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TMI Blog2022 (5) TMI 377X X X X Extracts X X X X X X X X Extracts X X X X ..... out in a recognized stock exchange by the appellant could have been set off against the income of the appellant arisen out of infrastructure business carried on by the appellant under Section 70 of the Income Tax Act, 1961. 2. By consent of parties appeal is heard finally. Some of the relevant facts for the purpose of deciding this appeal are as under :- The relevant assessment year is 2009-10 and financial year is 2008-09. The appellant is a domestic company and derives income from business. The appellant is dealing in collection of Toll fees in the name and style "M/s. Souvenir Developer (India), Pvt. Ltd., Dhule". The appellant is also carrying business of shares and derivatives. The return of income declaring total income of Rs.85,43,220/- was submitted electronically by assessee on 30th September 2009. The same was processed on 28th March 2011 under section 143 (1) of the Income Tax Act, 1961 by accepting the return of income. Subsequently the case of the appellant was picked up for scrutiny. The statutory notice under section 143(2) of the Income Tax Act, 1961 was issued on 28th September 2010. The appellant was granted an opportunity of being heard by the assessing office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips: Provided that for the purpose of this clause : (d) an eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognized stock exchange; or Explanation 1. - For the purposes of clause (d), the expressions - (i) "eligible transaction" means any transaction, - (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any speculation business carried on by him assessable for that assessment year; and (ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on. (3) In respect of allowance on account of depreciation or capital expenditure on scientific research, the provisions of sub-section (2) of section 72 shall apply in relation to speculation business as they apply in relation to any other business. (4) No loss shall be carried forward under this section for more than four assessment years immediately succeeding the assessment year for which the loss was first computed. Explanation. - Where any part of the business of a company (other than a company whose gross total income consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources", or a company the principal business of which is the business of trading in shares or banking]or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt of the submission that, the loss suffered by the appellant in the transactions arising out of securities in derivatives were not speculative transaction under Section 43(5) of the Income Tax Act, 1961. 11. Learned counsel for the appellant submits that, Proviso (d) to Section 43(5) of the Income Tax Act was inserted by Finance Act, 2005 with effect from 01.04.2006. He submits that, the said proviso to Section 43(5) carved out an exception to the definition of 'speculative transaction'. He submits that, the loss suffered in the transactions in derivatives before insertion of the proviso to Section 43(5) were considered as speculative and were not entitled to be setoff against the profit under any other heads of income except profit from speculative business. However, in view of the said proviso to Section 43(5) inserted by the Finance Act, 2005 with effect from 01.04.2006, the transactions in derivatives were not considered as speculative business. 12. The learned counsel for the appellant placed reliance on the judgment of the Hon'ble Supreme court in case of Snowtex Investment Limited Vs. Principal Commissioner of Income Tax, Central-2, Kolkata reported in 2019 SCC OnLine SC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... placed reliance on the judgment of this court in case of Commissioner of Income Tax Vs. Lokmat Newspapers P. Ltd. (supra) and would submit that, the authorities below have rightly considered the said judgment, though the same was not directly on the issue. In support of this submissions she placed reliance on paragraph no.6 of the said judgment. 17. The learned counsel for the revenue made an attempt to distinguish this judgment in case of The Commissioner of Income Tax, Central-IV Vs. Shri. Bharat R. Ruia (HUF) (supra). She submits that, question felt for consideration by this Court in this judgment was whether proviso inserted to Section 43(5) was clarificatory or not and the ratio in the said judgment would not apply to the facts of this case. The learned counsel for the revenue tenders the explanatory notes on the provisions of the Finance Act, 2005 dated 27th February, 2006 for showing the purpose and object of insertion of proviso to Section 43(5) of the Income Tax Act, 1961. 18. Mr. Shah, learned counsel for the appellant in his rejoinder argument would submit that, Section 43 of the Income Tax Act, 1961 falls under the Part (iv) of the Income Tax Act whereas, Section 43 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the impugned order at all. The Commissioner of Income Tax (Appeals) allowed the Rectification Application filed by the appellant under Section 143(3) read with Section 143 (1). The said order passed by the Commissioner of Income Tax (Appeals) allowing the Rectification Application filed by the appellant was not challenged by the respondent-revenue at any stage. 21. The Commissioner of Income Tax (Appeals) observed that, the Assessing Officer had not impugned anything in regard to the share trading loss in the assessment order under Section 143(3) and had rejected the Rectification Application stating that as per the return of income there was an income of Rs.85,43,220/- and hence there was no mistake apparent from record which required rectification. In paragraph no.9 of the said order passed by the Commissioner of Income Tax (Appeals) it was observed that, on verification of the case record, it was noticed that the appellant company had carried out activity of share trading in derivatives and had incurred loss amounting to Rs.1,90,66,444/-. 22. The Commissioner of Income Tax (Appeals), however, considered the explanation to Section 73 of the Act and erroneously observed that, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income Tax Act defines that 'speculative transaction' means a transaction 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 scrips. 25. In this case, the appellant has not claimed any set-off of the loss suffered by the appellant in the transactions in shares where delivery was actually effected. The appellant has admittedly claimed set-off of the loss suffered in respect of transactions in derivatives in view of the Finance Act, 2005 with effect from 01.04.2006. It is thus clear beyond reasonable doubt that the transaction in derivative was carved out as an exception in the definition of speculative transaction. None of the Authorities below, however, considered and dealt with the effect of said proviso (d) to Section 43(5) of the Income Tax Act, 1961 inserted by the Finance Act, 2005 with effect from 01.04.2006 in the impugned orders. 26. The explanatory notes on the provisions of the Finance Act, 2005 clearly indicates that the existing provision before such amendment of Clause (5) to Section 43 defines "speculative transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therwise other than by the actual delivery or transfer of the commodity or scrips. The Hon'ble Supreme Court also considered the circular issued by the Central Board Direct Taxes dated 27.02.2006 and observed that the amendment by the Finance Act, 2005 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. 30. The Hon'ble Supreme Court also considered the memorandum explaining the amendment introduced in the provisions of sub-section 43 (5) by the Finance Act, 2005 with effect from 01.04.2006. It is held that while amending the provisions of Section 43 (5), the Parliament indeed was cognizant of the provisions which were contained in Section 73 (4) of the Income Tax Act, 1961. It is held that it was only with effect from 01.04.2015 that an amendment was brought about to exclude trading in shares from the deeming provision contained in the Explanation to Section 73. 31. The Hon'ble Supreme Court held that it would be difficult to hold that the provisions which were contained in the Finance Act (No. 2) of 2014 in so far as they amended the Explanation to Section 73 wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "speculation transaction" was admittedly inserted by Finance Act, 2005 with effect from 01.04.2006. The said provision has been interpreted by the Hon'ble Supreme Court in case of Snowtex Investment Limited (supra). 35. It is thus clear that, the transactions in respect of trading in derivatives referred to in Clause (ac) of Section 2 of Securities Contracts (Regulation) Act, 1956 carried in a recognized stock exchange are excluded from the definition of "speculation transaction" described under Section 43 (5) of the Income Tax Act, 1961. In our view, the respondents thus, cannot be allowed to contend that the appellant had claimed any set off of the losses suffered by the appellant in respect of the speculation business carried on by the assessee against the profits and gains, if any, of another speculation business. 36. In our view, Section 73 (1) as well as the explanation inserted by Taxation Laws (Amendment) Act, 1975 with effect from 01.04.1977 thus would not apply to the loss having arisen in the trading in derivatives being not speculative transaction which is excluded from the definition of "speculation transaction" described under Section 43 (5) of the Income Tax Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the proviso to Section 43 (5) of the Finance Act, 2005) were speculative transactions covered under Section 43 (5) of the Act and the loss incurred in those transactions were liable to be treated as speculative loss and not business loss. 39. 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) 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. 40. In so far as the judgment of this Court in case of Commissioner of Income Tax Vs. Lokmat Newspapers Pvt. Ltd. (supra) relied upon by the learned counsel for revenue is concerned, the substantial question of law fell for consideration of this Court in the said judgment was "whether, on the facts and in the circumstances of the case and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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