2022 (7) TMI 267 - AT - Income Tax

Tribunal allows appeal on derivative transactions, deems non-speculative under Section 43(5)(d).

Wealthy Sky Development P. Ltd. Versus Principal Commissioner of Income-tax-1, Jaipur.

The Tribunal allowed the assessee's appeal, quashing the PCIT's order under Section 263. It held that derivative transactions on recognized stock ... Revision u/s 263 - losses in future and set off against profit on sale of land - as per CIT AO should not have allowed losses in futures u/s. 73(4) because the main business of the assessee is sale of land and therefore losses in futures being speculative loss could not have been allowed - HELD THAT:- The argument of the ld. D/R regarding the amendment of section 73 does not apply in respect of transactions undertaken in derivatives on recognized Stock Exchange and these transactions are out of ambit of this amendment. Therefore, there is no force in the argument of ld. D/R on this point. Similar issue has been adjudicated in the case of M/s. Jeenec Solution Pvt. Ltd. [2020 (3) TMI 1411 - ITAT AHMEDABAD] wherein one of us was co-author, and following the earlier decision [2018 (11) TMI 551 - ITAT AHMEDABAD] decided the matter in favour of the assessee. Therefore, following the decisions discussed hereinabove and considering the totality of facts and circumstances of the case, the appeal of assessee is allowed. Issues Involved:1. Invocation of Section 263 by the PCIT.2. Alleged errors and prejudice in the Show Cause Notice and order under Section 263.3. Applicability of Explanation to Section 73 and Section 43(5)(d) regarding speculative and non-speculative transactions.4. Rejection of case laws cited by the assessee.Detailed Analysis:1. Invocation of Section 263 by the PCIT:The assessee contested the PCIT's invocation of Section 263, arguing it was based on a mere change of opinion without identifying any error in the AO's order. The PCIT had issued a show cause notice under Section 263, asserting that the AO erroneously allowed the set-off of losses from futures against other business income, treating them as non-speculative. The PCIT claimed that the main business of the assessee was land trading, and thus, futures losses should be deemed speculative under Section 73(4).2. Alleged Errors and Prejudice in the Show Cause Notice and Order under Section 263:The assessee argued that the PCIT's order was erroneous on several counts:a. The PCIT invoked Section 263 merely to impose a different view than that of the AO.b. The PCIT incorrectly held that the AO failed to treat the futures loss as speculative.c. The PCIT misapplied Explanation to Section 73, disregarding the specific provisions of Section 43(5)(d).d. The PCIT ignored several case laws cited by the assessee, rendering the order legally untenable.3. Applicability of Explanation to Section 73 and Section 43(5)(d):The assessee maintained that the losses from futures should be treated as non-speculative business income under Section 43(5)(d), which overrides the general provisions of Section 73. The assessee cited the Explanatory Memorandum to the Finance Bill, 2005, which clarified that derivative transactions on recognized stock exchanges are non-speculative from AY 2006-07 onwards.The Tribunal referenced similar cases, including:- Magic Share Traders Ltd.: The Ahmedabad ITAT held that derivative losses should be treated as non-speculative business losses, not speculative, under Section 43(5)(d).- Jeenec Solutions Pvt. Ltd.: The SMC Bench of Ahmedabad ITAT reiterated that derivative transactions on recognized stock exchanges are non-speculative.The Tribunal noted that the PCIT's reliance on older judgments, such as DLF Commercial Developers Ltd., was misplaced as these did not consider the amendments to Section 43(5)(d).4. Rejection of Case Laws Cited by the Assessee:The Tribunal observed that the PCIT disregarded several relevant case laws cited by the assessee, including:- Asian Financial Services Ltd.: The Calcutta High Court held that derivative transactions are non-speculative and Section 73 does not apply.- Ivory Consultants Pvt. Ltd.: The Calcutta High Court quashed the revision under Section 263, affirming that derivative losses are non-speculative.The Tribunal concluded that the AO's order was not erroneous or prejudicial to the interest of the revenue. The AO had taken a possible view, and the PCIT's attempt to substitute this with her opinion was impermissible.Conclusion:The Tribunal allowed the assessee's appeal, quashing the PCIT's order under Section 263. The Tribunal emphasized that derivative transactions on recognized stock exchanges are non-speculative under Section 43(5)(d), and the AO's order was in accordance with the law. The PCIT's reliance on older judgments and disregard for relevant case laws was found to be unfounded.