TMI Blog2013 (7) TMI 334X X X X Extracts X X X X X X X X Extracts X X X X ..... - apparent from the tenor of its language is to deny speculative businesses the benefit of carry forward of losses. Tribunal erred in law in holding that the assessee was entitled to carry forward its losses - Following decisions of The Vanguard Fire & General Insurance Co. Ltd., Madras v. M/S. Fraser And Ross & Anr [1960 (5) TMI 25 - SUPREME COURT] and Rajshree Sugars and Chemicals Ltd. v. Axis Bank Ltd.[2008 (10) TMI 594 - MADRAS HIGH COURT] - Decided in favour of the revenue. - ITA 94/2013 - - - Dated:- 11-7-2013 - S. Ravindra Bhat And Najmi Waziri,JJ. For the Petitioner : Sh. Sanjeev Sabharwal, Sr. Standing Counsel with Sh. Puneet Gupta, Jr. Standing Counsel For the Respondent : Sh. Ajay Vohra and Ms. Kavita Jha, Advocates JUDGMENT Mr. Justice S. Ravindra Bhat 1. This appeal of the revenue impugns an order of the Income Tax Appellate Tribunal (ITAT) dated 30.11.2011 in the assessee s appeal [ITA No. 1446 (Del) of 2011] whereby its contention about inapplicability of Explanation to Section 73 of the Income Tax Act, 1961 in respect of its transactions, and the resulting relief in carry forward of its losses for the previous year, in respect of its deri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips, it would not be deemed to be speculative transaction. By the amendment made w.e.f. 01.04.2006, four categories of contracts including the one provided under Section 43(5)(d) i.e. transaction in respect of trading and derivative as defined under Securities Contract (Regulation) Act, 1956 are not to be deemed to be speculative transaction. However, counsel drew strength from the fact that the said provision, i.e., Section 43(5)(d) has restricted application in that it defines speculative transaction and excludes transactions and derivatives only for a limited purpose. On the other hand, Section 73 has wider application and relates to all manner of losses. It deals with a question of under what circumstances can carry forwarding of such losses be permitted. Learned counsel for the Revenue relied upon the decisions reported as CIT v. Intermetal Trade Ltd., 2006 (285) ITR 536 (M.P.); CIT v. Arvind Investments Ltd., 1991 (192) ITR 365 (Cal) and Eastern Aviation and Industries Ltd. v. CIT, 1994 (208) ITR 1023. In this regard, it is s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he relevant provisions of the Income Tax Act. Section 73 (with explanation), to the extent it is relevant, reads as follows: Losses in speculation business. 73. (1) Any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business. (2) Where for any assessment year any loss computed in respect of a speculation business has not been wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee had no income from any other speculation business, shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and (i) it shall be set off against the profits and gains, if any, of any speculation business carried on by him assessable for that assessment year; and (ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on. (3) In respect of allowance on account of depreciation or capital expenditure on scientific research, the provisions of sub-section (2) of section 72 shall apply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action, [Explanation Four the purpose of this clause, the expressions (i) eligible transaction‖ means any transaction - (A) Carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary registered under section 12 of the Securities and exchange Board of India Act, 1992 (15 of 1992) in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 or the Depositories Act, 1996 (22 of 1996) and the rules, regulations or bye-laws made or directions issued under those Acts or by banks or mutual funds on a recognized 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) recognized stock exchange‖ means a recognized stock exchange as referred to in clause (f) of section 2 of the Securities Contracts (Regulation) act, 1956 (42 of 1956) and whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es on to a spiral that can lead to a corporate melt down . The High Court then, after examining the nature and characteristics of derivatives transactions, observed that: 5. What are these 'derivatives' which have gained such a great deal of notoriety? In simple terms, derivatives are financial instruments whose values depend on the value of other underlying financial instruments. The International Accounting Standard (IAS) 39, defines "derivatives" as follows: A derivative is a financial instrument: (a) whose value changes in response to the change in a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index, or similar variable (sometimes called the 'underlying'); (b) that requires no initial net investment or little initial net investment relative to other types of contracts that have a similar response to changes in market conditions; and (c) that is settled at a future date. Actually, derivatives are assets, whose values are derived from values of underlying assets. These underlying assets can be commodities, metals, energy resources, and financial assets such as shares, bonds, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds under the circumstances. Similarly, in N.K. Jain and Ors. v C.K. Shah and Ors. AIR 1991 SC 1289, it was held that: 4. The subject matter and the context in which a particular word is used are of great importance and it is axiomatic that the object underlying the Act must always be kept in view in construing the context in which a particular word is used .. 11. The stated objective of Section 73- apparent from the tenor of its language is to deny speculative businesses the benefit of carry forward of losses. Explanation to Section 73 (4) has been enacted to clarify beyond any shadow of doubt that share business of certain types or classes of companies are deemed to be speculative. That in another part of the statute, which deals with computation of business income, derivatives are excluded from the definition of speculative transactions, only underlines that such exclusion is limited for the purpose of those provisions or sections. To borrow the Madras High Court s expression, ―derivatives are assets, whose values are derived from values of underlying assets‖; in the present case, by all accounts the derivatives are based on stocks and shares, which fall sq ..... X X X X Extracts X X X X X X X X Extracts X X X X
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