2023 (3) TMI 260 - AT - Income Tax

ITAT affirms F&O losses as business losses, rejects Department's appeal

The ITAT upheld the decision of the ld. CIT(A) in a case concerning the treatment of Future and Options (F&O) losses, dismissing the Department's ... Losses incurred by the assessee from F & O operations - Speculation loss or business loss - as per CIT-A Assessee has shown the above loss as business loss from trading in derivatives which has been conducted on recognized stock exchange and accordingly as per proviso (d) to section 43(5), the F & O loss is not speculative loss - Whether CIT(A) has erred allowing the F&O loss as business loss contrary to explanation to Section 73? - HELD THAT:- As decided in case of Asian Financial Services Ltd.[2016 (3) TMI 685 - CALCUTTA HIGH COURT] that loss incurred on account of derivatives would be deemed business loss under proviso to section 43(5) and not speculation loss and, hence, Explanation to section 73 could not be applied and as such, loss would be allowed to be set off against income arising out of proper business because derivatives were treated differently within meaning of Explanation to section 73(4) and not at par with shares. In the case of Blue Berry Trading Co. (P.) Ltd. [2022 (9) TMI 76 - ITAT MUMBAI] the ITAT held that where assessee executed futures and options transactions in recognized stock exchange through SEBI registered share broker, said transactions would fall under exception provided in definition of speculative transactions in terms of section 43(5)(d), and loss incurred on same was to be treated as regular business loss. In the assessee’s own case of Magic Share Traders Ltd. [2019 (6) TMI 1392 - ITAT AHMEDABAD] the ITAT held that Loss incurred on account of derivatives would be deemed business loss under proviso to section 43(5) and not speculation loss and, hence, Explanation to section 73 could not be applicable; and such loss would be set off against income from business. In our considered view, we observe that various courts, including the ITAT in assessee’s own case for assessment year 2012-13 and assessment year 2013-14 has decided the issue on identical facts in favour of the assessee. Issues:- Allowance of F&O loss as business loss contrary to Section 73 of the IT Act- Interpretation of proviso to section 43(5) regarding treatment of F&O loss- Application of Explanation to Section 73 on F&O losses- Legal nature of the controversy regarding F&O lossesAnalysis:1. The appeal involved a dispute over the treatment of Future and Options (F&O) losses by the Revenue against the order of the ld. Commissioner of Income Tax (Appeals). The Department contended that the F&O loss of Rs 3,74,54,163 should be treated as speculative loss under Section 73 of the IT Act, contrary to the assessee's claim of it being a business loss. 2. The Assessing Officer relied on the case of M/s. DLF Commercial Developers Pvt. Ltd. to classify the F&O losses as speculation loss, thus disallowing set off of such losses. However, the ld. CIT(A) allowed the appeal, stating that the F&O loss was not speculative as per proviso (d) to section 43(5) and was conducted on a recognized stock exchange. The ld. CIT(A) also cited a previous decision by Hon'ble ITAT in the assessee's case, supporting the treatment of F&O loss as a business loss.3. The crucial legal issue revolved around whether the F&O losses should be considered speculative under Explanation to Section 73. The ITAT analyzed the legal position, considering the treatment of derivatives as distinct from shares. The ITAT referred to the decision of the Hon'ble Calcutta High Court in Asian Financial Services case, which held that F&O losses should be treated as business losses under the proviso to section 43(5) and not as speculative losses, thus disallowing the application of Explanation to Section 73.4. The ITAT further discussed various precedents, including the case of Blue Berry Trading Co. (P.) Ltd. and Magic Share Traders Ltd., where similar issues were decided in favor of treating F&O losses as regular business losses. The ITAT concluded that the decision of the ld. CIT(A) was in line with previous judgments and found no reason to interfere, ultimately dismissing the appeal of the Department.5. In the final order, the ITAT upheld the decision of the ld. CIT(A) and dismissed the appeal of the Department, emphasizing the consistent legal interpretation regarding the treatment of F&O losses as business losses under the relevant provisions of the IT Act.This detailed analysis highlights the legal intricacies surrounding the classification of F&O losses and the application of relevant provisions, demonstrating a consistent judicial stance favoring the treatment of such losses as business losses rather than speculative losses under the IT Act.