TaxTMI 
TaxTMI 
2011 (6) TMI 136
X X X X Extracts X X X X
X X X X Extracts X X X X
....ugh the recognized Stock Exchange and whether the same were eligible transactions within the meaning of the provisions of the said section. 2. The only issue involved in the appeal is whether profit arising from derivative transactions at Rs. 23,62,290 should be treated as non-speculative and accordingly available to be set off against regular business income. 3. The facts relating to the issue are that assessee is engaged in the whole-sale business of iron and steel. He is also carrying out daily transactions in shares. He has made investment in shares, and also trading in shares and securities and money lending. The assessee has shown income from long term capital gains/short term capital gains from shares. During the assessment year in question assessee has shown loss from derivative transactions at Rs. 23,62,290 which is sought to be adjusted against normal business income. The Assessing Officer disallowed the claim on the ground that Government notification for treating income/loss from derivative transactions in shares as regular business income/loss is issued on 25-1-2006 under Explanation to section 43(5). Therefore, such loss cannot be treated as from non-speculative....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rry out derivative transactions through recognized stock exchanges prior to this date as required under that clause (ii) of Explanation to section 43(5) and, therefore, transactions carried out prior to this date would be speculative transactions and accordingly the loss in them cannot be set off against normal business income. 6. On the other hand, the ld. AR submitted that this notification is clarificatory in nature. Recognized stock exchanges are already in existence even prior to 25-1-2006. He relied on the decision of Special Bench of the Tribunal, Kolkata, in the case of Shree Capital Services Ltd. v. Asstt. CIT [2009] 121 ITD 498 wherein it is held that clause (d) of section 43(5), defining special transactions in derivatives, would be prospective in nature and would be effective from 1-4-2006. 7. We have heard the rival arguments and perused the material on record. The only issue involved in this appeal is whether by virtue of notification from CBDT dated 25-1-2006 in S.O.(89E) recognizing National Stock Exchange and Bombay Stock Exchange for the purpose of derivative transactions would make the application of clause (d) of section 43(5) effective only from 25-1-2006....
X X X X Extracts X X X X
X X X X Extracts X X X X
....gnised stock exchange ; and (B) which is supported by a time stamped contract note issued by such stock broker or sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub-clause (A) and permanent account number allotted under this Act ; (ii) "recognised stock exchange" means a recognised stock exchange as referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956), and which fulfils such conditions as may be prescribed and notified by the Central Government for this purpose." In derivative transactions there is no purchase or sale directly. These instruments, however, depend upon original assets and derive their value from them. Such derivatives are in the form of future and options. Before the amendment brought in by the IT Act with effect from 1-4-2006 in section 43(5), all the transactions in derivatives were treated as speculative in nature and, therefore, losses arising therein could not be allowed to be set off against other business income. However, with effect from 1-4-2006 amendments were made i....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... purview of section 43(5)." [Para 23] 9. Explanation to section 43(5) was also inserted by Finance Act, 2005 with effect from 1-4-2006. The conditions that a stock exchange is required to fulfil for being notified as recognized stock exchange for the purposes of clause (d) to section 43(5) were inserted by Income-tax 20th amendment Rules, 2005 with effect from 1-7-2005. These conditions as per rule 6DDA of Income-tax Rules, 1962 at the relevant time were as under :- "6DDA. Conditions that a stock exchange is required to fulfil to be notified as a recognised stock exchange for the purposes of clause (d) of proviso to sub-section (5) of section 43.-For the purposes of clause (d) of proviso to sub-section (5) of section 43, a stock exchange shall fulfil the following conditions in respect of trading in derivatives, namely :- (i) the stock exchange shall have the approval of the Securities and Exchange Board of India established under the Securities and Exchange Board of India Act, 1992 (15 of 1992) in respect of trading in derivatives and shall function in accordance with the guidelines or conditions laid down by the Securities and Exchange Board of India ; &n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d by the Central Government." *I.T. (20th Amend.) Rules, 2005, with effect from 1-7-2005." A combined reading of the provision of clause (d) to proviso to section 43(5) and the Explanation (ii) to section 43(5) and above rules 6DDA and 6DDB indicate that a stock exchange whether newly created or already existing should satisfy above conditions as per rule 6DDA and such stock exchange should be approved by the Stock Exchange Board of India (SEBI) under the SEBI Act, 1992 for recognition of a stock exchange should keep record of particulars of the clients, complete audit trial of all transactions are maintained for seven years and that such transactions are not erased or modified. On an application filed with CBDT along with particulars as given in rule 6DDB, the stock exchange will be notified as recognized stock exchange for the purpose of clause (d) to proviso to sub-section (5) of section 43. In our considered view rule 6DDA has come into effect from 1-7-2005 and will accordingly be effective from date only. In other words, a stock exchange can file an application with CBDT for recognition within the meaning of clause (d) of proviso to section 43(5) after this date. The mai....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ransactions or the stock exchanges have violated any condition prescribed under rule 6DDB then such recognition to stock exchanges by CBDT for the purpose of clause (d) of proviso to section 43(5) would be retrospective effect from 1-4-2006. 11. Our view that notification dated 25-1-2006 would be effective from 1-4-2005 i.e., it would be applicable to entire assessment year 2006-07 is also supported by a recent decision of ITAT, Mumbai in Asstt. CIT v. Parimal D. Nathwani [2011] 9 Taxmann.com 284 (Mum. - ITAT) pronounced on 21-1-2011 wherein following decision of the ITAT Delhi Bench in the case of G.K. Anand Bros. Buildwell (P.) Ltd. v. ITO [2009] 34 SOT 439 held that notification dated 24-1-2006 is only a subordinate legislation and cannot over ride the principal legislation enacted by the Parliament. ITAT Mumbai Bench in that case held as under :- "11. It is the contention of the revenue that the notification was issued on 24-1-2006 and accordingly the transactions effected prior to 24-1-2006 are to be considered as speculative transactions and the transactions after that date can be considered as non-speculative, in view of the notification issued by the Board. The Coordi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....herwise than by the actual delivery or the transfer of commodity or scrips. Proviso below section 43(5) carves out exceptions to section 43(5). As per clause (d) of the said proviso "an eligible transaction in respect of trading in derivatives referred in Securities Contracts (Regulation) Act, 1956 carried out in a recognized stock exchange shall not be deemed to be a speculative transaction". Clause (d) in the proviso was inserted by Finance Act, 2005 with effect from 1st April, 2006. Therefore, if a transaction falls within clause (d) of the proviso will not be deemed to be a speculative transaction in respect of transaction pertaining to assessment year 2006-07. Under clause (d) of the proviso, a transaction is not a speculative transaction provided it is an eligible transaction within the meaning of clause (i) of Explanation and it is carried on at recognized stock exchange as explained in clause (ii) of the said Explanation below proviso to section 43(5)(d). The recognized stock exchange means a recognized stock exchange as notified by the Central Government for this purpose. Therefore, even if the notification is from a particular date, as per clause (d) inserted, the same wi....