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TMI Blog2021 (7) TMI 1192X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. With effect from 01/042006, by deeming fiction, trading in derivatives was not to be regarded as speculative transaction when it was carried out on a recognized stock exchange. CBDT Circular dated 27/02/2006 indicated that this amendment was occasioned by the changes which were introduced by SEBI both at the legal and technological level for bringing in greater transparency in the market for derivatives We are of the considered opinion that Ld. CIT(A) has clinched the issue in the correct perspective. The losses arising to the assessee in derivative segment are not to be considered as speculative in nature by virtue of clause (d) to sub-section (5) of Sec.43. The same are to be treated as normal business losses. This being so, the set-off of the same would be allowed in accordance with the law. Ground No.1 of the appeal stand dismissed. Earned profit in trading activity in cash segment and speculation income - There are no losses under both the segments. The ground raised by the revenue is misplaced. - I.T.A. No.6789/Mum/2019 - - - Dated:- 27-7-2021 - Hon ble Shri Mahavir Singh, VP And Hon ble Shri Manoj Kumar Aggarwal, AM For the Assessee : Shri Paresh Shapar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich were to be treated as normal business loss as per Sec. 43(5)(d) of the Act. As a result, the provision of Sec.73 would not apply to the case of the assessee, 3.3 However, considering the explanation to Section 73 which provide that where any part of the business of the company consist in the sale and purchase of shares then such company shall be deemed to be carrying on a speculation business to the extent to which such business consist of purchase and sale of shares and relying upon the decision of Hon ble Delhi High Court in CIT V/s DLF Commercial Developers Ltd. (261 CTR 126) which held that stock derivative value is dependent on shares and therefore, the explanation to Sec. 73 would apply, Ld. AO opined that the explanation to Sec. 73 was applicable and the losses were speculative in nature. Consequently, the assessee was not entitled for set-off of the losses. Further, the assessee was not covered under any of the exceptions as provided in explanation to Sec. 73. Finally, the net loss of ₹ 2768.41 Lacs was held to be speculative in nature which would not be available for set-off against the business income. As a consequence, transaction charges of ₹ 84.07 La ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T (70 Taxmann.com 9). This decision, after considering the aforesaid decision of Hon ble Delhi High Court in DLF Commercial Developers Ltd. (supra) held that the loss in derivatives would be a business loss and not speculative loss. The Ld. CIT(A) also observed that this controversy has finally been settled down by Hon ble Supreme Court in the case of Snowtex Investment Ltd. Vs Pr. CIT (205 Taxmann.com 282) which held that as per the provisions of Sec.43(5), the profit / loss from derivative trading was not to be treated as speculative in nature. Therefore, the action of Ld. AO in denying the set-off of these losses as well as denying allowance of expenditure could not be upheld. Aggrieved as aforesaid, the revenue is in further appeal before us. Our findings Adjudication 5. After considering the ratio of decision of Hon ble Apex Court in Snowtex Investment Ltd. Vs Pr. CIT (205 Taxmann.com 282), as observed by Hon ble Court that the provisions of Sec.43(5) were amended by Finance Act, 2005. Prior to the amendment, Section 43(5) defined a 'speculative transaction' to mean a transaction in which a contract for the purchase or the sale of any commodity includ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st July, 2005 vide S. O. No. 932(E). Applicability: From A.Y. 2006-07 onwards. 6. In the aforesaid case before Hon ble Supreme Court, the assessee sought set-off of losses arising out of trading in shares from derivative income. The same was in view of the assertion that amendment to Explanation to Sec.73 by Finance Act, 2014 was retrospective in nature. However, rejecting the same, Hon ble Court held that the amendment to Explanation to Sec.73 was prospectively effective only from 01/04/2015 and therefore, the speculation losses arising out of share trading activity could not be allowed to be set-off from income from trading in derivatives since the derivative income, as per amendment made by Finance Act, 2005 was deemed not to be a speculative transaction. 7. In the present case before us, the assessee has incurred losses in derivative segment and claim the set-off of the same as normal business loss. It is undisputed fact that the derivative transactions are eligible transactions carried out on recognized stock exchange. Therefore, keeping in view the amendment brought in by Sec.43(5) w.e.f. AY 2006-07, the derivative income / losses are to be deemed as non-speculat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hall be chargeable to income-tax under the head 'Profits gains of business or profession'. Explanation 2 to section 28 provides that where speculative transactions carried on by an assessee are of such a nature as to constitute a business, then such speculation business shall be deemed to be distinct and separate from any other business. Section 72 of the Act provides for set-off of the carried forward business losses not being a loss sustained in a speculation business. Section 73 provides that the carried forward losses in speculation business shall not be set off except against profits and gains, in any other speculation business. The assessee claims that the losses incurred in derivative transactions are business losses which could be set off against profits and gains of any other business/any other heads of income, whereas the revenue contends that the losses incurred by the assessee in derivative transactions are speculative transactions covered under section 43(5) of the Act which could be set off only against profits of speculation business. 26. Section 43(5) of the Act defines the expression 'speculative transaction' to mean a transaction in which a co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requirement. It has lower risk than buying and holding stocks. It is just as easy to trade the short side as the long side. Only have to study one index instead of 100's of stocks. Settled in cash and therefore all problems related to bad delivery, forged, fake certificates, etc. can be avoided. 31. Futures contracts in both index as well as stocks can be bought and sold through the trading members of recognized stock exchange. Futures contracts expire on the last Thursday of the expiry month. All futures contracts are settled in cash either on a daily basis or at the expiry of the respective contracts as the case may be. Clients/Trading members are not required to hold any stock of the underlying for dealing in the Futures Market. There are presently 53 stocks which can be traded under the Futures/Options Contracts. 32. To illustrate, suppose the share value of a company 'X' in the Stock Exchange on 1st January is ₹ 100 per share. If an investor considers that the shares of Company 'X' are likely to shoot up in the next three months, then he may, if he has funds, purchase 100 shares of company 'X' on 1st January itself by paying ₹ 10, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... livery would be speculative transactions under section 43(5) of the Act. 34. It is contended that the expression 'commodity' does not include 'stocks shares', however, for the purposes of section 43(5), the expression 'commodity' has been expanded to include 'stocks shares' and since transactions in derivatives are not specifically included in section 43(5), the same would fall outside the purview of section 43(5). We see no merit in the above contentions. The expression 'commodity' would cover all articles of trade including stocks shares. Even under section 43(5), the expression 'commodity' is not expanded to include 'stocks shares'. In fact, use of 'comma' in between the word 'commodity' and the words 'including stocks shares' in section 43(5) make it clear that transactions for purchase of any commodity would include transaction for purchase or sale of stocks shares. In other words, section 43(5) does not seek to expand the scope of expression 'commodity' but merely emphasizes that the transaction in commodity includes transactions in stocks shares. Therefore, transactions i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is only those derivative transactions which are covered under clause (d) are taken outside the purview of section 43(5) and the rest of the transactions in derivatives would continue to be covered under section 43(5) of the Income-tax Act. In these circumstances, the argument that clause (d) inserted to the proviso to section 43(5) has retrospective effect cannot be accepted. 38. We do not consider it necessary to deal with various decisions relied upon by the Counsel for the assessee, as in our opinion, all those decisions are distinguishable on facts. However, we may note that the decision of the Calcutta High Court in the case of Nirmal Trading Co. (supra) wherein it is held that the 'letters of renunciation' are neither transactions in commodity nor transactions in shares, has no relevance to the facts of the present case, because, firstly, the letters of renunciation cannot be treated on par with futures contracts and secondly letters of renunciation are not articles of trade, whereas futures contracts are articles traded on the stock exchange. Various decisions of the ITAT wherein it is held that the derivative transactions are not speculative transactions, in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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