2012 (12) TMI 565 - AT - Income Tax

Tribunal Allows Setting Off Derivative Losses Against Profits: Business Income vs. Capital Gains

The Tribunal upheld the CIT (A)'s decision to allow setting off derivative losses against profits from delivery based transactions, deeming both as ... Whether loss from derivative transactions is eligible to set off against profit arising out of delivery based transactions – Whether delivery based purchase and sale of shares is deemed to be speculative business - Assessee is engage in both delivery and non-delivery based and derivatives transaction of shares & securities – AO treated the equity derivatives F&O losses upto 25.01.2006 as speculative loss - Provision of Sec. 43(5)(d) will be applicable vide Board Circular from date 25.01.2006, loss/profit arising on derivative transactions in equity futures and options at BSE/NSE was to be treated as business loss/profit – Held that:- Where an assessee is a company whose business consists in any part of the purchase and sale of shares of other Companies, it shall be deemed to be carrying on a speculation business to the extent to which the business consists of purchase and sale of such shares. Whether or not it is a profit or loss that has resulted from carrying on such business, is a consideration which is alien to the meaning of what constitutes a speculation business by the explanation to Section 73, any loss computed in respect of that speculation business, can be set off only against the profits and gains of an other speculation business. Therefore, loss from derivatives transactions is to be allowed to be set off against the profit arising out of delivery based transactions as both are speculative/deemed speculative transactions. Appeal decides in favour of assessee Issues:- Whether income from trading in shares and derivatives is speculative in natureRs.- Whether the loss from derivative transactions can be set off against the profit from delivery based transactionsRs.Analysis:1. The appeal was filed by the Revenue challenging the order of the CIT (A) regarding the assessment for the assessment year 2006-07. The Department contended that income from delivery based purchase and sale of shares should be deemed speculative under section 73 of the Income Tax Act. The Department also disputed the allowance of setting off losses from derivative trading against profits from share trading.2. The assessee, engaged in trading and investment of shares and securities, provided details of both delivery and non-delivery based share transactions and derivatives during the assessment. The Assessing Officer (AO) observed a net profit from non-delivery shares and a loss from derivatives. The AO disallowed the derivative losses under section 73, considering them speculative. The assessee argued that it was engaged in normal share trading and derivatives, with all income classified as business income, not capital gains.3. Before the CIT (A), the assessee argued that the Explanation to section 73 applied to its case as the income was mainly from business, not capital gains. The assessee contended that the section deemed purchase and sale of shares as speculative transactions. The CIT (A) agreed that the derivative losses were speculative but allowed setting off these losses against profits from delivery based transactions, citing a Bombay High Court judgment supporting this interpretation.4. The CIT (A) directed the AO to allow setting off derivative losses against profits from delivery based transactions, as both were deemed speculative transactions. The Tribunal upheld the CIT (A)'s decision, stating that it aligned with the High Court judgment. The Tribunal dismissed the Revenue's appeal, affirming the allowance of setting off derivative losses against profits from delivery based transactions.5. The Tribunal's decision was based on the interpretation of the Explanation to section 73 and the legal precedent set by the High Court. The Tribunal found no reason to deviate from the CIT (A)'s findings, ultimately dismissing the Revenue's appeal and upholding the allowance of setting off derivative losses against profits from delivery based transactions.