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2008 (7) TMI 463 - AT - Income TaxLoss From Derivative Transaction - speculative transaction or not - Disallowance of loss incurred on dealing in futures and options (derivatives) and also the expenses related to it - Whether the inserted cl. (d) in s. 43(5) is clarificatory in nature to be operative with retrospective effect to mitigate the hardship of assessees dealing in such trading in derivatives - CIT(A) confirmed the disallowance on claim of loss - HELD THAT:- We find substance in the submissions of ld AR that the trading in derivatives are not speculation and for that reason the law has been clarified to make it in consonance with the nature of transaction. The memorandum has further clarified that restriction u/s 43(5) is essentially designed an anti-evasion measure to prevent claim of artificially generated losses. Thus normal loss in derivatives can't be considered speculative - In fact, the concept of transaction in derivatives was introduced in the Securities Contracts (Regulation) Act, 1956, w.e.f. 22nd Feb., 2000. Therefore to remove the unintended misinterpretation where dealing in derivatives may be considered as speculative transaction, the amendment is made in s. 43(5) to clarify that derivative transactions are not speculative. Hence, the provisions so introduced are only explanatory and has retrospective application from the date the concept of derivatives is introduced in the Securities Contracts (Regulation) Act, 1956. We further agree with the submission of ld AR that as per provisions of s. 73, speculative loss can be adjusted only against speculative profit. If cl. (d) to s. 43(5) is considered as a prospective amendment and transaction in derivatives as 'speculative', then the losses in derivative prior to amendment would be taken as speculative loss and profit after amendment as business income. This would negate the adjustment of loss in derivative prior to AY 2006-07 from the profit in derivative in AY 2006-07 and subsequently - on a harmonious interpretation of law, the derivative transaction can't be considered as speculative transaction. In view of above it is clear that the transactions in derivative are normal business transactions. Accordingly the loss suffered in trading in derivatives can't be considered as speculative loss. In this regard we also find support from the decision of Dy. CIT vs. SSKI Investors Services (P) Ltd.[2007 (9) TMI 291 - ITAT BOMBAY-J] involving AY 2001-02. Therefore, the loss claimed by the assessee in derivative transaction needs to be allowed as a business loss as the same is not covered by s. 43(5). We thus while setting aside orders of the lower authorities on the issue raised in the grounds direct the AO to allow the claimed loss of incurred in dealing in derivatives and also the expenses related to it. In result, appeal is allowed.
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