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Income Tax Appellate Tribunal, “H”, BENCH MUMBAI
Before: SHRI G. MANJUNATHA & SHRI RAVISH SOOD
IN THE INCOME TAX APPELLATE TRIBUNAL “H”, BENCH MUMBAI BEFORE SHRI G. MANJUNATHA, ACCOUNTANT MEMBER & SHRI RAVISH SOOD, JUDICIAL MEMBER ITA No.2292/Mum/2018 (Assessment Year: 2014-15) Kunal Govind Kataria Vs. DCIT,CC-8(1) 2/B, Cenced Apartments Aaykar Bhawan Nr.Bajaj Park, Ambedkar M.K.Road Road, Bandra(West) Mumbai-400 020 Mumbai-400 050 PAN/GIR No.AODPK3994G (Appellant) .. (Respondent)
& ITA Nos.4026 & 4027/Mum/2018 (Assessment Years: 2009-10 & 2011-12) DCIT,CC-8(1) Vs. Kunal Govind Kataria Aaykar Bhawan 2/B, Cenced Apartments M.K.Road Nr.Bajaj Park, Ambedkar Mumbai-400 020 Road, Bandra(West) Mumbai-400 050 PAN/GIR No.AODPK3994G (Appellant) .. (Respondent)
Assessee by Shri Deepak R.Shah, AR Revenue by Shri B.Srinivas, CIT-DR
Date of Hearing 02/03/2020 Date of Pronouncement 24/07/2020 आदेश आदेश / O R D E R आदेश आदेश PER G.MANJUNATHA (A.M):
This bunch of three appeals, one appeal filed by the assessee and two appeals filed by the Revenue are directed against, separate but identical orders the Ld. Commissioner of Income tax (Appeals)- 50, Mumbai, all dated 23/03/2018 and pertains to Asst. Year 2009- 10, A.Y. 2011-12 and A.Y. 2014-15. Since, the facts are identical
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and issue is common, for the sake of convenience, these appeals were heard together and are being disposed-off by this consolidated order.
i) ITA NO.2292/MUM/2018
The assessee has raised the following grounds of appeal:
The learned Commissioner of Income Tax (A) has erred in law and on facts in confirming the disallowance of commodity derivative loss of Rs. 18,71,18,2547-made by the Assessing Officer without properly considering the facts that the appellant is carrying on derivative trading in commodity as exclusive business activity irrespective of the exchange traded, and also failed to follow the judicial decisions of the Hon'ble ITAT "E" bench in ITA No. 5179/MumA6 of Assessment Year 2012-2013 in the appellant's own case having same facts of, the case.
The brief facts of the case are that the assessee is an individual engaged in the business of trading commodity and currency derivatives, filed his return of income for AY 2014-15 on 01/10/2014, declaring total income of Rs.40,21,780/-. The case was selected for scrutiny and during the course of assessment proceedings, the Ld. AO noticed that the assessee has incurred loss of Rs.18,71,18,254/- from trading in commodity derivatives on the National Multi Commodity Exchange (NMCE), Ahmadabad and accordingly, called upon the assessee to explain as to why losses incurred from commodity derivatives traded on NMCE cannot be allowed to be set off against profit derived from commodity derivatives on MCX, as per provisions of section 43(5)(e) of the I.T.Act, 1961. In response to show cause notice, the assessee submitted that he is engaged in one and only business of trading in commodity derivatives and as per the provisions of section 28
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Explanation (2), the business of the assesee should be considered as one and accordingly, profit or loss derived should be treated as one, for the purpose of set off of loss against profits earned from commodity trading in Multi Exchanges.
The Ld. AO was not convinced with the explanation of the assessee and according to him losses incurred form commodity derivatives trading on National Multi Commodity Exchange, Ahmadabad a non recognized association as per Explanation 2 to clause (d) of sub-section (5) of section 43 cannot be allowed to be set off against profit derived from commodity derivatives trading on Multi Commodity Exchange, because profit or loss earned from trading on MCX is a trading profit and same cannot be set off against speculative profit. The relevant findings of the Ld. AO are as under:-
Assessee contentions have been noted but are found unacceptable for following reasons i) The losses incurred on NMCE fail to qualify as non speculative losses as NMCE was an unrecogn3sed stock exchange in AY 2014-15 Further, even in view of provision of Sec 43(5)(e), the ii) assessee’s losses fail the test of allowability as no Commodities Transaction Tax (CTT) (introduced from 01.07.2013) was paid for the Commodities derivatives trading on NMCE. This is evident from the. contract notes submitted by the assessee in course of assessment proceedings for commodities traded on NMCE, Ahmadabad iii) Further on an exercise to ascertain whether NMCE was a recognized association, the undersigned failed to find any notification with respect to declaration of NMCE as recognized association (for assessment 'year under consideration) within the meaning of Sec 43(5)(e) unlike the following notification in case of MCX which is reproduced below for sake of clarity,” “Government of India, Ministry of Finance, Department of Revenue, Central Board of Direct Raxes vide its Notification No2/2013 dated 29th November, 2013 hereby notifies the Multi Commodity Exchange of India Limited, Mumbai as a recognized association for the purposes fo clauses(e) of the proviso to clause(5) of the section 43 of the Income tax Act, 1961 ( 43 of 1961) red with sub rule (4) of rule 6DDD of the Income
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tax Rules, 1962 with effect from the date of publication of this notification in the official Gazette”.
Thus, on three counts, the assessee’s losses fail the test of the complementary provisions of Sec 43(5)(d) & sec 43(5)(e) rendering the losses accrued on NMCE as speculation losses and hence not allowable for set off against profits earned from Commodities derivatives trading on recognized stock exchanges. 12. In the light of above discussion, the loss incurred on NMCE, Ahmadabad amounting to Rs.18,71,18,254/- is disallowed being in the nature of speculation loss and hence disallowable against profits from non speculative business. Penalty proceedings initiated u/s 271(1)(c) r.w.s. 274 for furnishing inaccurate particulars of income.
Being aggrieved by the assessment order, the assessee preferred an appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assessee has filed detailed written submissions, on the issue, which has been reproduced at Para ‘7’ on pages 3 to 13 of Ld.CIT(A) order. The sum and substance of arguments of the assessee before the Ld.CIT(A) are that the assessee is carrying out only and only commodity derivatives trading in Multi commodity Exchanges and therefore, the same cannot be split, on the basis of trading in different commodity exchanges for the purposes of taxation. The assessee, further submitted that the provisions contained in section 43(5)(d) of the I.T.Act, 1961 is not applicable to commodities derivatives trading and therefore, the profit and loss from all the transactions, whether executed on recognized or non-recognized exchange are speculative transactions and therefore, the profit or loss needs to be allowed to be set off. The assessee has also relied upon the decision of ITAT, Mumbai in its own case for AY 2012-13 and argued that the ITAT has categorically held that the assessee’s business is one for the purpose of taxation and hence, the same should not be split into different businesses on the basis of trading on different Multi Commodity Exchanges.
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The Ld.CIT(A) after considering relevant submissions of the assessee and also by taking note of various provisions of the Act, including the Securities Contracts (Regulation) Act, 1956, he came to the conclusion that loss incurred by the assessee on commodity derivatives from National Multi Commodity Exchange (NMCE), Ahmadabad is in the nature of speculative loss and the same cannot be allowed to be set off against profit earned from commodity derivatives on MCX cannot be set off. The Ld.CIT(A), further noted that NMCE , Ahmadabad is a non-recognized association for the purposes of section 43(5)(e) of the Act, which is evident from the fact that the CBDT has not notified the said association, whereas MCX has been notified for the purpose of section 43(5)(e) of the Act. He, further noted that as per amended provisions of section 43(5)(e) of the Act, which is inserted by the Finance Act, 2013 w.e.f 01/04/2014 and applicable from AY 2014-15 onwards, only profit or loss derived from commodity derivatives in Multi Commodity Exchanges is outside the purview of speculative profit as per section 43(5)(e) of the Act, but such transactions should suffer Commodity Transaction Tax. In this case, the assesee has neither, paid commodity transaction tax, nor NMCE is a recognized stock exchange for the purpose of section 43(5)(e) of the Act, and thus, there is no error in the findings recorded by the Ld. AO in disallowing loss incurred from commodity derivative trading on NMEC, Ahmadabad. The relevant findings of the Ld.CIT(A) are as under:-
8.0 I have considered the facts of the case, the submissions of the appellant, the observations of the AO contained in the assessment order and the other materials on record on this issue. 8.1 The AO has disallowed an amount of Rs. 18,71,18,254/-, being loss incurred from derivative commodity trading through NMCE(National Multi
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-Commodity Exchange), Ahmedabad, an unrecognised exchange, considering the same as speculative loss and the same was not allowed to be set off against normal business profits. Thus, the speculation loss of Rs. 18,71,18,254/-, was not allowed by the A.O. to be set-off against the profit earned by the Appellant from the derivative trading through recognised exchanges like, MCX. 8.2 I have noted that the loss amounting to Rs. 18,71,18,2547- incurred by the appellant on National Multi -Commodity Exchange (NMCE), Ahmedabad is in the nature of speculative loss. In this regard, it is pertinent to refer to the provisions of section 43(5) of the Act, which are reproduced as under;- (5) "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:
Provided that for the purposes of this clause— a contract in respect of raw materials or merchandise entered into by , aperson in the course of his manufacturing or merchanting business to against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or 3IZI 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 his holdings of stocks and shares through price fluctuations; or (c) a contract entered into by a member of a forward market or a stock exchange in the course of any 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[(ac)] of section of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognised stock exchange; ^[or]] (e) an eligible transaction in respect of trading in commodity derivatives" carried out in a recognised association [, which is chargeable to commodities transaction tax under Chapter VII of the Finance Act, 2013 (17 of 2013),]] shall not be deemed to be a speculative transaction. [Explanation 1 I—For the purposes of[clause (d)], the expressions— (i) "eligible transaction" means any transaction, — • (A) carried out electronically on screen-based ^sterns through a stock broker or sub-broker or such other intermediary registered under section 1? 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
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(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 notified34 by the Central Government for this purpose;] [Explanation 2—For the purposes of clause (e), the expressions— (i)"commodity derivative" shall have the meaning as assigned to it in VII of the Finance Act, 2013; (ii) eligible transaction" means any transaction,— A) carried out electronically 'on screen-based systems through member or an intermediary, registered under the bye-laws, rules and regulations of the recognised association for trading in commodity derivative in accordance with the provisions of the Forward Contracts (Regulation) Act, 1952 (74 of 1952) and the rules, regulations or bye-laws made or directions issued under that Act on a recognised association; and (B) which is supported by a time stamped contract note issued by such member or intermediary to every client indicating in the contract note, the unique client identity number allotted under the Act, rules, regulations or bye-laws referred to in sub-clause (A), unique trade number and permanent account number allotted under this Act; (in) "recognised association1' means a recognised association as referred to in clause (j) of section 2 of the Forward Contracts (Regulation) Act, 1952 (74 of 1952) and which fulfils such conditions as may be prescribed" and is notified by the Central Government for this purpose;] 8.3 Thus, "speculative transaction" is a transaction in which the contract for the purchase or sale of any commodity is periodically or ultimately settled otherwise than by the actual delivery. Thus, in general the derivative transactions in a commodity falls under the category of "speculative transactions", as the derivative transactions are settled without taking delivery of any commodity. The exceptions to this general definition of "speculative transaction" are contained in the proviso to section 43(5) from clause (a) to (e) 8.4 For our purpose, clause (e) under proviso to section 43(5) is relevant, which clearly states that the commodity derivative transactions will be deemed to be non-speculative, if it is carried out in a recognized association and CTT(Commodities Transaction Tax) has been charged. The recognized association for the purpose of clause (e) has been defined as under:- (iii) "recognised association" means a recognised association as referred to in clause (j) of section 2 of the Forward Contracts (Regulation) Act, 1952 (74 of 1952) and which fulfils such conditions as may be prescribed7" and is notified by the Central Government for this purpose;
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8.5 As per the above definition of the "recognised association "NMCE (National Multi -Commodity Exchange), Ahmedabad, has not been notified by the CBDT for the purposes of clause (e) of the proviso to clause (5) of the section 43 of the Act and hence is not a recognised association. 8.6 On the other hand, MCX is a recognised association for the purposes of clause (e) of the proviso to clause (5) of the section 43 of the Act and the relevant notification in this regard is reproduced below:- "Government of India, Ministry of Finance, Department of Revenue, Central Board of Direct Taxes vide its Notification no. 92/2013 dated 29fh November 2013 hereby notifies the Multi Commodity Exchange of India Limited, Mumbai as a recognised association for the purposes of clause (e) of the proviso to clause (5) of the section 43 of the Income Tax Act, 1961 (43 of 1961) read with sub-rule (4) of rule 6DDD of the Income Tax Rules, 1962, with effect from the date of publication of this notification in the Official Gazette". 8.7 It may be important to note that clause (e) of the proviso to clause (5) of the section 43 of the Act has been inserted by the Finance Act, 2013 and is operational from 01.04.2014 and hence is applicable for the current assessment year under consideration. 8.8 Thus, the net effect of the amendment made in the Act from the A.Y. 2014-15 onwards, is that those derivative commodity transactions, which are carried out on a recognized stock exchange will fall in the category of non-speculative transaction in view of the deeming fiction of clause (e) of the proviso to clause (5) of the section 43 of the Act. On the other hand, the derivative commodity transactions carried out in an unrecognized stock exchange will fall in the category of speculative transaction.
8.9 Thus, the loss amounting to Rs. 18,71,18f254/- incurred by the appellant on National Multi -Commodity Exchange (NMCE), Ahmedabad is speculative in nature. While on the other hand, the profit earned by the appellant on MCX, a recognised exchange is to be treated as non- speculative !. Thus, the speculative loss of Rs. 18,71,18,2547- can't be set off e> non-speculative profit earned by the Appellant on MCX.
8.10 Also, no Commodities Transaction Tax (CTT) was payable till 01.07.2013 on the commodity derivatives transactions on NMCE. Thus, on this count also the commodity derivatives transactions on NMCE are to be treated as speculative in nature in view of provision of Sec 43(5)(e) of the Act. 8.11 In the light of above detailed discussion, the loss incurred on NMCE, Ahmedabad amounting to Rs. 18,71,18,2547/- is disallowed being in the nature of speculation loss and further, the same can't be set- off against profits earned from non-speculative transactions of MCX.
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The Ld. AR for the assessee submitted that the Ld.CIT(A) has erred in confirmed additions made by the Ld. AO towards disallowances of loss incurred from commodity derivative trading amounting to Rs.18,71,18,254/- on NMCE, Ahmadabad, without properly considering the fact that the assessee is carrying on derivative trading in commodities as exclusive business activity irrespective of any exchange and thus, income derived from such activity shall be considered one for the purpose of taxation. The ld. AR, further submitted that the Ld.CIT(A) failed to follow the decision of jurisdiction ITAT, Mumbai in assessee own case for AY 2012-13, where the Tribunal categorically held that the assessee’s business is only and only derivative trading in commodity and consequently, loss incurred or profit earned from commodity derivative trading should be treated as speculative loss/profit and should be allowed to set off against each other. The ld. AR, referring to Gazette notification of Govt. of India, submitted that NMCE, Ahmadabad, is a recognized association/exchange under Ministry of Consumer Affairs, Food and Public Distribution u/s 5 of the Forward Contracts (Regulation) Act, 1952. He, further submitted that when the Association/Exchange is a recognized by Govt. of India, merely because it was not notified by the CBDT for the purpose of section 43(50(d) and (e) of the Income Tax Act, 1961, the trading activity carried out on NMCE cannot be considered as different from activity carried out on MCX, Mumbai, when nature of transaction is one and the same.
The Ld. DR, on the other hand strongly supporting order of the Ld.CIT(A) submitted that as per the amended provisions of section 43(5)(e) by the Finance Act, 2013 w.e.f 01/04/2014, which is applicable for AY 2014-15 onwards, the commodity derivatives
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trading has been excluded from the definition of speculation loss or profit, provided the trading in derivatives should be in a recognized exchange/association and the transactions should suffer commodity transaction tax. In this case, the assessee is trading in MCX and NMCE, Ahmadabad and MCX is a recognized exchange for the purpose of section 43(5)(e) of the Act. Therefore, the loss or profit incurred form derivative trading on MCX is a business profit, whereas loss or profit incurred from derivative trading on NMCE, Ahmadabad is speculation loss or profit, because the said association is not recognized for the purpose of section 43(5)(e) of the I.T.Act, 1961. The Ld.CIT(A) after considering relevant facts has rightly confirmed additions made by the Ld. AO and his order should be upheld.
We have heard both the parties, perused the material available on record and gone through orders of the authorities below. The facts borne out from the records clearly indicates that the assessee is engaged in one and only business of trading in commodity derivatives in different exchanges and such profit or loss has been treated as one business for the purpose of taxation and accordingly, set off losses incurred from NMCE, Ahmadabad against profit derived from MCX. There is no dispute with regard to fact that the assessee is member of two commodity exchanges i.e, MCX and NMCE, Ahmadabad. The assessee is trading on both exchanges in commodity derivatives. Further, MCX, as well as NMCE, Ahmadabad, both are recognized stock exchanges by the Ministry of Consumer Affairs, Food and Public Distribution as a recognized association/exchange u/s 5 of the Forward Contracts (Regulation) Act, 1952. In fact, NMCE, Ahmadabad has been recognized by way of notification, dated 10/01/2003 in consultation with the Forward
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Market Commission under section 5 of the Forward Contracts (Regulation) Act, 1952. Similarly, MCX is also a recognized association under section 5 of the Forward Contracts (Regulation) Act, 1952. The only difference is MCX has been notified by the CBDT u/s 43(5)(d) of the I.T.Act, 1961 w.e.f. AY 2014-15, whereas NMCE, Ahmadabad is not notified for the purpose of section 43(5)(e) of the I.T.Act, 1961. Otherwise, both are recognized associations/exchanges for online trading in commodity derivatives. Therefore, we are of the considered view that it is incorrect to differentiate business carried out by the assessee in commodity derivatives on two exchanges only for the reasons that the one exchange is not notified by the CBDT u/s 43(5)(e) of the Act, more particularly when said exchange or association is a recognized association u/s 5 of the Forward Contracts (Regulation) Act, 1952.
We, further noted that the assessee is carrying out its business on both commodity exchanges on commodity derivatives and such business has been treated as one and only business for the purpose of taxation and accordingly profit or loss derived from both exchanges has been treated as one business by netting of profit or loss for the purpose of taxation. We, further, noted that as per section 28, Explanation 2 of the I.T.Act, 1961, where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business shall be deemed to be distinct and separate from any other business. Since, the appellant is dealing in commodity derivatives trading that too one and only business activity, the income generated through said business on different stock exchanges/associations needs to be treated as one and only business as per section 28 Explanation (2) of the Income Tax Act, 1961. This legal position is supported by the decision of
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Hon’ble Bombay High Court, in the case of ITO vs Kamani Tubes Ltd. (1994) 207 ITR 271 (Bom), where it was held that in deciding the character of transactions, what is important to consider is the distinctive character to such transactions, but not the platform in which such transactions has been carryout. Further, the provisions of section 43(5)(d) of the I.T.Act, 1961 is not applicable to commodities derivative trading, if such transactions are not carried out in a recognized stock exchange/association and also, the same are not suffered to commodity transaction tax. But, as per the amended provisions of section 43(5)(e) w.e.f. 01/04/2014, the commodity derivative transactions are excluded from the definition of speculative transactions, if such transactions are carried out in a recognized association and which is chargeable to commodity transaction tax under chapter VIII of the commodities Act, and such transactions shall not be deemed to be speculative transactions. Therefore, from the above, it is very clear that any transactions carried out in commodity derivatives on any association/exchange are speculative transactions. But, a benefit has been given to exclude those transactions from the definition of speculation transactions, if such transactions are carried out in recognized associations/exchanges and which are suffered commodity transactions tax. From the above, it is very clear that, basically any trading activity carried out in any association on online trading in commodity derivatives is in the nature of speculation transactions and the same cannot be differentiated, on the basis of recognizaiton or non-recognizaiton of a particular association/exchanges, more particularly when the assessee is engaged in one and only business of trading in derivatives on different associations/exchanges. Therefore, we are of the considered view that the Ld. AO, as well as the Ld.CIT(A) was completely erred in treating income/loss earned
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from different associations/exchanges for the purpose of taxation, when the assessee has done a composite business of trading in derivatives in Multiple Commodity Exchanges. Hence, we are of the considered view that the loss incurred by the assessee from trading in commodity derivatives on NMCE, Ahmadabad is a speculative loss, which is eligible for set off against profit earned from commodity derivatives on MCX, which is also a speculative profit for the purpose of taxation.
Further, assuming, but not accepting the fact that business carried out by the assessee in derivative trading on two exchanges is separate, because of recognition of MCX by the CBDT and non recognition of NMCE, Ahmadabad for the purpose of section 43(5)(e) of the Income Tax Act, 1961, but still loss incurred from derivatives trading on NMCE, Ahmadabad can be set off against profit earned from MCX, because both Association/ exchange are recognized exchanges and notified by the Ministry of Consumer Affairs, Food and Public Distribution as a recognized association/exchange u/s 5 of the Forward Contracts (Regulation) Act, 1952. In fact, NMCE, Ahmadabad has been recognized by way of notification, dated 10/01/2003 in consultation with the Forward Market Commission under section 5 of the Forward Contracts (Regulation) Act, 1952. Similarly, MCX is also a recognized association under section 5 of the Forward Contracts (Regulation) Act, 1952. Therefore, once any association is recognized from Govt. of India, then any trading activity carried out therein is outside the purview of section 43(5)9e) of the Act. Hence, loss incurred from derivatives trading on NMCE, cannot be considered as different from profit earned from MCX only on the basis of notification issued by the CBDT for the purpose of section 43(5)(d) of the Act, because the
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law requires recognition of Association/exchange from Govt. of India, but it does not specifically requires notification from CBDT u/s 43(5) of the Income Tax Act, 1961. We, therefore, are of the considered view that NMCE, Ahmadabad is a recognized association like MCX, Mumbai and profit or loss incurred from both exchanges is a business profit and consequently, any loss incurred from one exchange can be set off against profit earned from another exchange.
Coming to case laws relied upon by the assessee. The assessee has relied upon by the decision of ITAT, Mumbai in its own case for AY 2012-13 in ITA No.5179/Mum/2016. We find that the Tribunal has considered an identical issue, in light of recognized association and non-recognized association for the purpose of section 43(5)(e) of the Act and after considering relevant facts has came to the conclusion that the assesee is engaged in exclusive business of derivative trading on multiple commodity exchanges and the transactions entered in derivatives on various exchanges is his one and only business activity, whether considered as speculative or non speculative, as per section 43(5)(e) of the Act and said profit or loss should be allowed to be set off against each other. The relevant findings of the Tribunal are as under:-
We have heard rival contentions and gone through facts and circumstances of the case. We find that the assessee has started his business activity of derivative trading in commodity only and he has not done any activity of derivative trading in securities and equity. We are of the view that the derivative trading in commodity is to be considered as one business and the net income from the same should be assessed as business income of speculation business, since section 43(5) does not exclude commodity trading during the year. We find from the facts of the case that the assessee is member of MCX and he has to carry out transaction on another exchange because on MCX there was no volume in commodity like Coper, Crude Oil, Silver etc. and also there was difference in lot size of the commodity in Lead, Gold etc. Further in MCX
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exchange, some time, the trading limit exhausted and hence he has to approach other brokers of other exchange to continue the activity. We find from the facts of the case that the assessee on ICEX exchange earned profit in Lead and Gold commodity and incurred loss in Iron Ore. Thus, 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. Clause (d) of section 43(5) is relating to transactions in respect of the trading in derivatives referred to in clause (ac) of section 2 of Securities Control (Regulation) Act.1956. Clause (ac) of section 2 of Securities Control (Regulation) Act,1956 defined as under: (A) A security derived front a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for difference or any other form of Security. ITA No . 51 7 9/ Mu m/ 20 1 6 (B) A contract which derives its value from the prices, or index of prices, of underlying securities. 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. 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 developments, the present distinction between speculative and non-speculative ITA No . 51 7 9/ Mu m/ 20 1 6 transactions, in respect of trading in derivatives of securities is losing relevance. The Finance Act, 2005 has, accordingly, amended section 43(5) to provide that an eligible transaction in respect of trading in derivatives of securities carried out on a recognised stock exchange shall not be deemed as speculative transaction. The notification prescribing the rules and the conditions to be fulfilled by a stock exchange to be recognized by the Central Government for the purposes of section 43(5) [i.e., Rules 6DDA and 6DDB of the Income-tax Rules, 1962] has been published in the Official Gazette on 1st July, 2005 vide S. O. No. 932(E). Applicability: From A.Y. 2006-07 onwards." 8. But, the proviso to clause (e) takes out the definition of speculative transaction w.e.f 01.04.2014 by inserting the proviso by Finance Act, 2013, which we will discuss in the next paragraph.
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Alternative argument made by assessee is that commodity transaction are covered by proviso (e) of section 43(5) of the Act, which has been added by Finance Act, 2013 with effect front 01.04.2014 applicable for & from AY 2014-2015. Hence the transactions of derivative trading in commodity are speculation transactions as provided by section 43(5) of the Act and therefore the transactions carried out by NSE, BSE, MCX, ICEX or any other exchanges are on same footing and shall be adjusted against each other as whose transactions irrespective of any exchange are speculative transactions. The above view is also support by the judicial decision of the coordinate bench of this Tribunal in case of Varsha Corp. Ltd vs DCIT in appeal No.6534/Mum/2010 for AY 2009- 2010. The Tribunal in Para 8 and 9 of the Order has made interpretation ITA No . 51 7 9/ Mu m/ 20 1 6 and discussed the facts and after interpreting the various decisions as mentioned in the order finally held that the benefit of clause (e) of the proviso to section 43(5) of the Act, cannot be entitled the assessee for the transactions carried out prior to Assessment Year 2014- 2015 and accordingly the appeal filed by the assessee was dismissed. 10. Now we have to discuss the provision of section 43(5) of the Act with all its provision to understand the assessee's case. The relevant provision reads as under: - Section 43(5) ...... 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 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 ITA No . 51 7 9/ Mu m/ 20 1 6 (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 eligible transaction in respect of trading in commodity derivatives carried out in a recognized association which is chargeable to commodities transaction tax under Chapter VII of the Finance Act, 2013 (17 of 2013), I shall not be deemed to be a speculative transaction. From the plain reading of this provision, we observed that this clause (d) was added with effect from 01.04.2006 which is related to the transaction covered under Securities Contract (Regulation) Act. 1956 and clause (e) was inserted for trading in commodity derivatives with effect from 01.04.2014. In view of this position, we are of the view that the commodity derivatives transactions are speculative transactions and the assessee's business is only and only derivatives trading in commodity, the loss incurred or profit earned should be speculative loss / profit and should be allowed to set off against each other.
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In view of the above position of law, we are of the view that in the given facts of the case that 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) of the Act for treating the profit as business profit. The nature of activity is carried throughout the year by ITA No . 51 7 9/ Mu m/ 20 1 6 the assessee is one and only one to trade in derivatives on various exchanges and earned profit or income which includes loss. In such facts, we are of the opinion that the assessee is eligible for set off of this loss against the profit. We reverse the orders of the lower authorities and allow the claim of the assessee. This issue of assessee's appeal is allowed.
In this view of the matter and consistent with view taken by the co-ordinate bench in assessee’s own case for AY 2012-13, we are of the considered view that the assessee is engaged in one and only business of derivative trading in different commodity exchanges and such business needs to be considered as one business for the purpose of taxation and any profit or loss derived from different exchanges shall be aggregated by allowing losses to be set off. The Ld. AO and Ld.CIT(A) without appreciating these facts has disallowed loss incurred form derivative trading on NMCE, Ahmadabad as speculation loss against profit earned from derivative trading in MCX by holding that profit earned from MCX is not speculative profit. Hence, we direct the Ld. AO to delete additions made towards disallowances of loss incurred from NMCE, Ahmadabad and allowed said loss to be set off against profit derived from derivative trading on MCX.
In the result, appeal filed by the assessee is allowed.
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ii) ITA No. 4026/Mum/2018 & ITA No.4027/Mum/2018
The revenue has raised more or less common grounds of appeal for both assessment years. Therefore, for the sake of brevity, grounds of appeal filed for AY 2009-10 are reproduced as under:-
"Whether on facts and in circumstances of the case the Ld. CIT(A) was right in allowing the speculative loss incurred from derivative commodity trading through NMCE, an unrecognized exchange and allowing to be set off against business profits without appreciating the fact that the assessee's case exclusively fall under explanation to section 73of the I.T.Act. 1961". 2. "Whether on facts and in circumstances of the case the Ld. CIT(A) has erred in allowing the speculation loss of Rs. 76,38,044/- against non speculation gains which is prohibited by the provisions of section 73 of the I.T. Act, 1961".
We have heard both the parties, perused the material available on record and gone through orders of the authorities below. We find that the Ld.CIT (A) has deleted additions made by the Ld. AO towards disallowances of loss incurred from derivative trading on NMCE, Ahmadabad, on the ground that said loss is speculative loss and same can be set off of against profit earned from commodity derivatives on MCX, which is also speculation in nature. The Ld.CIT(A), while deleting additions made by the Ld. AO has taken support from decision of ITAT in assessee own case for AY 2012-13, where the Tribunal has held that the assessee is engaged in one and only business of trading in commodity derivatives on different exchanges/associations and said business needs to be considered as one business for the purpose of taxation and any profit or loss earned from different exchanges needs to be aggregated. The relevant findings of the ld.CIT(A) are as under;-
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13.0 I have considered the facts of the case, submissions of the appellant, the observations of the AO contained in the assessment order and the other materials on record on this issue. 13.1 The AO has disallowed an amount of Rs.76,38,044/-, being loss incurred from derivative commodity trading through NMCE, an unrecognised exchange, considering the same as speculative loss and the same was not allowed to be set off against business profits. Thus, the speculation loss of Rs.76,38,044/- was not allowed to be set-off against the profit of Rs.65,49,180/- earned by the Appellant from the derivative commodity trading through recognised exchanges like, MCX. 13.2 I have noted that a similar issue has arisen before the Hon'ble ITAT, Mumbai for the A.Y. 2012-13 in the case of the Appellant in ITA No. 5179/Mum/2016. The Hon'ble ITAT, Mumbai "I" Bench has decided the issue in favour of the Appellant, vide order dated 23.02.2018.The Hon'ble ITAT has in the said judgment dealt with all the objections raised by the A.O. in the assessment order, in great details. Thus, the relevant portion of the said judgment being important is reproduced hereunder:-
"6. We have heard rival contentions and gone through facts and circumstances of the case. We find that the assessee has started his business activity of derivative trading in commodity only and he has not done any activity of derivative trading in securities and equity. We are of the view that derivative trading in commodity is to be considered as one business and the net income from the same should be assessed as business income of speculation business, since section 43(5) does not exclude commodity trading during the year. We find from the facts of the case that the assessee is member of MCX and he has to carry out transaction on another exchange because on MCX there was no volume in commodity like Copper, Crude Oil, Silver etc. and also there was difference in lot size of the commodity in Lead, Gold etc. Further in MCX exchange, some time, the trading limit exhausted and hence he has to approach other brokers of other exchange to continue the activity. We find from the facts of the case that the assessee on ICEX exchange earned profit in Lead and Gold commodity and incurred loss in Iron Ore. Thus, 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. Clause (d) of section 43(5) is relating to transactions in respect of the trading in derivatives referred to in clause (ac) of section 2 of Securities Control (Regulation) Act 1956. Clause (ac) of section 2 of Securities Control (Regulation) Act, 1956 defined as under: (A) A security derived front a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for difference or any other form of Security. (B) A contract which derives its value from the prices, or index of prices, of underlying securities. 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.
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Even the board circular No.3 of 2006 dated 27.12.2006 has explained the scope and effect of amendment with effect from 01-06- 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 developments, the present distinction between speculative and non-speculative transactions, in respect of trading in derivatives of securities is losing relevance. The Finance Act, 2005 has, accordingly, amended section 43(5) to provide that an eligible transaction in respect of trading in derivatives of securities carried out on a recognised stock exchange shall not be deemed as speculative transaction. The notification prescribing the rules and the conditions to be fulfilled by a stock exchange to be recognized by the Central Government for the purposes of section 43(5) [i.e., Rules 6DDA and 6DDB of the Income-Tax Rules, 1962] has been published in the Official Gazette on 1s' July, 2005 vide S.O. No.932(E).
Applicability: From A.Y. 2006-07 onwards." 8. But, the proviso to clause (e) takes out the definition of speculative transaction w.e.f 01.04.2014 by inserting the proviso by Finance Act, 2013, which we will discuss in the next paragraph. 9. But, the proviso to clause (e) takes out the definition of speculative transaction w.e.f 01.04.2014 by inserting the proviso (e) of section 43(5) of the Act, which has been added by Finance Act, 2013 with effect from 01.04.2014 applicable for & from AY 2014-15. Hence the transactions of derivative trading in commodity are speculation transactions as provided by section 43(5) of the Act and therefore the transactions carried out by NSE, BSE, MCX, ICEX or any other exchanges are on same footing and shall be adjusted against each other as whose transactions irrespective of any exchange are speculative transactions. The above view is also support by the judicial decision of the coordinate bench of this Tribunal in case of Varsha Corp. Ltd. vs. DCIT in appeal No.6534/Mum/201 0 for AY 2009-1 0. The Tribunal in Para 8 and 9 of the Order has made interpretation and discussed the facts and after interpreting the various decisions as mentioned in the order finally held that the benefit of clause
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(e) of the proviso to section 43(5) of the Act, cannot be entitled the assessee for the transactions carried out prior to Assessment Year 2014- 15 and accordingly the appeal filed by the assessee was dismissed. 10. Now we have to discuss the proviso of section 43(5) of the Act with all its provision to understand the assessee's case. The relevant provision reads as under:- Section 43(5) ..... 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 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 the 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 eligible transaction in respect of trading in commodity derivatives carried out in a recognized association which is chargeable to commodities transaction tax under Chapter VII of the Finance Act, 2013 (17 of 2013), I shall not be deemed to be a speculative transaction. From the plain reading of this provision, we observed that this clause (d) was added with effect from 01.04.2006 which is related to the transaction covered under Securities Contract (Regulation) Act 1956 and clause (e) was inserted for trading in commodity derivatives with effect from 01.04.2014. In view of Ms position, we are of the view that the commodity derivatives transactions are speculative transactions and the assessee's business is only and only derivatives trading in commodity, the loss incurred or profit earned should be speculative loss/profit and should be allowed to set off against each other. 11. In view of the above position of law, we are of the view that in the given facts of the case that the assesses 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) of the Act for treating the profit as business profit. The nature of activity is carried
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throughout the year by the assessee is one and only one to trade in derivatives on various exchanges and earned profit which includes loss. In such facts, we are of the opinion that the assessee is eligible for set - off of this loss against the profit. We reverse the orders of the lower authorities and allow the claim of the assessee. This issue of assessee's appeal is allowed." 13.3 I have noted that the facts and circumstances for the current year under consideration are exactly the same as in A.Y. 2012-13. Respectfully following the judgment of the Hon'ble ITAT, Mumbai in the appellant's own case on this issue, the addition made by the A.O. on this issue is deleted.
Facts remain unchanged. The revenue has fails to bring on record any evidences to controvert the findings of facts recorded by the Ld.CIT(A), in light of the decision of ITAT in assessee’s own case for AY 2012-13. We, further noted that the commodity derivatives transactions are not excluded from the definition of speculative transactions under the provisions of section 43(5) of the I.T.Act, 1961 before AY 2014-15 and hence, all transactions in commodity derivatives in any exchanges are speculative transactions and consequent profit or loss earned there from is a speculative profit and accordingly, loss or profit from different exchanges needs to be set off against each other. We, therefore are of the opinion that there is no error in the findings recorded by the Ld.CIT(A), while deleting additions made towards disallowances of loss incurred from commodity derivatives on NMCE, Ahmadabad and hence, we are inclined to uphold the findings the Ld.CIT(A) and dismissed appeal filed by the revenue for AY 2009-10 and 2011-12.
In the result, appeal filed by the assessee for AY 2014-15 is allowed and appeals filed by the revenue for AY 2009-10 and 2011-12 are dismissed.
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Before parting, we shall deal with procedural aspect of prouncement of order as prescribed under rule 34(4) of Income Tax (Appellate Tribunal) Rules 1963. As per rule 34(4), no order shall be pronounced after expiry of 90 days from the date of hearing. This appeal was heard on 02/03/2020 and ordinarily, the order shall be pronounced on or before 31/05/2020. But, this order could not be pronounced on or before 31/05/2020, due to the fact that the Govt. of India has imposed nationwide lockdown from 25/03/2020 and the same has been extended time to time up to 31/05/2020 and because of this, the office was closed up to 22/05/2020. Further, if the above lockdown period is excluded for the purpose of limitation, then this order can be pronounced on or before 27/07/2020. Further, whether lockdown period can be excluded or not has been exhaustively dealt by the co-ordinate bench of ITAT, Mumbai, in the case of DCIT vs JSW Limited, in ITA No. 6264/Mum/2018, dated 14/05/2020, where it was held that due to corona virus pandemic, the period of limitation automatically gets extends till such period the lockdown is in force. We, therefore, are of the opinion that considering the prevailing situation and also, by respectfully following the decision of co- ordinate bench in the case of DCIT vs. JSW Limited (Supra), the order pronounced in the month of July 2020, is well within the time allowed under rule 34(4) of Income Tax (Appellate Tribunal) Rules 1963.
This order is pronounced as per Rule 34(4) of Income Tax
(Appellate) Tribunal Rules, 1963, by notice to parties on this
24/07/2020
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Sd/- Sd/- (RAVISH SOOD) (G. MANJUNATHA) JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai; Dated 24/07/2020 Thirumalesh Sr.PS
Copy of the Order forwarded to : The Appellant 1. The Respondent. 2. The CIT(A), Mumbai. 3. CIT 4. DR, ITAT, Mumbai 5. BY ORDER, 6. Guard file. स�यािपत �ित //True Copy// (Asstt. Registrar) ITAT, Mumbai