2024 (12) TMI 567 - HC - Income Tax

Derivative trading losses on recognized stock exchanges qualify as business losses under Section 72, not speculative losses under Section 73

The Principal Commissioner Of Income Tax Kochi-1. Versus M/s. Dewa Projects Pvt. ltd.,

The Principal Commissioner Of Income Tax Kochi-1. Versus M/s. Dewa Projects Pvt. ltd., - 2024:KER:90772 Issues:1. Treatment of carried forward loss from trading in derivatives as speculative loss under Section 73 of the Income Tax Act.2. Disallowance of 2% of exempt income as expenditure incurred for earning exempt income.3. Interpretation of the interplay between Section 43 and Section 73 of the Income Tax Act.Analysis:Issue 1: Treatment of carried forward loss from trading in derivatives as speculative loss under Section 73:The High Court addressed the issue of whether the carried forward loss from trading in derivatives should be treated as speculative loss under Section 73 of the Income Tax Act. The Assessing Officer had disallowed the set off of the loss against other business income, considering it speculative. The First Appellate Authority upheld this decision. However, the Appellate Tribunal referred to a judgment of the Calcutta High Court and clarified that post-amendment of Section 43, derivatives transactions were not speculative. The Tribunal remitted the issue to the Assessing Officer to bifurcate the speculative loss and normal business loss. The High Court concurred with the Tribunal's decision, emphasizing that since derivatives trading was not speculative post-amendment, the disallowance of the set off by the Assessing Officer was incorrect. Therefore, the High Court dismissed the appeal on this issue.Issue 2: Disallowance of 2% of exempt income as expenditure incurred for earning exempt income:Regarding the disallowance of 2% of exempt income as expenditure incurred for earning exempt income, the Tribunal found that Rule 8D, which was inserted into the Income Tax Rules, could not be applied retrospectively for the assessment year 2007-08. The Tribunal directed the Assessing Officer to disallow 2% of the exempt income towards expenditure incurred for earning the exempt income. The High Court upheld this decision, stating that the provisions of Rule 8D could not be applied retrospectively. Therefore, the High Court answered this issue against the Revenue and in favor of the assessee.Issue 3: Interpretation of the interplay between Section 43 and Section 73 of the Income Tax Act:The High Court delved into the interplay between Section 43 and Section 73 of the Income Tax Act. It referenced the amendments to Section 43, which excluded trading in derivatives on recognized stock exchanges from speculative transactions. The Court highlighted that the loss in derivative business should be treated as a business loss under Section 72, not a speculative loss under Section 73. The Court emphasized that since the transaction in derivatives was not speculative, the disallowance of the set off by the Assessing Officer was unlawful. The High Court concluded that the Tribunal's decision did not require any interference, answering the questions raised against the Revenue and in favor of the assessee.In conclusion, the High Court dismissed the Income Tax Appeal, upholding the decisions made by the Tribunal regarding the treatment of carried forward loss from trading in derivatives and the disallowance of 2% of exempt income as expenditure incurred for earning exempt income.