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TMI Blog2011 (11) TMI 646X X X X Extracts X X X X X X X X Extracts X X X X ..... y if the losses are carried forward for set off; 3. The ld. CIT (Appeals)-XVIII, New Delhi ought to have held that Section 73 does not override section 71 of the Income Tax Act, 1961 and as per the scheme of law Section 71 should got precedence over Section 73 of the Income Tax Act, 1961. 3. The ground of appeal raised by the Revenue reads as follows:- On the facts and circumstances of the case and in law, the ld. CIT (Appeals)has erred in deleting the addition of ₹ 4,13,81,432/- made by the assessing officer made on account of non-refundable membership fees. 4. First we will take up the appeal filed by the Revenue. The only issue for consideration in Revenue s appeal relates to deleting the addition of ₹ 4,13,81,432/- made by the assessing officer on account of non-refundable membership fee. The assessing officer had made disallowance on account of non refundable membership fee in respect of club memberships granted to various Individuals / Corporate entities. The facts of the case are that membership fee is received by the assessee in advance against which the services will required to be rendered over a period of three / five / sev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e learned Assessing Officer treated the total receipts as taxable in the year of receipt. However, learned CIT(A) as well as the ITAT deleted the addition and allowed the assessee to spread the receipts in two years. Hon ble High Court has considered the scope of total income provided in section 5 of the Income-tax Act, 1961 and has observed that income would accrue or arise or is deemed to occur or arise to an assessee in India during such year when a right to receive crystallized in favour of the assessee. Similarly, in the case of Mahindra Holidays Resorts (supra), facts are that assessee has been receiving amounts for selling timeshare unit. Under the scheme a person can become a member either by paying the full amount at a time or by paying instalments. The members are entitled to enjoy the holidays only after 12 or 18 months, from the date of membership. The membership will be entitled to facilitate a stay at a resort for one week in a year for 33/25 years. The assessee has recognized 40% of the total cost of membership towards accommodation and 60% towards facilities. It offered 40% of the receipts of tax in the year of receipt of the membership fees. The dispute arose bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent on satisfaction of section 43(5). Explanation to section 73 can be applied even if there is delivery based sale purchase shares and also in situations of trading of derivatives. The assessee was not engaged in any of the specified excluded categories of business so as to come out of the clutches of Explanation to section 73. The AO placed reliance on various decisions and held that loss of ₹ 492.71 lakhs had to be treated as speculative loss and could not be allowed to be adjusted against business income. 8. On appeal, before CIT(A) the ld. AR of the assessee submitted that the assessee was not engaged in the business of share trading as such. The assessee had suffered loss in trading of derivatives. Section 43(5) of the Act defines the term speculative transactions , which means a transaction in which a contract for purchase and sale of any commodity including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. Proviso to section 43(5) contains exceptions to this definition. Clause (d) of proviso to section 43(5) says that an eligible transaction in respect of trading in derivatives ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e treated as speculative loss. He also placed reliance on the decision of ITAT in the case of RBK Securities P. Ltd. Vs. ITO 118 TTJ 465 wherein it has been held that dealing in derivatives stands on different footing than deleting in purchase and sale of shares. He also placed reliance on the decision of the ITAT, Bangalore Bench in the case of C. Bharat Kumar Vs. DCIT 4 SOT 593 wherein similar view has been taken. He further submitted that the AO as well as the ld. CIT (A) had not properly appreciated the difference between dealing in shares i.e. sale and purchase of shares and dealing in derivatives and, therefore, had erroneously proceeded to include derivative transactions within the meaning of Explanation to section 73 of the Act. The ld. AR of the assessee also submitted that ITAT, Chennai Bench in the case of DCIT Vs. Peterson Securities P. Ltd. 127 I.T.D. 386 has held that derivatives are not for purchase or sale of any physical commodity as such and, therefore, trading in derivatives could not be treated as speculative transactions in the strict sense of section 43(5). The ld. AR of the assessee further clarified that in this case the assessment year involved was 2004-05 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (A) carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary registered under section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or the Depositories Act, 1996 (22 of 1996) and the rules, regulations or bye-laws made or directions issued under those Acts or by banks or mutual funds on a recognised stock exchange; and (B) which is supported by a time stamped contract note issued by such stock broker or sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub-clause (A) and permanent account number allotted under this Act. (ii) recognised stock exchange means a recognised stock exchange as referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfils such conditions as may be prescribed and notified by the Central Government for this purpose. 9.2 C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orward for eight years for set-off against speculation profits in subsequent years. These restrictions were essentially designed as an anti-evasion measure to prevent claims of artificially generated losses in the absence of an appropriate institutional infrastructure. Recent systemic and technological changes introduced by stock markets have resulted in sufficient transparency to prevent generating fictitious losses through artificial transactions or shifting of incidence of loss from one person to another. The screen based computerized trading provides for an excellent audit trail. Therefore, the present distinction between speculative and non-speculative transactions, particularly relating to derivatives is no more required. The proposed amendment, therefore, seeks to provide that an eligible transaction carried out in respect of trading in derivatives in a recognized stock exchange shall not be deemed to be a speculative transaction. The proposed amendment also seeks to notify relevant rules etc. regarding conditions to be fulfilled by recognised exchanges in this regard. Further it is also proposed to amend sub-section (4) of section 73 so as to reduce the peri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Securities P. Ltd. (supra) has held that dealing in derivatives is a separate kind of transaction which does not involve any purchase and sale of shares and, therefore, loss on account of F O(futures and options) transactions could not be treated as speculative loss. Similarly, ITAT, Chennai Bench in the case of DCIT Vs. Peterson Securities P. Ltd. (supra) has held that trading in derivatives could not be considered as speculative transaction. Set off of loss of derivative trading against the profit of share trading business was held to be permissible. ITAT, Mumbai Bench in the case of Hitesh Satish Chandra Joshi has held that loss from derivative transactions was business loss during assessment year 2006-07. 14. In the case before us the assessee was not engaged in the business of share trading as such. The assessee had suffered loss in trading of derivatives carried through recognized Stock Exchange (NSE). In view of above discussion, it is held that derivative transactions being separate from trading in shares, the provisions of Explanation to section 73 will not be applicable to such transactions and hence, the loss incurred by the assessee in derivative transactions th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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