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The Deputy Commissioner of Income-tax, Company Circle-I (1) , Chennai Versus M/s. Aishwarya & Co. P. Ltd.,

2015 (9) TMI 8 - ITAT CHENNAI

Loss on account of futures and options set off against the business profit - CIT(A) allowed claim - Held that:- Both trading of shares and derivative transactions are not coming under the purview of Section 43(5) of the Act which provides definition of “speculative transaction” exclusively for purposes of section 28 to 41 of the Act. Again, the fact that both delivery based transaction in shares and derivative transactions are nonspeculative as far as section 43(5) is concerned goes to confirm t .....

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r things also deals in purchase and sale of shares of other companies, the assessee shall be deemed to be carrying on a speculation business. The assessee, in the present case, principally is a share broker, as already indicated. The assessee is also in the business of buying and selling of shares for self where actual delivery is taken and given and also in buying and selling of shares where actual delivery was not intended to be taken or given. Therefore, the entire transaction carried out by .....

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vocate and Ms. J. Sree Vidya ORDER PER CHANDRA POOJARI, ACCOUNTANT MEMBER This appeal by the Revenue is directed against the order of the Commissioner of Income-tax (Appeals) dated 26.12.2013. 2. The only ground raised by the Revenue in this appeal is with regard to deletion of addition of ₹ 1,08,22,078/- being the loss on account of futures and options set off against the business profit. 3. The facts of the case are that the assessee is engaged in the business of broking and trading in s .....

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(5) inserted by the Finance Act, 2005 w.e.f. 1.4.2006. However, the AO held that loss incurred out of trading in futures and options is speculation loss and hence could not be allowed to be set off against brokerage income. Accordingly, he completed the assessment u/s.143(3) of the Act determining total income at ₹ 1,21,52,718/- making disallowances of ₹ 1,08,22,078/- on loss on purchase and sale in futures and options and disallowance u/s.14A of ₹ 10,000/- on the dividend earn .....

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sessee has submitted a complete statement of trading in future and options for AO's verification. Therefore it is not in dispute that the transactions only related to the futures and options, which are types of derivatives. Derivatives are financial instruments, whose value depends on or is derived from the performance of secondary sources such as an underlying bond, currency or commodity. In this regard, the ICAI Guidance Note on Accounting for Equity Index and Equity Stock Futures and Opti .....

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an instrument whose value depends on an underlying source or asset. For stock derivatives the price of the shares of a particular company is the underlying source. For an index derivative, the value of the index is the underlying source. The Assessing Officer has treated the loss on trading of future and options as loss in speculation business by virtue of explanation to Sec 73. He has come to that conclusion based on the decisions wherein it has been stated that the loss suffered by an assessee .....

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decided to exempt the derivatives from the purview of 'speculative transactions' only after confirming that there were sufficient transparency in the transactions, i.e. only trading in derivatives carried out in a recognised stock exchange; the loss incurred by the assessee arising out of forward and options ought to be set off against regular business income. The derivatives include contract which derives its value from the prices, or index of prices, of underlying securities. As such, .....

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not have a physical existence. Derivatives are not a contract for purchase or sale of any physical commodity as such. So, these are not speculative transactions in the strict sense of terms of s. 43(5), therefore the loss on I account of derivative cannot be treated as speculation loss. The dealings in derivative being a separate kind of transaction, without force of law, it is not possible to hold that the transaction was speculative in nature. 4.2 According to the CIT(A), the assessee has tran .....

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f derivatives are not the purchase and sale of shares. Therefore, the Assessing Officer is not justified in making disallowance of ₹ 1,08,22,078, since the assessee has correctly claimed set off of losses arising from trading in future and options (derivatives) from its business profit. Against this, the Revenue is in appeal before us. 5. The ld. DR submitted that the loss on share trading to a share broker is not a business loss and it is to be treated as a speculation loss by virtue of E .....

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rities Ltd. (DEL) (2006) 6 SOT 562 (iii) Priyasha Meven Fin. Ltd. (BOM) 24 SOT 422 6. The ld. AR has submitted written submissions, wherein it was stated that for the assessment year 2008-09, the assessee claimed set off of loss from purchase and sale in future and options, against the business income, as derivatives had been excluded from the definition of speculative business u/s.43(5) by sub-clause (d) to the Proviso inserted with effect from 1.4.2006. He further submitted that the Department .....

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their won group shares and showing losses to be set off against business profits. The legislature decided to exempt the derivatives from the purview of speculative transactions only after confirming that there were sufficient transparency in the transactions , i.e. only trading in derivatives carried out in a recognized stock exchange. The ld. AR has relied on the following decisions in support of its stand: 1. CIT v. First Securities P. Ltd. (370 ITR 72 - Kar.) 2. CIT v. Nirmal Trading Co. (82 .....

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6.2 Further, on the issue of whether the Delhi High Court is a binding precedent, he submitted that the Karnataka High Court has taken a different view and where two views are possible, the one in favour of the assessee should be followed, as held by the Supreme Court in the cases of CIT v. Vegetable Products Ltd. (88 ITR 192) and CIR v. Podar Cement (P) Ltd. (226 ITR 625). He has also relied on various decisions of the Supreme Court and High Courts in support of his argument. 7. We have heard .....

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speculation loss and not allowed set off against business loss. According to the AO, Explanation to sec.73 is applicable to the facts of the assessee s case and disallowed the claim of set off of losses from dealing of shares. The assessee carried the matter to the CIT(A), who allowed the claim of the assessee by holding that the loss incurred by the assessee in derivative transactions to be set off with the profits earned from derivative transactions. According to the ld. DR, the derivative tr .....

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of the scrips of share. As per the definition of sec.43(5), trading of shares which is done by taking delivery does not come under the purview of the said section. Similarly, as per clause (d) of sec.43(5), derivative transaction in shares is also not speculation transaction as defined in the said section. Therefore, both profit/loss from all the share delivery transactions and derivative transactions are having the same meaning, so far as sec.43(5) of the Act is concerned. Again, in view of th .....

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Pvt. Ltd. (2005) 95 ITD 117 (Mum)(SB). In this case, the Special Bench held that : Before considering whether the assessee s case is hit by the deeming provision of Explanation to Sec. 73 of the Act, the aggregate of the business profit / loss has to be worked out based on the non-speculative profits; either it is from share delivery or from share derivative. 8. From the above, it is concluded that both trading of shares and derivative transactions are not coming under the purview of Section 43 .....

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ss profit/loss is to be worked out irrespective of the fact, whether it is from share delivery transaction or derivative transaction. 8.1 Now, this view has been confirmed by the Hon ble Calcutta High Court in the case of M/s. Baljit Securities Pvt. Ltd. (88 CCH 313) and held as under:- Clause (d) of Section 43(5) became effective with effect from 1st April, 2006. Therefore, prior to 1st April, 2006 any transaction in which a contract for the purchase or sale of any commodity including stocks an .....

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st profits arising out of speculative transaction. In the present case, the assessee, as already indicated, has been dealing in shares where delivery was in fact taken and also in shares where delivery was not ultimately taken. In other words, the assessee has been dealing in actual selling and buying of shares as also dealing in shares only for the purpose of settling the transaction otherwise than by actual delivery. The question arise whether the losses arising out of the dealings and transac .....

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nterest on securities , or a company the principal business of which is the bu9siness of banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase. In order to resolve the issue before us, the section has to be read in the manner as follows: Explanation : Where any part of the bus .....

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