2022 (7) TMI 736 - AT - Income Tax

ITAT rules Futures & Derivatives loss not speculative

The ITAT ruled in favor of the assessee, allowing the appeal and determining that the loss from Futures and Derivatives should not be treated as ... Nature of loss - speculative or non speculative - action of the Ld. A.O. in treating the loss from the share business as speculative allegedly in view of Explanation to section-73 - assessee had carried forward a loss 'loss from Trading in Derivatives' on stock exchanges as Non-speculative in view of provisions of section 43(5) - HELD THAT:- As in view of the authoritative pronouncement of M/S SNOWTEX INVESTMENT LIMITED case [2019 (5) TMI 1165 - SUPREME COURT], we hold that loss from Futures and Derivatives is not speculation loss under Explanation to Section 73. Thus, disallowance of amount is directed to be deleted. - Decided in favour of assessee. Issues Involved:1. Treatment of loss from share business as speculative under Explanation to Section 73 of the Income Tax Act, 1961.2. Confirmation of addition of Rs.8,17,98,385/- as speculative loss.3. Adequacy of opportunity of being heard provided by the Assessing Officer.Issue-wise Detailed Analysis:1. Treatment of Loss from Share Business as Speculative:The primary issue revolves around whether the loss of Rs.8,17,98,385/- from the share business should be treated as speculative under the Explanation to Section 73 of the Income Tax Act, 1961. The assessee contended that the loss from trading in derivatives on stock exchanges should be considered non-speculative as per Section 43(5) of the Act. However, the Assessing Officer applied the Explanation to Section 73, treating the loss as speculative.Upon appeal, the CIT (A) upheld the Assessing Officer's decision, referencing his earlier order in the assessee's case and the Delhi High Court's decision in CIT vs. DLF Commercial Developers Ltd. (218 Taxman 0045). The CIT (A) noted that the Delhi High Court had held that transactions in derivatives undertaken by the company fall under the Explanation to Section 73 and are thus speculative. The CIT (A) found no contrary decision from any other High Court and concluded that the loss should be treated as speculative.2. Confirmation of Addition as Speculative Loss:The CIT (A) confirmed the addition of Rs.8,17,98,385/- as speculative loss, based on the Delhi High Court's decision in DLF Commercial Developers Ltd. The CIT (A) emphasized that the objective of Section 73 is to deny speculative businesses the benefit of carrying forward losses. The CIT (A) found that derivatives are based on stocks and shares, which fall within the Explanation to Section 73, and thus, the loss should be treated as speculative.3. Adequacy of Opportunity of Being Heard:The assessee argued that the Assessing Officer passed the impugned order without providing adequate opportunity of being heard. However, this issue was not elaborated upon in the judgment, as the primary focus was on the treatment of the loss as speculative.Appellate Tribunal's Decision:The ITAT Delhi Bench heard the appeal and considered the arguments from both parties. The assessee's counsel argued that the issue is covered in favor of the assessee by the ITAT's decision in the assessee's own case for AY 2012-13 and the Supreme Court's decision in the case of Snowtex Investment Ltd. The counsel also pointed out that the Delhi High Court's decision is not binding as the jurisdiction lies with the Punjab and Haryana High Court, and the Calcutta High Court's decision in Snowtex Investment Ltd. has been approved by the Supreme Court.The Revenue's representative relied on the orders of the Revenue authorities but could not dispute the assessee's propositions.Upon careful consideration, the ITAT found merit in the assessee's submissions. The ITAT referred to its decision in Mars Associates Pvt. Ltd. vs. DCIT, where it was held that loss from Futures and Derivatives is not speculative under Explanation to Section 73, following the Supreme Court's decision in Snowtex Investment Ltd. The ITAT concluded that the loss from Futures and Derivatives should not be treated as speculative and set aside the orders of the authorities below, deciding the issue in favor of the assessee.Conclusion:The appeal by the assessee was allowed, and the ITAT ruled that the loss from Futures and Derivatives is not speculative under Explanation to Section 73. The ITAT's decision was pronounced in the open court on July 14, 2022.