2011 (1) TMI 152 - AT - Income Tax

Addition of income Assessee has filed return of income offering income from consultancy & brokerage of Rs. 2, 48, 46, 172 short term capital gain of Rs. 89, 28, 352 and incomes from other sources of Rs. 1, 05, 849 - The assessee submitted during the assessment proceedings that the income from derivative transaction should be treated as STCG after the insertion of clause (d) of section 43(5) of Income Tax Act from A.Y. 2006-07 - A.O. treated the transactions entered before 24.1.2006 as speculative transactions and profit there on was treated as speculative profits - Held that - Since the assessee has not taken delivery the question of treating the transactions as investment does not arise and these transactions are to be considered under the head Profits and Gains of Business . - Since the assessee has not taken delivery the question of treating the transactions as investment does not arise and these transactions are to be considered under the head Profits and Gains of Business . Effective date for treating the transactions as non-speculative - cl. (d) of section 43(5) is prospective in nature and will be effective from the date from which the legislature made it effective i.e. 1st April 2006 and will be applicable to asst. yr. 2006-07 onwards - The notification is by way of a subordinated legislation but cannot override the principal legislation enacted by the Parliament. It only clarifies but will not override unless statutorily so prescribed. Since there is no dispute to the fact that the transactions in the present case in F&O segment are the eligible transactions carried out in a recognized stock exchange loss in such transactions cannot be deemed to be transaction in speculation business. The same being considered as regular business transaction loss incurred in the same is to be treated as business loss and not loss in speculation business. - A.O. is directed to treat the profit/loss on derivatives as non-speculative business profits as per the provisions of the Act effective from 1.4.2006.

Summary

Issues Involved:
1. Classification of profit/loss from derivative transactions as speculative or non-speculative.
2. Effective date for treating derivative transactions as non-speculative.

Issue-wise Analysis:

1. Classification of profit/loss from derivative transactions as speculative or non-speculative:

The Revenue contested the CIT(A)'s decision that profit/loss from eligible derivative transactions during the financial year should be considered as short-term capital gain/loss, and not speculative. The assessee, a consultant and real estate agent, reported income from consultancy and brokerage, short-term capital gains, and other sources. The short-term capital gains included derivative profit from futures and options. The assessee argued that post the insertion of clause (d) of section 43(5) of the Income Tax Act, 1961, such transactions should be treated as non-speculative from AY 2006-07. However, the A.O. held that transactions prior to 24.1.2006 should be treated as speculative based on a notification issued on 24.1.2006, while those after 25.1.2006 should be non-speculative.

The CIT(A) followed ITAT's previous rulings in the assessee's favor, holding that such transactions should not be deemed speculative. The Revenue cited the Special Bench decision in the case of Shree Capital Services, which held that transactions before 25.1.2006 are speculative. The assessee cited the Coordinate Bench decision in G.K. Anand Bros. Buildwell (P.) Ltd., which supported the view that post-amendment, transactions from 1.4.2005 should not be speculative.

The Tribunal concluded that derivatives transactions are inherently speculative as they are settled without actual delivery. The amendment effective from 1.4.2006 excluded such transactions from being speculative. The Special Bench in Shree Capital Services also affirmed that the amendment is prospective, applicable from AY 2006-07. Consequently, the CIT(A)'s decision to treat derivative income as capital gains was reversed, and such income was to be treated under 'Profits and Gains of Business'.

2. Effective date for treating derivative transactions as non-speculative:

The Revenue argued that the notification dated 24.1.2006 should determine the speculative nature of transactions before and after this date. The Tribunal referenced the Coordinate Bench's decision in G.K. Anand Bros. Buildwell (P.) Ltd., which held that the notification is subordinate legislation and cannot override the principal legislation. Therefore, the amendment effective from 1.4.2006 applies to all transactions in the financial year relevant to AY 2006-07 onwards, treating them as non-speculative.

The Tribunal rejected the Revenue's contention, directing the A.O. to treat profit/loss on derivatives as non-speculative business profits effective from 1.4.2006.

Conclusion:

The appeal was partly allowed. The Tribunal reversed the CIT(A)'s order on treating derivative income as capital gains and upheld the classification of such income as business profits. However, it rejected the Revenue's argument on the effective date, affirming that derivative transactions should be treated as non-speculative from 1.4.2006.