TaxTMI 
TaxTMI 
2011 (1) TMI 152
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....48,46,172, short term capital gain of Rs. 89,28,352 and incomes from other sources of Rs. 1,05,849. The short term capital gains include derivative profit in future & option of Rs. 62,44,700. The assessee submitted during the assessment proceedings that the income from derivative transaction should be treated as short term capital gain and there is no dispute on this issue after the insertion of clause (d) of section 43(5) of Income Tax Act as eligible transactions of derivative are no more speculative in nature from A.Y. 2006-07. Therefore, according to the assessee it should be treated as short term capital gain and taxed accordingly. The above submissions were not accepted by the A.O. The A.O. held that as per notification issued dated 24.1.2006 profit/loss earned prior to 24.1.2006 in derivative transactions should be treated as speculative gain/loss and profits & gains made in transactions in derivatives after 25.1.2006 are not to be held as speculative. According to the A.O. instructions given vide circular clarifies that trading in derivatives only after 25.1.2006 shall not be deemed to be speculative transaction. Therefore, the A.O. treated the transactions entered before 2....
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....to clause (d) of section 43(5) wherein the following was introduced w.e.f. 1st April, 2006 :- (d) an eligible transaction in respect of trading in derivatives referred to in clause [(ac)] of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognised stock exchange; shall not be deemed to be a speculative transaction. Explanation.-For the purposes of this clause, the expressions- (i) "eligible transaction" means any transaction,- (A) carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary registered under section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or the Depositories Act, 1996 (22 of 1996) and the rules, regulations or bye-laws made or directions issued under those Acts or by banks or mutual funds on a recognised stock exchange; and (B) which is supported by a time stamped contract note issued by such stock broker or sub-b....
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....ion 43(5). The Finance Act, 2005 has provided certain transactions in respect of trading in derivatives shall not be deemed to be speculative transactions within the meaning of section 43(5) . If the transaction in derivatives did not fall within the definition of "speculation transaction" under section 43(5), there was no question of exempting certain types of transaction in derivatives from the scope of speculative transaction under section 43(5) and clause (d) and Explanation thereto below section 43(5) introduced by the Finance Act, 2005 would be redundant. The term "derivatives" in which the underlying asset is shares, will fall within the meaning of "commodity" used in section 43(5) of the Act. Clause (d) of section 43(5) is prospective in nature and will be effective from the date on which the Legislature made it effective, i.e. April 1, 2006 and will be applicable to the assessment year 2006-07 onwards. Where the assessee-company, engaged in the business of financing and investments in shares and securities, suffered loss on account of futures and options, during the assessment year 2004-05 : Held accordingly, dismissing the appeal, that the transaction in derivati....
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....ansactions only. 8. By the very nature, the assessee choosing to enter into transactions in derivatives itself has to be considered as adventure in the nature of trade. Nobody can say that assessee has entered into Futures and Options contract with the intention of making investments. Even if a single transaction is undertaken, which is in the realm of speculation it cannot be considered as investment. When one undertakes purchase and sale of shares directly or in the stock market, the purchase can be for the purpose of investment or for the purpose of trading depending on the intention of the assessee at the time of entering into the transaction. As far as the derivatives transactions are concerned there is no purchase or sale of assets directly but only underlying securities by way of Futures and Options, as there is no delivery involved in these transactions. In view of this, even though derivatives derive its value from underlying assets, by very definition of derivatives transactions it is speculative in nature. Before the amendment brought out by the I.T. Act w.e.f. 1.4.2006, all the transactions in derivatives are invariably treated as speculative in nature and accordingl....
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....as non-speculative, in view of the notification issued by the Board. The Coordinate Bench in the case of G.K. Anand Bros. Buildwell (P.) Ltd. v. ITO 234 SOT 439 (Delhi) has considered the issue and held that notification dated 24.1.2006 is by way of a subordinated legislation but cannot override the principal legislation enacted by the Parliament. Therefore the loss in question was to be treated as business loss and not as speculative loss in the above said case. The facts and reasons for holding as such are as under :- "The assessee is carrying on business as builder, developer and contractor. During the year it has also done trading in shares by way of future and option transactions. This resulted into a loss of Rs. 20,36,328, The AO was of the opinion that loss in future and option segment is to be considered as speculation loss in terms of section 43(5) r/ w Explanation to section 73. The assessee submitted that the transactions are carried on through a broker M/s March Securities (P.) Ltd. who is a registered member of National Stock Exchange. The speculative transaction is defined in section 43(5) . Clause (d) of the proviso to section 43(5) provides, "an eligible transact....