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Income Tax Appellate Tribunal, VIRTUAL COURT
आदेश / O R D E R PER M. BALAGANESH (A.M): This appeal in A.Y.2015-16 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-48, Mumbai in appeal No.CIT(A)-48/I.T-133/DC CC-2(2)/2017-18 dated 28/05/2018 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3)of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 22/12/2017 by the ld. Dy. Commissioner of Income Tax, Central Circle 2(2), Mumbai (hereinafter referred to as ld. AO).
The only issue involved in this appeal is as to whether the ld. CIT(A) was justified in upholding the Future and Options (F&O) loss of Rs.15,51,432/- as speculation loss as per Explanation to Section 73 of the Act and consequently, denying the benefit of set off of the same against the business income of the assessee in the facts and circumstances of the case.
We have heard rival submissions and perused the materials available on record. We find that assessee is a private limited company engaged mainly in the business of trading in chemicals, pharmaceuticals and industrial raw materials. The assessee had carried on the activities of trading in Futures and Options (F & O) and the said activities were stated to be continued as on date. It was submitted by the ld. AR that assessee is engaged in the business of trading in shares, securities and derivatives with an intention to earn profit. During the year under consideration, the ld. AO observed that assessee had debited in his profit and loss account a sum of Rs.15,51,432/- towards loss incurred on Futures and Options. The ld. AO also observed that the said loss has been set off against the business income derived by the assessee. When show-caused by the ld. AO in this regard as to why the said F & O loss should not be disallowed and consequently denial of set off of the same against the business income, the assessee responded that it had started additional business activities in securities derivatives and trading during the year and the said business had been continued in subsequent years also which had been carried on in an organised manner on continuous basis with the object of earning profit. The assessee pleaded that the loss incurred on F & O transactions are derivative transaction loss and not from share trading transactions as stated in show-cause notice issued by the ld. AO and accordingly, pleaded that the provisions of Explanation to Section 73 of the Act are not at all applicable. The assessee further submitted that the transactions in Futures and Options ( F & O) (trading in derivatives) were carried out by the assessee in recognised stock exchange and these transactions are excluded from the definition of speculative transaction in terms of Section 43(5)(d) of the Act. Assessee had also furnished the copy of ledger confirmation of brokerage and commission expenses incurred for the assessment year under consideration. The ld. AO observed on going through the objects of the assessee company that assessee had incurred F & O loss during the year to the tune of Rs.15,51,432/-. He also observed that this is the first year of incurring of F & O loss by the assessee. He held that the said F & O loss is speculative in nature and accordingly, in terms of Explanation to Section 73 of the Act treated the said loss as speculative loss and consequently denied the benefit of set off of the same against the business income of the assessee. This action of the ld. AO was upheld by the ld. CIT(A).
3.1. We find that there is absolutely no dispute that assessee had executed F & O transactions in recognised stock exchange through SEBI registered share broker i.e. Sharekhan Ltd. and had incurred the loss of Rs.15,51,432/- during the year. Hence, it could be safely concluded that the loss arising out of F & O transactions referred to any clause (ac) of Section 2 of Securities Contract (Regulations) Act, 1956 and the same were carried out in recognised stock exchange. Hence the same would squarely fall under the exceptions to the definition of speculative transaction in terms of section 43(5)(d) of the Act. Accordingly, the provisions of Explanation to Section 73 of the Act would not come into play at all. We also find that the provisions of Section 43(5) which defines the expression “speculative transactions” had specifically excluded transactions of derivatives carried out in recognised stock exchange from the ambit of definition of speculative transaction in terms of Clause (d) thereon. For the sake of convenience, the relevant provisions of Section 43(5) are reproduced hereunder:- (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) …….. (b) ………. (c) ……….. (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 recognised stock exchange; shall not be deemed to be a speculative transaction”
3.2. Hence, as per Section 43(5)(d) of the Act, the derivative transaction carried out in a recognized stock only through a recognized registered SEBI share broker would fall outside the ambit of speculative transaction and would have to be categorized as a regular business transaction. If the said derivative transaction results in loss, it has to be construed as a regular business loss and not speculative loss. The income under the head „profits and gains of business‟ in terms of chapter IVD is to be computed in accordance with the provisions of Section 28 to 44D of the Act. The provisions of Section 43(5) comes in between the computation mechanism provided in sections 28 to 44D of the Act. Hence, the assessee while computing its income under the head „profits and gains of business‟ had to first compute the profit or loss from different source under the head „profits and gains of business‟ within the provisions of Section 28 to 44D of the Act. Having done so, the assessee had to make intra source adjustment within the same head u/s.70 of the Act. Accordingly, the set off of F&O loss with the regular business income done by the assessee is in order. We also find that the Hon‟ble Calcutta High Court in the case of Asian Financial Services Ltd. vs. CIT reported in 70 Taxmann.com 9 had held that loss incurred on account of derivatives would have to be treated as business loss and not speculation loss and accordingly, Explanation to Section 73 of the Act could not be made applicable thereon. We find that the ld. DR placed reliance on the orders of the lower authorities and could not controvert the arguments advanced by the ld. AR and the case law relied upon by him.
3.3. In view of the aforesaid observations, in the facts and circumstances of the case, we direct the ld. AO to treat the F & O loss of Rs.15,51,432/- as regular business loss and consequently allow set off of the same against the regular business income of the assessee. Accordingly, the ground No.1 raised by the assessee is allowed.
In the result, appeal of the assessee is allowed.
Order pronounced on 04/11/2020 by way of proper mentioning in the notice board.