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2016 (8) TMI 75 - ITAT MUMBAI

2016 (8) TMI 75 - ITAT MUMBAI - TMI - Treatment to business losses - speculation loss - transaction in F&O but the same was set off against the normal business - Held that:- Losses incurred prior to issue of notification on 25th January, 2006 but during the relevant previous year 2005-06 shall be treated as non-speculative normal business losses provided it satisfies other conditions as stipulated vide proviso (d) to clause (5) of Section 43 of the Act read with explanation. In our considered vi .....

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proviso (d) to clause (5) of Section 43 read with explanation and allowed to be carried forward as non- speculative business losses to set off against the normal business income of the instant previous year relevant to the assessment year in question, as laid down in the ratio of the decisions of the Tribunal cited before us as set out above and also as per our detailed discussions in preceding para’s of this order, hence we allow the appeal filed by the assessee on this ground - I. T. A. No. 77 .....

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pellate proceedings before the learned CIT(A) arising from the assessment order dated 24th November, 2011 passed by the learned Assessing Officer (hereinafter called the AO ) u/s 143(3) of the Income Tax Act,1961 (Hereinafter called the Act ). 2. The grounds of appeal raised by the assessee in the memo of appeal filed with the Income Tax Appellate Tribunal, Mumbai (hereinafter called the Tribunal ) read as under:- 1. Under the facts and circumstances of the case and in law, the learned Assessing .....

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5)(d). 3. The brief facts of the case are that assessee is a director in M/s Suraj Tools & Equipments (P) Ltd. and M/s Rontgen Saws (P) Ltd. The assessee has shown income from salary and income from other sources. It was observed by the AO from the return of income filed for the assessment year 2006-07 that the assessee has himself shown speculation loss of ₹ 20,83,591/- on account of transaction in F&O but the same was set off against the normal business by the assessee during the .....

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see has incurred loss in respect of F&O transactions before 25th January, 2006 of ₹ 20,83,591/- which cannot be treated as normal business loss as the transaction in F & O before 25th January, 2006 i.e. prior to the date when the stock exchange was notified as recognized stock exchange for the purpose of proviso (d) to clause (5) of Section 43 of the Act, and even though clause (d) come into effect from 1st April, 2006, the impugned transactions before 25th January, 2006 did not sa .....

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of ₹ 24,907/- and the said sum was added back to the income of the assessee u/s 14A of the Act by applying Rule 8D(2)(iii) of the Income Tax Rules, 1962 being 0.5% of average value of investment held by the assessee ,vide assessment order dated 24-11-2011 passed by the AO u/s 143(3) of the Act. 4. Aggrieved by the assessment order dated 24-11-2011 passed by the A.O. u/s. 143(3) of the Act, the assessee filed first appeal before the ld. CIT(A) which appeal stood dismissed by the learned CI .....

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he said ground no. 1 and the same may be dismissed as not being pressed. The ld. D.R. has also not raised any objection with respect to dismissal of the above ground no. 1 raised by the assessee in the memo of appeal filed with the Tribunal . Accordingly we order dismissal of ground no. 1 with respect to disallowance of ₹ 24,907/- u/s 14A of the Act as not being pressed. We order accordingly. 7. The ld. Counsel for the assessee submitted that proviso (d) to clause (5) of Section 43 of the .....

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ause (5) of Section 43 of the Act read with explanation except that it was entered into previous year 2005-06 prior to 25-01-2006 .It was submitted that the National Stock Exchange/Bombay Stock Exchange were recognised vide notification issued by Central Government on 25th January, 2006 which is to be treated as retrospective w.e.f. 01-04-2005 to cover the entire previous year 2005-06 , whereby losses incurred on eligible derivative transaction undertaken in the previous year 2005-06 relevant to .....

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e of Shri Arvind Kanji Chheda v. ACIT in ITA No. 2295/Mum/2012 for the assessment year 2008-09 dated 2nd December, 2014 and decision in the case of Gajendra Kumar T. Agarwal v. ITO reported in [2011] 11 ITR (Trib) 640 (Mumbai) , and contended that the assessee has incurred losses in eligible derivatives transactions in the assessment year 2006-07 which were entered into prior to 25-01-2006 i.e. date of notification of NSE and BSE as recognized stock exchanges and the losses should be allowed as .....

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ainst normal business income in the instant assessment year 2009-10 under appeal. The said F & O loss had occurred in the previous year 2005-06 itself but prior to 25th January 2006 on which date the National Stock Exchange(NSE) and Bombay Stock Exchange(BSE) were notified by Central Government as recognized stock exchanges in accordance with the powers conferred by clause (ii) in the Explanation to clause (d) of the proviso to clause (5) of Section 43 of the Act read with Rule 6DDB of the I .....

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of section 43 of the Income-tax Act, 1961(43 of 1961) read with sub-rule (4) of rule 6DDB of the Income- tax Rules, 1962, the Central Government hereby notifies the following stock exchanges as recognised stock exchanges for the purposes of the said clause with effect from the date of publication of this notification.in the Official Gazette, namely:- (1) National Stock Exchange of India Limited, Mumbai (2) Bombay Stock Exchange Limited, Mumbai 2. The Central Government may withdraw the recogniti .....

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t of Notification S. O. 89(E) Dated 25th January, 2006 The said Notification notifies Bombay Stock Exchange Limited, Mumbai and National Stock Exchange of India Limited, Mumbai as recognised Stock Exchanges for the purposes of clause (d) of the proviso to section 43(5) of the Income-tax Act, 1961. An eligible transaction in respect of trading in derivatives carried out on these two Stock Exchanges with effect from 25th January, 2006 shall not be deemed to be speculative transaction. The expressi .....

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25- 01-2006 and is seeking carrying forward as non-speculative losses and adjustment against the normal business income for the impugned assessment year 2009-10, by treating the said losses as non-speculative in nature while notification allow such losses to be treated as non-speculative only with respect to transactions in derivatives undertaken on NSE/BSE w.e.f. 25-01-2006. Before we proceed further, it would be relevant to analyse the provisions of proviso (d) to clause (5) of Section 43 of t .....

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mmodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips: Provided that for the purposes of this clause- (a) to (c) xx (d) an eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognised stock exchange; or (e) xx shall not be deemed to be a speculative transaction. Explanati .....

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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 recognised 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; .....

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actual delivery or transfer of the commodity or scrips shall be speculative transactions , while proviso(d) to Section 43(5) of the Act inter-alia provides that an eligible transaction in respect of trading in derivatives referred to in clause (ac) of Section 2 of the Securities Contracts(Regulation) Act, 1956 carried out in a recognized stock exchange shall not be deemed to be a speculative transaction. It is an admitted position between the rival parties that F & O transactions i.e. deriv .....

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andum explaining the provisions in the Finance Bill, 2005 which introduced clause (d) ((2005) 194 CTR(St.) 147 , the purpose of introduction of clause (d) has been explained, which reads as under: "Measures to rationalize the tax treatment of derivative transaction Under the existing provisions (cl.(5) of s.43) a transaction for the purchase and sale of any commodity including stocks and shares is deemed to be a 'speculative transaction', if it is settled otherwise than by actual de .....

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ock markets have resulted in sufficient transparency to prevent generating fictitious losses through artificial transactions or shifting of incidence of loss from one person to another. The screen based computerized trading provides for an excellent audit trail. Therefore, the present distinction between speculative and non- speculative transactions, particularly relating to derivatives is no more required. The proposed amendment therefore, seeks to provide that an eligible transaction carried o .....

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ill, accordingly, apply in relation to asst. years 2006-07 and subsequent years." From the above it is evident that the eligible transactions in derivatives carried out through recognized stock exchanges are exempted from the purview of being speculative transactions by virtue of proviso (d) to clause (5) of Section 43 read with explanation provided other conditions are satisfied because of recent and systemic and technological changes introduced by stock exchanges which are in-fact anti ev .....

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) of the Act, by introduction of proviso (d) to Section 43(5) by Finance Act,2005 w.e.f. 01-04-2006 which is applicable from assessment year 2006-07 and subsequent assessment years , and this was done by the Parliament keeping in view the recent systemic and technological changes introduced by stock markets which have resulted in sufficient transparency to prevent generating fictitious losses through artificial transactions or shifting of incidence of loss from one person to another. The screen .....

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ions in the markets, and derivative transactions which complies with all the stipulated prescribed requirements are to be taken out of being treated as speculative transaction and hence amendments were proposed from April 1, 2006 i.e. w.e.f. assessment year 2006-07 and subsequent assessment years onwards , which is absolutely clear and corroborated from the language used in Memorandum while introducing the proposed amendments vide Finance Bill, 2005, which reads as under: Recent systemic and tec .....

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for the purposes of proviso (d) to clause (5) of Section 43 read with explanation and notification thereof by Central Government was a mere procedural requirement to be complied with as the technical and systemic changes were already introduced by these two stock exchanges which have resulted in sufficient transparency to prevent generating fictitious losses through artificial transactions or shifting of incidence of loss from one person to another. The screen based computerized trading provide .....

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finally notified by Central Government as recognized stock exchanges w.e.f. 25-01-2006 (SO 899E) , dated 25-01-2006, but it was rather merely a procedural requirement as these stock exchanges were otherwise technologically equipped to be granted recognition when the Finance Bill,2005 was itself introduced by the Hon ble Finance Minister in the Parliament on 28-02-2005 as culled out from the language used in memorandum to Finance Bill, 2005 and hence the losses incurred in derivative transaction .....

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-2006 and is applicable for assessment year 2006-07 and subsequent years . It was held by the Hon ble Gujarat High Court in case of Claris Lifesciences Limited v. ACIT(2008) 112 ITD 307 (Guj HC) that once the approval is granted in the relevant previous year , and in the absence of anything indicated to the contrary, the approval has to be taken as effective from the beginning of the relevant year. The Mumbai Tribunal in the case of Prem Associates Advertising and Marketing v. JCIT in ITA 6547/M .....

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dinate bench in the case of Anand Buildwell(supra), as also with the views of Hon ble Gujarat High Court in the case of Claris Lifesciences(supra), once the approval is granted in the relevant previous year, and in the absence of anything indicated to the contrary , the approval has to be taken as effective from the beginning of the relevant year. The issue is thus covered, in favour of the line of reasoning adopted by the assessee, by decision of the coordinate bench in the case of Anand Brothe .....

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in other cases as cited by the learned counsel of the assessee as detailed above in preceding para s that losses incurred prior to issue of notification on 25th January, 2006 but during the relevant previous year 2005-06 shall be treated as non-speculative normal business losses provided it satisfies other conditions as stipulated vide proviso (d) to clause (5) of Section 43 of the Act read with explanation. In our considered view, the losses incurred by the assessee i.e. ₹ 20,83,591/- wh .....

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