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TMI Blog2018 (2) TMI 1709X X X X Extracts X X X X X X X X Extracts X X X X ..... s, the observations of the AO that the transactions carried out in the last two months of the year has no relevance to the business activity of derivative trading is of no substance. The commodity transactions are not covered by section 43(5)(d) of the Act. From the above definition it is clear that commodity derivative trading is not covered by Securities Control (Regulation) Act, 1956 and therefore the provision applied by the AO is against the facts of the case. The assessee is exclusively carrying on business of derivative trading on various exchanges and the transaction entered into derivative on various exchanges is his business activity whether considered as speculative or non speculative transaction as per section 43(5), the derivative transactions are not speculative transaction, in view of the fact that the derivative transaction is not supported or backed by deliverable commodity. The assessee is not claiming any special deduction under section 43(5)(d) for treating the profit as business profit. The nature of activity is carried throughout the year by the assessee is one and only one to trade in derivatives on various exchanges and earned profit or income which in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessing Officer. 3. The learned Commissioner of Income Tax (Appeals) has erred in law and on facts in considering the applicability of provision of section 43(5)(d) of the Income Tax Act,1961 instead of section 43(5)(e) applicable to the derivate trading in commodity as inserted by Finance Act 2013 applicable from Assessment Year 2014-2015. The appellant also submit that if section 43(5)(d) is applicable to derivative trading commodity then there was no need to insert section 43(5)(c) which is applicable exclusively for derivative trading in commodity. 3. Brief facts relating to this issue are that the assessee is carrying on business of trading in commodity derivatives on various exchanges like NSE, BSE, MCX, ICEX etc. The assessee declared net income from commodity feature amounting to ₹ 78,32,439/- derived from the profit and loss from various exchanges as under:- Trading on Recognized Exchange Commodity/ Derivatives trading Dr. Cr. MCS [Kayees Finance Investments Own Trading) Trading Through Broker 14,65,600 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A). 5. The CIT(A) after going through the submissions of the assessee confirmed the action of the AO vide Para 17 to 19 as under:- 17. The reliance of the Id AR of the appellant on the case of Varsha Corporation Ltd. vs DCIT in ITA no. 6534/ Mum/ 2012 dated 17.01 .2014 is without any strength as distinguishable on facts The said case pertains to A Y. 2009-10, the year in which MCX was not a recognized stock exchange under sec 43(5)(d), the question before Hon'ble ITAT, F-Bench, Mumbai was whether the action of the AO in treating the loss of ₹ 21,04,331/- incurred on trading in futures and options by hedging the gold in MCX, as speculation loss instead of business loss, was correct. The Hon'ble Tribunal after considering the submission of the assessee found that MCX through which the assessee carried out the transaction, was not a recognized stock exchange as required under the provisions of section 43(5)(d), but was later on notified as a recognized association for the purpose of clause (e) of sec. 43(5) wef 1st April. 2014. The Hon'ble Tribunal also distinguished the cases of ACIT vs Arnav Akshay Mehta (2012) 53 SOT 581 (Mum) and Delhi High Court judgmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hold that the futures contracts are not speculative transactions under Section 43(5) of the Act. 36) The exceptions enumerated in the proviso to Section 43(5) clearly provide that where speculative transactions are carried out with a view to guard against loss in respect of contracts for actual delivery in cases referred to in clause (a), (b) (c) of the proviso, then, such speculative transactions shall not be deemed, to be speculative transactions. So far as the transactions covered under clause (d) are concerned, they are deemed not to be speculative transactions only with effect from 1/4/2006. Therefore, the transactions covered under clause (d) would not be treated as speculative transactions only with effect from 1/4/2006. 19. Taking into consideration the entire facts and circumstances of the issue involved and various relevant judgments, in my considered opinion, the AO has correctly disallowed the appellant's claim of set off of derivate loss in commodity trading of ₹ 4,48,73,079/- by treating the derivative trading carried out on exchanges other than MCX and NSE as speculative by invoking the provisions of clause (d) of provisions to sec. 43(5) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO is against the facts of the case. 7. Even the board circular No. 3 of 2006 dated 27-12-2006 has explained the scope and effect of ammendment with effect from 01-06-2006 made in section 43(5) by the Finance Act 2005, which have been elaborated in the following portion of departmental circular: - 3.10 Excluding trading in derivatives on recognised stock exchanges from the ambit of speculative transactions Existing provisions of clause (5) of section 43 define speculative transaction to mean a transaction in which a contract for the purchase or sale of any commodity including stocks and shares is settled otherwise than by the actual delivery or transfer of the commodity or scrips. The proviso to section 43(5) lists out certain transactions which are not deemed to be speculative transactions. Systemic and technological changes introduced by SEBI have resulted in sufficient transparency in the stock markets and have to a large extent curbed the scope for generating fictitious losses through artificial transactions or shifting of incidence of loss from one person to another. The screen based computerized trading provides for audit trail. In the wake of these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action in which a contract for the purchase or 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 scripts. (a) A contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivers of goods manufactured by him or merchandise sold by him; or (b) A contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in hic holding of stocks and share through price fluctuations; or (c) A contract entered into by a member of a forward market or a stock exchange in the course of an transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member; or (d) An eligible transaction in respect of trading in derivatives referred to in clause l(ac) at section 2 of the Securities Contracts (Regulation) Act,1956 (42 of 1956) carried out in a recognized stock exchange; or (e) An ..... 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