2015 (9) TMI 8 - AT - Income Tax

Tribunal allows set-off of derivative trading losses against business income under sec. 43(5)

The Tribunal held that losses from derivative transactions should be aggregated with business profits/losses as they are non-speculative under sec. 43(5). ... Loss on account of futures and options set off against the business profit - CIT(A) allowed claim - Held that:- Both trading of shares and derivative transactions are not coming under the purview of Section 43(5) of the Act which provides definition of “speculative transaction” exclusively for purposes of section 28 to 41 of the Act. Again, the fact that both delivery based transaction in shares and derivative transactions are nonspeculative as far as section 43(5) is concerned goes to confirm that both will have same treatment as regards application of the Explanation to Section 73 is concerned, which creates a deeming fiction. Now, before application of the said Explanation, aggregation of the business profit/loss is to be worked out irrespective of the fact, whether it is from share delivery transaction or derivative transaction. As decided in Baljit Securities Pvt. Ltd. [2014 (6) TMI 475 - CALCUTTA HIGH COURT] 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. The assessee, in the present case, principally 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. Therefore, the entire transaction carried out by the assessee, indicated above, was within the umbrella of speculative transaction. There was, as such, no bar in setting off the loss arising out of derivatives from the income arising out of buying and selling of shares. This is what the learned Tribunal has done - Decided in favour of the assessee Issues Involved:1. Deletion of addition of Rs. 1,08,22,078/- being the loss on account of futures and options set off against the business profit.Detailed Analysis:Issue 1: Deletion of Addition of Rs. 1,08,22,078/- on Account of Futures and Options LossFacts of the Case:The assessee, engaged in broking and trading in securities, filed a return of income, admitting a total income of Rs. 13,20,640/-. The assessee incurred a loss of Rs. 1,08,22,078/- from futures and options trading and claimed it as revenue expenditure, arguing that such trading is no longer speculative as per proviso (d) to sec. 43(5) inserted by the Finance Act, 2005 w.e.f. 1.4.2006. However, the AO treated this loss as speculation loss and disallowed its set-off against brokerage income, completing the assessment u/s. 143(3) with total income determined at Rs. 1,21,52,718/-.CIT(A) Observations:The CIT(A) observed that the AO was not justified in treating the loss as speculation loss. The trading in futures and options was conducted on a recognized stock exchange (NSE), and this was not disputed by the AO. The CIT(A) noted that derivatives, including futures and options, are financial instruments whose value depends on underlying assets and are not speculative transactions as per sec. 43(5). The CIT(A) concluded that the loss from derivative trading should be set off against regular business income, as derivatives are exempt from the purview of 'speculative transactions' due to sufficient transparency in transactions conducted on recognized stock exchanges.Revenue's Argument:The Revenue argued that the loss on share trading by a share broker should be treated as speculation loss by virtue of Explanation to sec. 73 and Explanation 2 to sec. 28. The Revenue relied on various judicial precedents to support this view.Assessee's Argument:The assessee contended that derivatives had been excluded from the definition of 'speculative business' u/s. 43(5) by sub-clause (d) to the Proviso inserted w.e.f. 1.4.2006. The assessee relied on judicial decisions which held that transactions in derivatives are not speculative and should be treated as regular business transactions.Tribunal's Analysis:The Tribunal noted that the assessee is engaged in share trading, including derivative trading. The Tribunal observed that both delivery-based share transactions and derivative transactions are non-speculative as per sec. 43(5). The Tribunal cited the Special Bench decision in CIT v. Concord Commercial Pvt. Ltd. and the Calcutta High Court decision in M/s. Baljit Securities Pvt. Ltd., which supported the view that losses from derivative transactions should be aggregated with business profits/losses before applying the Explanation to sec. 73.Conclusion:The Tribunal concluded that both share trading and derivative transactions are not speculative under sec. 43(5). Therefore, the loss from derivative transactions should be aggregated with business profits/losses. The Tribunal upheld the CIT(A)'s order allowing the set-off of the loss from derivative trading against business income and dismissed the Revenue's appeal.Final Judgment:The appeal of the Revenue was dismissed, and the order of the CIT(A) was confirmed. The loss on account of futures and options trading was allowed to be set off against the business profit.Order Pronounced:The order was pronounced on Friday, the 29th of May, 2015, at Chennai.