ITAT, ‘E’ BENCH, MUMBAI ACIT v. Shreegopal Purohit ITA NO. 5666/M/2007 June 30, 2009

Allowability of set off of speculation loss against income from future and option (F&O) transactions

F&O transactions are not speculative transactions and thus, the income from such transactions cannot be set off against the speculation loss.

RELEVANT EXTRACTS:

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4. We have perused the records and considered the rival contentions carefully. The dispute raised in this appeal is whether F & O transaction can be considered as speculative transaction or not. The speculative transactions have been defined in section 43(5) as transactions in which contract for purchase or sale of any commodity including stock of shares is periodically and ultimately settled otherwise than by the actual delivery or transfer of commodity or scrips. The said provisions is reproduced below as ready reference.

“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 actual delivery or transfer of the commodity or scripts."

4.1 The Finance Act 2005 inserted clause (d) in section 43(5) as per which transactions in respect of trading in derivative were deemed to be not speculative transaction. The said sub clause is reproduced below as ready reference.

[(d) an eligible transaction in respect of trading in derivatives referred to in clause 31[(ac)] of section 2 32 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;

33[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 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 (15 of 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 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 (/) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfils such conditions as may be prescribed and notified by the Central Government for this purpose;]

4.2 There is no dispute that the transactions in future entered into by the assessee are derivative transactions as the assessee has admitted the same. Therefore the issue which arises for consideration is whether transactions in derivatives are speculative transactions within the meaning of the definition of the term under section 43(5) and in case these found to be speculative transactions, whether these can be considered as non speculative in view of the provisions of clause (d) of section 43(5) inserted w.e.f. 1.4.2006 which deems ^derivative transactions as non speculative. In other words, it is required to be considered whether the provisions of clause (d) of section 43(5) are clarificative in nature and have retrospective application.

4.3 We find that the same issue has already been considered by the Jaipur Bench of the Tribunal in case of PS Kapur (29 SOT 587). The Tribunal noted that in order that a transaction be speculative within the meaning of the definition in section 43(5), the following three ingradients should be satisfied.

(a) It should be transaction in purchase/ sale of commodity. Commodity would include stock and share.

(b) The transaction envisages delivery/ transfer

(c) The transaction is settled otherwise than by delivery or transfer.

4.4 The Tribunal further observed that derivative products are intangible and are not capable of delivery or transfer. For example, Nift (F&O) is a derivative product which derives it value from prices or index of prices of certain securities and is thus intangible. The transactions in derivative are thus not speculative as these lack the basic ingradients of speculative transactions as mentioned in para 4.3. The Tribunal also held that clause (d) of section 43(5) inserted by the Finance Act 2005 deeming the transactions in derivative as nonspeculative was clarificatory in nature as it only clarified the existing position. It has therefore retrospective application. Thus transactions in derivative were held to be nonspeculative. The argument of Learned AR that transactions in this case were not eligible transactions as mentioned in clause (d) is not supported by any evidence. In fact, the bills placed on record show that transactions have been carried through a member of Stock Exchange and no irregularity has been pointed out. Even if there are procedural violations and the transactions are not strictly eligible transactions, there is no . dispute that these are transactions in derivate products and such transactions even under the definition of speculative transactions in section 43(5) are non speculative as held by the Tribunal in case of P.S.Kapur (supra). We therefore hold that the subject transactions are not speculative transactions and thus the income from such transactions cannot be set off against the speculation loss. The order of CIT (A) therefore cannot be sustained. The same is set aside and the order of AO is upheld.

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