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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
AadoSa / O R D E R महावीर स िंह, न्याययक दस्य/ PER MAHAVIR SINGH, JM:
This appeal filed by the assessee is arising out of the order of Commissioner of Income Tax (Appeals)-22, Mumbai [in short CIT(A)], Appeal No. CIT(A)-22/IT/559/2015-16 vide order dated 15.03.2017. The Assessment was framed by the Dy. Commissioner of Income Tax, Central Circle-14(1)(1), Mumbai (in short ‘DCIT/ITO/ AO’) for the A.Y. 2013-14 ITAs No. 4208/Mum/2017 vide order dated 05.02.2016 under section 143(3) read with section 153C of the Income Tax Act, 1961 (hereinafter ‘the Act’).
The first issue in this appeal of assessee is against the order of CIT(A) confirming the disallowance of loss incurred in stock derivative transactions as speculative in nature. For this assessee has raised the following ground No. 4: -
4. As regards disallowance of loss of ₹ 1,14,23,252/- incurred in Stock derivation transactions, the Hon’ble CIT(A) erred in: a. Considering the said loss as a speculative loss instead of business loss, thereby restricting its set off against other business income. b. disregarding the provisions of section 43(5)(d) of the Income Tax Act, 191 (hereinafter referred to as ‘the Act’) read with Explanation thereto, by virtue of which eligible derivative transactions are not treated as speculative in nature. c. Applying the provisions of Explanation to Section 73 of the Act when in fact, the said Explanation clearly applies only to shares and not derivatives. d. In applying the ratio of decision in the case of CIT vs. DLF Commercial Developers Ltd. (2013) 35 taxmann.com ITAs No. 4208/Mum/2017 280 (Delhi), without prejudice to (c) above. e. applying the ratio of the decision in the case of CIT vs. DLF Commercial Developers (2013) 35 taxmann.com 280 (Delhi), without considering the fact that an appeal against the said decision is pending before the Supreme Court.”
Briefly stated facts are that the assessee is engaged in the business of buying and selling of shares, commodity derivatives and futures and options. The assessee incurred a loss in the segment of stock derivatives amounting to ₹ 1,14,23,252/- and claimed the same as set off against the business income from sale of shares and securities. The AO require the assessee to explain as to why the loss in F & O should not be treated as speculation loss as per explanation 2 to section 73 of the Act. The assessee vide letter dated 23.12.2015 explained that as per section 43(5)(d) of the Act, the same is derivative loss and it cannot be treated as speculative, it was explained by assessee that explanation to section 73 is a deeming provision and applies to company in respect of loss incurred in the business of dealing in shares and it shall apply only to loss incurred in the business of dealing in shares. According to assessee, F & O is derivative and not shares, hence, loss incurred in dealing in F & O is out of the purview of explanation to section 73 of the Act and is non-speculative loss in term of section 43(5)(d) of the Act. But the AO placing reliance on the decision of Hon’ble Delhi High Court in the case of CIT vs. DLF Commercial Developers Ltd [2013] 35 taxmann.com 280 (Delhi), treated the derivate trading loss incurred by assessee company as speculative and allowed to be carried forward to set off ITAs No. 4208/Mum/2017 against the speculative gain. Aggrieved, assessee preferred the appeal before CIT(A). The CIT(A) considering the DLF Commercial Developers Ltd. (supra) confirmed the action of the AO vide Para 7.3 as under: - “7.3 I have considered the Assessing Officer’s order and the appellant’s submissions. The main thrust of the appellant’s contention is that the explanation to section 73, deeming the losses incurred in share trading as speculation loss shall apply only with respect to transactions relating to trading of shares, and not with regards to losses in derivative transactions. However, on this issue, I find that the Hon’ble Delhi High Court in the case of CIT vs. DLF Commercial Developers Ltd (2013) 261 CTR 127 (Delhi) had observed as under:
The stated objective of Section 73- apparent from the tenor of its language is to deny speculative businesses the benefit of carry forward of losses. Explanation to Section 73 (4) has been enacted to clarify beyond any shadow of doubt that share business of certain types or classes of companies are deemed to be speculative. That in another part of the statute, which deals with computation of business income, derivatives are excluded from the definition of speculative transactions, only underlines that such ITAs No. 4208/Mum/2017 exclusion is limited for the purpose of those provisions or sections. To borrow the Madras High Court's expression, "derivatives are assets, whose values are derived from values of underlying assets"; in the present case, by all accounts the derivatives are based on stocks and shares, which fall squarely within the explanation to Section 73 (4). Therefore, it is idle to contend that derivatives do not fall within that provision, when the underlying asset itself does not qualify for the benefit, as they (derivatives -once removed from it and entirely dependent on stocks and shares, for determination of their value).
Respectfully following the above decision of Hon’ble Delhi Court, the action of the Assessing Officer in treating loss in F&O as speculative loss and denying set off of the same against the business income is upheld. The appellant’s ground of appeal on this issue is dismissed.”
Aggrieved, assessee is in appeal before Tribunal.
4. Before Tribunal the learned Counsel for the assessee claimed that the assessee has incurred loss F&O of ₹ 14,23,252/- and claimed the same against business income to sale of shares and securities by setting off the same. It was explained by the learned Counsel for the assessee, ITAs No. 4208/Mum/2017 who took us through Para 4.6 of the Para of AO and referred to the following “since the assessee company is entirely engaged in buying and selling of shares and securities, therefore explanation to section 73 is applicable in its case. Section 43 defines certain terms for the purpose of sections 28 to 41 that deals with computation of business income and therefore derivatives are excluded from the definition of speculative transactions.” The learned Counsel stated that there is no dispute on facts that assessee entered into future and options by trading in derivatives and claimed the loss. He relied on the decision of Hon’ble Calcutta High Court in the case of Asian Financial Services Limited vs. CIT (2017) 293 CTR (Cal) 240, wherein it is concluded that loss incurred by assessee on account of settlement of F & O i.e. derivatives transactions was not held to be speculative and was held to be eligible for set off against business profits but share falls squarely within the explanation to section 73 of the Act and derivative cannot be treated at par with the shares because legislator has treated them differently in view of section 43(5)(d) of the Act. On the other hand, the learned Sr. Departmental Representative relied on the orders of the lower authorities.
We have heard the rival contentions and gone through the facts and circumstances of the case. Before us, the assessee filed the details of break-up of income which read as under:-
Sr. Particulars Amount (Rs. In Amount (Rs. in No. lakhs) lakhs) 1. Income from F & O in commodities As per broker note (4.81) As per broker note (197.24) (202.05) As per broker note 146.22 Net income from commodity F & O 55.83 2. Income from F & O in currency As per broker note (42.00) 3. Income from F & O in shares As per broker note (114.23)
ITAs No. 4208/Mum/2017
Other income 76.47 5. Returned income (135.59) From the above facts and figures, we noted that the transactions carried out by the assessee of futures and options in shares are covered by the board circular No. 3 of 2016 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 ITAs No. 4208/Mum/2017 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.”
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. We find that F&O 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 ITAs No. 4208/Mum/2017 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 (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.
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 ITAs No. 4208/Mum/2017 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 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.