ACIT 3(1)(2), MUMBAI vs. EDELWEISS GLOBAL WEALTH MANAGEMENT LTD, MUMBAI

The only issue raised by the revenue is against the deletion of addition of Rs.5,16,74,976/- by the ld. CIT(A) as made by the AO by treating the loss on trading in currency derivative instruments as speculation loss.

Brief facts of the case are that the assessee is engaged in the business of marketing and distribution of financial products and advisory services and 2 /M um /201 6 filed return of income on 4.10.2010 declaring total loss of Rs.89,03,783/- under normal provisions of law and under section 115JB at Rs.1,08,60,745/-. During the assessment year relevant to the previous year under consideration, the assessee has claimed set off of loss in trading in currency derivative instruments of Rs.5,16,74,976/- against the business income earned. However, the AO was of the opinion that loss in trading in currency derivatives is not speculative and hence not eligible for setting off against the normal business loss. The assessee filed detailed reply before the AO. The AO is not satisfied with the reply of the assessee and treated the said loss as speculative in nature and added the same to the total income of the assessee denying the benefit of set off of Rs.4,90,23,770/- vide assessment order dated 18.2.2013 passed under section 143(3) of the Act. In the appellate proceedings, the ld. CIT(A) allowed the appeal of the assessee after considering the contentions and submissions raised during the course of appellate proceedings which have been incorporated in para 4.2 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 3 /M um /201 6 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 facs 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.

4 /M um /201 6 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 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”

The ld. DR argued before us that the loss on trading in foreign exchange is not a business loss but it is speculative loss and therefore the AO has rightly denied the setting off the said loss against the normal business income. The ld. AR on the contrary submitted that the Explanation to section 73 does not apply to the trading in foreign exchange and is applicable only to trading in shares and securities. The ld. AR also submitted that National Stock Exchange and MCX Stock Exchange have been notified as recognized stock exchanges with effect from 22.5.2009 in the Gazette of India. He also placed a copy of the notification issued by the CBDT notifying these exchanges as recognized Stock Exchanges. The ld AR stated that in view of the said facts , the transactions carried out on the said exchanges are not speculative transaction. He further submitted that all conditions as envisaged in section 43(5)(d) of the Act have been satisfied and hence should be allowed to be set off against the normal business income. The ld. AR also 5 /M um /201 6 drew our attention to the provisions of section 43(5) of the Act as amended by the Finance Act, 2005 in which Clause (d) was inserted in the proviso to sub-section (5) of section 43 of the Income Tax Act, 1961) dated 1.4.2006 defining the eligible transactions in respect of trading in derivatives as referred to section 2 of Securities Transaction Act, 1956 carried out in recognized Stock exchanges shall not be deemed to be a speculative transactions and accordingly, he submitted that any trading/transactions carried out in the Recognised Stock Exchange with effect from 1.4.2006 were to be treated as non speculative transactions. Finally, the ld. AR prayed before the Bench that the order of ld. CIT(A) be upheld and the AO be directed to allow loss in foreign exchange transaction as business loss.

We have heard the rival contentions and perused the material placed before us including the impugned orders and circular of CBDT (supra). We find that the transactions of trading in foreign exchange instruments on recognized stock exchange are not speculative transactions in view of the amendment by Finance Act, 2005 in section 43(5) of the IT Act, wherein the proviso has been inserted w.e.f.1.4.2006 providing that any transaction on recognized stock exchange in derivatives would not be a speculative transaction. 6. We find that the ld. CIT(A) has taken a very correct and legal view of the mater and rightly deleted the addition made by the AO. Accordingly, we