2019 (6) TMI 83 - AT - Income Tax

Tribunal permits set off of commodity futures loss against business income

Anand Mathur Versus Income Tax Officer Ward-43 (3), Kolka

The Tribunal allowed the assessee's appeal partially, directing the Assessing Officer to permit the set off of the loss from commodity futures and options ... Treatment to loss from derivative transactions in Commodity Futures and Options as speculative loss - set off of loss arising from derivative transactions in commodity future and options against business income - transactions were done through recognized stock exchange hence section 73(1) was not applicable - CBDT, on 22nd May 2009, recognizing MCX as recognized Stock Exchange for the purpose of section 43(5) - HELD THAT:- Similar issue has been decided in favour of the assessee by the Mumbai Bench of this Tribunal in the case of ACIT –vs.- Arnov Akshay Mehta [2012 (9) TMI 447 - ITAT MUMBAI] wherein held the transactions carried out through MCX Stock Exchange after 1st April 2006, would be eligible for being treated as non-speculation within the meaning of clause (d) of proviso to section 43(5). Recognition by the Central Govt. of the Stock Exchange from a later date will not debar the transaction as non-speculation, especially after 1st April 2006. Therefore, in our opinion, the assessee's derivative trading through MCX Stock Exchange in the assessment year 2007-08 is non-speculation transaction and, therefore, the loss incurred in such transactions is to be treated as normal business loss. Thus direct the AO to allow the claim of the assessee for set off of loss in question incurred by the assessee in Commodity Futures and Options against profit from non-speculation business as claimed. - Decided in favour of assessee. Issues Involved:1. General grounds raised by the assessee.2. Addition of Rs. 77,190/- on account of undisclosed interest income.3. Disallowance of Rs. 39,10,971/- on account of assessee’s claim for set off of loss arising from derivative transactions in commodity futures and options against business income by treating the same as speculative loss.Issue-wise Detailed Analysis:1. General Grounds Raised by the Assessee:The first ground raised by the assessee was general and did not call for any specific adjudication. Therefore, it was dismissed without further discussion.2. Addition of Rs. 77,190/- on Account of Undisclosed Interest Income:The second ground involved the addition of Rs. 77,190/- made by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)] on account of undisclosed interest income. Although the assessee’s counsel made submissions in support of the assessee’s case, it was noted that this issue was not pressed during the appellate proceedings. Consequently, the Tribunal dismissed this ground as not pressed.3. Disallowance of Rs. 39,10,971/- on Account of Loss from Derivative Transactions:The main issue in the appeal was the disallowance of Rs. 39,10,971/- claimed by the assessee as a set off of loss from derivative transactions in commodity futures and options against business income. The AO treated this loss as speculative and disallowed the set off.Assessee’s Contention:The assessee argued that, according to section 43(5) of the Income Tax Act and relevant circulars, income from dealing in derivatives through recognized stock exchanges should not be considered speculative loss but business income. The assessee cited the decision of the Hon’ble Delhi Bench in the case of ITO vs. M/s. Emperor International Limited to support this claim.Assessing Officer’s (AO) Findings:The AO distinguished the case cited by the assessee, noting that the loss in the cited case was from share futures, whereas the assessee’s loss was from commodity futures. The AO referred to section 43(5) and its proviso, concluding that trading in share derivatives is non-speculative, but trading in commodity derivatives is speculative. The AO, therefore, treated the loss as speculative and disallowed the set off against non-speculative business income.CIT(A)’s Decision:The CIT(A) upheld the AO’s decision, emphasizing the differences between commodity and security derivatives. The CIT(A) noted that commodity derivatives are traded on commodity exchanges, not stock exchanges, and are regulated by the Forward Markets Commission, not SEBI. The CIT(A) concluded that commodity derivatives squared off without delivery are speculative transactions and cannot be set off against non-speculative income.Tribunal’s Analysis:The Tribunal considered the arguments and referred to the Mumbai Bench’s decision in ACIT vs. Arnov Akshay Mehta, which dealt with a similar issue. The Tribunal noted that the procedural mechanism for recognizing stock exchanges should be deemed retrospective. Therefore, transactions in commodity derivatives through recognized stock exchanges after 1st April 2006 should not be treated as speculative.Conclusion:The Tribunal followed the Mumbai Bench’s decision and directed the AO to allow the assessee’s claim for set off of the loss incurred in commodity futures and options against non-speculative business income. Ground No. 3 of the assessee’s appeal was allowed.Result:The appeal of the assessee was partly allowed. The order was pronounced in the open court on May 29, 2019.