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2022 (5) TMI 377 - HC - Income TaxSpeculative transactions - set off of the loss - transaction in derivatives on recognized stock exchange as defined under Section 43 (5) (d) of the Income Tax Act, 1961 with reference to explanation given to Section 73 - Commissioner held that as provided under section 73, the loss suffered by the assessee would be a loss from speculative business and as such the appellant would not be entitled to claim setoff against the income from a non-speculative business - HELD THAT - In the facts of this case, admittedly the assessment year in question is 2009-2010 and financial year is 2008-2009 i.e. after insertion of the said Clause (d) to the proviso to Section 43 (5) of the Income Tax Act, 1961. The principles laid down by this Court in the said judgment in case of Commissioner of Income Tax Vs. Shri Bharat R. Ruia (HUF) 2011 (4) TMI 37 - BOMBAY HIGH COURT interpreting clause (d) inserted in the proviso to Section 43 (5) by Finance Act, 2005 with effect from 01.04.2006 apply to the facts of this case. Transactions in derivatives carried out by the assessee after 01.04.2006 thus would not be speculative transactions. Income Tax Appellate Tribunal could not have confirmed any addition on transaction in derivatives on recognised stock exchange as defined in Section 43 (5) (d) of the Income Tax Act, 1961 with reference to explanation given to Section 73 of the Income Tax Act, 1961 which is applicable to speculative transaction. By virtue of insertion of clause (d) to the proviso to Section 43 (5) of the Income Tax Act, 1961, the transactions in respect of the trading in derivatives as prescribed in clause (d) inserted in proviso to Section 43(5) would not be a speculative transaction. The appellant was thus entitled to claim set off of the loss suffered by the appellant in the said transactions in derivatives against the business income of the appellant from infrastructure business under Section 70 of the Income Tax Act 1961.
Issues Involved:
1. Whether the Tribunal was justified in confirming any addition on transaction in derivatives on recognized stock exchange as defined under Section 43(5)(d) of the Income Tax Act, 1961 with reference to explanation given to Section 73 of the Income Tax Act, 1961 which is applicable to speculative transactions. 2. Whether the loss suffered by the appellant on the transactions in respect of trading in derivatives could have been set off against the income of the appellant arisen out of infrastructure business under Section 70 of the Income Tax Act, 1961. Detailed Analysis: Issue 1: Addition on Transaction in Derivatives The appellant argued that transactions in derivatives on recognized stock exchanges should not be classified as speculative transactions under Section 43(5)(d) of the Income Tax Act, 1961. The Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal (ITAT) had erroneously treated these transactions as speculative, thereby denying the set-off of losses against other business income. The appellant cited the Finance Act, 2005, which amended Section 43(5) to exclude transactions in derivatives from the definition of speculative transactions. The appellant also referenced the Supreme Court judgment in Snowtex Investment Limited, which held that trading in derivatives on recognized stock exchanges is not speculative. The court noted that the authorities below failed to consider the effect of the proviso to Section 43(5) inserted by the Finance Act, 2005. The court emphasized that the transactions in derivatives are excluded from the definition of "speculative transaction" as per the amended Section 43(5)(d). Therefore, the Tribunal's confirmation of the addition based on speculative transaction provisions was incorrect. Issue 2: Set-off of Losses Against Infrastructure Business Income The appellant contended that the loss from derivative transactions should be set off against the income from the infrastructure business under Section 70 of the Income Tax Act, 1961. The Commissioner of Income Tax (Appeals) and ITAT had denied this set-off, treating the derivative losses as speculative and therefore not allowable against non-speculative business income. The court examined Section 70, which allows the set-off of losses from one source against income from another source under the same head of income. The court reiterated that derivative transactions are not speculative transactions due to the proviso to Section 43(5). Consequently, the loss from derivatives should be set off against the income from the infrastructure business. The court referenced the Supreme Court judgment in Snowtex Investment Limited, which clarified that losses from trading in derivatives are not speculative and can be set off against other business income. The court also distinguished the case from Lokmat Newspapers, where the transactions did not involve derivatives. Conclusion: The court concluded that the Tribunal erred in confirming the addition on transactions in derivatives as speculative transactions. The appellant is entitled to set off the loss from derivative transactions against the income from the infrastructure business under Section 70. The substantial questions of law were answered in favor of the appellant, and the appeal was allowed. Order: 1. Substantial question of law No. 1 is answered in negative and in favor of the assessee. 2. Substantial question No. 2 is answered in affirmative and in favor of the assessee. 3. Income Tax Appeal No. 79 of 2018 is allowed. No order as to costs.
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