCX. Allowing the speculation loss against non speculation gains which is prohibited by the provisions of section 73 - HELD THAT - Commodity derivatives transactions are not excluded from the definition of speculative transactions under the provisions of section 43(5) before AY 2014-15 and hence, all transactions in commodity derivatives in any exchanges are speculative transactions and consequent profit or loss earned there from is a speculative profit and accordingly, loss or profit from different exchanges needs to be set off against each other. There is no error in the findings recorded by the Ld.CIT(A), while deleting additions made towards disallowances of loss incurred from commodity derivatives on NMCE, Ahmadabad and hence, we are inclined to uphold the findings the Ld.CIT(A) and dismissed appeal filed by the revenue

Summary

Issues Involved:
1. Disallowance of commodity derivative loss.
2. Set-off of speculative loss against non-speculative profit.
3. Recognition of exchanges for the purpose of section 43(5)(e) of the Income Tax Act, 1961.

Detailed Analysis:

1. Disallowance of Commodity Derivative Loss:
The assessee, engaged in trading commodity and currency derivatives, incurred a loss of ?18,71,18,254 from trading in commodity derivatives on the National Multi Commodity Exchange (NMCE), which was not recognized by the CBDT for the purpose of section 43(5)(e) of the Income Tax Act, 1961. The Assessing Officer (AO) disallowed the set-off of this loss against profit from the Multi Commodity Exchange (MCX), citing that NMCE was an unrecognized exchange and the transactions did not suffer Commodity Transaction Tax (CTT). The AO treated the loss as speculative, disallowing it for set-off against non-speculative profit.

2. Set-off of Speculative Loss Against Non-Speculative Profit:
The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the loss from NMCE was speculative and could not be set off against non-speculative profit from MCX. The CIT(A) referred to section 43(5) and its proviso, emphasizing that NMCE was not a recognized exchange under section 43(5)(e) and that CTT was not applicable to NMCE transactions. The CIT(A) concluded that the loss from NMCE was speculative and not eligible for set-off against non-speculative profit from MCX.

3. Recognition of Exchanges for the Purpose of Section 43(5)(e):
The assessee argued that both NMCE and MCX were recognized exchanges under the Forward Contracts (Regulation) Act, 1952, and that the business of trading in commodity derivatives should be treated as one business for taxation purposes. The assessee cited a previous ITAT decision in its favor, where it was held that the business should not be split based on different exchanges. The ITAT, after considering the facts and legal provisions, concluded that the assessee's business of trading in commodity derivatives on different exchanges should be treated as one business. The ITAT held that the loss from NMCE, being speculative, should be allowed to be set off against the profit from MCX, also speculative.

Conclusion:
The ITAT allowed the appeal filed by the assessee, directing the AO to delete the disallowance of the loss incurred from NMCE and to allow the set-off against the profit from MCX. The ITAT dismissed the appeals filed by the revenue for the assessment years 2009-10 and 2011-12, upholding the CIT(A)'s decision to allow the set-off of speculative loss against speculative profit. The ITAT emphasized that the business of trading in commodity derivatives on different exchanges should be treated as one business for taxation purposes, irrespective of the recognition status of the exchanges under section 43(5)(e) of the Income Tax Act, 1961.