2023 (6) TMI 1423 - AT - Income Tax

Tribunal Affirms Derivative Trading Loss Offset Against Business Income; Transactions Deemed Non-Speculative.

The Tribunal allowed the appeal, directing the AO to permit the set-off of the Rs. 61,33,487 loss from derivative trading against normal business income. ... Loss from derivative trading - non adjustment of loss with assessee’s normal income - CIT(A) held loss in trading in currency as speculative loss - assessee submitted that the assessee had entered into derivative transactions in foreign currency through SEBI registered broker who is a member of United Stock Exchange of India Limited (USEL) and these derivative transactions are carried out through USEL which is a recognized stock exchange and these transactions are backed by time stamped contract notes carrying unique client identity number along with PAN and it is outside the ambit of the definition of speculative transaction defined u/s 43(5) HELD THAT:- We find that the impugned order passed by the ld. CIT(A) by which sustaining the order passed by the AO did not allow the claim of the assessee to adjust loss with assessee’s normal income is not in accordance with law. Since, the insertion of clause (d) to the provision of section 43(5) of the Act, the transaction in respect of trading in derivative as prescribed in clause (d) inserted in provision of section 43(5) would not be a speculative transaction in view of the judgement of Snow Ten Investment Ltd. [2019 (5) TMI 1165 - SUPREME COURT] Therefore, the view taken by the authorities below is here by not in accordance with law. Accordingly we set aside the order passed by the ld. CIT(A) and direct the AO to allow the claim of assessee to set off loss suffered by the assessee in the said transaction in derivative against the normal business of the assessee. Assessee appeal allowed. Issues:1. Disallowance of loss from derivative trading as speculative loss.2. Interpretation of CBDT instruction regarding losses on forex derivatives.3. Principles of natural justice not followed by CIT(A).Analysis:Issue 1: Disallowance of loss from derivative trading as speculative lossThe appellant contested the disallowance of a loss of Rs. 61,33,487 from derivative trading by the Assessing Officer (AO) on the grounds of it being a speculative business transaction. The AO held that speculative business loss can only be set off against speculative profit. The appellant challenged this decision before the Commissioner of Income-tax Appeals (CIT(A)), who upheld the AO's decision. However, the appellant argued that the loss from trading in currency should not be considered speculative as it was conducted through a SEBI registered broker on a recognized stock exchange. The appellant also cited the insertion of Proviso (d) to section 43(5) of the Act, which exempts certain transactions from being classified as speculative. The appellant provided supporting documents, including contract notes and ledger copies, to substantiate their claim. The Tribunal agreed with the appellant, citing a Supreme Court judgment that transactions in derivatives, as per the inserted clause (d) of section 43(5), should not be considered speculative. The Tribunal set aside the CIT(A)'s order and directed the AO to allow the set off of the loss against the normal business income of the assessee.Issue 2: Interpretation of CBDT instruction regarding losses on forex derivativesThe appellant also raised the issue of the CIT(A) not interpreting the CBDT instruction regarding the allowability of losses on forex derivatives. However, this specific issue was not elaborated upon in the judgment, and the Tribunal did not provide a detailed analysis or ruling on this matter.Issue 3: Principles of natural justice not followed by CIT(A)The appellant contended that the CIT(A) did not provide a reasonable opportunity to be heard, which goes against the principles of natural justice. While this issue was raised by the appellant, the judgment did not delve into this aspect, and the Tribunal did not provide any specific ruling or analysis regarding the alleged violation of natural justice principles by the CIT(A).In conclusion, the Tribunal allowed the appeal of the assessee, directing the AO to permit the set off of the loss from derivative trading against the normal business income. The judgment focused primarily on the classification of the derivative transactions and the applicability of the inserted clause (d) of section 43(5) to determine the nature of the transactions as non-speculative. The issues regarding the interpretation of CBDT instructions and the alleged violation of natural justice principles were not extensively addressed in the judgment.