Loss On Trading In Derivatives Of Securities Not A Speculative Loss, Can Be Set Off Against Business Income: Bombay High Court

The Bombay High Court has ruled that transactions in respect of trading in derivatives carried out in a recognized stock exchange are excluded from the definition of "speculation transaction" under the Income Tax Act, 1961. The Bench, consisting of Justices R.D. Dhanuka and S.G. Mehare, held that an assessee is thus entitled to claim set off of the loss suffered by it in the said transactions in derivatives against its business income. The Court added that the explanatory notes on the provisions of the Finance Act, 2005, clearly indicate that an eligible transaction in respect of trading in derivatives of securities, carried out on a recognized stock exchange, shall not be deemed as a speculative transaction. The assessee/appellant M/s. Souvenir Developer (India) Pvt Ltd deals in collection of Toll fees and also carries out the business of shares and derivatives. The appellant's income tax return was picked up for scrutiny. The Assessing Officer (AO) passed an order making certain additions to the income of the appellant. The AO refused to consider the loss suffered by the appellant on transactions in derivatives while computing his net taxable income. The appellant filed an appeal before the Commissioner of Income Tax (Appeals) (CIT (A)) against the assessment order. The CIT (A) upheld the order of the AO and held that the loss suffered by the appellant from transaction in derivatives was a speculative business, therefore it could not be set-off against the income from a non-speculative business, in view of the provisions of Section 73 of the Income Tax Act. Against the order of the CIT(A), the appellant filed an appeal before the ITAT. The ITAT dismissed the appeal and held that in view of the provisions of Section 73, the appellant was not entitled to claim set-off. The appellant filed an appeal before the Bombay High Court against the order of the ITAT. Section 43 (5) of the Income Tax Act defines "speculative transaction" as 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. The proviso (d) to Section 43(5) provides that an eligible transaction in respect of trading in derivatives, referred to in Clause (ac) of Section 2 of Securities Contracts (Regulation) Act, 1956, and carried out in a recognised stock exchange shall not be deemed to be a speculative transaction. Section 73 (1) provides that any loss with respect to a speculation business carried on by the assessee shall be set off only against the profits and gains of another speculation business. The explanation to Section 73 provides that where any part of the business of a company, other than the exceptions carved out therein, consist in the purchase and sale of shares of other companies, such companies shall, for the purpose of Section 73, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of shares. The assessee/appellant M/s Souvenir Developer contended before the Bombay High Court that the appellant had ventured into transactions in securities in derivatives at a recognized stock exchange and through registered brokers. The appellant averred that it had suffered losses in the said transactions in securities in derivatives. The appellant thus submitted that the said transactions were not speculative transactions in view of Section 43(5)(d) of the Income Tax Act. The appellant contended that the CIT (A) did not consider the provisions of Section 43(5)(d) of the Income Tax Act and had erroneously disallowed the appellant's claim for set off. The revenue department submitted that a deeming fiction is created under Section 73 of the Income Tax Act. The revenue department averred that in view of the definition of speculative transaction and the provisions of Section 73 of the Income Tax Act, losses in speculation business would not be governed by proviso (d) to Section 43(5) that carves out an exception to the definition of speculative transaction. The High Court ruled that none of the authorities had considered and dealt with the effect of insertion of proviso (d) to Section 43(5) of the Income Tax Act, which was inserted vide the Finance Act, 2005. The Court noted that the appellant had claimed set-off of the loss suffered in respect of the transactions in derivatives. The Court observed that the Finance Act, 2005 carved out transactions in derivative as an exception in the definition of speculative transaction. The Court held that the explanatory notes on the provisions of the Finance Act, 2005, clearly indicate that an eligible transaction in respect of trading in derivatives of securities, carried out on a recognized stock exchange, shall not be deemed as a speculative transaction. The High...

Loss On Trading In Derivatives Of Securities Not A Speculative Loss, Can Be Set Off Against Business Income: Bombay High Court

Parina Katyal

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