2017 (11) TMI 1354 - HC - Income Tax

Futures & Options losses deemed business losses, not speculative. Court affirms CIT(A) decision.

Commissioner of Income Tax, Jaipur-II, Jaipur Versus M/s. Bhargava Lodha Stock Brokers Pvt. Ltd.

Commissioner of Income Tax, Jaipur-II, Jaipur Versus M/s. Bhargava Lodha Stock Brokers Pvt. Ltd. - TMI Issues Involved:1. Whether the ITAT was justified in confirming the deletion of addition made on account of disallowance of speculative loss on derivative transactions, holding the same as business loss.Detailed Analysis:Issue 1: Interpretation of Section 43(5) of the Income Tax ActThe primary contention revolves around the interpretation of Section 43(5) of the Income Tax Act, which defines a 'speculative transaction.' The appellant argued that the Tribunal erred in interpreting this section, which states that a speculative transaction is one settled otherwise than by actual delivery or transfer of the commodity or scrips. The appellant emphasized that the Assessing Officer (AO) correctly classified the loss from Futures & Options (F&O) transactions as speculative, disallowing Rs. 1,07,66,000/- as business loss.AO's FindingsThe AO noted that the assessee, engaged in brokerage for shares and securities, claimed a jobbing loss of Rs. 1,38,64,306/- in the Profit & Loss account. The AO determined that this loss, incurred from F&O transactions, was speculative under Section 43(5) and disallowed it as a business loss. However, the AO allowed a set-off of Rs. 30,98,306/- shown as profit, resulting in a net disallowance of Rs. 1,07,66,000/-.Appellant's ArgumentThe appellant contended that the AO's interpretation of Section 43(5) was correct and that the CIT(A) and Tribunal erred in treating the loss as a business loss. The appellant referred to the Securities Contracts (Regulation) Act, 1956, and the Memorandum explaining the provisions of the Finance Bill 2005, which clarified that transactions in derivatives carried out in a recognized stock exchange should not be deemed speculative post-01/04/2006 due to technological advancements ensuring transparency.CIT(A)'s FindingsThe CIT(A) found that the assessee, a member of the National Stock Exchange, engaged in transactions to guard against potential losses in the ordinary course of its brokerage business. The CIT(A) relied on the ITAT Jaipur Bench's decision in the assessee's case for A.Y. 2004-05, which held that such transactions were covered by the proviso to Section 43(5) and should not be deemed speculative. Consequently, the CIT(A) directed the AO to treat the loss as a business loss.Respondent's ArgumentThe respondent cited the Madras High Court decision in CIT vs. New Ambadi Estates (P) Ltd., which was also relied upon by the Rajasthan High Court in CIT vs. Brig. Sh. P.S. Kapoor. The Madras High Court had distinguished between shares, stocks, and debentures, ruling that debentures do not fall within the definition of 'commodity' or 'stocks' or 'shares' under Section 43(5). The respondent argued that the transactions in question were not speculative and should be treated as business losses.High Court's ConclusionThe High Court, after considering the arguments and the factual position, accepted the view taken by the CIT(A) and the Tribunal. It upheld that the transactions in F&O were not speculative and should be treated as business losses. The court relied on the Madras High Court's decision and the ITAT Jaipur Bench's previous ruling in the assessee's case. Consequently, the issue was resolved in favor of the assessee and against the department.Judgment:The appeal was dismissed, affirming the Tribunal's decision to treat the F&O transaction losses as business losses rather than speculative losses.