TaxTMI 
TaxTMI 
2021 (7) TMI 1192
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....has erred in directing the AO to allow the set off of losses of Rs. 5,41,879/- incurred in the trading activity in cash segment against the business income during the year without appreciating the fact that AO has rightly treated the losses as speculative loss and not allowed to set off by invoking the provisions of Section 73(1) of the Income Tax Act, 1961. 2. After hearing rival arguments, our adjudication to the subject matter of appeal would be as given in succeeding paragraphs. Assessment Proceedings 3.1 The material facts are that the assessee being resident corporate assessee stated to be engaged as share-broker was assessed for the year under consideration u/s 143(3) on 15/12/2016. During assessment proceedings, it transpired that the assessee incurred losses of Rs. 3163.45 Lacs in trading activity in derivative segment and earned profit of Rs. 389.62 Lacs in trading activity in cash segment. It also earned speculation income of Rs. 5.41 Lacs. On net basis, the assessee incurred net loss of Rs. 2768.41 Lacs in trading activity in cash segment and derivative segment. In AY 2013-14, Ld. Ld. AO, invoking the provisions of Section 73(1), disallowed business loss after treati....
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.... as normal business losses and not speculation losses. As per the amendment introduced by Finance Bill, 2005, the distinction between speculative and non-speculative transactions, particularly relating to derivatives, was no more required. Reliance was placed on various judicial decisions to support the submissions that derivative losses was to be treated as normal business losses. The said income / losses in assessment orders for AY 2009-10 as well as AY 2013-14 were accepted by Ld.AO as normal business income while framing assessment u/s 143(3). In fact, in AY 2009-10, the Tribunal held that loss from cash segment could be set-off against the profit of the derivative segment and vice versa. It was held that activities of derivative and cash segment go hand in hand and alike treatment is required to be given for setting of losses of derivative segment against cash segment and vice versa. The amendment to explanation 73 as inserted by Finance Act, 2014 was to be applied retrospectively from the date of its insertion to explanation to Section 73 whereby the income from derivative and cash segment was require to be treated as business only. In the said background, the assessee also p....
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....tion 43 define 'speculative transaction' to mean a transaction in which a contract for the purchase or sale of any commodity including stocks and shares is settled otherwise than by the actual delivery or transfer of the commodity or scrips. The proviso to section 43(5) lists out certain transactions which are not deemed to be speculative transactions. Systemic and technological changes introduced by SEBI have resulted in sufficient transparency in the stock markets and have to a large extent curbed the scope for generating fictitious losses through artificial transactions or shifting of incidence of loss from one person to another. The screen based computerized trading provides for audit trail. In the wake of these developments, the present distinction between speculative and non-speculative transactions, in respect of trading in derivatives of securities is losing relevance. The Finance Act, 2005 has, accordingly, amended section 43(5) to provide that an eligible transaction in respect of trading in derivatives of securities carried out on a recognised stock exchange shall not be deemed as speculative transaction. The notification prescribing the rules and the conditi....
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....he transactions in derivatives referred to under section 2(ac) of the Act carried out in a recognized stock exchange were covered under section 43(5) of the Act, the Legislature could exclude those transactions from the purview of section 43(5) with effect from 1-4-2006. In other words, unless the transactions referred in clause (d) were covered under section 43(5), there would be no question of excluding those transactions from the purview of section 43(5). 24. It is however contended on behalf of the assessee that the derivative transactions carried out at the stock exchanges were not at all covered under section 43(5) of the Act and that clause (d) has been inserted to the proviso to section 43(5) as and by way of clarification and hence it would apply retrospectively so as to make it clear that the exchange traded derivative transactions carried out in a recognized stock exchange were always outside the scope of section 43(5). The question, therefore to be considered is, whether the derivative transactions fell outside the scope of main section 43(5) of the Income-tax Act. 25. Chapter IV of the Act contains provisions relating to the computation of profits and gains of busi....
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....anings (one) in economics, it is any tangible goods that is traded and (two) it is raw materials and goods, especially such goods as cocoa, coffee, jute, potatoes, tea, etc. which may also be traded. Thus, in common parlance, the expression commodity means an article of trade or commerce which are tangible in nature. 29. In the present case, the assessee had entered into futures contracts for purchase of shares of certain companies at a specified future date and at a specified price, which were to be settled in cash without actual delivery of the shares. Such a contract, whether constitutes a contract for purchase of a commodity is the question. 30. As per the 'Hand Book on Derivatives Trading' published by the National Stock Exchange of India Limited ("NSE' for short), a futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. There are various types of futures available for trading at the NSE. An investor can trade the 'entire stock market' by buying index futures instead of buying individual securities with the efficiency of a mutual fund. The advantages of trading in index futures ....
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....hase/sale of an asset which is tangible and which is capable of being delivered. However, section 18A of the 1956 Act inserted with effect from 22-2-2000 provides that notwithstanding anything contained in any other law for the time being in force, contracts in derivative (like futures contracts) shall be legal and valid if such contracts are traded on a recognized stock exchange and settled on the clearing house of a recognized stock exchange in accordance with the rules and bye-laws of such stock exchange. Thus, by operation of law, the transactions in futures are made legal and valid even if the underlying securities permitted to be purchased/sold under the futures contracts are not tangible and incapable of actual delivery, provided such transactions are traded on a recognized stock exchange and settled on the clearing house of a recognized stock exchange. Moreover, section 43(5) of the Act provides that a transaction for purchase/sale of any commodity would be a speculative transaction if it is settled otherwise than by actual delivery. For the purposes of section 43(5), it is not necessary that the commodity agreed to be purchased or sold must be capable of actual delivery.....
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....ion 43(5) clearly provide that where speculative transactions are carried out with a view to guard against loss in respect of contracts for actual delivery in cases referred to in clauses (a), (b) and (c) of the proviso, then, such speculative transactions shall not be deemed to be speculative transactions. So far as the transactions covered under clause (d) are concerned, they are deemed not to be speculative transactions only with effect from 1-4-2006. Therefore, the transactions covered under clause (d) would not be treated as speculative transactions only with effect from 1-4-2006. 37. The argument advanced on behalf of the assessee that clause (d) inserted to the proviso to section 43(5) by Finance Act, 1995 with effect from 1-4-2006 is clarificatory and hence retrospective in nature, cannot be accepted, because, firstly, the Legislature by Finance Act, 1995 has specifically provided that clause (d) to the proviso to section 43(5) shall come into operation prospectively with effect from 1-4-2006. Secondly, insertion of clause (d) was not necessitated on account of the fact that the provisions of section 43(5) were unworkable or interpretation of section 43(5) resulted in uni....