Derivative losses on recognised exchanges are not speculative where the statutory exception applies and disallowance fails

Derivative transactions carried out on a recognised stock exchange were treated as falling within the exception in section 43(5), as inserted by the Finance Act, 2005 with effect from 1 April 2006, so they were not speculative transactions for assessment year 2006-07. The stock exchange notification was viewed as clarificatory and not as overriding the statutory scheme. On that basis, derivative losses were not speculative losses and the related expenditure could not be disallowed on the footing of speculation business.

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Issues: Whether derivative losses incurred in the relevant assessment year, including the period before the stock exchange notification, were speculative losses under section 43(5) of the Income-tax Act, 1961, and whether the related expenditure could be disallowed on that basis.

Analysis: The definition of speculative transaction in section 43(5) was read with the exception inserted by clause (d) of the proviso by the Finance Act, 2005, effective from 1 April 2006. A derivative transaction falling within the statutory concept of an eligible transaction carried out on a recognized stock exchange was held not to be a speculative transaction for assessment year 2006-07. The notification of the stock exchange was treated as clarificatory and not as overriding the principal statutory scheme. On the facts, the derivative dealings were on a recognized exchange and therefore could not be treated as speculation business, with the consequence that the associated expenditure also could not be disallowed on that footing.

Conclusion: The derivative loss was not speculative loss and the related disallowance was not sustainable; the assessee succeeded on the issue.

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