TMI Blog2009 (7) TMI 172X X X X Extracts X X X X X X X X Extracts X X X X ..... tion in derivatives does not fall within the definition of 'speculation transaction' u/s. 43(5), then there was no question of exempting certain type of transaction in derivatives from the scope of speculative transaction u/s. 43(5). If it is held that the transaction in derivatives docs not fall in s. 43(5), it will make cl. (d) and Explanation thereto below s. 43(5) introduced by Finance Act, 2005 to be redundant. In furtherance to the above Explanation, the Central Government has also framed rules, i.e. r. 6DDA and r. 6DDB. It cannot be presumed that the Government has introduced a clause, i.e. cl. (d) as well as Explanation thereto, which was redundant and infructuous. Whether cl. (d) of s. 43(5) introduced by Finance Act, 2005 w.e.f. 1st April, 2006 is clarificatory and, therefore, retrospective in nature - The rule of reasonable construction must be applied while construing a statute. Considering the matter and relevant laws, it is evident that Expln. 2 to s. 43B itself being retrospective, the first proviso to that section is also to be considered as retrospective because the proviso supplies an obvious omission. But in the case of the assessee before us, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature and cannot be regarded as business loss. 2. That on the facts and in the circumstances of the case, learned CIT(A) erred in not holding that the derivative transactions entered into by the appellant in the form of futures and options are not covered under the provisions of s. 43(5) of the Act hence the said transactions cannot be considered as speculative transactions. 3. That on the facts and in the circumstances of the case, learned CIT(A) erred in not holding that the provisions of s. 43(5)(d) are clarificatory in nature and hence arc retrospective in operation." 2. The facts of the case are that the assessee is a company which is engaged in the business of financing and investments in shares and securities. During the year under consideration, the assessee suffered the loss amounting to Rs. 9,25,065 on account of futures and options. The AO treated the same as speculation loss as per s. 43(5) of the IT Act. On appeal, the CIT(A) confirmed the order of the AO on this ground. Hence this appeal by the assessee. 3. At the time of hearing before us. the learned counsel for the assessee argued at length. However, his arguments were basically two-folds, viz.: (i) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... underlying asset. The underlying assets can be securities, commodities, bullion, currency, livestock or anything else. He, therefore, submitted that the derivative gets its colour from the underlying security and the underlying security is either commodity or stock and in either case it will fall within the ambit of s. 43(5). In support of his contention, he relied upon the decision of Hon'ble apex Court in the case of CIT vs. B. Suresh (2009) 222 CTR (SC) 513 : (2009) 20 DTR (SC) 93 : (2009) 313 ITR 149 (SC). In the said case, the Hon'ble apex Court has held that the definition of 'goods' is very wide and it includes telecasting right of a film or TV programme. He submitted that the term 'commodity' is even wider and, therefore, the derivatives would fall within the term 'commodity' used in s. 43(5). He further submitted that the legislature inserted cl. (d) in s. 43(5) providing that the transaction in derivatives would not be treated as speculative transaction w.e.f. 1st April, 2006. This establishes that before this amendment, the transactions in derivatives were included in the meaning of s. 43(5), otherwise there was no purpose of inserting cl. (d). If it is held that transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or (c) a contract entered into by a member of a forward market or a stock exchange in the course of any 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." From the above it is clear that speculative transaction is a transaction in which contract for purchase and sale of any commodity is settled otherwise than by actual delivery. It is not in dispute that in the case of transaction in derivatives, the transaction is always settled otherwise than by actual delivery. However, it was contended by the learned counsel that s. 43(5) is applicable only in respect of contract for purchase and sale of commodity. His contention was that the derivative is not a commodity and, therefore, s. 43(5) would not be applicable at all. The learned Departmental Representative has furnished before us the print out taken from the website of SEBI explaining the term 'derivative', which reads as under: "The term 'derivative' indicates that it has no independent value, i.e. its value is entirely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merchandise. The basic requirement of s. 80HHC is earning in foreign exchange and retention of profits for export business. Profits are embedded in the "income" earned. Today the difference between the two is getting blurred with globalisation and cross-border transaction. Today with technological advancement one has to change our thinking regarding concepts like goods, merchandise and articles. In the case of B. Suresh the assessee had bought rights of various decoders and had recorded movies on beta-cam-tapes which were transferred as telecasting rights to Star TV for five years (it has a limited life). Hence, such 'rights' would certainly fall in the category of articles of trade and commerce, hence merchandise. On the question as to whether transfer of the said rights by way of lease would attract s. 80HHC, we find merit in the contention that under r. 9A and r. 9B, the word 'lease' is included in the meaning of the word 'sale'. Lastly, we find no infirmity in the judgment of the Bombay High Court in the case of Abdulgafar A. Nadiadwala vs. Asst. CIT Ors. (2004) 188 CTR (Bom) 232 : (2004) 267 ITR 488 (Bom)." Thus, their Lordships have held that due to technological adva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as Explanation thereto, which was redundant and infructuous. 5.3 In view of above, we hold that the term 'derivatives' in which underlying asset is shares, will fall within the meaning of 'commodity' used in s. 43(5) of the Act. 6. Now we come to next question whether cl. (d) of s. 43(5) introduced by Finance Act, 2005 w.e.f. 1st April, 2006 is clarificatory and, therefore, retrospective in nature. Clause (d) as well as Explanation thereto reads as under: "(d) an eligible transaction in respec1 of trading in derivatives referred to in cl. (ac) of s. 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognised stock exchange; shall not be deemed to be a speculative transaction. Explanation: For the purposes 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 s. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall not be deemed to be a speculative transaction. The proposed amendment also seeks to notify relevant rules etc. regarding conditions to be fulfilled by recognised exchanges in this regard. Further it is also proposed to amend sub-s. (4) of s. 73 so as to reduce the period of carry forward of speculation losses from eight assessment years to four assessment years. These amendments will take effect from 1st April, 2006 and will, accordingly, apply in relation to asst. yr. 2006-07 and subsequent years." From the above it is evident that the transaction in derivatives is exempted from the purview of speculative transaction under s. 43(5) because of recent systemic and technological changes introduced by stock exchange. The above intention of the legislature is also clear from the fact that all the transactions in derivatives have not been exempted from the ambit of speculative transaction under s. 43(5) but only the eligible transactions of trading in derivatives carried out in a recognised stock exchange are exempt. By way of Explanation, the legislature has also defined the term 'eligible transaction' and 'recognized stock, exchange'. The legislature has also provided the Ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considering cl. (d) of s. 43(5). 6.3 In the case of Podar Cement (P) Ltd., their Lordships of Hon'ble apex Court on the meaning of 'owner' and interpretation of taxing statutes observed as under: "From the Memorandum Explaining the Finance Bill, 1987, it is clear that the amendment to s. 27 of the Act, 1961 Act was intended to supply an obvious omission or to clear up doubts as to meaning of the word 'owner' in s. 22. The amendment introduced by the Finance Bill, 1987, was declaratory/clarificatory in nature so far as it related to s. 27(iii), (iiia) and (iiib). Consequently, these provisions are retrospective in operation." From the above decision it is evident that their Lordships were of the opinion that amendment to s. 22 was intended to clear up the obvious omission and doubts as to the meaning of the word 'owner' in that section and hence the amendment was clarificatory in nature. As we have already found that the purpose of introduction of cl. (d) of s. 43(5) was not to clear any obvious omission, but the legislature found that due to recent systemic and technological changes introduced by stock markets there is sufficient transparency in the transactions and, there ..... X X X X Extracts X X X X X X X X Extracts X X X X
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