DCIT 4(2)(1), MUMBAI vs. SPS SHARE BROKERS P.LTD, MUMBAI

आदेश / O R D E R

PER RAMIT KOCHAR, Accountant Member

This appeal, filed by the Revenue, being ITA No. 139/Mum/2016, is directed against appellate order dated 05.10.2015 passed by learned Commissioner of Income Tax (Appeals)-9, Mumbai (hereinafter called “the CIT(A)”), for assessment year 2012-13, the appellate proceedings had arisen before learned CIT(A) from assessment order dated 23.03.2015 passed by learned Assessing Officer (hereinafter called “the AO”) u/s 143(3) of the Income-tax Act, 1961 (hereinafter called “the Act”) for AY 2012-13.

I.T.A. No.139/Mum/2016

“Note on Currency Loss being allowed as a business loss . Sec 43(5) was amended vide Finance Act, 2005, wherein an “an eligible transaction in respect of trading in derivatives referred to in clause 27(ac) of section 228 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 [sec 43(5)(d)] Eligible transaction and –Recognised Stock Exchange has been defined as under:-

"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 bybhanks 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-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-

I.T.A. No.139/Mum/2016

clause (A) and permanent account number allotted under this Act: (Clause (i) to Explanation 2 to Sec.43(5)]

"Recognised stock exchange" means a recognised stock exchange as referred to in clause (I) of section 233 of the Securities Contracts (Regulation) Act. 1956 (42 of 1956) and which fulfils such conditions as may be prescribed and notified by the Central Government for this purpose,') " (Clause (ii) to Explanation I to Sec. 43(5)) Consequent to the amendment, the National Stock Exchange of India and Bombay Stock Exchange Limited were notified as recognized stock exchanges for the purpose of Sec 43(5)(d) vide notification no. 2/2006 dated 25.01.2006. The explanatory memorandum inter-alia states that “An eligible transaction in respect of trading in derivatives carried out on these two Stock Exchanges with effect from 25th January, 2006 shall not he deemed to be speculation transaction ".

All our trades in the currency derivatives are conducted in the recognised stock exchange of National Stock Exchange of India Limited (NSE). The same has been confirmed by the AO on verification of all the trades directly from the Exchange. Hence, as per the amended provisions, currency derivates are business transactions and not speculative copy of the notifications is also enclosed herewith.

Also, the profit loss on currency derivatives have been acknowledged and confirmed by the scrutiny in the previous year as being business profit/ loss.”

The AO rejected the aforesaid contentions of the assessee relying on the provisions of section 43(5)(d) by holding that foreign currency future are not covered by provisions of Section 2 of the Securities Contracts (Regulation) Act, 1956, and hence as per AO the loss of Rs. 5,44,52,507/- claimed by the assessee on account of foreign currency futures was not allowed by the AO as business loss by holding that the said loss has arisen from speculative transaction and is a speculative loss which was allowed to be carried forward by the AO as a speculative loss to subsequent years but not as a business loss, vide assessment order dated 23.03.2015 passed by the AO u/s 143(3) of the 1961 Act.

"The assessee company is a SEBI registered share-broker, inter-alia, holding memberships in the Currency derivatives segment of the National Stock Exchange of India Ltd. (NSE).

Sec. 43(5) of the Income Tax Act, 1961 defines a speculative transaction as under:

I.T.A. No.139/Mum/2016

"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:"

It also carves out certain exceptions to the above definition. Sec 43(5) of the Income Tax Act, 1961 was amended vide Finance Act, 2005, wherein clause (e) was inserted to provide that an "an eligible transaction in respect of trading in derivative referred to in clause 27[(ac)] of section 228 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.

"Eligible transaction" and "Recognised Stock Exchange" has been defined as under: "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-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; [Clause (i) to Explanation 2 to Sec. 43(5)]

"Recognised stock exchange" means a recognised stock exchange as referred to in clause (f) of section 233 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfils such conditions us may be prescribed and notified34 by the Central Government for this purpose;]" [Clause (ii) to Explanation 1 to Sec. 43(5)

Consequent to the amendment, the National Stock Exchange of India Limited and Bombay Stock Exchange Limited were notified as recognized stock exchanges for the purpose of Sec. 43(5)(d) vide notification no. 2/2006 dated 25-01-2006. The explanatory memorandum inter-alia states that “An eligible transaction in respect of trading in derivatives carried out on these two Stock Exchanges with effect from 25th January, 2006 shall not be deemed to be speculative transaction".

As seen above, a new clause (d) has been added to the proviso to section 43(5), excluding certain derivatives trading transactions from the definition of "speculative transaction". Such exclusion of derivatives transactions is however subject to certain conditions.

These conditions are:

• The transaction should have been carried out electronically on a screen-based system. All the derivatives transactions carried out by the assessee company during the year under consideration were carried out on an electronic screen-based platform.

I.T.A. No.139/Mum/2016

• The transaction should have been carried out through a stock broker or sub- broker or other intermediary registered under section 12 of the SEB1 Act, 1992 in accordance with the Securities Contracts (Regulation) Act, 1956, the SEBI Act, 1992 or the Depositories Act, 1996 and the rules, regulations or bye-laws made or directions issued under those Acts, or by banks or mutual funds.

All the derivatives transactions were routed through SEBI registered stock broker, as the assessee company itself is registered as such.

• The transaction has to be carried out on a recognised stock exchange. The definition of "recognised stock exchange" for the purposes of this provision is not the same as under the Securities Contracts (Regulation) Act, 1956, and requires certain further conditions to be fulfilled. A recognised stock exchange is defined as a stock exchange recognized, under section 2(f) of SCRA, and which fulfils the prescribed conditions and which is notified by the Central Government Act for this purpose. (Rule 6DDA)

The Bombay Stock Exchange Limited (BSE) & The National Stock Exchange of India Ltd. (NSE) were notified as recognized stock exchanges vide notification no. 2/2006 dated 25-01-2006 for the above said purpose

In the case of the assessee company all the derivatives transactions were conducted in the National Stock Exchange of India Ltd. (NSE)

• The transaction has to be supported by a time-stamped contract note issued by such stock broker, sub-broker or other intermediary.

All contract notes for the transactions done by the assessee company bear the time- stamp.

• The contract note has to indicate the unique client identity number allotted under SCRA, SEBI Act or Depositories Act and the permanent account number of the client.

The format of contract note to be issued provides the above mentioned details mandatorily. Hence, the assessee company has also fulfilled this criteria.

• Accordingly, profit or loss derived from trading in derivatives (be it either currency or equity) would not be regarded as speculative income or loss, but would be treated in the same manner as any other business loss.

Consider all these facts on merits itself, the learned Assessing Officer ought to have considered the transactions in currency derivatives as business transactions."

5.2 The assessee also submitted the following extract from the then Hon. Finance Minister, Shri P. Chidambaram's speech at the inauguration press conference of trading in NSE currency derivatives as under:

"It is a proud day today when I stand before you to dedicate to the financial services community a new product - Currency Futures. May I begin with warmly thanking the Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI) for

I.T.A. No.139/Mum/2016

jointly developing this product and I congratulate the National Stock Exchange (NSE) for earning the distinction of being the first exchange to comment its stake.

I wish all success to NSE and I am hopeful that the other two exchanges, which have received approvals in principle, and other exchanges would soon offer this product. I see before me and the screen the first trades {hat have been put through -I am not a trader and I cannot qualify ever to become a trader but if it makes any sense, as I am sure it does to a large number of you, someone is buying at 43.8250 and someone is selling at 43.8400. I hope one of them, at least, makes profit.

In the budget speech for 2008-2009, I had said, We propose to take measures to develop the bond, currency and derivatives market that will include launching exchange traded currency and interest rate futures and developing a transparent credit derivatives market with - appropriate safeguards. As you are aware, the above proposal emanated out of one of the key recommendations of the high power expert committee on making Mumbai your city our commercial capital and international financial center. That committee had pointed out that Indian International Finance Corporation (IFC) is handicapped by three key markets that are missing in India's financial system, namely, one, a properly functioning liquid corporate and sovereign bond market. Secondly, spot currency trading market and thirdly, broad derivatives markets that include exchange traded as well as tailored derivatives for the management of currency, interest rate and credit default risks. Similar recommendations have been made by other committees such as the Patil Committee, the Parekh Committee and the Raghuram Rajan Committee. Therefore, the budget announcement proposed on Bond-Currency-Derivatives (BCD) nexus the following. One launch of exchange traded Currency Futures and that is what we are doing today. I am glad we have been able to redeem a budget proposal."

As is highlighted in the above speech of the Hon. FM, the intent of the government is also to consider the trading in currency futures, on the Exchange platforms, as part of Derivatives trading for all practical and legal purposes"

5.3 The assessee further submitted the SEBI perspective of the currency futures transactions and submitted as under:

'Section 2(h) of the Securities Contracts (Regulation) Act, 1956 (SCRA) defines Security as under:

2(h) "securities" include — (i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate; (ia) derivative; .......................... (iia) such other instruments as may be declared by the Central Government to be securities; and (iii) rights or interest in securities;

Section 2(ac) of the Securities Contracts (Regulation) Act, 1956 (SCRA) defines derivative as under: *

"2(ac) "derivative" includes-

I.T.A. No.139/Mum/2016

(A) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security;

(B) a contract which derives its value from the prices, or index of prices, of underlying securities;"

Hence, from the above definition it is clear that Derivatives are securities under the SC(R)A and hence the trading of derivatives is governed by the regulatory framework under the SC(R)A and SEBI,

Why transactions in Currency Derivatives is a Derivative: SEBI Perspective:

SEBI was constituted by the Government to protect the interests of the investors in securities and to promote the development of, and regulate the securities market (Function of the SEBI as per section 11 of the SEBI Act, 1992).

But SEBI has also been regulating the currency derivatives as evident from the under- noted Press Release / Circular-

Press Release No. 297/2007 dated 14.11.2007: SEBI approves new derivative products viz., Options & Futures in shares and Exchange traded currency Futures & Options.

SEBI/DNPD/Circular-38/2008 dated 06.08.2008: Guidelines issued for trading in Exchange Traded Currency Derivatives.

Earlier, the Central Government had notified vide Notification No. S.O. 1327 (E) dated 22.5.09, the MCX Stock Exchange Ltd., which provides India-wide electronic platform for trading in currency futures under the regulatory control of SEBI and RB1, as a recognized stock exchange for the purpose of section 43(5), clause (d). (Earlier notification dated 25.02.2006 was in respect of NSE/Bombay Stock Exchange, which dealt in ,inter alia, in derivatives relating to shares and also currencies). Then after United Stock Exchange of India (USE), the fourth pan India exchange, was launched for trading in financial instruments in India and received final approval from the market regulator SEBI to start currency futures trading, the Central Government has notified vide Notification No. 12/2011dated 25.2.11 the said stock Exchange also as a recognized stock exchange for the purpose of section 43(5), clause (d)

Thus the intention of the legislature is also to consider currency as part of "Securities" for all practical and legal purposes." The learned CIT(A) after considering the submissions of the assessee allowed the loss claimed by the assessee as business loss by holding as under , vide appellate order dated 05.10.2015:-

“6.1 I have considered the stand of the AO as well as submissions of the appellant. The issue relates to claim of the appellant that the loss suffered by it, was in normal course of business whereas the AO has treated the same as speculation

I.T.A. No.139/Mum/2016

loss. The only issue is of the treatment of currency derivatives transactions as speculative transactions within the definition of Sec. 43(5) treating the same as business income considering explanation to section 43 (5) of the I.T. Act, 1961.

6.2 I have further gone through the assessment order and do not find that the AO has made any adverse comment regarding eligibility of transaction as defined in Section 43(5) Explanation (i). Therefore, on issue of fact regarding claim of the appellant regarding eligibility of transactions remains unquestioned by the AO in the assessment order and therefore, the said transactions fall within the purview of the Income Tax Act, 1961 to qualify as a non-speculative transaction after the Amendment by Finance Act, 2005 w.e.f. 01.04.2006 wherein Clause (d) was introduced/added to Section 43(5) of the Act. which reads 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) 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 delivery 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 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, (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 exchanges; 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),

shall not be deemed to be a speculative transaction.

[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-broker or such other intermediary to every client indicating in the contract

I.T.A. No.139/Mum/2016

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 notified by the Central Government for this purpose;] "

6.3 The Appellant in its submissions stated that the said transactions by the appellant fall within the exception of Sec. 43(5), wherein all the ingredients required to qualify for an exception to Sec. 43(5) are fulfilled. The appellant has contended that it fulfills all the criteria of being given benefit of exceptions as provided in Section 43(5) of the I.T. Act, 1961.It fulfills the criteria for the same which is as under:-

(a) The transaction should be an eligible transaction ->The appellant has carried out the transactions electronically on the screen based system through SEBI registered broker. Hence, the Appellant has satisfied this criteria. (b) The transaction should be carried out on a recognized stock exchange -> The Appellant has carried out the transactions on the National Stock Exchange of India Ltd. (NSE) which has been notified by CBDT as a recognized stock exchange vide notification no. 02/2006 dated 25.01.2006 as a recognized stock exchange. Hence, the appellant has also fulfilled this criteria. (c) Transaction should be in securities as defined under Securities Contract (Regulation) Act, 1956 -> The preamble of the Securities and Exchange Board of India (SEBI) Act, 1992 states that it is an" Act to provide for the establishment of a Board to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market and for matters connected therewith or incidental thereto."

6.4 The appellant further referred to the following :- (i) Press Release No. 297/2007 dated 14.11.2007: SEBI approves new derivative products viz., Options & Futures in shares and Exchange traded currency Futures & Options. (it) SEBI/DNPD/Circular-38/2008 dated 06.08.2008: Guidelines issued for trading in Exchange Traded Currency Derivatives,

As can be seen from the preamble, SEBI is the sole authority to regulate the transactions in securities considering this fact the AO conclusion that currency derivative does not fall within the limit of securities that is not accepted in the limit of SEBI press release and preamble of SEBI Act. Hence, needless to say, transactions in currency derivatives being conducted in recognized stock exchanges regulated by SEBI are certainly securities as defined under the Securities Contract (Regulation) Act, 1956. Hence, the appellant has satisfied this criteria too.

5 Considering the above, it can be concluded that the gains or loss arising from these transactions are business gains/loss and not speculative loss as held by the A.O. in his order u/Sec. 143(3). In order to substantiate the claim of the appellant the Ld.AR drew my attention to the decision of Hon'ble jurisdictional ITAT, Mumbai in the case of M/s IVF Advisors Pvt. Ltd. vs ACIT, ITA no. 4798/Mum/2012, AY 2009-10, wherein similar issue arose and the question to be decided was as under:-

I.T.A. No.139/Mum/2016

“On the Facts and circumstances of the case, and in law, the Ld. CIT(A) ought to have held that clause (d) of the proviso to section 43(5) of the Income Tax Act, 1961 (“the Act”) was applicable to be transactions in foreign currency futures entered into by the appellant and therefore that the loss from these transactions was not in the nature of speculation loss”.

The Hon'ble lTAT vide order dated 13.2.2015 has discussed the above issue in depth and allowed the appeal in favour of the assessee after making the following observations:-

" 2. Briefly stated, the facts of the case are that the assessee is an Investment Management Consultant. The return for the year was filed on 25/09/2009 declaring total income at Rs.Nil. The return was selected for scrutiny assessment. Statutory notices were issued and served upon the assessee, 3. While perusing the profit and loss account of the assessee, the AO noticed that the assessee has claimed a loss of Rs.93,63,235/- on account of loss on foreign currency futures. The AO was of the strong belief that the loss cannot be allowed in the light of the provisions of section 43(5) of the Income Tax Act, 1961 (the Act) r.w. clause (ac) of section 2 of the Securities Contracts (Regulation) Act 1956. While disallowing the loss of Rs.93,63,235/-, the AO has considered the relevant provisions of section 43(5) of the Act and section 2(ac) of the Securities Contracts (Regulation) Act. 4. Aggrieved by this finding of the AO the assessee carried the matter before Ld. CIT(A). It was strongly contended that the contracts in foreign currency futures were not speculative transaction, It was further explained that the foreign currency contract does not satisfy the condition of being a speculative transaction and, therefore, the loss on account of foreign currency futures was not speculative loss. After considering the facts and the submissions, Ld. CIT(A) observed that the assessee is not engaged in manufacturing or merchanting business and was also a dealer and investor in stock and shares. Therefore, the loss of Rs.93,63,235/- earned by the assessee on account of transactions in foreign currency future was not in the nature of hedging loss, therefore, such loss was not earned in the course of guarding against loss through future price fluctuation in respect of contracts for actual delivery of goods manufactured or in respect of stock of share entered into by a dealer. Ld. C1T(A) was of the firm belief that proviso (d) to section 43(5) was not applicable. Ld. CIT(A) confirmed the assessment order holding that the AO has correctly held that such loss was a speculation loss within the meaning of section 43(5) of the Act. Aggrieved by this assessee is before us. 5. Ld. Counsel for the assessee reiterated what has been submitted before lower authorities. Ld. Counsel for the assessee drew our attention to proviso (d) of section 43(5) of the Act and stated that the Revenue Authorities have failed to interpret the said proviso. It is the say of the Ld. Counsel that the contracts entered by the assessee cannot be said to be of speculative in nature because the contracts have ultimately been settled by the delivery offorex. 6. Per contra, Ld. DR strongly supported the order ofLd. CIT(A). 7. We have carefully perused the orders of the Revenue Authorities and the submissions made by the assessee in the light of the relevant provisions of the IT Act and also Securities Contract Regulation Act, 1956. Section 43(5) of the LT. Act read as under "(5) 32"'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 settled33 otherwise than by the actual deliven/33 or transfer of the commodity or scrips: Provided that for the purposes of this clause— (a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing

I.T.A. No.139/Mum/2016

or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery 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 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 236 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 recognized assodation[ 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. - For the purposes of this clause, 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-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 238 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfils such conditions as may be prescribed and notified39 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 Chapter 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 recognized 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 recognized association; and (B) which is supported by a time stamped contract note issued by such member or intermediary to very client indicating in the contract note, the unique client identity number allotted under the Act, rules, regulations or byelaws referred to in sub-clause (A), unique trade number and permanent account number allotted under this Act. (Hi) "recognized association" means a recognized 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" Proviso (d) excludes the transaction from the definition of speculative transaction in respect of trading of derivatives referred to in section 2(ac) of the Securities Contract (Regulation) Act, 1956 carried in recognized stock exchange. Section 2(ac) of the Securities Contract (Regulation) Act, 1956 read as under: " 2.[ac] "derivative" includes- (A) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security; (B) a contract which derives its value from the prices, or index of prices, of

I.T.A. No.139/Mum/2016

underlying securities;]" 7.1 Thus, . it can be seen that the derivatives also includes securities. The definition of eligible transaction mentioned herein above clearly show that the transaction must have been carried out electronically in accordance with the provisions of Securities Contracts (Regulation) Act arid the Rules and Regulations or bye laws made or directions issued under this Act or by banks or mutual funds on a recognized stock exchange and which is supported by time stamped contract note issued by such stock broker or sub-broker or intermediary to every client indicating in the contract note the unique client identity number and. permanent account number. 7.2 It would be pertinent to consider the decision of Hon'ble Madras High Court in the case of Rajshree Sugar & Chemicals Ltd. vs. Axis Bank Ltd., AIR 2011 (Mad) 144, wherein the term derivative has been defined to include foreign currency as an underlying security of the derivative. The relevant extract of the case is quoted below: "What are these derivatives which have gained such a great deal of notoriety? In simple terms, derivatives are financial instruments whose values depend on the value of other underlying financial instruments. The International Accounting Standard (IAS) 39, defines "derivatives" as follows: - "A derivative is a financial instrument: (a) whose value changes in response to the change in a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index, or similar variable (sometimes called the 'underlying'); (b) that requires no initial net investment or little initial net investment relative to other types of contracts that have a similar response to changes in market conditions; and (c) that is settled at a future date." Actually, derivatives are assets, whose values are derived from values of underlying assets. These underlying assets can be commodities, metals, energy resources, and financial assets such as shares, bonds, and foreign currencies." 7.3 Further, the SEBI website in its section 'frequently asked questions' has explained the meaning of derivative as under: Q 1. What are Derivatives? A. The term "Derivative" indicates that it has no independent value, i.e. its value is entirely "derived" from the value of the underlying asset. The underlying asset can be securities, commodities, bullion, currency, live stock or anything else. In other words, Derivative means a forward, future option or any other hybrid contract of the determined fixed duration, linked for the purpose of contract fulfillment to the value of a specified real or financial asset dr to an index of securities. With Securities Laws (Second Amendment) Act,1999, Derivatives has been included in the definition, of Securities. The term Derivative has been defined in Securities Contracts (Regulations) Act, as: A Derivative includes: - a. a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security; b. a contract which derives its value from the prices, or index of prices, of underlying securities; It is further provided by SEBI that in Aug.2008 SEBI permitted exchange traded currency derivative. 7.4 Considering the relevant provisions of the relevant Acts, discussed herein above in the light of Hon'ble Madras High Court and the answers given to frequently asked questions by the SEBI and the incorporation of exchange traded currency derivative from August, 2008, there remain no iota of doubt that the transaction of the assessee cannot be treated as speculative transaction. We have also gone through the copies of the contract notes incorporated in the paper book filed before us. A perusal of the contract note shows that the assessee has either entered into call option or put option and on the settlement day the transaction has been settled by delivery, either the assessee has paid US dollar on the settlement day or has taken delivery of US dollar. 7.5 To sum up, the derivatives include foreign currency and call option/ put option, are transactions of derivative markets and cannot be termed as speculative in nature. Considering the totality of the facts and in

I.T.A. No.139/Mum/2016

the light of the judicial discussion herein above, we have no hesitation in setting aside the order of Ld. CIT(A). Appeal filed by the assessee is accordingly allowed, 8. In the result, the appeal filed by the assessee is allowed."

6 Thus, it can be concluded that in the present case where the AO has not raised any concern about eligibility of transaction to be taken into consideration for being a non-speculative in nature and where the appellant has claimed that the loss incurred by the appellant was on transactions carried out on the recognized Stock Exchange and the transaction was carried out electronically on screen based system, and the fact that after the amendment in I.T, Act by Finance Act, 2005, the present transactions are squarely covered under exceptional clause 43 (5) (d) read with 43(5)(i) of the I.T. Act, 1961, the claim of the appellant cannot be negated for the simple reason as mentioned by the AO in the assessment order. In fact it seems the AO has got confused because of the concept. The AO has failed to appreciate that the appellant has carried out transactions in derivatives on the recognized Stock Exchange. The derivatives can be in shares and securities as well as currency too. Derivate market on the Stock exchange is not limited only to shares and stocks. 6.6.2 In this regard reference is made to the case of M/s Rajshree Sugars & Chemicals Ltd. Vs M/s Axis Bank Limited in O.A. Nos.251 and 252 of 2008 in CS.No.240 of 2008, O.A. Nos.526 and 527 of 2008 in C.S. No.240 of 2008, A. Nos.1926, 1927, 2446 and 2447 of 2008 in C.S. No.240 of 2008 wherein the Hon'ble Madras High Court in its judgement dated 14, Oct, 2008 has observed as under : "In simple terms, derivatives are financial instruments whose values depend on the value of other underlying financial instruments. The International Accounting Standard (IAS) 39, defines "derivatives" as follows- "A derivative is a financial instrument: (a) whose value changes in response to the change in a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index, or similar variable (sometimes called the 'underlying1); (b) that requires no initial net investment or little initial net investment relative to other types of contracts that have a similar response to changes in market conditions; and (c) that is settled at a future date. " Actually, derivatives tare assets, whose values are derived from values of underlying assets. These underlying assets can be commodities, metals, energy resources, and financial assets such as shares, bonds, and

Thus, in view of the above, there should not be any confusion as to whether "currency futures" is art of the term "derivative" as defined in section 2(ac) of SCRA, because the definition of "derivative" in section 2(ac) of SCRA is an inclusive definition, which means that any other item conforming to the given characteristics will also qualify to be a "derivative" transaction. In fact SEBI was constituted by the Government to protect the interests of the investors in securities and to promote the development of, and regulate the securities market (see Function of the SEBI as per section 11 of the SEBI Act, 1992) and SEBI has also been regulating the currency derivatives as evident from the above referred Press Release / Circulars.

In fact, earlier, the Central Government had notified vide Notification No. S.O. 1327 (E) dated 22.5.09, the MCX Stock Exchange Ltd., which provides India-wide electronic platform for trading in currency futures under the regulatory control of SEBI and RBI, as a recognized stock exchange for the purpose of section 43(5), clause

I.T.A. No.139/Mum/2016

(d). (Earlier notification dated 25.01.2006 was in respect of NSE / Bombay Stock Exchange, which dealt in ,inter alia, in derivatives relating to shares and also currencies).

Then after United Stock Exchange of India (USE), the fourth pan India exchange, was launched for trading in financial instruments in India and received final approval from the market regulator SEBI to start currency futures trading, the Central Government has notified vide Notification No. 12/2011 dated 25.2.11the said stock Exchange also as a recognized stock exchange for the purpose of section 43(5), clause (d). It is worth noting that MCX Stock Exchange Ltd. (MCX-SX) should not be mixed-up with the Multi Commodity Exchange of India Ltd., which is currently providing a platform for trading in commodities only. Commodity derivatives are so far outside the ambit of sec 43(5), clause (d). In view of the above discussion, it can be concluded that "Futures” transactions in currencies traded in the trading platform of the four recognized stock exchanges viz., National Stock Exchange, Bombay Stock Exchange, MCX Stock Exchange and United Stock Exchange of India are business transactions and not speculative transactions and loss arising there from can be adjusted against any other business income including speculative income.

6.6.3 To sum up, keeping in view the above facts, judicial pronouncements and other references, it can be concluded that the appellant's claim falls within the purview of derivative transaction and the loss is to be allowed since it is on screen based system on recognized Stock Exchange and the transactions are eligible transactions within the meaning of Exceptions to Section 43(5). This view is further strengthened by the Hon'ble ITAT of Mumbai which is a jurisdictional IT AT and which is binding in so far as Mumbai charge is concerned.

6.6.4 In fact, SEBI, Mumbai's Circular and Press Release dated 14.11.2007 quite long back made it very clear that the foreign exchange currency is also a part of derivatives in F &O. 3The same is reproduced here as under :-

SEBI Board approves New Derivative Products

As a step intended to progressively encourage markets to move onshore, the SEBI Board, in principle, approved introduction of new derivative products for the Indian market based on the interim recommendations made by the SEBI Committee on Derivatives headed by Prof. M.Rammohan Rao. The products will be introduced under suitable regulatory framework in due consultation wherever necessary with other regulatory authorities.

These new derivative products will be relating to: (1) Mini-contracts on equity indices, (2) Options with longer life/tenure, (3) Volatility index andF&O contracts, (4) Options on Futures, (5) Bond Indices and F&O contracts, (6) Exchange-traded currency (foreign exchange) Futures & Options, and (7) Introduction of exchange-traded products to cater to different investment strategies.

I.T.A. No.139/Mum/2016

It is expected that these new derivative products will provide investors with a larger range of risk mitigation products and create more activity in the Indian onshore markets. These products are also expected to bring transactions based on private- synthetic products to an exchange-traded transparent mechanism with appropriate regulatory supervision."

Further, SEBI vide Circular No.SEBI/DNPD/Cir.38/2008 dated 06.08.2008 had made the following references with reference to derivatives in currency.

"GENERAL MANAGER DERIVATIVES AND NEW PRODUCTS DEPARTMENT SEBI/DNPD/Cir- 38/2008

August 06, 2008

To, Recognized Stock Exchanges and their Clearing Corporations/ Clearing Houses, Clearing Members and Trading Members

SUB; EXCHANGE TRADED CURRENCY DERIVATIVES A RBI-SEBI Standing Technical Committee ("Committee") was constituted to evolve norms and oversee implementation of Exchange Traded Currency and Interest Rate Derivatives. To begin with, the Committee has looked at Exchange Traded Currency Derivatives and submitted a Report on Exchange Traded Currency Futures ("Report"). The Report, which was submitted on May 29, 2008, is also available on the SEBI website www.sebi.gov.in.

The Report lays down the framework for the launch of Exchange Traded Currency futures in terms of the eligibility norms for existing and new Exchanges and their Clearing Corporations/Houses, eligibility criteria for members of such Exchanges/Clearing Corporations/Houses, product design, risk management measures, surveillance mechanism and other related issues.

EXCHANGE TRADED CURRENCY DERIVATIVES For trading in Exchange Traded Currency Derivatives, Recognized Stock Exchanges and their Clearing Corporations / Clearing Houses, Clearing Members and Trading Members have to comply with the following:

Exchange: A Recognized Stock Exchange fulfilling the conditions mentioned under paras 5.1 and 5.2 of the Report may apply to SEBI for grant of approval for starting trading in Currency Derivatives. The application shall be accompanied by the details pertaining to the derivatives product proposed to be introduced (mentioned under para 7.2 of the Report), the proposed Bye-laws of the Exchange/Clearing Corporation / Clearing House and the model documents for Currency Derivatives Segment (in accordance with para 7.1 of Report).

Further, a Recognized Stock Exchange shall ensure that; a. Chapter 2 of the Report on product design is complied with. In addition, the last day for trading of the contract shall be two working days prior to the final settlement

I.T.A. No.139/Mum/2016

day, with the settlement price on the last trading day being the Reserve Bank's Reference Rate on that date.

b. Chapter 4 of the Report on surveillance and disclosures is complied with.

c. Membership of the Currency Derivatives Segment is separate from the membership of the other segments of the Exchange as mentioned under para 6.1 of the Report,

d. Appropriate mechanisms preventing participation of "persons resident outside India" as defined in Section 2(w) of the Foreign Exchange Management Act,1999 in Exchange Traded Currency Derivatives be put in place.

II. PARTICIPA TION OF BANKS

To enable Banks to become Clearing Member and / or Trading Member of the Currency Derivatives Segment of an Exchange, an Exchange shall amend its bye-laws, as under:

6.6.5 The present year is A.Y.2012-13 and the appellant's claim for currency derivative is subsequent to the issuance of SEBI circular and the decision of Hon'ble Madras High Court in the case of M/s Rajshree Sugars & Chemicals Ltd. Vs M/s Axis

I.T.A. No.139/Mum/2016

Bank Limited. Hence, the inclusion of exchange trading currency in the ambit of derivatives cannot be negated.

In view of the above, the appellant's claim regarding loss in currency derivative transaction is accepted and the AO is directed to treat the above referred loss as business loss and delete the disallowances of Rs.5,44,52,507/-which has been treated as speculative loss.

In the result, the appellant's claim on this issue is Allowed.” 5. Aggrieved by the decision of learned CIT(A) vide appellate order dated 05-10-2015, the Revenue has come in an appeal before the tribunal . The Ld. DR submitted that foreign currency is not security as defined under SCRA and hence loss suffered is not a business loss rather it is a speculative loss. It was submitted by learned DR that foreign currency is not derivative to be entitled to be allowed as business loss within meaning of Section 43(5) of the 1961 Act. While on the other hand the Ld. AR relied upon the decision of the Tribunal in the case of IVF Advisors Pvt. Ltd. v. ACIT, ITA no. 4798/Mum/2012, AY 2009-10 and decision in the case of Rajshree Sugar & Chemicals Ltd. v. Axis Bank Ltd., AIR 2011 (Mad) 144 . He also relied upon the decision of Mumbai Tribunal in the case of ACIT v. M/s Edelweiss Global Wealth Management Ltd in ITA no. 366/Mum/2016 wherein tribunal vide orders dated 24.11.2017 , held as under:- “ This is an appeal filed by the revenue is directed against the order of the ld.CIT(A)-8, Mumbai, dated 30.11.2015 for the assessment year 2010-11.

I.T.A. No.139/Mum/2016

to 4.10 of the appellate order and deleted the addition made by the AO by observing and holding as under :

“6. Decision

Ground No.1 and 4

6.1 I have given due consideration to the facts of the case. At the outset, it is pertinent to note that the facts of this case are identical to those in the case of IVF Advisors Pvt Ltd. ITA No.4798/Mum/2012 dated 13.2.2015 wherein the Hon’ble ITAT”I” Bench Mumbai has held as under :

7.4 Considering the relevant provisions of the relevant Acts, discussed herein above in the light of Hon’ble Madras High Court and the answers given to frequently asked questions by the SEBI and the incorporation of exchange traded currency derivative from August, 2008, there remain no iota of doubt that the transaction of the assessee cannot be treated as speculative transaction. We have also gone through the copies of the contract notes incorporated in the paper book filed before us. A perusal of the contract note shows that the assessee has either entered into call option or put option and on the settlement day the transaction has been settled by delivery, either the assessee has paid US dollar on the settlement day or has taken delivery of US dollar

7.5 To sum up, the derivatives include foreign currency and call option/ put option, are transactions of derivative markets and cannot be termed as speculative in nature. Considering the totality of the facts and in the light of the judicial discussion herein above, we have no hesitation in setting aside the order of Ld. CIT(A). Appeal filed by the assessee is accordingly allowed.”

6.2 Further CBDT, in its instruction No.3/2010 dated 23.3.2010 guided the AO to verify the loss on account of currency derivatives and its nature (whether speculative or non-speculative). The CBDT’s instruct9ion is quoted at para 4.9 above and discussed therein.

6.3 As can be seen from the facts of the instant case, the issues involved and circumstances to be examined are identical to those which were before the Hon’ble ITAT in is decision in ITAT Order No.4798/Mum/2012 dated 13.2.2015 which has been extensively referred to above, In view of the above facts and CBDT’s instruction No.3/2010 dated 23.3.2010 the ratio laid down by the Hon’ble ITAT has to be respectfully followed.

6.4 Accordingly, grounds of appeal 1 to 4 are allowed and the AO is directed to delete the addition of Rs.5,79,27,553/- on account of speculation loss. Grounds no.1 to 4 are allowed .

6.5 Grounds 5 and 6 refers to disallowance of Rs.62,52,577/- being loss incurred in trading of commodity derivatives treating the same as speculative loss.

6.6 It is seen that the AO has treated the commodity derivative loss as speculative loss despite the fact that the appellant itself has treated the said loss as speculative

I.T.A. No.139/Mum/2016

loss and disallowed he same, however, the same has not been set off against the speculative income by the AO and resultantly the speculative income has been assessed at Rs.1,36,29,223/-. This translates to double taxation.

6.7 The AO is directed to give benefit of set off of speculative loss of rs.62,68,501/- against speculative income declared in the return of income. Ground no.5 and 6 are allowed”

I.T.A. No.139/Mum/2016

assessee entered into foreign currency derivates trade electronically on screen based system through a registered broker in a recognised stock exchange namely NSE which was backed by time stamped contract and has undisputedly complied with all the requirements of provisions of Section 43(5)(d) of the 1961 Act. The only dispute between rival parties is whether foreign currency derivatives/futures is covered by Section 2 of the Securities Contracts (Regulation) Act , 1956. The AO was of an opinion that foreign currency futures are not covered by Section 2 of the Securities Contract (Regulation) Act, 1956 and hence the loss of Rs. 5,44,52,507/- claimed by the assessee on account of currency futures is not allowable as business loss and the same is to be considered as a speculative transaction in accordance with provisions of Section 43(5) of the Act and hence loss arising there from is speculation loss. The AO relied on definition of derivatives as defined in Section2(ac) of SCRA,1956 to hold that the assessee has not complied with the requirements of Section 43(5)(d) of the 1961 Act and hence loss is a speculative loss and not business loss. So far as foreign currency is concerned, we are in agreement with the AO that it is not a security within the meaning of SCRA but the AO failed to differentiate between the foreign currency perse and foreign currency derivative wherein the foreign currency is an underline security. Reference is drawn to the decision of ITAT-Mumbai in the case of Inventurus Knowledge Services P. Ltd v. ITO reported in (2016) 156 ITD 727(Mumbai), wherein the relevant portion of the tribunal order is reproduced here under:- “8. We have heard the rival submissions and carefully perused the relevant material on record and case laws relied upon by the parties. We have observed that the assessee company is a domestic company registered with the Development Commissioner, Vishakhapatnam Special Economic Zone as an approved SEZ and is a KPO primarily involved in the revenue cycle management for the clients across America and the assessee company is billing its overseas clients in foreign currency. The assessee company has a turnover of Rs. 5.83 crores during the assessment year under consideration. We have observed that assessee company has entered into forward foreign exchange contracts and the contract worth USD 4 Million were outstanding as un-expired as on 31st March 2009 on which the assessee company has booked marked to market loss of Rs. 1,09,98,560/- on the date of Balance Sheet as at 31st March 2009 based on the movement of value of United States Dollar vis- à-vis in relation to Indian Rupees based on prevailing rate as on 31-03-2009. Before we proceed further, it would be relevant to analyse the provisions of Section 43(5) of the Act read with proviso (d) and explanation 1 to Section 43(5) of the Act which reads as under:

I.T.A. No.139/Mum/2016

'Definitions of certain terms relevant to income from profits and gains of business or profession. 43. In sections 28 to 41 and in this section, unless the context otherwise requires- Xx xx xx

(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) to (c) xx xx xx (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; or (e) xx xx xx shall not be deemed to be a speculative transaction. 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-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 notified by the Central Government for this purpose;' Section 43(5) of the Act provides that 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 actual delivery or transfer of the commodity or scrips while proviso(d) to Section 43(5) of the Act inter-alia provides that an eligible transaction in respect of trading in derivatives referred to in clause (ac) of

I.T.A. No.139/Mum/2016

Section 2 of the Securities Contracts(Regulation) Act, 1956 carried out in a recognized stock exchange shall not be deemed to be a speculative transaction. We would also like to refer to the relevant definitions as contained in the Securities Contract (Regulation) Act, 1956 as under: Section 2(ac) of the Securities Contract (Regulation) Act, 1956 reads as under: 'Section 2 in the Securities Contracts (Regulation) Act, 1956 2 Definitions. - In this Act, unless the context otherwise requires,- Xx xx xx (ac) "derivative" includes- (A) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security; (B) a contract which derives its value from the prices, or index of prices, of underlying securities; Section 2(h) of the Securities Contract (Regulation) Act, 1956 reads as under: Section 2 in The Securities Contracts (Regulation) Act, 1956 2 Definitions. - In this Act, unless the context otherwise requires,- (h) "securities" include- Xx xx xx (ia) derivative; Xx xx xx' From the above, it is clear that speculative transaction is a transaction in which contract for purchase and sale of any commodity is settled otherwise than by actual delivery. It is not in dispute that in case of transaction in derivatives, the transaction is always settled otherwise than by actual delivery. The derivative derives its value from underlying asset which can be securities, commodities, bullion, currency etc. and in this instant case, the derivative transaction undertaken by the assessee company, the underlying asset of derivative transaction is foreign currency. The word 'commodity' is used in broadest sense in Section 43(5) of the Act as it mentions in the Section 43(5) of the Act that the commodity includes stock and shares. Thus, derivative will be included in the definition of the word 'commodity' as held in Shree Capital Services Ltd. (supra). Hence, derivative transactions in foreign currency shall be exempted from purview of speculative transactions u/s 43(5) of the Act provided other conditions as contained in proviso (d) read with Explanation 1 to Section 43(5) of the Act are fulfilled. Our view is fortified by the Memorandum explaining the provisions in the Finance Bill, 2005 which introduced clause (d) ((2005) 194 CTR(St.) 147 , the purpose of introduction of clause (d) has been explained, which reads as under: "Measures to rationalize the tax treatment of derivative transaction

I.T.A. No.139/Mum/2016

Under the existing provisions (cl.(5) of s.43) a transaction for the purchase and sale of any commodity including stocks and shares is deemed to be a 'speculative transaction', if it is settled otherwise than by actual delivery. However, certain categories of transactions are excluded from the purview of said provision. Further, the unabsorbed speculation losses are allowed to be carried forward for eight years for set-off against speculation profits in subsequent years. These restrictions were essentially designed as an anti- evasion measure to prevent claims of artificially generated losses in the absence of an appropriate institutional infrastructure. Recent systemic and technological changes introduced by stock markets have resulted in sufficient transparency to prevent generating fictitious losses through artificial transactions or shifting of incidence of loss from one person to another. The screen based computerized trading provides for an excellent audit trail. Therefore, the present distinction between speculative and non- speculative transactions, particularly relating to derivatives is no more required. The proposed amendment therefore, seeks to provide that an eligible transaction carried out in respect of trading in derivatives in a recognized stock exchange shall not be deemed to be a speculative transaction. The proposed amendment also seeks to notify relevant rules etc. regarding conditions to be fulfilled by recognized exchanges in this regard. Further it is also proposed to amend sub-s. (4) of s.73 so as to reduce the period of carry forward of speculation losses from eight assessment years to four assessment years. These amendments will take effect from 1st April 2006 and will, accordingly, apply in relation to asst. ys 2006-07 and subsequent years." From the above it is evident that the eligible transactions in derivatives carried out through recognized stock exchanges are exempted from the purview of speculation transactions u/s 43(5) of the Act provided other conditions are satisfied because of recent and systemic and technological changes introduced by stock exchanges. We have observed that the assessee company has entered into derivative transactions in foreign currency through SEBI registered broker who is a member National Stock Exchange of India Limited and these derivative transactions are carried on through National Stock Exchange of India which is a recognized stock exchange and these transactions are backed by time stamped contract notes carrying unique client identity number and PAN allotted under the Act. The reliance of the Ld. DR on the case of Araska Diamond (P.) Ltd. (supra) is misconceived as in this case the assessee did not fulfil the conditions as stipulated under section 43(5) of the Act read with proviso and Explanation thereto to entitle the assessee to bring forward contract in foreign currency within four corners of exemption from being treated as non-speculative transaction as per mandate of Section 43(5) of the Act. Thus, we hold that these derivative transactions in foreign currency as entered into by the assessee company duly fulfil all the conditions as specified u/s 43(5) of the Act read with proviso (d) and Explanation 1 to Section 43(5) of the Act. We further hold that these transactions are covered by the exception as contained in proviso (d) to Section 43(5) of the Act and hence are not speculative transactions as defined under Section 43(5) of the Act. Thus, we hold that loss of Rs. 1,09,98,560/- incurred by the company on derivative transactions in foreign currency in the instant appeal is not a speculative loss within the definition as contained in Section 43(5) of the Act.”

I.T.A. No.139/Mum/2016

The tribunal in the above case in 156 ITD 727 has held that transactions in derivative in foreign currency is not a speculative transaction and shall be covered by exception as contained in proviso (d) to Section 43(5) of the 1961 Act and the loss was held to be not speculative loss. We have also observed that the tribunal in the case of Edelweiss Global Wealth Management Ltd. (supra) has held that the said loss is a business loss . The order of the tribunal was reproduced in preceding para’s of this order and the same is not reproduced again to avoid repetition . Thus, keeping in view ratio of above decisions of the tribunal which we Respectfully follow, we hold that the said loss in foreign currency derivatives in the instant case be assessed as business loss and not as speculative loss. Thus, in the result Revenue fails in this appeal. We order accordingly.

order pronounced in the open court on 27.07.2018 आदेश की घोषणा खुऱे न्यायाऱय में ददनांकः 27.07.2018 को की गई । Sd/- Sd/- (SAKTIJIT DEY) (RAMIT KOCHAR) JUDICIAL MEMBER ACCOUNTANT MEMBER

Mumbai, dated: 27 .07.2018 Nishant Verma Sr. Private Secretary

copy to… 1. The appellant 2. The Respondent 3. The CIT(A) – Concerned, Mumbai 4. The CIT- Concerned, Mumbai 5. The DR Bench, 6. Master File // Tue copy// BY ORDER DY/ASSTT. REGISTRAR ITAT, MUMBAI