2025 (8) TMI 1318 - AT - Income Tax

Matter remitted for fresh AO examination on whether derivative trades meet Explanations 1 and 2 to s.43(5)

Arup Banerji Versus Deputy Commissioner of Income Tax, Circle-1, Allahabad

ITAT restored the matter to the file of the AO for fresh examination whether the derivative trades meet Explanations 1 & 2 to s.43(5), noting absence of ... Disallowance of set-off of loss from 'Derivative Trading' against the normal income from business and professional - as per DR appellant has not submitted any of the contract notes of the broker and sub-broker - HELD THAT:- Ideally, the assessee should submit the time stamped contract notes but considering that the time stamped contract notes may be very voluminous, the ITAT has held that where the assessee furnishes a statement of account from its brokers certifying that the trades have actually taken place and yielded the results claimed by the assessee, there is no reason to doubt that the conditions of the Explanations had been met. There is a controversy in this year as to whether such statements from brokers have been submitted or not. AR submits that he has filed the statements vide his submission dated 10.08.2017 but the ld. Sr. DR disputes this, stating that though the submission state that they are being filed, in fact they have not been filed. CIT(A) has also disallowed the appeal of the assessee on this account. We have also considered the submission of the assessee that he has filed digital copy of the contract notes immediately after the survey on his hard disk, but we note that there is no evidence presented before us, that the hard disk that were impounded / handed over, contained the digital copies of the contract notes. Furthermore, as the ld. Sr. DR has pointed out, these could only contain the details upto 17.12.2014 and not beyond because the survey was conducted in the middle of the year. Therefore, it is fairly clear that the assessee has not filed these details before the ld. AO which are required to satisfy the ld. AO that the assessee fulfills all the conditions that are laid down in the Explanations 1 & 2 to section 43(5). Be that as it may, we also observe that enquiries have been made under section 133(6) with the brokers, the results of which have not been brought on record. We also cannot be oblivious to the history of the assessee’s case where the assessee has, year after year, been trading in derivatives through the exact same brokers and in previous years, the trades have been held to be of such a nature that they fulfilled the conditions, as laid down in the Explanations to section 43(5). In the circumstances, in order to arrive at the truth of the nature of the income / loss, we believe it is in the interest of justice that the matter should be restored to the file of the ld. AO for examination of the material to determine whether the trade executed by the assessee meet the conditions of the Explanations 1 & 2 to section 43(5). Therefore, since the matter is being restored to the file of the ld. AO for a fresh decision in accordance with law, the appeal of the assessee is held to be allowed for statistical purposes. ISSUES PRESENTED AND CONSIDERED 1. Whether loss from derivative trading can be set off against normal business/professional income where the assessee claims such loss as non-speculative business loss under section 43(5) read with Explanations 1 & 2. 2. Whether time-stamped contract notes or alternative broker certifications/statements are requisite and sufficient evidence to treat derivative trading as non-speculative business transactions under the Explanations to section 43(5). 3. Whether prior favourable findings in earlier assessment years operate as estoppel or res judicata to mandate allowance of derivative losses in the subsequent year without production of requisite documents. 4. Whether failure to produce contract notes/demat/broker statements during assessment proceedings, or to seek time to produce voluminous material, justifies denial of set-off; and whether restoration to the AO is warranted where evidence may exist with brokers or was procured by survey. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Treatability of derivative trading loss as business (non-speculative) loss under section 43(5) Legal framework: Section 43(5) contains a deeming provision treating certain transactions as speculative unless they meet criteria in Explanations 1 & 2; Explanations carve out transactions in derivatives executed electronically on recognized exchanges through brokers/sub-brokers and supported by time-stamped contract notes from being speculative. Precedent treatment: Tribunal had in earlier assessment years adjudicated in favour of treating the assessee's derivative transactions as business income/loss where supporting broker certificates/statements were furnished; such prior decisions do not bind subsequent proceedings in income tax matters (res judicata not applicable). Interpretation and reasoning: The Court recognizes that the statutory scheme allows classification of derivative trades as non-speculative only upon satisfaction of the conditions in the Explanations. Mere assertion or inclusion of derivative results in audited financials is insufficient; primary compliance requires demonstrable linkage to trades executed on screen-based systems via recognized brokers and supported by time-stamped contract notes or, in appropriate circumstances, corroborative broker statements certifying trades. Ratio vs. Obiter: Ratio - Conditions in Explanations to section 43(5) are mandatory prerequisites for treating derivative transactions as business/non-speculative; audited trading account alone does not substitute for statutory documents. Obiter - Practical observation that time-stamped contract notes may be voluminous and may be supplemented by broker certificates in lieu of producing all contract notes. Conclusion: The Assessee must satisfy the AO that Explanations' conditions are met; absent such proof, set-off of derivative loss against normal business income cannot be allowed. Issue 2 - Requirement and sufficiency of time-stamped contract notes versus broker statements/certificates Legal framework: Explanations 1 & 2 to section 43(5) expressly refer to time-stamped contract notes as evidentiary support for the transactions being non-speculative; transactions carried out electronically on recognized exchanges through brokers/sub-brokers are covered if supported by such notes. Precedent treatment: Tribunal in earlier years accepted broker certificates/statements as adequate to verify trades where contract notes were not feasible to produce; courts/tribunals have recognized practical difficulties in producing voluminous time-stamped notes and accepted alternative proof where reliability is established. Interpretation and reasoning: The Tribunal acknowledges that while time-stamped contract notes are the ideal statutory proof, voluminous nature of such notes may render production impracticable; in such cases, a verified statement or account from the brokers certifying that the trades occurred and produced the stated results can be accepted as satisfactory evidence. However, the assesee bears the onus to produce such broker statements before the AO or demonstrate receipt of same by departmental enquiries (e.g., under section 133(6)). Where there is dispute as to whether such broker statements were filed, the AO must examine material on record or obtain brokers' responses. Ratio vs. Obiter: Ratio - Broker statements/certificates may, in appropriate circumstances, substitute for time-stamped contract notes if they credibly certify the trades and results; nevertheless, statutory conditions must be demonstrably complied with. Obiter - Acceptance that contract notes are voluminous and practical alternatives may be accepted does not negate the requirement of credible corroboration. Conclusion: Time-stamped contract notes are primary proof; verified broker statements/certificates can be accepted as sufficient substitute when produced and credible; absence of either justifies disallowance unless AO is satisfied after examination. Issue 3 - Effect of prior favourable tribunal decisions (res judicata/estoppel) on subsequent assessments Legal framework: Principles of res judicata/estoppel do not operate in income-tax proceedings to bind assessment outcomes across years unless the same question in the same factual matrix and the assessee produces identical proof before the AO; each assessment year is adjudicated on the facts and material for that year. Precedent treatment: Earlier favourable Tribunal findings for the assessee in other assessment years were noted but not treated as conclusive for the year under consideration. Interpretation and reasoning: The Court reiterates that prior decisions in other assessment years, even if favourable, do not absolve the assessee of the obligation to produce year-specific evidence required by the statute for the year in question. The onus remains on the assessee each year to place on record necessary documents to satisfy statutory conditions. Ratio vs. Obiter: Ratio - Prior favourable findings do not operate as estoppel to compel allowance in a later year absent year-specific compliance with statutory requirements. Obiter - The Court acknowledges the relevance of consistent trading pattern and prior adjudications as a factor in assessing credibility but not as a substitute for contemporaneous evidence. Conclusion: Prior Tribunal decisions help but do not eliminate the requirement to produce requisite documents for the assessment year; res judicata does not apply to compel allowance. Issue 4 - Procedural compliance, opportunity to produce documents, and restoration to AO for fresh examination Legal framework: AO may call for documents under section 142(1) and may examine records; if material exists with third parties, AO may procure it under section 133(6); Tribunal may remand matters to AO for fresh consideration where primary documents are not on record or require examination. Precedent treatment: Tribunal has, in prior matters, restored cases to AO where there is reasonable possibility that requisite material exists and where examination by AO is necessary to arrive at truth; yet restoration should not be routine where assessee has not availed opportunity or deliberately withheld documents. Interpretation and reasoning: The Tribunal found dispute of fact about whether broker statements/contract notes were filed with AO or obtained via section 133(6). Given history of similar transactions in prior years and enquiries made with brokers, the Tribunal considered it in the interest of justice to remit the matter to the AO to examine available material (including brokers' replies) and determine compliance with Explanations 1 & 2. The Tribunal also noted that the assessee did not demonstrate that the hard disk seized contained complete time-stamped notes for the full year and that the AO had given specific requisitions under section 142(1) to produce details which were not satisfactorily complied with. Nonetheless, because the brokers may possess corroborative material and prior years' records indicate similar patterns, remand was directed rather than outright dismissal. Ratio vs. Obiter: Ratio - Where factual dispute exists as to availability/production of requisite proof and brokers/third parties have been queried, Tribunal may restore the matter to AO for fresh examination rather than decide on incomplete record. Obiter - Restoration for 'interest of justice' may be appropriate when prior patterns and external enquiries suggest potential existence of material. Conclusion: Matter remanded to AO to examine whether Explanations' conditions are satisfied using material on record and enquiries to brokers; appeal allowed for statistical purposes and case restored for fresh decision in accordance with law.