SH. KAMAL KISHORE,DELHI vs. ACIT, NEW DELHI

Appellant by : Sh. R.S. Singhvi & Satyajeet Goel, CA Respondent by : Shri. S.K. Jain, Sr. (DR) Date of hearing : 15-11-2016 Date of pronouncement : 0 -02-2017 O R D E R PER N.K. SAINI, A.M.: This appeal by the assessee has been filed against the order of the CIT(A) dated 26.07.2016 for AY 2013-2014. The grounds raised by the assessee read as follows:

1. That on the facts and circumstances of the case, the CIT(A) was no justified in endorsing adjustment leading to enhancement of returned income by Rs. 15,50,100/- vide intimation u/s. 143(1) of the Act dt. 10.09.2014. 2 (i). That adjustment made in the intimation u/s. 143(1) of the Act with reference to claim of business loss amounting to Rs. 15,50,100/- on account of derivative loss on currency transactions was without any legal basis. ii. That claim of currency loss relating to derivative transactions carried out at recognized stock exchange is in the nature of business loss as per sec. 2 (ac) of the securities contracts (Regulation) Act, 1956. ii. That the CIT(A) has not properly appreciated the object and scope of sec. 2(ac) of the Securities Contracts (Regulation) Act, 1956 and as such confirmation of adjustment in the intimation u/s. 143(1) is not justified under the law.

3. That even otherwise, adjustment in the intimation u/s. 143(1) is not justified as same is not the nature of any arithmetical error or an incorrect claim and as such adjustment in the intimation is illegal, arbitrary and without jurisdiction. That intimation u/s. 143(1) and order of the CIT(A) are not sustainable on facts and under the law in respect of claim of business loss relating to currency derivative trading.”

2. The only grievance of the assessee in this appeal relates to the adjustment of derivatives loss amounting to Rs. 15,50,100/-. Facts of the case in brief are that the assessee filed his return of income declaring an income of Rs. 23,52,140/-. The AO made the adjustment of Rs. 15,50,100/- vide intimation dated 26.03.2015 u/s 143(1) of the Income Tax Act, 1961 (hereinafter referred as the Act).

3. Being aggrieved, the assessee carried the matter to the learned CIT(A) and made the submissions dated 23.6.2016, which are reproduced verbatim under:

“3.1 That the Id. AO wrongly disallowed set off of claimed business loss of Rs. 1550100/- against income under other head of income declared in the IT return.

3.2 That the Id. AO erred in law on facts in not allowing the benefit of s. 71 of the Act which allows the assessee the benefit of business loss to be set off against his income assessable for that assessment year under any other heads of income.

3.3 That intimation dt. 10/09/2014 as per which income was completed at Rs. 3902236/- is illegal, arbitrary and contrary to scheme of the Act.

4. That the Id. AO committed a grave mistake of law by exceeding the powers granted under the provisions of s. 143(1) of the Act by disallowing the claimed business loss of Rs. 1550100/- against income shown under other heads of income. The Id. AO ignored the fact that under the provision of s. 143(1) of the Act, he is empowered to make the adjustment for any arithmetical error in the return or an incorrect claim if such incorrect claim is apparent from any information in the return. An incorrect claim apparent from any information in the return shall mean a claim, on the basis of an entry, in the return of an item which is inconsistent with another entry of the same or some other item in such return.

6. The Id. AO did not mention any reason/ground in the IT order that the claimed business loss of assessee was inconsistent and/or otherwise inadmissible for set off against other heads of income shown in the IT return or was contrary to the provision of the Act.

8. Case relied upon: CIT vs. Smt. A. E. Sarojini (2007) 295 ITR 270 (Mad). In this case the hon 'ble Court held that the disallowance of claim made in the IT return cannot be made under the prima facie adjustment u/s 143(l)(a) of the Act.. A debatable issue can never be a subject matter for consideration while passing an order u/s 143(1) of the Act. [Facts: In this case the assessee claimed exemption u/s 54 of the Act for making investment in the construction of additional floor of existing building. The Id. AO disallowed the claim on the ground that the assessee had a residential house at the time of sale of the vacant site and that the sale proceeds were utilized for extension of the existing building].

9. That the Id. AO ignored the fact that while processing return u/s 143(1) of the Act it is not open to disregard income as declared in the return except adjustment for arithmetical error or incorrect apparent claim. The Id. AO wrongly ignored the fact that even if there is any defect or deficiency in the claim of the assessee, a deficiency notice should have been sent to him u/s 139(9) of the Act. Without complying with the mandate given in the section the IT order ids 143(1) is illegal and invalid. That the adjustment made of claimed business loss disallowing set off of the same against other heads of income in the IT return which is as per the provision of the Act is bad in law and contrary> to the provision of the Act.

5. The learned CIT(A) after considering the submissions of the assessee observed that the assessee has done trading in derivatives though CPR Capital Services Limited Stock Broker of member of National Stock Exchange and earned profit of Rs. 6,94,490/- in derivative trading and suffered a loss of Rs. 22,44,593/- in currency derivatives through United Stock Exchange Limited. The learned CIT(A) further observed that currency derivatives cannot be settled by physical delivery but can only be settled by payment of difference or cash settled. He also observed that currency is a commodity as it has physical existence and can be subject matter of trade therefore currency derivative trading is speculative transactions within the meaning of Section 43(5) of the Income Tax Act, 1961. The learned CIT(A) held that the AO was correct in not allowing the adjustment with business loss. He also observed that provisions of Section 2(ac) of the Securities Contract (Regulation) Act, 1956 do not mention ‘currency’ as one of the derivatives and that the definition of Security’ in Section 2(h) does not include currency derivatives. The learned CIT(A) held that the assessee cannot avail benefit of Section 71 to adjust his loss from other income as the losses are speculative in nature. The learned CIT(A) also held that the AO could have made any adjustments or disallowance to the returned income u/s 143(1) of the Act in accordance with the provisions contained in the said section. Now, the assessee is in appeal.

7. In his rival submissions, the learned DR strongly supported the impugned order passed by the CIT(A).

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 and 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 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 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 pre determined fixed duration, linked for the purpose of contract fulfillment to the value of a specified real or financial asset or 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.

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.

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.”

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 fulfill 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 fulfill 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. 1,09,98,56/- 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.