Case Note & Summary
The appellant, Souvenir Developers (I) Pvt. Ltd., is a domestic company deriving income from toll collection business and also trading in shares and derivatives. For the assessment year 2009-10, the appellant filed a return declaring total income of Rs.85,43,220/-. The Assessing Officer made an addition of Rs.5,35,872/- and refused to consider the loss suffered on derivative transactions while computing net taxable income, treating the derivative loss as speculative. The appellant's rectification application under Section 154 was rejected. The appellant appealed to the Commissioner of Income Tax (Appeals) and then to the Income Tax Appellate Tribunal, which confirmed the addition. The appellant then filed an appeal under Section 260-A of the Income Tax Act, 1961 before the High Court. The substantial questions of law were whether the Tribunal was justified in confirming the addition on derivative transactions as speculative under Section 43(5)(d) read with Section 73, and whether the loss could be set off against income from infrastructure business under Section 70. The Court held that derivative transactions on a recognized stock exchange are expressly excluded from the definition of speculative transaction under Section 43(5)(d). The explanation to Section 73 applies only to speculative transactions. Therefore, the loss is a business loss and can be set off against other business income under Section 70. The Court allowed the appeal, set aside the Tribunal's order, and directed the Assessing Officer to allow the set off of derivative loss against other business income.
Headnote
A) Income Tax - Derivative Transactions - Speculative Loss - Section 43(5)(d) read with Section 73 of Income Tax Act, 1961 - The issue was whether loss from trading in derivatives on a recognized stock exchange is speculative and cannot be set off against other business income. The Court held that such transactions are expressly excluded from the definition of speculative transaction under Section 43(5)(d), and the explanation to Section 73 applies only to speculative transactions. Therefore, the loss can be set off against other business income under Section 70. (Paras 1-2)
B) Income Tax - Set Off of Losses - Business Income - Section 70 of Income Tax Act, 1961 - The Court considered whether loss from derivatives could be set off against income from infrastructure business. Held that since the derivative transactions are not speculative, the loss is a business loss and can be set off against any other business income under Section 70. (Paras 1-2)
Issue of Consideration
Whether loss from derivative transactions on recognized stock exchange is speculative and whether it can be set off against income from infrastructure business under Section 70 of the Income Tax Act, 1961.
Final Decision
The appeal is allowed. The order of the Income Tax Appellate Tribunal is set aside. The Assessing Officer is directed to allow the set off of the loss from derivative transactions against the other business income of the appellant.
Law Points
- Derivative transactions on recognized stock exchange are not speculative
- Loss from derivatives can be set off against other business income
- Section 43(5)(d) excludes certain transactions from speculative definition
- Section 73 explanation applies only to speculative transactions
Case Details
2022 LawText (BOM) (05) 3
Income Tax Appeal No. 79 of 2018
R. D. Dhanuka, S. G. Mehare
Mr. S. P. Shah for appellant, Dr. Kalpalata Bharaswadkar-Patil for respondent
Souvenir Developers (I) Pvt. Ltd.
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Nature of Litigation
Income tax appeal under Section 260-A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal confirming addition on derivative transactions as speculative.
Remedy Sought
Appellant sought to set aside the Tribunal's order and allow set off of derivative loss against other business income.
Filing Reason
The Assessing Officer refused to consider loss from derivative transactions as business loss and treated it as speculative, which was upheld by the Tribunal.
Previous Decisions
The Assessing Officer passed assessment order on 29-12-2011, rectification under Section 154 rejected on 14-05-2012, appeal to CIT(A) dismissed, and Tribunal confirmed the addition.
Issues
Whether derivative transactions on recognized stock exchange are speculative under Section 43(5)(d) read with Section 73 of the Income Tax Act, 1961.
Whether loss from such derivatives can be set off against income from infrastructure business under Section 70 of the Income Tax Act, 1961.
Submissions/Arguments
Appellant argued that derivative transactions on recognized stock exchange are not speculative as per Section 43(5)(d) and loss should be allowed as business loss.
Respondent argued that the loss is speculative and cannot be set off against other business income.
Ratio Decidendi
Derivative transactions carried out on a recognized stock exchange are expressly excluded from the definition of speculative transaction under Section 43(5)(d) of the Income Tax Act, 1961. The explanation to Section 73 applies only to speculative transactions. Therefore, loss from such derivative transactions is a business loss and can be set off against other business income under Section 70 of the Act.
Judgment Excerpts
The appeal by the assessee under section 260-A of the Income Tax Act, 1961 raises the following substantial questions of law :- (i) Whether on the facts and circumstances of the case and in law, the Tribunal was justified in confirming any addition on transaction in derivatives on recognized stock exchange as defined under Section 43 (5) (d) of the Income Tax Act, 1961 with reference to explanation given to Section 73 of the Income Tax Act, 1961 which is applicable to speculative transactions. (ii) Whether loss suffered by the appellant on the transactions 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 by the appellant could have been set off against the income of the appellant arisen out of infrastructure business carried on by the appellant under Section 70 of the Income Tax Act, 1961.
Procedural History
The appellant filed return for AY 2009-10 on 30-09-2009, processed under Section 143(1) on 28-03-2011. Scrutiny notice under Section 143(2) issued on 28-09-2010. Assessment order passed on 29-12-2011 making addition and refusing derivative loss. Rectification under Section 154 rejected on 14-05-2012. Appeal to CIT(A) on 04-06-2012 dismissed. Tribunal confirmed addition. Present appeal under Section 260-A filed on 2018.
Acts & Sections
- Income Tax Act, 1961: 260-A, 43(5)(d), 73, 70, 143(1), 143(2), 154
- Securities Contracts (Regulation) Act, 1956: 2(ac)
