2014 (6) TMI 475 - HC - Income Tax

Calcutta High Court affirms Tribunal's decision on speculative transactions & setting off losses

Commissioner of Income Tax, Kol-III Versus M/s. Baljit Securities Pvt. Ltd.

The High Court of Calcutta upheld the Tribunal's decision, dismissing the revenue's appeal as lacking merit. The judgment clarified the interpretation of ... Profits and gains from the purchase and sale of shares - Setting off of loss of derivatives and day trading of shares – e meaning of the expression “speculative transaction”. - Held that:- Where an assessee, being the company, besides dealing in other things also deals in purchase and sale of shares of other companies, the assessee shall be deemed to be carrying on a speculation business – assessee is a share broker as already indicated - The assessee is also in the business of buying and selling of shares for self where actual delivery is taken and given and also in buying and selling of shares where actual delivery was not intended to be taken or given - the entire transaction carried out by the assessee was within the umbrella of speculative transaction - There was no bar in setting off the loss arising out of derivatives from the income arising out of buying and selling of shares – Decided against Revenue. Issues:1. Interpretation of the term 'speculative transaction' under Section 43(5) of the Act.2. Applicability of Section 73(1) regarding setting off losses from speculative transactions against profits.3. Analysis of the Explanation appended to Section 73 in the context of share transactions.Issue 1:The judgment revolves around the interpretation of the term 'speculative transaction' as defined in Section 43(5) of the Act. The court examined whether the assessee, a share broker involved in derivatives trading, was entitled to set off losses from derivatives against profits from buying and selling shares. The definition of speculative transaction prior to April 1, 2006, encompassed transactions settled without actual delivery. The court analyzed the exclusion of derivatives trading from speculative transactions post-April 1, 2006.Issue 2:Section 73(1) was crucial in determining the set off of losses from speculative business against profits. The court deliberated on the restriction that losses from speculative transactions could only be set off against profits from another speculative business. The case involved the assessee engaging in both actual delivery transactions and non-delivery transactions of shares, prompting a detailed analysis of whether losses from non-delivery transactions could be offset against profits from actual transactions.Issue 3:The court scrutinized the Explanation to Section 73, which deems a company dealing in the purchase and sale of shares to be carrying on a speculative business. The judgment emphasized that if a company's business includes share transactions, it is considered speculative to that extent. In this case, as the assessee was primarily a share broker involved in various types of share transactions, the court concluded that the entire transaction fell under speculative activity, allowing for the set off of losses from derivatives against profits from share transactions.In conclusion, the High Court of Calcutta upheld the Tribunal's decision, dismissing the appeal by the revenue as lacking merit. The judgment clarified the interpretation of speculative transactions, the application of Section 73(1) for setting off losses, and the impact of the Explanation on share transactions in determining speculative business activities.