2011 (11) TMI 646 - AT - Income Tax

Tribunal rejects Revenue's appeal on membership fees & allows assessee's claim on derivative losses.

The Revenue's appeal was dismissed as the Tribunal upheld the deletion of the addition made on account of non-refundable membership fees, following ... Speculative loss - Explanation to section 73 of the Income-tax Act, 1961 - section 43(5) - proviso (d) excluding eligible derivative transactions on a recognised stock exchange from speculative transactions - derivative transactions as distinct from trading in shares - recognised stock exchange / eligible transaction - time stamped contract note and electronic screen based trading - recognition of advance membership fees as revenue over period of serviceRecognition of advance membership fees as revenue over period of service - Deletion of addition made by assessing officer in respect of non refundable membership fees received in advance. - HELD THAT: - The assessing officer taxed the entire membership receipts in the year of receipt. The assessee had accounted for such receipts pro rata over the period for which membership services were to be rendered. The Tribunal applied the finding in the assessee's earlier ITAT decision for AY 2006 07 and relevant authorities (including Dinesh Kumar Goel and Mahindra Holidays reasoning) that where services are to be rendered in future and the right to receive is not a present crystallized revenue entitlement, the receipts are to be spread over the period of obligation. The CIT(A)'s deletion of the addition was held to be consistent with that reasoning and not erroneous.Addition on account of non refundable membership fees deleted; assessee entitled to spread receipts over period of membership.Speculative loss - Explanation to section 73 of the Income-tax Act, 1961 - section 43(5) - proviso (d) excluding eligible derivative transactions on a recognised stock exchange from speculative transactions - derivative transactions as distinct from trading in shares - recognised stock exchange / eligible transaction - time stamped contract note and electronic screen based trading - Whether loss on trading in derivatives on a recognised stock exchange is a speculative loss under the Explanation to section 73 and therefore not eligible for set off against other business income. - HELD THAT: - Section 43(5) defines speculative transactions and the proviso (d), introduced w.e.f. 1 4 2006, exempts 'eligible transactions' in derivatives on a recognised stock exchange from being treated as speculative. The Finance Act, 2005 memorandum explains the amendment as a response to transparency and screen based trading which prevent artificial losses. The Tribunal analysed the definition of derivatives and the statutory requirements for an 'eligible transaction' (electronic screen based trading supported by time stamped contract notes and unique client identity/PAN particulars). Given that the assessee traded derivatives through the recognised stock exchange (NSE) and was not in the business of share trading, the Tribunal held that derivatives are distinct from shares and losses from eligible derivative transactions could not be treated as speculative under the Explanation to section 73. Reliance was placed on consistent decisions of various ITAT benches holding derivative dealings to be non speculative where the statutory conditions are met. Accordingly the Explanation to section 73 was held inapplicable to such derivative losses and they are allowable for set off against other business income as per the Act.Loss on eligible derivative transactions executed on a recognised stock exchange is not a speculative loss under the Explanation to section 73 and may be set off against other business income.Final Conclusion: Revenue's appeal deleting spread of membership receipts is dismissed; assessee's appeal allowing set off of loss on derivatives traded on a recognised stock exchange is allowed. Issues Involved:1. Deletion of addition made on account of non-refundable membership fees.2. Treatment of loss incurred on derivatives as speculative loss u/s 73 of the Income Tax Act, 1961.Summary:Issue 1: Deletion of Addition Made on Account of Non-Refundable Membership FeesThe Revenue's appeal concerns the deletion of an addition of Rs. 4,13,81,432/- made by the assessing officer on account of non-refundable membership fees. The assessing officer had taxed the total amount received during the year of receipt itself, while the assessee accounted for the membership fee yearly in proportion to the period for which the membership was granted. The Tribunal found that the issue is covered by the decision of ITAT in the assessee's own case for the assessment year 2006-07, where it was held that the amounts received under different membership schemes are in the shape of advance and the income would accrue only in the later period when services are rendered. The Tribunal upheld the CIT (Appeals)'s order deleting the addition, referencing the judgment of the Hon'ble Delhi High Court in the case of Dinesh Kumar Goel and the Special Bench decision in Mahindra Holidays & Resorts. Consequently, the appeal filed by the Revenue was dismissed.Issue 2: Treatment of Loss Incurred on Derivatives as Speculative Loss u/s 73The assessee's appeal concerns the upholding of the addition made on account of loss incurred on derivatives by holding it as speculative loss within the meaning of Explanation to section 73 of the Income Tax Act, 1961. The AO treated the loss of Rs. 492.71 lakhs from trading in derivatives as speculative loss, which could not be adjusted against business income. The CIT (Appeals) upheld this view, distinguishing the case from the Special Bench decision in DCIT Vs. Venketeshwar Inv. & Finance P. Ltd.The Tribunal, however, noted that trading in derivatives is distinct from trading in shares and is not deemed speculative under section 43(5) if carried out in a recognized stock exchange. The Tribunal referenced several ITAT decisions, including those of the Mumbai Bench in DCIT Vs. SSKI Investors Service P. Ltd. and RBK Securities P. Ltd., which held that derivative transactions are not speculative. It concluded that the loss from derivative transactions should be set off against other business income, setting aside the CIT (Appeals)'s order and allowing the assessee's appeal.Conclusion:The appeal filed by the Revenue was dismissed, and the appeal filed by the assessee was allowed.