TMI Blog2020 (9) TMI 1042X X X X Extracts X X X X X X X X Extracts X X X X ..... rward Contracts (Regulation) Act, 1952. The only difference is MCX has been notified by the CBDT u/s 43(5)(d) w.e.f. AY 2014-15, whereas NMCE, Ahmadabad is not notified for the purpose of section 43(5)(e). Otherwise, both are recognized associations/exchanges for online trading in commodity derivatives. It is incorrect to differentiate business carried out by the assessee in commodity derivatives on two exchanges only for the reasons that the one exchange is not notified by the CBDT u/s 43(5)(e) of the Act, more particularly when said exchange or association is a recognized association u/s 5 of the Forward Contracts (Regulation) Act, 1952. Loss incurred from derivatives trading on NMCE, cannot be considered as different from profit earned from MCX only on the basis of notification issued by the CBDT for the purpose of section 43(5)(d) because the law requires recognition of Association/exchange from Govt. of India, but it does not specifically requires notification from CBDT u/s 43(5) - NMCE, Ahmadabad is a recognized association like MCX, Mumbai and profit or loss incurred from both exchanges is a business profit and consequently, any loss incurred from one exchange can be s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated order. i) ITA NO.2292/MUM/2018 2. The assessee has raised the following grounds of appeal: 1. The learned Commissioner of Income Tax (A) has erred in law and on facts in confirming the disallowance of commodity derivative loss of ₹ 18,71,18,2547-made by the Assessing Officer without properly considering the facts that the appellant is carrying on derivative trading in commodity as exclusive business activity irrespective of the exchange traded, and also failed to follow the judicial decisions of the Hon'ble ITAT E bench in ITA No. 5179/MumA6 of Assessment Year 2012-2013 in the appellant's own case having same facts of, the case. 3. The brief facts of the case are that the assessee is an individual engaged in the business of trading commodity and currency derivatives, filed his return of income for AY 2014-15 on 01/10/2014, declaring total income of ₹ 40,21,780/-. The case was selected for scrutiny and during the course of assessment proceedings, the Ld. AO noticed that the assessee has incurred loss of ₹ 18,71,18,254/- from trading in commodity derivatives on the National Multi Commodity Exchange (NMCE), Ahmadabad and accordingly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, 2013 hereby notifies the Multi Commodity Exchange of India Limited, Mumbai as a recognized association for the purposes fo clauses(e) of the proviso to clause(5) of the section 43 of the Income tax Act, 1961 ( 43 of 1961) red with sub rule (4) of rule 6DDD of the Income tax Rules, 1962 with effect from the date of publication of this notification in the official Gazette . 11. Thus, on three counts, the assessee s losses fail the test of the complementary provisions of Sec 43(5)(d) sec 43(5)(e) rendering the losses accrued on NMCE as speculation losses and hence not allowable for set off against profits earned from Commodities derivatives trading on recognized stock exchanges. 12. In the light of above discussion, the loss incurred on NMCE, Ahmadabad amounting to ₹ 18,71,18,254/- is disallowed being in the nature of speculation loss and hence disallowable against profits from non speculative business. Penalty proceedings initiated u/s 271(1)(c) r.w.s. 274 for furnishing inaccurate particulars of income. 5. Being aggrieved by the assessment order, the assessee preferred an appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assessee has filed detailed writ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E is a recognized stock exchange for the purpose of section 43(5)(e) of the Act, and thus, there is no error in the findings recorded by the Ld. AO in disallowing loss incurred from commodity derivative trading on NMEC, Ahmadabad. The relevant findings of the Ld.CIT(A) are as under:- 8.0 I have considered the facts of the case, the submissions of the appellant, the observations of the AO contained in the assessment order and the other materials on record on this issue. 8.1 The AO has disallowed an amount of ₹ 18,71,18,254/-, being loss incurred from derivative commodity trading through NMCE(National Multi -Commodity Exchange), Ahmedabad, an unrecognised exchange, considering the same as speculative loss and the same was not allowed to be set off against normal business profits. Thus, the speculation loss of ₹ 18,71,18,254/-, was not allowed by the A.O. to be set-off against the profit earned by the Appellant from the derivative trading through recognised exchanges like, MCX. 8.2 I have noted that the loss amounting to ₹ 18,71,18,2547- incurred by the appellant on National Multi -Commodity Exchange (NMCE), Ahmedabad is in the nature of speculative los ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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; (ii) recognised stock exchange means a recognised stock exchange as referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfils such conditions as may be prescribed and notified34 by the Central Government for this purpose;] [Explanation 2-For the purposes of clause (e), the expressions- (i) commodity derivative shall have the meaning as assigned to it in VII of the Finance Act, 2013; (ii) eligible transaction means any transaction,- A) carried out electronically 'on screen-based systems through member or an intermediary, registered under the bye-laws, rules and regulations of the recognised association for trading in commodity derivative in accordance with the provisions of the Forward Contracts (Regulation) Act, 1952 (74 of 1952) and the rules, re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is regard is reproduced below:- Government of India, Ministry of Finance, Department of Revenue, Central Board of Direct Taxes vide its Notification no. 92/2013 dated 29fh November 2013 hereby notifies the Multi Commodity Exchange of India Limited, Mumbai as a recognised association for the purposes of clause (e) of the proviso to clause (5) of the section 43 of the Income Tax Act, 1961 (43 of 1961) read with sub-rule (4) of rule 6DDD of the Income Tax Rules, 1962, with effect from the date of publication of this notification in the Official Gazette . 8.7 It may be important to note that clause (e) of the proviso to clause (5) of the section 43 of the Act has been inserted by the Finance Act, 2013 and is operational from 01.04.2014 and hence is applicable for the current assessment year under consideration. 8.8 Thus, the net effect of the amendment made in the Act from the A.Y. 2014-15 onwards, is that those derivative commodity transactions, which are carried out on a recognized stock exchange will fall in the category of non-speculative transaction in view of the deeming fiction of clause (e) of the proviso to clause (5) of the section 43 of the Act. On the other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iation/Exchange is a recognized by Govt. of India, merely because it was not notified by the CBDT for the purpose of section 43(50(d) and (e) of the Income Tax Act, 1961, the trading activity carried out on NMCE cannot be considered as different from activity carried out on MCX, Mumbai, when nature of transaction is one and the same. 8. The Ld. DR, on the other hand strongly supporting order of the Ld.CIT(A) submitted that as per the amended provisions of section 43(5)(e) by the Finance Act, 2013 w.e.f 01/04/2014, which is applicable for AY 2014-15 onwards, the commodity derivatives trading has been excluded from the definition of speculation loss or profit, provided the trading in derivatives should be in a recognized exchange/association and the transactions should suffer commodity transaction tax. In this case, the assessee is trading in MCX and NMCE, Ahmadabad and MCX is a recognized exchange for the purpose of section 43(5)(e) of the Act. Therefore, the loss or profit incurred form derivative trading on MCX is a business profit, whereas loss or profit incurred from derivative trading on NMCE, Ahmadabad is speculation loss or profit, because the said association is not recog ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as one business by netting of profit or loss for the purpose of taxation. We, further, noted that as per section 28, Explanation 2 of the I.T.Act, 1961, where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business shall be deemed to be distinct and separate from any other business. Since, the appellant is dealing in commodity derivatives trading that too one and only business activity, the income generated through said business on different stock exchanges/associations needs to be treated as one and only business as per section 28 Explanation (2) of the Income Tax Act, 1961. This legal position is supported by the decision of Hon ble Bombay High Court, in the case of ITO vs Kamani Tubes Ltd. (1994) 207 ITR 271 (Bom), where it was held that in deciding the character of transactions, what is important to consider is the distinctive character to such transactions, but not the platform in which such transactions has been carryout. Further, the provisions of section 43(5)(d) of the I.T.Act, 1961 is not applicable to commodities derivative trading, if such transactions are not carried out in a recognized stock exchange/associa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ognized exchanges and notified by the Ministry of Consumer Affairs, Food and Public Distribution as a recognized association/exchange u/s 5 of the Forward Contracts (Regulation) Act, 1952. In fact, NMCE, Ahmadabad has been recognized by way of notification, dated 10/01/2003 in consultation with the Forward Market Commission under section 5 of the Forward Contracts (Regulation) Act, 1952. Similarly, MCX is also a recognized association under section 5 of the Forward Contracts (Regulation) Act, 1952. Therefore, once any association is recognized from Govt. of India, then any trading activity carried out therein is outside the purview of section 43(5)9e) of the Act. Hence, loss incurred from derivatives trading on NMCE, cannot be considered as different from profit earned from MCX only on the basis of notification issued by the CBDT for the purpose of section 43(5)(d) of the Act, because the law requires recognition of Association/exchange from Govt. of India, but it does not specifically requires notification from CBDT u/s 43(5) of the Income Tax Act, 1961. We, therefore, are of the considered view that NMCE, Ahmadabad is a recognized association like MCX, Mumbai and profit or loss i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 43(5) is relating to transactions in respect of the trading in derivatives referred to in clause (ac) of section 2 of Securities Control (Regulation) Act.1956. Clause (ac) of section 2 of Securities Control (Regulation) Act,1956 defined as under: (A) A security derived front a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for difference or any other form of Security. ITA No . 51 7 9/ Mu m/ 20 1 6 (B) A contract which derives its value from the prices, or index of prices, of underlying securities. From the above definition it is clear that commodity derivative trading is not covered by Securities Control (Regulation) Act, 1956 and therefore the provision applied by the AO is against the facts of the case. 7. Even the board circular No. 3 of 2006 dated 27-12-2006 has explained the scope and effect of ammendment with effect from 01-06- 2006 made in section 43(5) by the Finance Act 2005, which have been elaborated in the following portion of departmental circular: - 3.10 Excluding 'trading in derivatives' on recognised stock exchanges from the ambit of 'speculative transactions' Existing prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt by the judicial decision of the coordinate bench of this Tribunal in case of Varsha Corp. Ltd vs DCIT in appeal No.6534/Mum/2010 for AY 2009- 2010. The Tribunal in Para 8 and 9 of the Order has made interpretation ITA No . 51 7 9/ Mu m/ 20 1 6 and discussed the facts and after interpreting the various decisions as mentioned in the order finally held that the benefit of clause (e) of the proviso to section 43(5) of the Act, cannot be entitled the assessee for the transactions carried out prior to Assessment Year 2014-2015 and accordingly the appeal filed by the assessee was dismissed. 10. Now we have to discuss the provision of section 43(5) of the Act with all its provision to understand the assessee's case. The relevant provision reads as under: - Section 43(5) ...... Speculative transaction means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scripts. (a) A contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profit as business profit. The nature of activity is carried throughout the year by ITA No . 51 7 9/ Mu m/ 20 1 6 the assessee is one and only one to trade in derivatives on various exchanges and earned profit or income which includes loss. In such facts, we are of the opinion that the assessee is eligible for set off of this loss against the profit. We reverse the orders of the lower authorities and allow the claim of the assessee. This issue of assessee's appeal is allowed. 13. In this view of the matter and consistent with view taken by the co-ordinate bench in assessee s own case for AY 2012-13, we are of the considered view that the assessee is engaged in one and only business of derivative trading in different commodity exchanges and such business needs to be considered as one business for the purpose of taxation and any profit or loss derived from different exchanges shall be aggregated by allowing losses to be set off. The Ld. AO and Ld.CIT(A) without appreciating these facts has disallowed loss incurred form derivative trading on NMCE, Ahmadabad as speculation loss against profit earned from derivative trading in MCX by holding that profit earned from MCX is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred from derivative commodity trading through NMCE, an unrecognised exchange, considering the same as speculative loss and the same was not allowed to be set off against business profits. Thus, the speculation loss of ₹ 76,38,044/- was not allowed to be set-off against the profit of ₹ 65,49,180/- earned by the Appellant from the derivative commodity trading through recognised exchanges like, MCX. 13.2 I have noted that a similar issue has arisen before the Hon'ble ITAT, Mumbai for the A.Y. 2012-13 in the case of the Appellant in ITA No. 5179/Mum/2016. The Hon'ble ITAT, Mumbai I Bench has decided the issue in favour of the Appellant, vide order dated 23.02.2018.The Hon'ble ITAT has in the said judgment dealt with all the objections raised by the A.O. in the assessment order, in great details. Thus, the relevant portion of the said judgment being important is reproduced hereunder:- 6. We have heard rival contentions and gone through facts and circumstances of the case. We find that the assessee has started his business activity of derivative trading in commodity only and he has not done any activity of derivative trading in securities and equity. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ract for the purchase or sale of any commodity including stocks and shares is settled otherwise than by the actual delivery or transfer of the commodity or scrips. The proviso to section 43(5) lists out certain transactions which are not deemed to be speculative transactions. Systemic and technological changes introduced by SEBI have resulted in sufficient transparency in the stock markets and have to a large extent curbed the scope for generating fictitious losses through artificial transactions or shifting of incidence of loss from one person to another. The screen based computerized trading provides for audit trail. In the wake of these developments, the present distinction between speculative and non-speculative transactions, in respect of trading in derivatives of securities is losing relevance. The Finance Act, 2005 has, accordingly, amended section 43(5) to provide that an eligible transaction in respect of trading in derivatives of securities carried out on a recognised stock exchange shall not be deemed as speculative transaction. The notification prescribing the rules and the conditions to be fulfilled by a stock exchange to be recognized by the Central Gov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sold by him; or (b) A contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in the holding of stocks and share through price fluctuations; or (c) A contract entered into by a member of a forward market or a stock exchange, in the course of an transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member; or (d) An eligible transaction in respect of trading in derivatives referred to in clause l(ac) at section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognized stock exchange; or (e) An eligible transaction in respect of trading in commodity derivatives carried out in a recognized association which is chargeable to commodities transaction tax under Chapter VII of the Finance Act, 2013 (17 of 2013), I shall not be deemed to be a speculative transaction. From the plain reading of this provision, we observed that this clause (d) was added with effect from 01.04.2006 which is related to the transaction covered under Securities Contract (Regulation) Act 1956 and clause (e) was inserted for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ingly, loss or profit from different exchanges needs to be set off against each other. We, therefore are of the opinion that there is no error in the findings recorded by the Ld.CIT(A), while deleting additions made towards disallowances of loss incurred from commodity derivatives on NMCE, Ahmadabad and hence, we are inclined to uphold the findings the Ld.CIT(A) and dismissed appeal filed by the revenue for AY 2009-10 and 2011-12. 18. In the result, appeal filed by the assessee for AY 2014-15 is allowed and appeals filed by the revenue for AY 2009-10 and 2011-12 are dismissed. 19. Before parting, we shall deal with procedural aspect of prouncement of order as prescribed under rule 34(4) of Income Tax (Appellate Tribunal) Rules 1963. As per rule 34(4), no order shall be pronounced after expiry of 90 days from the date of hearing. This appeal was heard on 02/03/2020 and ordinarily, the order shall be pronounced on or before 31/05/2020. But, this order could not be pronounced on or before 31/05/2020, due to the fact that the Govt. of India has imposed nationwide lockdown from 25/03/2020 and the same has been extended time to time up to 31/05/2020 and because of this, the offic ..... X X X X Extracts X X X X X X X X Extracts X X X X
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