TaxTMI 
TaxTMI 
2011 (11) TMI 454
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....tment is in appeal before us. 5. Ground No.1 reads as under :- In the facts and under the circumstances of the case the CIT(A) has erred in law while in giving relief to the assessee by holding loss on account of Derivatives trading as Short term capital loss not attracting sec. 43(5). 6. Brief facts apropos this issue are that assessee had debited in the profit & loss account a sum of Rs. 91,860/- as loss on derivative trade. Assessing Officer further noticed that in the computation of total income, assessee had added back the same and subsequently claimed such loss to be deducted from short term capital loss suffering Security Transaction Tax. He required the assessee to explain as to how the derivative loss was allowable when the nature of such loss was speculative. The assessee explained that such loss was not speculative transaction as per Section 43(5)(d) of the Act. However, Assessing Officer treated the said loss as speculative loss in view of provision of Section 43(5)(d) read with Section 2(ae) of Security Control (Regulation Act, 1956. Ld. CIT(A) allowed the assessee's appeal for the following reasons :- (i) Income from derivative transaction was not on....
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....ved from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other from of security; (B) a contract which derives its value from the prices, or index of prices, of underlying securities; (h) "securities" include - ** ** ** (ia) derivative." With reference to above definitions, Ld. Counsel submitted that like any other securities, "derivative" also are to be treated as "capital asset". Ld. Counsel had also filed before us extract from wherein property has been elaborately explained. In sum and substance Ld. Counsel submitted that Section 2(14) defining "capital asset" encompasses within its ambi 'enforceable contract' which is a 'property' held by an assessee. 9. We have considered the submissions of both the parties and have perused the records of the case. Assessing Officer treated the derivative loss as speculation loss in view of Section 43(5)(d). However, Ld. CIT(A) treated the derivative loss as short term capital loss by treating derivatives as capital asset.. Two issues arises for adjudication - (i) Firstly, whether the derivative can be treated as capital asse....
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....nto by traders. A 'Derivative' is an instrument having following characteristics:- a. A derivative's cash flows or fair value must fluctuate or vary based on the changes in an underlying variable. b. The contract must be based on a notional amount of quantity. The notional amount is the fixed amount or quantity that determines the size of change caused by the movement of the underlying. c. The contract can be readily settled by net cash payment. The derivative instrument can be used as a tool for hedging or can be a trading transaction unrelated to hedging. If it is not used as an hedging instrument, the gain or loss on the derivative instrument is required to be recognized as profit or loss in current earnings. Thus, the very nature of this contract suggests that assessee is involved in day to day operation of share trading activity so as to keep a track of price trend. Admittedly, in derivative transaction, the difference in price is settled. Therefore, keeping in view the very nature of transaction, which is risk adventure. It can not be said that derivative transactions were part of investment portfolio of assessee. Further, th....
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....services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable articles or thing, not being securities;" Admittedly, as per definition of derivative contained in Section 2 sub-section (ac) read with Section 2 sub-section (h) (ia) as reproduced earlier, the 'derivatives' are securities and, therefore, clearly covered by the exception provided in Explanation (1) to Section 194H. We, therefore, confirm the order of Ld. CIT(A) on this issue. 15. Ground Nos. 3 & 4 read as under :- 3. In the facts and under the circumstances of the case the CIT(A) has erred in facts while giving relief to the assessee on account of disallowance u/s l4A by directing that the insurance premium paid on account of Key man Insurance policy is to be excluded from the total of management expenses over which proportionate disallowance was made by the AO while determining amount of disallowance u/s 14A 4. In the facts and under the circumstances of the case the Ld. CIT(A) has erred in facts while giving relief to the assessee on account of disallowance u/s. l4A, by directing that prop....
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....er considering the assessee's submissions, directed the Assessing Officer to exclude Rs. 20.00 lakhs from the general overhead expenses and compute the disallowance on the balance amount. As regards management fees paid to Fund Manager, Ld. CIT(A) observed that since the expenditure on management fees did not pertain to dividend income, there was no justification to disallow Rs.1,21,677/- out of management fees. 17. Ld. Departmental Representative relied on the order of Assessing Officer. 18. Ld. Counsel appearing on behalf of the assessee relied on the order of Ld. CIT(A). 19. We have considered the submissions of both the parties and have perused the records of the case. As far as, ground No.3 assailing the exclusion of insurance premium paid of Rs. 20.00 lakhs under Keyman Insurance Premium is concerned, we do not find any reason to interfere with the order of Ld. CIT(A) because the facts are not disputed and the proceeds of Keyman Insurance Policy are fully taxable under section 28(vi) of the Act. Therefore, the expenditure relating to the same cannot come within the ambit of section 14A. Accordingly, for making disallowance under section 14A Rs. 20.00 lakhs was rightl....
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....ising from STT paid transaction. The only statutory requirement of Section 70 is that short term capital loss can be set off only against income from short term capital gain or long term capital gain. No particular mode or manner of set off is provided in the Act. Therefore, Assessing Officer should have adopted that chronological order or manner which was most beneficial to the assessee. The assessee relied on Board of Revenue Circular No. 26(LXVGI-3 of 1955) dated 07.07.1955 wherein it has been explained that "Section 24(1) of Income Tax Act, 1922, permitted set off of loss under one head against income under two or more heads of income. There was nothing in Section 24(1) to indicate that a particular mode of set off should be followed. It further explained that in absence of any such indication the general rule to be followed in all fiscal enactments was that where words used were neutral in import, a construction most beneficial to the assessee should be adopted. The Board, therefore, clarified that the department should adopt that mode which will give the assessee the maximum benefit". 23. We have considered the submissions of both the parties and have perused the records o....